Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 25, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File number 1-9273

 

 

LOGO

PILGRIM’S PRIDE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-1285071

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1770 Promontory Circle,

Greeley, CO

  80634-9038
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (970) 506-8000

 

 

(Former name, former address and former fiscal year, if changed since last report.)

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

Number of shares outstanding of the issuer’s common stock, as of October 28, 2011, was 214,481,914, including 200,000 shares of restricted stock.

 

 

 


INDEX

PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES

 

PART I. FINANCIAL INFORMATION      3   

                Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

     3   
  

Condensed Consolidated Balance Sheets September 25, 2011 and December 26, 2010

     3   
  

Condensed Consolidated Statements of Operations Thirteen and Thirty-Nine weeks ended September 25, 2011 and September 26, 2010

     4   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) Thirteen and Thirty-Nine weeks ended September 25, 2011 and September 26, 2010

     5   
  

Condensed Consolidated Statements of Stockholders’ Equity Thirty-Nine weeks ended September 25, 2011 and September 26, 2010

     6   
  

Condensed Consolidated Statements of Cash Flows Thirty-Nine weeks ended September 25, 2011 and September 26, 2010

     7   
  

Notes to Condensed Consolidated Financial Statements as of September 25, 2011

     8   

                Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     48   

                Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     69   

                Item 4.

  

Controls and Procedures

     73   
PART II. OTHER INFORMATION      74   

                Item 1.

  

Legal Proceedings

     74   

                Item 1A.

  

Risk Factors

     80   

                Item 5.

  

Other Information

     80   

                Item 6.

  

Exhibits

     81   
SIGNATURES      83   
EXHIBIT INDEX      84   

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PILGRIM’S PRIDE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 25,
2011
    December 26,
2010
 
     (In thousands)  

Cash and cash equivalents

   $ 46,904      $ 106,077   

Restricted cash and cash equivalents

     57,308        60,953   

Investment in available-for-sale securities

     52        1,554   

Trade accounts and other receivables, less allowance for doubtful accounts

     355,349        321,300   

Account receivable from JBS USA, LLC

     6,021        465   

Inventories

     919,550        1,029,254   

Income taxes receivable

     57,896        58,465   

Current deferred tax assets

     3,176        3,476   

Prepaid expenses and other current assets

     44,987        81,250   

Assets held for sale

     46,220        47,671   
  

 

 

   

 

 

 

Total current assets

     1,537,463        1,710,465   

Investment in available-for-sale securities

     1,797        11,595   

Deferred tax assets

     35,091        22,609   

Other long-lived assets

     62,124        67,143   

Identified intangible assets, net

     45,519        48,950   

Property, plant and equipment, net

     1,317,692        1,358,136   
  

 

 

   

 

 

 

Total assets

   $ 2,999,686      $ 3,218,898   
  

 

 

   

 

 

 

Accounts payable

   $ 326,308      $ 329,780   

Account payable to JBS USA, LLC

     16,257        7,212   

Accrued expenses and other current liabilities

     312,155        297,940   

Income taxes payable

     1,659        6,814   

Current deferred tax liabilities

     38,744        38,745   

Current maturities of long-term debt

     15,609        58,144   
  

 

 

   

 

 

 

Total current liabilities

     710,732        738,635   

Long-term debt, less current maturities

     1,458,890        1,281,160   

Note payable to JBS USA Holdings, Inc.

     50,000        —     

Deferred tax liabilities

     4,751        3,476   

Other long-term liabilities

     111,391        117,031   
  

 

 

   

 

 

 

Total liabilities

     2,335,764        2,140,302   

Common stock

     2,143        2,143   

Additional paid-in capital

     1,443,335        1,442,810   

Accumulated deficit

     (758,590     (348,653

Accumulated other comprehensive loss

     (25,492     (23,637
  

 

 

   

 

 

 

Total Pilgrim’s Pride Corporation stockholders’ equity

     661,396        1,072,663   

Noncontrolling interest

     2,526        5,933   
  

 

 

   

 

 

 

Total stockholders’ equity

     663,922        1,078,596   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,999,686      $ 3,218,898   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

3


PILGRIM’S PRIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     September 25,
2011
    September 26,
2010
    September 25,
2011
    September 26,
2010
 
     (In thousands, except per share data)  

Net sales

   $ 1,891,224      $ 1,719,850      $ 5,706,390      $ 5,070,336   

Costs and expenses:

        

Cost of sales

     1,953,611        1,560,031        5,868,115        4,726,007   

Operational restructuring charges, net

     —          2,525        —          2,525   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (62,387     157,294        (161,725     341,804   

Selling, general and administrative expense

     51,197        45,096        157,341        157,415   

Administrative restructuring charges, net

     11,472        (1,006     11,472        51,695   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (125,056     113,204        (330,538     132,694   

Interest expense

     27,930        26,492        82,863        81,027   

Interest income

     (323     (646     (1,311     (1,820

Foreign currency transaction losses (gains)

     13,925        (280     11,235        877   

Miscellaneous, net

     (3,728     (1,396     (6,236     (9,382
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before reorganization items and income taxes

     (162,860     89,034        (417,089     61,992   

Reorganization items, net

     —          —          —          18,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (162,860     89,034        (417,089     43,451   

Income tax expense (benefit)

     (60     30,512        (6,462     (4,295
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (162,800     58,522        (410,627     47,746   

Less: Net income (loss) attributable to noncontrolling interests

     (284     596        790        2,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Pilgrim’s Pride Corporation

   $ (162,516   $ 57,926      $ (411,417   $ 45,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding:

        

Basic

     214,282        214,282        214,282        214,282   

Diluted

     214,282        214,282        214,282        214,282   

Net income (loss) per share of common stock outstanding:

        

Basic

   $ (0.76   $ 0.27      $ (1.92   $ 0.21   

Diluted

   $ (0.76   $ 0.27      $ (1.92   $ 0.21   

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

4


PILGRIM’S PRIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     September 25,
2011
    September 26,
2010
    September 25,
2011
    September 26,
2010
 
           (In thousands)        

Net income (loss)

   $ (162,800   $ 58,522      $ (410,627   $ 47,746   

Other comprehensive income (loss):

        

Unrealized holding gains (losses) on available-for-sale securities

     (1,147     457        (1,867     743   

Tax effect(a)

     —          (172     —          (353
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized holding gains (losses) on available-for-sale securities, net of tax

     (1,147     285        (1,867     390   

Recognition in earnings of a previously unrecognized gain on a derivative instrument designated as a cash flow hedge

     —          —          —          (4,086

Tax effect

     —          —          —          1,521   
  

 

 

   

 

 

   

 

 

   

 

 

 

Recognition in earnings of a previously unrecognized gain on a derivative instrument designated as a cash flow hedge, net of tax

     —          —          —          (2,565

Gains associated with pension and other postretirement benefits

     23        42        12        9,470   

Tax effect(a)

     —          (16     —          (3,601
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains associated with pension and other postretirement obligations, net of tax benefits, net of tax

     23        26        12        5,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (1,124     311        (1,855     3,694   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (163,924     58,833        (412,482     51,440   

Less: Comprehensive income (loss) attributable to noncontrolling interests

     (284     596        790        2,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Pilgrim’s Pride Corporation

   $ (163,640   $ 58,237      $ (413,272   $ 48,991   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) For the thirteen and thirty-nine weeks ended September 25, 2011, no tax effect is reflected because the Company has recorded a valuation allowance against the deferred tax benefit.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

5


PILGRIM’S PRIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

     Pilgrim’s Pride Corporation Stockholders              
     Common Stock      Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
    Total  
     Shares      Amount             
     (In thousands)  

Balance at December 26, 2010

     214,282       $ 2,143       $ 1,442,810      $ (348,653   $ (23,637   $ 5,933      $ 1,078,596   

Comprehensive loss:

                

Net income (loss)

     —           —           —          (411,417     —          790        (410,627

Other comprehensive loss, net of tax:

                

Net unrealized holding losses on available-for-sale securities, net of tax

     —           —           —          —          (1,867     —          (1,867

Gains associated with pension and other postretirement benefit obligations, net of tax

     —           —           —          —          12        —          12   
                

 

 

 

Total other comprehensive loss, net of tax

                   (1,855
                

 

 

 

Total comprehensive loss

                   (412,482
                

 

 

 

Share-based compensation

     —           —           418        —          —          —          418   

Other activity

     —           —           107        1,480        —          (4,197     (2,610
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 25, 2011

     214,282       $ 2,143       $ 1,443,335      $ (758,590   $ (25,492   $ 2,526      $ 663,922   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 27, 2009

     77,141       $ 771       $ 648,583      $ (435,794   $ (27,266   $ 6,514      $ 192,808   

Comprehensive income:

                

Net income

     —           —           —          45,297        —          2,449        47,746   

Other comprehensive income (loss), net of tax:

                

Net unrealized holding gains on available-for-sale securities, net of tax

     —           —           —          —          390        —          390   

Recognition in earnings of a previously unrecognized gain on a derivative instrument designated as a cash flow hedge, net of tax

     —           —           —          —          (2,565     —          (2,565

Gains associated with pension and other postretirement benefit obligations, net of tax

     —           —           —          —          5,869        —          5,869   
                

 

 

 

Total other comprehensive income, net of tax

                   3,694   
                

 

 

 

Total comprehensive income

                   51,440   
                

 

 

 

Common stock issued

     137,141         1,372         798,628        —          —          —          800,000   

Other activity

     —           —           (4,401     —          —          (3,608     (8,009
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 26, 2010

     214,282       $ 2,143       $ 1,442,810      $ (390,497   $ (23,572   $ 5,355      $ 1,036,239   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

6


PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Thirty-Nine Weeks Ended  
     September 25,
2011
    September 26,
2010
 
     (In thousands)  

Cash flows from operating activities:

    

Net income (loss)

   $ (410,627   $ 47,746   

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

    

Depreciation and amortization

     156,706        175,397   

Asset impairment

     11,640        15,231   

Foreign currency transaction losses (gains)

     9,594        (399

Noncash loss on early extinguishment of debt recognized as a reorganization item

     —          13,654   

Accretion of bond discount

     339        —     

Loss (gain) on property disposals

     177        (3,057

Share-based compensation

     418        —     

Deferred income tax benefit

     (10,707     (11,705

Changes in operating assets and liabilities:

    

Restricted cash and cash equivalents

     3,645        5,072   

Trade accounts and other receivables

     (42,871     (42,566

Inventories

     101,565        (168,178

Prepaid expenses and other current assets

     34,824        (27,758

Accounts payable, accrued expenses and other current liabilities

     18,625        (146,603

Income taxes

     1,030        111,606   

Deposits

     2,180        55,447   

Other operating assets and liabilities

     (6,018     (1,579
  

 

 

   

 

 

 

Cash provided by (used in) operating activities

     (129,480     22,308   

Cash flows from investing activities:

    

Acquisitions of property, plant and equipment

     (121,869     (109,037

Purchases of investment securities

     (4,536     (9,377

Proceeds from sale or maturity of investment securities

     14,631        9,649   

Proceeds from property disposals

     7,502        11,581   
  

 

 

   

 

 

 

Cash used in investing activities

     (104,272     (97,184

Cash flows from financing activities:

    

