UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM | |
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _______ to _______
Commission File number 1-9273
PILGRIM’S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
(Address of principal executive offices) | (Zip code) | ||
Registrant’s telephone number, including area code: (970 ) 506-8000
(Former name, former address and former fiscal year, if changed since last report.)
Title of each class | Trading Symbol | Name of Exchange on Which Registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated Filer | ☐ | |||
Non-accelerated Filer | ☐ | Smaller reporting company | |||
Emerging growth company | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares outstanding of the issuer’s common stock, $0.01 par value per share, as of July 31, 2019, was 249,307,521 .
INDEX
PILGRIM’S PRIDE CORPORATION
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
1
PART I. | FINANCIAL INFORMATION |
ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
PILGRIM’S PRIDE CORPORATION | ||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
(Unaudited) | ||||||||
June 30, 2019 | December 30, 2018 | |||||||
(In thousands) | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash and cash equivalents | ||||||||
Trade accounts and other receivables, less allowance for doubtful accounts | ||||||||
Accounts receivable from related parties | ||||||||
Inventories | ||||||||
Income taxes receivable | ||||||||
Prepaid expenses and other current assets | ||||||||
Assets held for sale | ||||||||
Total current assets | ||||||||
Deferred tax assets | ||||||||
Other long-lived assets | ||||||||
Identified intangible assets, net | ||||||||
Goodwill | ||||||||
Operating lease assets, net | — | |||||||
Property, plant and equipment, net | ||||||||
Total assets | $ | $ | ||||||
Accounts payable | $ | $ | ||||||
Accounts payable to related parties | ||||||||
Revenue contract liability | ||||||||
Accrued expenses and other current liabilities | ||||||||
Income taxes payable | ||||||||
Current maturities of long-term debt | ||||||||
Total current liabilities | ||||||||
Noncurrent operating lease liability, less current maturities | — | |||||||
Long-term debt, less current maturities | ||||||||
Noncurrent income taxes payable | ||||||||
Deferred tax liabilities | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
Common stock | ||||||||
Treasury stock | ( | ) | ( | ) | ||||
Additional paid-in capital | ||||||||
Retained earnings | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Total Pilgrim’s Pride Corporation stockholders’ equity | ||||||||
Noncontrolling interest | ||||||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
PILGRIM’S PRIDE CORPORATION | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net sales | $ | $ | $ | $ | ||||||||||||
Cost of sales | ||||||||||||||||
Gross profit | ||||||||||||||||
Selling, general and administrative expense | ||||||||||||||||
Administrative restructuring activities | ( | ) | ( | ) | ||||||||||||
Operating income | ||||||||||||||||
Interest expense, net of capitalized interest | ||||||||||||||||
Interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Foreign currency transaction loss | ||||||||||||||||
Miscellaneous, net | ( | ) | ( | ) | ||||||||||||
Income before income taxes | ||||||||||||||||
Income tax expense | ||||||||||||||||
Net income | ||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||
Net income attributable to Pilgrim’s Pride Corporation | $ | $ | $ | $ | ||||||||||||
Weighted average shares of Pilgrim's Pride Corporation common stock outstanding: | ||||||||||||||||
Basic | ||||||||||||||||
Effect of dilutive common stock equivalents | ||||||||||||||||
Diluted | ||||||||||||||||
Net income attributable to Pilgrim’s Pride Corporation per share of common stock outstanding: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
PILGRIM’S PRIDE CORPORATION | |||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||||||
(Unaudited) | |||||||||||||||||
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||||
(In thousands) | |||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||
Other comprehensive loss: | |||||||||||||||||
Foreign currency translation adjustment | |||||||||||||||||
Losses arising during the period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Income tax effect | |||||||||||||||||
Derivative financial instruments designated as cash flow hedges | |||||||||||||||||
Gains (losses) arising during the period | ( | ) | ( | ) | |||||||||||||
Reclassification to net earnings of losses (gains) realized | ( | ) | |||||||||||||||
Available-for-sale securities | |||||||||||||||||
Gains arising during the period | |||||||||||||||||
Income tax effect | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Reclassification to net earnings of gains realized | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Income tax effect | |||||||||||||||||
Defined benefit plans | |||||||||||||||||
Gains (losses) arising during the period | ( | ) | ( | ) | |||||||||||||
Income tax effect | ( | ) | ( | ) | |||||||||||||
Reclassification to net earnings of losses realized | |||||||||||||||||
Income tax effect | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Total other comprehensive loss, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Comprehensive income | |||||||||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | ( | ) | ( | ) | |||||||||||||
Comprehensive income attributable to Pilgrim's Pride Corporation | $ | $ | $ | $ | |||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
PILGRIM’S PRIDE CORPORATION | ||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||||
For the twenty-six weeks ended June 30, 2019 | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||
Balance at December 30, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||
Share-based compensation plans: | ||||||||||||||||||||||||||||||||||
Common stock issued under compensation plans | — | — | ( | ) | — | — | — | |||||||||||||||||||||||||||
Requisite service period recognition | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Common stock purchased under share repurchase program | — | — | ( | ) | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||
Balance at June 30, 2019 | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
For the thirteen weeks ended June 30, 2019 | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||
Share-based compensation plans: | ||||||||||||||||||||||||||||||||||
Common stock issued under compensation plans | — | — | — | — | — | |||||||||||||||||||||||||||||
Requisite service period recognition | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Common stock purchased under share repurchase program | — | — | ( | ) | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||
Balance at June 30, 2019 | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
5
PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued) | ||||||||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||||
For the twenty-six weeks ended July 1, 2018 | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||
Share-based compensation plans: | ||||||||||||||||||||||||||||||||||
Common stock issued under compensation plans | — | — | ( | ) | — | — | — | |||||||||||||||||||||||||||
Requisite service period recognition | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Balance at July 1, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
For the thirteen weeks ended July 1, 2018 | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||
Balance at April 1, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||
Share-based compensation plans: | ||||||||||||||||||||||||||||||||||
Common stock issued under compensation plans | — | — | — | — | — | |||||||||||||||||||||||||||||
Requisite service period recognition | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Balance at July 1, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
PILGRIM’S PRIDE CORPORATION | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(Unaudited) | ||||||||
Twenty-Six Weeks Ended | ||||||||
June 30, 2019 | July 1, 2018 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Share-based compensation | ||||||||
Deferred income tax benefit | ( | ) | ( | ) | ||||
Loan cost amortization | ||||||||
Accretion of discount related to Senior Notes | ||||||||
Amortization of premium related to Senior Notes | ( | ) | ( | ) | ||||
Loss on property disposals | ||||||||
Foreign currency transaction loss related to borrowing arrangements | ||||||||
Gain on equity-method investments | ( | ) | ( | ) | ||||
Noncash loss on early extinguishment of debt | ||||||||
Asset impairment | ||||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts and other receivables | ( | ) | ( | ) | ||||
Inventories | ( | ) | ||||||
Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
Accounts payable, accrued expenses and other current liabilities | ||||||||
Income taxes | ( | ) | ||||||
Long-term pension and other postretirement obligations | ( | ) | ( | ) | ||||
Other operating assets and liabilities | ||||||||
Cash provided by operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Acquisitions of property, plant and equipment | ( | ) | ( | ) | ||||
Proceeds from property disposals | ||||||||
Cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Payments on revolving line of credit, long-term borrowings and capital lease obligations | ( | ) | ( | ) | ||||
Proceeds from revolving line of credit and long-term borrowings | ||||||||
Purchase of common stock under share repurchase program | ( | ) | ||||||
Payment of capitalized loan costs | ( | ) | ( | ) | ||||
Proceeds (payment) from equity contribution (distribution) under Tax Sharing Agreement between JBS USA Food Company Holdings and Pilgrim's Pride Corporation | ( | ) | ||||||
Cash used in financing activities | ( | ) | ( | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
Increase in cash, cash equivalents and restricted cash | ||||||||
Cash, cash equivalents and restricted cash, beginning of period | ||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
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 products to approximately 100 countries. Pilgrim’s fresh chicken products consist of refrigerated (nonfrozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. The Company’s prepared chicken products include fully cooked, ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated. The Company’s other products include ready-to-eat meals, multi-protein frozen foods, vegetarian foods and desserts. 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 June 30, 2019, Pilgrim’s had approximately 52,600 employees and the capacity to process approximately 45.4 million birds per work week for a total of more than 12.9 billion pounds of live chicken annually. Approximately 5,000 contract growers supply poultry for the Company’s operations. As of June 30, 2019, JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owned 78.4 % 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 thirteen and twenty-six weeks ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 29, 2019. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 30, 2018.
The Company operates on a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. The reader should assume any reference we make to a particular year (for example, 2019) in the notes to these Condensed Consolidated Financial Statements applies to our fiscal year and not the calendar year.
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
8
exchange rate in effect on the date of each asset’s acquisition. Income and expense accounts are remeasured using average exchange rates for the period. Net adjustments resulting from remeasurement of these financial records are reflected in Foreign currency transaction losses (gains) in the Condensed Consolidated Statements of Income.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease assets, net, Accrued expenses and other current liabilities, and Noncurrent operating lease liabilities, less current maturities, in our Condensed Consolidated Balance Sheet. Finance leases are included in Property, plant and equipment, net, Current portion of long-term debt, and Long-term debt, less current maturities, in our Condensed Consolidated Balance Sheet.
Beginning with the adoption of Accounting Standards Update (“ASU”) 2016-02 on December 31, 2018, operating lease assets and operating lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease asset also includes any lease payments made, including upfront costs and prepayments, and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate a lease when it is reasonably certain that we will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with a corresponding reduction to the operating lease asset.
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:
June 30, 2019 | December 30, 2018 | |||||||
(In thousands) | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash | ||||||||
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | $ | ||||||
Recent Accounting Pronouncements Adopted as of June 30, 2019
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842), along with several updates, which, in an effort to increase transparency and comparability among organizations utilizing leasing, requires an entity that is a lessee to recognize the assets and liabilities arising from operating leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. In transition, the entity may elect to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach or the beginning of the period of adoption using a cumulative-effect adjustment approach. We adopted the new standard on December 31, 2018 and recognized and measured leases at the beginning of the period of adoption. We elected the package of practical expedients available under the transition guidance which, among other things, allows the carry-forward of historical lease classification. The Company also elected the practical expedient allowing use of hindsight in assessing the lease term. We made an accounting policy election to not apply the new guidance to leases with a term of 12 months or less and will recognize those payments in the Condensed Consolidated Statement of Income on a straight-line basis over the lease term. We implemented a system solution for administering our leases and facilitating compliance with the new guidance. Adoption of the standard had a material impact on our Condensed Consolidated Balance Sheet as a result of the increase in assets and liabilities from recognition of operating lease assets and operating lease liabilities. However, the standard did not have a material impact on our Condensed Consolidated Statement of Income.
9
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, an accounting standard update that simplifies the application of hedge accounting guidance in current GAAP and improves the reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. Among the simplification updates, the standard eliminates the requirement in current GAAP to separately recognize periodic hedge ineffectiveness. Mismatches between the changes in value of the hedged item and hedging instrument may still occur but they will no longer be separately reported. The standard requires the presentation of the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The standard is effective for annual and interim reporting periods beginning after December 15, 2018, but early adoption is permitted. We have adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, an accounting standard update that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. The Company will not reclassify the stranded tax effects associated with the U.S. Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. We adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
In July 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, an accounting standard update to improve non-employee share-based payment accounting. The accounting standard update more closely aligns the accounting for employee and non-employee share based payments. The accounting standards update is effective as of the beginning of our 2019 calendar year with early adoption permitted. We adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
Recent Accounting Pronouncements Not Yet Adopted as of June 30, 2019
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 provisions of the new guidance will be effective as of the beginning of our 2020 fiscal year. Early adoption is permitted after our 2018 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
In 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 new guidance will be effective as of our 2020 fiscal year with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
In August 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 new guidance will be effective as of our 2020 fiscal year with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
2. | FAIR VALUE MEASUREMENTS |
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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 June 30, 2019 and December 30, 2018, 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:
June 30, 2019 | ||||||||
Level 1 | Total | |||||||
(In thousands) | ||||||||
Fair value assets: | ||||||||
Commodity futures instruments | $ | $ | ||||||
Commodity options instruments | ||||||||
Foreign currency instruments | ||||||||
Fair value liabilities: | ||||||||
Commodity futures instruments | ( | ) | ( | ) | ||||
Commodity options instruments | ( | ) | ( | ) | ||||
Foreign currency instruments | ( | ) | ( | ) | ||||
December 30, 2018 | ||||||||
Level 1 | Total | |||||||
(In thousands) | ||||||||
Fair value assets: | ||||||||
Commodity futures instruments | $ | $ | ||||||
Foreign currency instruments | ||||||||
Fair value liabilities: | ||||||||
Commodity futures instruments | ( | ) | ( | ) | ||||
Commodity option instruments | ( | ) | ( | ) | ||||
Foreign currency instruments | ( | ) | ( | ) | ||||
See “Note 6. 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 Sheet but for which fair value is disclosed, the Company is not required to provide the quantitative disclosure about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy.
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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:
June 30, 2019 | December 30, 2018 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Fixed-rate senior notes payable at 5.75%, at Level 1 inputs | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Fixed-rate senior notes payable at 5.875%, at Level 1 inputs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Secured loans, at Level 3 inputs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
See “Note 11. Long-Term Debt and Other Borrowing Arrangements” 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 Sheet. 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 Sheet. The fair value of the Company’s Level 1 fixed-rate debt obligations was based on the quoted market price at June 30, 2019 or December 30, 2018, as applicable. The fair value of the Company’s Level 3 fixed-rate debt obligation was based on discounted cash flows at June 30, 2019 or December 30, 2018, 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 gains or losses recognized for such assets and liabilities in the period reported.
3. TRADE ACCOUNTS AND OTHER RECEIVABLES
Trade accounts and other receivables, less allowance for doubtful accounts, consisted of the following:
June 30, 2019 | December 30, 2018 | |||||||
(In thousands) | ||||||||
Trade accounts receivable | $ | $ | ||||||
Notes receivable - current | ||||||||
Other receivables | ||||||||
Receivables, gross | ||||||||
Allowance for doubtful accounts | ( | ) | ( | ) | ||||
Receivables, net | $ | $ | ||||||
Account receivable from related parties(a) | $ | $ | ||||||
(a) Additional information regarding accounts receivable from related parties is included in “Note 19. Related Party Transactions.”
Activity in the allowance for doubtful accounts for the twenty-six weeks ended June 30, 2019 was as follows (in thousands):
Balance, beginning of period | $ | ( | ) | |
Provision charged to operating results | ( | ) | ||
Account write-offs and recoveries | ||||
Effect of exchange rate | ||||
Balance, end of period | $ | ( | ) | |
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4. INVENTORIES
Inventories consisted of the following:
June 30, 2019 | December 30, 2018 | ||||||
(In thousands) | |||||||
Raw materials and work-in-process | $ | $ | |||||
Finished products | |||||||
Operating supplies | |||||||
Maintenance materials and parts | |||||||
Total inventories | $ | $ | |||||
5. | 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:
June 30, 2019 | December 30, 2018 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Fixed income securities | $ | $ | $ | $ | ||||||||||||
Other | ||||||||||||||||
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 thirteen and twenty-six weeks ended June 30, 2019 related to the Company’s available-for-sale securities totaled $2.9 million and $5.1 million while gross realized losses were immaterial. Gross realized gains during the thirteen and twenty-six weeks ended July 1, 2018 related to the Company’s available-for-sale securities totaled $1.8 million and $2.9 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. No proceeds were received from the sale or maturity of available-for-sale securities recognized as either short- or long-term investments during the thirteen and twenty-six weeks ended June 30, 2019 and July 1, 2018, respectively. Net unrealized holding gains and losses on the Company’s available-for-sale securities recognized during the twenty-six weeks ended weeks ended June 30, 2019 and July 1, 2018 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 twenty-six weeks ended weeks ended June 30, 2019 and July 1, 2018 are disclosed in “Note 15. Stockholders’ Equity”.
6. | DERIVATIVE FINANCIAL INSTRUMENTS |
The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil, wheat and energy, such as natural gas, electricity and diesel fuel, which are all considered commodities. The Company considers these raw materials generally available from a number of different sources and believes it can obtain them to meet its requirements. These commodities are subject to price fluctuations and related price risk due to factors beyond our control, such as economic and political conditions, supply and demand, weather, governmental regulation and other circumstances. The Company purchases derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for approximately the next 12 months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate.
