UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 27, 202026, 2021
OR
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☐ | 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)
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Delaware | | 75-1285071 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1770 Promontory Circle | | 80634-9038 |
Greeley | CO | | |
(Address of principal executive offices) | | (Zip code) |
Registrant’s telephone number, including area code: (970) 506-8000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of Exchange on which Registered |
Common Stock, Par Value $0.01 | | PPC | | The Nasdaq Stock Market LLC |
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ý 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.
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Large Accelerated Filer | ý | | 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 ý
Number of shares outstanding of the issuer’s common stock, $0.01 par value per share, as of October 28, 2020,27, 2021, was 243,553,038243,675,522.
INDEX
INDEX
PILGRIM’S PRIDE CORPORATION
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(Unaudited) |
|
| | September 27, 2020 | | December 29, 2019 |
| | | | |
| | (In thousands) |
Cash and cash equivalents | | $ | 768,031 | | | $ | 260,568 | |
Restricted cash and cash equivalents | | 17,105 | | | 20,009 | |
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Trade accounts and other receivables, less allowance for doubtful accounts | | 706,123 | | | 741,281 | |
Accounts receivable from related parties | | 616 | | | 944 | |
Inventories | | 1,328,704 | | | 1,383,535 | |
Income taxes receivable | | 77,651 | | | 60,204 | |
Prepaid expenses and other current assets | | 159,643 | | | 131,695 | |
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Total current assets | | 3,057,873 | | | 2,598,236 | |
Deferred tax assets | | 4,126 | | | 4,426 | |
Other long-lived assets | | 15,079 | | | 36,325 | |
Operating lease assets, net | | 284,820 | | | 301,513 | |
Identified intangible assets, net | | 566,696 | | | 596,053 | |
Goodwill | | 955,087 | | | 973,750 | |
Property, plant and equipment, net | | 2,585,818 | | | 2,592,061 | |
Total assets | | $ | 7,469,499 | | | $ | 7,102,364 | |
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Accounts payable | | $ | 915,661 | | | $ | 993,780 | |
Accounts payable to related parties | | 5,752 | | | 3,819 | |
Revenue contract liability | | 57,221 | | | 41,770 | |
Accrued expenses and other current liabilities | | 691,329 | | | 575,319 | |
Income taxes payable | | 0 | | | 7,075 | |
Current maturities of long-term debt | | 25,485 | | | 26,392 | |
Total current liabilities | | 1,695,448 | | | 1,648,155 | |
Noncurrent operating lease liability, less current maturities | | 215,924 | | | 235,382 | |
Long-term debt, less current maturities | | 2,610,668 | | | 2,276,029 | |
Noncurrent income taxes payable | | 7,731 | | | 7,731 | |
Deferred tax liabilities | | 339,051 | | | 301,907 | |
Other long-term liabilities | | 169,365 | | | 97,100 | |
Total liabilities | | 5,038,187 | | | 4,566,304 | |
Common stock | | 2,612 | | | 2,611 | |
Treasury stock | | (342,698) | | | (234,892) | |
Additional paid-in capital | | 1,953,969 | | | 1,955,261 | |
Retained earnings | | 972,490 | | | 877,812 | |
Accumulated other comprehensive loss | | (165,520) | | | (75,129) | |
Total Pilgrim’s Pride Corporation stockholders’ equity | | 2,420,853 | | | 2,525,663 | |
Noncontrolling interest | | 10,459 | | | 10,397 | |
Total stockholders’ equity | | 2,431,312 | | | 2,536,060 | |
Total liabilities and stockholders’ equity | | $ | 7,469,499 | | | $ | 7,102,364 | |
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PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED BALANCE SHEETS |
|
| | (Unaudited) | | |
| | September 26, 2021 | | December 27, 2020 |
| | (In thousands) |
Cash and cash equivalents | | $ | 511,084 | | | $ | 547,624 | |
Restricted cash and cash equivalents | | 54,111 | | | 782 | |
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Trade accounts and other receivables, less allowance for doubtful accounts | | 889,586 | | | 741,992 | |
Accounts receivable from related parties | | 1,330 | | | 1,084 | |
Inventories | | 1,556,821 | | | 1,358,793 | |
Income taxes receivable | | 51,619 | | | 69,397 | |
Prepaid expenses and other current assets | | 177,156 | | | 183,039 | |
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Total current assets | | 3,241,707 | | | 2,902,711 | |
Deferred tax assets | | 5,465 | | | 5,471 | |
Other long-lived assets | | 26,190 | | | 24,780 | |
Operating lease assets, net | | 300,476 | | | 288,886 | |
Identified intangible assets, net | | 1,028,664 | | | 589,913 | |
Goodwill | | 1,381,872 | | | 1,005,245 | |
Property, plant and equipment, net | | 2,848,469 | | | 2,657,491 | |
Total assets | | $ | 8,832,843 | | | $ | 7,474,497 | |
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Accounts payable | | $ | 1,176,866 | | | $ | 1,028,710 | |
Accounts payable to related parties | | 6,594 | | | 9,650 | |
Revenue contract liabilities | | 20,564 | | | 65,918 | |
Accrued expenses and other current liabilities | | 999,014 | | | 807,847 | |
Income taxes payable | | 48,006 | | | — | |
Current maturities of long-term debt | | 19,885 | | | 25,455 | |
Total current liabilities | | 2,270,929 | | | 1,937,580 | |
Noncurrent operating lease liability, less current maturities | | 223,071 | | | 217,432 | |
Long-term debt, less current maturities | | 3,195,866 | | | 2,255,546 | |
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Deferred tax liabilities | | 418,430 | | | 339,831 | |
Other long-term liabilities | | 108,164 | | | 148,761 | |
Total liabilities | | 6,216,460 | | | 4,899,150 | |
Common stock | | 2,614 | | | 2,612 | |
Treasury stock | | (345,134) | | | (345,134) | |
Additional paid-in capital | | 1,962,750 | | | 1,954,334 | |
Retained earnings | | 966,815 | | | 972,569 | |
Accumulated other comprehensive income (loss) | | 17,198 | | | (20,620) | |
Total Pilgrim’s Pride Corporation stockholders’ equity | | 2,604,243 | | | 2,563,761 | |
Noncontrolling interest | | 12,140 | | | 11,586 | |
Total stockholders’ equity | | 2,616,383 | | | 2,575,347 | |
Total liabilities and stockholders’ equity | | $ | 8,832,843 | | | $ | 7,474,497 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| PILGRIM’S PRIDE CORPORATION | PILGRIM’S PRIDE CORPORATION | PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | CONDENSED CONSOLIDATED STATEMENTS OF INCOME | CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
(Unaudited) | (Unaudited) | (Unaudited) |
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 | | | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| | | (In thousands, except per share data) | | | (in thousands, except per share data) |
Net sales | Net sales | | $ | 3,075,121 | | | $ | 2,777,970 | | | $ | 8,974,072 | | | $ | 8,345,730 | | Net sales | | $ | 3,827,566 | | | $ | 3,075,121 | | | $ | 10,738,689 | | | $ | 8,974,072 | |
Cost of sales | Cost of sales | | 2,761,279 | | | 2,495,773 | | | 8,363,272 | | | 7,476,731 | | Cost of sales | | 3,455,723 | | | 2,761,279 | | | 9,725,362 | | | 8,363,272 | |
Gross profit | Gross profit | | 313,842 | | | 282,197 | | | 610,800 | | | 868,999 | | Gross profit | | 371,843 | | | 313,842 | | | 1,013,327 | | | 610,800 | |
Selling, general and administrative expense | Selling, general and administrative expense | | 219,554 | | | 94,032 | | | 404,837 | | | 264,313 | | Selling, general and administrative expense | | 251,066 | | | 219,554 | | | 857,217 | | | 404,837 | |
Administrative restructuring activity | | 0 | | | (20) | | | 0 | | | (90) | | |
| Operating income | Operating income | | 94,288 | | | 188,185 | | | 205,963 | | | 604,776 | | Operating income | | 120,777 | | | 94,288 | | | 156,110 | | | 205,963 | |
Interest expense, net of capitalized interest | Interest expense, net of capitalized interest | | 30,564 | | | 32,028 | | | 95,575 | | | 99,184 | | Interest expense, net of capitalized interest | | 29,833 | | | 30,564 | | | 110,818 | | | 95,575 | |
Interest income | Interest income | | (1,763) | | | (4,698) | | | (4,611) | | | (11,481) | | Interest income | | (1,244) | | | (1,763) | | | (4,452) | | | (4,611) | |
Foreign currency transaction loss (gain) | Foreign currency transaction loss (gain) | | 9,092 | | | 3,027 | | | (3,768) | | | 7,923 | | Foreign currency transaction loss (gain) | | 2,359 | | | 9,092 | | | 9,018 | | | (3,768) | |
Miscellaneous, net | Miscellaneous, net | | 360 | | | 1,367 | | | (33,873) | | | 2,521 | | Miscellaneous, net | | (1,391) | | | 360 | | | (10,005) | | | (33,873) | |
| Income before income taxes | Income before income taxes | | 56,035 | | | 156,461 | | | 152,640 | | | 506,629 | | Income before income taxes | | 91,220 | | | 56,035 | | | 50,731 | | | 152,640 | |
Income tax expense | Income tax expense | | 22,344 | | | 46,365 | | | 57,900 | | | 142,328 | | Income tax expense | | 30,385 | | | 22,344 | | | 55,931 | | | 57,900 | |
Net income | | 33,691 | | | 110,096 | | | 94,740 | | | 364,301 | | |
Net income (loss) | | Net income (loss) | | 60,835 | | | 33,691 | | | (5,200) | | | 94,740 | |
Less: Net income attributable to noncontrolling interests | Less: Net income attributable to noncontrolling interests | | 245 | | | 331 | | | 62 | | | 457 | | Less: Net income attributable to noncontrolling interests | | 110 | | | 245 | | | 554 | | | 62 | |
Net income attributable to Pilgrim’s Pride Corporation | | $ | 33,446 | | | $ | 109,765 | | | $ | 94,678 | | | $ | 363,844 | | |
Net income (loss) attributable to Pilgrim’s Pride Corporation | | Net income (loss) attributable to Pilgrim’s Pride Corporation | | $ | 60,725 | | | $ | 33,446 | | | $ | (5,754) | | | $ | 94,678 | |
| Weighted average shares of Pilgrim's Pride Corporation common stock outstanding: | | |
Weighted average shares of Pilgrim’s Pride Corporation common stock outstanding: | | Weighted average shares of Pilgrim’s Pride Corporation common stock outstanding: | |
Basic | Basic | | 244,186 | | | 249,467 | | | 246,740 | | | 249,344 | | Basic | | 243,675 | | | 244,186 | | | 243,643 | | | 246,740 | |
Effect of dilutive common stock equivalents | Effect of dilutive common stock equivalents | | 190 | | | 262 | | | 158 | | | 308 | | Effect of dilutive common stock equivalents | | 520 | | | 190 | | | — | | | 158 | |
Diluted | Diluted | | 244,376 | | | 249,729 | | | 246,898 | | | 249,652 | | Diluted | | 244,195 | | | 244,376 | | | 243,643 | | | 246,898 | |
| Net income attributable to Pilgrim's Pride Corporation per share of common stock outstanding: | | |
Net income (loss) attributable to Pilgrim’s Pride Corporation per share of common stock outstanding: | | Net income (loss) attributable to Pilgrim’s Pride Corporation per share of common stock outstanding: | |
Basic | Basic | | $ | 0.14 | | | $ | 0.44 | | | $ | 0.38 | | | $ | 1.46 | | Basic | | $ | 0.25 | | | $ | 0.14 | | | $ | (0.02) | | | $ | 0.38 | |
Diluted | Diluted | | $ | 0.14 | | | $ | 0.44 | | | $ | 0.38 | | | $ | 1.46 | | Diluted | | $ | 0.25 | | | $ | 0.14 | | | $ | (0.02) | | | $ | 0.38 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| PILGRIM’S PRIDE CORPORATION | PILGRIM’S PRIDE CORPORATION | PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(Unaudited) | (Unaudited) | (Unaudited) |
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 | | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| | (In thousands) | | (In thousands) |
Net income | | $ | 33,691 | | | $ | 110,096 | | | $ | 94,740 | | | $ | 364,301 | | |
Other comprehensive income: | | |
Net income (loss) | | Net income (loss) | $ | 60,835 | | | $ | 33,691 | | | $ | (5,200) | | | $ | 94,740 | |
Other comprehensive income (loss): | | Other comprehensive income (loss): | |
Foreign currency translation adjustment: | Foreign currency translation adjustment: | | Foreign currency translation adjustment: | |
Gains (losses) arising during the period | Gains (losses) arising during the period | | 66,626 | | | (50,213) | | | (48,921) | | | (50,824) | | Gains (losses) arising during the period | (36,003) | | | 66,626 | | | 13,135 | | | (48,921) | |
| Derivative financial instruments designated as cash flow hedges: | Derivative financial instruments designated as cash flow hedges: | | Derivative financial instruments designated as cash flow hedges: | |
Gains (losses) arising during the period | Gains (losses) arising during the period | | 1,281 | | | (1,669) | | | 3,182 | | | (1,269) | | Gains (losses) arising during the period | (1,030) | | | 1,281 | | | 1,179 | | | 3,182 | |
Income tax effect | Income tax effect | | 194 | | | 0 | | | 194 | | | 0 | | Income tax effect | 9 | | | 194 | | | 41 | | | 194 | |
Reclassification to net earnings for losses (gains) realized | Reclassification to net earnings for losses (gains) realized | | (1,619) | | | 247 | | | (1,039) | | | 74 | | Reclassification to net earnings for losses (gains) realized | 102 | | | (1,619) | | | (1,146) | | | (1,039) | |
Income tax effect | | Income tax effect | (43) | | | — | | | (115) | | | — | |
Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
Gains (losses) arising during the period | Gains (losses) arising during the period | | (8) | | | 312 | | | 6 | | | 506 | | Gains (losses) arising during the period | — | | | (8) | | | — | | | 6 | |
Income tax effect | Income tax effect | | 0 | | | (76) | | | (4) | | | (123) | | Income tax effect | — | | | — | | | — | | | (4) | |
Reclassification to net earnings for gains realized | Reclassification to net earnings for gains realized | | (6) | | | (159) | | | (18) | | | (466) | | Reclassification to net earnings for gains realized | — | | | (6) | | | — | | | (18) | |
Income tax effect | Income tax effect | | 1 | | | 37 | | | 4 | | | 113 | | Income tax effect | — | | | 1 | | | — | | | 4 | |
Defined benefit plans: | Defined benefit plans: | | Defined benefit plans: | |
Losses arising during the period | | 1,250 | | | (5,231) | | | (43,711) | | | (9,202) | | |
Gains (losses) arising during the period | | Gains (losses) arising during the period | (7,073) | | | 1,250 | | | 32,030 | | | (43,711) | |
Income tax effect | Income tax effect | | (10,094) | | | 1,142 | | | (930) | | | 2,240 | | Income tax effect | 1,412 | | | (10,094) | | | (8,506) | | | (930) | |
Reclassification to net earnings of losses realized | Reclassification to net earnings of losses realized | | 376 | | | 328 | | | 1,127 | | | 984 | | Reclassification to net earnings of losses realized | 613 | | | 376 | | | 1,568 | | | 1,127 | |
Income tax effect | Income tax effect | | (94) | | | (79) | | | (281) | | | (239) | | Income tax effect | (143) | | | (94) | | | (368) | | | (281) | |
Total other comprehensive income (loss), net of tax | Total other comprehensive income (loss), net of tax | | 57,907 | | | (55,361) | | | (90,391) | | | (58,206) | | Total other comprehensive income (loss), net of tax | (42,156) | | | 57,907 | | | 37,818 | | | (90,391) | |
Comprehensive income | Comprehensive income | | 91,598 | | | 54,735 | | | 4,349 | | | 306,095 | | Comprehensive income | 18,679 | | | 91,598 | | | 32,618 | | | 4,349 | |
Less: Comprehensive income attributable to noncontrolling interests | Less: Comprehensive income attributable to noncontrolling interests | | 245 | | | 331 | | | 62 | | | 457 | | Less: Comprehensive income attributable to noncontrolling interests | 110 | | | 245 | | | 554 | | | 62 | |
Comprehensive income attributable to Pilgrim's Pride Corporation | | $ | 91,353 | | | $ | 54,404 | | | $ | 4,287 | | | $ | 305,638 | | |
Comprehensive income attributable to Pilgrim’s Pride Corporation | | Comprehensive income attributable to Pilgrim’s Pride Corporation | $ | 18,569 | | | $ | 91,353 | | | $ | 32,064 | | | $ | 4,287 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
(Unaudited) |
|
Nine Months Ended September 26, 2021 | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interest | | Total |
| | Shares | | Amount | | Shares | | Amount | |
| | (In thousands) |
Balance at December 27, 2020 | | 261,185 | | | $ | 2,612 | | | (17,673) | | | $ | (345,134) | | | $ | 1,954,334 | | | $ | 972,569 | | | $ | (20,620) | | | $ | 11,586 | | | $ | 2,575,347 | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (5,754) | | | — | | | 554 | | | (5,200) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | 37,818 | | | — | | | 37,818 | |
Stock-based compensation plans: | | | | | | | | | | | | | | | | | | |
Common stock issued under compensation plans | | 162 | | | 2 | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | |
Requisite service period recognition | | — | | | — | | | — | | | — | | | 8,418 | | | — | | | — | | | — | | | 8,418 | |
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Balance at September 26, 2021 | | 261,347 | | | $ | 2,614 | | | (17,673) | | | $ | (345,134) | | | $ | 1,962,750 | | | $ | 966,815 | | | $ | 17,198 | | | $ | 12,140 | | | $ | 2,616,383 | |
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Three Months Ended September 26, 2021 | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Noncontrolling Interest | | Total |
| | Shares | | Amount | | Shares | | Amount | |
| | (In thousands) |
Balance at June 27, 2021 | | 261,347 | | | $ | 2,614 | | | (17,673) | | | $ | (345,134) | | | $ | 1,959,558 | | | $ | 906,090 | | | $ | 59,354 | | | $ | 12,030 | | | $ | 2,594,512 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 60,725 | | | — | | | 110 | | | 60,835 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (42,156) | | | — | | | (42,156) | |
Stock-based compensation plans: | | | | | | | | | | | | | | | | | | |
Common stock issued under compensation plans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Requisite service period recognition | | — | | | — | | | — | | | — | | | 3,192 | | | — | | | — | | | — | | | 3,192 | |
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Balance at September 26, 2021 | | 261,347 | | | $ | 2,614 | | | (17,673) | | | $ | (345,134) | | | $ | 1,962,750 | | | $ | 966,815 | | | $ | 17,198 | | | $ | 12,140 | | | $ | 2,616,383 | |
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PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
(Unaudited) |
|
Nine Months Ended September 27, 2020 | | 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 29, 2019 | | 261,119 | | | $ | 2,611 | | | (11,547) | | | $ | (234,892) | | | $ | 1,955,261 | | | $ | 877,812 | | | $ | (75,129) | | | $ | 10,397 | | | $ | 2,536,060 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 94,678 | | | — | | | 62 | | | 94,740 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (90,391) | | | — | | | (90,391) | |
Stock-based compensation plans: | | | | | | | | | | | | | | | | | | |
Common stock issued under compensation plans | | 66 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | | | — | | | 0 | |
Requisite service period recognition | | — | | | — | | | — | | | — | | | (1,291) | | | — | | | — | | | — | | | (1,291) | |
Common stock purchased under share repurchase program | | — | | | — | | | (5,974) | | | (107,806) | | | — | | | — | | | — | | | — | | | (107,806) | |
| | | | | | | | | | | | | | | | | | |
Balance at September 27, 2020 | | 261,185 | | | $ | 2,612 | | | (17,521) | | | $ | (342,698) | | | $ | 1,953,969 | | | $ | 972,490 | | | $ | (165,520) | | | $ | 10,459 | | | $ | 2,431,312 | |
| | | | | | | | | | | | | | | | | | |
Three Months Ended September 27, 2020 | | 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 June 28, 2020 | | 261,185 | | | $ | 2,612 | | | (15,668) | | | $ | (312,771) | | | $ | 1,958,727 | | | $ | 939,044 | | | $ | (223,427) | | | $ | 10,214 | | | $ | 2,374,399 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 33,446 | | | — | | | 245 | | | 33,691 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | 57,907 | | | — | | | 57,907 | |
Stock-based compensation plans: | | | | | | | | | | | | | | | | | | |
Common stock issued under compensation plans | | | | | | — | | | — | | | 0 | | | — | | | — | | | — | | | 0 | |
Requisite service period recognition | | — | | | — | | | — | | | — | | | (4,758) | | | — | | | — | | | — | | | (4,758) | |
Common stock purchased under share repurchase program | | — | | | — | | | (1,853) | | | (29,927) | | | — | | | — | | | — | | | — | | | (29,927) | |
Balance at September 27, 2020 | | 261,185 | | | $ | 2,612 | | | (17,521) | | | $ | (342,698) | | | $ | 1,953,969 | | | $ | 972,490 | | | $ | (165,520) | | | $ | 10,459 | | | $ | 2,431,312 | |
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| PILGRIM’S PRIDE CORPORATION | |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued) | |
(Unaudited) | |
| Nine Months Ended September 29, 2019 | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total | |
Nine Months Ended September 27, 2020 | | Nine Months Ended September 27, 2020 | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total |
| | Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total | | Shares | | Amount | | Shares | | Amount | |
| | (In thousands) | | (In thousands) |
Balance at December 30, 2018 | | 260,396 | | | $ | 2,604 | | | (11,431) | | | $ | (231,994) | | | $ | 1,945,136 | | | $ | 421,888 | | | $ | (127,834) | | | $ | 9,785 | | | $ | 2,019,585 | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 363,844 | | | — | | | 457 | | | 364,301 | | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (58,206) | | | — | | | (58,206) | | |
Stock-based compensation plans: | | |
Common stock issued under compensation plans | | 722 | | | 7 | | | — | | | — | | | (7) | | | — | | | — | | | — | | | 0 | | |
Requisite service period recognition | | — | | | — | | | — | | | — | | | 7,322 | | | — | | | — | | | — | | | 7,322 | | |
Common stock purchased under share repurchase program | | — | | | — | | | (116) | | | (2,898) | | | — | | | — | | | — | | | — | | | (2,898) | | |
Balance at September 29, 2019 | | 261,118 | | | $ | 2,611 | | | (11,547) | | | $ | (234,892) | | | $ | 1,952,451 | | | $ | 785,732 | | | $ | (186,040) | | | $ | 10,242 | | | $ | 2,330,104 | | |
| Three Months Ended September 29, 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 June 30, 2019 | | 260,855 | | | $ | 2,609 | | | (11,547) | | | $ | (234,892) | | | $ | 1,950,348 | | | $ | 675,967 | | | $ | (130,679) | | | $ | 9,911 | | | $ | 2,273,264 | | |
Balance at December 29, 2019 | | Balance at December 29, 2019 | | 261,119 | | | $ | 2,611 | | | (11,547) | | | $ | (234,892) | | | $ | 1,955,261 | | | $ | 877,812 | | | $ | (75,129) | | | $ | 10,397 | | | $ | 2,536,060 | |
Net income | Net income | | — | | | — | | | — | | | — | | | — | | | 109,765 | | | — | | | 331 | | | 110,096 | | Net income | | — | | | — | | | — | | | — | | | — | | | 94,678 | | | — | | | 62 | | | 94,740 | |
Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (55,361) | | | — | | | (55,361) | | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (90,391) | | | — | | | (90,391) | |
Stock-based compensation plans: | Stock-based compensation plans: | | Stock-based compensation plans: | |
Common stock issued under compensation plans | Common stock issued under compensation plans | | 263 | | | 2 | | | — | | | — | | | (2) | | | — | | | — | | | — | | | 0 | | Common stock issued under compensation plans | | 66 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | | | — | | | — | |
Requisite service period recognition | Requisite service period recognition | | — | | | — | | | — | | | — | | | 2,105 | | | — | | | — | | | — | | | 2,105 | | Requisite service period recognition | | — | | | — | | | — | | | — | | | (1,291) | | | — | | | — | | | — | | | (1,291) | |
Common stock purchased under share repurchase program | Common stock purchased under share repurchase program | | — | | | — | | | — | | | — | | | — | | | — | | | 0 | | Common stock purchased under share repurchase program | | — | | | — | | | (5,974) | | | (107,806) | | | — | | | — | | | — | | | — | | | (107,806) | |
| Balance at September 29, 2019 | | 261,118 | | | $ | 2,611 | | | (11,547) | | | $ | (234,892) | | | $ | 1,952,451 | | | $ | 785,732 | | | $ | (186,040) | | | $ | 10,242 | | | $ | 2,330,104 | | |
Balance at September 27, 2020 | | Balance at September 27, 2020 | | 261,185 | | | $ | 2,612 | | | (17,521) | | | $ | (342,698) | | | $ | 1,953,969 | | | $ | 972,490 | | | $ | (165,520) | | | $ | 10,459 | | | $ | 2,431,312 | |
| Three Months Ended September 27, 2020 | | Three Months Ended September 27, 2020 | | 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 June 28, 2020 | | Balance at June 28, 2020 | | 261,185 | | | $ | 2,612 | | | (15,668) | | | $ | (312,771) | | | $ | 1,958,727 | | | $ | 939,044 | | | $ | (223,427) | | | $ | 10,214 | | | $ | 2,374,399 | |
Net income | | Net income | | — | | | — | | | — | | | — | | | — | | | 33,446 | | | — | | | 245 | | | 33,691 | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | 57,907 | | | — | | | 57,907 | |
Stock-based compensation plans: | | Stock-based compensation plans: | |
Common stock issued under compensation plans | | Common stock issued under compensation plans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Requisite service period recognition | | Requisite service period recognition | | — | | | — | | | — | | | — | | | (4,758) | | | — | | | — | | | — | | | (4,758) | |
Common stock purchased under share repurchase program | | Common stock purchased under share repurchase program | | — | | | — | | | (1,853) | | | (29,927) | | | — | | | — | | | — | | | — | | | (29,927) | |
| Balance at September 27, 2020 | | Balance at September 27, 2020 | | 261,185 | | | $ | 2,612 | | | (17,521) | | | $ | (342,698) | | | $ | 1,953,969 | | | $ | 972,490 | | | $ | (165,520) | | | $ | 10,459 | | | $ | 2,431,312 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| PILGRIM’S PRIDE CORPORATION | PILGRIM’S PRIDE CORPORATION | PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) | (Unaudited) | (Unaudited) |
| | | Nine Months Ended | | Nine Months Ended |
| | | September 27, 2020 | | September 29, 2019 | | | September 26, 2021 | | September 27, 2020 |
| | | (In thousands) | | | (In thousands) |
Cash flows from operating activities: | Cash flows from operating activities: | | Cash flows from operating activities: | |
Net income | | $ | 94,740 | | | $ | 364,301 | | |
Net income (loss) | | Net income (loss) | | $ | (5,200) | | | $ | 94,740 | |
Adjustments to reconcile net income to cash provided by operating activities: | Adjustments to reconcile net income to cash provided by operating activities: | | Adjustments to reconcile net income to cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 248,641 | | | 210,381 | | Depreciation and amortization | | 274,336 | | | 248,641 | |
Deferred income tax expense | | 37,739 | | | 2,396 | | |
Deferred income tax expense (benefit) | | Deferred income tax expense (benefit) | | (26,436) | | | 37,739 | |
Loss on early extinguishment of debt recognized as a component of interest expense | | Loss on early extinguishment of debt recognized as a component of interest expense | | 24,654 | | | — | |
Stock-based compensation | | Stock-based compensation | | 8,418 | | | (1,291) | |
Loan cost amortization | | Loan cost amortization | | 3,762 | | | 3,635 | |
Gain on property disposals | Gain on property disposals | | (8,009) | | | (9,546) | | Gain on property disposals | | (3,605) | | | (8,009) | |
Negative adjustment to previously recognized gain on bargain purchase | | 3,746 | | | 0 | | |
Loan cost amortization | | 3,635 | | | 3,609 | | |
Stock-based compensation | | (1,291) | | | 7,322 | | |
Accretion of discount related to Senior Notes | Accretion of discount related to Senior Notes | | 737 | | | 737 | | Accretion of discount related to Senior Notes | | 1,104 | | | 737 | |
Amortization of premium related to Senior Notes | Amortization of premium related to Senior Notes | | (501) | | | (501) | | Amortization of premium related to Senior Notes | | (167) | | | (501) | |
Loss (gain) on equity-method investments | Loss (gain) on equity-method investments | | 297 | | | (48) | | Loss (gain) on equity-method investments | | (12) | | | 297 | |
Foreign currency transaction loss related to borrowing arrangements | | 0 | | | 1,259 | | |
Negative adjustment to previously recognized gain on bargain purchase | | Negative adjustment to previously recognized gain on bargain purchase | | — | | | 3,746 | |
| | Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Trade accounts and other receivables | Trade accounts and other receivables | | 44,615 | | | (46,648) | | Trade accounts and other receivables | | (138,948) | | | 44,615 | |
Inventories | Inventories | | 41,292 | | | (108,117) | | Inventories | | (149,653) | | | 41,292 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | (29,290) | | | 3,536 | | Prepaid expenses and other current assets | | 13,718 | | | (29,290) | |
Accounts payable, accrued expenses and other current liabilities | Accounts payable, accrued expenses and other current liabilities | | 93,114 | | | 67,308 | | Accounts payable, accrued expenses and other current liabilities | | 274,932 | | | 93,114 | |
Income taxes | Income taxes | | (30,868) | | | 40,549 | | Income taxes | | 66,413 | | | (30,868) | |
| Long-term pension and other postretirement obligations | Long-term pension and other postretirement obligations | | (823) | | | (1,578) | | Long-term pension and other postretirement obligations | | (13,491) | | | (823) | |
Other operating assets and liabilities | Other operating assets and liabilities | | 10,561 | | | 544 | | Other operating assets and liabilities | | (2,330) | | | 10,561 | |
Cash provided by operating activities | Cash provided by operating activities | | 508,335 | | | 535,504 | | Cash provided by operating activities | | 327,495 | | | 508,335 | |
Cash flows from investing activities: | Cash flows from investing activities: | | Cash flows from investing activities: | |
Acquisitions of property, plant and equipment | Acquisitions of property, plant and equipment | | (242,603) | | | (258,725) | | Acquisitions of property, plant and equipment | | (280,820) | | | (242,603) | |
Proceeds from property disposals | Proceeds from property disposals | | 21,715 | | | 15,168 | | Proceeds from property disposals | | 22,896 | | | 21,715 | |
Purchase of acquired business, net of cash acquired | Purchase of acquired business, net of cash acquired | | (4,216) | | | 0 | | Purchase of acquired business, net of cash acquired | | (953,947) | | | (4,216) | |
| Cash used in investing activities | Cash used in investing activities | | (225,104) | | | (243,557) | | Cash used in investing activities | | (1,211,871) | | | (225,104) | |
Cash flows from financing activities: | Cash flows from financing activities: | | Cash flows from financing activities: | |
| Proceeds from revolving line of credit and long-term borrowings | Proceeds from revolving line of credit and long-term borrowings | | 386,696 | | | 99,638 | | Proceeds from revolving line of credit and long-term borrowings | | 2,951,707 | | | 386,696 | |
Payments on revolving line of credit, long-term borrowings and finance lease obligations | | Payments on revolving line of credit, long-term borrowings and finance lease obligations | | (2,005,960) | | | (56,763) | |
Payments on early extinguishment of debt | | Payments on early extinguishment of debt | | (21,258) | | | — | |
Payments of capitalized loan costs | | Payments of capitalized loan costs | | (22,293) | | | — | |
Payment of equity distribution under Tax Sharing Agreement between JBS USA Food Company Holdings and Pilgrim’s Pride Corporation | | Payment of equity distribution under Tax Sharing Agreement between JBS USA Food Company Holdings and Pilgrim’s Pride Corporation | | (650) | | | — | |
Purchase of common stock under share repurchase program | Purchase of common stock under share repurchase program | | (107,806) | | | (2,898) | | Purchase of common stock under share repurchase program | | — | | | (107,806) | |
Payments on revolving line of credit, long-term borrowings and finance lease obligations | | (56,763) | | | (123,276) | | |
Payment from equity distribution under Tax Sharing Agreement between JBS USA Food Company Holdings and Pilgrim’s Pride Corporation | | 0 | | | (525) | | |
| Payment of capitalized loan costs | | 0 | | | (652) | | |
| Cash provided by (used in) financing activities | | 222,127 | | | (27,713) | | |
| Cash provided by financing activities | | Cash provided by financing activities | | 901,546 | | | 222,127 | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | | (799) | | | (808) | | Effect of exchange rate changes on cash and cash equivalents | | (381) | | | (799) | |
Increase in cash, cash equivalents and restricted cash | Increase in cash, cash equivalents and restricted cash | | 504,559 | | | 263,426 | | Increase in cash, cash equivalents and restricted cash | | 16,789 | | | 504,559 | |
Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | | 280,577 | | | 361,578 | | Cash, cash equivalents and restricted cash, beginning of period | | 548,406 | | | 280,577 | |
Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | | $ | 785,136 | | | $ | 625,004 | | Cash, cash equivalents and restricted cash, end of period | | $ | 565,195 | | | $ | 785,136 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Business
Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “PPC,” “the Company,” “we,” “us,” “our,” or similar terms) is one of the largest chicken producers in the world, with operations in the United States (“U.S.”), the United Kingdom (“U.K.”), Mexico, France, Puerto Rico, the Netherlands and the Netherlands.Ireland. Pilgrim’s products are sold to foodservice, retail and frozen entrée customers. The Company’s primary distribution is through retailers, foodservice distributors and restaurants throughout the countries listed above. Additionally, the Company exports chicken and pork products to approximately 110124 countries. Pilgrim’s fresh products consist of refrigerated (nonfrozen) whole chickens, whole cut-up chickens, selectedboth marinated and non-marinated chicken parts, that are either marinated or non-marinated, primary pork cuts, added valuevalue-added pork and pork ribs. The Company’s prepared products include fully cooked, ready-to-cook and individually frozenindividually-frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated, processed sausages, bacon, slow-cooked, smoked meat, gammon joints, pre-packed meats, sandwich and gammon joints.deli counter meats and meat balls. The Company’s other products include plant-based protein offerings, ready-to-eat meals, multi-protein frozen foods, vegetarian foods and desserts, pre-packed meats, sandwich, deli counter meats, pulled pork balls, meat ballsdesserts. The Company also provides direct-to-consumer meals and coated foods. As a vertically integrated company, we control every phase ofhot food-to-go solutions in the production of our products.U.K. and Ireland. We operate feed mills, hatcheries, processing plants and distribution centers in 14 U.S. states, the U.K., Mexico, France, Puerto Rico, the Netherlands and the Netherlands.Ireland. As of September 27, 2020,26, 2021, Pilgrim’s had approximately 55,40058,900 employees. As of September 27, 2020,26, 2021, PPC had the capacity to process approximately 44.943.7 million birds per work week for a total of more than 13.213.7 billion pounds of live chicken annually. Approximately 4,800 contract growers supply chicken for the Company’s operations. As of September 27, 2020,26, 2021, PPC had the capacity to process approximately 44,00044,300 pigs per work week for a total of 423.6445.1 million pounds of live pork annually and approximately 295285 contract growers supply pork for the Company'sCompany’s operations. As of September 27, 2020,26, 2021, JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owned 80.2% 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 nine months ended September 27, 202026, 2021 are not necessarily indicative of the results that may be expected for the year ending December 27, 2020.26, 2021. For further information, refer to the consolidated and combined financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 29, 2019.27, 2020.
The Company operates on the basis of a 52/53 week fiscal year ending on the Sunday falling on or before December 31. Any reference we make to a particular year (for example, 2020)2021) in the notes to these Condensed Consolidated Financial Statements applies to our fiscal year and not the calendar year. The three months ended September 26, 2021 represents the period from June 28, 2021 through September 26, 2021. The nine months ended September 26, 2021 represents the period from December 28, 2020 through September 26, 2021. The three months ended September 27, 2020 represents the period from June 29, 2020 through September 27, 2020. The nine months ended September 27, 2020 represents the period from December 30, 2019 through September 27, 2020. The nine months ended September 29, 2019 represents the period from December 31, 2018 through September 29, 2019.
The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation.
The Condensed Consolidated Financial Statements have been prepared in conformity with U.S. GAAP using management’s best estimates and judgments. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments. Significant estimates made by the Company include the allowance for doubtful accounts, reserves related to inventory obsolescence or valuation, useful lives of long-lived assets, goodwill, valuation of deferred tax assets, insurance accruals, valuation of pension and other postretirement benefits obligations, income tax accruals, certain derivative positions, certain litigation reserves and valuations of acquired businesses.
The functional currency of the Company'sCompany’s U.S. and Mexico operations and certain holding-company subsidiaries in Luxembourg, the U.K., Malta 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'sCompany’s operations in France, and the Netherlands and Ireland is the euro. For foreign currency-denominated
entities other than the Company'sCompany’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 lossincome (loss) in the Condensed Consolidated Balance Sheets. For the Company'sCompany’s Mexico operations, remeasurement from the Mexican peso to U.S. dollars is performed for monetary assets and liabilities using the exchange rate in effect as of the balance sheet date. Remeasurement is performed for non-monetary assets using the historical exchange rate in effect on the date of each asset’s acquisition. Income and expense accounts are remeasured using average exchange rates for the period. Net adjustments resulting from remeasurement of these financial records, as well as foreign currency transaction gains and losses, are reflected in Foreign currency transaction loss (gain) in the Condensed Consolidated Statements of Income.
Restricted Cash
The Company is required to maintain cash balances with a broker as collateral for exchange traded futures contracts. These balances are classified as restricted cash as they are not available for use by the Company to fund daily operations. The balance of restricted cash may also include investments in U.S. Treasury Bills that qualify as cash equivalents, as required by the broker, to offset the obligation to return cash collateral.