Proceeds from note payable to JBS USA

     50,000        —     

Proceeds from revolving line of credit and long-term borrowings

     804,689        1,652,700   

Payments on revolving line of credit, long-term borrowings and capital lease obligations

     (669,832     (2,508,549

Proceeds from sale of common stock

     —          800,000   

Purchase of remaining interest in subsidiary

     (2,504     (7,637

Payment of capitalized loan costs

     (4,395     (49,981

Other financing activities

     (106     (353
  

 

 

   

 

 

 

Cash provided by (used in) financing activities

     177,852        (113,820

Effect of exchange rate changes on cash and cash equivalents

     (3,273     (1,391
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (59,173     (190,087

Cash and cash equivalents, beginning of period

     106,077        236,300   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 46,904      $ 46,213   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Business

Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “PPC,” “the Company,” “we,” “us,” “our,” or similar terms) is the second-largest chicken company in the United States (“US”), Mexico and Puerto Rico. Our fresh chicken retail line is sold throughout the US and Puerto Rico, and in the northern and central regions of Mexico. Our prepared-foods products meet the needs of some of the largest customers in the food service industry across the US. Additionally, the Company exports commodity chicken products to approximately 95 countries. As a vertically integrated company, we control every phase of the production of our products. We operate feed mills, hatcheries, processing plants and distribution centers in 14 US states, Puerto Rico and Mexico. Our fresh chicken products consist of refrigerated (non-frozen) whole or cut-up chicken, either pre-marinated or non-marinated, and pre-packaged chicken in various combinations of freshly refrigerated, whole chickens and chicken parts. Our prepared chicken products include portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties and bone-in chicken parts. These products are sold either refrigerated or frozen and may be fully cooked, partially cooked or raw. In addition, these products are breaded or non-breaded and either pre-marinated or non-marinated.

Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the US for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the US Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the US for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments unless otherwise disclosed) considered necessary for a fair presentation have been included. Operating results for the thirteen and thirty-nine weeks ended September 25, 2011 are not necessarily indicative of the results that may be expected for the year ending December 25, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 26, 2010.

Pilgrim’s operates on a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. The reader should assume any reference we make to a particular year (for example, 2011) in the notes to these Condensed Consolidated Financial Statements applies to our fiscal year and not the calendar year.

The Condensed Consolidated Financial Statements include the accounts of the Company and its majority owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation.

 

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company measures the financial statements of its Mexico subsidiaries as if the US dollar were the functional currency. Accordingly, we remeasure assets and liabilities, other than non-monetary assets, of the Mexico subsidiaries at current exchange rates. We remeasure non-monetary assets using the historical exchange rate in effect on the date of each asset’s acquisition. We remeasure income and expenses at average exchange rates in effect during the period. Currency exchange gains or losses are included in the line item Foreign currency transaction losses (gains) in the Condensed Consolidated Statements of Operations.

Revenue Recognition

We recognize revenue when all of the following circumstances are satisfied: (i) persuasive evidence of an arrangement exists, (ii) price is fixed or determinable, (iii) collectability is reasonably assured and (iv) delivery has occurred. Delivery occurs in the period in which the customer takes title and assumes the risks and rewards of ownership of the products specified in the customer’s purchase order or sales agreement. Revenue is recorded net of estimated incentive offerings including special pricing agreements, promotions and other volume-based incentives. Revisions to these estimates are charged back to net sales in the period in which the facts that give rise to the revision become known.

Recently Adopted Accounting Pronouncements

On December 27, 2010, the Company adopted a portion of Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements, which amended Accounts Standards Codification (“ASC”) Subtopic 820-10 by including new required disclosures regarding activity in Level 3 fair value measurements. The adoption of the subject guidance under amended ASC 820-10 did not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements Issued But Not Yet Adopted

The Financial Accounting Standards Board (the “FASB”) recently issued ASU No. 2011-05, Presentation of Comprehensive Income which eliminates the option of reporting other comprehensive income (“OCI”) as a component of the statement of stockholders equity. The amendment requires that total comprehensive income, the components of net income and the components of OCI either be presented in one continuous statement of comprehensive income or in two separate but consecutive statements. The amendment is effective for fiscal years beginning after December 15, 2011 and is to be applied retrospectively. The Company has not yet adopted this amendment; however, adoption will not have a material impact on the Company’s financial position, results of operations or cash flow.

The FASB recently issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Disclosure Requirements in the U.S. GAAP and IFRS. The amendment clarifies the FASB’s intent about the application of existing fair value measurement and disclosure

 

9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

requirements (ASC Topic 820) and improves consistency in wording to ensure that U.S. GAAP and IFRS are described the same way. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendment is effective for fiscal years beginning after December 15, 2011 and is to be applied prospectively. The Company has not yet adopted this amendment; however, adoption will not have a material impact on the Company’s financial position, results of operations or cash flow.

Common Stock Equivalents

Due to the net losses incurred in the thirteen and thirty-nine weeks ended September 25, 2011, the Company did not include 162 and 7,795 common stock equivalents, respectively, in the calculations of the denominators for net loss per diluted common share as these common stock equivalents would be anti-dilutive.

2. CHAPTER 11 PROCEEDINGS

Emergence from Bankruptcy

On December 1, 2008, Pilgrim’s and six of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”), seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). We emerged from Chapter 11 bankruptcy proceedings on December 28, 2009. In connection with our emergence from bankruptcy, our common stock outstanding immediately prior to the emergence was cancelled and converted into the right to receive newly-issued shares of common stock of the reorganized Company based on a one-for-one exchange ratio, which constituted 36.0% of the total number of shares of our newly-issued common stock on that date. The remaining shares of our newly-issued common stock, constituting 64.0% of our total issued and outstanding common stock on December 28, 2009, were purchased for $800.0 million by JBS USA Holdings, Inc. (“JBS USA”), a wholly-owned indirect subsidiary of JBS S.A., a Brazil-based meat producer. On November 5, 2010, JBS USA increased its stake in the Company to 67.3% of the total number of shares issued and outstanding on such date.

Upon exiting from bankruptcy, Pilgrim’s and certain of its subsidiaries entered into an exit credit facility that provided for an aggregate commitment of $1.75 billion (the “Exit Credit Facility”). The facility currently consists of a $700.0 million revolving credit facility maturing on December 28, 2014 and a $582.3 million Term B facility maturing on December 28, 2014. As of September 25, 2011, a principal amount of $394.4 million under the revolving loan commitment and a principal amount of $578.5 million under the Term B facility were outstanding.

 

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Financial Reporting Considerations

The Company’s emergence from bankruptcy did not qualify for fresh start accounting because the reorganization value determined for the Company upon emergence exceeded post-petition liabilities and allowed claims. Reorganization value is the estimated fair value of the Company before considering liabilities and approximates the amount a willing buyer would pay for the assets of the Company immediately after the restructuring. To determine its reorganization value, the Company considered recent third-party valuations of its assets as well as the purchase price paid by JBS USA for 64.0% of the common stock of the reorganized Company. Management believes that the method used to determine the Company’s reorganization value was the most appropriate method under the circumstances because the Bankruptcy Court did not declare a reorganization value for the Company. The Company’s conclusion that it did not qualify for fresh start accounting was substantiated by the fact that (i) no liabilities were discounted in the plan of reorganization and (ii) the common stock of the reorganized Company traded at an average price of $8.40 per share on December 28, 2009, resulting in a market capitalization on 36.0% of the outstanding common stock of the reorganized Company of approximately $650.0 million and indicating that the investment community believed that the fair value of the Company’s assets exceeded its post-petition liabilities and allowed claims on December 28, 2009. The acquisition of a controlling interest in the Company by JBS USA did not qualify for push-down accounting as JBS USA only purchased 64.0% of the common stock of the reorganized Company on December 28, 2009. Thus, the Company did not revalue its assets and liabilities because of either its emergence from bankruptcy or the purchase of 64.0% of the common stock of the reorganized Company by JBS USA.

From December 1, 2008 through March 28, 2010, the Company applied ASC Topic 852, Reorganizations, in preparing the Condensed Consolidated Financial Statements. ASC Topic 852 requires that the financial statements, for periods subsequent to a Chapter 11 filing, distinguish transactions and events that were directly associated with the reorganization from the ongoing operations of the business.

Beginning in December 2008, certain activities directly associated with the reorganization were approved by the Bankruptcy Court. These activities eliminated approximately 8,100 positions and resulted in net pre-tax charges totaling $138.5 million. Of these charges, we recognized $51.8 million of professional fees directly related to the reorganization, $25.0 million of finance costs related to various credit facilities, $14.1 million of incentive compensation costs and $62.9 million of other reorganization costs such as severance, other personnel costs and facility closure costs. We also recognized an aggregate net gain totaling $15.3 million on asset disposals directly associated with the reorganization. The cash-related portion of these reorganization costs totaled $133.7 million. Asset impairments and other noncash charges totaled $20.1 million. Proceeds received on asset disposals directly associated with the reorganization totaled $78.9 million.

 

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the thirteen weeks ended September 25, 2011 and September 26, 2010, we did not incur costs related to reorganization. Net reorganization costs totaling $18.5 million were recognized during the thirty-nine weeks ended September 26, 2010. We did not incur reorganization items during the thirty-nine weeks ended September 25, 2011.

The following expenses, realized gains and provisions for losses that were realized or incurred in the bankruptcy proceedings were recorded in Reorganization items, net on the accompanying Condensed Consolidated Statement of Operations for thirty-nine weeks ended September 26, 2010:

 

    Thirty-Nine
Weeks Ended
September 26, 2010
 
    (In thousands)  

Professional fees directly related to reorganization(a)

  $ 2,785   

Finance costs related to various credit facilities(b)

    13,654   

Other costs(c)

    2,102   
 

 

 

 

Reorganization items, net

  $ 18,541   
 

 

 

 

 

(a) Professional fees directly related to reorganization included post-petition fees associated with advisors to Pilgrim’s and the six subsidiaries that filed bankruptcy petitions, the statutory committee of unsecured creditors and certain secured creditors.
(b) For the thirty-nine weeks ended September 26, 2010, Finance costs related to various credit facilities included (i) recognition of expenses totaling $17.8 million related to the elimination of unamortized loan costs associated with certain credit facilities and unsecured notes payable that were effectively extinguished on December 28, 2009 and (ii) recognition of a previously unrealized gain totaling $4.1 million related to a derivative instrument designated as a cash flow hedge against the interest rate charged on an unsecured note payable that was effectively extinguished on December 28, 2009.
(c) Other costs included costs related to post-petition facilities closures.

Net cash outflow resulting from reorganization items during the thirty-nine weeks ended September 26, 2010 totaled $30.7 million. This included payment of professional fees directly related to the reorganization totaling $15.7 million, payment of incentive compensation totaling $12.9 million that was contingent upon confirmation by the Bankruptcy Court of a plan of reorganization, severance payments of $1.5 million and net payment of facility closure costs totaling $0.5 million. These cash flows are included in Cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows.