The Company has operations in Mexico and Europe (including the U.K.) and, therefore, has exposure to 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 foreign exchange risk.
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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. Our counterparties require that we 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.
We have not designated certain derivative financial instruments that we have 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, we 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 and Cost of sales in the Condensed Consolidated Statements of Income.
We have designated certain derivative financial instruments related to our U.K. and Europe segment that we have purchased to mitigate foreign currency transaction exposures as cash flow hedges. Before the settlement date of the financial derivative instruments, we recognize changes in the fair value of the effective portion of the cash flow hedge into accumulated other comprehensive income (“AOCI”) while we recognize changes in the fair value of the ineffective portion immediately in earnings. When the derivative financial instruments associated with the effective portion are settled, the amount in AOCI is then reclassified to earnings. Gains or losses related to these derivative financial instruments are included in the line item Cost of sales in the Condensed Consolidated Statements of Income.
The Company recognized net losses of $0.5 million and $24.0 million related to changes in the fair value of its derivative financial instruments during the thirteen weeks ended June 30, 2019 and July 1, 2018, respectively. The Company recognized net losses of $8.5 million and $17.6 million related to changes in the fair value of its derivative financial instruments during the twenty-six weeks ended June 30, 2019 and July 1, 2018, respectively. Information regarding the Company’s outstanding derivative instruments and collateral posted with brokers is included in the following table:
June 30, 2019 | December 30, 2018 | ||||||
(Fair values in thousands) | |||||||
Fair values: | |||||||
Commodity derivative assets | $ | $ | |||||
Commodity derivative liabilities | ( | ) | ( | ) | |||
Foreign currency derivative assets | |||||||
Foreign currency derivative liabilities | ( | ) | ( | ) | |||
Collateral posted with brokers(a) | |||||||
Derivatives coverage(b): | |||||||
Corn | % | % | |||||
Soybean meal | % | % | |||||
Period through which stated percent of needs are covered: | |||||||
Corn | July 2020 | March 2020 | |||||
Soybean meal | May 2020 | December 2019 | |||||
(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. |
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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 Loss on Derivative | |||||||||||||||
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
(In thousands) | |||||||||||||||
Foreign currency derivatives | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Total | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
Gain (Loss) Reclassified from AOCI into Income | |||||||||||||||
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
(In thousands) | |||||||||||||||
Foreign currency derivatives | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||
Total | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||
At June 30, 2019, the pre-tax deferred net gains on derivatives recorded in AOCI that are expected to be reclassified to the Condensed Consolidated Statements of Income during the next twelve months are $0.9 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.
7. | GOODWILL AND INTANGIBLE ASSETS |
The activity in goodwill by segment for the twenty-six weeks ended June 30, 2019 was as follows:
December 30, 2018 | Currency Translation | June 30, 2019 | |||||||||
(In thousands) | |||||||||||
U.S. | $ | $ | $ | ||||||||
U.K. and Europe | |||||||||||
Mexico | |||||||||||
Total | $ | $ | $ | ||||||||
Identified intangible assets consisted of the following:
December 30, 2018 | Amortization | Currency Translation | June 30, 2019 | ||||||||||||
(In thousands) | |||||||||||||||
Carrying amount: | |||||||||||||||
Trade names | $ | $ | — | $ | $ | ||||||||||
Customer relationships | — | ||||||||||||||
Non-compete agreements | — | ||||||||||||||
Trade names not subject to amortization | — | ||||||||||||||
Accumulated amortization: | |||||||||||||||
Trade names | ( | ) | ( | ) | ( | ) | |||||||||
Customer relationships | ( | ) | ( | ) | ( | ) | |||||||||
Non-compete agreements | ( | ) | ( | ) | ( | ) | |||||||||
Total identified intangible assets | $ | $ | ( | ) | $ | $ | |||||||||
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 |
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At June 30, 2019, 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.
8. | 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 16 years, some of which may include options to extend the lease for up to one year and some of 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.
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||
June 30, 2019 | June 30, 2019 | ||||||
(In thousands) | |||||||
Operating lease cost (a) | $ | $ | |||||
Amortization of finance lease liabilities | |||||||
Interest on finance leases | |||||||
Short-term and variable lease cost | |||||||
Net lease cost | $ | $ | |||||
The weighted-average remaining lease term and discount rate for lease liabilities included in our Condensed Consolidated Balance Sheet are as follows:
June 30, 2019 | ||
Weighted-average remaining lease term (years): | ||
Operating leases | ||
Finance leases | ||
Weighted-average discount rate: | ||
Operating leases | % | |
Finance leases | % | |
Supplemental cash flow information related to leases is as follows (in thousands):
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Twenty-Six Weeks Ended | |||
June 30, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | ||
Financing cash flows from finance leases | |||
Operating lease assets obtained in exchange for operating lease liabilities | $ | ||
Future minimum lease payments under noncancellable leases at June 30, 2019 are as follows (in thousands):
Operating Leases | Finance Leases | ||||||
For the fiscal years ending December: | |||||||
Year 1 | $ | $ | |||||
Year 2 | |||||||
Year 3 | |||||||
Year 4 | |||||||
Year 5 | |||||||
Thereafter | |||||||
Total future minimum lease payments | |||||||
Less: imputed interest | |||||||
Present value of lease liabilities | $ | $ | |||||
Future minimum lease payments under capital and noncancellable operating leases with terms exceeding one year at December 30, 2018 were as follows (in thousands):
Capital Lease Obligations | Noncancellable Operating Lease Obligations | ||||||
For the fiscal years ending December: | |||||||
Year 1 | $ | $ | |||||
Year 2 | |||||||
Year 3 | |||||||
Year 4 | |||||||
Year 5 | |||||||
Thereafter | |||||||
Net minimum lease payments | $ | ||||||
Amount representing interest | ( | ) | |||||
Present value of net minimum lease payments | $ | ||||||
Lease liabilities as of June 30, 2019 are included in our Condensed Consolidated Balance Sheet as follows (in thousands):
Operating Leases | Finance Leases | ||||||
Accrued expenses and other current liabilities | $ | $ | |||||
Current maturities of long-term debt | |||||||
Noncurrent operating lease liability, less current maturities | |||||||
Long-term debt, less current maturities | |||||||
Total lease liabilities | $ | $ | |||||
As of June 30, 2019, the Company's operating and finance leases that have not commenced are immaterial.
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9. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment (“PP&E”), net consisted of the following:
June 30, 2019 | December 30, 2018 | ||||||
(In thousands) | |||||||
Land | $ | $ | |||||
Buildings | |||||||
Machinery and equipment | |||||||
Autos and trucks | |||||||
Construction-in-progress | |||||||
PP&E, gross | |||||||
Accumulated depreciation | ( | ) | ( | ) | |||
PP&E, net | $ | $ | |||||
The Company recognized depreciation expense of $65.7 million and $61.9 million during the thirteen weeks ended June 30, 2019 and July 1, 2018, respectively. The Company recognized depreciation expense of $127.2 million and $122.6 million during the twenty-six weeks ended June 30, 2019 and July 1, 2018, respectively.
During the twenty-six weeks ended June 30, 2019, Pilgrim's spent $177.6 million on capital projects and transferred $116.5 million of completed projects from construction-in-progress to depreciable assets. Capital expenditures were primarily incurred during the twenty-six weeks ended June 30, 2019 to improve efficiencies and reduce costs. During the twenty-six weeks ended July 1, 2018, the Company spent $155.2 million on capital projects and transferred $109.6 million of completed projects from construction-in-progress to depreciable assets.
During the thirteen and twenty-six weeks ended June 30, 2019, the Company sold certain PP&E for $1.2 million and $1.7 million, respectively, in cash and recognized net losses on these sales of $0.3 million and $0.2 million, respectively. PP&E sold in the twenty-six weeks ended June 30, 2019 included a breeder farm in Texas, vacant land in Minnesota and miscellaneous equipment. During the thirteen and twenty-six weeks ended July 1, 2018, the Company sold certain PP&E for cash of $0.2 million and $1.2 million, respectively, and recognized net losses on these sales of $0.1 million and $0.2 million, respectively. PP&E sold in the twenty-six weeks ended July 1, 2018 included a processing plant in Alabama and miscellaneous equipment.
Management has committed to the sale of miscellaneous equipment that no longer fits into the operating plans of the Company. The Company is actively marketing these assets for immediate sale and believes a sale of each asset can be consummated within the next 12 months. At June 30, 2019 and December 30, 2018, the Company reported assets totaling $0.1 million and $0.2 million, respectively, in the line item Assets held for sale on its Condensed Consolidated Balance Sheets. The fair values of the miscellaneous equipment that were classified as assets held for sale as of June 30, 2019 were based on quoted market prices.
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. At June 30, 2019, the carrying amounts of these idled assets totaled $41.9 million based on depreciable value of $137.1 million and accumulated depreciation of $95.2 million.
At June 30, 2019, 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.
10. | 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:
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June 30, 2019 | December 30, 2018 | ||||||
(In thousands) | |||||||
Accounts payable: | |||||||
Trade accounts | $ | $ | |||||
Book overdrafts | |||||||
Other payables | |||||||
Total accounts payable | |||||||
Accounts payable to related parties(a) | |||||||
Revenue contract liability(b) | |||||||
Accrued expenses and other current liabilities: | |||||||
Compensation and benefits | |||||||
Interest and debt-related fees | |||||||
Insurance and self-insured claims | |||||||
Current maturities of operating lease liabilities | — | ||||||
Derivative liabilities: | |||||||
Commodity futures | |||||||
Commodity options | |||||||
Foreign currency derivatives | |||||||
Other accrued expenses | |||||||
Total accrued expenses and other current liabilities | |||||||
$ | $ | ||||||
(a) Additional information regarding accounts payable to related parties is included in “Note 19. Related Party Transactions.”
(b) Additional information regarding revenue contract liabilities is included in “Note 13. Revenue Recognition.”
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11. LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term debt and other borrowing arrangements, including current notes payable to banks, consisted of the following components:
Maturity | June 30, 2019 | December 30, 2018 | |||||||
(In thousands) | |||||||||
Long-term debt and other long-term borrowing arrangements: | |||||||||
Senior notes payable, net of premium and discount at 5.75% | 2025 | $ | $ | ||||||
Senior notes payable, net of discount at 5.875% | 2027 | ||||||||
U.S. Credit Facility (defined below): | |||||||||
Term note payable at 3.69% | 2023 | ||||||||
Revolving note payable at 5.25% | 2023 | ||||||||
Moy Park France Invoice Discounting Revolver with payables at EURIBOR plus 0.8% | 2019 | ||||||||
Moy Park Credit Agricole Bank Overdraft with notes payable at EURIBOR plus 1.50% | On Demand | ||||||||
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 Rate plus 1.50% | 2023 | ||||||||
Secured loans with payables at weighted average of 3.69% | Various | ||||||||
Finance lease obligations | Various | ||||||||
Long-term debt | |||||||||
Less: Current maturities of long-term debt | ( | ) | ( | ) | |||||
Long-term debt, less current maturities | |||||||||
Less: Capitalized financing costs | ( | ) | ( | ) | |||||
Long-term debt, less current maturities, net of capitalized financing costs: | $ | $ | |||||||
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 subsidiary and Wells Fargo Bank, National Association, as trustee (the “2015 Indenture”). The 2015 Indenture provides, among other things, that the Senior Notes due 2025 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 subsidiary and U.S. Bank National Association, as trustee (the “2017 Indenture”). The
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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 subsidiary. In addition, any of the Company’s other existing or future domestic restricted subsidiaries that incur or guarantee any other indebtedness (with limited exceptions) must also guarantee the Senior Notes due 2025 and the 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 subsidiary and rank equally with all of the Company’s and its guarantor subsidiary’s 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 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 June 30, 2019, the Company had Term Loans outstanding totaling $487.5 million and the amount available for borrowing under the revolving loan commitment was $708.4 million. The Company had letters of credit of $41.6 million and no borrowings outstanding under the revolving loan commitment as of June 30, 2019.
The U.S. Credit Facility includes a $75.0 million sub-limit for swingline loans and a $125.0 million sub-limit for letters of credit. Outstanding borrowings under the revolving loan commitment and the Term Loans bear interest at a per annum rate equal to (i) in the case of LIBOR loans, LIBOR plus 1.25 % 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 (ii) 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 (i) the accounts receivable and inventory of the Company and its non-Mexico subsidiaries, (ii) 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 (iii) 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.
U.K. and Europe Credit Facilities
Moy Park France Invoice Discounting Facility
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In June 2009, Moy Park France Sàrl entered into a €20.0 million invoice discounting facility with GE De Facto (the “Invoice Discounting Facility”). The facility limit was decreased by 50 percent in June 2018. The Invoice Discounting Facility is payable on demand and the term is extended on an annual basis. The agreement can be terminated by either party with three months’ notice. Outstanding borrowings under the Invoice Discounting Facility bear interest at a per annum rate equal to EURIBOR plus a margin of 0.80 %. As of June 30, 2019, the U.S. dollar-equivalent loan commitment, borrowing availability, and outstanding borrowings under the Invoice Discounting Facility were $11.4 million, $8.0 million, and $3.4 million, respectively.
The Invoice Discounting Facility contains financial covenants and various other covenants that may adversely affect Moy Park's ability to, among other things, incur additional indebtedness, consummate certain asset sales, enter into certain transactions with JBS and the Company's other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of Moy Park's assets.
Moy Park Credit Agricole Bank Overdraft
On December 3, 2018, Moy Park entered into an unsecured €0.5 million bank overdraft agreement (the “Overdraft Agreement”) with Credit Agricole. The Overdraft Agreement is payable on demand and can be cancelled anytime by the Company or Credit Agricole. Outstanding borrowings under the Overdraft Agreement bear interest at a per annum rate equal to EURIBOR plus 1.50 %. As of June 30, 2019, there were no outstanding borrowings under the Overdraft Agreement.
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 (i) LIBOR or, in relation to any loan in euros, EURIBOR, plus (ii) 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 June 30, 2019, both the U.S. dollar-equivalent loan commitment and borrowing availability under the Bank of Ireland Facility Agreement were $127.0 million. As of June 30, 2019, 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
12. INCOME TAXES
The Company recorded income tax expense of $96.0 million, a 27.4 % effective tax rate, for the twenty-six weeks ended June 30, 2019 compared to income tax expense of $75.5 million, a 25.1 % effective tax rate, for the twenty-six weeks ended July 1, 2018. The increase in income tax expense in 2019 resulted primarily from an increase in pre-tax income and an increase in unrecognized tax benefits in Mexico.
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
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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 June 30, 2019, 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 twenty-six weeks ended June 30, 2019 and July 1, 2018, there are tax effects of ($0.9 ) million and ($0.2 ) million, respectively, reflected in other comprehensive loss.
For the twenty-six weeks ended June 30, 2019 and July 1, 2018, 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 the Company and our subsidiaries for years prior to 2011 are no longer subject to examination by tax authorities.
13. 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.
Thirteen Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended June 30, 2019 | ||||||||||||||||||||||
Domestic | Export | Net Sales | Domestic | Export | Net Sales | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
U.S. | $ | $ | $ | $ | $ | $ | |||||||||||||||||
U.K. and Europe | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||
Net Sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||
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Thirteen Weeks Ended July 1, 2018 | Twenty-Six Weeks Ended July 1, 2018 | ||||||||||||||||||||||
Domestic | Export | Net Sales | Domestic | Export | Net Sales | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
U.S. | $ | $ | $ | $ | $ | $ | |||||||||||||||||
U.K. and Europe | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||
Net Sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||
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 the new revenue standard, 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 during the twenty-six weeks ended June 30, 2019 are as follows (in thousands):
Balance, beginning of period | $ | ||
Revenue recognized | ( | ) | |
Cash received, excluding amounts recognized as revenue during the period | |||
Balance, end of period | $ | ||
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.
14. | PENSION AND OTHER POSTRETIREMENT BENEFITS |
The Company sponsors programs that provide retirement benefits to most of its employees. These programs include qualified defined benefit pension plans, nonqualified defined benefit retirement plans, a defined benefit postretirement life insurance plan and defined contribution retirement savings plan. Expenses recognized under all these retirement plans totaled $5.7 million and $3.1 million in the thirteen weeks ended June 30, 2019 and July 1, 2018, respectively, and $9.6 million and $6.2 million in the twenty-six weeks ended June 30, 2019 and July 1, 2018, respectively.