The following table reconciles cash, cash equivalents and restricted cash as reported in the Condensed Consolidated Balance Sheets to the total of the same amounts shown in the Condensed Consolidated Statements of Cash Flows:
| | | September 27, 2020 | | December 29, 2019 | | September 26, 2021 | | December 27, 2020 |
| | (In thousands) | | (In thousands) |
Cash and cash equivalents | Cash and cash equivalents | | $ | 768,031 | | | $ | 260,568 | | Cash and cash equivalents | | $ | 511,084 | | | $ | 547,624 | |
Restricted cash | Restricted cash | | 17,105 | | | 20,009 | | Restricted cash | | 54,111 | | | 782 | |
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | | $ | 785,136 | | | $ | 280,577 | | Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | | $ | 565,195 | | | $ | 548,406 | |
Recent Accounting Pronouncements Adopted as of September 27, 2020
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which, in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. The adoption of this guidance did not have a material impact on our financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, new accounting guidance to improve the effectiveness of disclosures related to fair value measurements. The new guidance removes certain disclosure requirements related to transfers between Level 1 and Level 2 of the fair value hierarchy along with the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. Additions to the disclosure requirements include more quantitative information related to significant unobservable inputs used in Level 3 fair value measurements and gains and losses included in other comprehensive income. The adoption of this guidance did not have a material impact on our financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, new accounting guidance to improve the effectiveness of disclosures related to defined benefit plans by eliminating certain required disclosures, clarifying existing disclosures, and adding new disclosures. Changes include removing disclosures related to the amounts in accumulated other comprehensive income expected to be recognized in the next fiscal year, adding narrative disclosure of the reasons for significant gains and losses related to changes in the defined benefit obligation, and clarifying the disclosures required for plans with projected and accumulated benefit obligations in excess of plan assets. The adoption of this guidance did not have a material impact on our financial statements.
Recent Accounting Pronouncements Not Yet Adopted as of September 27,December 28, 2020
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to improve consistency and simplify several areas of existing guidance. ASU 2019-12 removes certain exceptions to the general
principles related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years, with earlyThe adoption permitted. We are currently evaluating the effect that the ASU 2019-12 willof this guidance did not have a material impact on our consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. This update also specifies that for the purpose of applying paragraph 815-10-15-1419(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. The entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. The adoption of this guidance did not have a material impact on our financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which provided codification updates for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements. Additionally, changes to clarify the codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities were also included in this update. The adoption of this guidance did not have a material impact on our financial statements.
Recent Accounting Pronouncements Not Yet Adopted as of September 26, 2021
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to the application of current GAAP to existing contracts, hedging relationships and other transactions affected by reference rate reform. The new guidance will ease the transition to new reference rates by allowing entities to update contracts and hedging relationships without applying many of the contract modification requirements specific to those contracts. The provisions of the new guidance will be effective beginning March 12, 2020, extending through December 31, 2022 with the option to apply the guidance at any point during that time period. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides further clarification on the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. Once an entity elects an expedient or exception it must be applied to all eligible contracts or transactions. We currently have hedging transactions and debt agreements that reference LIBOR and will apply the new guidance as these contracts are modified to reference other rates.
2. BUSINESS ACQUISITIONS
Tulip Limited
On October 15, 2019, the Company acquired 100% of the equity of Tulip Limited and its subsidiaries (together, “Tulip”) from Danish Crown AmbA for £311.3 million, or $393.3 million. The acquisition was funded with cash on hand. Tulip, which has subsequently changed its name to Pilgrim's Pride Ltd. (“PPL”), is a leading, integrated prepared pork supplier headquartered in Warwick, U.K. The acquisition solidifies Pilgrim's as a leading European food company, creating one of the largest integrated prepared foods businesses in the U.K. The PPL operations are included in the Company’s U.K. and Europe reportable segment.
Through September 27, 2020, all transaction costs incurred in conjunction with this acquisition totaled approximately $1.4 million. These costs were expensed as incurred and are reflected within Selling, general and administrative expense in the Company’s Condensed Consolidated Statements of Income.
The results of operations of the acquired business since October 15, 2019 are included in the Company’s Condensed Consolidated Statements of Income. Net sales and net income generated by the acquired business during the three months ended September 27, 2020 totaled $341.8 million and $2.2 million, respectively. Net sales generated and net loss incurred by the acquired business during the nine months ended September 27, 2020 totaled $999.1 million and $0.3 million, respectively.
The assets acquired and liabilities assumed in the acquisition were measured at their fair values as of October 15, 2019 as set forth below. The excess of the fair values of the net tangible assets and identifiable intangible assets over the purchase price was recorded as gain on bargain purchase in the Company’s U.K. and Europe reportable segment. The fair values recorded were determined based upon various external and internal valuations. The fair values recorded for the assets acquired and liabilities assumed for PPL are as follows (in thousands):
| | | | | |
Cash and cash equivalents | $ | 6,854 | |
Trade accounts and other receivables | 146,423 | |
Inventories | 104,211 | |
Prepaid expenses and other current assets | 6,579 | |
Operating lease assets | 5,613 | |
Property, plant and equipment | 329,711 | |
Identified intangible assets | 40,418 | |
Other assets | 14,647 | |
Total assets acquired | 654,456 | |
Accounts payable | 110,296 | |
Other current liabilities | 55,830 | |
Operating lease liabilities | 5,613 | |
Deferred tax liabilities | 16,804 | |
Pension obligations | 18,435 | |
Other long-term liabilities | 1,056 | |
Total liabilities assumed | 208,034 | |
Total identifiable net assets | 446,422 | |
Gain on bargain purchase | (53,134) | |
Total consideration transferred | $ | 393,288 | |
Significant assumptions used in the Company's valuation of the assets and liabilities of PPL and the bases for their determination are summarized as follows:
Property, plant and equipment, net. Property, plant and equipment at fair value gave consideration to the highest and best use of the assets. The valuation of the Company's real property improvements and the majority of its personal property was based on the cost approach. The valuation of the Company's land, as if vacant, and certain personal property assets was based on the market or sales comparison approach.
Customer relationships. The Company valued PPL customer relationships using the income approach, specifically the multi-period excess earnings model. Under this model, the fair value of the customer relationships asset was determined by estimating the net cash inflows from the relationships discounted to present value. In estimating the fair value of the customer relationships, net sales related to existing PPL customers were estimated to grow at a rate of 2.0% annually, but the Company also anticipates losing existing PPL customers at an attrition rate of 10.0%. Income taxes were estimated at 18.0% of pre-tax income in 2020 and 17.0% of pre-tax income thereafter and net cash flows attributable to the Company's existing customers were discounted using a rate of 22.0%. The resulting customer relationships intangible asset has a fair value of $40.4 million and a useful life of 11 years.
See “Note 9. Goodwill and Intangible Assets” for additional information regarding the goodwill and intangible assets recognized by the Company in the acquisition.
The following unaudited pro forma information presents the combined financial results for the Company and PPL as if the acquisition had been completed at the beginning of 2019.
| | | | | | | | | | | |
| Nine Months Ended |
| September 27, 2020 | | September 29, 2019 |
| (In thousands, except per share amounts) |
Net sales | $ | 8,972,602 | | | $ | 9,348,098 | |
Net income attributable to Pilgrim's | 97,150 | | | 341,501 | |
Net income attributable to Pilgrim's per common share - diluted | 0.39 | | | 1.37 | |
The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the Company’s results of operations would have been had it completed the acquisitions on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisitions.
FAMPAT/Plan Pro
On April 1, 2020, Avícola Pilgrim's Pride de Mexico S.A. de C.V. acquired 100% of the equity of FAMPAT S.A. de C.V. and Plan Pro Restaurantes S.A. de C.V. (together, “FAMPAT/Plan Pro”) for an aggregate purchase price of 70.4 million Mexican pesos, or $3.0 million. The acquisition was funded with cash on hand. Transaction costs were immaterial; these costs were expensed as incurred and are reflected within Selling, general and administrative expense in the Company’s Condensed Consolidated Statements of Income. The acquired operations produce value-added products such as taquitos, enchiladas and pizza, bringing additional breadth and diversity to the Company's product portfolio. The results of operations and financial position of FAMPAT/Plan Pro have been included in the consolidated results of operations and financial position of the Company from the date of acquisition. The FAMPAT/Plan Pro operations are included in the Company’s Mexico reportable segment.
The allocation of the purchase price reflects fair value using Level 3 unobservable inputs and resulted in a fair value of goodwill of $2.2 million, which is not deductible for income tax purposes. The values recorded were determined based on a valuation using management’s estimates and assumptions.
3. REVENUE RECOGNITION
The vast majority of the Company'sCompany’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'sCompany’s facility, in which case control transfers to the customer at that point and the Company recognizes revenue. The Company'sCompany’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.flows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 27, 2020 | | Nine Months Ended September 27, 2020 |
| Domestic | | Export | | Net Sales | | Domestic | | Export | | Net Sales |
| (In thousands) |
U.S. | $ | 1,835,351 | | | $ | 58,871 | | | $ | 1,894,222 | | | $ | 5,404,597 | | | $ | 215,194 | | | $ | 5,619,791 | |
U.K. and Europe | 764,516 | | | 81,161 | | | 845,677 | | | 2,207,962 | | | 217,178 | | | 2,425,140 | |
Mexico | 335,222 | | | 0 | | | 335,222 | | | 929,141 | | | 0 | | | 929,141 | |
Net sales | $ | 2,935,089 | | | $ | 140,032 | | | $ | 3,075,121 | | | $ | 8,541,700 | | | $ | 432,372 | | | $ | 8,974,072 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 26, 2021 |
| (In thousands) |
| Fresh | | Prepared | | Export | | Other | | Total |
U.S. chicken | $ | 1,931,953 | | | $ | 235,763 | | | $ | 117,454 | | | $ | 181,680 | | | $ | 2,466,850 | |
U.K. and Europe chicken | 195,967 | | | 274,275 | | | 83,430 | | | 22,036 | | | 575,708 | |
Mexico chicken | 375,470 | | | 31,209 | | | — | | | 23,597 | | | 430,276 | |
Total chicken | 2,503,390 | | | 541,247 | | | 200,884 | | | 227,313 | | | 3,472,834 | |
U.K. and Europe pork | 52,265 | | | 269,563 | | | 21,012 | | | 11,892 | | | 354,732 | |
Total net sales | $ | 2,555,655 | | | $ | 810,810 | | | $ | 221,896 | | | $ | 239,205 | | | $ | 3,827,566 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 29, 2019 | | Nine Months Ended September 29, 2019 |
| Domestic | | Export | | Net Sales | | Domestic | | Export | | Net Sales |
| (In thousands) |
U.S. | $ | 1,857,859 | | | $ | 73,798 | | | $ | 1,931,657 | | | $ | 5,523,497 | | | $ | 208,704 | | | $ | 5,732,201 | |
U.K. and Europe | 451,347 | | | 66,184 | | | 517,531 | | | 1,372,028 | | | 196,368 | | | 1,568,396 | |
Mexico | 328,782 | | | 0 | | | 328,782 | | | 1,045,133 | | | 0 | | | 1,045,133 | |
Net sales | $ | 2,637,988 | | | $ | 139,982 | | | $ | 2,777,970 | | | $ | 7,940,658 | | | $ | 405,072 | | | $ | 8,345,730 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 27, 2020 |
| (In thousands) |
| Fresh | | Prepared | | Export | | Other | | Total |
U.S. chicken | $ | 1,590,003 | | | $ | 163,604 | | | $ | 58,871 | | | $ | 81,744 | | | 1,894,222 | |
U.K. and Europe chicken | 221,862 | | | 201,884 | | | 62,783 | | | 17,368 | | | 503,897 | |
Mexico chicken | 314,233 | | | 10,830 | | | — | | | 10,159 | | | 335,222 | |
Total chicken | 2,126,098 | | | 376,318 | | | 121,654 | | | 109,271 | | | 2,733,341 | |
U.K. and Europe pork | 176,667 | | | 125,963 | | | 18,378 | | | 20,772 | | | 341,780 | |
Total net sales | $ | 2,302,765 | | | $ | 502,281 | | | $ | 140,032 | | | $ | 130,043 | | | $ | 3,075,121 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 26, 2021 |
| (In thousands) |
| Fresh | | Prepared | | Export | | Other | | Total |
U.S. chicken | $ | 5,337,016 | | | $ | 637,344 | | | $ | 347,269 | | | $ | 393,250 | | | $ | 6,714,879 | |
U.K. and Europe chicken | 624,414 | | | 735,985 | | | 223,147 | | | 55,764 | | | 1,639,310 | |
Mexico chicken | 1,150,486 | | | 88,352 | | | — | | | 63,953 | | | 1,302,791 | |
Total chicken | 7,111,916 | | | 1,461,681 | | | 570,416 | | | 512,967 | | | 9,656,980 | |
U.K. and Europe pork | 290,673 | | | 709,743 | | | 55,489 | | | 25,804 | | | 1,081,709 | |
Total net sales | $ | 7,402,589 | | | $ | 2,171,424 | | | $ | 625,905 | | | $ | 538,771 | | | $ | 10,738,689 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 27, 2020 |
| (In thousands) |
| Fresh | | Prepared | | Export | | Other | | Total |
U.S. chicken | $ | 4,584,162 | | | $ | 535,960 | | | $ | 215,194 | | | $ | 284,475 | | | $ | 5,619,791 | |
U.K. and Europe chicken | 678,369 | | | 533,862 | | | 164,657 | | | 49,154 | | | 1,426,042 | |
Mexico chicken | 843,835 | | | 54,315 | | | — | | | 30,991 | | | 929,141 | |
Total chicken | 6,106,366 | | | 1,124,137 | | | 379,851 | | | 364,620 | | | 7,974,974 | |
U.K. and Europe pork | 509,663 | | | 382,500 | | | 52,521 | | | 54,414 | | | 999,098 | |
Total net sales | $ | 6,616,029 | | | $ | 1,506,637 | | | $ | 432,372 | | | $ | 419,034 | | | $ | 8,974,072 | |
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 CostsTaxes
The Company can incur incremental costs to obtain or fulfill a contract such as broker expenses that are not expected to be recovered. The amortization period for such expenses is less than one year; therefore, the costs are expensed as incurred.
Taxes
There is no change in accounting for taxes due to the adoption of ASU 2014-09,Revenue from Contracts with Customers (Topic 606), on January 1, 2018 as there is no material change to the timing of revenue recognition. We excludeexcludes 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, such as cash, received from governmental agency contracts for which performance obligations to the end customer have not been satisfied.
Changes in the revenue contract liability balancesliabilities balance are as follows:
| | | | | | | | | | | |
| | | | | | | |
| September 27, 202026, 2021 | | | | | | |
| (In thousands) | | | | |
Balance beginningas of periodDecember 27, 2020 | $ | 41,77065,918 | | | | | | | |
Revenue recognized | (25,449)(57,494) | | | | | | | |
Cash received, excluding amounts recognized as revenue during the period | 40,90012,140 | | | | | | | |
Balance endas of periodSeptember 26, 2021 | $ | 57,22120,564 | | | | | | | |
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.receivable.
4. LEASES
The Company is party to operating lease agreements for warehouses, office space, vehicle maintenance facilities and livestock growing farms in the U.S., distribution centers, hatcheries and office space in Mexico and farms, processing facilities and office space in the U.K. and Europe. Additionally, the Company leases equipment, over-the-road transportation vehicles
and other assets in all 3 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 15 years, some of which may include options to extend the lease for up to one year and some which may include options to terminate the lease within one year. The exercise of options to extend lease terms is at our sole discretion. Certain leases also include options to purchase the leased property.
Certain lease agreements include rental payment increases over the lease term that can be either fixed or variable. Fixed payment increases and variable payment increases based on an index or rate are included in the initial lease liability using the index or rate at commencement date. Variable payment increases not based on an index are recognized as incurred. Certain lease agreements contain residual value guarantees, primarily vehicle and transportation equipment leases.
The following table presents components of lease expense. Operating lease cost, finance lease amortization and finance lease interest are respectively included in Cost of sales, Selling, general and administrative expense and Interest expense, net of capitalized interest in the Condensed Consolidated Statements of Income.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
| (In thousands) |
Operating lease cost(a) | $ | 22,210 | | | $ | 25,021 | | | $ | 67,951 | | | $ | 75,452 | |
Amortization of finance lease assets | 109 | | | 64 | | | 327 | | | 111 | |
Interest on finance leases | 24 | | | 15 | | | 77 | | | 22 | |
Short-term lease cost | 16,684 | | | 13,826 | | | 47,423 | | | 39,936 | |
Variable lease cost(a) | 797 | | | 864 | | | 2,845 | | | 1,900 | |
Net lease cost | $ | 39,824 | | | $ | 39,790 | | | $ | 118,623 | | | $ | 117,421 | |
(a)Variable lease cost of $0.8 million and $1.9 million during the three months ended and nine months ended September 29, 2019 were previously presented in Operating lease cost on our quarterly report on Form 10-Q for the quarterly period ended September 29, 2019. This was reclassified to conform to Variable lease cost presented as of September 27, 2020.
The weighted-average remaining lease term and discount rate for lease liabilities included in our Condensed Consolidated Balance Sheets are as follows:
| | | | | | | | | | | |
| September 27, 2020 | | September 29, 2019 |
Weighted-average remaining lease term (years): | | | |
Operating leases | 5.62 | | 5.82 |
Finance leases | 3.90 | | 4.54 |
Weighted-average discount rate: | | | |
Operating leases | 4.56% | | 4.86% |
Finance leases | 5.05% | | 5.31% |
Supplemental cash flow information related to leases is as follows:
| | | | | | | | | | | |
| Nine Months Ended |
| September 27, 2020 | | September 29, 2019 |
| (In thousands) |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 69,627 | | | $ | 74,988 | |
Operating cash flows from finance leases | 77 | | | 22 | |
Financing cash flows from finance leases | 367 | | | 111 | |
Operating lease assets obtained in exchange for operating lease liabilities | 42,986 | | | 24,290 | |
Finance lease assets obtained in exchange for finance lease liabilities | 0 | | | 1,435 | |
Future minimum lease payments under noncancellable leases at September 27, 2020 are as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| (In thousands) |
Future minimum lease payments: | | |
Year 1 | $ | 78,963 | | | $ | 513 | |
Year 2 | 65,771 | | | 494 | |
Year 3 | 54,493 | | | 494 | |
Year 4 | 42,446 | | | 440 | |
Year 5 | 29,175 | | | 29 | |
Thereafter | 50,445 | | | 0 | |
Total future minimum lease payments | 321,293 | | | 1,970 | |
Less: imputed interest | (37,873) | | | (187) | |
Present value of lease liabilities | $ | 283,420 | | | $ | 1,783 | |
Lease liabilities as of September 27, 2020 are included in our Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| (In thousands) |
Accrued expenses and other current liabilities | $ | 67,496 | | | $ | 0 | |
Current maturities of long-term debt | 0 | | | 432 | |
Noncurrent operating lease liability, less current maturities | 215,924 | | | 0 | |
Long-term debt, less current maturities | 0 | | | 1,351 | |
Total lease liabilities | $ | 283,420 | | | $ | 1,783 | |
Lease liabilities as of December 29, 2019 are included in our Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| (In thousands) |
Accrued expenses and other current liabilities | $ | 66,239 | | | $ | 0 | |
Current maturities of long-term debt | 0 | | | 486 | |
Noncurrent operating lease liability, less current maturities | 235,382 | | | 0 | |
Long-term debt, less current maturities | 0 | | | 1,664 | |
Total lease liabilities | $ | 301,621 | | | $ | 2,150 | |
As of September 27, 2020, the Company had $5.0 million operating leases and 0 finance leases that have not yet commenced.
5.3. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil, wheat, natural gas, electricity and diesel fuel, which are all considered commodities. The Company considers these raw materials generally available from a number of different sources and believes it can obtain them to meet its requirements. These commodities are subject to price fluctuations and related price risk due to factors beyond our control, such as economic and political conditions, supply and demand, weather, governmental regulation and other circumstances. Generally, the Company purchases derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for approximately the next twelve months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate.
The Company has operations in Mexico, the U.K., France, the Netherlands and the Netherlands.Ireland. Therefore, it has exposure to translational foreign exchange risk when the financial results of those operations are remeasured in U.S. dollars. The Company has purchased foreign currency forward contracts to manage this translational foreign exchange risk.
The Company has exposure to variability in cash flows from interest payments due to the use of variable interest rates on certain long-term debt arrangements in the U.S. reportable segment. The Company has purchased an interest rate swap
contract to convert the variable interest rate to a fixed interest rate on a portion of its outstanding long-term debt arrangements in order to manage this interest rate risk and add stability to interest expense and cash flows.
The fair value of derivative assets is included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets while the fair value of derivative liabilities is included in the line item Accrued expenses and other current liabilities on the same statements. The Company’s counterparties require that it post collateral for changes in the net fair value of the derivative contracts. This cash collateral is reported in the line item Restricted cash and cash equivalents on the Condensed Consolidated Balance Sheets.
Undesignated contracts may include contracts not designated as a hedge or for which the normal purchase normal sales (“NPNS”) exception was not elected, contracts that do not qualify for hedge accounting and derivatives that do not or no longer qualify for the NPNS scope exception. The fair value of each of these derivatives is recognized in the Condensed Consolidated Balance Sheets within Prepaid expenses and other current assets or Accrued expenses and other current liabilities. Changes in fair value of each derivative are recognized immediately in the Condensed Consolidated Statements of Income within Net sales, Cost of sales, Selling, general and administrative expense, or Foreign currency transaction loss (gain) depending on the risk the derivative is intended to mitigate. While management believes these instruments help mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive record keeping requirements.
The Company has elected not designatedto apply the NPNS exemption to a fixed-price product sales contract with a certain customer in order to mitigate various risk exposures and to try to achieve an accounting result that aligns the accounting for the derivative with the economics achieved through the use of the derivative. Transactions originating from this contact are accounted for as undesignated derivatives and recognized at fair value.
The Company does not apply hedge accounting treatment to certain derivative financial instruments that it has purchased to mitigate commodity purchase exposures in the U.S. and Mexico or foreign currency transaction exposures on our Mexico operations as cash flow hedges.operations. Therefore, the Company recognized changes in the fair value of these derivative financial instruments immediately in earnings. Gains or losses related to the commodity derivative financial instruments are included in the line item Cost of sales in the Condensed Consolidated Statements of Income. Gains or losses related to the foreign currency derivative financial instruments are included in the line item Foreign currency transaction loss (gain) and Cost of sales in the Condensed Consolidated Statements of Income.
The Company has designateddoes apply hedge accounting to certain derivative financial instruments related to its U.K. and Europe reportable segment that it has purchased to mitigate foreign currency transaction exposures as cash flow hedges.exposures. Before the settlement date of the financial derivative instruments, the Company recognizes changes in the fair value of the effective portion of the cash flow hedge into accumulated other comprehensive income (“AOCI”) while it recognize changes in the fair value of the ineffective portion immediately in earnings.. When the derivative financial instruments associated with the effective portion are settled, the amount in AOCI is then reclassified to earnings. Gains or losses related to these derivative financial instruments are included in the line item Net sales and Cost of sales in the Condensed Consolidated Statements of Income.
The Company has designateddoes apply hedge accounting to a derivative financial instrument related to its U.S. reportable segment that it has purchased to mitigate variable interest rate exposures as a cash flow hedge.exposures. The interest rate swap has monthly settlement dates. Upon each settlement date, the Company recognizes changes in the fair value of the effective portion of the cash flow hedge into AOCI, while it recognizes changes in the ineffective portion immediately in earnings.AOCI. Upon settlement of the effective portion,derivative instrument, the amount in AOCI is then reclassified to earnings. Gains or losses related to the interest rate swap derivative financial instrument are included in the line item Interest expense, net of capitalized interest in the Condensed Consolidated Statements of Income.
The Company recognized net gains of $12.0 million and net losses of $10.0 million related to changes in the fair value of its derivative financial instruments during the three months ended September 27, 2020 and September 29, 2019, respectively. The Company recognized net gains of $29.2 million and net losses of $18.5 million related to changes in the fair value of its derivative financial instruments during the nine months ended September 27, 2020 and September 29, 2019, respectively. Information regarding the Company’s outstanding derivative instruments and cash collateral posted with brokers is included in the following table:
| | | September 27, 2020 | | December 29, 2019 | | September 26, 2021 | | December 27, 2020 |
| | (In thousands) | | (In thousands) |
Fair values: | | |
Fair values | | Fair values | |
Commodity derivative assets | Commodity derivative assets | $ | 12,639 | | | $ | 5,053 | | Commodity derivative assets | $ | 8,443 | | | $ | 24,059 | |
Commodity derivative liabilities | Commodity derivative liabilities | (6,079) | | | (5,430) | | Commodity derivative liabilities | (29,744) | | | (6,531) | |
Foreign currency derivative assets | Foreign currency derivative assets | 7,919 | | | 426 | | Foreign currency derivative assets | 1,814 | | | 2,204 | |
Foreign currency derivative liabilities | Foreign currency derivative liabilities | (316) | | | (5,400) | | Foreign currency derivative liabilities | (139) | | | (428) | |
Interest rate swap derivative liabilities | Interest rate swap derivative liabilities | (780) | | | 0 | | Interest rate swap derivative liabilities | (345) | | | (640) | |
Sales contract derivative assets | | Sales contract derivative assets | 2,201 | | | — | |
Cash collateral posted with brokers(a) | Cash collateral posted with brokers(a) | 17,106 | | | 20,009 | | Cash collateral posted with brokers(a) | 54,111 | | | 782 | |
Derivatives coverage(b): | Derivatives coverage(b): | | Derivatives coverage(b): | |
Corn | Corn | 0 | % | | 12.0 | % | Corn | 13.8 | % | | 16.0 | % |
Soybean meal | Soybean meal | 17.0 | % | | 44.0 | % | Soybean meal | 35.0 | % | | 24.0 | % |
| Period through which stated percent of needs are covered: | Period through which stated percent of needs are covered: | | Period through which stated percent of needs are covered: | |
Corn | Corn | NA | | December 2020 | Corn | September 2022 | | December 2021 |
Soybean meal | Soybean meal | July 2021 | | July 2020 | Soybean meal | March 2022 | | December 2021 |
|
(a)Collateral posted with brokers consists primarily of cash, short-term treasury bills, or other cash equivalents.
(b)Derivatives coverage is the percent of anticipated commodity needs covered by outstanding derivative instruments through a specified date.
The following table presents the gains and losses of each derivative instrument held by the Company not designated or qualifying as hedging instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | |
Losses (Gains) by Type of Contract (a) | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 | | Affected Line Item in the Condensed Consolidated Statements of Income |
| (In thousands) | | |
Foreign currency derivatives gain (loss) | $ | (4,493) | | | $ | (7,741) | | | $ | (7,975) | | | $ | 19,815 | | | Foreign currency transaction loss (gain) |
Commodity derivative gain | 25,632 | | | 19,883 | | | 44,430 | | | 9,458 | | | Cost of sales |
Sales contract derivative gain (loss) | (2,932) | | | — | | | 2,201 | | | — | | | Net sales |
Total | $ | 18,207 | | | $ | 12,142 | | | $ | 38,656 | | | $ | 29,273 | | | |
(a)Amounts in parentheses represent income (expenses) related to results of operations.
The following tables present the components of the gain or loss on derivatives that qualify as cash flow hedges:
| | | Gain (Loss) Recognized in Other Comprehensive Income on Derivative | | Gain (Loss) Recognized in Other Comprehensive Income on Derivative |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 | | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| | (In thousands) | | (In thousands) |
Foreign currency derivatives | Foreign currency derivatives | $ | 1,388 | | | $ | (1,644) | | | $ | 4,088 | | | $ | (1,257) | | Foreign currency derivatives | $ | (984) | | | $ | 1,388 | | | $ | 1,327 | | | 4,088 | |
Interest rate swap derivatives | Interest rate swap derivatives | 50 | | | 0 | | | (879) | | | 0 | | Interest rate swap derivatives | (35) | | | 50 | | | (164) | | | (879) | |
Total | Total | $ | 1,438 | | | $ | (1,644) | | | $ | 3,209 | | | $ | (1,257) | | Total | $ | (1,019) | | | $ | 1,438 | | | $ | 1,163 | | | 3,209 | |
| | | | | | Gain (Loss) Reclassified from AOCI into Income | |
| Three Months Ended | | Nine Months Ended | |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 | |
| (In thousands) | |
Foreign currency derivatives | $ | 1,720 | | | $ | 247 | | | $ | 1,138 | | | $ | 74 | | |
Interest rate swap derivatives | (101) | | | 0 | | | (99) | | | 0 | | |
Total | $ | 1,619 | | | $ | 247 | | | $ | 1,039 | | | $ | 74 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 26, 2021 | | Three Months Ended September 27, 2020 |
| Net sales(a) | | Cost of sales(b) | | Interest expense, net of capitalized interest(b) | | Net sales(a) | | Cost of sales(b) | | Interest expense, net of capitalized interest(b) |
| (In thousands) |
Total amounts of income and expense line items presented in the Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded | $ | 3,827,566 | | | $ | 3,455,723 | | | $ | 29,833 | | | $ | 3,075,121 | | | $ | 2,761,279 | | | $ | 30,564 | |
Impact from cash flow hedging instruments: | | | | | | | | | | | |
Interest rates swaps | — | | | — | | | 170 | | | — | | | — | | | 101 | |
Foreign currency contracts | 67 | | | (2) | | | — | | | (206) | | | 649 | | | — | |
(a) Amounts in parentheses represent income (expenses) related to net sales.
(b) Amounts in parentheses represent (income) expenses related to cost of sales and interest expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 26, 2021 | | Nine Months Ended September 27, 2020 |
| Net sales(a) | | Cost of sales(b) | | Interest expense, net of capitalized interest(b) | | Net sales(a) | | Cost of sales(b) | | Interest expense, net of capitalized interest(b) |
| (In thousands) | | |
Total amounts of income and expense line items presented in the Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded | $ | 10,738,689 | | | $ | 9,725,362 | | | $ | 110,818 | | | $ | 8,974,072 | | | $ | 8,363,272 | | | $ | 95,575 | |
Impact from cash flow hedging instruments: | | | | | | | | | | | |
Interest rates swaps | — | | | — | | | 460 | | | — | | | — | | | 99 | |
Foreign currency contracts | 2,475 | | | 868 | | | — | | | (656) | | | 517 | | | — | |
(a) Amounts in parentheses represent income (expenses) related to net sales.
(b) Amounts in parentheses represent (income) expenses related to cost of sales and interest expense.
At September 27, 2020,26, 2021, the pre-tax deferred net lossesgains on foreign currency derivatives recorded in AOCI that are expected to be reclassified to the Condensed Consolidated Statements of Income during the next twelve months are $1.9 million.
$378.0 thousand. 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 losses to earnings.
At September 27, 2020,26, 2021, the pre-tax deferred net losses on interest rate swap derivatives recorded in AOCI that are expected to be reclassified to the Condensed Consolidated Statements of Income during the next twelve months are $0.5 million.$345.0 thousand. This expectation is based on the anticipated settlements on the hedged interest rate that will occur over the next twelve months, at which time the Company will recognize the deferred losses or gains to earnings.
6.4. TRADE ACCOUNTS AND OTHER RECEIVABLES
Trade accounts and other receivables, less allowance for doubtful accounts, consisted of the following:
| | | September 27, 2020 | | December 29, 2019 | | September 26, 2021 | | December 27, 2020 |
| | | (In thousands) | | | (In thousands) |
Trade accounts receivable | Trade accounts receivable | | $ | 646,696 | | | $ | 696,372 | | Trade accounts receivable | | $ | 822,878 | | | $ | 691,499 | |
| Notes receivable - current | | 24,265 | | | 4,187 | | |
Notes receivable | | Notes receivable | | 25,079 | | | 25,712 | |
Other receivables | Other receivables | | 42,704 | | | 48,189 | | Other receivables | | 49,220 | | | 31,954 | |
Receivables, gross | Receivables, gross | | 713,665 | | | 748,748 | | Receivables, gross | | 897,177 | | | 749,165 | |
Allowance for doubtful accounts | Allowance for doubtful accounts | | (7,542) | | | (7,467) | | Allowance for doubtful accounts | | (7,591) | | | (7,173) | |
Receivables, net | Receivables, net | | $ | 706,123 | | | $ | 741,281 | | Receivables, net | | $ | 889,586 | | | $ | 741,992 | |
| Accounts receivable from related parties(a) | Accounts receivable from related parties(a) | | $ | 616 | | | $ | 944 | | Accounts receivable from related parties(a) | | $ | 1,330 | | | $ | 1,084 | |
|
(a) Additional information regarding accounts receivable from related parties is included in “Note 18.16. Related Party Transactions.”
Activity in the allowance for doubtful accounts for the nine months ended September 27, 2020 was as follows (in thousands):follows:
| | | | | | | | |
| | September 26, 2021 |
| | (In thousands) |
Balance, beginning of period | | $ | (7,467)(7,173) | |
Provision charged to operating results | | (560)(436) | |
| | |
Account write-offs and recoveries | | 2784 | |
| | |
Effect of exchange rate | | 20714 | |
Balance, end of period | | $ | (7,542)(7,591) | |
7.5. INVENTORIES
Inventories consisted of the following:
| | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| (In thousands) |
Raw materials and work-in-process | $ | 778,118 | | | $ | 800,749 | |
Finished products | 427,667 | | | 425,919 | |
Operating supplies | 45,561 | | | 82,447 | |
Maintenance materials and parts | 77,358 | | | 74,420 | |
Total inventories | $ | 1,328,704 | | | $ | 1,383,535 | |
| | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| (In thousands) |
Raw materials and work-in-process | $ | 1,040,242 | | | $ | 868,369 | |
Finished products | 382,799 | | | 356,052 | |
Operating supplies | 62,830 | | | 66,495 | |
Maintenance materials and parts | 70,950 | | | 67,877 | |
Total inventories | $ | 1,556,821 | | | $ | 1,358,793 | |
8.6. INVESTMENTS IN SECURITIES
The Company recognizes investments in available-for-sale securities as cash equivalents, current investments or long-term investments depending upon each security'ssecurity’s length to maturity. Additionally, those securities identified by management at the time of purchase for funding operations in less than one year are classified as current.
The following table summarizes our investments in available-for-sale securities:
| | | September 27, 2020 | | December 29, 2019 | | September 26, 2021 | | December 27, 2020 |
| | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value |
| | (In thousands) | | (In thousands) |
Cash equivalents: | Cash equivalents: | | Cash equivalents: | |
Fixed income securities | Fixed income securities | | $ | 120,841 | | | $ | 120,841 | | | $ | 159,623 | | | $ | 159,623 | | Fixed income securities | | $ | 79,394 | | | $ | 79,394 | | | $ | 178,677 | | | $ | 178,677 | |
Other | | 99,697 | | | 99,697 | | | 0 | | | 0 | | |
|
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
Gross realized gains during the three and nine months ended September 26, 2021 related to the Company’s available-for-sale securities totaled $1.0 million and $3.9 million, respectively, while gross realized losses were immaterial. Gross realized gains during the three and nine months ended September 27, 2020 related to the Company’s available-for-sale securities totaled $1.5 million and $3.9 million, while gross realized losses were immaterial. Gross realized gains during the three months ended and nine months ended September 29, 2019 related to the Company’s available-for-sale securities totaled $4.1 million and $9.3 millionrespectively, while gross realized losses were immaterial. Proceeds received from the sale or maturity of available-for-sale securities recognized as either short or long-term investments are historically disclosed in the Condensed Consolidated Statements of Cash Flows. Net unrealized holding gains and losses on the Company’s available-for-sale securities recognized during the nine months ended September 27, 202026, 2021 and September 29, 201927, 2020 that have been included in accumulated other comprehensive lossincome (loss) and the net amount of gains and losses reclassified out of accumulated other comprehensive lossincome (loss) to earnings during the nine months ended September 27, 202026, 2021 and September 29, 201927, 2020 are disclosed in “Note 14.12. Stockholders’ Equity”.
9.7. GOODWILL AND INTANGIBLE ASSETS
The activity in goodwill by segment for the nine months ended September 27, 202026, 2021 was as follows:
| | | December 29, 2019 | | Additions | | | Currency Translation | | September 27, 2020 | | December 27, 2020 | | Additions | | | Currency Translation | | September 26, 2021 |
| | (In thousands) | | (In thousands) |
U.S. | U.S. | | $ | 41,936 | | | $ | 0 | | | | $ | 0 | | | $ | 41,936 | | U.S. | | $ | 41,936 | | | $ | — | | | | $ | — | | | $ | 41,936 | |
U.K. and Europe | U.K. and Europe | | 806,207 | | | 0 | | | | (20,860) | | | 785,347 | | U.K. and Europe | | 835,505 | | | 370,237 | | | | 6,390 | | | 1,212,132 | |
Mexico | Mexico | | 125,607 | | | 2,197 | | | | 0 | | | 127,804 | | Mexico | | 127,804 | | | — | | | | — | | | 127,804 | |
Total | Total | | $ | 973,750 | | | $ | 2,197 | | | | $ | (20,860) | | | $ | 955,087 | | Total | | $ | 1,005,245 | | | $ | 370,237 | | | | $ | 6,390 | | | $ | 1,381,872 | |
|
Identified intangible assets consisted of the following:
17 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 27, 2020 | | Additions | | Amortization | | Currency Translation | | | | | | September 26, 2021 |
| | (In thousands) |
Cost: | | | | | | | | | | | | | | |
Trade names | | $ | 78,343 | | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | 78,343 | |
Customer relationships | | 297,062 | | | 395,719 | | | — | | | 195 | | | | | | | 692,976 | |
Non-compete agreements | | 320 | | | — | | | — | | | — | | | | | | | 320 | |
Trade names not subject to amortization | | 405,240 | | | 57,349 | | | — | | | 3,257 | | | | | | | 465,846 | |
Accumulated amortization: | | | | | | | | | | | | | | |
Trade names | | (47,486) | | | — | | | (1,476) | | | — | | | | | | | (48,962) | |
Customer relationships | | (143,246) | | | — | | | (16,010) | | | (283) | | | | | | | (159,539) | |
Non-compete agreements | | (320) | | | — | | | — | | | — | | | | | | | (320) | |
Intangible assets, net | | $ | 589,913 | | | $ | 453,068 | | | $ | (17,486) | | | $ | 3,169 | | | | | | | $ | 1,028,664 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
goodwill, trade names not subject to amortization, and a customer relationships intangible asset recorded as part of the acquisition of the Kerry Consumer Foods’ Specialty Meats and Ready Meals businesses (“Kerry Meats and Meals Acquisition”). For additional information regarding the initial valuation and assumptions used, refer to “Note 19. Business Acquisitions.” | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 29, 2019 | | | | Amortization | | Currency Translation | | | | | | September 27, 2020 |
| (In thousands) |
Cost: | | | | | | | | | | | | | | |
Trade names | | $ | 78,343 | | | | | $ | — | | | $ | 0 | | | | | | | $ | 78,343 | |
Customer relationships | | 292,278 | | | | | — | | | (3,407) | | | | | | | 288,871 | |
Non-compete agreements | | 320 | | | | | — | | | 0 | | | | | | | 320 | |
Trade names not subject to amortization | | 391,431 | | | | | — | | | (9,915) | | | | | | | 381,516 | |
Accumulated amortization: | | | | | | | | | | | | | | |
Trade names | | (45,518) | | | | | (1,476) | | | 0 | | | | | | | (46,994) | |
Customer relationships | | (120,481) | | | | | (15,549) | | | 990 | | | | | | | (135,040) | |
Non-compete agreements | | (320) | | | | | 0 | | | 0 | | | | | | | (320) | |
Total | | $ | 596,053 | | | | | $ | (17,025) | | | $ | (12,332) | | | | | | | $ | 566,696 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Intangible assets are amortized over the estimated useful lives of the assets as follows:
| | | | | |
Customer relationships | 5-163-20 years |
Trade names subject to amortization | 3-2020 years |
Non-compete agreements | 3 years |
| |
| |
| |
| |
| |
| |
At September 27, 2020,26, 2021, the Company assessed if events or changes in circumstances indicated that the aggregateasset group-level carrying amountamounts 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 aggregateasset group-level carrying amountamounts of its identified intangible assets subject to amortization at that date.