 

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company did not record activity through the accrued reorganization cost accounts during the thirty-nine weeks ended September 25, 2011. The following table sets forth activity that was recorded through the Company’s accrued reorganization cost accounts during the thirty-nine weeks ended September 26, 2010:

 

     Accrued
Professional
Fees
    Accrued
Incentive
Compensation
    Accrued
Other
Costs
    Total  
     (In thousands)  

Balance at December 27, 2009

   $ 14,125      $ 13,024      $ 745      $ 27,894   

Accruals

     4,434        —          849        5,283   

Payment /Disposal

     (15,680     (12,913     (1,538     (30,131

Adjustments

     (2,879     (111     (56     (3,046
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 26, 2010

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company has resolved a majority of the claims filed against it through settlement or by Bankruptcy Court order. The claims resolution process continues for the remaining unresolved claims and will continue until all claims are concluded. Unpaid amounts related to unresolved claims are classified in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. During the thirty-nine weeks ended September 25, 2011, the Company paid creditors approximately $0.4 million to settle allowed claim amounts and interest accrued on those claim amounts. As of September 25, 2011, the following pre-petition obligations relating to claims not subject to litigation remain outstanding:

 

In thousands

      

Trade claims

   $ 313   

Interest accrued on unpaid claims

     45   
  

 

 

 

Total pre-petition obligations

   $ 358   
  

 

 

 

The Company is also the named defendant in several pre-petition lawsuits that, as of September 25, 2011, have not been resolved. Additional information regarding these lawsuits is included in “Note 16. Commitments and Contingencies.”

3. EXIT OR DISPOSAL ACTIVITIES

In February 2008, the Company’s Board of Directors approved certain exit or disposal activities as part of a plan to rationalize both our manufacturing and distribution footprints and to eliminate administrative redundancies in an effort to curtail losses resulting from record-high feed ingredient costs and an oversupply of chicken in the US. Beginning in January 2010, Company management implemented certain additional exit or disposal activities to integrate the administrative functions of the Company into those of JBS USA. In July 2011, additional exit and disposal activities were implemented by Company management to consolidate operations at our Dallas, Texas facility into other facilities in the surrounding area. These exit or disposal activities eliminated a total of approximately 5,100 positions and resulted in net pre-tax charges totaling $142.1 million. Of these charges, we recognized $49.1 million of severance and other personnel costs, $46.3 million of asset impairments, $31.8 million in losses related to the sale of unneeded eggs and the depletion of unneeded flocks, $4.0 million of grower compensation, $2.0

 

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

million of lease continuation costs, $2.1 million in losses related to scrapped inventory and $6.8 million in other restructuring costs. All exit or disposal costs related to these activities, with the exception of costs or losses related to asset impairments, sales of unneeded eggs, depletion of unneeded flocks and scrapped inventory, resulted in cash expenditures or will result in cash expenditures within one year. The cash-related portion of these exit or disposal costs totaled $54.2 million.

Results of operations for the thirteen weeks ended September 25, 2011 and September 26, 2010 included exit or disposal costs totaling $1.0 million and $3.2 million, respectively. Results of operations for the thirteen weeks ended September 25, 2011 and September 26, 2010 also included adjustments totaling $0.3 million and $10.1 million, respectively, which reduced accrued costs. Adjustments recognized in the thirteen weeks ended September 25, 2011 included the elimination of accrued severance in excess of actual severance costs incurred during the exit or disposal period. Adjustments recognized in the thirteen weeks ended September 26, 2010 included favorable adjustments to incentive compensation related to excise taxes upon finalization of an incentive plan analysis as well as elimination of accrued severance and other exit or disposal costs.

Results of operations for the thirty-nine weeks ended September 25, 2011 and September 26, 2010 included exit or disposal costs totaling $2.3 million and $41.1 million, respectively. Results of operations for the thirty-nine weeks ended September 25, 2011 and September 26, 2010 also included adjustments totaling $1.0 million and $11.0 million, respectively, which reduced accrued costs. Adjustments recognized in the thirty-nine weeks ended September 25, 2011 and September 26, 2010 included the elimination of accrued severance in excess of actual severance costs incurred during the exit or disposal period. During the thirty-nine weeks ended September 26, 2010, we also recognized an adjustment for the assumption of a lease obligation related to a closed office building by an outside party and favorable adjustments to incentive compensation related to excise taxes upon finalization of an incentive plan analysis.

 

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table sets forth activity that was recorded through the Company’s accrued exit or disposal cost accounts during the thirty-nine weeks ended September 25, 2011 and September 26, 2010:

 

     Accrued
Severance
    Accrued
Lease
Obligation
    Accrued
Grower Pay
    Accrued
Other Exit
or Disposal
Costs
    Accrued
Inventory
Charges
    Total  
     (In thousands)  

Balance at December 26, 2010

   $ 4,150      $ —        $ —        $ —        $ 793      $ 4,943   

Accruals

     2,290        —          —          —          —          2,290   

Payment /Disposal

     (4,357     —          —          —          —          (4,357

Adjustments

     (964     —          —          —          —          (964
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 25, 2011

   $ 1,119      $ —        $ —        $ —        $ 793      $ 1,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 27, 2009

   $ 516      $ 20      $ 3,615      $ —        $ 1,903      $ 6,054   

Accruals

     29,074        —          —          9,870        2,118        41,062   

Payment /Disposal

     (24,647     —          (1,055     —          (2,649     (28,351

Adjustments

     (139     (20     (1,004     (9,870     —          (11,033
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 26, 2010

   $ 4,804      $ —        $ 1,556      $ —        $ 1,372      $ 7,732   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net exit or disposal costs totaling $0.7 million and $1.3 million were recognized during the thirteen and thirty-nine weeks ended September 25, 2011, respectively, and were recorded in either Cost of sales, Selling, general and administrative expense, or Administrative restructuring charges, net on the accompanying Condensed Consolidated Statements of Operations. Net exit or disposal costs recognized during the thirteen and thirty-nine weeks ended September 26, 2010 were classified as Administrative restructuring charges, net or Operational restructuring charges, net. Certain exit or disposal costs were classified as Administrative restructuring charges, net, a component of operating income below gross profit, on the accompanying Consolidated Statements of Operations because management believed these costs were not directly related to the Company’s ongoing production. Components of operational restructuring charges and administrative restructuring charges recognized during the thirteen and thirty-nine weeks ended September 25, 2011 and September 26, 2010 are summarized below:

 

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     September  25,
2011
     September  26,
2010
    September  25,
2011
     September  26,
2010
 
            
     (In thousands)  

Operational restructuring charges, net:

          

Relocation charges expensed as incurred

   $ —         $ 2,121      $ —         $ 2,121   

Asset impairments (Note 9-Property, Plant and Equipment)

     —           404        —           404   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ —         $ 2,525      $ —         $ 2,525   
  

 

 

    

 

 

   

 

 

    

 

 

 

Administrative restructuring charges, net:

          

Accrued severance provisions (adjustments)

   $ 1,000       $ 3,897      $ 1,000       $ 29,784   

Reversal of incentive compensation cost and related excise tax

     —           (9,869     —           —     

Relocation charges expensed as incurred

     —           4,966        —           4,966   

Asset impairments (Note 9-Property, Plant and Equipment)

     8,832         —          8,832         14,827   

Loss on egg sales and flock depletion expensed as incurred

     1,640         —          1,640         2,118   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 11,472       $ (1,006   $ 11,472       $ 51,695   
  

 

 

    

 

 

   

 

 

    

 

 

 

We continue to review and evaluate various restructuring and other alternatives to streamline our operations, improve efficiencies and reduce costs. Such initiatives may include selling assets, consolidating operations and functions, employee relocation and voluntary and involuntary employee separation programs. Any such actions may require us to obtain the pre-approval of our lenders under our Exit Credit Facility. In addition, such actions will subject the Company to additional short-term costs, which may include asset impairment charges, lease commitment costs, employee retention and severance costs and other costs. Certain of these activities may have a disproportionate impact on our income relative to the cost savings in a particular period.

Additional information regarding the Dallas, Texas facility closure is included in “Note 9. Property, Plant and Equipment.”

 

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4. FAIR VALUE MEASUREMENT

The asset (liability) amounts recorded in the Condensed Consolidated Balance Sheets (carrying amounts) and the estimated fair values of financial instruments at September 25, 2011 and December 26, 2010 consisted of the following:

 

     September 25, 2011     December 26, 2010        
     Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
    Note
Reference
 
           (In thousands)              

Cash and cash equivalents

   $ 46,904      $ 46,904      $ 106,077      $ 106,077     

Short-term restricted cash and cash equivalents(a)

     57,308        57,308        60,953        60,953     

Short-term investments in available-for-sale securities

     52        52        1,554        1,554        7   

Trade accounts and other receivables

     355,349        355,349        321,300        321,300        5   

Account receivable from JBS USA, LLC

     6,021        6,021        465        465        5, 15   

Derivative trading accounts margin cash(b):

     8        8        4,528        4,528     

Commodity derivative assets(b):

             8   

Futures

     7,549        7,549        32,962        32,962     

Options

     2,044        2,044        399        399     

Long-term investments in available-for-sale securities

     1,797        1,797        11,595        11,595        7   

Long-term restricted cash equivalents(c)

     5,000        5,000        5,000        5,000     

Accounts payable and Accrued expenses and other current liabilites(d)

     (632,007     (632,007     (611,333     (611,333     10   

Account payable to JBS USA, LLC

     (16,257     (16,257     (7,212     (7,212     10, 15   

Commodity derivative liabilities(e):

             8   

Futures

     (3,333     (3,333     (8,497     (8,497  

Options

     (2     (2     (7,890     (7,890  

Derivative trading accounts margin liability(e)

     (3,121     (3,121     —          —       

Long-term debt and other borrowing arrangements(f)

     (1,474,499     (1,434,416     (1,339,304     (1,355,135     11   

Note payable to JBS USA Holdings

     (50,000     (51,346     —          —          11   

 

(a) Cash and cash equivalents held by the Company’s captive insurance subsidiaries is restricted as to use because it collateralizes certain insurance obligations.
(b) Derivative trading accounts margin cash and commodity derivative assets are included in Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets.
(c) Long-term restricted cash and cash equivalents are included in Other long-lived assets on the Condensed Consolidated Balance Sheets.
(d) Accounts payable and Accrued expenses and other current liabilities presented above excludes commodity derivative liabilities and derivative trading accounts margin liability.
(e) Commodity derivative liabilities and margin liability are included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.
(f) The fair values of the Company’s long-term debt and other borrowing arrangements were estimated by calculating the net present value of future payments for each debt obligation or borrowing by: (i) using the US Treasury interest rate applicable for an instrument with a life similar to the remaining life of each debt obligation or borrowing plus the same interest rate spread applied to each debt obligation or borrowing at inception, (ii) using a current discount rate for similar types of debt obligations with the same credit rating or (iii) using the quoted market price at September 25, 2011.

The carrying amounts of our cash and cash equivalents, derivative trading accounts margin cash, restricted cash and cash equivalents, accounts receivable, accounts payable and certain other liabilities approximate their fair values due to their relatively short maturities. The Company adjusts its investments, commodity derivative assets and commodity derivative liabilities to fair value based on quoted market prices in active markets for identical instruments, quoted market prices in active markets for similar instruments with inputs that are observable for the subject instrument, or unobservable inputs such as discounted cash flow models or valuations.