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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:
Twenty-Six Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended July 1, 2018 | ||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||||||
Change in projected benefit obligation: | (In thousands) | ||||||||||||||
Projected benefit obligation, beginning of period | $ | $ | $ | $ | |||||||||||
Interest cost | |||||||||||||||
Actuarial losses (gains) | ( | ) | ( | ) | |||||||||||
Benefits paid | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Curtailments and settlements | ( | ) | |||||||||||||
Projected benefit obligation, end of period | $ | $ | $ | $ | |||||||||||
Twenty-Six Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended July 1, 2018 | ||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||||||
Change in plan assets: | (In thousands) | ||||||||||||||
Fair value of plan assets, beginning of period | $ | $ | $ | $ | |||||||||||
Actual return on plan assets | |||||||||||||||
Contributions by employer | |||||||||||||||
Benefits paid | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Curtailments and settlements | ( | ) | |||||||||||||
Fair value of plan assets, end of period | $ | $ | $ | $ | |||||||||||
June 30, 2019 | December 30, 2018 | ||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||||||
Funded status: | (In thousands) | ||||||||||||||
Unfunded benefit obligation, end of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
June 30, 2019 | December 30, 2018 | ||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||||||
Amounts recognized in the Condensed Consolidated Balance Sheets at end of period: | (In thousands) | ||||||||||||||
Current liability | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Long-term liability | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Recognized liability | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
June 30, 2019 | December 30, 2018 | ||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||||||
Amounts recognized in accumulated other comprehensive loss at end of period: | (In thousands) | ||||||||||||||
Net actuarial loss (gain) | $ | $ | $ | $ | ( | ) | |||||||||
The accumulated benefit obligation for the Company's defined benefit pension plans was $165.6 million and $157.6 million at June 30, 2019 and December 30, 2018, respectively. Each of the Company's defined benefit pension plans had accumulated benefit obligations that exceeded the fair value of plan assets at June 30, 2019 and December 30, 2018. As of June 30, 2019, the weighted average duration of the Company's defined benefit pension obligation is 29.69 years.
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Net Periodic Benefit Costs
Net defined benefit pension and other postretirement costs included the following components:
Thirteen Weeks Ended June 30, 2019 | Thirteen Weeks Ended July 1, 2018 | Twenty-Six Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended July 1, 2018 | ||||||||||||||||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Interest cost | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Estimated return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Settlement loss | |||||||||||||||||||||||||||||||
Amortization of net loss | |||||||||||||||||||||||||||||||
Net costs | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
The weighted average assumptions used in determining pension and other postretirement plan information were as follows:
June 30, 2019 | December 30, 2018 | ||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||
Assumptions used to measure benefit obligation at end of period: | |||||||||||
Discount rate | % | % | % | % | |||||||
Twenty-Six Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended July 1, 2018 | ||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||
Assumptions used to measure net pension and other postretirement cost: | |||||||||||
Discount rate | % | % | % | % | |||||||
Expected return on plan assets | % | NA | % | 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 June 30, 2019 and December 30, 2018, all pension and other postretirement benefit plans used variations of the RP2014 mortality table and the MP2015 mortality improvement scale.
The sensitivity of the projected benefit obligation for pension benefits to changes in the discount rate is set out below. The impact of a change in the discount rate of 0.25% on the projected benefit obligation for other benefits is less than $1,000 . This sensitivity analysis is based on changing one assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to variations in significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as for calculating the liability recognized in the Condensed Consolidated Balance Sheets.
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Increase in Discount Rate of 0.25% | Decrease in Discount Rate of 0.25% | ||||||
(In thousands) | |||||||
Impact on projected benefit obligation for pension benefits | $ | ( | ) | $ | |||
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:
June 30, 2019 | December 30, 2018 | ||||
Cash and cash equivalents | % | % | |||
Interest income receivable | % | % | |||
Pooled separate accounts(a): | |||||
Equity securities | % | % | |||
Fixed income securities | % | % | |||
Common collective trust funds(a): | |||||
Equity securities | % | % | |||
Fixed income securities | % | % | |||
Real estate | % | % | |||
Total assets | % | % | |||
(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, real estate trusts or other marketable securities, but the unit price generally will be different from the value of the underlying securities because the fund may also hold cash for liquidity purposes, and the fees imposed by the fund are deducted from the fund value rather than charged separately to investors. Some PSAs and CCTs have no restrictions as to their investment strategy and can invest in riskier investments, such as derivatives, hedge funds, private equity funds, or similar investments. |
Absent regulatory or statutory limitations, the target asset allocation for the investment of pension assets in the pooled separate accounts is 50 % in each of fixed income securities and equity securities and the target asset allocation for the investment of pension assets in the common collective trust funds is 30 % in fixed income securities and 70 % in equity securities. The plans only invest in fixed income and equity instruments for which there is a readily available public market. 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.
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The fair value measurements of plan assets fell into the following levels of the fair value hierarchy as of June 30, 2019 and December 30, 2018:
June 30, 2019 | December 30, 2018 | ||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Interest income receivable | |||||||||||||||||||||||||||||||
Pooled separate accounts: | |||||||||||||||||||||||||||||||
Large U.S. equity funds(d) | |||||||||||||||||||||||||||||||
Small/Mid U.S. equity funds(e) | |||||||||||||||||||||||||||||||
International equity funds(f) | |||||||||||||||||||||||||||||||
Fixed income funds(g) | |||||||||||||||||||||||||||||||
Common collective trusts funds: | |||||||||||||||||||||||||||||||
Large U.S. equity funds(d) | |||||||||||||||||||||||||||||||
Small U.S. equity funds(e) | |||||||||||||||||||||||||||||||
International equity funds(f) | |||||||||||||||||||||||||||||||
Fixed income funds(g) | |||||||||||||||||||||||||||||||
Real estate(h) | |||||||||||||||||||||||||||||||
Total assets | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
(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. |
The valuation of plan assets in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities primarily include equity and fixed income securities funds.
Benefit Payments
The following table reflects the benefits as of June 30, 2019 expected to be paid through 2028 from the Company's pension and other postretirement plans. Because its pension plans are primarily funded plans, the anticipated benefits with respect to these plans will come primarily from the trusts established for these plans. Because the Company's other postretirement plans are unfunded, the anticipated benefits with respect to these plans will come from its own assets.
Pension Benefits | Other Benefits | ||||||
(In thousands) | |||||||
2019 (remaining) | $ | $ | |||||
2020 | |||||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
2024-2028 | |||||||
Total | $ | $ | |||||
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The Company anticipates contributing $4.3 million and less than $0.1 million, as required by funding regulations or laws, to its pension plans and other postretirement plans, respectively, during the remainder of 2019.
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:
Twenty-Six Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended July 1, 2018 | ||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | ||||||||||||
(In thousands) | |||||||||||||||
Net actuarial loss (gain), beginning of period | $ | $ | ( | ) | $ | $ | |||||||||
Amortization | ( | ) | ( | ) | |||||||||||
Curtailment and settlement adjustments | ( | ) | |||||||||||||
Actuarial loss (gain) | ( | ) | ( | ) | |||||||||||
Asset loss (gain) | ( | ) | |||||||||||||
Net actuarial loss (gain), end of period | $ | $ | $ | $ | ( | ) | |||||||||
The Company expects to recognize in net pension cost throughout the remainder of 2019 an actuarial loss of $0.7 million that was recorded in accumulated other comprehensive loss at June 30, 2019.
Risk Management
Through its defined benefit plans, the Company is exposed to a number of risks, the most significant of which are detailed below:
Asset volatility. The plan liabilities are calculated using a discount rate set with reference to corporate bond yields; if plan assets under perform this yield, this will create a deficit. The pension plans hold a significant proportion of equities, which are expected to outperform corporate bonds in the long-term while contributing volatility and risk in the short-term. The Company monitors the level of investment risk but has no current plan to significantly modify the mixture of investments. The investment position is discussed more below.
Changes in bond yields. A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.
The investment position is managed and monitored by a committee of individuals from various departments. This group actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the pension obligations. The group has not changed the processes used to manage its risks from previous periods. The group does not use derivatives to manage its risk. Investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. The majority of equities are in U.S. large and small cap companies with some global diversification into international entities. The plans are not exposed to significant foreign currency risk.
Remeasurement
The Company remeasures both plan assets and obligations on a quarterly basis.
15. | STOCKHOLDERS' EQUITY |
Accumulated Other Comprehensive Loss
The following tables provide information regarding the changes in accumulated other comprehensive loss:
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Twenty-Six Weeks Ended June 30, 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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | ( | ) | |||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) to net income | ( | ) | ( | ) | |||||||||||||||
Currency translation | |||||||||||||||||||
Net current period other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Balance, end of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Twenty-Six Weeks Ended July 1, 2018(a) | |||||||||||||||||||
Gains 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 Gains on Available-for-Sale Securities | Total | |||||||||||||||
(In thousands) | |||||||||||||||||||
Balance, beginning of period | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||
Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | ( | ) | |||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) to net income | ( | ) | |||||||||||||||||
Currency translation | ( | ) | ( | ) | |||||||||||||||
Net current period other comprehensive income (loss) | ( | ) | ( | ) | |||||||||||||||
Balance, end of period | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||
(a) | All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive income (loss). |
Amounts Reclassified from Accumulated Other Comprehensive Loss(a) | ||||||||||
Details about Accumulated Other Comprehensive Loss Components | Twenty-Six Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended July 1, 2018 | 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 | $ | $ | ( | ) | Cost of sales | |||||
Realized gain on sale of securities | Interest income | |||||||||
Amortization of defined benefit pension and other postretirement plan actuarial losses: | ||||||||||
Union employees pension plan(b)(d) | ( | ) | ( | ) | Cost of sales | |||||
Legacy Gold Kist plans(c)(d) | ( | ) | ( | ) | Cost of sales | |||||
Legacy Gold Kist plans(c)(d) | ( | ) | ( | ) | Selling, general and administrative expense | |||||
Total before tax | ( | ) | ( | ) | ||||||
Tax benefit | ( | ) | ||||||||
Total reclassification for the period | $ | ( | ) | $ | ( | ) | ||||
(a) | Amounts in parentheses represent debits to results of operations. |
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(b) | The Company sponsors the Union Plan, a qualified defined benefit pension plan covering certain locations or work groups with collective bargaining agreements. |
(c) | The Company sponsors the GK Pension Plan, a qualified defined benefit pension plan covering certain eligible U.S. employees who were employed at locations that the Company purchased through its acquisition of Gold Kist in 2007, the SERP Plan, a nonqualified defined benefit retirement plan covering certain former Gold Kist executives, the Directors’ Emeriti Plan, a nonqualified defined benefit retirement plan covering certain former Gold Kist directors and the Retiree Life Plan, a defined benefit postretirement life insurance plan covering certain retired Gold Kist employees (collectively, the “Legacy Gold Kist Plans”). |
(d) | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See “Note 14. Pension and Other Postretirement Benefits” to the Condensed Consolidated Financial Statements. |
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. 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
16. | INCENTIVE COMPENSATION |
The Company sponsors short-term incentive plans that provides the grant of either cash or share-based bonus awards payable upon achievement of specified performance goals. Full-time, salaried exempt employees of the Company's U.S. operations who are selected by the administering committee are eligible to participate in the Pilgrim's Short Term Incentive Plan (“STIP”). Certain full-time, salaried employees of the Company’s Mexico operations are eligible to participate in the Pilgrim’s Mexico Incentive Plan (“PMIP”). The Company assumed responsibility for the JFC LLC Long-Term Equity Incentive Plan dated January 1, 2014, as amended (the “JFC LTIP”) through its acquisition of JFC LLC and its subsidiaries (together, “GNP”) on January 6, 2017. The Company assumed responsibility for the Moy Park Incentive Plan dated January 1, 2013, as amended (the “MPIP”) through its acquisition of Moy Park on September 8, 2017. At June 30, 2019, the Company has accrued $16.0 million, $1.3 million, $1.3 million and $0.8 million related to cash bonus awards that could potentially be awarded under the STIP, JFC LTIP, MPIP and PMIP, respectively, during 2019.
The Company also sponsors a performance-based, omnibus long-term incentive plan that provides for the grant of a broad range of long-term equity-based and liability-based awards to the Company’s officers and other employees, members of the Board of Directors and any consultants (the “LTIP”). Awards that may be granted under the LTIP include “incentive stock options,” within the meaning of the IRC, nonqualified stock options, stock appreciation rights, restricted stock awards and restricted stock units (“RSUs”). Equity-based awards are converted into shares of the Company's common stock shortly after award vesting. Compensation cost to be recognized for an equity-based awards grant is determined by multiplying the number of awards granted by the closing price of a share of the Company's common stock on the award grant date. Liability-based awards granted under the LTIP are converted into cash shortly after award vesting. Compensation cost to be recognized for a liability-based awards grant is first determined by multiplying the number of awards granted by the closing price of a share of the Company's common stock on the award grant date. However, the compensation cost to be recognized is adjusted at each subsequent milestone date (i.e., forfeiture date, vesting date or financial reporting date) by multiplying the number of awards granted by the closing price of a share of the Company's common stock on the milestone date. At June 30, 2019, we have in reserve approximately 3.8 million shares of common stock for future issuance under the LTIP. The LTIP will expire pursuant to its terms on December 28, 2019 and no awards will be granted under the LTIP after that date. On May 1, 2019, the Company's stockholders approved the Pilgrim’s Pride Corporation 2019 Long Term Incentive Plan (the “2019 LTIP”) and reserved 2.0 million shares of common stock for awards under the plan. The 2019 LTIP is intended to replace the expiring plan. The 2019 LTIP will be effective as of December 28, 2019.
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The following LTIP awards were outstanding during the twenty-six weeks ended June 30, 2019:
Award Type | Awards Granted | Grant Date | Intended Settlement Method | Grant Date Fair Value per Award | Milestone Date Fair Value per Award | Vesting Condition | Vesting Date | Awards Forfeited to Date | ||||||||||||||
RSU | 2/14/2018 | Stock | $ | NA | Service | 1/1/2019 | ||||||||||||||||
RSU | 3/1/2018 | Stock | NA | Service | (a) | |||||||||||||||||
RSU | 3/1/2018 | Stock | NA | Performance / Service | (b) | |||||||||||||||||
RSU | 3/1/2018 | Cash | $ | Performance / Service | (c) | |||||||||||||||||
RSU | 5/10/2018 | Stock | NA | Service | (d) | |||||||||||||||||
RSU | 5/10/2018 | Cash | Service | 5/1/2019 | ||||||||||||||||||
RSU | 12/18/2018 | Stock | NA | Service | 7/1/2019 | |||||||||||||||||
RSU | 1/7/2019 | Stock | NA | Performance / Service | (e) | |||||||||||||||||
RSU | 1/7/2019 | Cash | Performance / Service | (f) | ||||||||||||||||||
RSU | 4/30/2019 | Stock | NA | Service | 7/1/2020 | |||||||||||||||||
(a) | The restricted stock units vest in ratable tranches on December 31, 2018, December 31, 2019 and December 31, 2020. Expected compensation cost related to these units totals $ |
(b) | The restricted stock units vest in ratable tranches on December 31, 2019, December 31, 2020 and December 31, 2021. Expected compensation cost related to these units totals $ |
(c) | The restricted stock units vest in ratable tranches on December 31, 2019, December 31, 2020 and December 31, 2021. Expected compensation cost related to these units totals $ |
(d) | These restricted stock units were granted to the three non-employees who currently serve on the Company's Board of Directors. Each participating director's units will vest upon his departure from the Company's Board of Directors. Compensation cost was recognized in profit/loss upon the grant date. |
(e) | If performance conditions related to the Company's 2019 operating results are satisfied, the restricted stock units vest in ratable tranches on December 31, 2020, December 31, 2021 and December 31, 2022. Expected compensation cost related to these units totals $ |
(f) | If performance conditions related to the Company's 2019 operating results are satisfied, the restricted stock units vest in ratable tranches on December 31, 2020, December 31, 2021 and December 31, 2022. Expected compensation cost related to these units totals $ |
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
(In thousands) | |||||||||||||||
Equity-based awards compensation cost: | |||||||||||||||
Cost of sales | $ | $ | $ | $ | |||||||||||
Selling, general and administrative expense | |||||||||||||||
Total cost | |||||||||||||||
Income tax benefit | |||||||||||||||
Net cost | $ | $ | $ | $ | |||||||||||
Liability-based awards compensation cost: | |||||||||||||||
Selling, general and administrative expense | $ | $ | $ | $ | |||||||||||
Income tax benefit | |||||||||||||||
Net cost | $ | $ | $ | $ | |||||||||||
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The Company’s RSU activity is included below:
Twenty-Six Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended July 1, 2018 | ||||||||||||
Number | Weighted Average Grant Date Fair Value | Number | Weighted Average Grant Date Fair Value | ||||||||||
(In thousands, except weighted average fair values) | |||||||||||||
Equity-based RSUs: | |||||||||||||
Outstanding at beginning of period | $ | $ | |||||||||||
Granted | |||||||||||||
Vested | ( | ) | |||||||||||
Forfeited | ( | ) | ( | ) | |||||||||
Outstanding at end of period | $ | $ | |||||||||||
Twenty-Six Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended July 1, 2018 | ||||||||||||
Number | Weighted Average Milestone Date Fair Value(a) | Number | Weighted Average Milestone Date Fair Value(a) | ||||||||||
(In thousands, except weighted average fair values) | |||||||||||||
Liability-based RSUs: | |||||||||||||
Outstanding at beginning of period | $ | $ | |||||||||||
Granted | |||||||||||||
Vested | ( | ) | |||||||||||
Outstanding at end of period | $ | $ | |||||||||||
(a) | The milestone date fair value is the closing price of a share of the Company's common stock on the respective milestone date (i.e., grant date, vesting date, forfeiture date or financial reporting date). |
The total fair values of equity-based awards and liability-based awards vested during the twenty-six weeks ended June 30, 2019 were $7.1 million and $0.1 million, respectively. No awards vested during the twenty-six weeks ended July 1, 2018.