10. 8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (“PP&E”), net consisted of the following:
| | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| (In thousands) |
Land | $ | 250,438 | | | $ | 222,076 | |
Buildings | 1,913,680 | | | 1,754,219 | |
Machinery and equipment | 3,087,897 | | | 3,139,748 | |
Autos and trucks | 72,419 | | | 64,122 | |
Finance leases | 2,182 | | | 2,182 | |
Construction-in-progress | 248,984 | | | 229,015 | |
PP&E, gross | 5,575,600 | | | 5,411,362 | |
Accumulated depreciation | (2,989,782) | | | (2,819,301) | |
PP&E, net | $ | 2,585,818 | | | $ | 2,592,061 | |
| | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| (In thousands) |
Land | $ | 258,701 | | | $ | 255,171 | |
Buildings | 2,075,174 | | | 1,983,823 | |
Machinery and equipment | 3,444,602 | | | 3,230,199 | |
Autos and trucks | 74,524 | | | 73,647 | |
Finance leases | 2,182 | | | 2,182 | |
Construction-in-progress | 213,488 | | | 199,161 | |
PP&E, gross | 6,068,671 | | | 5,744,183 | |
Accumulated depreciation | (3,220,202) | | | (3,086,692) | |
PP&E, net | $ | 2,848,469 | | | $ | 2,657,491 | |
The Company recognized depreciation expense of $77.7 $86.3 million and $66.2$77.7 million during the three months ended September 27, 202026, 2021 and September 29, 2019,27, 2020, respectively. The Company recognized depreciation expense of $231.6$256.9 million and $193.4$231.6 million during the nine months ended September 26, 2021 and September 27, 2020, and September 29, 2019, respectively.
During the nine months ended September 27, 2020, Pilgrim's26, 2021, Pilgrim’s spent $242.6 $280.8 million onon capital projects and transferred $190.1$324.1 million of completedcompleted projects from construction-in-progress to depreciable assets. Capital expenditures were primarily incurred during the nine months ended September 27, 202026, 2021 to improve efficiencies and reduce costs. During the nine months ended September 29, 2019,27, 2020, the Company spent $258.7$242.6 million on capital projects and transferred $189.9$190.1 million of completed projects from construction-in-progress to depreciable assets.
During the three and nine months ended September 26, 2021, the Company sold certain PP&E for $1.5 million and $22.9 million, respectively, in cash and recognized a net loss of $1.5 million and a net gain of $3.6 million on these sales, respectively. PP&E sold during the nine months ended September 26, 2021 consisted of a broiler farm in Mexico, 2 processing plants within the U.K. and other miscellaneous equipment. During the three and nine months ended September 27, 2020, the Company sold certain PP&Emiscellaneous equipment for cash of $11.8 million and $21.7 million, respectively, in cash and recognized net gains on these sales of $6.4 million and $8.0 million, respectively. PP&E sold during the nine months ended September 27, 2020 consisted of broiler farms and related machinery in Mexico and other miscellaneous equipment. During the three and nine months ended September 29, 2019, the Company sold miscellaneous
equipment for cash of $13.4 million and $15.2 million, respectively, and recognized net gains on these sales of $9.8 million and $9.5 million, respectively.
The Company has closed or idled various facilities in the U.S. and in the U.K. Neither theThe Board of Directors nor JBS has not determined if it would be in the best interest of the Company to divest any of these idled assets. Management is therefore not certain that it can or will divest any of these assets within one year, is not actively marketing these assets and, accordingly, has not classified them as assets held for sale.The Company continues to depreciate these assets. As of September 27, 2020,26, 2021, the carrying amounts of these idled assets totaled $41.9 $41.8 million based on depreciable value of $185.0$205.8 million and accumulated depreciation of $143.1$164.0 million.
As of September 27, 2020,26, 2021, the Company assessed if events or changes in circumstances indicated that the aggregateasset group-level carrying amountamounts 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 aggregateasset group-level carrying amountamounts of its property, plant and equipment held for use at that date.
9. 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:
| | | September 27, 2020 | | December 29, 2019 | | September 26, 2021 | | December 27, 2020 | |
| | (In thousands) | | (In thousands) | |
Accounts payable: | Accounts payable: | | Accounts payable: | | |
Trade accounts | Trade accounts | $ | 816,210 | | | $ | 875,374 | | Trade accounts | $ | 1,093,534 | | | $ | 904,674 | | |
Book overdrafts | Book overdrafts | 81,633 | | | 98,267 | | Book overdrafts | 64,908 | | | 106,435 | | |
Other payables | Other payables | 17,818 | | | 20,139 | | Other payables | 18,424 | | | 17,601 | | |
Total accounts payable | Total accounts payable | 915,661 | | | 993,780 | | Total accounts payable | 1,176,866 | | | 1,028,710 | | |
Accounts payable to related parties(a) | Accounts payable to related parties(a) | 5,752 | | | 3,819 | | Accounts payable to related parties(a) | 6,594 | | | 9,650 | | |
Revenue contract liability(b) | 57,221 | | | 41,770 | | |
Revenue contract liabilities(b) | | Revenue contract liabilities(b) | 20,564 | | | 65,918 | | |
Accrued expenses and other current liabilities: | Accrued expenses and other current liabilities: | | Accrued expenses and other current liabilities: | | |
Legal settlements(c) | | Legal settlements(c) | 312,500 | | | 75,000 | | |
Compensation and benefits | Compensation and benefits | 157,935 | | | 164,946 | | Compensation and benefits | 197,206 | | | 189,767 | | |
Taxes | Taxes | 55,596 | | | 41,901 | | Taxes | 83,072 | | | 67,812 | | |
Current maturities of operating lease liabilities | | Current maturities of operating lease liabilities | 76,318 | | | 71,592 | | |
Insurance and self-insured claims | | Insurance and self-insured claims | 63,036 | | | 61,212 | | |
Interest and debt-related fees | Interest and debt-related fees | 27,853 | | | 31,183 | | Interest and debt-related fees | 47,670 | | | 29,559 | | |
Insurance and self-insured claims | 61,001 | | | 67,332 | | |
Current maturities of operating lease liabilities | 67,496 | | | 66,239 | | |
Derivative liability | 7,175 | | | 10,830 | | |
DOJ antitrust fine(c) | 110,524 | | | 0 | | |
Accrued sales rebates | | Accrued sales rebates | 47,252 | | | 44,708 | | |
Derivative liabilities | | Derivative liabilities | 30,228 | | | 7,599 | | |
U.S. Department of Justice agreement | | U.S. Department of Justice agreement | — | | | 110,524 | | |
Other accrued expenses | Other accrued expenses | 203,749 | | | 192,888 | | Other accrued expenses | 141,732 | | | 150,074 | | |
| Total accrued expenses and other current liabilities | Total accrued expenses and other current liabilities | 691,329 | | | 575,319 | | Total accrued expenses and other current liabilities | 999,014 | | | 807,847 | | |
Total accounts payable, accrued expenses and other current liabilities | Total accounts payable, accrued expenses and other current liabilities | $ | 1,669,963 | | | $ | 1,614,688 | | Total accounts payable, accrued expenses and other current liabilities | $ | 2,203,038 | | | $ | 1,912,125 | | |
(a) Additional information regarding accounts payable to related parties is included in “Note 18.16. Related Party Transactions.”
(b) Additional information regarding revenue contract liabilities is included in “Note 3.2. Revenue Recognition.”
(c) Additional information regarding the DOJ antitrust finelegal settlements is included in "Note 20.“Note 18. Commitments and Contingencies."”
12.10. INCOME TAXES
The Company recorded income tax expense of $55.9 million, a 110.3% effective tax rate, for the nine months ended September 26, 2021 compared to income tax expense of $57.9 million, a 37.9% effective tax rate, for the nine months ended September 27, 2020 compared to income tax expense of $142.3 million, a 28.1% effective tax rate, for the nine months ended September 29, 2019.2020. The decrease in income tax expense in 20202021 resulted primarily from a decrease in pre-tax income and the effects of foreign currency fluctuations, partially offset by the recognition of a non-deductible fine$6.1 million reserve recognized against certain U.K. interest deductions, $3.8 million in adjustments to tax returns, and the recognition of $110.5 million accrued during the year, refer to “Note 20. Commitments and Contingencies” for more information. In addition, the Company recognized deferred tax expense of $10.6$32.2 million related to the repeal of the previously enacted reductionenactment of the U.K. corporate tax rate change to 17.0%. Therefore, the current corporate tax rate in the U.K. is maintained at 19.0%.25% effective April 1, 2023.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and tax-planning strategies in making this assessment. As of September 27, 2020,26, 2021, 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 nine months ended September 27, 202026, 2021 and September 29, 2019,27, 2020, there is a tax effect of $(1.0)$(8.5) million and $2.0$(1.0) million, respectively, reflected in other comprehensive income.
For the nine months ended September 27, 202026, 2021 and September 29, 2019,27, 2020, there are immaterial tax effects reflected in income tax expense due to excess tax benefits and shortfalls related to share-basedstock-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 its subsidiaries for years prior to 2011 are no longer subject to examination by tax authorities.
As of July 27, 2020, JBS ownowns in excess of 80% of Pilgrim's.Pilgrim’s. JBS has a federal tax election to file a consolidated tax return with subsidiaries in which it holds an ownership of at least 80%. The
For the nine months ended September 26, 2021, the Company is currently analyzingrecognized a $6.1 million uncertain tax position related to interest deductions in the related impacts to our federal and stateU.K. for tax return filings.
13.11. DEBT
Long-term debt and other borrowing arrangements, including current notes payable to banks, consisted of the following components:
| | | | | | | | | | | | | | | | | |
| Maturity | | September 27, 2020 | | December 29, 2019 |
| | | (In thousands) |
Senior notes payable, net of premium and discount at 5.75% | 2025 | | $ | 1,001,793 | | | $ | 1,002,095 | |
Senior notes payable, net of discount at 5.875% | 2027 | | 844,972 | | | 844,433 | |
U.S. Credit Facility (defined below): | | | | | |
Term note payable at 1.42% | 2023 | | 456,250 | | | 475,000 | |
Revolving note payable at 1.44% | 2023 | | 350,000 | | | 0 | |
Moy Park Bank of Ireland Revolving Facility with notes payable at LIBOR or EURIBOR plus 1.25% to 2.00% | 2023 | | 0 | | | 0 | |
Mexico Credit Facility (defined below) with notes payable at TIIE plus 1.50% | 2023 | | 0 | | | 0 | |
Secured loans with payables at weighted average of 3.34% | Various | | 64 | | | 948 | |
Finance lease obligations | Various | | 1,783 | | | 2,150 | |
| | | | | |
Long-term debt | | | 2,654,862 | | | 2,324,626 | |
Less: Current maturities of long-term debt | | | (25,485) | | | (26,392) | |
Long-term debt, less current maturities | | | 2,629,377 | | | 2,298,234 | |
Less: Capitalized financing costs | | | (18,709) | | | (22,205) | |
Long-term debt, less current maturities, net of capitalized financing costs | | | $ | 2,610,668 | | | $ | 2,276,029 | |
19
| | | | | | | | | | | | | | | | | |
| Maturity | | September 26, 2021 | | December 27, 2020 |
| | | (In thousands) |
Senior notes payable, net of discount at 3.50% | 2032 | | $ | 900,000 | | | $ | — | |
Senior notes payable, net of discount at 4.25% | 2031 | | 990,440 | | | — | |
Senior notes payable, net of discount at 5.875% | 2027 | | 845,687 | | | 845,149 | |
Senior notes payable, net of premium and discount at 5.75% | 2025 | | — | | | 1,001,693 | |
Fifth Amended and Restated U.S. Credit Facility (defined below): | | | | | |
Term note payable at 1.33% | 2026 | | 506,250 | | | — | |
Revolving note payable at 3.50% | 2026 | | — | | | — | |
Fourth Amended and Restated U.S. Credit Facility (defined below): | | | | | |
Term note payable at 1.33% | 2023 | | — | | | 450,000 | |
Revolving note payable at 3.50% | 2023 | | — | | | — | |
Moy Park Bank of Ireland Revolving Facility with notes payable at LIBOR or EURIBOR plus 1.25% to 2.00% | 2023 | | — | | | — | |
Mexico Credit Facility (defined below) with notes payable at TIIE plus 1.50% | 2023 | | — | | | — | |
Secured loans with payables at weighted average of 3.34% | 2022 | | 13 | | | 38 | |
Finance lease obligations | Various | | 4,596 | | | 1,664 | |
| | | | | |
Long-term debt | | | 3,246,986 | | | 2,298,544 | |
Less: Current maturities of long-term debt | | | (19,885) | | | (25,455) | |
Long-term debt, less current maturities | | | 3,227,101 | | | 2,273,089 | |
Less: Capitalized financing costs | | | (31,235) | | | (17,543) | |
Long-term debt, less current maturities, net of capitalized financing costs | | | $ | 3,195,866 | | | $ | 2,255,546 | |
U.S. Senior Notes
On March 11, 2015, the Company completed a sale of $500.0 million aggregate principal amount of its 5.75% senior notes due 2025. On September 29, 2017, the Company completed an add-on offering of $250.0 million of these senior notes. The issuance price of this add-on offering was 102.0%, which created gross proceeds of $255.0 million. The additional $5.0 million will be amortized over the remaining life of the senior notes. On March 7, 2018, the Company completed another add-on offering of $250.0 million of these senior notes (together with the senior notes issued in March 2015 and September 2017, the “Senior Notes due 2025”). The issuance price of this add-on offering was 99.25%, which created gross proceeds of $248.1 million. The $1.9 million discount will be amortized over the remaining life of the senior notes. Each issuance of the Senior Notes due 2025 is treated as a single class for all purposes under the 2015 Indenture (defined below) and have the same terms.
The Senior Notes due 2025 are governed by, and were issued pursuant to, an indenture dated as of March 11, 2015 by and among the Company, its guarantor subsidiaries and U.S.Regions 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 April 8, 2021, the Company announced the early tender results in connection with its previously announced offer to purchase for cash any and all of the $1.0 billion aggregate principal amount of the Senior Notes due 2025. Outstanding principal totaling $896.1 million, representing 89.6% of the Senior Notes due 2025, was validly tendered. On April 14, 2021, the Company redeemed $103.9 million, which represented the remaining outstanding principal balance of the Senior Notes due 2025. Tender and call premium of $21.3 million, capitalized financing costs of $4.6 million, remaining original issue premium of $2.6 million from the add-on offering in September 2017 and remaining original issue discount of $1.1 million from the add-on offering in March 2018 were recognized in earnings during the second quarter of 2021.
On September 29, 2017, the Company completed a sale of $600.0 million aggregate principal amount of its 5.875% senior notes due 2027. On March 7, 2018, the Company completed an add-on offering of $250.0 million of these senior notes (together with the senior notes issued in September 2017, the “Senior Notes due 2027”). The issuance price of this add-on offering was 97.25%, which created gross proceeds of $243.1 million. The $6.9 million discount will be amortized over
the remaining life of the Senior Notes due 2027. Each issuance of the Senior Notes due 2027 is treated as a single class for all purposes under the 2017 Indenture (defined below) and have the same terms.
The Senior Notes due 2027 are governed by, and were issued pursuant to, an indenture dated as of September 29, 2017 by and among the Company, its guarantor subsidiaries and U.S.Regions 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.
21On April 8, 2021, the Company completed a sale of $1.0 billion aggregate principal amount of its 4.25% sustainability-linked senior notes due 2031 (“Senior Notes due 2031”). The Company used the net proceeds, together with cash on hand, to redeem the Senior Notes due 2025. The issuance price of this offering was 98.994%, which created gross proceeds of $989.9 million. The $10.1 million discount will be amortized over the remaining life of the Senior Notes due 2031. Each issuance of the Senior Notes due 2031 is treated as a single class for all purposes under the April 2021 Indenture (defined below) and have the same terms.
TableThe Senior Notes due 2031 are governed by, and were issued pursuant to, an indenture dated as of ContentsApril 8, 2021 by and among the Company, its guarantor subsidiaries and Regions Bank, as trustee (the “April 2021 Indenture”). The April 2021 Indenture provides, among other things, that the Senior Notes due 2031 bear interest at a rate of 4.25% per annum payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2021. From and including October 15, 2026, the interest rate payable on the notes shall be increased to 4.50% per annum unless the Company has notified the trustee at least 30 days prior to October 15, 2026 that in respect of the year ended December 31, 2025, (1) the Company’s greenhouse gas emissions intensity reduction target of 17.679% by December 31, 2025 from a 2019 baseline (the “Sustainability Performance Target”) has been satisfied and (2) the satisfaction of the Sustainability Performance Target has been confirmed by a qualified provider of third-party assurance or attestation services appointed by the Company to review the Company’s statement of the greenhouse gas emissions intensity in accordance with its customary procedures.On September 2, 2021, the Company completed a sale of $900.0 million in aggregate principal amount of its 3.50% senior notes due 2032 (“Senior Notes due 2032”). The Company used the proceeds, together with borrowings under the delayed draw term loan under its U.S. Credit Facility, to finance the Kerry Meats and Meals Acquisition and to pay related fees and expenses. Each issuance of the Senior Notes due 2032 is treated as a single class for all purposes under the September 2021 Indenture (defined below) and have the same terms.
The Senior Notes due 2032 are governed by, and were issued pursuant to, an indenture dated as of September 2, 2021 by and among the Company, its guarantor subsidiaries and Regions Bank, as trustee (the “September 2021 Indenture”). The September 2021 Indenture provides, among other things, that the Senior Notes due 2032 bear interest at a rate of 3.50% per annum payable semi-annually on March 1 and September 1 of each year, beginning on March 1, 2022.
The Senior Notes due 2025, the Senior Notes due 2027, the Senior Notes due 2031 and the Senior Notes due 20272032 were and are each guaranteed on a senior unsecured basis by the Company’s guarantor subsidiaries. In addition, any of the Company’s other existing or future domestic restricted subsidiaries that incur or guarantee any other indebtedness (with limited exceptions) must also guarantee the Senior Notes due 20252027 and the Senior Notes due 2027.2031. The Senior Notes due 2025, the Senior Notes due 2027, the Senior Notes due 2031 and the Senior Notes due 20272032 and related guarantees were and are unsecured senior obligations of the Company and its guarantor subsidiaries and rank equally with all of the Company’s and its guarantor subsidiaries’ other unsubordinated indebtedness. The Senior Notes due 2025,2027, the 20152017 Indenture, the Senior Notes due 20272031, the April 2021 Indenture, the Senior Notes due 2032 and the 2017September 2021 Indenture also contain customary covenants and events of default, including failure to pay principal or interest on the Senior Notes due 20252027, the Senior Notes due 2031 and the Senior Notes due 2027,2032, respectively, when due, among others.
U.S. Credit FacilityFacilities
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.“Fourth U.S. Credit Facility”) with CoBank, ACB, as administrative agent and collateral agent, and the other lenders party thereto. The Fourth 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 Fourth 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. On August 9, 2021, the Company refinanced the Fourth U.S. Credit Facility resulting in a loss on early extinguishment of debt of $400.0 thousand from capitalized loan costs recognized as a component of interest expense.
On August 9, 2021, the Company, and certain of the Company’s subsidiaries refinanced the Fourth U.S. Credit Facility, entering into a Fifth Amended and Restated Credit Agreement (the “Fifth U.S. Credit Facility”) with CoBank, ACB, as administrative agent and collateral agent, and the other lenders party thereto. The Fifth U.S. Credit Facility provides for an $800.0 million revolving credit commitment and a term loan commitment of up to $700.0 million (the “New Term Loans”) which includes a delayed draw commitment of $268.8 million for up to six months from the effective date. The Company used the proceeds of the New Term Loans for refinancing the Fourth U.S. Credit Facility maturing on July 20, 2023, to pay the fees and expenses incurred in connection with the transaction and for general corporate purposes.
The Fifth U.S. Credit Facility includes an accordionincremental commitment and loan feature that allows the Company, at any time,subject to certain conditions, to increase the aggregate revolving loan and term loan commitments. The aggregate amount of incremental commitments by upand loans shall not exceed the sum of $500.0 million plus the maximum amount that would result in a senior secured leverage ratio, on a pro-forma basis, of not more than 3.00 to an additional $1.25 billion, subject to the satisfaction of certain conditions, including obtaining the lenders’ agreement to participate in the increase.1.00.
The revolving loan commitment under the Fifth U.S. Credit Facility matures on July 20, 2023.August 9, 2026. All principal on the New Term Loans is due at maturity on July 20, 2023.August 9, 2026. Installments of principal are required to be made, in an amount equal to 1.25% of the original principal amount of the New Term Loans, on a quarterly basis prior to the maturity date of the New Term Loans. CovenantsLoans beginning 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.January 2022. As of September 27, 2020,26, 2021, the Company had outstanding borrowings under the term loan commitment of $456.3$506.3 million. As of September 27, 2020,26, 2021, the Company had outstanding borrowings, outstanding letters of credit and available borrowings under the revolving credit commitment of $350.0 million, $40.4$38.5 million and $359.6$761.5 million, respectively.
The Fifth U.S. Credit Facility includes a $75.0an $80.0 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 New Term Loans bear interest at a per annum rate, based on Company's senior secured net leverage ratio, equal to (1) in the case of LIBOR loans, LIBOR plus 1.25% through August 2, 2018 and, thereafter, based on the Company’s net senior secured leverage ratio, between LIBOR plus 1.25% and LIBOR plus 2.75% and (2) in the case of alternate base rate loans, the base rate plus 0.25% through August 2, 2018 and, based on the Company’s net senior secured leverage ratio, between the base rate plus 0.25% and the base rate plus 1.75% thereafter..
The Fifth U.S. Credit Facility contains customary financial and other various covenants for transactions of this type, including restrictions on the Company'sCompany’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 Fifth 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.leverage ratio and a minimum interest coverage ratio.
All obligations under the Fifth U.S. Credit Facility continue to be unconditionally guaranteedsecured by first priority liens on (1) all present and future personal property of the the Company, and certain of the Company’s subsidiaries and continue to be secured by a first priority lien on (1) the accounts receivableguarantors, including all material domestic and inventoryfirst-tier direct foreign subsidiaries, (2) all present and future shares of capital stock of the Companyborrowers and its non-Mexico subsidiaries, (2) 100% of the equity interests in the Company's domestic subsidiaries, To-Ricos, Ltd. and To-Ricos Distribution, Ltd., and 65% of the equity interests in its direct foreign subsidiariesguarantors, and (3) substantially all of the present and future assets of the Company and the guarantors under the Fifth U.S. Credit Facility. The Company is currently in compliance with the covenants under the Fifth U.S. Credit Facility.
Moy Park Bank of Ireland Revolving Facility Agreement
On June 2, 2018, Moy Park Holdings (Europe) Ltd. and its subsidiaries entered into an unsecured multicurrency revolving facility agreement (the “Bank of Ireland Facility Agreement”) with the Governor and Company of the Bank of Ireland, as agent, and the other lenders party thereto. The Bank of Ireland Facility Agreement provides for a multicurrency revolving loan commitment of up to £100.0 million. The multicurrency revolving loan commitments under the Bank of Ireland Facility Agreement mature on June 2, 2023. Outstanding borrowings under the Bank of Ireland Facility Agreement bear interest at a rate per annum equal to the sum of (1) LIBOR or, in relation to any loan in euros, EURIBOR, plus (2) a margin, ranging
from 1.25% to 2.00% based on Leverage (as defined in the Bank of Ireland Facility Agreement). All obligations under the Bank of Ireland Facility Agreement are guaranteed by certain of Moy Park'sPark’s subsidiaries. As of September 27, 2020,26, 2021, the U.S. dollar-equivalent loan commitment and borrowing availability were both $127.5$136.8 million. As of September 27, 2020,26, 2021, there were 0no outstanding borrowings under the Bank of Ireland Facility Agreement.
The Bank of Ireland Facility Agreement contains representations and warranties, covenants, indemnities and conditions that the Company believes are customary for transactions of this type. Pursuant to the terms of the Bank of Ireland Facility Agreement, Moy Park is required to meet certain financial and other restrictive covenants. Additionally, Moy Park is prohibited from taking certain actions without consent of the lenders, including, without limitation, incurring additional indebtedness, entering into certain mergers or other business combination transactions, permitting liens or other encumbrances on its assets and making restricted payments, including dividends, in each case except as expressly permitted under the Bank of Ireland Facility Agreement. The Bank of Ireland Facility Agreement contains events of default that the Company believes are customary for transactions of this type. If a default occurs, any outstanding obligations under the Bank of Ireland Facility Agreement may be accelerated.
Mexico Credit Facility
On December 14, 2018, certain of the Company'sCompany’s Mexican subsidiaries entered into an unsecured credit agreement (the “Mexico Credit Facility”) with Banco del Bajio, Sociedad Anónima, Institución de Banca Múltiple, as lender. The loan commitment under the Mexico Credit Facility is $1.51.5 billion Mexican pesos and can be borrowed on a revolving basis. Outstanding borrowings under the Mexico Credit Facility accrue interest at a rate equal to the 28-Day Interbank Equilibrium Interest Rate plus 1.5%. The Mexico Credit Facility contains covenants and defaults that the Company believes are customary for transactions of this type. The Mexico Credit Facility will be used for general corporate and working capital purposes. The Mexico Credit Facility will mature on December 14, 2023. As of September 27, 2020,26, 2021, the U.S. dollar-equivalent of the loan commitment and borrowing availability were both $67.2was $74.8 million. As of September 27, 2020,26, 2021, there were 0no outstanding borrowings under the Mexico Credit Facility.
14. STOCKHOLDERS'12. STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive LossIncome
The following tables provide information regarding the changes in accumulated other comprehensive loss:income:
| | | Nine Months Ended September 27, 2020(a) | | Nine Months Ended September 26, 2021(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 | | Gains Related to Foreign Currency Translation | | Losses on Derivative Financial Instruments Classified as Cash Flow Hedges | | Losses Related to Pension and Other Postretirement Benefits | | Gains (losses) on Available-for-Sale Securities | | Total |
| | (In thousands) | | (In thousands) |
Balance, beginning of period | Balance, beginning of period | $ | (1,108) | | | $ | (2,406) | | | $ | (71,615) | | | $ | 0 | | | $ | (75,129) | | Balance, beginning of period | $ | 82,782 | | | $ | (1,191) | | | $ | (102,211) | | | $ | — | | | $ | (20,620) | |
| Other comprehensive income (loss) before reclassifications | (48,921) | | | 3,403 | | | (44,641) | | | 2 | | | (90,157) | | |
Amounts reclassified from accumulated other comprehensive loss to net income | 0 | | | (1,039) | | | 846 | | | (14) | | | (207) | | |
Other comprehensive income before reclassifications | | Other comprehensive income before reclassifications | 13,135 | | | 1,204 | | | 23,524 | | | — | | | 37,863 | |
Amounts reclassified from accumulated other comprehensive income to net income | | Amounts reclassified from accumulated other comprehensive income to net income | — | | | (1,261) | | | 1,200 | | | — | | | (61) | |
Currency translation | Currency translation | 0 | | | (27) | | | 0 | | | 0 | | | (27) | | Currency translation | — | | | 16 | | | — | | | — | | | 16 | |
Net current period other comprehensive income (loss) | (48,921) | | | 2,337 | | | (43,795) | | | (12) | | | (90,391) | | |
Net current period other comprehensive income | | Net current period other comprehensive income | 13,135 | | | (41) | | | 24,724 | | | — | | | 37,818 | |
Balance, end of period | Balance, end of period | $ | (50,029) | | | $ | (69) | | | $ | (115,410) | | | $ | (12) | | | $ | (165,520) | | Balance, end of period | $ | 95,917 | | | $ | (1,232) | | | $ | (77,487) | | | $ | — | | | $ | 17,198 | |
| | | Nine Months Ended September 29, 2019(a) | | Nine Months Ended September 27, 2020(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 Gains on Available-for-Sale Securities | | Total | | Losses Related to Foreign Currency Translation | | Gains on Derivative Financial Instruments Classified as Cash Flow Hedges | | Losses Related to Pension and Other Postretirement Benefits | | Losses on Available-for-Sale Securities | | Total |
| | (In thousands) | | (In thousands) |
Balance, beginning of period | Balance, beginning of period | $ | (55,770) | | | $ | (683) | | | $ | (71,463) | | | $ | 82 | | | $ | (127,834) | | Balance, beginning of period | $ | (1,108) | | | $ | (2,406) | | | $ | (71,615) | | | $ | — | | | $ | (75,129) | |
| Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | (50,824) | | | (1,257) | | | (6,962) | | | 383 | | | (58,660) | | Other comprehensive income (loss) before reclassifications | (48,921) | | | 3,403 | | | (44,641) | | | 2 | | | (90,157) | |
Amounts reclassified from accumulated other comprehensive loss to net income | Amounts reclassified from accumulated other comprehensive loss to net income | 0 | | | 74 | | | 745 | | | (353) | | | 466 | | Amounts reclassified from accumulated other comprehensive loss to net income | — | | | (1,039) | | | 846 | | | (14) | | | (207) | |
Currency translation | Currency translation | 0 | | | (12) | | | 0 | | | 0 | | | (12) | | Currency translation | — | | | (27) | | | — | | | — | | | (27) | |
Net current period other comprehensive income (loss) | Net current period other comprehensive income (loss) | (50,824) | | | (1,195) | | | (6,217) | | | 30 | | | (58,206) | | Net current period other comprehensive income (loss) | (48,921) | | | 2,337 | | | (43,795) | | | (12) | | | (90,391) | |
Balance, end of period | Balance, end of period | $ | (106,594) | | | $ | (1,878) | | | $ | (77,680) | | | $ | 112 | | | $ | (186,040) | | Balance, end of period | $ | (50,029) | | | $ | (69) | | | $ | (115,410) | | | $ | (12) | | | $ | (165,520) | |
(a) All amounts are net of tax. Amounts in parentheses represent income (expenses) related to results of operations.
| | | | | | | | | | | | | | | | | | | | |
| | Amount Reclassified from Accumulated Other Comprehensive Loss(a) | | |
Details about Accumulated Other Comprehensive Loss Components | | Nine Months Ended September 27, 2020 | | Nine Months Ended September 29, 2019 | | Affected Line Item in the Condensed Consolidated Statements of Income |
| | (In thousands) | | |
Realized gain on settlement of foreign currency derivatives classified as cash flow hedges | | $ | 1,452 | | | $ | 0 | | | Net sales |
Realized loss on settlement of foreign currency derivatives classified as cash flow hedges | | (314) | | | (74) | | | Cost of sales |
Realized gain on settlement of interest rate swap derivatives classified as cash flow hedges | | (99) | | | 0 | | | Interest expense, net of capitalized interest |
Realized gain on sale of securities | | 18 | | | 466 | | | Interest income |
Amortization of pension and other postretirement plan actuarial losses: | | | | | | |
Union Plan(b) | | (72) | | | (54) | | | Miscellaneous, net |
Legacy Gold Kist Plans(b)(c) | | (1,055) | | | (930) | | | Miscellaneous, net |
Total before tax | | (70) | | | (592) | | | |
Tax benefit | | 277 | | | 126 | | | |
Total reclassification for the period | | $ | 207 | | | $ | (466) | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Amount Reclassified from Accumulated Other Comprehensive Income(a) | | |
Details about Accumulated Other Comprehensive Income Components | | Nine Months Ended September 26, 2021 | | Nine Months Ended September 27, 2020 | | Affected Line Item in the Condensed Consolidated Statements of Income |
| | (In thousands) | | |
Realized gain on settlement of foreign currency derivatives classified as cash flow hedges | | $ | 746 | | | $ | 1,452 | | | Net sales |
Realized gain (loss) on settlement of foreign currency derivatives classified as cash flow hedges | | 860 | | | (314) | | | Cost of sales |
Realized loss on settlement of interest rate swap derivatives classified as cash flow hedges | | (460) | | | (99) | | | Interest expense, net of capitalized interest |
Realized gain on sale of securities | | — | | | 18 | | | Interest income |
Amortization of pension and other postretirement plan actuarial losses(b) | | (1,568) | | | (1,127) | | | Miscellaneous, net |
Total before tax | | (422) | | | (70) | | | |
Tax expense | | 483 | | | 277 | | | |
Total reclassification for the period | | $ | 61 | | | $ | 207 | | | |
(a) AmountsPositive amounts represent income to the results of operations while amounts in parentheses represent income (expenses) relatedexpenses to the results of operations.
(b) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See “Note 15.13. Pension and Other Postretirement Benefits” to the Condensed Consolidated Financial Statements.
(c) The Company sponsors the GK Pension Plan, the SERP Plan, the Directors' Emeriti Plan and the Retiree Life Plan (collectively, the “Legacy Gold Kist Plans”).Benefits.”
Share Repurchase Program and Treasury Stock
On October 31, 2018, the Company’s Board of Directors approved a $200.0 million share repurchase authorization. The Company plans to repurchaserepurchased 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.purchases. As of September 27, 2020,26, 2021, the Company had repurchased approximately 6.16.3 million shares under this program with a market value of approximately $110.9$113.4 million. The Company accounted for the shares repurchased using the cost method. The Company currently plans to maintain these shares as treasury stock.
This program expired on February 16, 2021. Restrictions on Dividends
Both the Fifth U.S. Credit Facility and the indentures governing the Company’s senior notes restrict, but do not prohibit, the Company from declaring dividends. Additionally, the Moy Park Multicurrency RevolvingPark’s Bank of Ireland Facility Agreement restricts Moy Park’s ability and the ability of certain of Moy Park’s subsidiaries to, among other things, make payments and distributions to the Company.
15.13. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors programs that provide retirement benefits to most of its employees. These programs include qualified defined benefit pension plans such as the Pilgrim'sPilgrim’s Pride Retirement Plan for Union Employees (the “Union Plan”) the Pilgrim'sPilgrim’s Pride Pension Plan for Legacy Gold Kist Employees (the “GK Pension Plan”), the Tulip Limited Pension Plan and
the Geo Adams Group Pension Fund (together, the “U.K. Plans”), nonqualified defined benefit retirement plans, a defined benefit postretirement life insurance plan and defined contribution retirement savings plan. Expenses recognized under all retirement plans totaled $6.2$4.3 million and $5.0$6.2 million in the three months ended September 26, 2021 and September 27, 2020, and September 29, 2019, respectively, and $13.3$13.6 million and $14.6$13.3 million in the nine months ended September 27, 202026, 2021 and September 29, 2019,27, 2020, respectively.