 

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Effective September 28, 2008, the Company adopted guidance under ASC Topic 820, Fair Value Measurements and Disclosures, which establishes a framework for measuring fair value and required enhanced disclosures about fair value measurements. The subject guidance under ASC Topic 820 clarifies that 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. The subject guidance under ASC Topic 820 also requires disclosure about how fair value was determined for assets and liabilities and established a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

 

Level 1    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.

As of September 25, 2011, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash and cash equivalents, derivative assets and liabilities, short-term investments in available-for-sale securities and long-term investments in available-for-sale securities. Cash equivalents consist of short-term, highly liquid, income-producing investments such as money market funds and other funds that have maturities of 90 days or less. Derivative assets and liabilities consist of long and short positions on both exchange-traded commodity futures and commodity options as well as margin cash on account with the Company’s derivatives brokers. Short-term investments in available-for-sale securities consist of short-term, highly liquid, income-producing investments such as municipal debt securities that have maturities of greater than 90 days but less than one year. Long-term investments in available-for-sale securities consist of income-producing investments such as municipal debt securities, corporate debt securities, equity securities and fund-of-funds units that have maturities of greater than one year.

 

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following items were measured at fair value on a recurring basis at September 25, 2011:

 

     Level 1     Level 2     Level 3      Total  
           (In thousands)         

Cash and cash equivalents

   $ 46,904      $ —        $ —         $ 46,904   

Short-term restricted cash and cash equivalents

     57,257        51        —           57,308   

Short-term investments in available-for-sale securities

     —          52        —           52   

Derivative trading accounts margin cash

     8        —          —           8   

Commodity derivative assets:

         

Futures

     7,549        —          —           7,549   

Options

     —          2,044        —           2,044   

Long-term investments in available-for-sale securities

     —          552        1,245         1,797   

Long-term restricted cash equivalents

     5,000        —          —           5,000   

Commodity derivative liabilities:

         

Futures

     (3,333     —          —           (3,333

Options

     —          (2     —           (2

Derivative trading accounts margin liability

     (3,121     —          —           (3,121

Financial assets and liabilities classified in Level 1 at September 25, 2011 include cash and cash equivalents, restricted cash and cash equivalents, equity securities and commodity futures derivative instruments traded in active markets. The valuation of these instruments 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. Level 2 securities primarily include fixed income securities and commodity option derivative instruments. 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. The Company’s sole Level 3 financial asset at September 25, 2011 was a fund of funds investment.

The following table presents activity for the thirty-nine weeks ended September 25, 2011 and September 26, 2010, respectively, related to the Company’s investment in a fund of funds asset that is measured at fair value on a recurring basis using Level 3 inputs:

 

     Thirty-Nine Weeks Ended  
     September 25,
2011
     September 26,
2010
 
     (In thousands)  

Balance at beginning of period

   $ 1,190       $ 1,116   

Included in other comprehensive income

     55         19   
  

 

 

    

 

 

 

Balance at end of period

   $ 1,245       $ 1,135   
  

 

 

    

 

 

 

 

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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. Certain long-lived assets held for sale with a carrying amount of $31.5 million were written down to their fair value of $22.7 million, resulting in a loss of $8.8 million recorded in earnings during the thirteen weeks ended September 25, 2011. During the thirty-nine weeks ended September 25, 2011 certain long-lived assets held for sale with a carrying amount of $38.2 million were written down to their fair value of $26.6 million, resulting in a loss of $11.6 million recorded in earnings. The estimated cost to sell these assets is immaterial. These assets are classified as Level 2 assets because their fair value can be corroborated based on observable market data.

5. TRADE ACCOUNTS AND OTHER RECEIVABLES

Trade accounts and other receivables, less allowance for doubtful accounts, consisted of the following:

 

     September 25,
2011
    December 26,
2010
 
     (In thousands)  

Trade accounts receivable

   $ 345,339      $ 318,008   

Account receivable from JBS USA, LLC

     6,021        465   

Other receivables

     15,270        9,355   
  

 

 

   

 

 

 

Receivables, gross

     366,630        327,828   

Allowance for doubtful accounts

     (5,260     (6,063
  

 

 

   

 

 

 

Receivables, net

   $ 361,370      $ 321,765   
  

 

 

   

 

 

 

 

20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6. INVENTORIES

Inventories consisted of the following:

 

     September 25,
2011
     December 26,
2010
 
     (In thousands)  

Chicken:

     

Live chicken and hens

   $ 376,762       $ 348,700   

Feed, eggs and other

     238,784         221,939   

Finished chicken products

     283,208         440,458   
  

 

 

    

 

 

 

Total chicken inventories

     898,754         1,011,097   
  

 

 

    

 

 

 

Other products:

     

Commercial feed, table eggs and other

     15,214         12,355   

Distribution inventories (other than chicken products)

     5,582         5,802   
  

 

 

    

 

 

 

Total other products inventories

     20,796         18,157   
  

 

 

    

 

 

 

Total inventories

   $ 919,550       $ 1,029,254   
  

 

 

    

 

 

 

Inventories included a lower-of-cost-or-market allowance of $6.0 million and $2.5 million at September 25, 2011 and December 26, 2010, respectively.

7. INVESTMENTS IN SECURITIES

We recognize investments in available-for-sale securities as cash equivalents, current investments or long-term investments depending upon each security’s length to maturity. Additionally, those securities identified by management at the time of purchase for funding operations in less than one year are classified as current. The following table summarizes our investments in available-for-sale securities:

 

     September 25, 2011      December 26, 2010  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In thousands)  

Cash equivalents:

           

Fixed income securities

   $ 50       $ 51       $ 50       $ 51   

Other

     57,257         57,257         60,902         60,952   

Short-term investments:

           

Fixed income securities

   $ 51       $ 52       $ 1,518       $ 1,554   

Long-term investments:

           

Fixed income securities

   $ 470       $ 552       $ 3,285       $ 3,452   

Equity securities

     —           —           5,884         6,953   

Other

     1,300         1,245         1,300         1,190   

 

21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Maturities for the Company’s investments in fixed income securities as of September 25, 2011 were as follows:

 

     Amount      Percent  
     (In thousands)         

Matures in less than one year

   $ 103         16

Matures between one and two years

     162         25

Matures between two and five years

     229         35

Matures in excess of five years

     161         24
  

 

 

    

 

 

 
   $ 655         100
  

 

 

    

 

 

 

The cost of each security sold and the amount reclassified out of accumulated other comprehensive income into earnings is determined on a specific identification basis.

The Company and certain retirement plans that it sponsors invest in a variety of financial instruments. Certain postretirement funds in which the Company participates hold significant amounts of mortgage-backed securities. However, none of the mortgages collateralizing these securities are considered subprime.

Certain investments are held in trust as compensating balance arrangements for our insurance liability and are classified as either restricted cash and cash equivalents, current investments or long-term investments based on a date of maturity and management’s intention for use of such assets.

8. DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil and energy, such as natural gas, electricity and diesel fuel, which are all considered commodities. The Company considers these raw materials generally available from a number of different sources and believes it can obtain them to meet its requirements. These commodities are subject to price fluctuations and related price risk due to factors beyond our control, such as economic and political conditions, supply and demand, weather, governmental regulation and other circumstances. Generally, the Company purchases derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for periods of up to 12 months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate. The fair value of derivative assets is included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets while the fair value of derivative liabilities is included in the line item Accrued expenses and other current liabilities on the same statements. Our counterparties require that we post cash collateral for changes in the net fair value of the derivative contracts.

 

22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

We have not designated the derivative financial instruments that we have purchased to mitigate commodity purchase exposures as cash flow hedges. Therefore, we recognized changes in the fair value of these derivative financial instruments immediately in earnings. Gains or losses related to these derivative financial instruments are included in the line item Cost of sales in the Condensed Consolidated Statements of Operations. The Company recognized net gains of $34.4 million and $60.8 million, respectively, related to changes in the fair value of its derivative financial instruments during the thirteen and thirty-nine weeks ended September 25, 2011. The Company recognized $15.4 million and $6.4 million in net gains, respectively, related to changes in the fair value of its derivative financial instruments during the thirteen and thirty-nine weeks ended September 26, 2010.

Information regarding the Company’s outstanding derivative instruments and cash collateral posted with (owed to) brokers is included in the following table:

 

    September 25,
2011
    December 26,
2010
 
    (Fair values in thousands)  

Fair values:

   

Commodity derivative assets

  $ 9,593      $ 33,361   

Commodity derivative liabilities

    (3,335     (16,387

Cash collateral posted with (owed to) brokers

    (3,113     4,528   

Derivatives Coverage(a):

   

Corn

    N/A        13.8

Soybean meal

    N/A        8.7

Period through which stated percent of needs are covered:

   

Corn

    N/A        December 2011   

Soybean meal

    N/A        December 2011   

Written put options outstanding(b):

   

Fair value

  $ (2   $ 7,890   

Number of contracts:

   

Corn

    80        6,775   

Soybean meal

    —          750   

Expiration dates

    December 2011       
 
 
May 2011
through
December 2011
  
  
  

Short positions on outstanding futures derivative instruments(b):

   

Fair value

  $ 7,524      $ 8,497   

Number of contracts:

   

Corn

    1,395        2,805   

Soybean meal

    630        692   

 

(a) Derivatives coverage is the percent of anticipated corn and soybean meal needs covered by outstanding derivative instruments through a specified date. As of September 25, 2011, the Company had short derivative positions to offset long forward cash purchases, which exceeded open long derivative positions for both corn and soybean meal. These positions expire by December 2012.
(b) A written put option is an option that the Company has sold that grants the holder the right, but not the obligation, to sell the underlying asset at a certain price for a specified period of time. When the Company takes a short position on a futures derivative instrument, it agrees to sell the underlying asset in the future at a price established on the contract date. The Company writes put options and takes short positions on futures derivative instruments to minimize the impact of feed ingredients price volatility on its operating results.

 

23


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On December 28, 2009, the Company recognized in earnings a previously unrealized gain totaling $4.1 million on a derivative instrument designated as a cash flow hedge against the interest rate charged on an unsecured note payable that was effectively extinguished on December 28, 2009. This gain was included in the line item Reorganization items, net in the Consolidated Statement of Operations for the thirty-nine weeks ended September 26, 2010.

9. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment (“PP&E”), net consisted of the following:

 

     September 25,
2011
    December 26,
2010
 
     (In thousands)  

Land

   $ 79,162      $ 81,212   

Buildings

     1,096,470        1,091,004   

Machinery and equipment

     1,486,878        1,414,718   

Autos and trucks

     61,573        57,441   

Construction-in-progress

     82,623        96,442   
  

 

 

   

 

 

 

PP&E, gross

     2,806,706        2,740,817   

Accumulated depreciation

     (1,489,014     (1,382,681
  

 

 

   

 

 

 

PP&E, net

   $ 1,317,692      $ 1,358,136   
  

 

 

   

 

 

 

The Company recognized depreciation expense of $49.4 million and $52.5 million during the thirteen weeks ended September 25, 2011 and September 26, 2010, respectively and $144.4 million and $159.3 million during the thirty-nine weeks ended September 25, 2011 and September 26, 2010, respectively.