At June 30, 2019, the total unrecognized compensation cost related to all nonvested equity-based awards was $12.0 million. This cost is expected to be recognized over a weighted average period of 1.74 years. At June 30, 2019, the total unrecognized compensation cost related to all nonvested liability-based awards was $3.5 million. This cost is expected to be recognized over a weighted average period of 2.34 years.
Historically, we have issued new shares to satisfy equity-based award conversions.
17. RESTRUCTURING-RELATED ACTIVITIES
In 2018, the Company elected to close its 40 North Foods product incubator operation located in Boulder, Colorado. Implementation of this restructuring initiative is expected to result in total pre-tax charges of approximately $0.6 million, and approximately $0.5 million of these charges are estimated to result in cash outlays. These activities were initiated in the second quarter of 2018 and are expected to be substantially completed by the third quarter of 2019.
In 2017, the Company initiated a restructuring initiative to capitalize on cost-saving opportunities within its GNP operations located in Luverne, Minnesota and St. Cloud, Minnesota. Implementation of the initiative is expected to result in total pre-tax charges of approximately $6.2 million, and approximately $4.3 million of these charges are estimated to result in cash outlays. These activities were initiated in the first quarter of 2017 and are expected to be substantially completed by the second quarter of 2020.
The following table provides a summary of our estimates of net costs associated with these restructuring initiatives by major type of cost:
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Type of Cost | 40 North Foods | GNP | Total Estimated Amount Expected to be Incurred | ||||||||
(In thousands) | |||||||||||
Employee termination benefits | $ | $ | $ | ||||||||
Inventory adjustments | |||||||||||
Asset impairments | |||||||||||
Other, net(a) | |||||||||||
Total estimated costs, net | $ | $ | $ | ||||||||
(a) | Comprised of other costs directly related to the restructuring initiatives, including prepaid software impairment, St. Cloud, Minnesota office lease costs, Luverne, Minnesota plant closure costs, and Boulder, Colorado office lease costs and sublease income. |
During the thirteen and twenty-six weeks ended June 30, 2019, the Company recognized the following expenses (income) and paid (received) the following cash related to each restructuring initiative:
Thirteen Weeks Ended June 30, 2019 | Twenty-Six Weeks Ended June 30, 2019 | ||||||||||||||
Expenses (Income) | Cash Outlays (Receipts) | Expenses (Income) | Cash Outlays (Receipts) | ||||||||||||
(In thousands) | |||||||||||||||
40 North Foods - Other, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
GNP - Employee termination benefits | |||||||||||||||
$ | ( | ) | $ | $ | ( | ) | $ | ||||||||
The expenses (income) are reported in the line item Administrative restructuring activities on the Condensed Consolidated Statements of Income and are recognized in the U.S. segment.
The following table reconciles liabilities and reserves associated with each restructuring initiative from initiative inception to June 30, 2019. Ending liability balances for employee termination benefits and other charges are reported in the line item Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. The ending reserve balance for inventory impairments is reported in the line item Inventories in our Condensed Consolidated Balance Sheets.
40 North Foods | GNP | ||||||||||||||||||||||||||
Employee Termination Benefits | Other, Net | Total | Employee Termination Benefits | Inventory Impairments | Other, Net | Total | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Restructuring charges incurred | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Cash payments and disposals | ( | ) | ( | ) | |||||||||||||||||||||||
Liability or reserve at December 31, 2017 | |||||||||||||||||||||||||||
Restructuring charges incurred | ( | ) | ( | ) | |||||||||||||||||||||||
Restructuring income recognized | ( | ) | ( | ) | |||||||||||||||||||||||
Cash payments and disposals | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||
Cash received | |||||||||||||||||||||||||||
Liability or reserve at December 30, 2018 | |||||||||||||||||||||||||||
Restructuring income recognized | ( | ) | ( | ) | |||||||||||||||||||||||
Cash payments and disposals | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
Cash received | |||||||||||||||||||||||||||
Liability or reserve at June 30, 2019 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
18. | COMMITMENTS AND CONTINGENCIES |
General
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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 (i) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (ii) any tax, duty or other charge with respect to the loan (except standard income tax) or (iii) 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 costs 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 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.
The Company is subject to various legal proceedings and claims which arise in the ordinary course of business. In the Company’s opinion, it has made appropriate and adequate accruals for claims where necessary; however, the ultimate liability for these matters is uncertain, and if significantly different than the amounts accrued, the ultimate outcome could have a material effect on the financial condition or results of operations of the Company. For a discussion of the material legal proceedings and claims, see Part II, Item 1. “Legal Proceedings.” Below is a summary of some of these material proceedings and claims. The Company believes it has substantial defenses to the claims made and intends to vigorously defend these cases.
Tax Claims and Proceedings
A Mexico subsidiary of the Company is currently appealing an unfavorable tax adjustment proposed by Mexican tax authorities due to an examination of a specific transaction undertaken by the Mexico subsidiary during tax years 2009 and 2010. 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 June 21, 2019, 26 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);
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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); and Services Group of America, Inc. v. Tyson Food, Inc., et al., Case No. 1:19-cv-04194) 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. On June 20, 2019, an additional direct action complaint (Commonwealth of Puerto Rico v. Koch Foods, Inc., et al., Case No. 3:19-cv-01605) was filed with U.S. District Court for the District of Puerto Rico by the Commonwealth of Puerto Rico, the allegations of which also largely mirror those in the class action complaints. Substantial completion of document discovery for most defendants, including PPC, occurred on July 18, 2018. The Court’s scheduling order currently requires completion of fact discovery on March 13, 2020, class certification briefing and expert reports proceeding from April 13, 2020 to December 14, 2020, and summary judgment to proceed 60 days after the Court rules on motions for class certification. 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 United States Department of Justice filed a motion to intervene and stay discovery in the In re Broiler Chicken Antitrust Litigation for a period of 6 months. Following a hearing on June 27, 2019, on June 28, 2019, the Court granted the government’s motion to intervene, and ordered a limited 3-month stay of discovery until September 27, 2019. On July 1, 2019, the Department of Justice issued a subpoena to PPC in connection with its investigation.
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 (i) 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, (ii) its conduct constituted a violation of federal antitrust laws, (iii) PPC’s revenues during the class period were the result of illegal conduct and (iv) that PPC lacked effective internal control over financial reporting. The complaint also states that PPC’s industry was anticompetitive. 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 this quarterly report, 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, or 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. Rulings on the motion are pending. In addition, on March 12, 2018, the Northern District of Texas, Fort Worth Division, or the Bankruptcy Court, enjoined 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. To date, plaintiffs have not amended the consolidated complaint to comply with the Bankruptcy Court’s injunction order or the confirmation order.
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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 (i) consolidate the two stockholder derivative cases, (ii) stay the consolidated action until the resolution of the motion to dismiss in the Hogan putative securities class action, and (iii) appoint co-lead counsel. The Court granted the motion on May 8, 2017, staying the proceedings pending resolution of the motion to dismiss in the Hogan action.
In January 2018, a stockholder derivative action entitled Raul v. Nogueira de Souza, et al., was filed in the U.S. District Court for the District of Colorado against PPC, as nominal defendant, as well as PPC’s directors, its Chief Financial Officer, and majority shareholder, JBS S.A. The complaint alleges, among other things, that (i) defendants permitted PPC to omit material information from its proxy statements filed in 2014 through 2017 related to the conduct of Wesley Mendonça Batista and Joesley Mendonça Batista, (ii) the individual defendants and JBS S.A. breached their fiduciary duties by failing to prevent PPC and its officers from engaging in an antitrust conspiracy as alleged in the Broiler Litigation and (iii) issuing false and misleading statements as alleged in the Hogan class action litigation. On May 17, 2018, the plaintiffs filed an unopposed motion to stay proceedings pending a final resolution of the Hogan class action litigation. The court-ordered deadline for the defendants to file an answer or otherwise respond to the complaint was originally set for July 30, 2018. This deadline was extended to August 31, 2018, at which time the plaintiffs filed an unopposed motion to voluntarily dismiss the complaint without prejudice. The Court granted the plaintiffs’ motion on September 4, 2018.
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 Holding and several members of the Batista family, in the Court of Chancery of the State of Delaware, or 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. 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 is proceeding to discovery, with fact discovery scheduled to close in February 2020, expert discovery scheduled to close in May 2020, and, subject to the Chancery Court’s availability, trial commencing in November 2020.
The Company believes it has strong defenses in each of the above litigations and intends to contest them vigorously. The Company cannot predict the outcome of these actions nor when they will be resolved. If the plaintiffs were to prevail in any of these litigations, the Company could be liable for damages, which could be material and could adversely affect its financial condition or results of operations.
J&F Investigation
On May 3, 2017, certain officers of J&F Investimentos S.A. (“J&F,” and 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 plea bargain agreements (collectively, the “Plea Bargain Agreements”) with the Brazilian Federal Prosecutor’s Office (Ministério Público Federal) (the “MPF”) in connection with certain misconduct by J&F and such individuals acting in their capacity as J&F executives. The details of such misconduct are set forth in separate annexes to the Plea Bargain Agreements, and include admissions of 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 MPF, whereby J&F assumed responsibility for the conduct that was described in the annexes to the Plea Bargain Agreements. In connection with the Leniency Agreement, J&F has agreed to pay a fine of 10.3 billion Brazilian reais, adjusted for inflation, over a 25 -year period. Various proceedings by Brazilian governmental authorities remain pending against J&F and certain of its former or current officers to potentially invalidate the Plea Bargain Agreements and impose more severe penalties for additional alleged misconduct that were not disclosed in the annexes to the Plea Bargain Agreements.
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J&F is conducting an internal investigation in accordance with the terms of the Leniency Agreement, and has engaged outside advisors to assist in conducting this investigation, which is ongoing, and with which we are fully cooperating. JBS S.A. and the Company have engaged outside U.S. legal counsel to: (i) conduct an independent investigation in connection with matters disclosed in the Leniency Agreement and the Plea Bargain Agreements; and (ii) communicate with relevant U.S. authorities, including the Department of Justice regarding the factual findings of that investigation. Additionally, JBS S.A. 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 the J&F and JBS S.A. 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. We will monitor the results of the investigations. 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.
Any further developments in these, or other, matters involving the controlling shareholders, directors, or officers of J&F, or other parties affiliated with us, could subject JBS S.A. and its subsidiaries (including the Company) to potential fines or penalties, may materially adversely affect the public perception or reputation of JBS S.A. and its subsidiaries (including the Company) and could have a material adverse effect on JBS S.A. and its subsidiaries (including the Company).
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19. | RELATED PARTY TRANSACTIONS |
Pilgrim’s has been and, in some cases, continues to be a party to certain transactions with affiliated companies.
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
(In thousands) | |||||||||||||||
Sales to related parties: | |||||||||||||||
JBS USA Food Company(a) | $ | $ | $ | $ | |||||||||||
JBS Five Rivers | |||||||||||||||
JBS Global (UK) Ltd. | |||||||||||||||
JBS Chile Ltda. | |||||||||||||||
Combo, Mercado De Congelados | |||||||||||||||
Total sales to related parties | $ | $ | $ | $ | |||||||||||
Cost of goods purchased from related parties: | |||||||||||||||
JBS USA Food Company(a) | $ | $ | $ | $ | |||||||||||
Seara Meats B.V. | |||||||||||||||
JBS Aves Ltda. | |||||||||||||||
JBS Toledo NV | |||||||||||||||
JBS Global (UK) Ltd. | |||||||||||||||
Total cost of goods purchased from related parties | $ | $ | $ | $ | |||||||||||
Expenditures paid by related parties: | |||||||||||||||
JBS USA Food Company(b) | $ | $ | $ | $ | |||||||||||
Seara Alimentos | |||||||||||||||
JBS Chile Ltda. | |||||||||||||||
Total expenditures paid by related parties | $ | $ | $ | $ | |||||||||||
Expenditures paid on behalf of related parties: | |||||||||||||||
JBS USA Food Company(b) | $ | $ | $ | $ | |||||||||||
JBS S.A. | |||||||||||||||
Seara International Ltd. | |||||||||||||||
Total expenditures paid on behalf of related parties | $ | $ | $ | $ | |||||||||||
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June 30, 2019 | December 30, 2018 | ||||||
(In thousands) | |||||||
Accounts receivable from related parties: | |||||||
JBS USA Food Company(a) | $ | $ | |||||
JBS Chile Ltda. | |||||||
Combo, Mercado de Congelados | |||||||
Seara International Ltd. | |||||||
Total accounts receivable from related parties | $ | $ | |||||
Accounts payable to related parties: | |||||||
JBS USA Food Company(a) | $ | $ | |||||
Seara Meats B.V. | |||||||
JBS Toledo NV | |||||||
JBS Chile Ltda. | |||||||
Total accounts payable to related parties | $ | $ | |||||
(a) | The Company routinely executes transactions to both purchase products from JBS USA Food Company (“JBS USA”) and sell products to them. As of June 30, 2019, approximately $ |
(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 companies. Under this agreement, the fees associated with procuring SAP licenses and maintenance services are allocated between the Company and JBS USA in proportion to the percentage of licenses used by each company. The agreement expires on the date of expiration, or earlier termination, of the underlying SAP license agreement. The Company also has an agreement with JBS USA to allocate the costs of supporting the business operations by one consolidated corporate team, which have historically been supported by their respective corporate teams. Expenditures paid by JBS USA on behalf of the Company will be reimbursed by the Company and expenditures paid by the Company on behalf of JBS USA will be reimbursed by JBS USA. This agreement expires on December 31, 2019. |
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20. SEGMENT REPORTING
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 Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S.
Information on segments and a reconciliation to income before income taxes are as follows:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
Net Sales | (In thousands) | ||||||||||||||
U.S. | $ | $ | $ | $ | |||||||||||
U.K. and Europe | |||||||||||||||
Mexico | |||||||||||||||
Total net sales | $ | $ | $ | $ | |||||||||||
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
Operating Income | (In thousands) | ||||||||||||||
U.S. | $ | $ | $ | $ | |||||||||||
U.K. and Europe | |||||||||||||||
Mexico | |||||||||||||||
Elimination | ( | ) | |||||||||||||
Total operating income | |||||||||||||||
Interest expense, net of capitalized interest | |||||||||||||||
Interest income | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Foreign currency transaction losses (gains) | |||||||||||||||
Miscellaneous, net | ( | ) | ( | ) | |||||||||||
Income before income taxes | $ | $ | $ | $ | |||||||||||
In addition to the net sales reported above, the U.S. segment also generated intersegment net sales of $32.5 million and $45.6 million in the thirteen weeks ended June 30, 2019 and July 1, 2018, respectively, from transactions with the Mexico segment and intersegment net sales of $67.5 million and $72.1 million in the twenty-six weeks ended June 30, 2019 and July 1, 2018, respectively, from transactions with the Mexico segment. These intersegment net sales were transacted at market prices.