Defined Benefit Plans Obligations and Assets
The change in benefit obligation, change in fair value of plan assets, funded status and amounts recognized in the Condensed Consolidated Balance Sheets for the defined benefit plans were as follows:
| | | Nine Months Ended September 27, 2020 | | Nine Months Ended September 29, 2019 | | Nine Months Ended |
| | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | September 26, 2021 | | September 27, 2020 |
Change in projected benefit obligation: | (In thousands) | |
| | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | | (In thousands) |
Change in projected benefit obligation | | Change in projected benefit obligation | |
Projected benefit obligation, beginning of period | Projected benefit obligation, beginning of period | $ | 369,066 | | | $ | 1,527 | | | $ | 157,619 | | | $ | 1,462 | | Projected benefit obligation, beginning of period | $ | 404,194 | | | $ | 1,593 | | | $ | 369,066 | | | $ | 1,527 | |
Interest cost | Interest cost | 6,047 | | | 27 | | | 4,402 | | | 39 | | Interest cost | 4,119 | | | 12 | | | 6,047 | | | 27 | |
Actuarial losses | 30,650 | | | 75 | | | 20,726 | | | 130 | | |
Actuarial loss (gain) | | Actuarial loss (gain) | (9,873) | | | (20) | | | 30,650 | | | 75 | |
Benefits paid | Benefits paid | (9,763) | | | (120) | | | (4,564) | | | (111) | | Benefits paid | (9,792) | | | (113) | | | (9,763) | | | (120) | |
Curtailments and settlements | Curtailments and settlements | (7,083) | | | 0 | | | (8,783) | | | 0 | | Curtailments and settlements | (4,393) | | | — | | | (7,083) | | | — | |
Other | 22 | | | 0 | | | 0 | | | 0 | | |
Currency translation gain | (4,071) | | | 0 | | | 0 | | | 0 | | |
Prior service cost | | Prior service cost | — | | | — | | | 22 | | | — | |
Currency translation loss (gain) | | Currency translation loss (gain) | 2,169 | | | — | | | (4,071) | | | — | |
Projected benefit obligation, end of period | Projected benefit obligation, end of period | $ | 384,868 | | | $ | 1,509 | | | $ | 169,400 | | | $ | 1,520 | | Projected benefit obligation, end of period | $ | 386,424 | | | $ | 1,472 | | | $ | 384,868 | | | $ | 1,509 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 26, 2021 | | September 27, 2020 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| (In thousands) |
Change in plan assets | | | | | | | |
Fair value of plan assets, beginning of period | $ | 305,983 | | | $ | — | | | $ | 294,589 | | | $ | — | |
Actual return on plan assets | 28,325 | | | — | | | (5,343) | | | — | |
Contributions by employer | 10,569 | | | 113 | | | 11,801 | | | 120 | |
Benefits paid | (9,792) | | | (113) | | | (9,763) | | | (120) | |
Curtailments and settlements | (4,393) | | | — | | | (7,083) | | | — | |
Expenses paid from assets | (279) | | | — | | | (603) | | | — | |
Currency translation gain (loss) | 1,466 | | | — | | | (4,337) | | | — | |
Fair value of plan assets, end of period | $ | 331,879 | | | $ | — | | | $ | 279,261 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| (In thousands) |
Funded status | | | | | | | |
Unfunded benefit obligation, end of period | $ | (54,545) | | | $ | (1,472) | | | $ | (98,211) | | | $ | (1,593) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| (In thousands) |
Amounts recognized in the Condensed Consolidated Balance Sheets at end of period | | | | | | | |
Current liability | $ | (6,775) | | | $ | (164) | | | $ | (7,510) | | | $ | (169) | |
Long-term liability | (47,770) | | | (1,308) | | | (90,701) | | | (1,424) | |
Recognized liability | $ | (54,545) | | | $ | (1,472) | | | $ | (98,211) | | | $ | (1,593) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 27, 2020 | | Nine Months Ended September 29, 2019 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Change in plan assets: | (In thousands) |
Fair value of plan assets, beginning of period | $ | 294,589 | | | $ | 0 | | | $ | 102,414 | | | $ | 0 | |
Actual return on plan assets | (5,343) | | | 0 | | | 12,637 | | | 0 | |
Contributions by employer | 11,801 | | | 120 | | | 6,096 | | | 111 | |
Benefits paid | (9,763) | | | (120) | | | (4,564) | | | (111) | |
Curtailments and settlements | (7,083) | | | 0 | | | (8,783) | | | 0 | |
Other | (603) | | | 0 | | | 0 | | | 0 | |
Currency translation loss | (4,337) | | | 0 | | | 0 | | | 0 | |
Fair value of plan assets, end of period | $ | 279,261 | | | $ | 0 | | | $ | 107,800 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Funded status: | (In thousands) |
Unfunded benefit obligation, end of period | $ | (105,607) | | | $ | (1,509) | | | $ | (74,477) | | | $ | (1,527) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| (In thousands) |
Amounts recognized in accumulated other comprehensive loss at end of period | | | | | | | |
Net actuarial loss | $ | 62,515 | | | $ | 153 | | | $ | 95,522 | | | $ | 174 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Amounts recognized in the Condensed Consolidated Balance Sheets at end of period: | (In thousands) |
Current liability | $ | (3,605) | | | $ | (156) | | | $ | (14,967) | | | $ | (158) | |
Long-term liability | (102,002) | | | (1,353) | | | (59,510) | | | (1,369) | |
Recognized liability | $ | (105,607) | | | $ | (1,509) | | | $ | (74,477) | | | $ | (1,527) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Amounts recognized in accumulated other comprehensive loss at end of period: | (In thousands) |
Net actuarial loss | $ | 100,579 | | | $ | 166 | | | $ | 58,239 | | | $ | 91 | |
The accumulated benefit obligation for the Company'sCompany’s defined benefit pension plans was $384.9$386.4 million and $369.1$404.2 million at September 27, 202026, 2021 and December 29, 2019,27, 2020, respectively. Each of the Company'sCompany’s defined benefit pension plans had accumulated benefit obligations that exceeded the fair value of plan assets at both September 27, 202026, 2021 and December 29, 2019.27, 2020. As of September 27, 2020,26, 2021, the weighted average duration of the Company'sCompany’s defined benefit pension obligation is 27.7318.22 years.
Net Periodic Benefit Costs
Net defined benefit pension and other postretirement costs included the following components:
| | | Three Months Ended September 27, 2020 | | Three Months Ended September 29, 2019 | | Nine Months Ended September 27, 2020 | | Nine Months Ended September 29, 2019 | | Three Months Ended September 26, 2021 | | Three Months Ended September 27, 2020 | | Nine Months Ended September 26, 2021 | | Nine Months Ended September 27, 2020 |
| | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | (In thousands) | | (In thousands) |
Interest cost | Interest cost | | $ | 1,997 | | | $ | 9 | | | $ | 1,468 | | | $ | 13 | | | $ | 6,047 | | | $ | 27 | | | $ | 4,402 | | | $ | 39 | | Interest cost | | $ | 1,682 | | | $ | 4 | | | $ | 1,997 | | | $ | 9 | | | $ | 4,119 | | | $ | 12 | | | $ | 6,047 | | | $ | 27 | |
Estimated return on plan assets | Estimated return on plan assets | | (3,256) | | | 0 | | | (1,349) | | | 0 | | | (9,754) | | | 0 | | | (4,047) | | | 0 | | Estimated return on plan assets | | (3,170) | | | — | | | (3,256) | | | — | | | (7,626) | | | — | | | (9,754) | | | — | |
Settlement loss | Settlement loss | | 2,941 | | | 0 | | | 1,134 | | | 0 | | | 2,941 | | | 0 | | | 3,064 | | | 0 | | Settlement loss | | 539 | | | — | | | 2,941 | | | — | | | 1,376 | | | — | | | 2,941 | | | — | |
Other | | 87 | | | 0 | | | 0 | | | 0 | | | 624 | | | 0 | | | 0 | | | 0 | | |
Expenses paid from assets | | Expenses paid from assets | | 110 | | | — | | | 87 | | | — | | | 279 | | | — | | | 624 | | | — | |
Amortization of net loss | Amortization of net loss | | 376 | | | 0 | | | 328 | | | 0 | | | 1,127 | | | 0 | | | 984 | | | 0 | | Amortization of net loss | | 607 | | | — | | | 376 | | | — | | | 1,553 | | | 1 | | | 1,127 | | | — | |
Net costs | | $ | 2,145 | | | $ | 9 | | | $ | 1,581 | | | $ | 13 | | | $ | 985 | | | $ | 27 | | | $ | 4,403 | | | $ | 39 | | |
Amortization of past service cost | | Amortization of past service cost | | 6 | | | — | | | — | | | — | | | 14 | | | — | | | — | | | — | |
Net costs(a) | | Net costs(a) | | $ | (226) | | | $ | 4 | | | $ | 2,145 | | | $ | 9 | | | $ | (285) | | | $ | 13 | | | $ | 985 | | | $ | 27 | |
(a) Net costs are included in the line item Miscellaneous, net on the Condensed Consolidated Statements of Income.
Economic Assumptions
The weighted average assumptions used in determining pension and other postretirement plan information were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Assumptions used to measure benefit obligation at end of period: | | | | | | | |
Discount rate | 1.97 | % | | 2.05 | % | | 2.56 | % | | 2.77 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Assumptions used to measure benefit obligation at end of period | | | | | | | |
Discount rate | 2.01 | % | | 2.08 | % | | 1.83 | % | | 1.80 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 26, 2021 | | September 27, 2020 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Assumptions used to measure net pension and other postretirement cost | | | | | | | |
Discount rate | 1.87 | % | | 1.80 | % | | 2.51 | % | | 2.77 | % |
| | | | | | | |
Expected return on plan assets | 3.53 | % | | NA | | 4.67 | % | | NA |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 27, 2020 | | Nine Months Ended September 29, 2019 |
| Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Assumptions used to measure net pension and other postretirement cost: | | | | | | | |
Discount rate | 2.51 | % | | 2.77 | % | | 4.40 | % | | 4.07 | % |
| | | | | | | |
Expected return on plan assets | 4.67 | % | | NA | | 5.50 | % | | NA |
The discount rate represents the interest rate used to determine the present value of future cash flows currently expected to be required to settle the Company'sCompany’s pension and other benefit obligations. The weighted average discount rate assumptions used to determine future pension obligations at September 26, 2021 and December 27, 2020 were based on Prudential Financial, Inc.’s (“Prudential”) Pru Above Mean yield curve, which was designed by Prudential to provide a means for each plan was establishedsponsors to value the liabilities of their postretirement benefit plans. The Pru Above Mean yield curve represents a series of annual discount rates from bonds with an AA minimum average credit quality rating as rated by comparing the projection of expected benefit payments to the AA Above Median yield curve.Moody’s Investor Service, Standard & Poor’s and Fitch Ratings. 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'splan’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. The discount rate assumptions used to determine future pension obligations for the U.K. pension plans at September 26, 2021 and December 27, 2020 were based on corporate bond spot yield curves provided by Merrill Lynch. Merrill Lynch bases this calculation entirely on AA1-AA3 rated bonds. As part of the evaluation of pension and other postretirement assumptions, the Company applied assumptions for mortality that incorporate generational white and blue collar mortality trends. In determining its benefit obligations, the Company used generational tables that take into consideration increases in plan participant longevity. As of September 26, 2021 and December 27, 2020, and December 29, 2019, allthe U.S. pension and other postretirement benefit plans used variations of the RP2014Pri-2012 mortality table and the MP2015MP2020 mortality improvement scale. As of September 26, 2021 and December 27, 2020, and December 29, 2019, the U.K. Planspension plans used variations of the AxC00 mortality table in combination with the CMI_2018CMI_2019 Sk=7.5 mortality improvement scale for pre-retirement employees and the S3PxAS3PMA mortality table in combination with the CMI_2018CMI_2019 Sk=7.5 mortality improvement scale for postretirement employees.
The sensitivity of the projected benefit obligation for pension benefits to changes in the discount rate is set out below. The impact of a change in the discount rate of 0.25% on the projected benefit obligation for other benefits is less than $1,000. This sensitivity analysis is based on changing one assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to variations in significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as for calculating the liability recognized in the Condensed Consolidated Balance Sheets.
| | | | | | | | | | | |
| Increase in Discount Rate of 0.25% | | Decrease in Discount Rate of 0.25% |
| (In thousands) |
Impact on projected benefit obligation for pension benefits | $ | (10,302) | | | $ | 10,846 | |
| | | | | | | | | | | |
| Increase in Discount Rate of 0.25% | | Decrease in Discount Rate of 0.25% |
| (In thousands) |
Impact on projected benefit obligation for pension benefits | $ | (10,344) | | | $ | 10,890 | |
The expected rate of return on plan assets was primarily based on the determination of an expected return and behaviors for each plan'splan’s current asset portfolio that the Company believes are likely to prevail over long periods. This determination was made using assumptions for return and volatility of the portfolio. Asset class assumptions were set using a combination of empirical and forward-looking analysis. To the extent historical results were affected by unsustainable trends or events, the effects of those trends or events were quantified and removed. The Company also considered anticipated asset allocations, investment strategies and the views of various investment professionals when developing this rate.
Plan Assets
The following table reflects the pension plans’ actual asset allocations:
| | | September 27, 2020 | | December 29, 2019 | | September 26, 2021 | | December 27, 2020 |
Cash and cash equivalents | Cash and cash equivalents | 2 | % | | 4 | % | Cash and cash equivalents | 2 | % | | 1 | % |
Pooled separate accounts for the Union Plan(a): | Pooled separate accounts for the Union Plan(a): | | Pooled separate accounts for the Union Plan(a): | |
Equity securities | Equity securities | 2 | % | | 2 | % | Equity securities | 2 | % | | 2 | % |
Fixed income securities | Fixed income securities | 2 | % | | 2 | % | Fixed income securities | 2 | % | | 2 | % |
Pooled separate accounts and common collective trust funds for the GK Pension Plan(a): | Pooled separate accounts and common collective trust funds for the GK Pension Plan(a): | | Pooled separate accounts and common collective trust funds for the GK Pension Plan(a): | |
Equity securities | Equity securities | 19 | % | | 20 | % | Equity securities | 20 | % | | 20 | % |
Fixed income securities | Fixed income securities | 13 | % | | 12 | % | Fixed income securities | 12 | % | | 13 | % |
Real estate | Real estate | 2 | % | | 2 | % | Real estate | 1 | % | | 1 | % |
Pooled separate accounts for the UK Plans(a): | | |
Pooled separate accounts for the U.K. Plans(a): | | Pooled separate accounts for the U.K. Plans(a): | |
Equity securities | Equity securities | 33 | % | | 40 | % | Equity securities | 36 | % | | 35 | % |
Fixed income securities | Fixed income securities | 20 | % | | 18 | % | Fixed income securities | 19 | % | | 20 | % |
Real estate | Real estate | 7 | % | | 0 | % | Real estate | 6 | % | | 6 | % |
Total assets | Total assets | 100 | % | | 100 | % | Total assets | 100 | % | | 100 | % |
(a) Pooled separate accounts (“PSAs”) and common collective trust funds (“CCTs”) are two of the most common types of alternative vehicles in which benefit plans invest. These investments are pooled funds that look like mutual funds, but they are not registered with the SEC. Often times, they will
be invested in mutual funds or other marketable securities, but the unit price generally will be different from the value of the underlying securities because the fund may also hold cash for liquidity purposes, and the fees imposed by the fund are deducted from the fund value rather than charged separately to investors. Some PSAs and CCTs have no restrictions as to their investment strategy and can invest in riskier investments, such as derivatives, hedge funds, private equity funds, or similar investments.
Absent regulatory or statutory limitations, the target asset allocation for the investment of pension assets in the PSAs for the Union Plan is 50% in each of fixed income securities and equity securities, the target asset allocation for the investment of pension assets in the PSAs and/or CCTs for the GK Pension Plan is 35% in fixed income securities, 60% in equity securities and 5% in real estate and investment of pension assets in the PSAs for the U.K. Plans is 28% in fixed income securities, 62% in equity securities and 10% in real estate. The plans only invest in fixed income and equity instruments for which there is a readily available public market. The Company develops its expected long-term rate of return assumptions based on the historical rates of returns for equity and fixed income securities of the type in which its plans invest.
The fair value measurements of plan assets fell into the following levels of the fair value hierarchy as of September 27, 202026, 2021 and December 29, 2019:27, 2020:
| | | September 27, 2020 | | December 29, 2019 | | September 26, 2021 | | December 27, 2020 |
| | Level 1(a) | | Level 2(b) | | Level 3(c) | | Total | | Level 1(a) | | Level 2(b) | | Level 3(c) | | Total | | Level 1(a) | | Level 2(b) | | Level 3(c) | | Total | | Level 1(a) | | Level 2(b) | | Level 3(c) | | Total |
| | (In thousands) | | (In thousands) |
Cash and cash equivalents | Cash and cash equivalents | $ | 6,819 | | | $ | 0 | | | $ | 0 | | | $ | 6,819 | | | $ | 11,582 | | | $ | 0 | | | $ | 0 | | | $ | 11,582 | | Cash and cash equivalents | $ | 7,748 | | | $ | — | | | $ | — | | | $ | 7,748 | | | $ | 1,487 | | | $ | — | | | $ | — | | | $ | 1,487 | |
PSAs for the Union Plan: | PSAs for the Union Plan: | | PSAs for the Union Plan: | |
Large U.S. equity funds(d) | Large U.S. equity funds(d) | 0 | | | 2,962 | | | 0 | | | 2,962 | | | 0 | | | 3,071 | | | 0 | | | 3,071 | | Large U.S. equity funds(d) | — | | | 2,979 | | | — | | | 2,979 | | | — | | | 3,100 | | | — | | | 3,100 | |
Small/Mid U.S. equity funds(e) | Small/Mid U.S. equity funds(e) | 0 | | | 368 | | | 0 | | | 368 | | | 0 | | | 372 | | | 0 | | | 372 | | Small/Mid U.S. equity funds(e) | — | | | 1,155 | | | — | | | 1,155 | | | — | | | 392 | | | — | | | 392 | |
International equity funds(f) | International equity funds(f) | 0 | | | 1,772 | | | 0 | | | 1,772 | | | 0 | | | 1,878 | | | 0 | | | 1,878 | | International equity funds(f) | — | | | 2,060 | | | — | | | 2,060 | | | — | | | 1,874 | | | — | | | 1,874 | |
Fixed income funds(g) | Fixed income funds(g) | 0 | | | 5,037 | | | 0 | | | 5,037 | | | 0 | | | 4,452 | | | 0 | | | 4,452 | | Fixed income funds(g) | — | | | 5,167 | | | — | | | 5,167 | | | — | | | 5,365 | | | — | | | 5,365 | |
PSAs and CCTs for the GK Pension Plan: | PSAs and CCTs for the GK Pension Plan: | | PSAs and CCTs for the GK Pension Plan: | |
Large U.S. equity funds(d) | Large U.S. equity funds(d) | 0 | | | 26,324 | | | 0 | | | 26,324 | | | 0 | | | 20,378 | | | 0 | | | 20,378 | | Large U.S. equity funds(d) | — | | | 33,199 | | | — | | | 33,199 | | | — | | | 29,602 | | | — | | | 29,602 | |
Small/Mid U.S. equity funds(e) | Small/Mid U.S. equity funds(e) | 0 | | | 13,763 | | | 0 | | | 13,763 | | | 0 | | | 12,495 | | | 0 | | | 12,495 | | Small/Mid U.S. equity funds(e) | — | | | 16,905 | | | — | | | 16,905 | | | — | | | 17,569 | | | — | | | 17,569 | |
International equity funds(f) | International equity funds(f) | 0 | | | 14,105 | | | 0 | | | 14,105 | | | 0 | | | 25,149 | | | 0 | | | 25,149 | | International equity funds(f) | — | | | 16,823 | | | — | | | 16,823 | | | — | | | 16,320 | | | — | | | 16,320 | |
Fixed income funds(g) | Fixed income funds(g) | 0 | | | 37,365 | | | 0 | | | 37,365 | | | 0 | | | 35,627 | | | 0 | | | 35,627 | | Fixed income funds(g) | — | | | 40,951 | | | — | | | 40,951 | | | — | | | 38,944 | | | — | | | 38,944 | |
Real estate(h) | Real estate(h) | 0 | | | 5,664 | | | 0 | | | 5,664 | | | 0 | | | 5,613 | | | 0 | | | 5,613 | | Real estate(h) | — | | | 5,032 | | | — | | | 5,032 | | | — | | | 5,677 | | | — | | | 5,677 | |
PSAs for the UK Plans: | | |
PSAs for the U.K. Plans: | | PSAs for the U.K. Plans: | |
Large U.S. equity funds(d) | Large U.S. equity funds(d) | 0 | | | 35,091 | | | 0 | | | 35,091 | | | 0 | | | 17,756 | | | 0 | | | 17,756 | | Large U.S. equity funds(d) | — | | | 47,598 | | | — | | | 47,598 | | | — | | | 39,002 | | | — | | | 39,002 | |
International equity funds(f) | International equity funds(f) | 0 | | | 56,792 | | | 0 | | | 56,792 | | | 0 | | | 102,494 | | | 0 | | | 102,494 | | International equity funds(f) | — | | | 71,175 | | | — | | | 71,175 | | | — | | | 69,251 | | | — | | | 69,251 | |
Fixed income funds(g) | Fixed income funds(g) | 0 | | | 57,223 | | | 0 | | | 57,223 | | | 0 | | | 53,722 | | | 0 | | | 53,722 | | Fixed income funds(g) | — | | | 62,844 | | | — | | | 62,844 | | | — | | | 60,212 | | | — | | | 60,212 | |
Real estate(h) | Real estate(h) | 0 | | | 15,976 | | | 0 | | | 15,976 | | | 0 | | | 0 | | | 0 | | | 0 | | Real estate(h) | — | | | 18,243 | | | — | | | 18,243 | | | — | | | 17,188 | | | — | | | 17,188 | |
Total assets | Total assets | $ | 6,819 | | | $ | 272,442 | | | $ | 0 | | | $ | 279,261 | | | $ | 11,582 | | | $ | 283,007 | | | $ | 0 | | | $ | 294,589 | | Total assets | $ | 7,748 | | | $ | 324,131 | | | $ | — | | | $ | 331,879 | | | $ | 1,487 | | | $ | 304,496 | | | $ | — | | | $ | 305,983 | |
(a) Unadjusted quoted prices in active markets for identical assets are used to determine fair value.
(b) Quoted prices in active markets for similar assets and inputs that are observable for the asset are used to determine fair value.
(c) Unobservable inputs, such as discounted cash flow models or valuations, are used to determine fair value.
(d) This category is comprised of investment options that invest in stocks, or shares of ownership, in large, well-established U.S. companies. These investment options typically carry more risk than fixed income options but have the potential for higher returns over longer time periods.
(e) This category is generally comprised of investment options that invest in stocks, or shares of ownership, in small to medium-sized U.S. companies. These investment options typically carry more risk than larger U.S. equity investment options but have the potential for higher returns.
(f) This category is comprised of investment options that invest in stocks, or shares of ownership, in companies with their principal place of business or office outside of the U.S.
(g) This category is comprised of investment options that invest in bonds, or debt of a company or government entity (including U.S. and non-U.S. entities). These investment options typically carry more risk than short-term fixed income investment options, but less overall risk than equities.
(h) This category is comprised of investment options that invest in real estate investment trusts or private equity pools that own real estate. These long-term investments are primarily in office buildings, industrial parks, apartments or retail complexes. These investment options typically carry more risk, including liquidity risk, than fixed income investment options.
Benefit Payments
The following table reflects the benefits as of September 27, 202026, 2021 expected to be paid through 20292030 from the Company'sCompany’s pension and other postretirement plans. The Company’s pension plans are primarily funded plans. Therefore, anticipated benefits with respect to these plans will come primarily from the trusts established for these plans. The Company'sCompany’s other postretirement plans are unfunded. Therefore, anticipated benefits with respect to these plans will come from the Company’s own assets.
| | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | (In thousands) | | (In thousands) |
2020 | $ | 11,551 | | | $ | 40 | | |
2021 | 2021 | 16,430 | | | 155 | | 2021 | $ | 13,675 | | | $ | 56 | |
2022 | 2022 | 16,403 | | | 150 | | 2022 | 17,084 | | | 163 | |
2023 | 2023 | 16,472 | | | 144 | | 2023 | 16,584 | | | 156 | |
2024 | 2024 | 16,452 | | | 137 | | 2024 | 16,172 | | | 149 | |
2025-2029 | 81,067 | | | 565 | | |
2025 | | 2025 | 15,674 | | | 140 | |
2026-2030 | | 2026-2030 | 72,166 | | | 555 | |
Total | Total | $ | 158,375 | | | $ | 1,191 | | Total | $ | 151,355 | | | $ | 1,219 | |
As required by funding regulations or laws, the Company anticipates contributing $3.7$1.8 million and $0.2$0.1 million to its pension plans and other postretirement plans, respectively, during the remainder of 2020.2021.
Unrecognized Benefit Amounts in Accumulated Other Comprehensive LossIncome
The amounts in accumulated other comprehensive lossincome that were not recognized as components of net periodic benefits cost and the changes in those amounts are as follows:
| | | Nine Months Ended September 27, 2020 | | Nine Months Ended September 29, 2019 | | Nine Months Ended |
| | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | September 26, 2021 | | September 27, 2020 |
| | (In thousands) | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
Net actuarial loss (gain), beginning of period | $ | 58,239 | | | $ | 91 | | | $ | 54,343 | | | $ | (34) | | |
| | | (In thousands) |
Net actuarial loss, beginning of period | | Net actuarial loss, beginning of period | $ | 95,522 | | | $ | 174 | | | $ | 58,239 | | | $ | 91 | |
Amortization | Amortization | (1,127) | | | 0 | | | (984) | | | 0 | | Amortization | (1,567) | | | (1) | | | (1,127) | | | — | |
Curtailment and settlement adjustments | Curtailment and settlement adjustments | (2,941) | | | 0 | | | (3,064) | | | 0 | | Curtailment and settlement adjustments | (1,376) | | | — | | | (2,941) | | | — | |
Actuarial loss | 30,650 | | | 75 | | | 20,726 | | | 129 | | |
Actuarial loss (gain) | | Actuarial loss (gain) | (9,873) | | | (20) | | | 30,650 | | | 75 | |
Asset loss (gain) | Asset loss (gain) | 15,089 | | | 0 | | | (8,590) | | | 0 | | Asset loss (gain) | (20,699) | | | — | | | 15,089 | | | — | |
Currency translation loss | Currency translation loss | 669 | | | 0 | | | 0 | | | 0 | | Currency translation loss | 508 | | | — | | | 669 | | | — | |
Net actuarial loss, end of period | Net actuarial loss, end of period | $ | 100,579 | | | $ | 166 | | | $ | 62,431 | | | $ | 95 | | Net actuarial loss, end of period | $ | 62,515 | | | $ | 153 | | | $ | 100,579 | | | $ | 166 | |
Risk Management
Through its defined benefit plans, the Company is exposed to a number of risks, the most significant of which are detailed below:
Asset volatility. The plan liabilities are calculated using a discount rate set with reference to corporate bond yields; if plan assets under perform this yield, this will create a deficit. The pension plans hold a significant proportion of equities, which are expected to outperform corporate bonds in the long-term while contributing volatility and risk in the short-term. The Company monitors the level of investment risk but has no current plan to significantly modify the mixture of investments. The investment position is discussed more below.
Changes in bond yields. A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.
The investment position is managed and monitored by a committee of individuals from various departments. This group actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the pension obligations. The group has not changed the processes used to manage its risks from previous periods. The group does not use derivatives to manage its risk. Investments are well diversified, such that the failure of any single
investment would not have a material impact on the overall level of assets. The majority of equities are in U.S. large and small cap companies with some global diversification into international entities.
Remeasurement
The Company remeasures both plan assets and obligations on a quarterly basis.
Defined Contribution Plans
The Company sponsors 2 defined contribution retirement savings plans in the U.S. reportable segment for eligible U.S. and Puerto Rico employees. The Company maintains 3 postretirement plans for eligible employees in the Mexico reportable segment, as required by Mexico law, which primarily cover termination benefits. The Company maintains 2 defined contribution retirement savings plans in the U.K. and Europe reportable segment for eligible U.K. and Europe employees, as required by U.K. and Europe law. The Company’s expenses related to its defined contribution plans totaled $3.3$3.6 million in the three months ended September 27, 202026, 2021 and $10.4$11.7 million and in the nine months ended September 27, 2020.26, 2021.
16.14. STOCK-BASED COMPENSATION
For the three months ended September 27, 202026, 2021 and September 29, 2019,27, 2020, we recognized total stock-based compensation gainexpense of $1.7$2.4 million and expense $2.1gain of $1.7 million, respectively. For the three months ended September 27, 202026, 2021 and September 29, 2019,27, 2020, the total income tax expensebenefit and benefitexpense recognized for stock-based compensation arrangements was $0.4$0.6 million and $0.5$0.4 million, respectively.
For the nine months ended September 26, 2021 and September 27, 2020 and September 29, 2019,, we recognized total stock-based compensation expense of $2.2$7.6 million and $7.3$2.2 million, respectively. For the nine months ended September 26, 2021 and September 27, 2020 and September 29, 2019,, the total income tax benefit recognized for stock-based compensation arrangements was $0.6$1.9 million and $1.8$0.6 million, respectively.
During the nine months ended September 27, 2020,26, 2021, we granted 316,460123,851 time-vesting restricted stock units at a grant date price of $19.73 per unit. These awards will vest equally on July 1, 2022, July 1, 2023 and July 1, 2024. We also granted 533,883 performance-based restricted stock units at a grant date price of $30.94$22.79 per unit, 27,350 performance-based restricted stock units at a grant date price of $25.45 per unit and 5,470 performance-based restricted stock units at a grant date price of $27.46 per unit. These awards will convert to time-vesting restricted stock units in the first quarter of 20212022 if or when the Compensation Committee of the Company'sCompany’s Board of Directors certifies the achievement of 20202021 performance targets. Once converted to time-vesting restricted stock units, the awards will vest ratablyequally on December 31, 2021,2022, December 31, 2022,2023 and December 31, 2023. We2024. During the same period we also granted 13,630 event-based400,000 performance-based restricted stock units at a grant date price of $22.01$19.73 per unitunit. These awards will convert to time-vesting restricted stock units in the nonemployee membersfirst quarter of 2024 if or when the Compensation Committee of the Company'sCompany’s Board of Directors. TheDirectors certifies the achievement of performance targets over a three-year period of January 1, 2021 through December 31, 2023. Once converted to time-vesting restricted stock units, the awards granted to each director will vest in full upon the director's terminationequally on July 1, 2024, July 1, 2025 and July 1, 2026. We also granted 9,459 restricted stock units on April 6, 2021 at a grant date price of service with the Board$24.26 and 14,586 vesting restricted stock units on April 28, 2021 at a grant date price of Directors.$24.69.
17.15. FAIR VALUE MEASUREMENTSMEASUREMENT
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities measured at fair value must be categorized into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation:
| | | | | | | | |
Level 1 | | Unadjusted quoted prices in active markets for identical assets or liabilities; |
| |
Level 2 | | Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
| |
Level 3 | | Unobservable inputs, such as discounted cash flow models or valuations. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.
As of September 27, 202026, 2021 and December 29, 2019,27, 2020, 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, sales contracts instruments, foreign currency instruments to manage translation and remeasurement risk and interest rate swap instruments.
The following items were measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| Level 1 | | Total | | Level 1 | | Total |
| (In thousands) |
Assets: | | | | | | | |
Commodity futures instruments | $ | 5,327 | | | $ | 5,327 | | | $ | 4,147 | | | $ | 4,147 | |
Commodity options instruments | 7,312 | | | 7,312 | | | 906 | | | 906 | |
Foreign currency instruments | 7,919 | | | 7,919 | | | 426 | | | 426 | |
Liabilities: | | | | | | | |
Commodity futures instruments | (2,957) | | | (2,957) | | | (4,797) | | | (4,797) | |
Commodity options instruments | (3,122) | | | (3,122) | | | (633) | | | (633) | |
Foreign currency instruments | (316) | | | (316) | | | (5,400) | | | (5,400) | |
Interest rate swap instrument | (780) | | | (780) | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| (In thousands) |
Assets: | | | | | | | | | | | |
Commodity derivative assets | $ | 8,443 | | | $ | — | | | $ | 8,443 | | | $ | 24,059 | | | $ | — | | | $ | 24,059 | |
Foreign currency derivative assets | 1,814 | | | — | | | 1,814 | | | 2,204 | | | — | | | 2,204 | |
Sales contract derivative assets | — | | | 2,201 | | | 2,201 | | | — | | | — | | | — | |
Liabilities: | | | | | | | | | | | |
Commodity derivative liabilities | (29,744) | | | — | | | (29,744) | | | (6,531) | | | — | | | (6,531) | |
Foreign currency derivative liabilities | (139) | | | — | | | (139) | | | (428) | | | — | | | (428) | |
Interest rate swap derivative liabilities | — | | | (345) | | | (345) | | | (640) | | | — | | | (640) | |
| | | | | | | | | | | |
See “Note 5.3. Derivative Financial Instruments” for additional information.
The valuation of financial assets and liabilities classified in Level 1 is determined using a market approach, taking into account current interest rates, creditworthiness, and liquidity risks in relation to current market conditions, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of financial assets and liabilities in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable for substantially the full term of the financial instrument. The valuation of financial assets in Level 3 is determined using an income approach based on unobservable inputs such as discounted cash flow models or valuations. For each class of assets and liabilities not measured at fair value in the Condensed Consolidated Balance Sheets but for which fair value is disclosed, the Company is not required to provide the quantitative disclosure about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy.
In addition to the fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods or significant assumptions from prior periods are also required to be disclosed.
The carrying amounts and estimated fair values of our fixed-rate debt obligation recorded in the Condensed Consolidated Balance Sheets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| (In thousands) |
Fixed-rate senior notes payable at 5.75%, at Level 1 inputs | $ | (1,001,793) | | | $ | (1,018,880) | | | $ | (1,002,095) | | | $ | (1,034,200) | |
Fixed-rate senior notes payable at 5.875%, at Level 1 inputs | (844,972) | | | (875,500) | | | (844,433) | | | (919,505) | |
Secured loans, at Level 3 inputs | (64) | | | (64) | | | (948) | | | (939) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| (In thousands) |
Fixed-rate senior notes payable at 5.75%, at Level 2 inputs | $ | — | | | $ | — | | | $ | (1,001,693) | | | $ | (1,024,510) | |
Fixed-rate senior notes payable at 5.875%, at Level 2 inputs | (845,687) | | | (906,313) | | | (845,149) | | | (911,957) | |
Fixed-rate senior notes payable at 4.25%, at Level 2 inputs | (990,440) | | | (1,075,000) | | | — | | | — | |
Fixed-rate senior notes payable at 3.50%, at Level 2 inputs | (900,000) | | | (924,003) | | | — | | | — | |
Secured loans, at Level 3 inputs | (13) | | | (13) | | | (38) | | | (38) | |
See “Note 13.11. Debt” for additional information.
The carrying amounts of our cash and cash equivalents, derivative trading accounts'accounts’ margin cash, restricted cash and cash equivalents, accounts receivable, accounts payable and certain other liabilities approximate their fair values due to their relatively short maturities. Derivative assets were recorded at fair value based on quoted market prices and are included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. Derivative liabilities were recorded at fair value based on quoted market prices and are included in the line item Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The fair value of the Company’s Level 12 fixed-rate debt obligations was based on the quoted market price at September 27, 202026, 2021 or December 29, 2019,27, 2020, as applicable. The fair value of the Company’s Level 3 fixed-rate debt obligation was based on discounted cash flowflows using weighted average cost of capital ranging fromdebt of 0.5% to 3.6% as offor the periods ending September 27, 202026, 2021 and December 29, 2019.27, 2020.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges when required by U.S. GAAP. There were no significant fair value measurement losses recognized for such assets and liabilities in the periods reported.
18.16. RELATED PARTY TRANSACTIONS
Pilgrim’s has been and, in some cases, continues to be a party to certain transactions with affiliated companies.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
| (In thousands) |
Sales to related parties: | | | | | | | |
JBS USA Food Company(a) | $ | 3,768 | | | $ | 3,799 | | | $ | 10,315 | | | $ | 10,968 | |
JBS Global (U.K.) Ltd. | 0 | | | 32 | | | 0 | | | 118 | |
JBS Chile Ltda. | 114 | | | 0 | | | 70 | | | 132 | |
Combo, Mercado De Congelados | 293 | | | 118 | | | 780 | | | 146 | |
JBS Australia Pty. Ltd. | 660 | | | 0 | | | 1,941 | | | 0 | |
Total sales to related parties | $ | 4,835 | | | $ | 3,949 | | | $ | 13,106 | | | $ | 11,364 | |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
| (In thousands) |
Cost of goods purchased from related parties: | | | | | | | |
JBS USA Food Company(a) | $ | 27,657 | | | $ | 31,270 | | | $ | 100,467 | | | $ | 94,511 | |
Seara Meats B.V. | 2,637 | | | 7,297 | | | 6,360 | | | 16,187 | |
| | | | | | | |
| | | | | | | |
JBS Toledo NV | 0 | | | 64 | | | 156 | | | 272 | |
JBS Global (U.K.) Ltd. | 224 | | | 0 | | | 669 | | | 0 | |
Total cost of goods purchased from related parties | $ | 30,518 | | | $ | 38,631 | | | $ | 107,652 | | | $ | 110,970 | |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
| (In thousands) |
Expenditures paid by related parties: | | | | | | | |
JBS USA Food Company(b) | $ | 6,429 | | | $ | 7,919 | | | $ | 28,402 | | | $ | 26,028 | |
| | | | | | | |
Seara Food Europe Holdings | 3 | | | 0 | | | 5 | | | 0 | |
| | | | | | | |
JBS Chile Ltda. | 0 | | | 0 | | | 0 | | | 6 | |
Seara Alimentos | 0 | | | 0 | | | 0 | | | 7 | |
| | | | | | | |
Total expenditures paid by related parties | $ | 6,432 | | | $ | 7,919 | | | $ | 28,407 | | | $ | 26,041 | |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
| (In thousands) |
Expenditures paid on behalf of related parties: | | | | | | | |
JBS USA Food Company(b) | $ | 6,689 | | | $ | 1,675 | | | $ | 13,315 | | | $ | 5,654 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total expenditures paid on behalf of related parties | $ | 6,689 | | | $ | 1,675 | | | $ | 13,315 | | | $ | 5,654 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| (In thousands) |
Sales to related parties | | | | | | | |
JBS USA Food Company(a) | $ | 4,437 | | | $ | 3,768 | | | $ | 11,519 | | | $ | 10,315 | |
JBS Chile Ltda. | 266 | | | 114 | | | 353 | | | 70 | |
Combo, Mercado de Congelados | 201 | | | 293 | | | 978 | | | 780 | |
JBS Australia Pty. Ltd. | 172 | | | 660 | | | 1,994 | | | 1,941 | |
| | | | | | | |
Total sales to related parties | $ | 5,076 | | | $ | 4,835 | | | $ | 14,844 | | | $ | 13,106 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| (In thousands) |
Cost of goods purchased from related parties | | | | | | | |
JBS USA Food Company(a) | $ | 62,371 | | | $ | 27,657 | | | $ | 168,167 | | | $ | 100,467 | |
Seara Meats B.V. | 1,074 | | | 2,637 | | | 3,418 | | | 6,360 | |
Penasul UK LTD | 1,071 | | | — | | | 6,227 | | | — | |
Planterra Food Company | — | | | — | | | 150 | | | — | |
JBS Global (U.K.) Ltd. | 247 | | | 224 | | | 742 | | | 669 | |
JBS Food Trading (Shanghai) Limited | 19 | | | — | | | 61 | | | — | |
| | | | | | | |
JBS Toledo NV | — | | | — | | | — | | | 156 | |
JBS Asia Co Limited | — | | | — | | | 5 | | | — | |
| | | | | | | |
Total cost of goods purchased from related parties | $ | 64,782 | | | $ | 30,518 | | | $ | 178,770 | | | $ | 107,652 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| (In thousands) |
Expenditures paid by related parties | | | | | | | |
JBS USA Food Company(b) | $ | 27,295 | | | $ | 6,429 | | | $ | 68,027 | | | $ | 28,402 | |
Seara Food Europe Holdings | — | | | 3 | | | 12 | | | 5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total expenditures paid by related parties | $ | 27,295 | | | $ | 6,432 | | | $ | 68,039 | | | $ | 28,407 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| (In thousands) |
Expenditures paid on behalf of related parties | | | | | | | |
JBS USA Food Company(b) | $ | 8,011 | | | $ | 6,689 | | | $ | 35,457 | | | $ | 13,315 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| (In thousands) |
Accounts receivable from related parties | | | |
JBS USA Food Company(a) | $ | 1,221 | | | $ | 714 | |
Combo, Mercado de Congelados | 79 | | | — | |
JBS Australia Pty. Ltd. | 28 | | | 370 | |
| | | |
JBS Chile Ltda. | 2 | | | — | |
| | | |
Total accounts receivable from related parties | $ | 1,330 | | | $ | 1,084 | |
| | | September 27, 2020 | | December 29, 2019 | | September 26, 2021 | | December 27, 2020 |
| | (In thousands) | | (In thousands) |
Accounts receivable from related parties: | | |
Accounts payable to related parties | | Accounts payable to related parties | |
JBS USA Food Company(a) | JBS USA Food Company(a) | $ | 531 | | | $ | 643 | | JBS USA Food Company(a) | $ | 5,439 | | | $ | 8,562 | |
JBS Chile Ltda. | 33 | | | 301 | | |
Combo, Mercado de Congelados | 10 | | | 0 | | |
Penasul UK LTD | | Penasul UK LTD | 271 | | | — | |
Seara Meats B.V. | | Seara Meats B.V. | 754 | | | 1,075 | |
JBS Global (U.K.) Ltd. | | JBS Global (U.K.) Ltd. | 122 | | | 5 | |
| JBS Australia Pty. Ltd. | 42 | | | 0 | | |
Total accounts receivable from related parties | $ | 616 | | | $ | 944 | | |
| | September 27, 2020 | | December 29, 2019 | |
| (In thousands) | |
Accounts payable to related parties: | | |
JBS USA Food Company(a) | $ | 4,778 | | | $ | 2,826 | | |
JBS Global (U.K.) Ltd. | 0 | | | 5 | | |
Seara Meats B.V. | 974 | | | 988 | | |
JBS Chile Ltda. | | JBS Chile Ltda. | 8 | | | 8 | |
| Total accounts payable to related parties | Total accounts payable to related parties | $ | 5,752 | | | $ | 3,819 | | Total accounts payable to related parties | $ | 6,594 | | | $ | 9,650 | |
(a) The Company routinely executes transactions to both purchase products from JBS USA Food Company (“JBS USA”) and sell products to them. As of September 27, 2020,26, 2021, approximately $1.3 million$255.0 thousand of goods purchased from JBS USA were in transit and not reflected on our Condensed Consolidated Balance Sheet.