During the thirteen and thirty-nine weeks ended September 25, 2011, the Company sold certain PP&E for cash of $2.6 million and $7.5 million and recognized net losses on these sales of $0.5 million and $0.2 million, respectively. PP&E sold in 2011 included an empty office building in West Virginia, an idled egg production facility and surrounding undeveloped land in Texas, an idled feed mill in Georgia, various broiler and breeder farms in Texas, vacant land in Texas, developed real estate in Texas and miscellaneous processing equipment. During the thirteen and thirty-nine weeks ended September 26, 2010, the Company sold certain PP&E for cash of $10.0 million and $11.6 million and recognized net gains on these sales of $3.0 million and $3.1 million, respectively. PP&E sold in 2010 included undeveloped land in Texas and Mexico, feed mills in North Carolina and Texas, a research laboratory in Georgia, aircraft hangars in Texas, a broiler farm in Texas and miscellaneous equipment.

 

24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Management has committed to the sale of certain properties and related assets, including, but not limited to, processing plants, office buildings and farms, which no longer fit into the operating plans of the Company. The Company is actively marketing these properties and related assets for immediate sale and believes a sale of each property can be consummated within the next 12 months. At September 25, 2011 and December 26, 2010, the Company reported properties and related assets totaling $46.2 million and $47.7 million, respectively, in Assets held for sale on its Consolidated Balance Sheets. For both the thirteen and thirty-nine weeks ended September 25, 2011, the Company recognized impairment expense of $8.8 million and $11.6 million, respectively, on certain of these assets based on purchase offers received from outside parties and accepted by the Company.

As part of the Chapter 11 reorganization activities discussed in “Note 2. Chapter 11 Proceedings” and the exit or disposal activities discussed in “Note 3. Exit or Disposal Activities,” the Company closed or idled various processing complexes, processing plants, hatcheries and broiler farms throughout the US. Neither the Board of Directors nor JBS USA has determined if it would be in the best interest of the Company to divest any of these idled assets. Management is therefore not certain that it can or will divest any of these assets within one year, is not actively marketing these assets and, accordingly, has not classified them as assets held for sale. The Company continues to depreciate these assets. At September 25, 2011, the carrying amount of these idled assets was $60.0 million based on depreciable value of $148.0 million and accumulated depreciation of $88.0 million. We reopened an idled processing plant in Douglas, Georgia in January 2011. The Company has currently delayed the decision to bring the Douglas, Georgia facility to full capacity during the second quarter of 2012 and will re-evaluate capacity needs during the first quarter of 2012.

The Company last formally estimated the fair values of its assets held for sale and idled assets during the thirteen weeks ended December 26, 2010. Most of the production-related assets were valued at their highest and best use—as operating chicken processing facilities. A selected few of the production-related assets and the office buildings held for sale were valued as empty facilities. Management does not believe that the aggregate carrying amount of the assets held for sale or the idled assets is significantly impaired at the present time. However, should the carrying amounts of these assets consistently exceed future purchase offers received, if any, recognition of impairment charges could become necessary. Further, if chicken prices and feed ingredient prices fail to improve relative to current levels, the Company’s ability to recover the carrying value of its operating assets, including its property, plant and equipment and identified intangible assets could be materially jeopardized. At the present time, the Company’s forecasts indicate that it can recover the carrying value of its operating assets, including its property, plant and equipment and identified intangible assets, based on the projected cash flows of the operations.

During the third quarter of 2011, the Company changed its plans regarding the disposal of the Dallas, Texas processing facility. On September 30, 2011, the Company idled this facility rather than listing it for sale. During the fourth quarter of 2011, the Company will also impair the carrying amount of certain Company-owned breeder farms that supplied the Dallas facility by approximately $0.5 million. During the third quarter

 

25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

of 2011, the Company recorded severance expense totaling $1.0 million and losses on egg sales and flock depletion of $1.6 million related to the idling of this facility, which were recorded in Administrative restructuring charges, net on the accompanying Condensed Consolidated Statements of Operations. The Company also expects to incur closing costs totaling approximately $15.6 million and to write off related breeder hen and egg inventories of $0.4 million in future quarters.

10. CURRENT LIABILITIES

Current liabilities, other than income taxes and current maturities of long-term debt, consisted of the following components:

 

     September 25,
2011
     December 26,
2010
 
     (In thousands)  

Accounts payable:

     

Trade accounts

   $ 290,225       $ 247,500   

Unfunded payments

     34,257         80,393   

Other payables

     1,826         1,887   
  

 

 

    

 

 

 
     326,308         329,780   

Account payable to JBS USA, LLC

     16,257         7,212   

Accrued expenses and other current liabilities:

     

Compensation and benefits

     104,685         108,639   

Interest and debt-related fees

     22,574         12,624   

Insurance and self-insured claims

     85,607         83,648   

Commodity derivative liabilities:

     

Futures

     3,333         8,497   

Options

     2         7,890   

Other accrued expenses

     95,596         76,296   

Pre-petition obligations

     358         346   
  

 

 

    

 

 

 
     312,155         297,940   
  

 

 

    

 

 

 
   $ 654,720       $ 634,932   
  

 

 

    

 

 

 

 

26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11. LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS

Long-term debt and other borrowing arrangements consisted of the following components:

 

     Maturity      September 25,
2011
    December 26,
2010
 
            (In thousands)  

Senior notes, at 7  7/8%, net of unaccreted discount

     2018       $ 496,732      $ 496,393   

The Exit Credit Facility Term B-1 note payable at 4.6875%

     2014         275,443      $ 297,193   

The Exit Credit Facility Term B-2 note payable at 9.00%

     2014         303,019        335,307   

The Exit Credit Facility with one revolving note payable on which the Company had funds borrowed at 4.25% and 6.25%

     2014         394,400        205,300   

ING Credit Agreement (defined below) with notes payable at LIBOR plus 1.65% to LIBOR plus 3.125%

     2011         —          —     

JBS USA Holdings Subordinated Loan Agreement with one term note payable at 9.845%

     2015         50,000        —     

Other

     Various         4,905        5,111   
     

 

 

   

 

 

 

Long-term debt

        1,524,499        1,339,304   

Less: Current maturities of long-term debt

        (15,609     (58,144
     

 

 

   

 

 

 

Long-term debt, less current maturities

      $ 1,508,890      $ 1,281,160   
     

 

 

   

 

 

 

Senior and Subordinated Notes

On December 15, 2010, the Company closed on the sale of $500.0 million of 7  7/8% Senior Notes due in 2018 (the “2018 Notes”). The 2018 Notes are unsecured obligations of the Company and are guaranteed by one of the Company’s subsidiaries. Interest is payable on December 15 and June 15 of each year, commencing on June 15, 2011. Additionally, we have an aggregate principal balance of $3.9 million of 7  5/8% senior unsecured notes, 8  3/8% senior subordinated unsecured notes and 9 1/4% senior unsecured notes outstanding at September 25, 2011.

On June 23, 2011, the Company entered into the Subordinated Loan Agreement with JBS USA (the “Subordinated Loan Agreement”), which provided an aggregate commitment of $100.0 million. On June 23, 2011, JBS USA made a term loan to the Company in the principal amount of $50.0 million. In addition, JBS USA agreed to make an additional one-time term loan in the principal amount of $50.0 million if the Company’s availability under the revolving loan commitment in the Exit Credit Facility is less than $200.0 million. Pursuant to the terms of the Subordinated Loan Agreement, we also agreed to reimburse JBS USA up to $56.5 million for draws upon any letters of credit issued for JBS USA’s account that support certain obligations of Mayflower Insurance Company, Ltd., a wholly owned subsidiary of the Company. The commitment, under the Subordinated Loan Agreement, will terminate on the earlier to occur of (i) the date on which all amounts owing under the Exit Credit Facility are due and payable in accordance with its terms or (ii) June 27, 2015. Loans under the Subordinated Loan Agreement mature on June 28, 2015.

 

27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Exit Credit Facility

Upon exiting from bankruptcy, Pilgrim’s and certain of its subsidiaries entered into the Exit Credit Facility, which provided for an aggregate commitment of $1.75 billion. The facility consisted of a three-year $600.0 million revolving credit facility, a three-year $375.0 million Term A facility and a five-year $775.0 million Term B facility. The Exit Credit Facility also includes an accordion feature that allows us, at any time, to increase the aggregate revolving loan commitment by up to an additional $250.0 million and to increase the aggregate Term B loans commitment by up to an additional $400.0 million, in each case subject to the satisfaction of certain conditions, including an aggregate cap on all commitments under the Exit Credit Facility of $1.85 billion. On January 13, 2011, we increased the amount of the revolving loan commitments under the Exit Credit Facility to $700.0 million. On April 22, 2011, we increased the amount of the sub-limit for swingline loans under the Exit Credit Facility to $100.0 million. The Term A loan was repaid on December 15, 2010 with proceeds from the 2018 Notes. The revolving loan commitment and the Term B loans will mature on December 28, 2014.

On September 25, 2011, a principal amount of $578.5 million under the Term B loans commitment and $394.4 million under the revolving loan commitment were outstanding. On December 28, 2009, the Company paid loan costs totaling $50.0 million related to the Exit Credit Facility that it recognized as an asset on its balance sheet. The Company amortizes these capitalized costs to expense over the life of the Exit Credit Facility.

Subsequent to the end of each fiscal year, a portion of our cash flow must be used to repay outstanding principal amounts under the Term B loans. In April 2011, the Company paid approximately $46.3 million of its excess cash flow toward the outstanding principal under the Term B loans. After giving effect to this prepayment and other prepayments of the Term B loans, the Term B loans must be repaid in 16 quarterly installments of approximately $3.9 million beginning on April 15, 2011, with the final installment due on December 28, 2014. The Exit Credit Facility also requires us to use the proceeds we receive from certain asset sales and specified debt or equity issuances and upon the occurrence of other events to repay outstanding borrowings under the Exit Credit Facility.

Actual borrowings by the Company under the revolving credit commitment component of the Exit Credit Facility are subject to a borrowing base, which is a formula based on certain eligible inventory, eligible receivables and restricted cash under the control of CoBank ACB, as administrative agent under the Exit Credit Facility. As of September 25, 2011, the applicable borrowing base was $678.4 million, the amount available for borrowing under the revolving loan commitment was $243.9 million and outstanding borrowings and letters of credit under the revolving loan commitment were $394.4 million and $40.1 million, respectively.

 

28


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Under the Exit Credit Facility, JBS USA, the Company’s majority stockholder, or its affiliates may make loans to the Company on a subordinated basis on terms reasonably satisfactory to the agents and up to $200.0 million of such subordinated indebtedness may be included in the calculation of EBITDA (as defined in the Exit Credit Facility).

The Exit Credit Facility contains financial covenants and various other covenants that may adversely affect our ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make certain restricted payments, consummate certain assets sales, enter into certain transactions with JBS USA and our other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of our assets.

On June 23, 2011, the Company entered into an amendment to the Exit Credit Facility, which, among other things, temporarily suspended the requirement for the Company to comply with the fixed charge coverage ratio and senior secured leverage ratio financial covenants until September 23, 2012 and modified the consolidated tangible net worth financial covenant. The Company is currently in compliance with the modified tangible net worth covenant. However, if chicken prices and feed ingredient prices fail to improve relative to current levels, the Company’s ability to maintain compliance with this financial covenant could be materially jeopardized.