June 30, 2019 | December 30, 2018 | ||||||
Long-Lived Assets(a) | (In thousands) | ||||||
U.S. | $ | $ | |||||
U.K. and Europe | |||||||
Mexico | |||||||
Total assets | $ | $ | |||||
(a) | For this disclosure, we exclude financial instruments, deferred tax assets, operating lease assets and intangible assets in accordance with Accounting Standards Codification (“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. |
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Description of the Company
We are one of the largest chicken producers in the world, with operations in the United States (“U.S.”), United Kingdom (“U.K.”), Mexico, France, Puerto Rico and the Netherlands. As of June 30, 2019, we had approximately 52,600 employees and the capacity to process approximately 45.4 million birds per work week for a total of approximately 12.9 billion pounds of live chicken annually. Approximately 5,000 contract growers supply poultry for our operations. As of June 30, 2019, JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owned 78.4% of our outstanding common stock. See “Note 1. Description of Business and Basis of Presentation” of our Condensed Consolidated Financial Statements included in this quarterly report for additional information.
We operate on a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. The reader should assume any reference we make to a particular year (for example, 2019) in this quarterly report applies to our fiscal year and not the calendar year.
Executive Summary
We reported net income attributable to Pilgrim’s Pride Corporation of $170.1 million, or $0.68 per diluted common share, for the thirteen weeks ended June 30, 2019. These operating results included gross profit of $367.9 million. During the thirteen weeks ended June 30, 2019, we generated $283.0 million of cash from operations.
We reported net income attributable to Pilgrim’s Pride Corporation of $254.2 million, or $1.02 per diluted common share, for the twenty-six weeks ended June 30, 2019. These operating results included gross profit of $586.8 million. During the twenty-six weeks ended June 30, 2019, we generated $403.4 million of cash from operations.
Our U.S. and Mexico segments use corn and soybean meal as the main ingredients for feed production, while our U.K. and Europe segment uses wheat as the main ingredient for feed production. The following table compares the highest and lowest prices reached on nearby futures for one bushel of corn, one ton of soybean meal and one metric ton of wheat during the current and previous years:
Corn(a) | Soybean Meal(a) | Wheat(a) | |||||||||||||||||||||
Highest Price | Lowest Price | Highest Price | Lowest Price | Highest Price | Lowest Price | ||||||||||||||||||
2019: | |||||||||||||||||||||||
Second Quarter | $ | 4.69 | $ | 3.72 | $ | 334.90 | $ | 295.50 | £ | 176.21 | £ | 174.54 | |||||||||||
First Quarter | 3.98 | 3.66 | 330.20 | 305.30 | 173.80 | 155.30 | |||||||||||||||||
2018: | |||||||||||||||||||||||
Fourth Quarter | 3.90 | 3.68 | 327.30 | 307.80 | 179.30 | 167.00 | |||||||||||||||||
Third Quarter | 3.87 | 3.43 | 341.40 | 303.30 | 194.65 | 165.75 | |||||||||||||||||
Second Quarter | 4.27 | 3.66 | 391.70 | 329.90 | 159.75 | 142.40 | |||||||||||||||||
First Quarter | 4.01 | 3.63 | 394.10 | 319.60 | 139.20 | 134.70 | |||||||||||||||||
(a) | We obtain corn and soybean meal prices from the Chicago Board of Trade, and we obtain wheat prices from the London International Financial Futures and Options Exchange. |
We purchase derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our anticipated consumption of commodity inputs such as corn, soybean meal, soybean oil and natural gas. We will sometimes purchase a derivative instrument to minimize the impact of a commodity’s price volatility on our operating results. We will also purchase derivative financial instruments in an attempt to mitigate currency exchange rate exposure related to the financial statements of our Mexico segment that are denominated in Mexican pesos and our U.K. and Europe segment that are denominated in British pounds and euros. For additional information see “Note 6. Derivative Financial Instruments”.
During the thirteen weeks ended June 30, 2019 and July 1, 2018, we recognized net losses totaling $0.5 million and $24.0 million, respectively, related to changes in the fair value of our derivative financial instruments. During the twenty-six weeks ended June 30, 2019 and July 1, 2018, we recognized net losses totaling $8.5 million and $17.6 million, respectively, related to changes in the fair value of our derivative financial instruments.
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Although changes in the market price paid for feed ingredients impact cash outlays at the time we purchase the ingredients, these changes do not immediately impact cost of sales. The cost of feed ingredients is recognized in cost of sales, on a first-in-first-out basis, at the same time that the sales of the chickens that consume the feed grains are recognized. Thus, there is a lag between the time cash is paid for feed ingredients and the time the cost of such feed ingredients is reported in cost of goods sold. For example, corn delivered to a feed mill and paid for one week might be used to manufacture feed the following week. However, the chickens that eat that feed might not be processed and sold for another 42 to 63 days, and only at that time will the costs of the feed consumed by the chicken become included in cost of goods sold.
Commodities such as corn, soybean meal and soybean oil are actively traded through various exchanges with future market prices quoted on a daily basis. These quoted market prices, although a good indicator of the commodity's base price, do not represent the final price for which we can purchase these commodities. There are several components in addition to the quoted market price, such as freight, storage and seller premiums, that are included in the final price that we pay for grain. Although changes in quoted market prices may be a good indicator of the commodity’s base price, the components mentioned above may have a significant impact on the total change in grain costs recognized from period to period.
Market prices for chicken products are currently at levels sufficient to offset the costs of feed ingredients. However, there can be no assurance that chicken prices will not decrease due to such factors as competition from other proteins and substitutions by consumers of non-protein foods because of uncertainty surrounding the general economy and unemployment.
Brexit
The anticipated exit of the U.K. from the European Union (“E.U.”) (commonly referred to as “Brexit”) and the resulting significant change to the relationship between the U.K. and the E.U., as well as relationships between the U.K. and countries outside the E.U., could disrupt the overall economic growth or stability of the U.K. and the E.U. and otherwise negatively impact our European operations. The U.K. is due to exit the E.U. on October 31, 2019. The U.K. could leave the E.U. prior to October 31, 2019 if a withdrawal agreement negotiated between the U.K. and the E.U. is approved by the U.K. Parliament. If the U.K. were to approve the withdrawal agreement, it would maintain the status quo regarding trade rights with the E.U. until December 2020 in order to allow negotiation of a free trade agreement between the two governments. If the withdrawal agreement is not approved by October 31, 2019, the U.K. would either leave the E.U. immediately under World Trade Organization terms or would request and be reliant upon the E.U. approving a further extension to the exit date.
It is possible that Brexit could result in our European operations becoming subject to materially different, and potentially conflicting, laws, regulations or tariffs which could require costly new compliance initiatives. There could also be additional adverse impacts on immigration and trade between the U.K. and the E.U. or countries outside the E.U. Such impacts might directly increase our costs or could decrease demand for our goods. The completion of Brexit could also adversely affect the value of our British pound- and euro-denominated assets and obligations. Future fluctuations in the exchange rate between the British pound, the euro and other currencies of our suppliers may have the effect of increasing the cost of goods sold by our European operations. We might not be able to pass on such increases to our customers. Any one of these impacts could have an adverse effect on our results of operations and financial condition.
To prepare for the impacts of Brexit, our European operations have (i) engaged with various U.K. and E.U. government departments to highlight the issues of Brexit and to develop potential solutions to those issues, (ii) engaged with customers to formalize contingency plans to minimize business disruption should the U.K. exit the E.U. without an approved withdrawal agreement, (iii) analyzed product flows and reviewed meat availability to determine appropriate plans for customers, (iv) engaged with customers to commence post-Brexit business plans and to negotiate cost-sharing arrangements for such plans, and (v) increased stock levels where possible to help manage border delays that could occur following Brexit.
Significant uncertainty remains until the terms of the exit are known. We will continue to analyze and plan for the exit as information becomes available.
Segment and Geographic Reporting
We operate in three reportable segments: U.S., U.K. and Europe, and Mexico. We measure segment profit as operating income. Corporate expenses are allocated to Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. For additional information, see “Note 20. Segment Reporting” of our Condensed Consolidated Financial Statements included in this quarterly report.
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Results of Operations
Thirteen Weeks Ended June 30, 2019 Compared to Thirteen Weeks Ended July 1, 2018
Net sales. Net sales generated in the thirteen weeks ended June 30, 2019 increased $6.4 million, or 0.2%, from net sales generated in the thirteen weeks ended July 1, 2018. The following table provides net sales information:
Sources of net sales | Thirteen Weeks Ended June 30, 2019 | Change from Thirteen Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S.(a) | $ | 1,916,954 | $ | 17,519 | 0.9 | % | |||||
U.K. and Europe(b) | 535,902 | (27,200 | ) | (4.8 | )% | ||||||
Mexico(c) | 390,229 | 16,053 | 4.3 | % | |||||||
Total net sales | $ | 2,843,085 | $ | 6,372 | 0.2 | % | |||||
(a) | U.S. net sales generated in the thirteen weeks ended June 30, 2019 increased $17.5 million, or 0.9%, from U.S. net sales generated in the thirteen weeks ended July 1, 2018 primarily because of an increase in sales volume, partially offset by a decrease in net sales per pound. The increase in sales volume experienced by our U.S. segment contributed $31.8 million, or 1.7 percentage points, to the increase in net sales. The impact of increased sales volume on net sales was partially offset by a decrease in net sales per pound of $14.2 million, or 0.7 percentage points. Included in U.S. net sales generated during the thirteen weeks ended June 30, 2019 and July 1, 2018 were net sales to JBS USA Food Company totaling $3.5 million and $4.5 million, respectively. |
(b) | U.K. and Europe net sales generated in the thirteen weeks ended June 30, 2019 decreased $27.2 million, or 4.8%, from U.K. and Europe net sales generated in the thirteen weeks ended July 1, 2018 primarily because of a decrease in sales volume and the unfavorable impact of foreign currency translation, partially offset by an increase in net sales per pound. The decrease in sales volume contributed $41.1 million, or 7.3 percentage points, and the unfavorable impact of foreign currency translation contributed $31.3 million, or 5.6 percentage points, to the decrease in net sales. An increase in net sales per pound partially offset the decrease in net sales by $45.2 million, or 8.0 percentage points. |
(c) | Mexico net sales generated in the thirteen weeks ended June 30, 2019 increased $16.1 million, or 4.3%, from Mexico net sales generated in the thirteen weeks ended July 1, 2018 primarily because of an increase in net sales per pound and the positive impact of foreign currency remeasurement, partially offset by a decrease in sales volume. Increased net sales per pound and the positive impact of foreign currency remeasurement resulted in an increase in net sales of $22.0 million, or 5.9 percentage points, and $5.9 million, or 1.6 percentage points, respectively. These increases were partially offset by a decrease in sales volume of $11.8 million, or 3.2 percentage points. |
Gross profit. Gross profit increased by $93.6 million, or 34.1%, from $274.2 million generated in the thirteen weeks ended July 1, 2018 to $367.9 million generated in the thirteen weeks ended June 30, 2019. The following tables provide information regarding gross profit and cost of sales information:
Components of gross profit | Thirteen Weeks Ended June 30, 2019 | Change from Thirteen Weeks Ended July 1, 2018 | Percent of Net Sales | ||||||||||||||
Thirteen Weeks Ended | |||||||||||||||||
Amount | Percent | June 30, 2019 | July 1, 2018 | ||||||||||||||
(In thousands, except percent data) | |||||||||||||||||
Net sales | $ | 2,843,085 | $ | 6,372 | 0.2 | % | 100.0 | % | 100.0 | % | |||||||
Cost of sales(a)(b)(c) | 2,475,221 | (87,270 | ) | (3.4 | )% | 87.1 | % | 90.3 | % | ||||||||
Gross profit | $ | 367,864 | $ | 93,642 | 34.1 | % | 12.9 | % | 9.7 | % | |||||||
Sources of gross profit | Thirteen Weeks Ended June 30, 2019 | Change from Thirteen Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S. | $ | 246,570 | $ | 92,646 | 60.2 | % | |||||
U.K. and Europe | 43,516 | (5,595 | ) | (11.4 | )% | ||||||
Mexico | 77,754 | 6,551 | 9.2 | % | |||||||
Intersegment transactions, net | 24 | 40 | (250.0 | )% | |||||||
Total gross profit | $ | 367,864 | $ | 93,642 | 34.1 | % | |||||
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Sources of cost of sales | Thirteen Weeks Ended June 30, 2019 | Change from Thirteen Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S.(a) | $ | 1,670,384 | $ | (75,127 | ) | (4.3 | )% | ||||
U.K. and Europe(b) | 492,386 | (21,605 | ) | (4.2 | )% | ||||||
Mexico(c) | 312,475 | 9,502 | 3.1 | % | |||||||
Intersegment transactions, net | (24 | ) | (40 | ) | (250.0 | )% | |||||
Total cost of sales | $ | 2,475,221 | $ | (87,270 | ) | (3.4 | )% | ||||
(a) | Cost of sales incurred by our U.S. segment during the thirteen weeks ended June 30, 2019 decreased $75.1 million, or 4.3%, from cost of sales incurred by our U.S. segment during the thirteen weeks ended July 1, 2018. Cost of sales decreased primarily because of the $104.3 million impact of decreased cost per pound sold, partially offset by a $29.2 million impact from sales volume increases. Included in the decreased cost per pound sold and the impact of sales volume increases in cost of sales is a $38.6 million decrease in feed ingredient costs, a $28.3 million decrease in losses related to commodity derivatives and a $6.5 million decrease in freight costs. Other factors affecting cost of sales were individually immaterial. |
(b) | Cost of sales incurred by our U.K. and Europe segment during the thirteen weeks ended June 30, 2019 decreased $21.6 million, or 4.2%, from cost of sales incurred by our U.K. and Europe segment during the thirteen weeks ended July 1, 2018. U.K. and Europe cost of sales decreased primarily because of the $37.5 million impact of reduced sales volume and the $28.8 million favorable impact of foreign currency translation. Partially offsetting the decreases in sales volume and impact of foreign currency translation was an increase in cost per pound sold of $44.7 million. Included in the impact of reduced sales volume, foreign currency translation and increased cost per pound sold on the decrease in cost of sales was a reduction of live bird input costs of $20.1 million. Other factors affecting cost of sales were individually immaterial. |
(c) | Cost of sales incurred by our Mexico segment during the thirteen weeks ended June 30, 2019 increased $9.5 million, or 3.1%, from cost of sales incurred by our Mexico segment during the thirteen weeks ended July 1, 2018. Mexico cost of sales increased primarily because of the $14.4 million impact of increased cost per pound sold and the $4.7 million unfavorable impact of foreign currency remeasurement. Partially offsetting the impact of the increases in both cost per pound sold and the impact of foreign currency remeasurement was the $9.6 million impact from reduced sales volume. Included in the impact of increased cost per pound sold, foreign currency remeasurement and reduced sales volume was a $3.3 million increase in outsourced labor costs, a $2.7 million increase in grower pay, a $1.8 million increase in direct production labor costs and a $1.7 million increase in warehousing and freight costs. Other factors affecting cost of sales were individually immaterial. |
Operating income. Operating income increased by $94.4 million, or 51.0%, from $185.1 million generated in the thirteen weeks ended July 1, 2018 to $279.6 million generated in the thirteen weeks ended June 30, 2019. The following tables provide information regarding operating income and SG&A expense:
Components of operating income | Thirteen Weeks Ended June 30, 2019 | Change from Thirteen Weeks Ended July 1, 2018 | Percent of Net Sales | ||||||||||||||
Thirteen Weeks Ended | |||||||||||||||||
Amount | Percent | June 30, 2019 | July 1, 2018 | ||||||||||||||
(In thousands, except percent data) | |||||||||||||||||
Gross profit | $ | 367,864 | $ | 93,642 | 34.1 | % | 12.9 | % | 9.7 | % | |||||||
SG&A expense(a)(b)(c) | 88,357 | 382 | 0.4 | % | 3.1 | % | 3.1 | % | |||||||||
Administrative restructuring activities(d) | (43 | ) | (1,178 | ) | (103.8 | )% | — | % | — | % | |||||||
Operating income | $ | 279,550 | $ | 94,438 | 51.0 | % | 9.8 | % | 6.5 | % | |||||||
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Sources of operating income | Thirteen Weeks Ended June 30, 2019 | Change from Thirteen Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S. | $ | 186,960 | $ | 87,491 | 88.0 | % | |||||
U.K. and Europe | 24,194 | 532 | 2.2 | % | |||||||
Mexico | 68,372 | 6,375 | 10.3 | % | |||||||
Intersegment transactions, net | 24 | 40 | (250.0 | )% | |||||||
Total operating income | $ | 279,550 | $ | 94,438 | 51.0 | % | |||||
Sources of SG&A expense | Thirteen Weeks Ended June 30, 2019 | Change from Thirteen Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S.(a) | $ | 59,653 | $ | 6,333 | 11.9 | % | |||||
U.K. and Europe(b) | 19,322 | (6,127 | ) | (24.1 | )% | ||||||
Mexico(c) | 9,382 | 176 | 1.9 | % | |||||||
Total SG&A expense | $ | 88,357 | $ | 382 | 0.4 | % | |||||
Sources of administrative restructuring activities | Thirteen Weeks Ended June 30, 2019 | Change from Thirteen Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S.(d) | $ | (43 | ) | $ | (1,178 | ) | (103.8 | )% | |||
U.K. and Europe | — | — | — | % | |||||||
Mexico | — | — | — | % | |||||||
Total administrative restructuring activities | $ | (43 | ) | $ | (1,178 | ) | (103.8 | )% | |||
(a) | SG&A expense incurred by our U.S. segment during the thirteen weeks ended June 30, 2019 increased $6.3 million, or 11.9%, from SG&A expense incurred by our U.S. segment during the thirteen weeks ended July 1, 2018, primarily because of a $3.0 million increase in incentive compensation expenses, a $2.5 million increase in advertising and promotion expenses related to Internet promotions and a $1.4 million increase in deferred compensation expenses. These increases in SG&A expenses were partially offset by a decrease of $1.2 million in professional service fees primarily due to a reduction in consulting fees. Other factors affecting SG&A expense were individually immaterial. |
(b) | SG&A expense incurred by our U.K. and Europe segment during the thirteen weeks ended June 30, 2019 decreased $6.1 million, or 24.1%, from SG&A expense incurred by our U.K. and Europe segment during the thirteen weeks ended July 1, 2018. SG&A expense incurred by our U.K. and Europe segment decreased primarily because of a decrease of $3.3 million in severance expenses, a $1.3 million decrease in administrative payroll expenses, a $0.9 million decrease in legal fees and a $0.6 million decrease in amortization related costs. Other factors affecting SG&A expense were individually immaterial. |
(c) | SG&A expense incurred by our Mexico segment during the thirteen weeks ended June 30, 2019 increased $0.2 million, or 1.9%, from SG&A expense incurred by our Mexico segment during the thirteen weeks ended July 1, 2018. Factors affecting SG&A expenses by our Mexico segment were individually immaterial. |
(d) | Administrative restructuring activities incurred by our U.S. segment during the thirteen weeks ended June 30, 2019 included $43,000 of sublease income related to the termination of 40 North Foods operations. Administrative restructuring activities incurred by our U.S. segment during the thirteen weeks ended July 1, 2018 included $0.4 million in severance costs related to the GNP acquisition and $0.7 million in severance, asset impairment and lease obligations resulting from termination of 40 North Foods operations. |
Net interest expense. Net interest expense decreased 14.9% to $30.2 million recognized in the thirteen weeks ended June 30, 2019 from $35.4 million recognized in the thirteen weeks ended July 1, 2018. Average borrowings decreased from $2.7 billion in the thirteen weeks ended July 1, 2018 to $2.3 billion in the thirteen weeks ended June 30, 2019. The weighted average interest rate increased from 5.2% in the thirteen weeks ended July 1, 2018 to 5.4% in the thirteen weeks ended June 30, 2019.