(b) The Company has an agreement with JBS USA to allocate costs associated with JBS USA’s procurement of SAP licenses and maintenance services for its combined companies. Under this agreement, the fees associated with procuring SAP licenses and maintenance services are allocated between the Company and JBS USA in proportion to the percentage of licenses used by each company. The agreement expires on the date of expiration, or earlier termination, of the underlying SAP license agreement. The Company also has an agreement with JBS USA to allocate the costs of supporting the business operations by one consolidated corporate team, which have historically been supported by their respective corporate teams. Expenditures paid by JBS USA on behalf of the Company will be reimbursed by the Company and expenditures paid by the Company on behalf of JBS USA will be reimbursed by JBS USA. This agreement expires on December 31, 2020.
19.17. REPORTABLE SEGMENTS
The Company operates in 3 reportable segments: U.S., U.K. and Europe, and Mexico. The Company measures segment profit as operating income. Corporate expenses are allocated to the Mexico and U.K. and Europe reportable segments based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. reportable segment.
U.S. Reportable Segment
We conduct separate operations in the continental U.S. and in Puerto Rico. For segment reporting purposes, the Puerto Rico operations are included in the U.S. reportable segment. The chicken products processed by the U.S. reportable segment are sold to foodservice, retail and frozen entrée customers. The segment’s primary distribution is through retailers, foodservice distributors and restaurants.
U.K. and Europe Reportable Segment
The U.K. and Europe reportable segment processes primarily chicken and pork products that are sold to foodservice, retail and frozen entrée customers. The segment’s primary distribution is through retailers, foodservice distributors and restaurants.
Mexico Reportable Segment On September 24, 2021, the Company completed the Kerry Meats and Meals Acquisition, which will operate as a business unit within the U.K. and Europe reportable segment.
The chicken products processed by the Mexico reportable segment are sold to foodservice, retail and frozen entrée customers. The segment’s primary distribution is through retailers, foodservice distributors and restaurants.
Additional information regarding reportable segments is as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 27, 2020(a) | | September 29, 2019(b) | | September 27, 2020(c) | | September 29, 2019(d) | | September 26, 2021(a) | | September 27, 2020(b) | | September 26, 2021(c) | | September 27, 2020(d) |
| | (In thousands) | | (In thousands) |
Net sales: | | |
Net sales | | Net sales | |
U.S. | U.S. | $ | 1,894,222 | | | $ | 1,931,657 | | | $ | 5,619,791 | | | $ | 5,732,201 | | U.S. | $ | 2,466,850 | | | $ | 1,894,222 | | | $ | 6,714,879 | | | $ | 5,619,791 | |
U.K. and Europe | U.K. and Europe | 845,677 | | | 517,531 | | | 2,425,140 | | | 1,568,396 | | U.K. and Europe | 930,440 | | | 845,677 | | | 2,721,019 | | | 2,425,140 | |
Mexico | Mexico | 335,222 | | | 328,782 | | | 929,141 | | | 1,045,133 | | Mexico | 430,276 | | | 335,222 | | | 1,302,791 | | | 929,141 | |
Total | Total | $ | 3,075,121 | | | $ | 2,777,970 | | | $ | 8,974,072 | | | $ | 8,345,730 | | Total | $ | 3,827,566 | | | $ | 3,075,121 | | | $ | 10,738,689 | | | $ | 8,974,072 | |
(a)For the three months ended September 26, 2021, the U.S. reportable segment had intercompany sales to the Mexico reportable segment of $83.9 million. These sales consisted of fresh products, prepared products and grain.
(b)For the three months ended September 27, 2020, the U.S. reportable segment had intercompany sales to the Mexico reportable segment of $46.2 million. These sales consisted of fresh products, prepared products and grain.
(b)(c)For the threenine months ended September 29, 2019,26, 2021, the U.S. reportable segment had intercompany sales to the Mexico reportable segment of $56.9$234.7 million. These sales consisted of fresh products, prepared products and grain.
(c)(d)For the nine months ended September 27, 2020, the U.S. reportable segment had intercompany sales to the Mexico reportable segment of $159.9 million. These sales consisted of fresh products, prepared products and grain.
(d)For the nine months ended September 29, 2019, the U.S. reportable segment had intercompany sales to the Mexico reportable segment of $122.9 million. These sales consisted of fresh products, prepared products, and grain.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
| (In thousands) |
Reportable segment profit: | | | | | | | |
U.S. | $ | 2,451 | | | $ | 125,169 | | | $ | 126,951 | | | $ | 426,968 | |
U.K. and Europe | 29,949 | | | 25,325 | | | 76,324 | | | 62,233 | |
Mexico | 61,653 | | | 37,667 | | | 2,229 | | | 115,503 | |
Eliminations | 235 | | | 24 | | | 459 | | | 72 | |
Total operating income | 94,288 | | | 188,185 | | | 205,963 | | | 604,776 | |
Interest expense, net of capitalized interest | 30,564 | | | 32,028 | | | 95,575 | | | 99,184 | |
Interest income | (1,763) | | | (4,698) | | | (4,611) | | | (11,481) | |
Foreign currency transaction loss (gain) | 9,092 | | | 3,027 | | | (3,768) | | | 7,923 | |
Miscellaneous, net | 360 | | | 1,367 | | | (33,873) | | | 2,521 | |
| | | | | | | |
Income before income taxes | 56,035 | | | 156,461 | | | 152,640 | | | 506,629 | |
Income tax expense | 22,344 | | | 46,365 | | | 57,900 | | | 142,328 | |
Net income | $ | 33,691 | | | $ | 110,096 | | | $ | 94,740 | | | $ | 364,301 | |
| | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| (In thousands) |
Total assets: | | | |
U.S. | $ | 5,570,836 | | | $ | 5,207,282 | |
U.K. and Europe | 2,824,974 | | | 2,824,382 | |
Mexico | 1,033,958 | | | 1,020,331 | |
Eliminations | (1,960,269) | | | (1,949,631) | |
Total assets | $ | 7,469,499 | | | $ | 7,102,364 | |
| | | | | | | | | | | |
| September 27, 2020 | | December 29, 2019 |
| (In thousands) |
Long-lived assets(a): | | | |
U.S. | $ | 1,799,455 | | | $ | 1,789,530 | |
U.K. and Europe | 782,952 | | | 801,887 | |
Mexico | 292,028 | | | 306,413 | |
Eliminations | (3,797) | | | (4,256) | |
Total long-lived assets | $ | 2,870,638 | | | $ | 2,893,574 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| (In thousands) |
Reportable segment profit (loss) | | | | | | | |
U.S. | $ | 70,666 | | | $ | 2,451 | | | $ | (85,380) | | | $ | 126,951 | |
U.K. and Europe | 445 | | | 29,949 | | | 32,771 | | | 76,324 | |
Mexico | 49,652 | | | 61,653 | | | 208,677 | | | 2,229 | |
Eliminations | 14 | | | 235 | | | 42 | | | 459 | |
Total operating income | 120,777 | | | 94,288 | | | 156,110 | | | 205,963 | |
Interest expense, net of capitalized interest | 29,833 | | | 30,564 | | | 110,818 | | | 95,575 | |
Interest income | (1,244) | | | (1,763) | | | (4,452) | | | (4,611) | |
Foreign currency transaction loss (gain) | 2,359 | | | 9,092 | | | 9,018 | | | (3,768) | |
Miscellaneous, net | (1,391) | | | 360 | | | (10,005) | | | (33,873) | |
| | | | | | | |
Income before income taxes | 91,220 | | | 56,035 | | | 50,731 | | | 152,640 | |
Income tax expense | 30,385 | | | 22,344 | | | 55,931 | | | 57,900 | |
Net income (loss) | $ | 60,835 | | | $ | 33,691 | | | $ | (5,200) | | | $ | 94,740 | |
| | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| (In thousands) |
Total assets by reportable segment | | | |
U.S. | $ | 6,472,756 | | | $ | 5,189,021 | |
U.K. and Europe | 4,146,047 | | | 3,034,219 | |
Mexico | 1,132,193 | | | 1,212,428 | |
Eliminations | (2,918,153) | | | (1,961,171) | |
Total assets | $ | 8,832,843 | | | $ | 7,474,497 | |
| | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| (In thousands) |
Long-lived assets by reportable segment(a) | | | |
U.S. | $ | 1,850,525 | | | $ | 1,815,460 | |
U.K. and Europe | 1,022,966 | | | 842,049 | |
Mexico | 279,197 | | | 292,651 | |
Eliminations | (3,743) | | | (3,783) | |
Total long-lived assets | $ | 3,148,945 | | | $ | 2,946,377 | |
(a)For this disclosure, we exclude financial instruments, deferred tax assets and intangible assets in accordance with ASC 280-10-50-41, Segment Reporting. Long-lived assets, as used in ASC 280-10-50-41, implies hard assets that cannot be readily removed.
20.18. COMMITMENTS AND CONTINGENCIES
General
The Company is a party to many routine contracts in which it provides general indemnities in the normal course of business to third parties for various risks. Among other considerations, the Company has not recorded a liability for any of these indemnities because, based upon the likelihood of payment, the fair value of such indemnities would not have a material impact on its financial condition, results of operations and cash flows.
Financial Instruments
The Company’s loan agreements generally obligate the Company to reimburse the applicable lender for incremental increased costs due to a change in law that imposes (1) any reserve or special deposit requirement against assets of, deposits with or credit extended by such lender related to the loan, (2) any tax, duty or other charge with respect to the loan (except standard income tax) or (3) capital adequacy requirements. In addition, some of the Company’s loan agreements contain a withholding tax provision that requires the Company to pay additional amounts to the applicable lender or other financing
party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law. These increased cost and withholding tax provisions continue for the entire term of the applicable transaction, and there is no limitation on the maximum additional amounts the Company could be obligated to pay under such provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default, and, in a secured financing transaction, would entitle the lender to foreclose upon the collateral to realize the amount due.
Litigation
The Company is subject to various legal proceedings and claims which arise in the ordinary course of business. In the Company’s opinion, it has made appropriate and adequate accruals for claims where necessary; however, the ultimate liability for these matters is uncertain, and if significantly different than the amounts accrued, the ultimate outcome could have a material effect on the financial condition or results of operations of the Company. For a discussion of material legal proceedings and claims, see Part II, Item 1. “Legal Proceedings.” The Company believes it has substantial defenses to the claims made in the pending litigations described below and intends to vigorously defend these cases.
Tax Claims and Proceedings
During 2014 and 2015 the Mexican Tax Authorities opened a review of Avícola Pilgrim’s Pride de Mexico, S.A. de C.V. (“APPM”) in regards to tax years 2009 and 2010, respectively. In both instances, the Mexican Tax Authorities claim that controlled company status did not exist for certain subsidiaries because APPM did not own 50% of the shares in voting rights of Incubadora Hidalgo, S. de R.L de C.V. and Commercializadora de Carnes de México S. de R.L de C.V. (both in 2009) and Pilgrim’s Pride, S. de R. L. de C.V. (in 2010). As a result, APPM should have considered dividends paid out of these subsidiaries partially taxable since a portion of the dividend amount was not paid from the net tax profit account (CUFIN). APPM is currently appealing. Amounts under appeal are $24.3$30.4 million and $16.1$18.4 million for tax years 2009 and 2010, respectively. No loss has been recorded for these amounts at this time.time as the Company does not believe a loss is probable.
In re Broiler Chicken Antitrust Litigation
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 (the “Illinois Court”) against PPC and 1319 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 3 consolidated amended complaints: one on behalf of direct purchasers (“the Direct Purchaser Plaintiff Class”) and two on behalf of distinct groups of indirect purchasers. Between December 8, 2017 and October 14, 2020, 44September 1, 2021, 81 individual direct action complaints were filed with the Illinois Court by individual direct purchaser entities (“DAPs”) naming PPC as a defendant, the allegations of which largely mirror those in the class action complaints. Subsequent amendments to certain complaints with four complaints including additionaladded allegations of price fixing prices and bid rigging bids on small birds sold to quick service restaurants. On August 26, 2020, the Commonwealth of Puerto Rico, one of the plaintiffs, filed a notice dismissing its case. On September 22, 2020, the Illinois Court required direct action plaintiffs to file a consolidated complaint by October 23, 2020 and stayed bid-rigging claims until the resolution of plaintiffs’ supply reduction and other conspiracy claims are resolved. The Illinois 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.
certain sales. On June 21, 2019, the U.S. Department of Justice (the “DOJ”) filed a motion to intervene and stay discovery in the In re Broiler Chicken Antitrust Litigation for a period of six months. Following a hearing on June 27, 2019, on June 28, 2019, the Illinois Court granted the government’s motion to intervene, ordering a limited stay, which was subsequently reset, until March 31, 2020. The stay was lifted on March 31, 2020. See “DOJ Antitrust Matter” below for a discussion of developments related to the DOJ.
On August 28, 2020,17, 2021, the Illinois Court issued a revised scheduling order through trial, under which contemplates class certification briefing and related expert reports proceeding from October 30, 2020 to May 6, 2021, the close of all merits fact discovery for defendants and most plaintiffs closed on June 11,July 31, 2021, andwith additional discovery of subsequent DAPs proceeding in six month increments following consolidation of each DAP complaint. Expert discovery will proceed from August 31, 2021 through May 13, 2022 with summary judgment briefing beginning on June 10, 2022 and related expert reports proceeding from July 2,concluding on November 21, 2022. The Court has not yet set a trial date.
On January 11, 2021, PPC announced that it had entered into an agreement to February 22, 2022.settle all claims made by the putative Direct Purchaser Plaintiff Class (“DPPs”). The Illinois Court granted final approval of the settlement on June 29, 2021. As a result of this agreement, PPC recognized an expense of $75.0 million within Selling, general and administrative expense in the Condensed Consolidated Statements of Income for the year ended December 27, 2020. Pursuant to this agreement, PPC paid the DPPs this amount during the first quarter of 2021.
On July 28, 2021, PPC and the putative End-User Consumer Indirect Purchaser Plaintiff Class (“EUCPs”) reached an agreement to settle all claims, subject to Court approval under Rule 23. Preliminary, and ultimately final, approval of the settlement was granted on August 12, 2021 and final approval hearing is scheduled for December 20, 2021. In addition, on August 3, 2021, PPC and the putative Commercial and Institutional Indirect Purchaser Plaintiff Class (“CIIPPs”) reached an agreement, to settle all claims subject to Court approval under Rule 23. A motion for preliminary approval of that settlement was filed on September 30, 2021 and a hearing on the motion was held on October 15, 2021. Under the terms of these
settlements, PPC has setpaid the EUCPs an amount of $75.5 million and has agreed to pay the CIIPPs an amount of $45.0 million to release all outstanding claims brought by such Classes. Settlement with the CIIPPs is subject to the final approval of the Illinois Court. As a trial dateresult of October 17, 2022.these agreements, PPC recognized this expense within Selling, general and administrative expense in the Condensed Consolidated Statements of Income for the nine months ended September 26, 2021.
The settlements with the DPPs, EUCPs and CIIPPs do not cover the claims of the DAPs or other parties who have or will opt out of such settlements (collectively, the “Opt Outs”). PPC will therefore continue to litigate against such Opt Outs and will seek reasonable settlements where they are available. PPC has recognized an expense of $257.4 million to cover both negotiated and potential settlements with various Opt Outs. The amount accrued is an estimate that is subject to change. PPC recognized this expense within Selling, general and administrative expense in the Condensed Consolidated Statements of Income for the nine months ended September 26, 2021.
On February 21, 2017, the Attorney General of Florida (the “Florida AG”) issued a civil investigative demand (“CID”) regarding the broiler chicken market. The CID requests, among other things, data and information related to the acquisition and processing of broiler chickens and the sale of chicken products. PPC is cooperating with the Florida AG in producing documents pursuant to the CID.
On August 6, 2020, the Attorney General of Washington (the “Washington AG”) issued a CID regarding similar broiler chicken matters that are the subject of the Florida CID. The CID requests, among other things, data and information related to the acquisition and processing of broiler chickens and the sale of chicken products. PPC is cooperating with the Washington AG in producing documents pursuant to the CID.
On each of February 24, 2021 and May 4, 2021, the Attorney General of Louisiana (the “Louisiana AG”) issued CIDs regarding similar broiler chicken matters that are the subject of Florida CID. The CIDs requested, among other things, data and information related to the sale of chicken products in Louisiana. PPC is cooperating with the Louisiana AG in producing documents pursuant to the CID.
On September 1, 2020, the Attorney General of New Mexico filed a complaint raising similar allegations as the class action and direct action complaints before the Illinois Court. The case is styled as State of New Mexico ex rel. Hector Balderas v. Koch Foods, et al., No. D-101-CV-2020-0891 and is pending beforein the First Judicial District Court in the County of Santa Fe.Fe, New Mexico. The complaint alleges the same claims as those made in the In re Broiler Chicken Antitrust Litigation under New Mexico state law. PPC has not been served withanswered the complaint.complaint on February 1, 2021.
under Alaska state law. PPC answered the complaint on June 14, 2021. Other Claims and Proceedings
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 (the “Colorado Court”) against PPC and its named executive officers.officers (the “Hogan Litigation”). The complaint alleges, among other things, that PPC’s SEC filings contained statements that were rendered materially false and misleading by PPC’s failure to disclose that (1) PPC colluded with several of its industry peers to fix prices in the broiler-chicken market as alleged in the In re Broiler Chicken Antitrust Litigation, (2) its conduct constituted a violation of federal antitrust laws, (3) PPC’s revenues during the class period were the result of illegal conduct and (4) that PPC lacked effective internal control over financial reporting. The complaint also states that PPC’s industry was anticompetitive and seeks compensatory damages. On April 4, 2017, the Colorado 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 Colorado 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 Colorado 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 Colorado Court denied the plaintiff’s motion for reconsideration and granted plaintiff leave to file a Second Amended Complaint. On June 8, 2020, the plaintiff filed a Second Amended Complaint against the same defendants, based in part on the Indictment (defined below). On July 31, 2020, defendants filed a motion to dismiss the Second Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs filed an opposition toThe Colorado Court granted the motion to dismiss on August 31, 2020,April 19, 2021 and issued judgment in favor of defendants. On May 17, 2021, the plaintiff filed a motion for amended
judgment. PPC and the other defendants filed their replyopposition to the motion for amended judgment on September 20, 2020.June 7, 2021. The Court'sColorado Court’s decision on the motion to dismissfor the amended judgment is currently pending.
On January 27, 2017, a purported class action on behalf of broiler chicken farmers was brought against PPC and 4 other producers in the U.S. District Court for the Eastern District of Oklahoma (the “Oklahoma Court”) 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 Antitrust Act and the Packers and Stockyards Act and seek, among other relief, treble damages. The complaint was consolidated with a subsequently filed consolidated amended class action complaint styled as In re Broiler Chicken Grower Litigation, Case No. CIV-17-033-RJS (the “Grower Litigation”“Grower Litigation”). The defendants (including PPC) jointly moved to dismiss the consolidated amended complaint on September 9, 2017 for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Oklahoma Court granted only certain other defendants’ motions challenging jurisdiction. In addition, on March 12, 2018, the U.S. District Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”) enjoined the Oklahoma Court 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 January 6, 2020, the Oklahoma Court denied the defendants'pending Rule 12 motion, to dismiss the consolidated amended complaint and lifted the stay on discovery. On February 21, 2020, the Oklahoma Court plaintiffs filed a Second Amended Complaint in light of the Bankruptcy Court’s injunction. On April 13, 2020, the Oklahoma Court entered a case management order setting a September 24, 2021 deadline for the close of fact discovery. In September 2020, similar class action complaints were filed in the Colorado Court and the U.S. District Court for the District of Kansas (the “Kansas Court”) alleging claims that mirror those before the Oklahoma Court. On October 6, 2020, the Oklahoma Court plaintiffs filed a motion with the U.S. Judicial Panel on Multidistrict Litigation (the “JPML”) seeking consolidation of the various cases, including any tag-along cases,a series of copycat complaints filed in September and transfer of them to the Oklahoma Court. On October 8, 2020 another similar class action complaint was filed in the U.S. District CourtCourts for the District of Colorado, the District of Kansas, and the Northern District of California. Defendants, on October 13,On December 15, 2020, in the Kansas Court case and, on October 14, 2020, in the Colorado Court case, filed motions seeking dismissal of those complaints under the first-to-file rule. The motions before the JPML Colorado Court, and Kansas Court are pending. Discovery inordered the transfer of all cases to the Oklahoma Court for consolidated or coordinated pretrial proceedings. On February 12, 2020, the Oklahoma Court entered a case management order in the multi-district litigation setting a February 1, 2022 deadline for the close of fact discovery. That order also set a deadline of September 15, 2022 for the filing of class certification motions, with deadlines of October 27, 2022 for opposition briefing and December 1, 2022 for reply briefing. Under the order, motions for summary judgment are to be filed on February 1, 2023, with oppositions and replies due March 22, 2023, and April 12, 2023, respectively. PPC will continue to litigate against the putative class of plaintiffs and will seek a reasonable settlement if it is ongoing.available. PPC has recognized an estimate of probable loss as expense that is subject to change. PPC recognized this expense within Selling, general and administrative expense in the Condensed Consolidated Statements of Income for the three and nine months ended September 26, 2021.
On March 9, 2017, a stockholder derivative action, 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 Nineteenth Judicial District Court for the County of Weld in Colorado (the “Weld County Court”). 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, Brima v. Lovette, et al., No. 2017 cv. 30308, was brought against all of PPC’s directors and its Chief Financial Officer in the Weld County Court. The Brima complaint contains largely the same allegations as the DiSalvio complaint. On May 4, 2017, The DiSalvio and Brima litigations (“the plaintiffs in both the DiSalvioDerivative Litigation”) have been consolidated, and Brima litigations moved to (1) consolidate the two stockholderon October 14, 2020, an amended shareholder derivative cases, (2) stay the consolidated action until the resolution of the motion to dismiss in the Hogan putative securities class action, and (3) appoint co-lead counsel. The Weld County Court granted the motion on May 8, 2017, staying the proceedings pending resolution of the motion to dismiss in the Hogan litigation.
On January 24, 2018, a stockholder derivative action styled as Sciabacucchi v. JBS S.A. et al. complaint was brought against all of PPC’s directors, JBS S.A., JBS USA Holdings and several members of the Batista family, in the Court of Chancery of the State of Delaware (the “Chancery Court”). The complaintfiled which alleges, among other things, that the named defendants breached their fiduciary duties arising outby failing to prevent PPC from engaging in an antitrust conspiracy as alleged in the Broiler litigation, the Indictment (as defined below), and other related proceedings; and by failing to prevent the issuance of PPC’s acquisition of Moy Park. On May 24, 2018, Employees Retirement Systemfalse and misleading statements as alleged in the Hogan securities litigation and the UFCW securities litigation (as defined below). The consolidated case was stayed, pending the resolution of the City of St. Louis filed a derivative complaint, which was virtually identicalmotion to the Sciabacucchi complaint. Both complaints sought compensatory damages. On July 2, 2018, the Chancery Court granted a stipulation consolidating the cases and making the first complaint (Sciabacucchi) the operative complaint. Also by stipulation, various defendants have been voluntarily dismissed from the case without prejudice. The remaining defendants are JBS S.A., JBS USA Holding, and directors Lovette, Nogueira de Souza, Tomazoni, and Molina. PPC also remainsdismiss in the case as a nominal defendant. On March 15, 2019,Hogan Litigation described above. Following the ChanceryColorado Court denied the non-PPCgranting defendants’ motion to dismiss. As a result, the case proceeded to discovery, and trial was scheduled to commence in November 2020. On October 3, 2019, the parties entered into a stipulation agreeing to settle the dispute for (1) a cash payment to PPC by the non-PPC defendants of $42.5 million less any fees and expenses awarded to the plaintiffs’ counsel, as well as any applicable taxes (the “Settlement Amount”), and (2) corporate governance changes to be implemented by PPC. No portion of the Settlement Amount will be paid by PPC to the non-PPC defendants. The settlement was approved by the Chancery Court on January 28, 2020. On March 2, 2020, the Settlement Amount was transferred to PPC, and as a result, PPC recognized income, net of legal fees, of $34.6 million, which is included in Miscellaneous, net dismiss in the Condensed Consolidated Statement of IncomeHogan litigation, the stay was lifted. The parties then filed a joint motion to continue the stay pending the Colorado Court’s decision on the motion for amended judgment. The Weld County Court granted the nine months ended September 27, 2020.motion to continue the stay on June 22, 2021.
Between August 30, 2019 and October 16, 2019, 4 purported class action lawsuits were filed in the U.S. District Court for the District of Maryland (the “Maryland Court”) against PPC and a number of other chicken producers, as well as WMS (Webber,Webber, Meng, Sahl and Company)Company and Agri Stats. The plaintiffs seek to represent a nationwide class of processing plant production and maintenance workers (“Plant Workers”). They allege that the defendants conspired to fix and depress the compensation paid to Plant Workers in violation of the Sherman Act and seek damages from January 1, 2009 to the present. On November 12, 2019, the Maryland Court ordered the consolidation of the four4 cases for pretrial purposes. The defendants (including PPC) jointly moved to dismiss the consolidated complaint on November 22, 2019. Shortly thereafter, the plaintiffs informed the defendants and the Maryland Court that they would be amending their complaint, which they did on December 20, 2019. The consolidated amended complaint asserts largely similar allegations to the pleadings in the consolidated complaint, but was extended to include more class members and turkey processors as well as chicken processors. The defendants filed motions to dismiss the consolidated amended complaint on March 2, 2020, with oppositions originally due on April 24, 2020 and replies on May 21, 2020. The Maryland Court has issueddismissed PPC and a seriesnumber of Standing Orders related to the exigent circumstances created by COVID-19, which extended filing deadlines by 84 days, including the deadlines for the response briefings related to defendants' motions to dismiss. The Company filed its motion to dismiss, andother defendants on September 16, 2020 the Maryland Court granted the motion without prejudice. The Maryland Court did allow, however,plaintiffs subsequently filed amended complaints on November 2, 2020 re-naming PPC and the other dismissed defendants. On June 14, 2021, PPC entered into a binding Settlement Agreement to settle all claims with the putative class for $29.0 million and paid the plaintiffs to amend their Complaint, which they are expected to do.this amount during the third quarter of 2021. PPC recognized this expense within Selling, general and administrative expense in the Condensed Consolidated Statements of Income for the nine months ended September 26, 2021.
On July 6, 2020, United Food and Commercial Workers International Union Local 464A (“UFCW”), acting on behalf of itself and a putative class of persons who purchased shares of PPC stock between February 9, 2017 and June 3, 2020, filed a class action complaint in the Colorado Court against PPC, and Messrs. Lovette, Penn, and Sandri. The complaint alleges, among other things, that PPC’s public statements regarding its business and the drivers behind its financial results were false and misleading due to the defendants’ purported failure to disclose its participation in an antitrust conspiracy as alleged in the Broiler litigation and the Indictment (defined below). On September 4, 2020, UFCW and the New Mexico State Investment Council (“NMSIC”) filed competing motions to be appointed lead plaintiff under the Private Litigation Securities Reform Act. AOn March 17, 2021, the court appointed NMSIC as lead plaintiff. On May 26, 2021, NMSIC filed an amended complaint, which shortened the end date of the putative class period to June 3, 2020. PPC and the other defendants moved to dismiss the amended complaint on July 19, 2021. NMSIC filed an opposition to the motion to dismiss on September 1, 2021, and PPC and the other defendants filed their reply on September 30, 2021. The Colorado Court’s decision on the lead plaintiff motionsmotion to dismiss is currently pending.
PPC believes it has strong defenses in the pending litigations described above and intends to contest them vigorously. PPC cannot predict the outcome of these pending litigations nor when they will be resolved. The consequences of the pending litigation matters are inherently uncertain, and adverse actions, judgments or settlements in some or all of these matters may result in materially adverse monetary damages, fines, penalties or injunctive relief against PPC. Any claims or litigation, even if fully indemnified or insured, could damage PPC’s reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.
DOJ Antitrust Matter
On July 1, 2019, the DOJU.S. Department of Justice (the “DOJ”) issued a subpoena to PPC in connection with its investigation arising from the In re Broiler Chicken Antitrust Litigation. The Company has been cooperating with the DOJ investigation.
On June 3, 2020, PPC learned of an indictment by a Grand Jury in the Colorado Court against Jayson Penn, the chief executive officer and president of PPC at that time, in addition to two2 former employees of PPC and a former employee of a different company (the “Indictment”). The Indictment alleges that the defendants entered into and engaged in a conspiracy to suppress and eliminate competition by rigging bids and fixing prices and other price-related terms for broiler chicken products
sold in the U.S., in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. Section 1. On June 4, 2020, PPC learned that Mr. Penn pleaded not guilty to the charges. Effective June 15, 2020, Mr. Penn began a paid leave of absence from PPC. In connection with Mr. Penn’s leave of absence, PPC’s Board of Directors appointed the chief financial officer of PPC, Fabio Sandri, to serve in the additional role of PPC’s interim president and chief executive officer. On September 22, 2020, PPC'sPPC’s Board of Directors appointed Fabio Sandri as PPC'sPPC’s President and Chief Executive Officer in addition to his role as Chief Financial Officer. On September 22, 2020, PPC disclosed that Mr. Penn was no longer with the Company. On February 10, 2021, the Company appointed Matthew Galvanoni as its new Chief Financial Officer, effective March 15, 2021.
On October 6, 2020, PPC learned of a superseding indictment by a Grand Jury in the Colorado Court against those individuals in the first Indictment as well as the former Chief Executive Officer of PPC, William Lovette, 1 additional former employee of PPC, and 4 employees of different companies. The Company has initiated a search processsuperseding indictment alleges similar claims to identify a new chief financial officer.the Indictment.
On October 13, 2020, the Company announced that it had entered into a plea agreement (the “Plea Agreement”) with the DOJ pursuant to which the Company agreed to (1) plead guilty to one1 count of conspiracy in restraint of competition involving sales of broiler chicken products in the U.S. in violation of the Sherman Antitrust Act, 15 U.S.C. § 1, and (2) pay a fine of $110,524,140.$110.5 million. The Company recognized the fine as an expense which is included in Selling, general and administrative expense in the Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2020. Under the Plea Agreement, which is subject to the approval of the Colorado Court, the DOJ agreed not to bring further charges against the Company for any antitrust violation involving the sale of broiler chicken products in the U.S. occurring prior to the date of the Plea Agreement. On February 23, 2021, the Colorado Court approved the Plea Agreement and assessed a fine of $107.9 million. The Company continues to cooperate with the DOJ in connection with the ongoing federal antitrust investigation into alleged price fixing and other anticompetitive conduct in the broiler chicken industry.
J&F Investigation On July 29, 2021, PPC learned of an additional indictment by a Grand Jury in the Colorado Court against 4 former employees of PPC, which alleged similar claims to the Indictment.
19. BUSINESS ACQUISITION
Kerry Consumer Foods' Meats and Meals
On May 3, 2017, certain officersSeptember 24, 2021, the Company acquired 100% of J&F Investimentos S.A. (“J&F,”the equity of the Kerry Consumer Foods' Meats and togetherMeals businesses for cash of £695.3 million, or $954.1 million, subject to customary working capital adjustments. The acquisition was funded with the companies controlled by J&F,Company's recent senior notes offering and borrowings under the “J&F Group”),credit facility. The acquisition solidifies Pilgrim's as a company organizedleading European food company. The Specialty Meats business is a leading manufacturer of branded and private label meats, meat snacks and food-to-go products in Brazilthe U.K. and an indirect controlling stockholderIreland. The Ready Meals business is a leading ethnic chilled and frozen ready meals business in the U.K. The acquired operations are included in the Company's U.K. and Europe reportable segment. Kerry Consumer Foods' Meats and Meals businesses operations for the period from September 24, 2021 through September 26, 2021 were insignificant.
Transaction costs incurred in conjunction with the acquisition were approximately $9.3 million for the nine months ended September 26, 2021. These costs were expensed as incurred and are reflected within Selling, general and administrative expense in the Company's Consolidated Statements of Income.
The assets acquired and liabilities assumed in the acquisition were measured at their values as of September 24, 2021 as set forth below. The excess of the Company, including a former senior executive and former board memberspurchase price over the preliminary fair value of the Company, entered into cooperation agreements (acordos de colaboração) (collectively,net intangible assets and identifiable assets was recorded as goodwill in the “Cooperation Agreements”)Company's U.K. and Europe reportable segment. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the acquisition as well the assembled workforce. Benefits include (1) complementary product offerings, (2) an enhanced footprint in the U.K. and Ireland and (3) an enhanced position in the fast-growing plant-based protein, direct-to-consumer and hot food-to-go markets. The goodwill is not expected to be tax deductible for tax purposes. The fair values of the assets acquired and liabilities assumed are preliminary and we are currently completing our fair value assessment with the Brazilian Officeassistance of third-party valuation specialists. Any adjustments identified in the Prosecutor General (Procuradoria-Geral da República) in connection with certain illicit conduct by J&F and such individuals acting in their capacity as J&F executives. measurement period, which will not exceed one year from the acquisition date, will be accounted for prospectively.
The details of such illicit conduct are set forth in separate annexes to the Cooperation Agreements, and include admissions of improper payments to politicians and political parties in Brazil during a ten-year period in exchange for receiving, or attempting to receive, favorable treatment for certain J&F Group companies in Brazil.
On June 5, 2017, J&F, for itself and as the controlling shareholder of the J&F Group companies, entered into a leniency agreement (the “Leniency Agreement”) with the Brazilian Federal Prosecutor (Ministério Público Federal) whereby J&F assumed responsibilitypreliminary fair values recorded for the conduct that was described inassets acquired and liabilities assumed for the annexes to the Cooperation Agreements. In connection with the Leniency Agreement, J&F has agreed to pay a fine of 10.3 billion Brazilian acquisition are as follows (in thousands):
| | | | | |
| Preliminary |
Cash and cash equivalents | $ | 113 | |
Trade accounts and other receivables | 7,386 | |
Inventories | 60,339 | |
Prepaid expenses and other current assets | 7,953 | |
Operating lease assets | 14,967 | |
Property, plant and equipment | 170,617 | |
Identified intangible assets | 453,068 | |
Total assets acquired | 714,443 | |
| |
Accounts payable | 8,016 | |
Other current liabilities | 9,568 | |
Operating lease liabilities | 13,405 | |
Deferred tax liabilities | 97,040 | |
Other long-term liabilities | 2,591 | |
Total liabilities assumed | 130,620 | |
Total identifiable net assets | 583,823 | |
Goodwill | 370,237 | |
Total consideration transferred | $ | 954,060 | |
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 seeking to invalidate the Cooperation Agreements and impose more severe penalties for additional alleged illicit conduct that was not disclosed in the annexes to the Cooperation Agreements.
On October 14, 2020, certain affiliates of the Company – J&F Investimentos, S.A., JBS S.A., Joesley Batista and Wesley Batista – entered into a settlement agreement (the “Settlement”) with the SEC. The Company was not a party to the Settlement, was not a respondent in the related proceedings, and is not required to make any related payment. Under the Settlement, the SEC issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 (the “SEC Order”) finding securities law violations by such affiliates that resulted in the Company, an indirect subsidiary, failing to maintain accurate books and records and internal accounting controls. According to the SEC Order, the violations, which related to certain intercompany transactions from 2009 to 2015, were unbeknownst to the Company’s management, and the SEC Order will have no impact on the Company’s previously filed financial statements or its prior assessments of internal control over financial reporting.
On October 14, 2020, J&F reached an agreement (the “J&F Plea Agreement”) with the DOJ regarding violations stemming from the same facts and conduct that were the subject of the Leniency Agreement and the Cooperation Agreements (described above). Pursuant to the J&F Plea Agreement, J&F pled guilty to one count of conspiracy to violate the U.S. Foreign Corrupt Practices Act. The J&F Plea Agreement imposed a fine of $256,497,026, and J&F was required to make a payment of $128,248,513 under the J&F Plea Agreement (due to J&F receiving a 50% credit for amounts paid to Brazilian authorities). JBS and PPC are not parties to the J&F Plea Agreement and will not bear any liabilities arising from it. The J&F Plea Agreement resolved the U.S. criminal legal exposure of J&F and all its affiliates related to the conduct that was the subject of the Leniency Agreement and the Cooperation Agreements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
Overview
We are one of the largest chicken producers in the world, and as a vertically integrated chicken producer, we are able to control every phase of the production process, which helps us manage food safety and quality, control margins and improve customer service. This gives us the opportunity to continue to create growth and development opportunities, further increasing our position as a leading domestic and global protein company. With the acquisitions of Kerry Consumer Foods' specialty meats and ready meals businesses, Pilgrim’s Pride Limited (“PPL”) and Moy Park in 2021, 2019 and 2017, respectively, we solidified ourselves as a leading European food company while diversifying our product mix with introduction into the pork market. With the acquisition of GNP in 2017, we further solidified ourselves as a leading poultry company within the U.S.