ING Credit Agreement

On September 25, 2006, Avícola Pilgrim’s Pride de México, S. de R.L. de C.V., a wholly owned subsidiary of the Company and certain subsidiaries, entered into a secured revolving credit agreement (the “ING Credit Agreement”) with ING Capital, LLC, as agent and the lenders party thereto. The ING Credit Agreement had a final maturity date of September 25, 2011.

On September 23, 2011, Avícola Pilgrim’s Pride de México, S. de R.L. de C.V entered into an amendment to the ING Credit Agreement, which, among other things, (i) extended the final maturity date to October 31, 2011 and (ii) reduced the aggregate principal amount of the revolving loan commitments under the ING Credit Agreement from an aggregate principal amount of $50.0 million to an aggregate principal amount of 557.4 million Mexican pesos minus the Reserve Commitment Amount (the “Reserve Commitment Amount”). The Reserve Commitment Amount consists of a revolving commitment of 257.3 million Mexican pesos that is reserved for one or more financial institutions that are not lenders under the ING Credit Agreement as of the date of the amendment, which commitment amount can be converted to a revolving commitment pursuant to certain terms and conditions set forth in the amendment. As of September 25, 2011 the revolving commitment was a principal amount of 300.1 million Mexican pesos, a US dollar-equivalent of $22.2 million. There were no outstanding borrowings under the ING Credit Agreement at September 25, 2011.

Subsequent to the date of the Condensed Consolidated Balance Sheet, Avícola Pilgrim’s Pride de México, S. de R.L. de C.V. and certain subsidiaries (the “Loan Parties”) entered into an amended and restated credit agreement

 

29


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(the “Amended ING Credit Agreement”) with ING Bank (México), S.A. Institución de Banca Múltiple, ING Grupo Financiero, as lender and ING Capital LLC, as administrative agent. The Amended ING Credit Agreement has a final maturity date of September 25, 2014. The Amended ING Credit has a revolving commitment of 557.4 million Mexican pesos minus the Reserve Commitment Amount.

Under the Amended ING Credit Agreement, if (i) any default or event of default has occurred and is continuing or (ii) the quotient of the borrowing base divided by the outstanding loans and letters of credit (the “Collateral Coverage Ratio”) under the Amended ING Credit Agreement is less than 1.25 to 1.00, the loans and letters of credit under the Amended ING Credit Agreement will be subject to, and cannot exceed, a borrowing base. The borrowing base is a formula based on certain accounts receivable, inventory, prepaid assets, net cash under the control of the administrative agent and up to 150.0 million Mexican pesos of fixed assets of the Loan Parties. The borrowing base formula will be reduced by trade payables of the Loan Parties. If the Collateral Coverage Ratio falls below 1.25 to 1.00, the borrowing base requirement would terminate upon the earlier of (i) the Collateral Coverage Ratio exceeding 1.25 to 1.00 as of the latest measurement period for 60 consecutive days or (ii) the borrowing availability under the Amended ING Credit Agreement being equal to or greater than the greater of 20% of the revolving commitments under the Amended ING Credit Agreement and 100.0 million Mexican pesos for a period of 60 consecutive days.

The Amended ING Credit Agreement is secured by substantially the same assets and has similar terms and conditions as the ING Credit Agreement.

12. INCOME TAXES

The Company recorded an income tax benefit of $6.5 million, a 1.5% effective tax rate, for the thirty-nine weeks ended September 25, 2011, compared to an income tax benefit of $4.3 million, a (9.9%) effective tax rate, for the thirty-nine weeks ended September 26, 2010. The income tax benefit recognized for the thirty-nine weeks ended September 25, 2011 was primarily the result of the tax benefit recorded on the Company’s year-to-date loss that is expected to be realized, partially offset by tax expense for items originating in the prior year and an increase in reserves for unrecognized tax benefits.

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 carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment. As of September 25, 2011, the Company does not believe it has sufficient positive evidence to conclude that realization of its federal, state and foreign deferred tax assets is more likely than not to be realized.

 

30


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

With few exceptions, the Company is no longer subject to US federal, state or local income tax examinations for years prior to 2003 and is no longer subject to Mexico income tax examination for years prior to 2006. The Company continues to be under examination for Gold Kist and its subsidiaries for the tax years ended June 30, 2004 through December 27, 2006. The Company is still currently working with the Internal Revenue Service (“IRS”) through the normal processes and procedures to resolve the IRS’ proofs of claim. There has been no significant change in the resolution of the IRS’ claim since December 26, 2010. See “Note 16. Commitments and Contingencies” for additional information.

13. PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors programs that provide retirement benefits to most of its employees. These programs include qualified defined benefit pension plans, nonqualified defined benefit retirement plans, a defined benefit postretirement life insurance plan, defined contribution retirement savings plans and deferred compensation plans. Under all of our retirement plans, the Company’s expenses were $1.6 million and $1.7 million in the thirteen weeks ended September 25, 2011 and September 26, 2010, respectively, and $6.9 million and $8.8 million in the thirty-nine weeks ended September 25, 2011 and September 26, 2010, respectively.

The following table provides the components of net periodic benefit cost for the defined benefit plans mentioned above:

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
   September 25, 2011      September 26, 2010      September 25, 2011      September 26, 2010  
     Pension
Benefits
    Other
Benefits
     Pension
Benefits
    Other
Benefits
     Pension
Benefits
    Other
Benefits
     Pension
Benefits
    Other
Benefits
 
     (In thousands)      (In thousands)  

Service cost

   $ 40      $ —         $ 101      $ —         $ 139      $ —         $ 603      $ —     

Interest cost

     2,075        26         2,121        28         6,751        90         12,598        84   

Estimated return on plan assets

     (1,427     —           (1,407     —           (4,948     —           (8,358     —     

Amortization of prior service cost

     22        —           65        —           77        —           387        —     

Amortization of net loss

     1        —           2        —           2        —           11        —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 711      $ 26       $ 882      $ 28       $ 2,021      $ 90       $ 5,241      $ 84   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

During the thirty-nine weeks ended September 25, 2011, the Company contributed $5.7 million to its defined benefit plans. Subsequent to September 25, 2011, the Company contributed $1.3 million to its defined benefit plans.

 

31


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. INCENTIVE COMPENSATION PLANS

The Company granted 200,000 restricted shares of its common stock to William W. Lovette, the Company’s Chief Executive Officer, effective January 14, 2011 in connection with the employment agreement with Mr. Lovette. Fifty percent of these shares will vest on January 3, 2013 and the remaining shares will vest on January 3, 2014, subject to Mr. Lovette’s continued employment with the Company through the applicable vesting date. The $1.4 million fair value of the shares as of the grant date was determined by multiplying the number of shares granted by the closing market price of the Company’s common stock on the grant date. Assuming no forfeiture of shares, the Company will recognize share-based compensation expense of $0.7 million ratably from January 14, 2011 to January 3, 2013. The Company will also recognize share-based compensation expense of $0.7 million ratably from January 14, 2011 to January 3, 2014. During the thirteen and thirty-nine weeks ended September 25, 2011, the Company recognized share-based compensation expense totaling $0.1 million and $0.4 million, respectively.

The Company sponsors an annual incentive program that provides the grant of bonus awards payable upon achievement of specified performance goals (the “STIP”). Full-time, salaried exempt employees of the Company and its affiliates who are selected by the administering committee are eligible to participate in the STIP. The Company has not accrued costs related to the STIP as of the date of this quarterly report because a liability is not probable to be incurred at this time given current financial results.

The Company also sponsors a performance-based, omnibus long-term incentive plan that provides for the grant of a broad range of long-term equity-based and cash-based awards to the Company’s officers and other employees, members of the Board and any consultants (the “LTIP”). The equity-based awards that may be granted under the LTIP include “incentive stock options,” within the meaning of the Internal Revenue Code, nonqualified stock options, stock appreciation rights, restricted stock awards and restricted stock units. No awards have been granted under the LTIP and the Company has not accrued costs related to the LTIP as of the date of this quarterly report.

15. RELATED PARTY TRANSACTIONS

On December 28, 2009, JBS USA became the holder of the majority of the common stock of the Company. Lonnie A. “Bo” Pilgrim, an original partner in the Company’s predecessor partnership founded in 1946, and certain entities related to Mr. Pilgrim collectively own the second-largest block of Pilgrim’s common stock. Mr. Pilgrim serves as the Founder Director of the Company.

 

32


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Transactions with a JBS USA subsidiary and the Founder Director are summarized below:

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
     September 25,
2011
     September 26,
2010
     September 25,
2011
     September 26,
2010
 
     (In thousands)  

JBS USA, LLC:

           

Purchases from JBS USA, LLC

   $ 43,784       $ 25,173       $ 121,811       $ 62,996   

Expenditures paid by JBS USA, LLC on behalf of Pilgrim’s Pride Corporation(a)

     6,323         6,259         20,473         18,768   

Sales to JBS USA, LLC

     27,141         2,217         68,864         3,993   

Expenditures paid by Pilgrim’s Pride Corporation on behalf of JBS USA, LLC(a)

     163         1         813         234   

Founder Director:

           

Purchase of commercial egg property from Founder Director(b)

     —           —           —           12,000   

Loan guaranty fees paid to Founder Director(c)

     —           —           —           8,928   

Contract grower pay paid to Founder Director

     164         228         833         927   

Consulting fee paid to Founder Director(d)

     375         374         1,123         1,122   

Board fees paid to Founder Director(d)

     40         —           116         —     

Lease payments on commercial egg property paid to Founder Director

     —           —           —           125   

Sales of inventory to Founder Director

     16         —           21         23   

Sale of airplane hangars and undeveloped land to Founder Director(e)

     —           —           —           1,450   

 

(a) On January 19, 2010, the Company entered into an agreement with JBS USA, LLC in order to allocate costs associated with JBS USA, LLC’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, LLC 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. On May 5, 2010, the Company also entered into an agreement with JBS USA, LLC in order 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, LLC on behalf of the Company will be reimbursed by the Company and expenditures paid by the Company on behalf of JBS USA, LLC will be reimbursed by JBS USA, LLC. This agreement expires on May 5, 2015.
(b) On February 23, 2010, the Company purchased a commercial egg property from the Founder Director for $12.0 million. Prior to the purchase, the Company leased the commercial egg property including all of the ongoing costs of the operation from the Founder Director.
(c) Prior to December 28, 2009, Pilgrim Interests, Ltd., an entity related to the Founder Director, guaranteed a portion of the Company’s debt obligations. In consideration of such guarantees, the Company would pay Pilgrim Interests, Ltd. a quarterly fee equal to 0.25% of one-half of the average aggregate outstanding balance of such guaranteed debt. Pursuant to the terms of the financing in place during the term of the Company’s Chapter 11 case, the Company could not pay any loan guarantee fees without the consent of the lenders party thereto. At December 27, 2009, the Company had accrued loan guaranty fees totaling $8.9 million. The Company paid these fees after emerging from bankruptcy on December 28, 2009.
(d) In connection with the Company’s plan of reorganization, the Company and the Founder Director entered into a consulting agreement, which became effective on December 28, 2009. The terms of the consulting agreement include, among other things, that the Founder Director (i) will provide services to the Company that are comparable in the aggregate with the services provided by him to the Company prior to December 28, 2009, (ii) will be appointed to the Board of Directors of the Company and during the term of the consulting agreement will be nominated for subsequent terms on the board, (iii) will be compensated for services rendered to the Company at a rate of $1.5 million per year for a term of five years, (iv) will be subject to customary non-solicitation and non-competition provisions and (v) will be, along with his spouse, provided with medical benefits (or will be compensated for medical coverage) that are comparable in the aggregate to the medical benefits afforded to employees of the Company.
(e) On June 9, 2010, the Company sold two airplane hangars and undeveloped land to the Founder Director for $1.45 million.