Income taxes. Income tax expense increased to $75.5 million, a 30.8% effective tax rate, for the thirteen weeks ended June 30, 2019 compared to income tax expense of $38.5 million, a 26.6% effective tax rate, for the thirteen weeks ended July 1, 2018. The increase in income tax expense in 2019 resulted primarily from an increase in pre-tax income and an increase in unrecognized tax benefits in Mexico.
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Twenty-Six Weeks Ended June 30, 2019 Compared to Twenty-Six Weeks Ended July 1, 2018
Net sales. Net sales generated in the twenty-six weeks ended June 30, 2019 decreased $15.6 million, or 0.3%, from net sales generated in the twenty-six weeks ended July 1, 2018. The following table provides net sales information:
Sources of net sales | Twenty-Six Weeks Ended June 30, 2019 | Change from Twenty-Six Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S.(a) | $ | 3,800,544 | $ | 60,004 | 1.6 | % | |||||
U.K. and Europe(b) | 1,050,865 | (56,537 | ) | (5.1 | )% | ||||||
Mexico(c) | 716,351 | (19,098 | ) | (2.6 | )% | ||||||
Total net sales | $ | 5,567,760 | $ | (15,631 | ) | (0.3 | )% | ||||
(a) | U.S. net sales generated in the twenty-six weeks ended June 30, 2019 increased $60.0 million, or 1.6%, from U.S. net sales generated in the twenty-six weeks ended July 1, 2018, primarily because of an increase in sales volume and an increase in net sales per pound. The increases in sales volume and net sales per pound experienced by our U.S. segment contributed $48.1 million, or 1.3 percentage points, and $11.9 million, or 0.3 percentage points, respectively, to the increase in net sales. Included in U.S. net sales generated during the twenty-six weeks ended June 30, 2019 and July 1, 2018 were net sales to JBS USA Food Company totaling $7.2 million and $6.0 million, respectively. |
(b) | U.K. and Europe net sales generated in the twenty-six weeks ended June 30, 2019 decreased $56.5 million, or 5.1%, from U.K. and Europe net sales generated in the twenty-six weeks ended July 1, 2018, primarily because of the unfavorable impact of foreign currency translation and a decrease in sales volume, partially offset by an increase in net sales per pound. The unfavorable impact of foreign currency translation and decrease in sales volume contributed $66.6 million, or 6.0 percentage points, and $64.0 million, or 5.8 percentage points, respectively, to the decrease in net sales. These decreases were partially offset by an increase in net sales per pound of $74.1 million, or 6.7 percentage points. |
(c) | Mexico net sales generated in the twenty-six weeks ended June 30, 2019 decreased $19.1 million, or 2.6%, from Mexico net sales generated in the twenty-six weeks ended July 1, 2018, primarily because of a decrease net sales per pound, a decrease in sales volume and the unfavorable impact of foreign currency remeasurement. The decrease in net sales per pound contributed $11.3 million, or 1.5 percentage points, to the decrease in net sales. The decrease in sales volume and the unfavorable impact of foreign currency remeasurement contributed $4.4 million, or 0.6 percentage points, and $3.4 million, or 0.5 percentage points, respectively, to the decrease in net sales. |
Gross profit. Gross profit increased by $24.9 million, or 4.4%, from $561.9 million generated in the twenty-six weeks ended July 1, 2018 to $586.8 million generated in the twenty-six weeks ended June 30, 2019. The following tables provide information regarding gross profit and cost of sales information:
Components of gross profit | Twenty-Six Weeks Ended June 30, 2019 | Change from Twenty-Six Weeks Ended July 1, 2018 | Percent of Net Sales | ||||||||||||||
Twenty-Six Weeks Ended | |||||||||||||||||
Amount | Percent | June 30, 2019 | July 1, 2018 | ||||||||||||||
(In thousands, except percent data) | |||||||||||||||||
Net sales | $ | 5,567,760 | $ | (15,631 | ) | (0.3 | )% | 100.0 | % | 100.0 | % | ||||||
Cost of sales(a)(b)(c) | 4,980,957 | (40,547 | ) | (0.8 | )% | 89.5 | % | 89.9 | % | ||||||||
Gross profit | $ | 586,803 | $ | 24,916 | 4.4 | % | 10.5 | % | 10.1 | % | |||||||
Sources of gross profit | Twenty-Six Weeks Ended June 30, 2019 | Change from Twenty-Six Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S. | $ | 416,741 | $ | 80,446 | 23.9 | % | |||||
U.K. and Europe | 73,101 | (18,742 | ) | (20.4 | )% | ||||||
Mexico | 96,913 | (36,828 | ) | (27.5 | )% | ||||||
Intersegment transactions, net | 48 | 40 | 500.0 | % | |||||||
Total gross profit | $ | 586,803 | $ | 24,916 | 4.4 | % | |||||
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Sources of cost of sales | Twenty-Six Weeks Ended June 30, 2019 | Change from Twenty-Six Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S.(a) | $ | 3,383,803 | $ | (20,442 | ) | (0.6 | )% | ||||
U.K. and Europe(b) | 977,764 | (37,795 | ) | (3.7 | )% | ||||||
Mexico(c) | 619,438 | 17,730 | 2.9 | % | |||||||
Intersegment transactions, net | (48 | ) | (40 | ) | 500.0 | % | |||||
Total cost of sales | $ | 4,980,957 | $ | (40,547 | ) | (0.8 | )% | ||||
(a) | Cost of sales incurred by our U.S. segment during the twenty-six weeks ended June 30, 2019 decreased $20.4 million, or 0.6%, from cost of sales incurred by our U.S. segment during the twenty-six weeks ended July 1, 2018. Cost of sales decreased primarily because of a $64.2 million impact of decreased cost per pound sold, partially offset by a $43.8 million impact of increased sales volume. Included in the decreased cost per pound sold and increased sales volume was a $26.9 million decrease in feed ingredient costs, an $18.7 million decrease in losses related to commodity derivatives, a $7.7 million deferment of costs related to outgoing product shipments in transit at the reporting date and a $7.6 million decrease in freight costs. These decreases in costs of sales were partially offset by a $41.8 million increase in hourly payroll increases. Other factors affecting cost of sales were individually immaterial. |
(b) | Cost of sales incurred by our U.K. and Europe segment during the twenty-six weeks ended June 30, 2019 decreased $37.8 million, or 3.7%, from cost of sales incurred by our U.K. and Europe segment during the twenty-six weeks ended July 1, 2018. U.K. and Europe cost of sales decreased primarily because of a $62.0 million impact of foreign currency translation and the $58.7 million impact due to a reduction in sales volume. These decreases in cost of sales were partially offset by an increase in cost per pound sold of $82.9 million. Included in the impact of foreign currency translation, reduced sales volume and increased cost per pound sold on the decrease in cost of sales was a reduction in live bird input costs of $48.5 million. The impact of reduced live bird input costs on cost of sales was partially offset by a $5.8 million increase in contract labor due to an increase in the national minimum wage, a $3.1 million increase in electricity costs and a $2.9 million increase in gas costs due to increased rates. Other factors affecting cost of sales were individually immaterial. |
(c) | Cost of sales incurred by our Mexico segment during the twenty-six weeks ended June 30, 2019 increased $17.7 million, or 2.9%, from cost of sales incurred by our Mexico segment during the twenty-six weeks ended July 1, 2018. Mexico cost of sales increased primarily because of the impact of increased cost per pound sold of $24.2 million. This increase in cost per pound was partially offset by a $3.6 million impact of reduced sales volume and a $2.9 million favorable impact of foreign currency remeasurement. Included in the impact of increased cost per pound sold, decrease in sales volume and impact of foreign currency remeasurement was a $6.3 million increase in grower pay due to increased rates, a $6.0 million increase in direct production labor costs, a $3.4 million increase in electricity costs and a $3.4 million increase in freight and warehouse costs. Other factors affecting cost of sales were individually immaterial. |
Operating income. Operating income increased by $29.9 million, or 7.7%, from $386.7 million generated in the twenty-six weeks ended July 1, 2018 to $416.6 million generated in the twenty-six weeks ended June 30, 2019. The following tables provide information regarding operating income and SG&A expense:
Components of operating income | Twenty-Six Weeks Ended June 30, 2019 | Change from Twenty-Six Weeks Ended July 1, 2018 | Percent of Net Sales | ||||||||||||||
Twenty-Six Weeks Ended | |||||||||||||||||
Amount | Percent | June 30, 2019 | July 1, 2018 | ||||||||||||||
(In thousands, except percent data) | |||||||||||||||||
Gross profit | $ | 586,803 | $ | 24,916 | 4.4 | % | 10.5 | % | 10.1 | % | |||||||
SG&A expense(a)(b)(c) | 170,281 | (2,977 | ) | (1.7 | )% | 3.1 | % | 3.1 | % | ||||||||
Administrative restructuring activities(d) | (70 | ) | (1,994 | ) | (103.6 | )% | — | % | — | % | |||||||
Operating income | $ | 416,592 | $ | 29,887 | 7.7 | % | 7.5 | % | 6.9 | % | |||||||
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Sources of operating income | Twenty-Six Weeks Ended June 30, 2019 | Change from Twenty-Six Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S. | $ | 301,800 | $ | 75,045 | 33.1 | % | |||||
U.K. and Europe | 36,908 | (8,167 | ) | (18.1 | )% | ||||||
Mexico | 77,836 | (37,031 | ) | (32.2 | )% | ||||||
Intersegment transactions, net | 48 | 40 | 500.0 | % | |||||||
Total operating income | $ | 416,592 | $ | 29,887 | 7.7 | % | |||||
Sources of SG&A expense | Twenty-Six Weeks Ended June 30, 2019 | Change from Twenty-Six Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S.(a) | $ | 115,011 | $ | 7,395 | 6.9 | % | |||||
U.K. and Europe(b) | 36,193 | (10,575 | ) | (22.6 | )% | ||||||
Mexico(c) | 19,077 | 203 | 1.1 | % | |||||||
Total SG&A expense | $ | 170,281 | $ | (2,977 | ) | (1.7 | )% | ||||
Sources of administrative restructuring activities | Twenty-Six Weeks Ended June 30, 2019 | Change from Twenty-Six Weeks Ended July 1, 2018 | |||||||||
Amount | Percent | ||||||||||
(In thousands, except percent data) | |||||||||||
U.S.(d) | $ | (70 | ) | $ | (1,994 | ) | (103.6 | )% | |||
U.K. and Europe | — | — | — | % | |||||||
Mexico | — | — | — | % | |||||||
Total administrative restructuring activities | $ | (70 | ) | $ | (1,994 | ) | (103.6 | )% | |||
(a) | SG&A expense incurred by our U.S. segment during the twenty-six weeks ended June 30, 2019 increased $7.4 million, or 6.9%, from SG&A expense incurred by our U.S. segment during the twenty-six weeks ended July 1, 2018, primarily because of a $4.4 million increase in incentive compensation expenses, a $3.3 million increase in Internet promotion expenses, a $2.6 million increase in administrative payroll expenses and a $1.2 million increase in deferred compensation expenses. These increases in SG&A expenses were partially offset by a $3.6 million decrease in professional fees mainly due to a reduction in consulting expenses. Other factors affecting SG&A expense were individually immaterial. |
(b) | SG&A expense incurred by our U.K. and Europe segment during the twenty-six weeks ended June 30, 2019 decreased $10.6 million, or 22.6%, from SG&A expense incurred by our U.K. and Europe segment during the twenty-six weeks ended July 1, 2018. SG&A expense incurred by our U.K. and Europe segment decreased primarily because of a $3.9 million decrease in administrative payroll expenses, a $3.3 million decrease in severance expenses, a $2.0 million decrease in legal expenses and a $1.3 million decrease in amortization expenses. Other factors affecting SG&A expense were individually immaterial. |
(c) | SG&A expense incurred by our Mexico segment during the twenty-six weeks ended June 30, 2019 increased $0.2 million, or 1.1%, from SG&A expense incurred by our Mexico segment during the twenty-six weeks ended July 1, 2018. Factors affecting SG&A expenses by our Mexico segment were individually immaterial. |
(d) | Administrative restructuring activities incurred by our U.S. segment during the twenty-six weeks ended June 30, 2019 included $70,000 of sublease income related to the termination of 40 North Foods operations. Administrative restructuring activities incurred by our U.S. segment during the twenty-six weeks ended July 1, 2018 included $1.0 million in severance costs related to the GNP acquisition, $0.7 million in severance, asset impairment and lease obligations resulting from termination of 40 North Foods operations and $0.2 million in costs related to the closure of the Luverne, Minnesota facility. |
Net interest expense. Net interest expense decreased 28.3% to $60.4 million recognized in the twenty-six weeks ended June 30, 2019 from $84.1 million recognized in the twenty-six weeks ended July 1, 2018. Average borrowings decreased from $2.7 billion in the twenty-six weeks ended July 1, 2018 to $2.3 billion in the twenty-six weeks ended June 30, 2019. The weighted average interest rate increased from 5.1% in the twenty-six weeks ended ended July 1, 2018 to 5.4% in the twenty-six weeks ended June 30, 2019.
Income taxes. Income tax expense increased to $96.0 million, a 27.4% effective tax rate, for the twenty-six weeks ended June 30, 2019 compared to income tax expense of $75.5 million, a 25.1% effective tax rate, for the twenty-six weeks ended July 1, 2018. The increase in income tax expense in 2019 resulted primarily from an increase in pre-tax income and an increase in unrecognized tax benefits in Mexico.