We reported a net incomeloss attributable to Pilgrim’s of $33.4$5.8 million, or $0.14$0.02 per diluted common share, and net income before tax totaling $56.0$50.7 million, for the threenine months ended September 27, 2020.26, 2021. These operating results included net sales of $3.1$10.7 billion, gross profit of $313.8 million$1.0 billion and $367.6$327.5 million of cash generated from operations.provided by operating activities. We generated a consolidated operating margin of 3.1%1.5% with operating margins of 0.1%(1.3)%, 3.5%1.2% and 18.4% in our United States (“U.S.”), United Kingdom (“U.K.”) and Europe, and Mexico reportable segments, respectively.
We reported net income attributable to Pilgrim’s of $94.7 million, or $0.38 per diluted common share, and profit before tax totaling $152.6 million, for the nine months ended September 27, 2020. These operating results included net sales of $9.0 billion, gross profit of $610.8 million and $508.3 million of cash generated from operations. We generated a consolidated operating margin of 2.3% with operating margins of 2.3%, 3.1% and 0.2%16.0% in our U.S., U.K. and Europe, and Mexico reportable segments, respectively.
As discussed in “Note 20. Commitments and Contingencies”, on October 13, 2020, we announced that we have entered into a plea agreement (the “Plea Agreement”) with For theU.S. Department of Justice (the “DOJ”). As a result of the Plea Agreement, we recognized a fine of $110,524,140 as expense, which is included in Selling, general and administrative expense in the Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2020. In addition,26, 2021, we generated EBITDA and Adjusted EBITDA of $431.4 million and $972.4 million, respectively. A reconciliation of net income to EBITDA and Adjusted EBITDA is included below.
Kerry Meats and Meals Acquisition
On September 24, 2021, the Company acquired 100% of the equity of the Kerry Consumer Foods' specialty meats and ready meals businesses (the “Kerry Meats and Meals Acquisition”) for £695.3 million, or $954.1 million, subject to customary working capital adjustments. The acquisition was funded with the Company's recent senior notes offering and borrowings under the credit facility.
Kerry Consumer Foods' specialty meats business is a leading manufacturer of branded and private label meats, meat snacks and food-to-go products in the U.K. and Ireland. Kerry Consumer Foods' ready meals business is a leading ethnic chilled and frozen ready meals business in the U.K. The combined businesses produced over £725 million in annual sales during the year ended December 31, 2020 and have more than 4,000 team members.
The acquisition solidifies Pilgrim's as discussed below under “Hometown Strong Initiative”, we launched an initiative duringa leading European food company. The acquired operations are included in the Company's U.K. and Europe reportable segment.
Unsolicited Offer from JBS S.A. to Purchase Outstanding Shares of PPC Common Stock
On September 20, 2021, the Company announced that its board of directors had formed a special committee of independent directors to review and evaluate the previously announced unsolicited proposal received on August 12, 2021 from JBS S.A. to acquire all of the outstanding shares of common stock of PPC that JBS does not currently own.
U.K. Economic Conditions
During the third quarter of 2021, we experienced unprecedented challenges in the U.K. economic environment. We were confronted with sudden, serious labor shortages as European Union workers returned home following Brexit, affecting our ability to support the communitiesprocess, pack and transport products. In addition, we also faced significant cost pressure from feed ingredients – specifically oils and micronutrients – and increased costs for utilities, logistics, chemicals, labor and packaging. Our U.K. pork operations also had to overcome low hog prices resulting from an oversupply in which we operate with unexpected challenges, such as the COVID-19 pandemic, and as a result, we recorded $14.5 million in incremental donation expense related to this initiativeEurope. Although chicken sales were robust during the third quarter. Adjusted net income forquarter, pork foodservice sales increased to pre-COVID-19 (defined below) levels and pork retail sales remained stable from the threeprior year, these sales were generated at significantly reduced margins.
We have responded to these challenges by opening negotiations with customers to recoup extraordinary costs we have experienced. We also continue to focus on operational excellence initiatives that deliver labor efficiencies, better agricultural performance and nine months ended September 27, 2020, which excludes the DOJ antitrust fine, increase in donation expenseimproved yields. We’re also maintaining tight control over selling, general and other items shown in the “Reconciliation of Adjusted Net Income” table below, was $161.7 million and $206.9 million, respectively. See “Reconciliation of Adjusted Net Income” section below for a reconciliation of Net income attributable to Pilgrim's to Adjusted net income attributable to Pilgrim's.administrative expenses.
Impact of COVID-19
The extensive impact of the pandemic caused by the novel coronavirus (“COVID-19”) has resulted and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world.
In an effort to halt the outbreak of COVID-19, a number of countries, states, counties and other jurisdictions have imposed various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations and extended closures of businesses. On April 28, 2020, former President Trump signed an executive order directing the Department of Agriculture to ensure meat and poultry processors in the U.S. continue operations uninterrupted to the maximum extent possible and designating meat and poultry processing plants as critical infrastructure.
As the global spread of the virus began to accelerate late in March of 2020, we began to experience adverse impacts to our business and financial results. The impact of the COVID-19 pandemic included disruptions in supply chain, an increase in both broiler and chick costs and an increase in payroll and benefits costs. DuringWith the three months ended September 27, 2020, the impact of theuncertainty surrounding COVID-19, pandemic on our financial results decreased because of increased demand for our products at retail grocery stores and quick service restaurants and our ability to meet this demand through our transitioned business operations, as further discussed below. Wewe believe that we will continue to experience certain disruptions to our business due to the COVID-19 pandemic for the remainder of 20202021.
During 2021, COVID-19 vaccinations have increased while daily COVID-19 case rates decreased, leading to gradual relaxations of COVID-19 restrictions, such as those directly affecting restaurants’ indoor dining capacities and into 2021.increased consumer mobility. The delivery of the second and third COVID-19 direct relief packages to taxpayers, in addition to extended unemployment benefits, were supportive of consumer income. These same relief packages have been a factor in labor shortages and higher absenteeism at our facilities, which has caused a reduction in chicken production.
The impact of COVID-19 and measures to prevent its spread have affected and continue to affect our business in a number of ways.
•Our workforce. Employee health and safety is our priority. As an essential business in a critical infrastructure industry, we continue to produce chicken and pork products, while coordinating with and implementing guidance from the U.S. Centers for Disease Control and Prevention, the National Institute of Occupational Safety and Health, and local and regional Departments of Health in an effort to keep our employees safe and healthy. Measures we have implemented include, but are not limited to: increasing physical distancing of our employees, where possible, by staggering start and shift breaks, placing on-site tents to create more space for employees at break and at meal times, and installing physical barriers to distance employees while working on production lines; adding temperature and symptom screening stations for employees prior to entering our facilities; increasing personal hygiene practices and providing our employees additional personal protective equipment and sanitation stations; and increasing sanitation
of our facilities. In the U.S., we provided appreciation bonuses to eligible employees in April and May of 2020 and expanded certain sick leave policies to provide more flexibility. In addition, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely.
•Our operations. All of our 6069 production facilities are operating, although some facilities have reduced production levels and outputs due to increased health and safety measures, employee absenteeism and as a consequence of the decline in demand by restaurants and other foodservice businesses.. To date, we have not experienced a material impact from a plant closure and our facilities have largely been exempt from government closure orders.
•Demand for our products. COVID-19 and the implementation of restricted living have led to a shift in demand from restaurants to retail grocery stores, with consumers eating more at home due to stay-at-home orders. In our U.S. and Mexico businesses, demand for parts and whole-birds (typically bound for restaurants) and prepared foods (distributed, in part,pandemic restrictions. Two PPL plants had their export licenses to schools) has declined, while our U.K. and Europe business, which is more retail focused, has generally seen less of an impact.China suspended due to pandemic issues. In an effort to counter the adverse effects of COVID-19, we have transitioned, where commercially reasonable and possible to do so, our business operations to be in the best position to supply changing COVID-19 market demands. These efforts have included transferring live supply to case ready, shifting production form and mix from foodservice to retail, increasing capacity utilization of retail packaging equipment, and analyzing export positions.
•Liquidity.Our liquidity position is strong and we have taken additional measures to increase liquidity to prepare for the challenging environment ahead. On March 20, 2020 and March 25, 2020, we elected to borrow $200.0 million and $150.0 million, respectively, under the U.S. Credit Facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. The draw-down proceeds are expected to be held on our balance sheet and may be used for general corporate purposes.
•Foreign currency exchange rates and commodity prices. During the nine months ended September 27, 2020,26, 2021, we experienced increased volatility in foreign currency exchange rates and commodity prices, in part related to the uncertainty from COVID-19, as well as actions taken by governments and central banks in response to COVID-19. We expect continued volatility in foreign currency exchange rates and commodity prices during 2020,2021, though we cannot reasonably estimate the duration, extent or impact of that volatility.
•CARES Act. On March 27, 2020, the U.S. government enacted the CARES Act, which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. We estimateAs of the payment ofSeptember 26, 2021, we have delayed approximately $51$52.3 million of employer payroll taxes otherwise due in 2020 will be delayed with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022.
U.S. Credit Facility
On August 9, 2021, we, and certain of our subsidiaries entered into a Fifth 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 $800.0 million revolving credit commitment and a term loan commitment of up to $700.0 million. The maturity date of the revolving loan commitment and the term loans was extended from July 20, 2023 to August 9, 2026.
Additional information regarding the U.S. Credit Facility is included in “Note 11. Debt.”
Senior Notes due 2032
On September 2, 2021, we completed a sale of $900.0 million aggregate principal amount of 3.50% senior notes due 2032 (“Senior Notes due 2032”). We used the proceeds, together with borrowings under the delayed draw term loan under the U.S. Credit Facility, to finance the Kerry Meats and Meals Acquisition and to pay related fees and expenses. The remaining proceeds will be used to repay outstanding revolver borrowings under the U.S. Credit Facility and for general corporate purposes.
Additional information regarding the Senior Notes due 2032 is included in “Note 11. Debt.”
Senior Notes due 2031
On April 8, 2021, we completed a sale of $1.0 billion aggregate principal amount of 4.25% sustainability-linked senior notes due 2031 (“Senior Notes due 2031”). We used the net proceeds of the sale, together with cash on hand, to redeem our 5.75% senior notes due 2025 (“Senior Notes due 2025”). From and including October 15, 2026, the interest rate payable on the notes will increase to 4.50% per annum unless we timely notify the related indenture trustee that our greenhouse gas emissions intensity reduction target has been satisfied and that the satisfaction of the target has been confirmed by a qualified provider of third-party assurance or attestation services appointed by us to review our statement of the greenhouse gas emissions intensity in accordance with its customary procedures.
Additional information regarding the Senior Notes due 2031 is included in “Note 11. Debt.”
Raw Materials and Pricing
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, soybean meal and barley as the main ingredients for feed production.
The spread of COVID-19 and the resulting consumer reaction early in the second quarter triggered an unexpected shift in demand from foodservice to retail markets. While the industry redirected supply from foodservice to retail, not all foodservice items could be quickly reworked toward retail. This drove a sudden supply and demand imbalanceMarket prices for chicken products during the second quarter, with increased amounts of excess products on the market and a decline in unit pricing temporarily below cost. The industry adjusted through reductions of egg sets and chick placements which continued throughout the three months ended September 27, 2020, resulting in lower26, 2021 remained above the 5-year average and maintained levels of broiler production. Retail demand remained robust as consumers predominantly favored food at home consumption.
well above historical norms throughout the period. During the third quarter of 2021, industry chick placements were flat relative to levels from a year as declining hatchability rates offset increased egg sets. The result was mild growth of +1.8% primarily driven by both increased liveweights and head counts. While the U.S. experienced a renewed wave of COVID-19 cases in the third quarter of 2021, foodservice demand while not yet at pre-COVID-19 levels, has improved since the onset of the COVID-19 pandemic and the low point of demand experienced April 2020.remained consistent. The retail environment maintained its consistency as consumers continued to use chicken as a cost effective staple in home meal preparation. As a result, robust chicken demand coincided with mild production growth and already pressured cold storage inventory levels, which entered the quarter well below the 5-year average, resulting in the continued strength of market prices for chicken products in the three months ended September 27, 202026, 2021.
While market prices for chicken products have become relatively more stable and settled at a level within the five-year range, moving with seasonal norms. While chicken prices have reverted to more normal seasonal levels and movements,improved thus far in 2021, prices for the remainder of 2020 and into 2021the year will depend on the continued recoverystatus of the foodservice industry together withand the evolution of retail meat demand, influenced by factors such as the evolution of the COVID-19 crisis, how governments imposepandemic, government regulation and ease restrictions, uncertainty surrounding both the general economy and unemployment rates, total protein supply and how these elements affect consumers’ chicken consumption domestically and globally.
Hometown Strong Initiative
The Hometown Strong initiative was developed in order to help the communities in which we operate respond to the unexpected challenges on society, such as the COVID-19 pandemic. We believe the Hometown Strong initiative will provide consequential investment projects for a lasting impact on these communities and help them prepare for unanticipated challenges and build for the future. For 2020, we committed to Hometown Strong donations of $20.0 million, and during the three months and nine months ended September 27, 2020, we recorded $14.5 million in incremental donations expense relating to this initiative.supply.
Reportable Segments
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 the Mexico and U.K. and Europe reportable segments based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. For additional information, see “Note 19.17. Reportable Segments” of our Condensed Consolidated Financial Statements included in this quarterly report.
Results of Operations
Three Months Ended September 27, 202026, 2021 Compared to the Three Months Ended September 29, 201927, 2020
Net sales. Net sales generated in the three months ended September 27, 202026, 2021 increased $297.2$752.4 million, or 10.7%24.5%, from net sales generated in the three months ended September 29, 2019.27, 2020. The following table provides net sales information:
| Sources of net sales | Sources of net sales | | Three Months Ended September 27, 2020 | | Change from Three Months Ended September 29, 2019 | | Sources of net sales | | Three Months Ended September 26, 2021 | | Change from Three Months Ended September 27, 2020 | |
Amount | | Percent | | Amount | | Percent | |
| | | (In thousands, except percent data) | | | | (In thousands, except percent data) | |
U.S. | U.S. | | $ | 1,894,222 | | | $ | (37,435) | | | (1.9) | % | | U.S. | | $ | 2,466,850 | | | $ | 572,628 | | | 30.2 | % | |
U.K. and Europe | U.K. and Europe | | 845,677 | | | 328,146 | | | 63.4 | % | | U.K. and Europe | | 930,440 | | | 84,763 | | | 10.0 | % | |
Mexico | Mexico | | 335,222 | | | 6,440 | | | 2.0 | % | | Mexico | | 430,276 | | | 95,054 | | | 28.4 | % | |
Total net sales | Total net sales | | $ | 3,075,121 | | | $ | 297,151 | | | 10.7 | % | | Total net sales | | $ | 3,827,566 | | | $ | 752,445 | | | 24.5 | % | |
U.S. Reportable Segment. U.S. net sales generated in the three months ended September 27, 2020 decreased $37.426, 2021 increased $572.6 million, or 1.9%30.2%, from U.S. net sales generated in the three months ended September 29, 201927, 2020 primarily because of a decreasedue to an increase in net sales per pound partially offset by anwhich contributed $582.4 million, or 30.7 percentage points, to the increase in sales volume.net sales. The decreaseincrease in net sales per pound contributed $57.2 million, or 2.9 percentage points, to the decreasewas driven primarily from higher than average chicken commodity prices in net sales, and resulted from reduced demand for foodservice products and commodity pricing volatility due to the COVID-19 pandemic. The sales volume increase experienced by the U.S. segment partially offset the decrease in net sales per pound by $19.8 million, or 1.0 percentage points. When compared with the three months ended June 28, 2020, however, U.S. net sales generated induring the three months ended September 27, 2020 increased $95.526, 2021. The increase in net sales was partially offset by a decrease in sales volume of $9.8 million, or 5.30.5 percentage points, as a result of increasing demand for foodservice products and the stabilizing of commodity pricing due to recent developments in the COVID-19 pandemic.points.
U.K. and Europe Reportable Segment. U.K. and Europe net sales generated in the three months ended September 27, 202026, 2021 increased $328.1$84.8 million, or 63.4%10.0%, from U.K. and Europe net sales generated in the three months ended September 29, 201927, 2020 primarily because of the acquired Pilgrim's Pride Ltd. (“PPL”) operations, which were acquired in October 2019, partially offset bydue to a decrease in net sales generated by our existing U.K. and Europe operations. The impact of the acquired PPL operations contributed $341.8 million, or 66.0 percentage points, to the increase in net sales. The decrease in net sales by our existing U.K. and Europe operations offset the favorable impact of the PPL operations on net sales by $13.6 million, or 2.6 percentage points. The decrease in net sales by our existing U.K. and Europe operations primarily resulted from a decrease in sales volume of $38.0 million. This decrease in sales volume was partially offset by the favorable impact of foreign currency translation and an increase in sales volume, partially offset by a decrease in net sales per pound. The favorable impact of foreign currency translation contributed $61.7 million, or 7.3 percentage points, to the increase in net sales. The increase in sales volume contributed $25.8 million, or 3.0 percentage points, to the increase in net sales and was primarily driven by market recoveries in foodservice from the lessening of restrictions due to the COVID-19 pandemic from prior year. The decrease in net sales per pound of $21.3$2.8 million, and $3.1 million, respectively. The decreaseor 0.3 percentage points, partially offset the increase in net sales and was primarily driven by falling pork prices in our existing U.K and Europe operations is a result of reduced demand for foodservice products due to the COVID-19 pandemic.U.K.
Mexico Reportable Segment. Mexico net sales generated in the three months ended September 27, 202026, 2021 increased $6.4$95.1 million, or 2.0%28.4%, from Mexico net sales generated in the three months ended September 29, 201927, 2020 primarily because ofdue to an increase in net sales per pound of $46.5 million, or 13.9 percentage points, and an increase in sales volume. These increases in net sales were partially offset by the unfavorablea favorable impact of foreign currency remeasurement. Theremeasurement of $40.9 million, or 12.2 percentage points. This increase in net sales per pound and sales volume contributed $47.5 million, or 14.5 percentage points, and $5.2 million, or 1.6 percentage points, respectively,was driven primarily by higher live chicken commodity prices in Mexico from increased demand during the three months ended September 26, 2021 in comparison to the three months ended September 27, 2020. Also contributing to the increase in net sales. The unfavorable impactsales was an increase from sales volume of foreign currency remeasurement partially offset these increases with a decrease to net sales of $46.3$7.7 million, or 14.12.3 percentage points.
Gross profit. Gross profit increased by $31.6$58.0 million, or 11.2%18.5%, from $282.2 million generated in the three months ended September 29, 2019 to $313.8 million generated in the three months ended September 27, 2020.2020 to $371.8 million generated in the three months ended September 26, 2021. The following tables provide information regarding gross profit and cost of sales information:
| Components of gross profit | Components of gross profit | | Three Months Ended September 27, 2020 | | Change from Three Months Ended September 29, 2019 | | Percent of Net Sales | | Components of gross profit | | Three Months Ended September 26, 2021 | | Change from Three Months Ended September 27, 2020 | | Percent of Net Sales | |
| Three Months Ended | | | Three Months Ended | |
| Amount | | Percent | | September 27, 2020 | | September 29, 2019 | | | Amount | | Percent | | September 26, 2021 | | September 27, 2020 | |
| | | (In thousands, except percent data) | | | | (In thousands, except percent data) | |
Net sales | Net sales | | $ | 3,075,121 | | | $ | 297,151 | | | 10.7 | % | | 100.0 | % | | 100.0 | % | | Net sales | | $ | 3,827,566 | | | $ | 752,445 | | | 24.5 | % | | 100.0 | % | | 100.0 | % | |
Cost of sales | Cost of sales | | 2,761,279 | | | 265,506 | | | 10.6 | % | | 89.8 | % | | 89.8 | % | | Cost of sales | | 3,455,723 | | | 694,444 | | | 25.1 | % | | 90.3 | % | | 89.8 | % | |
Gross profit | Gross profit | | $ | 313,842 | | | $ | 31,645 | | | 11.2 | % | | 10.2 | % | | 10.2 | % | | Gross profit | | $ | 371,843 | | | $ | 58,001 | | | 18.5 | % | | 9.7 | % | | 10.2 | % | |
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Sources of gross profit | | Three Months Ended September 27, 2020 | | Change from Three Months Ended September 29, 2019 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 183,133 | | | $ | (9,050) | | | (4.7) | % | |
U.K. and Europe | | 60,330 | | | 17,289 | | | 40.2 | % | |
Mexico | | 70,144 | | | 23,195 | | | 49.4 | % | |
Elimination | | 235 | | | 211 | | | 879.2 | % | |
Total gross profit | | $ | 313,842 | | | $ | 31,645 | | | 11.2 | % | |
| Sources of cost of sales | | Three Months Ended September 27, 2020 | | Change from Three Months Ended September 29, 2019 | | |
Amount | | Percent | | |
Sources of gross profit | | Sources of gross profit | | Three Months Ended September 26, 2021 | | Change from Three Months Ended September 27, 2020 | |
| Amount | | Percent | |
| | | (In thousands, except percent data) | | | | (In thousands, except percent data) | |
U.S. | U.S. | | $ | 1,711,089 | | | $ | (28,385) | | | (1.6) | % | | U.S. | | $ | 278,028 | | | $ | 94,895 | | | 51.8 | % | |
U.K. and Europe | U.K. and Europe | | 785,347 | | | 310,857 | | | 65.5 | % | | U.K. and Europe | | 32,324 | | | (28,006) | | | (46.4) | % | |
Mexico | Mexico | | 265,078 | | | (16,755) | | | (5.9) | % | | Mexico | | 61,477 | | | (8,667) | | | 12.4 | % | |
Elimination | Elimination | | (235) | | | (211) | | | 879.2 | % | | Elimination | | 14 | | | (221) | | | (94.0) | % | |
Total cost of sales | | $ | 2,761,279 | | | $ | 265,506 | | | 10.6 | % | | |
| | | | Total gross profit | | Total gross profit | | $ | 371,843 | | | $ | 58,001 | | | 18.5 | % | |
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Sources of cost of sales | | Three Months Ended September 26, 2021 | | Change from Three Months Ended September 27, 2020 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 2,188,822 | | | $ | 477,733 | | | 27.9 | % | |
U.K. and Europe | | 898,116 | | | 112,769 | | | 14.4 | % | |
Mexico | | 368,799 | | | 103,721 | | | 39.1 | % | |
Elimination | | (14) | | | 221 | | | 94.0 | % | |
Total cost of sales | | $ | 3,455,723 | | | $ | 694,444 | | | 25.1 | % | |
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U.S. Reportable Segment. Cost of sales incurred by our U.S. operations during the three months ended September 27, 2020 decreased $28.426, 2021 increased $477.7 million, or 1.6%27.9%, from cost of sales incurred by our U.S. segment during the three months ended SeptemberMarch 29, 2019.2020. Cost of sales decreasedincreased primarily because of the impact of decreasedincreased cost per pound sold of $46.3$486.6 million, or 2.628.4 percentage points, and was partially offset by increaseda decrease in sales volume of $17.9$8.9 million, or 1.00.5 percentage points. Included in the decrease inincreased cost per pound soldof sales was a decrease$307.0 million in live operations costs, a $65.0 million increase in payroll costs, $57.0 million increase in prepared foods purchases, and $38.0 million in freight costs. The increase in live operations costs includes an increase of $277.6 million in feed costs of $39.3 million, primarily due to a $44.5 million decrease in feed ingredient costs. Also included in the decrease in cost per pound sold was a decrease in derivative expense of $31.8 million resulting from higher realized losses in commodity derivatives in the three months ended September 29, 2019. Partially offsetting these decreases in cost per pound sold were increases in other live costs, benefit costs and outside services of $19.8 million, $15.7 million and $4.4 million, respectively. Benefits increased mainly because of increases related to the COVID-19 pandemic and the increased live costs were mainly a result of an $18.2 increase in grower costs due to higher contract rates.chick costs. The increase in outside services resultedfeed costs was driven primarily from an increasehigher corn and soy commodity prices, our main ingredients in outside processing labor.feed. Other factors affecting cost of sales were individually immaterial.
U.K. and Europe Reportable Segment. Cost of sales incurred by our U.K. and Europe operations during the three months ended September 27, 202026, 2021 increased $310.9$112.8 million, or 65.5%14.4%, from cost of sales incurred by our U.K. and Europe segment during the three months ended September 29, 2019, primarily because of costs incurred by the acquired PPL operations, partially offset by a decrease27, 2020. The increase in cost of sales incurred by our existing U.K. and Europe operations. Cost of sales incurred by the acquired PPL operations contributed $325.6 million, or 68.6 percentage points, to the increase in cost of sales. Cost of sales related to the existing U.K. and Europe operations decreased $14.8 million, or 3.1 percentage points,was primarily from a decrease in sales volume of $34.8 million, partially offset by thean unfavorable impact of foreign currency translation of $59.5 million, or 7.6 percentage points, increased cost per pound sold of $29.3 million, or 3.7 percentage points, and anincreased sales volume of $24.0 million, or 3.1 percentage points. The increase in sales volume is primarily from market recoveries in foodservice from the lessening of restrictions due to the COVID-19 pandemic from prior year. The increase in cost per pound sold of $19.4 millionis primarily from increases in feed costs and $0.6 million, respectively. Included in the increased cost per pound sold in our existing U.K. and Europe operations was a $4.0 million increase in payroll costs from increased pay rates and bonuses during the COVID-19 pandemic.inflationary pressures. Other factors affecting cost of sales were individually immaterial.
Mexico Reportable Segment. Cost of sales incurred by our Mexico operations during the three months ended September 27, 2020 decreased $16.8March 28, 2021 increased $103.7 million, or 5.9%39.1%, from cost of sales incurred by our Mexico segment during the three months ended September 29, 2019.27, 2020. This decreaseincrease was primarily becausedriven by increased cost per pound sold of the favorable$62.6 million, or 23.6 percentage points, an unfavorable impact of foreign currency remeasurement of $36.6$35.0, or 13.2 percentage points and an increase in sales volume of $6.1 million, or 13.02.3 percentage points. The favorable impact of foreign currency remeasurement was partially offset by increasesincrease in cost per pound sold was primarily driven by increases in corn and sales volume of $15.3 million, or 5.5 percentage points,soy commodity prices, our main ingredients in feed, and $4.5 million, or 1.6 percentage points, respectively. Included in theby increased cost per pound sold was a $6.5 million increase in utility costs due to increased natural gas costs from increased rates and a $3.2 million increase in contracted grower pay due to increased pay rates.hatchery egg costs. Other factors affecting cost of sales were individually immaterial.
Operating income. Operating income decreasedincreased by $93.9$26.5 million, or 49.9%28.1%, from $188.2 million generated in the three months ended September 29, 2019 to $94.3 million generated in the three months ended September 27, 2020.2020 to $120.8 million generated in the three months ended September 26, 2021. The following tables provide information regarding operating income and selling, general and administrative (“SG&A”) expense:
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Components of operating income | | Three Months Ended September 27, 2020 | | Change from Three Months Ended September 29, 2019 | | Percent of Net Sales | |
Three Months Ended | |
Amount | | Percent | | September 27, 2020 | | September 29, 2019 | |
| | (In thousands, except percent data) | |
Gross profit | | $ | 313,842 | | | $ | 31,645 | | | 11.2 | % | | 10.2 | % | | 10.2 | % | |
SG&A expense | | 219,554 | | | 125,522 | | | 133.5 | % | | 7.1 | % | | 3.4 | % | |
Administrative restructuring activity | | — | | | 20 | | | (100.0) | % | | — | % | | — | % | |
Operating income | | $ | 94,288 | | | $ | (93,897) | | | (49.9) | % | | 3.1 | % | | 6.8 | % | |
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Sources of operating income | | Three Months Ended September 27, 2020 | | Change from Three Months Ended September 29, 2019 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 2,451 | | | $ | (122,718) | | | (98.0) | % | |
U.K. and Europe | | 29,949 | | | 4,625 | | | 18.3 | % | |
Mexico | | 61,653 | | | 23,985 | | | 63.7 | % | |
Eliminations | | 235 | | | 211 | | | 879.2 | % | |
Total operating income | | $ | 94,288 | | | $ | (93,897) | | | (49.9) | % | |
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Sources of SG&A expense | | Three Months Ended September 27, 2020 | | Change from Three Months Ended September 29, 2019 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 180,682 | | | $ | 113,648 | | | 169.5 | % | |
U.K. and Europe | | 30,381 | | | 12,664 | | | 71.5 | % | |
Mexico | | 8,491 | | | (790) | | | (8.5) | % | |
Total SG&A expense | | $ | 219,554 | | | $ | 125,522 | | | 133.5 | % | |
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Components of operating income | | Three Months Ended September 26, 2021 | | Change from Three Months Ended September 27, 2020 | | Percent of Net Sales | |
Three Months Ended | |
Amount | | Percent | | September 26, 2021 | | September 27, 2020 | |
| | (In thousands, except percent data) | |
Gross profit | | $ | 371,843 | | | $ | 58,001 | | | 18.5 | % | | 9.7 | % | | 10.2 | % | |
SG&A expense | | 251,066 | | | 31,512 | | | 14.4 | % | | 6.6 | % | | 7.1 | % | |
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Operating income | | $ | 120,777 | | | $ | 26,489 | | | 28.1 | % | | 3.2 | % | | 3.1 | % | |
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Sources of operating income | | Three Months Ended September 26, 2021 | | Change from Three Months Ended September 27, 2020 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 70,666 | | | $ | 68,215 | | | 2,783.1 | % | |
U.K. and Europe | | 445 | | | (29,504) | | | (98.5) | % | |
Mexico | | 49,652 | | | (12,001) | | | 19.5 | % | |
Eliminations | | 14 | | | (221) | | | (94.0) | % | |
Total operating income | | $ | 120,777 | | | $ | 26,489 | | | 28.1 | % | |
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Sources of SG&A expense | | Three Months Ended September 26, 2021 | | Change from Three Months Ended September 27, 2020 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 207,362 | | | $ | 26,680 | | | 14.8 | % | |
U.K. and Europe | | 31,879 | | | 1,498 | | | 4.9 | % | |
Mexico | | 11,825 | | | 3,334 | | | 39.3 | % | |
Total SG&A expense | | $ | 251,066 | | | $ | 31,512 | | | 14.4 | % | |
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U.S. Reportable Segment. SG&A expense incurred by our U.S. reportable segment during the three months ended September 27, 202026, 2021 increased $113.6$26.7 million, or 169.5%14.8%, from SG&A expense incurred by our U.S. reportable segment during the three months ended September 29, 2019.27, 2020. This increase in SG&A expense incurred resulted primarily from the $110.5an increase in legal defense costs of $8.7 million DOJ antitrust fine, $14.5and $15.5 million recognized in incremental donations expenseanticipation of probable losses related to the Hometown Strong initiative and a $7.3 million increase in professional fees due to increased legal fees. Partially offsetting these increases in SG&A expense was a $7.8 million decrease in benefit expenses primarily from decreased incentive compensation, a $3.7 million decrease in payroll expenses primarily from decreased stock-based compensation and a $3.7 million decrease in marketing costs mainly due to decreased internet media expenses.ongoing litigation. Other factors affecting SG&A expense were individually immaterial.
U.K. and Europe Reportable Segment. SG&A expense incurred by our U.K. and Europe reportable segment during the three months ended September 27, 202026, 2021 increased $12.7$1.5 million, or 71.5%4.9%, from SG&A expense incurred by our U.K. and Europe segment during the three months ended September 29, 2019. SG&A expenses recognized by our U.K. and Europe reportable segment increased primarily due to expenses of $11.7 million incurred by the acquired PPL operations. Our existing U.K. and Europe operation's SG&A expense increased $1.0 million. Factors27, 2020. Factors affecting SG&A expense in our existing U.K. and Europe operations were individually immaterial.
Mexico Reportable Segment. SG&A expense incurred by our Mexico reportable segment during the three months ended September 27, 2020 decreased26, 2021 increased approximately $0.8$3.3 million, or 8.5%39.3%, from SG&A expense incurred by our Mexico segment during the three months ended September 29, 2019. Factors27, 2020. The primary driver of the increase in SG&A expense was payroll and bonus costs. Other factors affecting our Mexico segment'ssegment’s SG&A expense were individually immaterial.
Net interest expense. Net interest expense increaseddecreased to $28.6 million recognized in the three months ended September 26, 2021 from $28.8 million recognized in the three months ended September 27, 2020 from $27.32020. The decrease in net interest expense resulted primarily due to a decrease in interest expense on outstanding borrowings of $0.6 million, partially offset by a loss on early extinguishment of debt recognized in the three months ended September 29, 2019.as a component of interest expense of $0.4 million. Average borrowings increaseddecreased by $323.5$21.3 million from $2.3 billion during the three months ended September 29, 2019 to $2.7$2.66 billion during the three months ended September 27, 2020.2020 to $2.64 billion during the three months ended September 26, 2021. As a percent of net sales, interest expense in the three months ended September 26, 2021 and September 27, 2020 was 0.8% and September 29, 2019 was 1.0% and 1.2%, respectively.
Income taxes. Income tax expense decreasedincreased to $30.4 million, a 33.3% effective tax rate, for the three months ended September 26, 2021 compared to an income tax expense of $22.3 million, a 39.9% effective tax rate, for the three months ended September 27, 2020 compared to income tax expense of $46.4 million, a 29.6% effective tax rate, for the three months ended September 29, 2019.2020. The decreaseincrease in income tax expense resulted primarily from a decreasean increase in pre-tax income and the effects of foreign currency fluctuations partially offset byas well as the recognition of the non-deductible DOJ antitrust fine of $110.5a $6.1 million referreserve recognized against certain U.K. interest deductions and $3.8 million in adjustments to “Note 20. Commitments and Contingencies” for more information. In addition, we recognized deferred tax expense of $10.6 million related to the repeal of the previously enacted reduction of the U.K corporate tax rate to 17.0%. Therefore, the current corporate tax rate is maintained at 19.0%.returns.
Nine Months Ended September 27, 202026, 2021 Compared to the Nine Months Ended September 29, 201927, 2020
Net sales. Net sales generated in the nine months ended September 27, 202026, 2021 increased $628.3 million,$1.8 billion, or 7.5%19.7%, from net sales generated in the nine months ended September 29, 2019.27, 2020. The following table provides net sales information:
| Sources of net sales | Sources of net sales | | Nine Months Ended September 27, 2020 | | Change from Nine Months Ended September 29, 2019 | | Sources of net sales | | Nine Months Ended September 26, 2021 | | Change from Nine Months Ended September 27, 2020 | |
Amount | | Percent | | Amount | | Percent | |
| | | (In thousands, except percent data) | | | | (In thousands, except percent data) | |
U.S. | U.S. | | $ | 5,619,791 | | | $ | (112,410) | | | (2.0) | % | | U.S. | | $ | 6,714,879 | | | $ | 1,095,088 | | | 19.5 | % | |
U.K. and Europe | U.K. and Europe | | 2,425,140 | | | 856,744 | | | 54.6 | % | | U.K. and Europe | | 2,721,019 | | | 295,879 | | | 12.2 | % | |
Mexico | Mexico | | 929,141 | | | (115,992) | | | (11.1) | % | | Mexico | | 1,302,791 | | | 373,650 | | | 40.2 | % | |
Total net sales | Total net sales | | $ | 8,974,072 | | | $ | 628,342 | | | 7.5 | % | | Total net sales | | $ | 10,738,689 | | | $ | 1,764,617 | | | 19.7 | % | |
U.S. Reportable Segment. U.S. net sales generated in the nine months ended September 27, 2020 decreased $112.4 million,26, 2021 increased $1.1 billion, or 2.0%19.5%, from U.S. net sales generated in the nine months ended September 29, 201927, 2020 primarily because of a decreasean increase in net sales per pound partially offset byand an increase in sales volume. The decreaseincrease in net sales per pound contributed $161.3 million,$1.1 billion, or 2.919.5 percentage points, to the decreaseincrease in net sales, and resulted from a decreasesales. This increase in net sales per pound was driven primarily from higher than average chicken commodity prices in both our fresh and prepared foods lines of business. Thethe U.S. during the nine months ended September 26, 2021. There was also an increase in sales volume increase experienced bythat contributed $1.2 million to the U.S. segment partially offset the decreaseincrease in net sales per pound by $48.9 million, or 0.9 percentage points.sales.
U.K. and Europe Reportable Segment. U.K. and Europe net sales generated in the nine months ended September 27, 202026, 2021 increased $856.7$295.9 million, or 54.6%12.2%, from U.K. and Europe net sales generated in the nine months ended September 29, 201927, 2020 primarily because of the recently acquired PPL operations, partially offset by a decrease in net sales by our existing U.K. and Europe operations. The impact of the acquired PPL operations contributed $999.1 million, or 63.7 percentage points, to the increase in net sales. The decrease in net sales by our existing U.K. and Europe operations offset the favorable impact of the PPL operations on net sales by $142.4 million, or 9.1 percentage points. The decrease in net sales by our existing U.K. and Europe operations resulted from a decrease in sales volume, a decrease in net sales per pound and the unfavorable impact of foreign currency translation of $88.2$226.2 million, $50.4or 9.3 percentage points, an increase in sales volume of $66.7 million, or 2.8 percentage points, and $3.8 million, respectively. The decreasean increase in net sales per pound of $3.0 million, or 0.1 percentage points. The increase in our existing U.K and Europe operations is a resultsales volume was primarily driven by market recoveries in foodservice from the lessening of reduced demand for foodservice productsrestrictions due to the COVID-19 pandemic.pandemic from prior year. The increase in net sales per pound was driven by increased feed costs.