 

33


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of September 25, 2011 and December 26, 2010, the outstanding payable to JBS USA was $16.3 million and $7.2 million, respectively. As of September 25, 2011 and December 26, 2010, the outstanding receivable from JBS USA, LLC was $6.0 million and $0.5 million, respectively. As of September 25, 2011, approximately $5.1 million of goods from JBS USA, LLC were in transit and not reflected on our Consolidated Balance Sheet.

The Company is party to grower contracts involving farms owned by the Founder Director that provide for the placement of Company-owned flocks on these farms during the grow-out phase of production. These contracts are on terms substantially the same as contracts executed by the Company with unaffiliated parties and can be terminated by either party upon completion of the grow-out phase for each flock.

The Company maintains depository accounts with a financial institution in which the Founder Director is also a major stockholder. Fees paid to this bank during the thirteen and thirty-nine weeks ended September 25, 2011 and September 26, 2010 were insignificant. The Company had account balances at this financial institution of approximately $1.5 million and $4.2 million at September 25, 2011 and December 26, 2010, respectively.

The Founder Director has deposited $0.3 million with the Company as an advance on miscellaneous expenditures.

A son of the Founder Director occasionally sells commodity feed products and a limited amount of other services to the Company. There were no significant purchases during the thirteen and thirty-nine weeks ended September 25, 2011 and September 26, 2010. He also leases a small amount of land on an arm’s-length basis from the Company for an insignificant rent.

On March 2, 2011, the Company contracted with a third party real estate company to market the home of our Chief Executive Officer in order for him to relocate to Colorado. The officer has been guaranteed up to $2.1 million when the home is sold.

On October 7, 2011, the Company and certain of its wholly owned subsidiaries entered into an agreement with JBS USA, LLC and JBS Trading International, Inc. to sell certain real property, tractor trailers, inventory, equipment, accounts receivable and other assets related to our distribution and transportation businesses. The purchase price for these assets is $23.0 million, payable in cash, subject to adjustment based on the final accounting of the assets. The closing is expected to occur on November 18, 2011. Company management analyzed the terms of the contract and believe that they were substantially similar to and contain terms no less favorable to us than those obtainable from unaffiliated parties. Additionally, the Audit Committee of the Company’s Board of Directors has reviewed and approved the agreement.

On October 26, 2011 the Company entered into an agreement with Swift Pork Company, a wholly owned subsidiary of JBS USA, LLC to sell certain real property, tractor trailers, inventory, livestock, equipment, accounts receivable and other assets related to our pork business. The purchase price for these assets is $13.0 million, payable in cash, subject to adjustment based on

 

34


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

the final accounting of the assets. The closing is expected to occur on December 2, 2011. Company management analyzed the terms of the contract and believe that they were substantially similar to and contain terms no less favorable to us than those obtainable from unaffiliated parties. Additionally, the Audit Committee of the Company’s Board of Directors has reviewed and approved the agreement.

16. COMMITMENTS AND CONTINGENCIES

We are a party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks. Among other considerations, we have not recorded a liability for any of these indemnities as based upon the likelihood of payment, the fair value of such indemnities would not have a material impact on our financial condition, results of operations and cash flows.

The Company is subject to various legal proceedings and claims which arise in the ordinary course of business. In the Company’s opinion, it has made appropriate and adequate accruals for claims where necessary; however, the ultimate liability for these matters is uncertain, and if significantly different than the amounts accrued, the ultimate outcome could have a material effect on the financial condition or results of operations of the Company. For a discussion of the material legal proceedings and claims, see Part II, Item 1. “Legal Proceedings.” Below is a summary of some of these material proceedings and claims. The Company believes it has substantial defenses to the claims made and intends to vigorously defend these cases.

On December 1, 2008, Pilgrim’s and six of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The cases were jointly administered under Case No. 08-45664. The Company emerged from Chapter 11 on December 28, 2009. The Company continues to work through the claims allowance process with respect to claims arising before December 28, 2009. The Company will be responsible to the extent those claims become allowed claims.

Among the claims presently pending are claims brought against certain current and former directors, executive officers and employees of the Company, the Pilgrim’s Pride Administrative Committee and the Pilgrim’s Pride Pension Committee seeking unspecified damages under

 

35


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

section 502 of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132. These claims were brought by individual participants in the Pilgrim’s Pride Retirement Savings Plan, individually and on behalf of a putative class, alleging that the defendants breached fiduciary duties to plan participants and beneficiaries or otherwise violated ERISA. Although the Company is not a named defendant in these claims, our bylaws require us to indemnify our current and former directors and officers from any liabilities and expenses incurred by them in connection with actions they took in good faith while serving as an officer or director. In these actions the plaintiffs assert claims in excess of $35.0 million. The likelihood of an unfavorable outcome or the amount or range of any possible loss to the Company cannot be determined at this time.

Also, among the claims presently pending against the Company are two identical claims seeking unspecified damages, each brought by a stockholder, individually and on behalf of a putative class, alleging violations of certain antifraud provisions of the Securities Exchange Act of 1934. The Company intends to defend vigorously against the merits of these actions. The likelihood of an unfavorable outcome or the amount or range of any possible loss to the Company cannot be determined at this time.

Other claims presently pending against the Company are claims seeking unspecified damages brought by current or former contract chicken growers who allege, along with other assertions, that the Company breached grower contracts, conspired with a competitor to depress grower pay and made false representations to induce the plaintiffs into building chicken farms and entering into chicken growing agreements with the Company. In August 2011, the U.S. District Court for the Eastern District of Texas—Marshall Division, held a bench trial with respect to the claims of 91 growers from El Dorado, finding in favor of the Company on each of the grower claims with exception of claims under 7 U.S.C. §192(e) of the Packers and Stockyards Act of 1921, and awarding damages to plaintiffs in the aggregate of approximately $25.8 million. We deny any liability in these actions and intend to continue vigorous defenses to the litigation, including through post judgment proceedings and appeals. There can be no assurances that other similar claims may not be brought against the Company. The Company has recorded its estimated probable loss related to these claims. We express no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to us.

The IRS has filed an amended proof of claim in the Bankruptcy Court pursuant to which the IRS asserts claims that total $74.7 million. We have filed in the Bankruptcy Court (i) an objection to the IRS’ amended proof of claim and (ii) a motion requesting the Bankruptcy Court to determine our US federal tax liability pursuant to Sections 105 and 505 of the Bankruptcy Code. The objection and motion assert that the Company has no liability for the additional US federal taxes that have been asserted for pre-petition periods by the IRS. The IRS has responded in opposition to our objection and motion. On July 8, 2010, the Bankruptcy Court granted our unopposed motion requesting that the Bankruptcy Court abstain from determining our federal tax liability. As a result, we intend to work with the IRS through the normal processes and procedures that are available to all taxpayers outside of bankruptcy (including the United States Tax Court (“Tax Court”) proceedings discussed below) to resolve the IRS’ amended proof of claim.

 

36


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In connection with the amended proof of claim, on May 26, 2010, we filed a petition in Tax Court in response to a Notice of Deficiency that was issued to the Company as the successor in interest to Gold Kist. The Notice of Deficiency and the Tax Court proceeding relate to a loss that Gold Kist claimed for its tax year ended June 30, 2004. The matter is currently in litigation before the Tax Court.

On August 10, 2010, we filed two petitions in Tax Court. The first petition relates to three Notices of Deficiency that were issued to us with respect to our 2003, 2005 and 2007 tax years. The second petition relates to a Notice of Deficiency that was issued to us with respect to Gold Kist’s tax year ended June 30, 2005 and its short tax year ended September 30, 2005. Both cases are currently in litigation before the Tax Court.

We express no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to us related to the above Tax Court cases. If adversely determined, the outcome could have a material effect on the Company’s operating results and financial position.

The Notices of Deficiency and the Tax Court proceedings discussed above cover the same tax years and the same amounts that were asserted by the IRS in its $74.7 million amended proof of claim that was filed in the Bankruptcy Court.

17. INSURANCE PROCEEDS

On August 16, 2011, an ammonia leak and explosion at our Marshville, North Carolina facility damaged portions of the building, machinery and equipment. As of September 25, 2011, the Company has incurred costs of $5.5 million, which have been offset by an insurance receivable. The Company is in the process of filing a claim with its insurance company as a result of these damages and expects to receive proceeds in subsequent quarters. In April and May of 2011, severe weather and flooding damaged portions of the buildings, machinery and equipment at the Company’s facilities in Russellville, Alabama, Sumter, South Carolina and DeQueen, Arkansas (collectively, the “Southeast Locations”). The Company received proceeds of $1.0 million related to these damages during the thirteen weeks ended September 25, 2011. On September 19, 2010, a fire at the Company’s Elberton, Georgia facility damaged a portion of the building, machinery and equipment. This facility is currently fully operational and the Company is in process of completing repairs and finalizing the insurance claim. On July 21, 2008, a fire at one of the Company’s facilities in Mt. Pleasant, Texas damaged a significant portion of the plant’s building, machinery and equipment. The Company resumed operations at the Mt. Pleasant plant in April 2009. The insurance claim was closed in May 2010.

 

37


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company received the following proceeds during the thirteen and thirty-nine weeks ended September 25, 2011 and September 26, 2010:

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
     September 25,
2011
     September 26,
2010
     September 25,
2011
     September 26,
2010
 
     (In thousands)      (In thousands)  

Business interruption(a):

           

Mt. Pleasant, Texas

   $ —         $ —         $ —         $ 5,000   

Equipment repair and replacement(a):

           

Southeast Locations

     1,000         —           1,000         —     

Elberton, Georgia

     —           —           300         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,000       $ —         $ 1,300       $ 5,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Business interruption and equipment repair and replacement proceeds are recognized in Cost of sales on the Condensed Consolidated Statements of Operations.

18. NONCONTROLLING INTEREST

In April 2007, the Company purchased a 49% ownership interest in Merit Provisions LLC (“Merit”). Until March 2011, Merit purchased inventory from the Company for ultimate distribution to a major foodservice company. In June 2011, the Company purchased the remaining 51% ownership interest in Merit from J.O.Y. Products Corporation for $2.5 million.

19. BUSINESS SEGMENT AND GEOGRAPHIC REPORTING

We operate in one reportable business segment, as a producer and seller of chicken products we either produce or purchase for resale in the US, Puerto Rico and Mexico. We conduct separate operations in the US, Puerto Rico and Mexico; however, for geographic reporting purposes, we include Puerto Rico with our US operations. Corporate expenses are allocated to Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the US.