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Liquidity and Capital Resources
The following table presents our available sources of liquidity as of June 30, 2019:
Source of Liquidity | Facility Amount | Amount Outstanding | Amount Available | |||||||||
(In millions) | ||||||||||||
Cash and cash equivalents | $ | 538.2 | ||||||||||
Borrowing arrangements: | ||||||||||||
U.S. Credit Facility(a) | $ | 750.0 | $ | — | 708.4 | |||||||
Mexico Credit Facility(b) | 78.0 | — | 78.0 | |||||||||
U.K. and Europe Credit Facilities(c) | 138.4 | 3.4 | 135.0 | |||||||||
(a) | Availability under the U.S. Credit Facility (as described below) is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at June 30, 2019 totaled $41.6 million. |
(b) | As of June 30, 2019, the U.S. dollar-equivalent of the amount available under the Mexico Credit Facility (as described below) was $78.0 million. The Mexico Credit Facility provides for a loan commitment of $1.5 billion Mexican pesos. |
(c) | As of June 30, 2019, the U.S. dollar-equivalent of the amount available under the U.K. and Europe Credit Facilities (as described below) were $135.0 million. The U.K. and Europe Credit Facilities provide for loan commitments of £100.0 million (or $127.0 million U.S. dollar equivalent) under the Bank of Ireland Facility Agreement (as described below) and €10.0 million (or $11.4 million U.S. dollar equivalent) under the Invoice Discounting Facility (as described below). |
Long-Term Debt and Other Borrowing Arrangements
U.S. Senior Notes
On March 11, 2015, we completed a sale of $500.0 million aggregate principal amount of our 5.75% senior notes due 2025. On September 29, 2017, we 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, we 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 us, our guarantor subsidiary and Wells Fargo Bank, National Association, as trustee (the “2015 Indenture”). The 2015 Indenture provides, among other things, that the Senior Notes due 2025 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, we completed a sale of $600.0 million aggregate principal amount of our 5.875% senior notes due 2027. On March 7, 2018, we 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 us, our guarantor subsidiary and U.S. Bank National Association, as trustee (the “2017 Indenture”). The 2017 Indenture provides, among other things, that the Senior Notes due 2027 bear interest at a rate of 5.875% per annum from the date of issuance until maturity, payable semi-annually in cash in arrears, beginning on March 30, 2018 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 our guarantor subsidiary. In addition, any of our 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 us and our guarantor subsidiary and rank equally with all of our and our guarantor subsidiary’s other unsubordinated indebtedness. The Senior Notes due 2025, the 2015 Indenture, the Senior Notes due 2027 and the 2017 Indenture also contain customary covenants
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and events of default, including failure to pay principal or interest on the Senior Notes due 2025 and the Senior Notes due 2027 when due, among others.
U.S. Credit Facility
On July 20, 2018, we, and certain of our 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”). We 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 our 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 us, 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 us to use the proceeds we receive 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 June 30, 2019, we had Term Loans outstanding totaling $487.5 million, and the amount available for borrowing under the revolving loan commitment was $708.4 million. We had letters of credit of $41.6 million and no borrowings outstanding under the revolving loan commitment as of June 30, 2019.
The U.S. Credit Facility includes a $75.0 million sub-limit for swingline loans and a $125.0 million sub-limit for letters of credit. Outstanding borrowings under the revolving loan commitment and the Term Loans bear interest at a per annum rate equal to (i) in the case of LIBOR loans, LIBOR plus 1.25% through August 2, 2018 and, thereafter, based on our net senior secured leverage ratio, between LIBOR plus 1.25% and LIBOR plus 2.75% and (ii) in the case of alternate base rate loans, the base rate plus 0.25% through August 2, 2018 and, based on our 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 our ability to incur additional indebtedness, incur liens, pay dividends, make certain restricted payments, consummate certain asset sales, enter into certain transactions with our affiliates, or merge, consolidate and/or sell or dispose of all or substantially all of our assets, among other things. The U.S. Credit Facility requires us to comply with a minimum level of tangible net worth covenant. The U.S. Credit Facility also provides that we may not incur capital expenditures in excess of $500.0 million in any fiscal year.
All obligations under the U.S. Credit Facility continue to be unconditionally guaranteed by certain of our subsidiaries and continue to be secured by a first priority lien on (i) the accounts receivable and inventory of us and our non-Mexico subsidiaries, (ii) 100% of the equity interests in our domestic subsidiaries, To-Ricos, Ltd. and To-Ricos Distribution, Ltd., and 65% of the equity interests in our direct foreign subsidiaries and (iii) substantially all of the assets of us and the guarantors under the U.S. Credit Facility. We are currently in compliance with the covenants under the U.S. Credit Facility.
U.K. and Europe Credit Facilities
Moy Park France Invoice Discounting Facility
In June 2009, Moy Park France Sàrl entered into a €20.0 million invoice discounting facility with GE De Facto (the “Invoice Discounting Facility”). The facility limit was decreased by 50 percent in June 2018. The Invoice Discounting Facility is payable on demand and the term is extended on an annual basis. The agreement can be terminated by either party with three months’ notice. Outstanding borrowings under the Invoice Discounting Facility bear interest at a per annum rate equal to EURIBOR plus a margin of 0.80%. As of June 30, 2019, the U.S. dollar-equivalent loan commitment, borrowing availability, and outstanding borrowings under the Invoice Discounting Facility were was $11.4 million, $8.0 million, and $3.4 million, respectively.
The Invoice Discounting Facility contains financial covenants and various other covenants that may adversely affect Moy Park's ability to, among other things, incur additional indebtedness, consummate certain asset sales, enter into certain transactions with JBS and our other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of Moy Park's assets.
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Moy Park Credit Agricole Bank Overdraft
On December 3, 2018, Moy Park entered into an unsecured €0.5 million bank overdraft agreement (the “Overdraft Agreement”) with Credit Agricole. The Overdraft Agreement is payable on demand and can be cancelled anytime by us or Credit Agricole. Outstanding borrowings under the Overdraft Agreement bear interest at a per annum rate equal to EURIBOR plus 1.50%. As of June 30, 2019, there were no outstanding borrowings under the Overdraft Agreement.
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 (i) LIBOR or, in relation to any loan in euros, EURIBOR, plus (ii) 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 June 30, 2019, both the U.S. dollar-equivalent loan commitment and borrowing availability under the Bank of Ireland Facility Agreement were $127.0 million. As of June 30, 2019, 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 we believe 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 we believe 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 our 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. The U.S. dollar-equivalent of the loan commitment under the Mexico Credit Facility is $78.0 million. Outstanding borrowings under the Mexico Credit Facility accrue interest at a rate equal to the 28-Day Interbank Equilibrium Interest Rate plus 1.50%. The Mexico Credit Facility contains covenants and defaults that we believe are customary for transactions of this type. The Mexico Credit Facility is used for general corporate and working capital purposes. The Mexico Credit Facility will mature on December 14, 2023. As of June 30, 2019, there were no outstanding borrowings under the Mexico Credit Facility.
Collateral
Substantially all of our domestic inventories and domestic fixed assets are pledged as collateral to secure the obligations under the U.S. Credit Facility. The U.K. and Europe and Mexico credit facilities are unsecured.
Historical Flow of Funds
Twenty-Six Weeks Ended June 30, 2019
Cash provided by operating activities was $403.4 million for the twenty-six weeks ended June 30, 2019. The cash flows provided by operating activities resulted primarily from net income of $254.2 million, net noncash expenses of $143.2 million, a change in accounts payable, accrued expenses and other current liabilities of $20.7 million and changes in income taxes of $34.0 million. These cash flows were offset by the use of $27.2 million in cash related to inventories and $20.4 million use of cash related to trade accounts and other receivables.
The change in trade accounts and other receivables, including accounts receivable from related parties, represented a$20.4 million use of cash related to operating activities for the twenty-six weeks ended June 30, 2019. This change is primarily due to customer payment timing.
The change in inventories represented a $27.2 million use of cash related to operating activities for the twenty-six weeks ended June 30, 2019. This change resulted primarily from an increase in our finished products inventory.
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The change in prepaid expenses and other current assets represented a $1.3 million use of cash related to operating activities for the twenty-six weeks ended June 30, 2019. This change resulted primarily from a net increase in value-added tax receivables.
The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities, including accounts payable to related parties, represented a $20.7 million source of cash related to operating activities for the twenty-six weeks ended June 30, 2019. This change resulted primarily from the timing of payments.
The change in income taxes, which includes income taxes receivable, income taxes payable, deferred tax assets, deferred tax liabilities, reserves for uncertain tax positions, and the tax components within accumulated other comprehensive loss, represented a $34.0 million source of cash related to operating activities for the twenty-six weeks ended June 30, 2019. This change resulted primarily from the timing of estimated tax payments and an increase in unrecognized tax benefits in Mexico.
Net noncash expenses provided $143.2 million of cash related to operating activities for the twenty-six weeks ended ended June 30, 2019. Net noncash expense items included depreciation and amortization of $138.5 million, share-based compensation of $5.2 million and loan cost amortization of $2.4 million, which were partially offset by a deferred income tax benefit of $3.4 million.
Cash used in investing activities totaled $175.9 million for the twenty-six weeks ended June 30, 2019. Cash used to acquire property, plant and equipment totaled $177.6 million. Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs. Cash proceeds generated from property disposals totaled $1.7 million during the twenty-six weeks ended June 30, 2019.
Cash used by financing activities totaled $17.5 million for the twenty-six weeks ended June 30, 2019. Uses of cash included payments on revolving lines of credit, long-term borrowings and capital lease obligations totaling $113.1 million, the purchase of common stock under share repurchase program totaling $2.9 million, capitalized loan costs totaling $0.6 million and a $0.5 million cash payment from equity distributions under a tax sharing agreement with JBS USA Food Company Holdings. These uses of cash were partially offset by proceeds from revolving line of credit and long-term debt totaling $99.6 million.
Twenty-Six Weeks Ended July 1, 2018
Cash provided by operating activities was $304.0 million for the twenty-six weeks ended July 1, 2018. The cash flows provided by operating activities resulted primarily from net income of $225.6 million, net noncash expenses of $143.1 million, a $104.0 million source of cash related to accounts payable, accrued expenses and other current liabilities and a $60.3 million source of cash related to inventories. These cash flows were partially offset by the use of $161.6 million in cash related to income taxes, the use of $31.9 million in cash related to trade accounts and other receivables and the use of $31.1 million in cash related to prepaid expenses and other current assets.
The change in trade accounts and other receivables, including accounts receivable from related parties, represented a$31.9 million use of cash related to operating activities for the twenty-six weeks ended July 1, 2018. This change was primarily due to customer payment timing.
The change in inventories represented a $60.3 million source of cash related to operating activities for the twenty-six weeks ended July 1, 2018. This change resulted primarily from a decrease in our finished products inventory.
The change in prepaid expenses and other current assets represented a $31.1 million use of cash related to operating activities for the twenty-six weeks ended July 1, 2018. This change resulted primarily from a net increase in both commodity derivatives and value-added tax receivables.
The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities, including accounts payable to related parties, represented a $104.0 million source of cash related to operating activities for the twenty-six weeks ended July 1, 2018. This change resulted primarily from the timing of payments.
The change in income taxes, which includes income taxes receivable, income taxes payable, deferred tax assets, deferred tax liabilities, reserves for uncertain tax positions, and the tax components within accumulated other comprehensive loss, represented a $161.6 million use of cash related to operating activities for the twenty-six weeks ended July 1, 2018. This change resulted primarily from the timing of estimated tax payments.
Net noncash expenses provided $143.1 million of cash related to operating activities for the twenty-six weeks ended ended July 1, 2018. Net noncash expense items included depreciation and amortization of $139.5 million, share-based compensation of $5.6 million, foreign currency transaction loss related to borrowing arrangements of $4.2 million, and noncash loss on early extinguishment of debt of $4.9 million, which were partially offset by a deferred income tax benefit of $11.9 million.
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Cash used in investing activities totaled $154.0 million for the twenty-six weeks ended July 1, 2018. Cash used to acquire property, plant and equipment totaled $155.2 million. Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs. Cash proceeds generated from property disposals totaled $1.2 million during the twenty-six weeks ended July 1, 2018.
Cash used by financing activities totaled $69.5 million for the twenty-six weeks ended July 1, 2018. Cash used for payments on revolving lines of credit, long-term borrowings and capital lease obligations totaled $673.5 million. Cash used to pay capitalized loan costs totaled $5.7 million. These cash payments were partially offset by cash proceeds from revolving line of credit and long-term debt totaling $604.1 million and equity contributions under a tax sharing agreement with JBS USA Food Company Holdings totaling $5.6 million.
Contractual Obligations
Contractual obligations at June 30, 2019 were as follows:
Contractual Obligations(a) | Total | Less than One Year | One to Three Years | Three to Five Years | Greater than Five Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Long-term debt(b) | $ | 2,342,828 | $ | 30,192 | $ | 50,136 | $ | 412,500 | $ | 1,850,000 | ||||||||||
Interest(c) | 840,098 | 125,545 | 247,958 | 234,314 | 232,281 | |||||||||||||||
Finance leases | 141 | 98 | 43 | — | — | |||||||||||||||
Operating leases | 366,352 | 88,181 | 122,461 | 85,103 | 70,607 | |||||||||||||||
Derivative liabilities | 20,801 | 20,801 | — | — | — | |||||||||||||||
Purchase obligations(d) | 458,980 | 452,255 | 6,725 | — | — | |||||||||||||||
Total | $ | 4,029,200 | $ | 717,072 | $ | 427,323 | $ | 731,917 | $ | 2,152,888 | ||||||||||
(a) | The total amount of unrecognized tax benefits at June 30, 2019 was $23.8 million. We did not include this amount in the contractual obligations table above as reasonable estimates cannot be made at this time of the amounts or timing of future cash outflows. |
(b) | Long-term debt is presented at face value and excludes $41.6 million in letters of credit outstanding related to normal business transactions. |
(c) | Interest expense in the table above assumes the continuation of interest rates and outstanding borrowings as of June 30, 2019. |
(d) | Includes agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. |
We are a party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks. Among other considerations, we have not recorded a liability for any of these indemnities as, based upon the likelihood of payment, the fair value of such indemnities would not have a material impact on our financial condition, results of operations and cash flows.
We expect cash flows from operations, combined with availability under our credit facilities, to provide sufficient liquidity to fund current obligations, projected working capital requirements, maturities of long-term debt and capital spending for at least the next twelve months.
Recent Accounting Pronouncements Adopted as of June 30, 2019
In February 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on lease arrangements, which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. We adopted the standard as of December 31, 2018. Adoption of the standard had a material impact on our Condensed Consolidated Balance Sheet as a result of the increase in assets and liabilities from recognition of operating assets and lease liabilities. However, the standard did not have a material impact on our Condensed Consolidated Statement of Income.
In August 2017, the FASB issued an accounting standard update that simplifies the application of hedge accounting guidance in current accounting principles generally accepted in the U.S. and improves the reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. We adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
In February 2018, the FASB issued an accounting standard update that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. We adopted this standard as of December 31, 2018, and elected not to reclassify the stranded tax effects. The adoption of this guidance did not have a material impact on our financial statements.
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In July 2018, the FASB issued an accounting standard update to improve non-employee share-based payment accounting. The accounting standard update more closely aligns the accounting for employee and non-employee share based payments. We adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
Recent Accounting Pronouncements Not Yet Adopted as of June 30, 2019
In June 2016, the FASB issued new accounting guidance on the measurement of credit losses on financial instruments, which 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 provisions of the new guidance will be effective as of the beginning of our 2020 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements.
In August 2018, the FASB issued an accounting standard update to improve the effectiveness of disclosures related to fair value measurements. This accounting standard update removes certain disclosure requirements related to transfers between fair value hierarchy levels and the valuation processes used for certain fair value measurements. The update requires additional disclosures as to significant unobservable inputs used in certain fair value measurements and gains and losses included in other comprehensive income. The new guidance will be effective as of our 2020 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements.
In August 2018, the FASB issued an accounting standard update to improve the effectiveness of disclosures related to defined benefit plans. The update removes disclosures related to the amounts in accumulated other comprehensive income expected to be recognized in the next fiscal year, adds narrative disclosure of the reasons for significant gains and losses related to changes in the defined benefit obligation, and clarifies the disclosures required for plans with projected and accumulated benefit obligations in excess of plan assets. The new guidance will be effective as of our 2020 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements.