Mexico Reportable Segment. Mexico net sales generated in the nine months ended September 27, 2020 decreased $116.026, 2021 increased $373.7 million, or 11.1%40.2%, from Mexico net sales generated in the nine months ended September 29, 201927, 2020 primarily because of the unfavorable impact of foreign currency remeasurement, offset by an increase in net sales per pound of $310.4 million, or 33.4 percentage points, and an increase in sales volume. The unfavorablethe favorable impact of foreign currency remeasurement contributed $122.7of $100.0 million, or 11.710.8 percentage points, to the decreasepoints. The increase in net sales. This decrease in net sales was partially offset by the increase net sales per pound was driven primarily by higher live chicken commodity prices in Mexico during the nine months ended September 26, 2021 in comparison to the nine months ended September 27, 2020. The increases from foreign currency remeasurement and net sales per pound were partially offset by a decrease in sales volume of $3.6$36.7 million, or 0.34.0 percentage points, and $3.1 million, or 0.3 percentage points, respectively.points.
Gross profit. Gross profit decreasedincreased by $258.2$402.5 million, or 29.7%65.9%, from $869.0 million generated in the nine months ended September 29, 2019 to $610.8 million generated in the nine months ended September 27, 2020.2020 to $1,013.3 million generated in the nine months ended September 26, 2021. The following tables provide information regarding gross profit and cost of sales information:
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Components of gross profit | | Nine Months Ended September 26, 2021 | | Change from Nine Months Ended September 27, 2020 | | Percent of Net Sales | |
| | Nine Months Ended | |
| Amount | | Percent | | September 26, 2021 | | September 27, 2020 | |
| | (In thousands, except percent data) | |
Net sales | | $ | 10,738,689 | | | $ | 1,764,617 | | | 19.7 | % | | 100.0 | % | | 100.0 | % | |
Cost of sales | | 9,725,362 | | | 1,362,090 | | | 16.3 | % | | 90.6 | % | | 93.2 | % | |
Gross profit | | $ | 1,013,327 | | | $ | 402,527 | | | 65.9 | % | | 9.4 | % | | 6.8 | % | |
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Sources of gross profit | | Nine Months Ended September 26, 2021 | | Change from Nine Months Ended September 27, 2020 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 651,235 | | | $ | 241,978 | | | 59.1 | % | |
U.K. and Europe | | 120,177 | | | (48,929) | | | (28.9) | % | |
Mexico | | 241,873 | | | 209,895 | | | 656.4 | % | |
Elimination | | 42 | | | (417) | | | (90.8) | % | |
Total gross profit | | $ | 1,013,327 | | | $ | 402,527 | | | 65.9 | % | |
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Components of gross profit | | Nine Months Ended September 27, 2020 | | Change from Nine Months Ended September 29, 2019 | | Percent of Net Sales | |
| | Nine Months Ended | |
| Amount | | Percent | | September 27, 2020 | | September 29, 2019 | |
| | (In thousands, except percent data) | |
Net sales | | $ | 8,974,072 | | | $ | 628,342 | | | 7.5 | % | | 100.0 | % | | 100.0 | % | |
Cost of sales | | 8,363,272 | | | 886,541 | | | 11.9 | % | | 93.2 | % | | 89.6 | % | |
Gross profit | | $ | 610,800 | | | $ | (258,199) | | | (29.7) | % | | 6.8 | % | | 10.4 | % | |
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Sources of gross profit | | Nine Months Ended September 27, 2020 | | Change from Nine Months Ended September 29, 2019 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 409,257 | | | $ | (199,666) | | | (32.8) | % | |
U.K. and Europe | | 169,106 | | | 52,964 | | | 45.6 | % | |
Mexico | | 31,978 | | | (111,884) | | | (77.8) | % | |
Elimination | | 459 | | | 387 | | | 537.5 | % | |
Total gross profit | | $ | 610,800 | | | $ | (258,199) | | | (29.7) | % | |
| Sources of cost of sales | Sources of cost of sales | | Nine Months Ended September 27, 2020 | | Change from Nine Months Ended September 29, 2019 | | Sources of cost of sales | | Nine Months Ended September 26, 2021 | | Change from Nine Months Ended September 27, 2020 | |
Amount | | Percent | | Amount | | Percent | |
| | | (In thousands, except percent data) | | | | (In thousands, except percent data) | |
U.S. | U.S. | | $ | 5,210,534 | | | $ | 87,256 | | | 1.7 | % | | U.S. | | $ | 6,063,644 | | | $ | 853,110 | | | 16.4 | % | |
U.K. and Europe | U.K. and Europe | | 2,256,034 | | | 803,780 | | | 55.3 | % | | U.K. and Europe | | 2,600,842 | | | 344,808 | | | 15.3 | % | |
Mexico | Mexico | | 897,163 | | | (4,108) | | | (0.5) | % | | Mexico | | 1,060,918 | | | 163,755 | | | 18.3 | % | |
Elimination | Elimination | | (459) | | | (387) | | | 537.5 | % | | Elimination | | (42) | | | 417 | | | 90.8 | % | |
Total cost of sales | Total cost of sales | | $ | 8,363,272 | | | $ | 886,541 | | | 11.9 | % | | Total cost of sales | | $ | 9,725,362 | | | $ | 1,362,090 | | | 16.3 | % | |
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U.S. Reportable Segment. Cost of sales incurred by our U.S. operations during the nine months ended September 27, 202026, 2021 increased $87.3$853.1 million, or 1.7%16.4%, from cost of sales incurred by our U.S. segment during the nine months ended September 29, 2019.27, 2020. Cost of sales increased primarily because of the impact of increased sales volume and increased cost per pound sold resulting in increases of $43.7$852.0 million, or 0.916.4 percentage points, and $43.5 million, or 0.8 percentage points, respectively.increased sales volume of $1.1 million. Included in the increased cost per pound soldof sales was a $621.6 million in live operations costs, a $101.0 increase in prepared foods purchases, and a $97.0 million increase in payroll costs. The primary drivers of the increase in live operations costs are a $555.4 million increase in feed costs, $45.1 million in chick costs and an increase in live inputcontract grower costs of $53.8 million, which resulted from increased grower pay costs due to higher contract rates. An$17.3 million. The increase in payrollfeed costs mainly due to increased pay rates, contributed $19.0 million to the increaseis driven primarily from higher corn and soy commodity prices, our main ingredients in cost of sales. There were also increases in contract services costs, mainly due to outsourced processing labor, and increased benefit costs, mainly due to the COVID-19 pandemic, contributing $15.2 million and $11.0 million, respectively. These increases in cost of sales were partially offset by a $20.4 million decrease in derivative losses compared to the nine months ended September 29, 2019.feed. Other factors affecting cost of sales were individually immaterial.
U.K. and Europe Reportable Segment. Cost of sales incurred by our U.K. and Europe operations during the nine months ended September 27, 202026, 2021 increased $803.8$344.8 million, or 55.3%15.3%, from cost of sales incurred by our U.K. and Europe segment during the nine months ended September 29, 2019, primarily because of costs incurred by the acquired PPL operations, partially offset by a decrease27, 2020. The increase in cost of sales incurred by our existing U.K. and Europe operations. Cost of sales incurredwas driven by the acquired PPL operations contributed $959.0unfavorable impact of foreign currency translation, increased cost per pound sold and increased sales volume contributing $216.2 million, or 66.09.6 percentage points, $66.6 million, or 3.0 percentage points, and $62.0 million, or 2.7 percentage points, respectively, to the increase in cost of sales. Cost of sales related to the existing U.K. and Europe operations decreased $155.2 million, or 10.7 percentage points, primarily from a decrease in sales volume, a decreaseThe increase in cost per pound sold is driven by increased feed and other input costs. The increase in sales volume is primarily from market recoveries in foodservice from the favorable impactlessening of foreign currency translation contributing $81.6 million, $70.2 million and $3.4 million, respectively. Included inrestrictions due to the decrease in cost per pound in our existing U.K. and Europe operations was a $9.9 million decrease in freight costs resultingCOVID-19 pandemic from decreased sales and increased efficiency in third party warehouse management.prior year. Other factors affecting cost of sales were individually immaterial.
Mexico Reportable Segment. Cost of sales incurred by our Mexico operations during the nine months ended September 27, 2020 decreased $4.126, 2021 increased $163.8 million, or 0.5%18.3%, from cost of sales incurred by our Mexico segment during the nine months ended September 29, 2019.27, 2020. This decrease in cost of salesincrease was primarily because of the favorable impact of foreign currency remeasurement of $118.4 million, or 13.2 percentage points. Partially offsetting the favorable impact of foreign
currency remeasurement was an increase in cost per pound sold and sales volumethe unfavorable impact of $111.7foreign currency remeasurement of $117.8 million, or 12.413.2 percentage points, and $2.6$81.4 million, or 0.39.1 percentage points, respectively. IncludedThe increase in the increased cost per pound sold was a $17.3 millionprimarily driven by an increase in payroll costs resulting from increased direct labor costs,corn and soy commodity prices, which are our main feed ingredients. These increases were partially offset by a $15.4decrease in sales volume of $35.4 million, increase in contracted grower pay due to higher rates, a $6.1 million increase in utilities due to higher natural gas rates and a $5.9 million increase in warehouse costs.or 4.0 percentage points. Other factors affecting cost of sales were individually immaterial.
Operating income. Operating income decreased by $398.8$49.9 million, or 65.9%24.2%, from $604.8 million generated in the nine months ended September 29, 2019 to $206.0 million generated in the nine months ended September 27, 2020.2020 to $156.1 million generated in the nine months ended September 26, 2021. The following tables provide information regarding operating income and selling, general and administrative (“SG&A&A”) expense:
| Components of operating income | Components of operating income | | Nine Months Ended September 27, 2020 | | Change from Nine Months Ended September 29, 2019 | | Percent of Net Sales | | Components of operating income | | Nine Months Ended September 26, 2021 | | Change from Nine Months Ended September 27, 2020 | | Percent of Net Sales | |
Nine Months Ended | | Six Months Ended | |
Amount | | Percent | | September 27, 2020 | | September 29, 2019 | | Amount | | Percent | | September 26, 2021 | | September 27, 2020 | |
| | | (In thousands, except percent data) | | | | (In thousands, except percent data) | |
Gross profit | Gross profit | | $ | 610,800 | | | $ | (258,199) | | | (29.7) | % | | 6.8 | % | | 10.4 | % | | Gross profit | | $ | 1,013,327 | | | $ | 402,527 | | | 65.9 | % | | 9.4 | % | | 6.8 | % | |
SG&A expense | SG&A expense | | 404,837 | | | 140,524 | | | 53.2 | % | | 4.5 | % | | 3.2 | % | | SG&A expense | | 857,217 | | | 452,380 | | | 111.7 | % | | 8.0 | % | | 4.5 | % | |
Administrative restructuring activity | | — | | | 90 | | | (100.0) | % | | — | % | | — | % | | |
| Operating income | Operating income | | $ | 205,963 | | | $ | (398,813) | | | (65.9) | % | | 2.3 | % | | 7.2 | % | | Operating income | | $ | 156,110 | | | $ | (49,853) | | | (24.2) | % | | 1.5 | % | | 2.3 | % | |
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Sources of operating income | | Nine Months Ended September 27, 2020 | | Change from Nine Months Ended September 29, 2019 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 126,951 | | | $ | (300,017) | | | (70.3) | % | |
U.K. and Europe | | 76,324 | | | 14,091 | | | 22.6 | % | |
Mexico | | 2,229 | | | (113,274) | | | (98.1) | % | |
Eliminations | | 459 | | | 387 | | | 537.5 | % | |
Total operating income | | $ | 205,963 | | | $ | (398,813) | | | (65.9) | % | |
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Sources of SG&A expense | | Nine Months Ended September 27, 2020 | | Change from Nine Months Ended September 29, 2019 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 282,306 | | | $ | 100,261 | | | 55.1 | % | |
U.K. and Europe | | 92,782 | | | 38,873 | | | 72.1 | % | |
Mexico | | 29,749 | | | 1,390 | | | 4.9 | % | |
Total SG&A expense | | $ | 404,837 | | | $ | 140,524 | | | 53.2 | % | |
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Sources of operating income | | Nine Months Ended September 26, 2021 | | Change from Nine Months Ended September 27, 2020 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | (85,380) | | | $ | (212,331) | | | (167.3) | % | |
U.K. and Europe | | 32,771 | | | (43,553) | | | (57.1) | % | |
Mexico | | 208,677 | | | 206,448 | | | (9,261.9) | % | |
Eliminations | | 42 | | | (417) | | | (90.8) | % | |
Total operating income | | $ | 156,110 | | | $ | (49,853) | | | (24.2) | % | |
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Sources of SG&A expense | | Nine Months Ended September 26, 2021 | | Change from Nine Months Ended September 27, 2020 | |
Amount | | Percent | |
| | (In thousands, except percent data) | |
U.S. | | $ | 736,615 | | | $ | 454,309 | | | 160.9 | % | |
U.K. and Europe | | 87,406 | | | (5,376) | | | (5.8) | % | |
Mexico | | 33,196 | | | 3,447 | | | 11.6 | % | |
Total SG&A expense | | $ | 857,217 | | | $ | 452,380 | | | 111.7 | % | |
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U.S. Reportable Segment. SG&A expense incurred by our U.S. reportable segment during the nine months ended September 27, 202026, 2021 increased $100.3$454.3 million, or 55.1%160.9%, from SG&A expense incurred by our U.S. reportable segment during the nine months ended September 29, 2019.27, 2020. This increase in SG&A expense incurred resulted primarily from the $110.5an increase of $26.5 million DOJ antitrust fine, a $14.5in legal defense costs and $413.8 million increaserecognized in donations expense resulting primarily from the Hometown Strong initiative and a $10.3 million increase in professional fees dueanticipation of probable losses related to increased legal fees. These increases in SG&A expense were partially offset by a $13.5 million decrease in benefit expenses resulting from lower incentive compensation, a $7.0 million decrease in marketing costs mainly due to reduced internet media expenses, a $6.0 million decrease in payroll costs resulting from reduced stock-based compensation expenses and a $3.9 million decrease in travel and entertainment expenses due to less travel during the COVID-19 pandemic.ongoing litigation. Other factors affecting SG&A expense were individually immaterial.
U.K. and Europe Reportable Segment. SG&A expense incurred by our U.K. and Europe reportable segment during the nine months ended September 27, 2020 increased $38.926, 2021 decreased $5.4 million, or 72.1%5.8%, from SG&A expense incurred by our U.K. and Europe segment during the nine months ended September 29, 2019.27, 2020. The decrease in SG&A expense was driven primarily by a reduction in bonus expenses by our U.K. and Europe reportable segment increased primarily due to expenses incurred by the acquired PPL operations and our existing U.K. and Europe operations by $36.4 million and $1.7 million, respectively. Factorsreduced information technology costs. Other factors affecting SG&A expense in our existing U.K. and Europe operations were individually immaterialimmaterial.
Mexico Reportable Segment. SG&A expense incurred by our Mexico reportable segment during the nine months ended September 27, 202026, 2021 increased approximately $1.4$3.4 million, or 4.9%11.6%, from SG&A expense incurred by our Mexico segment during the nine months ended September 29, 2019, mainly from an27, 2020. The primary driver of the increase in employee relations expenses of $1.6 million.SG&A expense was payroll and bonus costs. Other factors affecting our Mexico segment'ssegment’s SG&A expense were individually immaterial.
Net interest expense. Net interest expense increased to $106.4 million recognized in the nine months ended September 26, 2021 from $91.0 million recognized in the nine months ended September 27, 20202020. The increase in net interest expense resulted primarily from $87.7a loss on early extinguishment of debt recognized as a component of interest expense of $24.7 million, recognizedpartially offset by a decrease in the nine months ended September 29, 2019.interest expense on average outstanding borrowings of $9.3 million. Average borrowings increaseddecreased by $242.0$144.9 million from $2.3 billion during the nine months ended September 29, 2019 to $2.6 billion during the nine months ended September 27, 2020.2020 to $2.4 billion during the nine months ended September 26, 2021. As a percent of net sales, interest expense in the nine months ended September 26, 2021 and September 27, 2020 was 1.0% and September 29, 2019 was 1.1% and 1.2%, respectively.
Income taxes. Income tax expense decreased to $55.9 million, a 110.3% effective tax rate, for the nine months ended September 26, 2021 compared to income tax expense of $57.9 million, a 37.9% effective tax rate, for the nine months ended September 27, 2020 compared to income tax expense of $142.3 million, a 28.1% effective tax rate, for the nine months ended September 29, 2019.2020. The decrease in income tax expense resulted primarily from a decrease in pre-tax income and the effects of foreign currency fluctuation, partially offset by the recognition of a $6.1 million reserve recognized against certain U.K. interest deductions, $3.8 million in adjustments to tax returns and the non-deductible DOJ antitrust finerecognition of $110.5 million, refer to “Note 20. Commitments and Contingencies” for more information. In addition, we recognized deferred tax expense of $10.6$32.2 million related to the repealenactment of the previously enacted reduction of the U.K corporateU.K. tax rate change to 17.0%. Therefore, the current corporate tax rate is maintained at 19.0%.25% effective April 1, 2023.
Liquidity and Capital Resources
The following table presents our available sources of liquidity as of September 27, 2020:26, 2021:
| Sources of Liquidity | Sources of Liquidity | | Facility Amount | | Amount Outstanding | | Amount Available | Sources of Liquidity | | Facility Amount | | Amount Outstanding | | Amount Available |
| | | (In millions) | | | (In millions) |
Cash and cash equivalents | Cash and cash equivalents | | $ | — | | | $ | — | | | $ | 768.0 | | Cash and cash equivalents | | $ | — | | | $ | — | | | $ | 511.1 | |
Borrowing arrangements: | Borrowing arrangements: | | Borrowing arrangements: | |
U.S. Credit Facility(a) | | 750.0 | | | 350.0 | | | 359.6 | | |
Mexico Credit Facility(b) | | 67.2 | | | — | | | 67.2 | | |
U.K. and Europe Credit Facilities(c) | | 139.1 | | | — | | | 139.1 | | |
U.S. Credit Facility Revolving Note Payable(a) | | U.S. Credit Facility Revolving Note Payable(a) | | 800.0 | | | — | | | 761.5 | |
U.S. Credit Facility Term Loans(b) | | U.S. Credit Facility Term Loans(b) | | 700.0 | | | 506.3 | | | 193.7 | |
Mexico Credit Facility(c) | | Mexico Credit Facility(c) | | 74.8 | | | — | | | 74.8 | |
U.K. and Europe Credit Facilities(d) | | U.K. and Europe Credit Facilities(d) | | 136.8 | | | — | | | 136.8 | |
(a)Availability under the U.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at September 27, 202026, 2021 totaled $40.4$38.5 million.
(b)For more information on the U.S. Credit Facility Term Loans, refer to “Note 11. Debt.”
(c)The U.S. dollar-equivalent of the facility amount under the Mexico Credit Facility is $67.2$74.8 million ($(MX$1.5 billion Mexican pesos)billion).
(c)(d)The U.S. dollar-equivalent of the facility amountsamount under the U.K. and Europe Credit Facilities are $127.5is $136.8 million (£100.0 million) and $11.6 million (€10.0 million).
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.
In July 2021, one of our Mexican subsidiaries received an observation letter from the Mexican Tax Authority (the “MTA”) asserting a withholding tax liability due in connection with our 2015 acquisition of Provemex Holding LLC and its subsidiaries. Although we do not expect any claims or assessments set forth in the observation letter to result in future cash outlays, we are currently evaluating the claims and assessments as set forth in the observation letter. We responded to the observation letter in August 2021 and are awaiting further response from the MTA.
Historical Flow of Funds
| Cash Flows from Operating Activities | Cash Flows from Operating Activities | | Nine Months Ended | Cash Flows from Operating Activities | | Nine Months Ended |
| | | September 27, 2020 | | September 29, 2019 | | | September 26, 2021 | | September 27, 2020 |
| | (In millions) | | (In millions) |
Net income | | $ | 94.7 | | | $ | 364.3 | | |
Net income (loss) | | Net income (loss) | | $ | (5.2) | | | $ | 94.7 | |
Net noncash expenses | Net noncash expenses | | 285.0 | | | 215.6 | | Net noncash expenses | | 282.1 | | | 285.0 | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Trade accounts and other receivables | Trade accounts and other receivables | | 44.6 | | | (46.6) | | Trade accounts and other receivables | | (138.9) | | | 44.6 | |
Inventories | Inventories | | 41.3 | | | (108.1) | | Inventories | | (149.7) | | | 41.3 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | (29.3) | | | 3.5 | | Prepaid expenses and other current assets | | 13.7 | | | (29.3) | |
Accounts payable, accrued expenses and other current liabilities | Accounts payable, accrued expenses and other current liabilities | | 93.1 | | | 67.3 | | Accounts payable, accrued expenses and other current liabilities | | 274.9 | | | 93.1 | |
Income taxes | Income taxes | | (30.9) | | | 40.5 | | Income taxes | | 66.4 | | | (30.9) | |
Long-term pension and other postretirement obligations | Long-term pension and other postretirement obligations | | (0.8) | | | (1.5) | | Long-term pension and other postretirement obligations | | (13.5) | | | (0.8) | |
Other operating assets and liabilities | Other operating assets and liabilities | | 10.6 | | | 0.5 | | Other operating assets and liabilities | | (2.4) | | | 10.6 | |
Cash provided by operating activities | Cash provided by operating activities | | $ | 508.3 | | | $ | 535.5 | | Cash provided by operating activities | | $ | 327.4 | | | $ | 508.3 | |
Net Noncash Expenses
Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $282.1 million for the nine months ended September 26, 2021. Net noncash expense items included depreciation and amortization of $274.3 million, loss on early extinguishment of debt of $24.7 million, stock-based compensation of $8.4 million, loan cost amortization of $3.8 million and accretion of discounts related to Senior Notes of $1.1 million. These expense items were partially offset by deferred income tax benefit of $26.4 million, gains on property disposals of $3.6 million and amortization of premiums related to Senior Notes of $0.2 million.Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $285.0 million for the nine months ended September 27, 2020. Net noncash expense items included depreciation and amortization of $248.6 million, deferred income tax expense of $37.7 million, an adjustment to a previously recognized gain on a bargain purchase of $3.7 million, loan cost amortization of $3.6 million, accretion of discounts related to Senior
Notes and a loss in equity-method investments and of $0.7 million and $0.3 million, respectively. These expense items were partially offset by gains on property disposals, stock-based compensation and amortization of premiums related to Senior Notes of $8.0 million, $1.3 million and $0.5 million, respectively.
Items necessaryChanges in Operating Assets and Liabilities
The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $138.9 million use of cash related to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $215.6 million for the nine months ended September 29, 2019. Net noncash expense items included depreciation26, 2021. This change primarily resulted from an increase in trade accounts receivable due to customer payment timing and amortization of $210.4 million, share based compensation of $7.3 million, loan cost amortization of $3.6 million, deferred income tax expense of $2.4 million, foreign currency transaction loss related to borrowing arrangements of $1.3 million and accretion of discount related to Senior Notes of $0.7 million. These expense items were partially offset by a gain on property disposals of $9.5 million and amortization of premium related to Senior Notes of $0.5 million.
Changes in Operating Assets and Liabilities
increased sales. The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $44.6 million source of cash related to operating activities for the nine months ended September 27, 2020.
The change in trade accounts and other receivables, including accounts receivable from related parties,inventories represented a $46.6$149.7 million use of cash related to operating activities for the nine months ended September 29, 2019. These changes are26, 2021. This change resulted primarily from an increase in our raw materials and work-in-process inventories due to customer payment timing.
increased feed and chick costs. The change in inventories represented a $41.3 million source of cash related to operating activities for the nine months ended September 27, 2020. This change resulted primarily from a decrease in our semi-processed and work-in-process inventories.
The change in inventoriesprepaid expenses and other current assets represented a $108.1$13.7 million usesource of cash related to operating activities for the nine months ended September 29, 2019.26, 2021. This change resulted primarily from ana net increase in our finished products inventory.
commodity derivative assets. The change in prepaid expenses and other current assets represented a $29.3 million use of cash related to operating activities for the nine months ended September 27, 2020. This change resulted primarily from an increase in prepaid inventory in our Mexico reporting segment.
The change in prepaidaccounts payable, revenue contract liabilities, accrued expenses and other current assetsliabilities, including accounts payable to related parties, represented a $3.5$274.9 million source of cash related to operating activities for the nine months ended September 29, 2019.26, 2021. This change resulted primarily from a net decrease in value-added tax receivables.
an accrual for probable losses related to ongoing litigation. The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities, including accounts payable to related parties, represented a $93.1 million source of cash related to operating activities for the nine months ended September 27, 2020. This change resulted primarily from the timing of receipt of invoicing and payments as well as the accrual of the $110.5 million DOJ antitrust fine.
The change in accountsincome taxes, which includes income taxes receivable, income taxes payable, revenue contractdeferred tax assets, deferred tax liabilities, accrued expensesreserves for uncertain tax positions, and the tax components within accumulated other current liabilities, including accounts payable to related parties,comprehensive loss, represented a $67.3$66.4 million source of cash related to operating activities for the nine months ended September 29, 2019. This change resulted primarily from the timing of payments.
26, 2021. 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 $30.9 million use of cash related to operating activities for the nine months ended September 27, 2020. This change resulted primarily from the timing of estimated tax payments. The change in income taxes represented a $40.5 million source of cash related to operating activities for the nine months ended September 29, 2019. This change resulted primarily from the timing of estimated tax payments.
| Cash Flows from Investing Activities | Cash Flows from Investing Activities | | Nine Months Ended | Cash Flows from Investing Activities | | Nine Months Ended |
| | | September 27, 2020 | | September 29, 2019 | | | September 26, 2021 | | September 27, 2020 |
| | (In millions) | | (In millions) |
Acquisitions of property, plant and equipment | Acquisitions of property, plant and equipment | | $ | (242.6) | | | $ | (258.7) | | Acquisitions of property, plant and equipment | | $ | (280.9) | | | $ | (242.6) | |
Proceeds from property disposals | Proceeds from property disposals | | 21.7 | | | 15.1 | | Proceeds from property disposals | | 22.9 | | | 21.7 | |
Business acquisition | Business acquisition | | (4.2) | | | — | | Business acquisition | | (953.9) | | | (4.2) | |
Cash used in investing activities | Cash used in investing activities | | $ | (225.1) | | | $ | (243.6) | | Cash used in investing activities | | $ | (1,211.9) | | | $ | (225.1) | |
Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs for the nine months ended September 27, 202026, 2021 and September 29, 2019.27, 2020. Proceeds from property disposals were primarily from sales of two processing plants in our U.K. and Europe reportable segment and a broiler farm in our Mexico reportable segment during the nine months ended September 26, 2021. Cash used for the Kerry Meats and Meals Acquisition, less cash acquired, totaled $953.9 million.
| Cash Flows from Financing Activities | Cash Flows from Financing Activities | | Nine Months Ended | Cash Flows from Financing Activities | | Nine Months Ended |
| | | September 27, 2020 | | September 29, 2019 | | | September 26, 2021 | | September 27, 2020 |
| | (In millions) | | (In millions) |
Proceeds from revolving line of credit and long-term borrowings | Proceeds from revolving line of credit and long-term borrowings | | $ | 386.7 | | | $ | 99.6 | | Proceeds from revolving line of credit and long-term borrowings | | $ | 2,951.9 | | | $ | 386.7 | |
Payments on revolving line of credit, long-term borrowings and finance lease obligations | | Payments on revolving line of credit, long-term borrowings and finance lease obligations | | (2,006.0) | | | (56.8) | |
Payments on early extinguishment of debt | | Payments on early extinguishment of debt | | (21.3) | | | — | |
Payments of capitalized loan costs | | Payments of capitalized loan costs | | (22.3) | | | — | |
Distribution from Tax Sharing Agreement with JBS USA Food Company Holdings | | Distribution from Tax Sharing Agreement with JBS USA Food Company Holdings | | (0.7) | | | — | |
Purchase of common stock under share repurchase program | Purchase of common stock under share repurchase program | | (107.8) | | | (2.9) | | Purchase of common stock under share repurchase program | | — | | | (107.8) | |
Payments on revolving line of credit, long-term borrowings and finance lease obligations | | (56.8) | | | (123.3) | | |
Payment of capitalized loan costs | | — | | | (0.6) | | |
Distributions from Tax Sharing Agreement with JBS USA Food Company Holdings | | — | | | (0.5) | | |
Cash provided by (used in) financing activities | | $ | 222.1 | | | $ | (27.7) | | |
Cash provided by financing activities | | Cash provided by financing activities | | $ | 901.6 | | | $ | 222.1 | |
Proceeds from revolving line of credit and long-term borrowings is mainlyinclude the sale of $1.0 billion of sustainability-linked senior notes due to2031, the sale of the $900.0 million senior notes due 2032 and $431.3 million from the refinancing of the U.S. Credit Facility with the remaining primarily from borrowings on our revolving loan commitmentcommitments under our U.S. and Mexico Credit Facilities. The net proceeds of the senior notes due 2031 were used, together with cash on hand, to redeem the senior notes due 2025. This redemption of the senior notes due 2025 of $1.0 billion is the primary driver of the payments on long-term borrowings with the remaining amount primarily from payments on our revolving loan commitments under our U.S. and Mexico Credit Facilities and finance lease obligations. The net proceeds of the senior notes due 2032 were used to finance the Kerry Meats and Meals Acquisition and to pay related fees and expenses. The net proceeds of the U.S. Credit Facility refinancing were used to pay the balance due on the Fourth U.S. Credit Facility and the fees and expenses for the refinancing transaction.
The payment on early extinguishment of debt is the early tender consideration paid as a result of the redemption of the senior notes due 2025, the repayment of the Fourth U.S. Credit Facility with the refinancing and repayments on our revolving loan commitments under our U.S. and Mexico Credit Facilities. The payment of capitalized loan costs were those loan costs incurred as a part of the sale of the senior notes due 2031, the sale of the senior notes due 2032 and the fees and expenses for the refinancing of the U.S. Credit Facility. Payments on debt obligations primarily represent paymentsThe Distribution from Tax Sharing Agreement with JBS USA Food Company Holdings is payment of net tax incurred during the tax year 2020 under the Mexico Credit Facility and the U.S. Credit Facility. Shares repurchased under the share repurchase program duringtax sharing agreement. During the nine months ended September 27, 2020, totaled 6.1 million.4.1 million shares were repurchased under the share repurchase program. For further information relating to the share repurchase program, refer to “Note 14. Stockholders'12. Stockholders’ Equity.”
Debt
Our long-term debt and other borrowing arrangements consist of senior notes, revolving credit facilities and other term loan agreements. For a description, refer to “Note 13.11. Debt.”
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.
Contractual Obligations
Contractual obligations at September 27, 2020 were as follows:
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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) | | $ | 2,656,314 | | | $ | 25,052 | | | $ | 781,262 | | | $ | 1,000,000 | | | $ | 850,000 | |
Interest(c) | | 664,162 | | | 118,666 | | | 234,527 | | | 186,125 | | | 124,844 | |
Finance leases | | 1,970 | | | 513 | | | 988 | | | 469 | | | — | |
Operating leases | | 321,293 | | | 78,963 | | | 120,264 | | | 71,621 | | | 50,445 | |
Derivative liabilities | | 7,175 | | | 7,175 | | | — | | | — | | | — | |
DOJ antitrust fine | | 110,524 | | | 110,524 | | | — | | | — | | | — | |
Purchase obligations(d) | | 219,074 | | | 216,820 | | | 2,254 | | | — | | | — | |
Total | | $ | 3,980,512 | | | $ | 557,713 | | | $ | 1,139,295 | | | $ | 1,258,215 | | | $ | 1,025,289 | |
(a)The total amount of unrecognized tax benefits at September 27, 2020 was $12.8 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 $40.4 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 September 27, 2020.
(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.
Recent Accounting Pronouncements
See “Note 1. General” of our Condensed Consolidated Financial Statements included in this quarterly report for additional information relating to these recent accounting pronouncements.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our annual report on Form 10-K for the fiscal year ended December 29, 2019,27, 2020, filed with the Securities and Exchange Commission (the “SEC”) on February 21, 202011, 2021 (the “2019“2020 Annual Report”).
Reconciliation of Adjusted Net Income to EBITDA and Adjusted EBITDA
Adjusted“EBITDA” is defined as the sum of net income attributable to Pilgrim's(loss) plus interest, taxes, depreciation and amortization. “Adjusted EBITDA” is calculated by adding to Net income attributable to Pilgrim'sEBITDA certain items of expense and deducting from Net income attributable to Pilgrim'sEBITDA certain items of income. Management believesincome that presentation of Adjusted net income attributable to Pilgrim's provides useful supplemental information about our operating performance and enables comparison of our performance between periods because certain costs shown belowwe believe are not indicative of our currentongoing operating performance. A reconciliationperformance consisting of: (1) foreign currency transaction losses, (2) transaction costs related to business acquisitions, (3) costs related to the DOJ agreement and litigation settlements, (4) deconsolidation of Net income attributable to Pilgrim's to Adjusteda subsidiary and (5) net income attributable to Pilgrim'snoncontrolling interests. EBITDA is as follows:
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PILGRIM'S PRIDE CORPORATION |
Reconciliation of Adjusted Net Income |
(Unaudited) |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
| (In thousands) |
Net income attributable to Pilgrim's | $ | 33,446 | | | $ | 109,765 | | | $ | 94,678 | | | $ | 363,844 | |
Adjustments: | | | | | | | |
| | | | | | | |
Acquisition charges and restructuring activity | — | | | 43 | | | 134 | | (26) | |
DOJ agreement | 110,524 | | | — | | | 110,524 | | | — | |
Hometown Strong commitment | 14,506 | | | — | | | 14,506 | | | — | |
Foreign currency transaction losses (gains) | 9,092 | | | 3,027 | | | (3,768) | | | 7,923 | |
Net tax benefit of adjustments(a) | (5,916) | | | (747) | | | (9,158) | | | (1,923) | |
Adjusted net income attributable to Pilgrim's | $ | 161,652 | | | $ | 112,088 | | | $ | 206,916 | | | $ | 369,818 | |
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| | | | | | | |
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(a) Net tax benefitpresented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of adjustments representsresults prepared in conformity with U.S. GAAP, to compare the taxperformance of companies. We believe investors would be interested in our Adjusted EBITDA because this is how our management analyzes EBITDA applicable to continuing operations. We also believe that Adjusted EBITDA, in combination with our financial results calculated in accordance with U.S. GAAP, provides investors with additional perspective regarding the impact of all adjustments shown abovecertain significant items on EBITDA and facilitates a more direct comparison of its performance with the exclusionits competitors. EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Some of the DOJ antitrust finelimitations of these measures are:
•They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
•They do not reflect changes in, or cash requirements for, our working capital needs;
•They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
•Although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
•They are not adjusted for all noncash income or expense items that are reflected in our statements of cash flows;
•EBITDA does not reflect the impact of earnings or charges attributable to noncontrolling interests;
•They do not reflect the impact of earnings or charges resulting from matters we consider to not be indicative of our ongoing operations; and
•They do not reflect limitations on or costs related to transferring earnings from our subsidiaries to us.
In addition, other companies in our industry may calculate these measures differently than we do, limiting their usefulness as this item is non-deductiblea comparative measure. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with U.S. GAAP. You should compensate for tax purposes.these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only on a supplemental basis.
| | | | | |
| Nine Months Ended |
| September 26, 2021 |
| (In thousands) |
Net loss | $ | (5,200) | |
Add: | |
Interest expense, net | 106,366 | |
Income tax expense | 55,931 | |
Depreciation and amortization | 274,336 | |
EBITDA | 431,433 | |
Add: | |
Foreign currency transaction losses | 9,018 | |
Transaction costs related to business acquisitions | 9,318 | |
DOJ agreement and litigation settlements | 524,285 | |
Minus: | |
Deconsolidation of a subsidiary | 1,131 | |
Net income attributable to noncontrolling interest | 554 | |
Adjusted EBITDA | $ | 972,369 | |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, soybean oil, 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. 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, (1) executing purchase agreements with suppliers for future physical delivery of feed ingredients at established prices and (2) purchasing or selling derivative financial instruments such as futures and options.
For this sensitivity analysis, market risk is estimated as a hypothetical 10% increase in the weighted-average cost of our primary feed ingredients as of the periods presented.
| | | | | | | | | | | |
| Three Months Ended September 26, 2021 |
| Amount | | Impact of 10% Increase in Feed Ingredient Prices |
| (In thousands) |
Feed purchases(a) | $ | 1,071,132 | | | $ | 107,113 | |
Feed inventory(b) | 167,943 | | | 16,794 | |
(a)Based on our feed consumption, a 10% increase in the price of our feed purchases would have increased cost of sales for the three months ended September 26, 2021.
(b)A 10% increase in ending feed ingredient prices would have increased inventories as of September 26, 2021.
The impact of this fluctuation, if realized, could be mitigated by related commodity hedging activity. However, fluctuations greater than 10% could occur.
| | | | | | | | | | | |
| Three Months Ended September 27, 2020 |
| Amount | | Impact of 10% Increase in Feed Ingredient Prices |
| (In thousands) |
Feed purchases(a) | $ | 674,470 | | | $ | 67,447 | |
Feed inventory(b) | 120,074 | | | 12,007 | |
(a)Based on our feed consumption, a 10% increase in the price of our feed purchases will increase cost of sales for the three months ended September 27, 2020.
(b)A 10% increase in ending feed ingredient prices will increase inventories as of September 27, 2020.
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| September 27, 2020 |
| Amount | | Impact of 10% Increase to the Fair Value of Commodity Derivative Assets |
| (In thousands) |
Commodity derivative assets(a) | $ | 30,489 | | | $ | 3,049 | |
| | | | | | | | | | | |
| September 26, 2021 |
| Amount | | Impact of 10% Increase in Commodity Prices |
| (In thousands) |
Net commodity derivative assets(a) | $ | 32,810 | | | $ | 3,281 | |
(a)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% increase in corn, soybean meal, soybean oil and wheat prices would have resulted in an increase in the fair value of our net commodity derivative asset position, including margin cash, as of September 27, 2020.26, 2021.
Interest Rates
Fixed-rate debt. Market risk for fixed-rate debt is estimated as the potential decrease in fair value resulting from a hypothetical increase in interest rates of 10%. Using a discounted cash flow analysis, a hypothetical 10% increase in interest rates would have decreased the fair value of our fixed-rate debt by $48.9$86.0 million as of September 27, 2020.26, 2021.
Variable-rate debt. Our variable-rate debt instruments represent approximately 30.9%15.7% of our total debt as of September 27, 2020.26, 2021. Holding other variables constant, including levels of indebtedness, an increase in interest rates of 25 basis points would have increased our interest expense by an immaterial amount for the three months ended September 27, 2020.26, 2021.
Foreign Currency
Mexico Subsidiaries
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 operations.
The Mexican peso exchange rate can directly and indirectly impact our financial condition and results of operations. For this sensitivity analysis, market risk is estimated as a hypothetical 10% change in the current exchange rate used to convert Mexican pesos to U.S. dollars as of September 27, 2020.26, 2021. However, fluctuations greater than 10% could occur. No assurance can be given as to how future movements in the Mexican peso could affect our future financial condition or results of operations.
| | | | | | | | | | | |
| Three Months Ended September 27, 2020 |
| Impact of 10% Deterioration in Exchange Rate(a) | | Impact of 10% Appreciation in Exchange Rate(b) |
| (In thousands, except for exchange rate data) |
Foreign currency remeasurement gain (loss) | $ | (14,849) | | | $ | 18,149 | |
Exchange rate of Mexican peso to the U.S. dollar: | | | |
As reported | 22.34 | | | 22.34 |
Hypothetical 10% change | 24.57 | | | 20.11 |
(a)Based on the net monetary asset position of our Mexican subsidiaries, a 10% weakening in the exchange rate of Mexican pesos to U.S. dollar will result in recognition of foreign currency remeasurement loss for the three months ended September 27, 2020.
(b)Based on the net monetary asset position of our Mexican subsidiaries, a 10% strengthening in the exchange rate of Mexican pesos to U.S. dollar will result in recognition of foreign currency remeasurement gain for the three months ended September 27, 2020. | | | | | | | | | | | |
| Three Months Ended September 26, 2021 |
| Impact of 10% Deterioration in Exchange Rate | | Impact of 10% Appreciation in Exchange Rate |
| (In thousands, except for exchange rate data) |
Foreign currency remeasurement gain (loss) | $ | (4,723) | | | $ | 5,772 | |
Exchange rate of Mexican peso to the U.S. dollar: | | | |
As reported | 20.05 | | | 20.05 |
Hypothetical 10% change | 22.06 | | | 18.05 |
U.K. and Europe Foreign Investments
We are exposed to foreign exchange-related variability of investments and earnings from our foreign investments in the U.K. and Europe.Europe subsidiaries. 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. For this sensitivity analysis, market risk is estimated as a hypothetical 10% change in exchange rates used to convert U.S. dollars to British pound and to euro, and the effect of this change on our U.K. and Europe foreign investments:
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| September 27, 2020 |
| Amount | | Impact of 10% Deterioration in Exchange Rates | | Impact of 10% Appreciation in Exchange Rates |
| (In thousands) |
Net assets(a) | $ | 2,071,602 | | | $ | (188,327) | | | $ | 230,178 | |
Foreign currency forward contracts(b): | | | | | |
British pound to U.S. dollar | (22,255) | | | 2,473 | | | (2,023) | |
Euro to U.S. dollar | (28,775) | | | 3,197 | | | (2,616) | |
investments.(a)Net Assets. As of September 26, 2021, our U.K. and Europe subsidiaries that are denominated in British pound had net assets of $2.9 billion. A 10% weakeningdeterioration in the British pound to U.S. dollar exchange rate after consideration of our derivative and nonderivative financial instruments, would cause a decrease in the net assets of our U.K. and Europe foreign investments that are denominatedsubsidiaries of $262.9 million. A 10% appreciation in the British pound as of September 27, 2020. A 10% strengthening into U.S. dollar exchange rate after consideration of our derivative and nonderivative financial instruments, would cause an increase in the net assets of our U.K. and Europe foreign investments that are denominated in British pound assubsidiaries of September 27, 2020.$321.4 million.
(a)Cash flow hedging transactions. We hadperiodically enter into foreign currency forward contracts, which wereare designated and qualify as cash flow hedges, with an aggregate notional amount of $51.0 million, to hedge foreign currency risk on a portion of sales generated and purchases made by our investments in U.K. and Europe. On the basis of our sensitivity analysis, theEurope subsidiary. A 10% weakening or strengthening of the U.S. dollar against the British pound and U.S. dollar against the euro would result in positiveimmaterial changes in our cash flows on settlement for September 27, 2020 while the strengthening fair values of the U.S. dollar against the British pound and U.S. dollar against the euro would result in negative changes in our cash flows on settlement for September 27, 2020. these derivative instruments. 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
We and certainCertain 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 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 toThe U.S., Mexico and most of Europe are currently experiencing low to moderate inflationinflation. The U.K. is currently experiencing more pronounced inflation. None of the locations in the U.S., the U.K. and Europe, and Mexicowhich we operate are experiencing hyperinflation. Due to this and our rapid inventory turnover rate, the results of operations have not been significantly affected by inflation.
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:
•The impact of the COVID-19 pandemic, efforts to contain the pandemic and resulting economic downturn on our operations and financial condition;
•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 flock 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 PPL (formerly Tulip), 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, including risks associated with Brexit;
•Restrictions imposed by, and as a result of, Pilgrim'sPilgrim’s leverage;
•Disruptions in international markets and distribution channels;
•The impact of cyber-attacks, natural disasters, power losses, unauthorized access, telecommunication failures, and other problems on our information systems;
•Our ability to maintain favorable labor relations with our employees and our compliance with labor laws;
•Extreme weather or natural disasters;
•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 29, 201927, 2020 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 or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC'sSEC’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 or submits under the Exchange Act 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.
TheAs of September 26, 2021, the Company’s management, with the participation of the Company’sCompany's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 27, 2020.procedures. Consistent with guidance issued by the SEC for a recently acquired business, management is excluding the internal control over financial reporting of PPL, formerly known as Tulip,Kerry Meats and Meals from its evaluation of the effectiveness of the Company’s disclosure controls and procedures as of September 27, 2020.26, 2021. Total assets of Kerry Meats and net sales of PPL,Meals, which the Companycompany acquired on October 15, 2019,September 24, 2021, included in our Condensed Consolidated Financial Statements as of and for the ninethree months ended September 27, 202026, 2021 were $691.2 million and $999.1 million, respectively. $1.1 billion.
Based on that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 27, 2020,26, 2021, the Company’s disclosure controls and procedures were effective.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.
Changes in Internal Control over Financial Reporting
There wasThe Company’s management, including the Chief Executive Officer and Chief Financial Officer, identified no change in the Company’s internal control over financial reporting that occurred during the quarterthree months ended September 27, 202026, 2021 that has materially affected, or is reasonably likely to materially affect, the Company��sCompany’s internal control over financial reporting. As mentioned above, the Company acquired PPL, on October 15, 2019. The Company is in the process of reviewing the internal control structure of PPL and, if necessary, will make appropriate changes as it integrates PPL into the Company's overall internal control over financial reporting process.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Tax ClaimsThe information required with respect to this item can be found in Part I, Item 1, Notes to Consolidated Financial Statements, “Note 18. Commitments and Proceedings
During 2014 and 2015 the Mexican Tax Authorities opened a review of Avícola Pilgrim’s Pride de Mexico, S.A. de C.V. (“APPM”)Contingencies” in regards to tax years 2009 and 2010, respectively. In both instances, the Mexican Tax Authorities claim that controlled company status did not exist for certain subsidiaries because APPM did not own 50% of the shares in voting rights of Incubadora Hidalgo, S. de R.L de C.V. and Commercializadora de Carnes de México S. de R.L de C.V. (both in 2009) and Pilgrim’s Pride, S. de R. L. de C.V. (in 2010). As a result, APPM should have considered dividends paid out of these subsidiaries partially taxable since a portion of the dividend amount was not paid from the net tax profit account (CUFIN). APPM is currently appealing. Amounts under appeal are $24.3 million and $16.1 million for tax years 2009 and 2010, respectively. No loss has been recorded for these amounts at this time.
In re Broiler Chicken Antitrust Litigation
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 (the “Illinois Court”) against PPC and 13 other producers by and on behalf of direct and indirect purchasers of broiler chickens alleging violations of federal and state antitrust and unfair competition laws. The complaints seek, among other relief, treble damages for an alleged conspiracy among defendants to reduce output and increase prices of broiler chickens from the period of January 2008 to the present. The class plaintiffs have filed three consolidated amended complaints: one on behalf of direct purchasers and two on behalf of distinct groups of indirect purchasers. Between December 8, 2017 and October 14, 2020, 44 individual direct action complaints (Affiliated Foods, Inc., et al. v. Claxton Poultry Farms, Inc., et al., Case No. 1:17-cv-08850; Sysco Corp. v. Tyson Foods Inc., et al., Case No. 1:18-cv-00700; U.S. Foods Inc. v. Tyson Foods Inc., et al., Case No. 1:18-cv-00702; Action Meat Distributors, Inc., et al. v. Claxton Poultry Farms, Inc., et al., Case No. 1:18-cv-03471; Jetro Holdings, LLC v. Tyson Foods, Inc., et al., Case No. 1:18-cv-04000; Associated Grocers of the South, Inc., et al. v. Tyson Foods, Inc., et al., Case No. 1:18-cv-4616; The Kroger Co., et al. v. Tyson Foods, Inc., et al., Case No. 1:18-cv-04534; Ahold Delhaize USA, Inc. v. Koch Foods, Inc., et al., Case No. 1:18-cv-05351; Samuels as Trustee In Bankruptcy for Central Grocers, Inc. et al., v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, Inc. et al., Case No. 1:18-cv-05341; W. Lee Flowers & Company, Inc. v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, Inc. et al., Case No. 1:18-cv-05345; BJ's Wholesale Club, Inc. v. Tyson Foods, Inc., et al., Case No. 1:18-cv-05877; United Supermarkets LLC, et al. v. Tyson Foods Inc., et al., Case No. 1:18-cv-06693; Associated Wholesale Grocers, Inc. v. Koch Foods, Inc., et al., Case No. 1:18-cv-06316 (transferred from the U.S. District Court for the District of Kansas on September 17, 2018, following Defendants’ successful motion to transfer); Shamrock Foods Company, et al. v. Tyson Foods, Inc., et al., Case No. 1:18-cv-7284; Winn-Dixie Stores, Inc., et al. v. Koch Foods, Inc., et al., Case No. 1:18-cv-00245; Quirch Foods, LLC, f/k/a Quirch Foods Co. v. Koch Foods, Inc., et al., Case No. 1:18-cv-08511; Sherwood Food Distributors, L.L.C., et al. v. Tyson Foods, Inc., et al., Case No. 1:19-cv-00354; Hooters of America, LLC v. Tyson Foods, Inc., et al., Case No. 1:19-cv-00390; Darden Restaurants, Inc. v. Tyson Foods, Inc., et al., Case No. 1:19-cv-00530; Associated Grocers, Inc., et al. v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, et al., Case No. 1:19-cv-00638; Checkers Drive-In Restaurants, Inc. v. Tyson Foods, Inc., et al., Case No. 1:19-cv-01283; Conagra Brands, Inc., et al. v. Tyson Foods, Inc., et al., Case No. 1:19-cv-02190; Giant Eagle, Inc. v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, et al., Case No. 1:19-cv-02758; Save Mart Supermarkets v. Tyson Foods, Inc., et al., Case No. 1:19-cv-02805; Walmart Inc., et al. v. Pilgrim’s Pride Corporation, et al., Case No. 1:19-cv-03915 (transferred from the U.S. District Court for the Western District of Arkansas on June 11, 2019, following Plaintiffs’ unopposed motion to transfer); Services Group of America, Inc. v. Tyson Food, Inc., et al., Case No. 1:19-cv-04194; Restaurants of America, Inc., et al. v. Tyson Foods, Inc., et al., No. 19-cv-04824; Anaheim Wings, d/b/a Hooters of Anaheim, et al. v. Tyson Foods, Inc., et al., No. 19- cv-05229; Amigos Meat Distributors, LP, et al. v. Tyson Foods, Inc., et al., No. 19-cv-05424; PJ Food Service, Inc. v. Tyson Foods, Inc., et al., No. 19-cv-6141; The Golub Corporation, et al. v. Norman W. Fries, Inc., d/b/a Claxton Poultry Farms, et al., Case No. 19-cv-06955; Commonwealth of Puerto Rico v. Koch Foods, Inc., et al., Case No. 3:19-cv-01605 (transferred from the U.S. District Court for the District of Puerto Rico); El Pollo Loco, Inc. v. Tyson Foods et al., Case No. 20-cv-01943; Independent Purchasing Cooperative, Inc. v. Koch Foods, Inc. et al., Case No. 20-cv-02013; Kraft Heinz Foods Company v. Amick Farms, LLC et al., Case No. 20-cv-02278; Boston Market Corporation v. Tyson Foods, Inc. et al., Case No. 20-cv-03450; Barbeque Integrated, Inc. v. Tyson Foods, Inc. et al., Case No. 20-cv-03454; FIC Restaurants, Inc., v. Tyson Foods, Inc. et al., Case No. 20-cv-03458; The Johnny Rockets Group, Inc., v. Tyson Foods, et al., Case No. 20-cv-03459; WZ Franchise Corp. v. Tyson Foods, Inc., et al., Case No. 20-cv-05204; Bob Evans Farms Inc. v. Tyson Foods, Inc., et al., Case No. 20-cv-05253; The Fresh Market, Inc. v. Tyson Foods, Inc., et al., Case No. 20-cv-05257; Wawa, Inc. v. Tyson Foods, Inc., et al., Case No. 20-cv-05259; and Brookshire Brothers, Inc., et al. v. Norman W. Fries, Inc., et al., Case No. 20-cv-06123) were filed with the Illinois Court by individual direct purchaser entities naming PPC as a defendant, the allegations of which largely mirror those in the class action complaints, with four complaints including additional allegations of fixing prices and rigging bids on small birds sold to
quick service restaurants. On August 26, 2020, the Commonwealth of Puerto Rico, one of the plaintiffs, filed a notice dismissing its case. On September 22, 2020, the Illinois Court required direct action plaintiffs to file a consolidated complaint by October 23, 2020 and stayed bid-rigging claims until the resolution of plaintiffs’ supply reduction and other conspiracy claims are resolved. The Illinois Court has ordered the parties to coordinate scheduling of the direct action complaints with the class complaints with any necessary modifications to reflect time of filing. Discovery will be consolidated.
On June 21, 2019, the U.S. Department of Justice (the “DOJ”) filed a motion to intervene and stay discovery in the In re Broiler Chicken Antitrust Litigation for a period of six months. Following a hearing on June 27, 2019, on June 28, 2019, the Illinois Court granted the government’s motion to intervene, ordering a limited stay, which was subsequently reset, until March 31, 2020. The stay was lifted on March 31, 2020. See “DOJ Antitrust Matter” below for a discussion of developments related to the DOJ.
On August 28, 2020, the Illinois Court issued a revised scheduling order through trial, which contemplates class certification briefing and related expert reports proceeding from October 30, 2020 to May 6, 2021, the close of all merits fact discovery on June 11, 2021, and summary judgment briefing and related expert reports proceeding from July 2, 2021 to February 22, 2022. The Illinois Court has set a trial date of October 17, 2022.
On September 1, 2020, the Attorney General of New Mexico filed a complaint raising similar allegations as the class action and direct action complaints before the Illinois Court. The case is styled as State of New Mexico ex rel. Hector Balderas v. Koch Foods, et al., No. D-101-CV-2020-0891quarterly report and is pending before the First Judicial District Court in the County of Santa Fe. PPC has not been served with the complaint.
Other Claims and Proceedings
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 (the “Colorado Court”) 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 misleadingincorporated by PPC’s failure to disclose that (1) PPC colluded with several of its industry peers to fix prices in the broiler-chicken market as alleged in the In re Broiler Chicken Antitrust Litigation, (2) its conduct constituted a violation of federal antitrust laws, (3) PPC’s revenues during the class period were the result of illegal conduct and (4) that PPC lacked effective internal control over financial reporting. The complaint also states that PPC’s industry was anticompetitive and seeks compensatory damages. On April 4, 2017, the Colorado 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 Colorado 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 Colorado 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 Colorado Court denied the plaintiff’s motion for reconsideration and granted plaintiff leave to file a Second Amended Complaint. On June 8, 2020, the plaintiff filed a Second Amended Complaint against the same defendants, based in part on the Indictment (defined below). On July 31, 2020, defendants filed a motion to dismiss the Second Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs filed an opposition to the motion to dismiss on August 31, 2020, and defendants filed their reply on September 20, 2020. The Court's decision on the motion to dismiss is pending.
On January 27, 2017, a purported class action on behalf of broiler chicken farmers was brought against PPC and four other producers in the U.S. District Court for the Eastern District of Oklahoma (the “Oklahoma Court”) alleging, among other things, a conspiracy to reduce competition for grower services and depress the price paid to growers. Plaintiffs allege violations of the Sherman Act and the Packers and Stockyards Act and seek, among other relief, treble damages. The complaint was consolidated with a subsequently filed consolidated amended class action complaint styled as In re Broiler Chicken Grower Litigation, Case No. CIV-17-033-RJS (the “Grower Litigation”). The defendants (including PPC) jointly moved to dismiss the consolidated amended complaint on September 9, 2017 for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Oklahoma Court granted only certain other defendants’ motions challenging jurisdiction. In addition, on March 12, 2018, the U.S. District Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”) enjoined the Oklahoma Court 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 January 6, 2020, the Oklahoma Court denied defendants' motion to dismiss the consolidated amended complaint and lifted the stay on discovery. On February 21, 2020, the Oklahoma Court plaintiffs filed a Second Amended Complaint in light of the Bankruptcy Court’s injunction. On April 13, 2020, the Oklahoma Court entered a case management
order setting a September 24, 2021 deadline for the close of fact discovery. In September 2020, similar class action complaints were filed in the Colorado Court and the U.S. District Court for the District of Kansas (the “Kansas Court”) alleging claims that mirror those before the Oklahoma Court. On October 6, 2020, the Oklahoma Court plaintiffs filed a motion with the U.S. Judicial Panel on Multidistrict Litigation (the “JPML”) seeking consolidation of the various cases, including any tag-along cases, and transfer of them to the Oklahoma Court. On October 8, 2020, another similar class action complaint was filed in the U.S. District Court for the Northern District of California. Defendants, on October 13, 2020, in the Kansas Court case and, on October 14, 2020, in the Colorado Court case, filed motions seeking dismissal of those complaints under the first-to-file rule. The motions before the JPML, Colorado Court, and Kansas Court are pending. Discovery in the Oklahoma Court case is ongoing.
On March 9, 2017, a stockholder derivative action, 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 Nineteenth Judicial District Court for the County of Weld in Colorado (the “Weld County Court”). 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, Brima v. Lovette, et al., No. 2017 cv. 30308, was brought against all of PPC’s directors and its Chief Financial Officer in the Weld County Court. The Brima complaint contains largely the same allegations as the DiSalvio complaint. On May 4, 2017, the plaintiffs in both the DiSalvio and Brima litigations moved to (1) consolidate the two stockholder derivative cases, (2) stay the consolidated action until the resolution of the motion to dismiss in the Hogan putative securities class action, and (3) appoint co-lead counsel. The Weld County Court granted the motion on May 8, 2017, staying the proceedings pending resolution of the motion to dismiss in the Hogan litigation.
On January 24, 2018, a stockholder derivative action styled as Sciabacucchi v. JBS S.A. et al. was brought against all of PPC’s directors, JBS S.A., JBS USA Holdings and several members of the Batista family, in the Court of Chancery of the State of Delaware (the “Chancery Court”). The complaint alleges, among other things, that the named defendants breached their fiduciary duties arising out of PPC’s acquisition of Moy Park. On May 24, 2018, Employees Retirement System of the City of St. Louis filed a derivative complaint, which was virtually identical to the Sciabacucchi complaint. Both complaints sought compensatory damages. On July 2, 2018, the Chancery Court granted a stipulation consolidating the cases and making the first complaint (Sciabacucchi) the operative complaint. Also by stipulation, various defendants have been voluntarily dismissed from the case without prejudice. The remaining defendants are JBS S.A., JBS USA Holding, and directors Lovette, Nogueira de Souza, Tomazoni, and Molina. PPC also remains in the case as a nominal defendant. On March 15, 2019, the Chancery Court denied the non-PPC defendants’ motion to dismiss. As a result, the case proceeded to discovery, and trial was scheduled to commence in November 2020. On October 3, 2019, the parties enteredreference into a stipulation agreeing to settle the dispute for (1) a cash payment to PPC by the non-PPC defendants of $42.5 million less any fees and expenses awarded to the plaintiffs’ counsel, as well as any applicable taxes (the “Settlement Amount”), and (2) corporate governance changes to be implemented by PPC. No portion of the Settlement Amount will be paid by PPC to the non-PPC defendants. The settlement was approved by the Chancery Court on January 28, 2020. On March 2, 2020, the Settlement Amount was transferred to PPC, and as a result, PPC recognized income, net of legal fees, of $34.6 million, which is included in Miscellaneous, net in the Condensed Consolidated Statement of Income for the nine months ended September 27, 2020.
Between August 30, 2019 and October 16, 2019, four purported class action lawsuits were filed in the U.S. District Court for the District of Maryland (the “Maryland Court”) against PPC and a number of other chicken producers, as well as WMS (Webber, Meng, Sahl and Company) and Agri Stats. The plaintiffs seek to represent a nationwide class of processing plant production and maintenance workers (“Plant Workers”). They allege that the defendants conspired to fix and depress the compensation paid to Plant Workers in violation of the Sherman Act and seek damages from January 1, 2009 to the present. The four cases are Jien v. Perdue Farms, Inc., Case No. 19-cv-2521; Earnest v. Perdue Farms, Inc. et al., Case No. 19-cv-02680; Robinson v. Tyson Foods, Inc. et al., Case No. 19-cv-02960; and Avila v. Perdue Farms, Inc., et al., Case No. 19-cv-03018.On November 12, 2019, the Maryland Court ordered the consolidation of the four cases for pretrial purposes. The defendants (including PPC) jointly moved to dismiss the consolidated complaint on November 22, 2019. Shortly thereafter, the plaintiffs informed the defendants and the Maryland Court that they would be amending their complaint, which they did on December 20, 2019. The consolidated amended complaint asserts largely similar allegations to the pleadings in the consolidated complaint, but was extended to include more class members and turkey processors as well as chicken processors. The defendants filed motions to dismiss the consolidated amended complaint on March 2, 2020, with oppositions originally due on April 24, 2020 and replies on May 21, 2020. The Maryland Court has issued a series of Standing Orders related to the exigent circumstances created by COVID-19, which extended filing deadlines by 84 days, including the deadlines for the response briefings related to defendants' motions to dismiss. The Company filed its motion to dismiss, and on September 16, 2020, the Maryland Court granted the motion without prejudice. The Maryland Court did allow, however, the plaintiffs to amend their Complaint, which they are expected to do.
On July 6, 2020, United Food and Commercial Workers International Union Local 464A (“UFCW”), acting on behalf of itself and a putative class of persons who purchased shares of PPC stock between February 9, 2017 and June 3, 2020, filed a class action complaint in the Colorado Court against PPC, and Messrs. Lovette, Penn, and Sandri. The complaint alleges, among other things, that PPC’s public statements regarding its business and the drivers behind its financial results were false and misleading due to the defendants’ purported failure to disclose its participation in an antitrust conspiracy as alleged in the Broiler litigation and the Indictment (defined below). On September 4, 2020, UFCW and the New Mexico State Investment Council filed competing motions to be appointed lead plaintiff under the Private Litigation Securities Reform Act. A decision on the lead plaintiff motions is currently pending.
PPC believes it has strong defenses in the pending litigations described above and intends to contest them vigorously. PPC cannot predict the outcome of these pending litigations nor when they will be resolved. The consequences of the pending litigation matters are inherently uncertain, and adverse actions, judgments or settlements in some or all of these matters may result in materially adverse monetary damages, fines, penalties or injunctive relief against PPC. Any claims or litigation, even if fully indemnified or insured, could damage PPC’s reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.
DOJ Antitrust Matter
On July 1, 2019, the DOJ issued a subpoena to PPC in connection with its investigation arising from the In re Broiler Chicken Antitrust Litigation. The Company has been cooperating with the DOJ investigation.
On June 3, 2020, PPC learned of an indictment by a Grand Jury in the Colorado Court against Jayson Penn, the chief executive officer and president of PPC at that time, in addition to two former employees of PPC and a former employee of a different company (the “Indictment”). The Indictment alleges that the defendants entered into and engaged in a conspiracy to suppress and eliminate competition by rigging bids and fixing prices and other price-related terms for broiler chicken products sold in the U.S., in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. Sectionthis Item 1. On June 4, 2020, PPC learned that Mr. Penn pleaded not guilty to the charges. Effective June 15, 2020, Mr. Penn began a paid leave of absence from PPC. In connection with Mr. Penn’s leave of absence, PPC’s Board of Directors appointed the chief financial officer of PPC, Fabio Sandri, to serve in the additional role of PPC’s interim president and chief executive officer. On September 22, 2020, PPC's Board of Directors appointed Fabio Sandri as PPC's President and Chief Executive Officer, in addition to his role as Chief Financial Officer. Effective September 22, 2020, PPC disclosed that Mr. Penn was no longer with the Company. The Company has initiated a search process to identify a new Chief Financial Officer.
On October 13, 2020, the Company announced that it had entered into a plea agreement (the “Plea Agreement”) with the DOJ pursuant to which the Company agreed to (1) plead guilty to one count of conspiracy in restraint of competition involving sales of broiler chicken products in the U.S. in violation of the Sherman Antitrust Act, 15 U.S.C. § 1, and (2) pay a fine of $110,524,140. The Company recognized the fine as expense which is included in Selling, general and administrative expense in the Condensed Consolidated Statement of Income for the three and nine months ended September 27, 2020. Under the Plea Agreement, which is subject to the approval of the Colorado Court, the DOJ agreed not to bring further charges against the Company for any antitrust violation involving the sale of broiler chicken products in the U.S. occurring prior to the date of the Plea Agreement. The Company continues to cooperate with the DOJ in connection with the ongoing federal antitrust investigation into alleged price fixing and other anticompetitive conduct in the broiler chicken industry.
ITEM 1A. RISK FACTORS
In addition toFor a discussion of the other information set forthCompany’s potential risks and uncertainties, please see “ Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report, you should carefully consider the risks discussed in ourCompany’s annual report on Form 10-K for the year ended December 29, 2019, including under27, 2020 and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, in each case as updated by the heading “Item 1A. Risk Factors”, which, alongCompany’s periodic filings with risksthe SEC. Material changes to the risk factors disclosed in “ Part I—Item 1A—Risk Factors” in the annual report on Form 10-K for the year ended December 27, 2020 are included below:
We are increasingly dependent on information technology, and our business and reputation could suffer if we are unable to protect our information technology systems against, or effectively respond to, cyber-attacks, other cyber incidents or security breaches or if our information technology systems are otherwise disrupted.
The proper functioning of our information systems is critical to the successful operation of our business. We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic and financial information, to manage a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers, and suppliers. Although our information systems are protected with robust backup systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to cyber-attacks, natural disasters, power losses, unauthorized access, telecommunication failures, and other problems. In addition, certain software used by us is licensed from, and certain services related to our information systems are provided by, third parties who could choose to discontinue their relationship with us. If critical information systems fail or these systems or related software or services are otherwise unavailable, our ability to process orders, maintain proper levels of inventories, collect accounts receivable, pay expenses, and maintain the security of Company and customer data could be adversely affected. Cyber-attacks and other cyber incidents are occurring more frequently and are constantly evolving in nature and sophistication. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our information technology systems or networks. To date, none of these actual or attempted cyber-attacks has had a material effect on our operations or financial condition.
For example, we determined on May 30, 2021 that we were the target of an organized cybersecurity attack (the “Cyberattack”) affecting some of the servers supporting our global IT systems. Upon learning of the intrusion, we contacted federal officials and activated our cybersecurity protocols, including voluntarily shutting down all affected systems to isolate the intrusion, limit the potential infection and preserve core systems. Restoring systems critical to production was prioritized. In addition, encrypted backup servers, which were not affected by the Cyberattack, allowed for a return to full operations within two days. We incurred a loss of approximately $10.0 million related to the Cyberattack during the second quarter of 2021, which included an allocation of $2.4 million of the total $11.0 million ransom paid by our parent company.
Our response, IT systems and encrypted backup servers allowed for a rapid recovery from the Cyberattack. As a result, the loss of food produced was limited to less than one day of production. We continue to cooperate with government officials regarding this report, are risks we believe could materially affect the Company’s business, financial condition or future results. These risksincident. We are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Companyaware of any evidence that any customer, supplier, employee or that it currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition or future results.
The outbreak of COVID-19 and its impact on business and economic conditions have negatively affected, and could continue to negatively affect our business, results of operations, financial condition and the trading value of our securities.
The outbreak of COVID-19, which surfaced in Wuhan, China in December 2019, has since been declared a global pandemic. The impact of this pandemicdata has been compromised or misused as a result of the Cyberattack.
Our failure to maintain our cyber-security measures and keep abreast of new and evolving threats may make our systems vulnerable. The potential consequences of a material cyber-security incident include reputational damage, litigation with third parties, regulatory actions, disruption of plant operations, and increased cyber-security protection and remediation costs. There can be no assurance that we will likely continuebe able to prevent all of the rapidly evolving forms of increasingly sophisticated and frequent cyber-attacks. Moreover, our efforts to address network security vulnerabilities may not be extensivesuccessful, resulting potentially in many aspectsthe theft, loss, destruction or corruption of society, which has resulted in and will likely continue to result in significant disruptions to the global economy,information we store electronically, as well as businessesunexpected interruptions, delays or cessation of service, any of which would cause harm to our business operations. The vulnerability of our systems and capital markets around the world. Inour failure to identify or respond timely to cyber incidents could have an effort to halt the outbreak of COVID-19, a number of countries, states, counties and other jurisdictions have imposed a number of measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitationsadverse effect on gatherings of people, reducedour operations and extended closuresreputation and expose us to liability or regulatory enforcement actions.
Our operations are subject to general risks of businesses. Onlitigation.
April 28,We are involved on an ongoing basis in litigation relating to alleged antitrust violations or arising in the ordinary course of business or otherwise. Trends in litigation may include class actions involving consumers, shareholders, employees or injured persons, and claims relating to commercial, labor, employment, antitrust, securities or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty, and adverse litigation trends and outcomes could result in material damages, which could adversely affect our financial condition and results of operations.
For example, between September 2, 2016 and October 13, 2016, a series of purported class action lawsuits were brought against PPC and 19 other defendants 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 sought, 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 filed three consolidated amended complaints: one on behalf of direct purchasers and two on behalf of distinct groups of indirect purchasers. In March 2021, PPC paid the direct purchasers $75.0 million, which PPC recognized as an expense during the fourth quarter of fiscal 2020. In June 2021, PPC announced that it had entered into agreements to settle all claims made by the two distinct groups of indirect purchasers. Pursuant to these agreements, PPC agreed to pay the two distinct groups of indirect purchasers an aggregate $120.5 million, which PPC recognized as an expense during the second quarter of fiscal 2021. PPC also recognized expense of $183.9 million for probable losses to opt-out plaintiffs in the broiler chicken antitrust litigation during the second and third quarters of 2021.
Between August 30, 2019 and October 16, 2019, four purported class action lawsuits were brought against PPC, a number of other chicken producers and various other defendants on behalf of a nationwide class of processing plant production and maintenance workers alleging that the defendants conspired to fix and depress the compensation paid to these workers in violation of the Sherman Act and sought damages from January 1, 2009 to the present. In June 2021, PPC announced that it had entered into an agreement to settle all claims made by the workers. Pursuant to this agreement, PPC agreed to pay the workers an aggregate $29.0 million, which PPC recognized as an expense during the second quarter of fiscal 2021.
In addition, on October 13, 2020, President Trump signed an executive order directingPPC announced that it had entered into a plea agreement with the U.S. Department of AgricultureJustice pursuant to ensure meat and poultry processorswhich the it agreed to plead guilty to one count of conspiracy in restraint of competition involving sales of broiler chicken products in the U.S. continue operations uninterruptedin violation of the Sherman Antitrust Act. In March 2021, PPC paid a fine of $107.9 million.
For additional information, see Part I, Item 1, Notes to Condensed Consolidated Financial Statements, “Note 18. Commitments and Contingencies” in this quarterly report.
The consequences of the maximum extent possiblelitigation matters PPC faces are inherently uncertain, and designating meat and poultry processing plants as critical infrastructure.
The COVID-19 outbreak has had, and a continuing outbreakadverse actions, judgments or future outbreaks are likely to have, numerous adverse effects on our business and operations.
If COVID-19 continues to spread, we may be required to temporarily close onesettlements in some or more of our production facilities.As of October 28, 2020, all of our 60 production facilities are operating, although some facilities have reduced production levelsthese matters has resulted and outputs due to increased health and safety measures and the decline in demand by restaurants and other foodservice businesses. There can be no assurance that the health and safety measures we have taken (which include adding temperature and symptom screening stations for employees prior to entering our facilities and increasing physical distancing of our employees) will eradicate the risks associated with working in a critical infrastructure industry, including but not limited to, infection of our employees or the temporary closure of a facility, which could, in turn, have a material adverse impact on our reputation, business, results of operations and financial condition.
We may experience decreased production and sales due to the changing demand for food products. COVID-19 and the implementation of restricted living have led to a shift in demand from restaurants to retail grocery stores, with consumers eating more at home due to stay-at-home orders. In our U.S. and Mexico businesses, demand for parts and whole-birds (typically bound for restaurants) and prepared foods (distributed, in part, to schools) has declined, while our U.K. and European business, which is more retail focused, has generally seen less of an impact. Although we have taken and continue to take steps to shift our production and meet this changing demand, we may be unable to effectively implement our plans to adjust our supply of products, which could materially adversely impact our business and results of operations.
Our brand or reputation could be negatively impacted. The meat production industry has recently been the focus of negative press reports in light of the spread of COVID-19 at certain companies’ facilities. Although we have not been the focus of such reports, our brand or reputation could be negatively impacted by such reports.
In addition to the risks described above, the COVID-19 pandemic could have additional adverse effects on our business and financial condition, including, but not limited to, the following:
•a significant increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future result in materially adverse monetary damages, fines, penalties, or the risk that we may be unableinjunctive relief against PPC. Any claims or litigation, even if fully indemnified or insured, could damage PPC’s reputation and make it more difficult to meet the requirements of the covenants in our existing credit facilities, which could negatively affect our liquidity position and our abilitycompete effectively or to fund operations or future investment opportunities;
•an impairmentobtain adequate insurance in the carrying value of goodwill or intangible assets or a change in the useful life of definite-lived intangible assets;
•significant volatility or decline in the trading price of our securities; and
•our inability to execute strategic business activities including acquisitions and divestiture.
The potential effects of COVID-19 could also impact or heighten many of the risks described in our risk factors included in Part 1, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 29, 2019, filed with the SEC on February 21, 2020, including, but not limited to: increased risk of cyber-attacks, other cyber incidents or security breaches; litigation risks; deterioration in labor relations with our employees; increase in employee turnover; and our dependence on contract growers.
The situation surrounding COVID-19 remains fluid and the likelihood of impacts on the Company that could be material increases the longer the virus impacts activity levels in the countries where we operate, including the U.S., the U.K. and Mexico. Therefore, it is difficult to predict with certainty the potential impact of the virus on the Company’s business, operations and financial condition.future.
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. As of September 27, 2020,26, 2021, the Company had repurchased 6,105,444 shares under this program for an aggregate cost of $110.9 million and an average price of $18.1707 per share. This program expired on February 16, 2021. Set forth below is information regarding our stock repurchases for the three months ended September 27, 2020.26, 2021.
| Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities |
Period | 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) | 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) |
June 29, 2020 through July 26, 2020 | | 1,467,987 | | | $ | 16.3515 | | | 5,720,767 | | | $ | 94,983,270 | | |
July 27, 2020 through August 30, 2020 | | 82,750 | | | 15.4028 | | | 5,803,517 | | | 93,708,689 | | |
August 31, 2020 through September 27, 2020 | | 301,927 | | | 15.3965 | | | 6,105,444 | | | 89,060,082 | | |
June 28, 2021 through July 25, 2021 | | June 28, 2021 through July 25, 2021 | | — | | | $ | — | | | 6,105,444 | | | $ | 89,060,082 | |
July 26, 2021 through August 29, 2021 | | July 26, 2021 through August 29, 2021 | | — | | | — | | | 6,105,444 | | | 89,060,082 | |
August 30, 2021 through September 26, 2021 | | August 30, 2021 through September 26, 2021 | | — | | | — | | | 6,105,444 | | | 89,060,082 | |
Total | Total | | 1,852,664 | | | $ | 16.1535 | | | 6,105,444 | | | $ | 89,060,082 | | Total | | — | | | $ | — | | | 6,105,444 | | | $ | 89,060,082 | |
(a) Reflects the remaining dollar value of shares that may yet be repurchased under our share repurchase authorization.
ITEM 6. EXHIBITS
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3.1 | | |
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3.2 | | |
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4.1 | | Indenture dated as of April 8, 2021 among the Company, Pilgrim’s Pride Corporation of West Virginia, Inc., Gold’n Plump Poultry, LLC, Gold’n Plump Farms, LLC, JFC LLC and Regions Bank, as Trustee (incorporated by reference from Exhibit 4.1 of the Company’s Current Report on Form 8-K (No. 001-09273) filed on April 9, 2021). |
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4.2 | | |
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4.3 | | Indenture, dated as of September 2, 2021 among the Company, as issuer, Pilgrim's Pride Corporation of West Virginia, Inc., Gold'n Plump Poultry, LLC, Gold'n Plump Farms, LLC and JFC LLC, as Guarantors, and Regions Bank, as Trustee (incorporated by reference from Exhibit 4.1 of the Company’s Current Report on Form 8-K (No. 001-09273) filed on September 2, 2021). |
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10.1 | | |
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10.2 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | Inline XBRL Instance Document |
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101.SCH | | Inline XBRL Taxonomy Extension Schema |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation |
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101.DEF | | Inline XBRL Taxonomy Extension Definition |
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101.LAB | | Inline XBRL Taxonomy Extension Label |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* | | 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.
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| | PILGRIM’S PRIDE CORPORATION | |
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Date: October 28, 202027, 2021 | | /s/ Fabio SandriMatthew Galvanoni | |
| | Fabio SandriMatthew Galvanoni | |
| | President and Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer | |
| | (Principal Executive Officer, Principal Financial Officer, Chief Accounting Officer and Duly Authorized Officer) | |