See “Note 1. Description of Business and Basis of Presentation” of our Condensed Consolidated Financial Statements included in this quarterly report for additional information relating to these recent accounting pronouncements.
Critical Accounting Policies
During the twenty-six weeks ended June 30, 2019, (i) no existing accounting policies became critical accounting policies because of an increase in the materiality of associated transactions or changes in the circumstances to which associated judgments and estimates relate and (ii) there were no significant changes in the manner in which critical accounting policies were applied or in which related judgments and estimates were developed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market Risk-Sensitive Instruments and Positions
The risk inherent in our market risk-sensitive instruments and positions is primarily the potential loss arising from adverse changes in commodity prices, foreign currency exchange rates, interest rates and the credit quality of available-for-sale securities as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions our management may take to mitigate our exposure to such changes. Actual results may differ.
Commodity Prices
We purchase certain commodities, primarily corn, soybean meal and wheat, for use as ingredients in the feed we either sell commercially or consume in our live operations. As a result, our earnings are affected by changes in the price and availability of such feed ingredients. In the past, we have from time to time attempted to minimize our exposure to the changing price and availability of such feed ingredients using various techniques, including, but not limited to, (i) executing purchase agreements with suppliers for future physical delivery of feed ingredients at established prices and (ii) purchasing or selling derivative financial instruments such as futures and options.
For this sensitivity analysis, market risk is estimated as a hypothetical 10.0% change in the weighted-average cost of our
primary feed ingredients as of June 30, 2019. However, fluctuations greater than 10.0% could occur. Based on our feed consumption during the thirteen weeks ended June 30, 2019, such a change would have resulted in a change to cost of sales of approximately $71.6 million, excluding the impact of any feed ingredients derivative financial instruments in that period. A 10.0% change in
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ending feed ingredient inventories at June 30, 2019 would be $12.0 million, excluding any potential impact on the production costs of our chicken inventories.
We purchase commodity derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our anticipated consumption of commodity inputs for the next 12 months. A 10.0% change in corn and soybean meal prices on June 30, 2019 would have resulted in a change of approximately $1.7 million in the fair value of our net commodity derivative asset position, including margin cash, as of that date.
Interest Rates
Our variable-rate debt instruments represent approximately 21.0% of our total debt at June 30, 2019. Holding other variables constant, including levels of indebtedness, an increase in interest rates of 25 basis points would have increased our interest expense by less than $0.1 million for the thirteen weeks ended June 30, 2019.
Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a hypothetical decrease in interest rates of 10.0%. Using a discounted cash flow analysis, a hypothetical 10.0% decrease in interest rates would have decreased the fair value of our fixed-rate debt by approximately $2.8 million as of June 30, 2019.
Foreign Currency
Our earnings are also affected by foreign exchange rate fluctuations related to the Mexican peso net monetary position of our Mexico subsidiaries. We manage this exposure primarily by attempting to minimize our Mexican peso net monetary position. We are also exposed to the effect of potential currency exchange rate fluctuations to the extent that amounts are repatriated from Mexico to the U.S. We currently anticipate that the future cash flows of our Mexico subsidiaries will be reinvested in our Mexico segment.
The Mexican peso exchange rate can directly and indirectly impact our financial condition and results of operations in
several ways, including potential economic recession in Mexico because of devaluation of their currency. Foreign currency exchange losses, representing the change in the U.S. dollar value of the net monetary assets of our Mexican subsidiaries denominated in Mexican pesos, were a gain of $3.5 million and a loss of $3.4 million in the thirteen weeks ended June 30, 2019 and July 1, 2018, respectively. Foreign currency exchange losses, representing the change in the U.S. dollar value of the net monetary assets of our Mexican subsidiaries denominated in Mexican pesos, were a gain of $4.3 million and a loss of $3.7 million in the twenty-six weeks ended June 30, 2019 and July 1, 2018, respectively. The average exchange rates for the thirteen weeks ended June 30, 2019 and July 1, 2018 were 19.11 Mexican pesos to 1 U.S. dollar and 19.41 Mexican pesos to 1 U.S. dollar, respectively. For this sensitivity analysis, market risk is estimated as a hypothetical 10.0% deterioration in the current exchange rate used to convert Mexican pesos to U.S. dollars as of June 30, 2019 and July 1, 2018. However, fluctuations greater than 10.0% could occur. Based on the net monetary asset position of our Mexico segment at June 30, 2019, such a change would have resulted in a decrease in foreign currency transaction gains recognized in the thirteen weeks ended June 30, 2019 of approximately $14.1 million. Based on the net monetary asset position of our Mexico segment at July 1, 2018, such a change would have resulted in an increase in foreign currency transaction losses recognized in the thirteen weeks ended July 1, 2018 of approximately $2.7 million. No assurance can be given as to how future movements in the Mexican peso could affect our future financial condition or results of operations.
Additionally, we are exposed to foreign exchange-related variability of investments and earnings from our foreign investments in Europe (including the U.K.). Foreign currency market risk is the possibility that our financial results or financial position could be better or worse than planned because of changes in foreign currency exchange rates. At June 30, 2019, our U.K. and Europe segment had net assets of approximately $1.6 billion, denominated in British pounds, after consideration of our derivative and nonderivative financial instruments. Based on our sensitivity analysis, a 10% adverse change in exchange rates would cause a reduction of $157.0 million to our net assets.
At June 30, 2019, we had foreign currency forward contracts, which were designated and qualify as cash flow hedges, with an aggregate notional amount of $16.5 million to hedge a portion of our investments in Europe (including the U.K.). On the basis of our sensitivity analysis, a weakening of the U.S. dollar against the British pound by 10% would result in a $2.2 million negative change in our cash flows on settlement while a weakening of the U.S. dollar against the euro by 10% would result in a $0.6 million increase in our cash flows on settlement. No assurance can be given as to how future movements in currency rates could affect our future financial condition or results of operations.
Quality of Investments
Certain retirement plans that we sponsor invest in a variety of financial instruments. We have analyzed our portfolios of investments and, to the best of our knowledge, none of our investments, including money market funds units, commercial paper and municipal securities, have been downgraded, and neither we nor any fund in which we participate hold significant amounts
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of structured investment vehicles, auction rate securities, collateralized debt obligations, credit derivatives, hedge funds investments, fund of funds investments or perpetual preferred securities. Certain postretirement funds in which we participate hold significant amounts of mortgage-backed securities. However, none of the mortgages collateralizing these securities are considered subprime.
Impact of Inflation
Due to low to moderate inflation in the U.S., Europe (including the U.K.) and Mexico and our rapid inventory turnover rate, the results of operations have not been significantly affected by inflation during the past three-year period.
Forward Looking Statements
Certain written and oral statements made by our Company and subsidiaries of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made herein, in our other filings with the SEC, in press releases, and in certain other oral and written presentations. Statements of our intentions, beliefs, expectations or predictions for the future, denoted by the words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “imply,” “intend,” “should,” “foresee” and similar expressions, are forward-looking statements that reflect our current views about future events and are subject to risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include the following:
• | Matters affecting the chicken industry generally, including fluctuations in the commodity prices of feed ingredients and chicken; |
• | Our ability to obtain and maintain commercially reasonable terms with vendors and service providers; |
• | Our ability to maintain contracts that are critical to our operations; |
• | Our ability to retain management and other key individuals; |
• | Outbreaks of avian influenza or other diseases, either in our own flocks or elsewhere, affecting our ability to conduct our operations and/or demand for our poultry products; |
• | Contamination of our products, which has previously and can in the future lead to product liability claims and product recalls; |
• | Exposure to risks related to product liability, product recalls, property damage and injuries to persons, for which insurance coverage is expensive, limited and potentially inadequate; |
• | Changes in laws or regulations affecting our operations or the application thereof; |
• | Our ability to ensure that our directors, officers, employees, agents, third-party intermediaries and the companies to which we outsource certain of our business operations will comply with anti-corruption laws or other laws governing the conduct of business with government entities; |
• | New immigration legislation or increased enforcement efforts in connection with existing immigration legislation that cause our costs of business to increase, cause us to change the way in which we do business or otherwise disrupt our operations; |
• | Competitive factors and pricing pressures or the loss of one or more of our largest customers; |
• | Inability to consummate, or effectively integrate, any acquisition, including the acquisition of Moy Park, or to realize the associated anticipated cost savings and operating synergies; |
• | Currency exchange rate fluctuations, trade barriers, exchange controls, expropriation and other risks associated with foreign segments; |
• | Restrictions imposed by, and as a result of, the leverage of Pilgrim's Pride; |
• | Disruptions in international markets and distribution channels; |
• | Our ability to maintain favorable labor relations with our employees and our compliance with labor laws; |
• | Extreme weather or natural disasters; |
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• | The impact of uncertainties in litigation; and |
• | Other risks described herein and under “Risk Factors” in our annual report on Form 10-K for the year ended December 30, 2018 as filed with the SEC. |
Actual results could differ materially from those projected in these forward-looking statements as a result of these factors, among others, many of which are beyond our control.
In making these statements, we are not undertaking, and specifically decline to undertake, any obligation to address or update each or any factor in future filings or communications regarding our business or results, and we are not undertaking to address how any of these factors may have caused changes to information contained in previous filings or communications. Although we have attempted to list comprehensively these important cautionary risk factors, we must caution investors and others that other factors may in the future prove to be important and affect our business or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our Company in the reports that it files with the SEC is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of June 30, 2019, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information we are required to disclose in our reports filed with the SEC is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the evaluation described above, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, made changes during the twenty-six weeks ended June 30, 2019 to the Company's internal controls over financial reporting for the implementation of a new information technology system relating to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842). No other changes to the Company's internal control over financial reporting occurred during the twenty-six weeks ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Tax Claims and Proceedings
A Mexico subsidiary of the Company is currently appealing an unfavorable tax adjustment proposed by Mexican tax authorities due to an examination of a specific transaction undertaken by the Mexico subsidiary during tax years 2009 and 2010. 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 June 21, 2019, 26 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); and Services Group of America, Inc. v. Tyson Food, Inc., et al., Case No. 1:19-cv-04194) 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. On June 20, 2019, an additional direct action complaint (Commonwealth of Puerto Rico v. Koch Foods, Inc., et al., Case No. 3:19-cv-01605) was filed with U.S. District Court for the District of Puerto Rico by the Commonwealth of Puerto Rico, the allegations of which also largely mirror those in the class action complaints. Substantial completion of document discovery for most defendants, including PPC, occurred on July 18, 2018. The Court’s scheduling order currently requires completion of fact discovery on March 13, 2020, class certification briefing and expert reports proceeding from April 13, 2020 to December 14, 2020, and summary judgment to proceed 60 days after the Court rules on motions for class certification. 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 United States Department of Justice filed a motion to intervene and stay discovery in the In re Broiler Chicken Antitrust Litigation for a period of 6 months. Following a hearing on June 27, 2019, on June 28, 2019, the Court granted the government’s motion to intervene, and ordered a limited 3-month stay of discovery until September 27, 2019. On July 1, 2019, the Department of Justice issued a subpoena to PPC in connection with its investigation.
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
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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 (i) 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, (ii) its conduct constituted a violation of federal antitrust laws, (iii) PPC’s revenues during the class period were the result of illegal conduct and (iv) that PPC lacked effective internal control over financial reporting. The complaint also states that PPC’s industry was anticompetitive. 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 this quarterly report, 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, or 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. Rulings on the motion are pending. In addition, on March 12, 2018, the Northern District of Texas, Fort Worth Division, or the Bankruptcy Court, enjoined 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. To date, plaintiffs have not amended the consolidated complaint to comply with the Bankruptcy Court’s injunction order or the confirmation order.
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 (i) consolidate the two stockholder derivative cases, (ii) stay the consolidated action until the resolution of the motion to dismiss in the Hogan putative securities class action, and (iii) appoint co-lead counsel. The Court granted the motion on May 8, 2017, staying the proceedings pending resolution of the motion to dismiss in the Hogan action.
In January 2018, a stockholder derivative action entitled Raul v. Nogueira de Souza, et al., was filed in the U.S. District Court for the District of Colorado against PPC, as nominal defendant, as well as PPC’s directors, its Chief Financial Officer, and majority shareholder, JBS S.A. The complaint alleges, among other things, that (i) defendants permitted PPC to omit material information from its proxy statements filed in 2014 through 2017 related to the conduct of Wesley Mendonça Batista and Joesley Mendonça Batista, (ii) the individual defendants and JBS S.A. breached their fiduciary duties by failing to prevent PPC and its officers from engaging in an antitrust conspiracy as alleged in the Broiler Litigation and (iii) issuing false and misleading statements as alleged in the Hogan class action litigation. On May 17, 2018, the plaintiffs filed an unopposed motion to stay proceedings pending a final resolution of the Hogan class action litigation. The court-ordered deadline for the defendants to file an answer or otherwise respond to the complaint was originally set for July 30, 2018. This deadline was extended to August 31, 2018, at which time the plaintiffs filed an unopposed motion to voluntarily dismiss the complaint without prejudice. The Court granted the plaintiffs’ motion on September 4, 2018.
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 Holding and several members of the Batista family, in the Court of Chancery of the State of Delaware, or 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. On July 2, 2018, the Chancery Court
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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 is proceeding to discovery, with fact discovery scheduled to close in February 2020, expert discovery scheduled to close in May 2020, and, subject to the Chancery Court’s availability, trial commencing in November 2020.
The Company believes it has strong defenses in each of the above litigations and intends to contest them vigorously. The Company cannot predict the outcome of these actions nor when they will be resolved. If the plaintiffs were to prevail in any of these litigations, the Company could be liable for damages, which could be material and could adversely affect its financial condition or results of operations.
ITEM 1A. | RISK FACTORS |
In addition to the other information set forth in this quarterly report, you should carefully consider the risks discussed in our annual report on Form 10-K for the year ended December 30, 2018, including under the heading “Item 1A. Risk Factors”, which, along with risks disclosed in this report, are risks we believe could materially affect the Company’s business, financial condition or future results. These risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. The Company accounted for the shares repurchased using the cost method. The Company currently plans to maintain these shares as treasury stock.
Issuer Purchases of Equity Securities | ||||||||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of the Shares That May Yet Be Purchased Under the Plans or Programs (a) | ||||||||||
April 1, 2019 through April 28, 2019 | 4,100 | $ | 21.42 | 4,100 | $ | 199,675,684 | ||||||||
April 29, 2019 through June 2, 2019 | 39,357 | 25.41 | 39,357 | 198,675,697 | ||||||||||
June 3, 2019 through June 30, 2019 | 72,537 | 24.95 | 72,537 | 196,865,927 | ||||||||||
Total | 115,994 | $ | 24.98 | 115,994 | $ | 196,865,927 | ||||||||
(a) Reflects the remaining dollar value of shares that may yet be repurchased under our share repurchase authorization.
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ITEM 6. EXHIBITS
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31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101 | The following financial information from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Stockholder's Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements. | ||
* | Filed herewith. | |
** | Furnished herewith. | |
*** | Represents a management contract or compensation plan arrangement. | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PILGRIM’S PRIDE CORPORATION | ||
Date: July 31, 2019 | /s/ Fabio Sandri | |
Fabio Sandri | ||
Chief Financial Officer | ||
(Principal Financial Officer, Chief Accounting Officer and Duly Authorized Officer) | ||
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EXHIBIT 31.1
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jayson Penn, certify that:
1. | I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2019, of Pilgrim's Pride Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: July 31, 2019 | /s/ Jayson Penn | |
Jayson Penn | ||
Principal Executive Officer | ||
EXHIBIT 31.2
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Fabio Sandri, certify that:
1. | I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2019, of Pilgrim's Pride Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: July 31, 2019 | /s/ Fabio Sandri | |
Fabio Sandri | ||
Chief Financial Officer | ||
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. § 1350 ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Pilgrim's Pride Corporation (the “Company”), does hereby certify, to such officer's knowledge, that:
The quarterly report on Form 10-Q for the quarter ended June 30, 2019 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: July 31, 2019 | /s/ Jayson Penn | |
Jayson Penn | ||
Principal Executive Officer | ||
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. § 1350 ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Pilgrim's Pride Corporation (the “Company”), does hereby certify, to such officer's knowledge, that:
The quarterly report on Form 10-Q for the quarter ended June 30, 2019 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: July 31, 2019 | /s/ Fabio Sandri | |
Fabio Sandri | ||
Chief Financial Officer | ||