 

38


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net sales to customers and long-lived assets are as follows:

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
     September 25,
2011
     September 26,
2010
     September 25,
2011
     September 26,
2010
 
     (In thousands)      (In thousands)  

Net sales to customers:

           

United States

   $ 1,698,179       $ 1,565,186       $ 5,133,293       $ 4,607,775   

Mexico

   $ 193,045         154,664         573,097         462,561   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net sales to customers

   $ 1,891,224       $ 1,719,850       $ 5,706,390       $ 5,070,336   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 25,
2011
     September 26,
2010
 
     (In thousands)  

Long-lived assets(a):

     

United States

   $ 1,235,164       $ 1,278,100   

Mexico

     82,528         80,036   
  

 

 

    

 

 

 

Total long-lived assets

   $ 1,317,692       $ 1,358,136   
  

 

 

    

 

 

 

 

(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. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

On December 15, 2010, the Company closed on the sale of $500.0 million of 7  7/8% Senior Notes due in 2018 (the “2018 Notes”). The 2018 Notes are unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by Pilgrim’s Pride Corporation of West Virginia, Inc., a wholly owned subsidiary of the Company (the “Guarantor”). In accordance with Rule 3-10 of Regulation S-X promulgated under the Securities Act of 1933, the following condensed consolidating financial statements present the financial position, results of operations and cash flows of the Company (referred to as “Parent” for the purpose of this note only) on a Parent-only basis, the Guarantor on a Guarantor-only basis, the combined non-Guarantor subsidiaries and elimination entries necessary to arrive at the information for the Parent, the Guarantor and non-Guarantor subsidiaries on a consolidated basis. Investments in subsidiaries are accounted for by the Company using the equity method for this presentation.

The tables below present the condensed consolidating balance sheets as of September 25, 2011 and December 26, 2010, the condensed consolidating statements of operations for the thirteen and thirty-nine weeks ended September 25, 2011 and September 26, 2010 and the condensed consolidating statements of cash flows for the thirty-nine weeks ended September 25, 2011 and September 26, 2010 based on the guarantor structure.

 

39


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

September 25, 2011

(In thousands)

 

     Parent      Subsidiary
Guarantor
     Subsidiary
Non-Guarantors
     Eliminations/
Adjustments
    Consolidation  

Cash and cash equivalents

   $ 17,424       $ —         $ 29,480       $ —        $ 46,904   

Restricted cash and cash equivalents

     —           —           57,308         —          57,308   

Investment in available-for-sale securities

     —           —           52         —          52   

Trade accounts and other receivables, less allowance for doubtful accounts

     303,671         1,832         49,846         —          355,349   

Account receivable from JBS USA, LLC

     6,021         —           —           —          6,021   

Inventories

     782,253         22,403         114,894         —          919,550   

Income taxes receivable

     61,736         —           —           (3,840     57,896   

Current deferred tax assets

     —           6,025         4,699         (7,548     3,176   

Prepaid expenses and other current assets

     27,905         192         16,890         —          44,987   

Assets held for sale

     30,205         —           16,015         —          46,220   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     1,229,215         30,452         289,184         (11,388     1,537,463   

Investment in available-for-sale securities

     —           —           1,797         —          1,797   

Intercompany receivable

     72,837         21,261         —           (94,098  

Investment in subsidiaries

     340,214         —           —           (340,214  

Deferred tax assets

     39,505         —           —           (4,414     35,091   

Other long-lived assets

     59,577         —           182,547         (180,000     62,124   

Identified intangible assets, net

     32,366         —           13,153         —          45,519   

Property, plant and equipment, net

     1,159,396         50,093         112,091         (3,888     1,317,692   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,933,110       $ 101,806       $ 598,772       $ (634,002   $ 2,999,686   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Accounts payable

   $ 258,697       $ 9,556       $ 58,055       $ —        $ 326,308   

Account payable to JBS USA, LLC

     16,257         —           —           —          16,257   

Accrued expenses and other current liabilities

     229,161         13,885         69,109         —          312,155   

Income taxes payable

     —           —           5,499         (3,840     1,659   

Current deferred tax liabilities

     46,292         —           —           (7,548     38,744   

Current maturities of long-term debt

     15,609         —           —           —          15,609   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     566,016         23,441         132,663         (11,388     710,732   

Long-term debt, less current maturities

     1,483,890         —           —           (25,000     1,458,890   

Note payable to JBS USA Holdings, Inc.

     50,000         —           —           —          50,000   

Intercompany payable

     —           —           94,098         (94,098  

Deferred tax liabilities

     —           4,117         5,048         (4,414     4,751   

Other long-term liabilities

     264,884         —           1,507         (155,000     111,391   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     2,364,790         27,558         233,316         (289,900     2,335,764   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Pilgrim’s Pride Corporation stockholders’ equity

     568,320         74,248         362,930         (344,102     661,396   

Noncontrolling interest

     —           —           2,526         —          2,526   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     568,320         74,248         365,456         (344,102     663,922   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,933,110       $ 101,806       $ 598,772       $ (634,002   $ 2,999,686   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

40


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

December 26, 2010

(In thousands)

 

     Parent      Subsidiary
Guarantor
     Subsidiary
Non-Guarantors
     Eliminations/
Adjustments
    Consolidation  

Cash and cash equivalents

   $ 67,685       $ —         $ 38,392       $ —        $ 106,077   

Restricted cash and cash equivalents

     —           —           60,953         —          60,953   

Investment in available-for-sale securities

     —           —           1,554         —          1,554   

Trade accounts and other receivables, less allowance for doubtful accounts

     267,348         1,779         52,173         —          321,300   

Account receivable from JBS USA, LLC

     465         —           —           —          465   

Inventories

     905,215         20,668         103,371         —          1,029,254   

Income taxes receivable

     62,117         —           —           (3,652     58,465   

Current deferred tax assets

     —           6,025         5,176         (7,725     3,476   

Prepaid expenses and other current assets

     66,178         345         14,727         —          81,250   

Assets held for sale

     24,741         —           22,930         —          47,671   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     1,393,749         28,817         299,276         (11,377     1,710,465   

Investment in available-for-sale securities

     —           —           11,595         —          11,595   

Intercompany receivable

     60,882         23,724         —           (84,606     —     

Investment in subsidiaries

     337,762         —           —           (337,762     —     

Deferred tax assets

     27,023         —           —           (4,414     22,609   

Other long-lived assets

     64,371         —           182,772         (180,000     67,143   

Identified intangible assets, net

     35,308         —           13,642         —          48,950   

Property, plant and equipment, net

     1,199,495         45,872         116,657         (3,888     1,358,136   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,118,590       $ 98,413       $ 623,942       $ (622,047   $ 3,218,898   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Accounts payable

   $ 265,940       $ 7,398       $ 56,442       $ —        $ 329,780   

Account payable to JBS USA, LLC

     7,212         —           —           —          7,212   

Accrued expenses and other current liabilities

     185,897         26,394         85,649         —          297,940   

Income taxes payable

     —           —           10,466         (3,652     6,814   

Current deferred tax liabilities

     46,470         —           —           (7,725     38,745   

Current maturities of long-term debt

     58,144         —           —           —          58,144   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     563,663         33,792         152,557         (11,377     738,635   

Long-term debt, less current maturities

     1,306,160         —           —           (25,000     1,281,160   

Intercompany payable

     —           —           84,606         (84,606     —     

Deferred tax liabilities

     —           4,117         3,773         (4,414     3,476   

Other long-term liabilities

     269,844         —           2,187         (155,000     117,031   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     2,139,667         37,909         243,123         (280,397     2,140,302   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Pilgrim’s Pride Corporation stockholders’ equity

     978,923         60,504         374,886         (341,650     1,072,663   

Noncontrolling interest

     —           —           5,933         —          5,933   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     978,923         60,504         380,819         (341,650     1,078,596   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,118,590       $ 98,413       $ 623,942       $ (622,047   $ 3,218,898   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

41


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Thirteen weeks Ended September 25, 2011

(In thousands)

 

     Parent     Subsidiary
Guarantor
     Subsidiary
Non-Guarantors
    Eliminations/
Adjustments
    Consolidation  

Net sales

   $ 1,536,794      $ 110,438       $ 309,764      $ (65,772   $ 1,891,224   

Cost of sales

     1,583,838        105,531         330,014        (65,772     1,953,611   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (47,044     4,907         (20,250     —          (62,387

Selling, general and administrative expense

     45,240        —           5,957        —          51,197   

Administrative restructuring charges, net

     4,583        —           6,889        —          11,472   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     1,633,661        105,531         342,860        (65,772     2,016,280   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (96,867     4,907         (33,096     —          (125,056

Other expenses (income):

           

Interest expense

     27,845        —           85        —          27,930   

Interest income

     —          —           (323     —          (323

Foreign currency transaction losses

     114        —           13,811        —          13,925   

Miscellaneous, net

     25,645        1,125         (30,653     155        (3,728
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other expenses (income)

     53,604        1,125         (17,080     155        37,804   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (150,471     3,782         (16,016     (155     (162,860

Income tax expense (benefit)

     (3,257     1,428         1,769        —          (60
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of consolidated subsidiaries

     (147,214     2,354         (17,785     (155     (162,800

Equity in earnings of consolidated subsidiaries

     (12,217     —           —          12,217        —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

     (159,431     2,354         (17,785     12,062        (162,800

Less: Net loss attributable to noncontrolling interest

     —          —           (284     —          (284
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Pilgrim’s Pride Corporation

   $ (159,431   $ 2,354       $ (17,501   $ 12,062      $ (162,516
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

42


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Thirteen Weeks Ended September 26, 2010

(In thousands)

 

     Parent     Subsidiary
Guarantor
     Subsidiary
Non-Guarantors
    Eliminations/
Adjustments
    Consolidation  

Net sales

   $ 1,414,025      $ 122,898       $ 286,708      $ (103,781   $ 1,719,850   

Costs and expenses:

           

Cost of sales

     1,274,527        116,189         273,096        (103,781     1,560,031   

Operational restructuring charges, net

     2,525        —           —          —          2,525   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     136,973        6,709         13,612        —          157,294   

Selling, general and administrative expense

     49,782        —           (4,686     —          45,096   

Administrative restructuring charges, net

     (1,006     —           —          —          (1,006
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     1,325,828        116,189         268,410        (103,781     1,606,646   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     88,197        6,709         18,298        —          113,204   

Other expenses (income):

           

Interest expense

     26,329        —           163        —          26,492   

Interest income

     (14     —           (632     —          (646

Foreign currency transaction losses (gains)

     144        —           (424     —          (280

Miscellaneous, net

     20,157        995         (23,753     1,205        (1,396
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other expenses

     46,617        995         (24,647     1,205        24,170   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     41,580        5,714         42,945        (1,205     89,034   

Income tax expense

     21,017        2,157         7,338        —          30,512   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of consolidated subsidiaries

     20,563        3,557         35,607        (1,205     58,522   

Equity in earnings of consolidated subsidiaries

     13,662        —           —          (13,662     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

     34,225        3,557         35,607        (14,867     58,522   

Less: Net income attributable to noncontrolling interest

     —          —           596        —          596   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Pilgrim’s Pride Corporation

   $ 34,225      $ 3,557       $ 35,011      $ (14,867   $ 57,926   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

43


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Thirty-Nine Weeks Ended September 25, 2011

(In thousands)

 

     Parent     Subsidiary
Guarantor
     Subsidiary
Non-Guarantors
    Eliminations/
Adjustments
    Consolidation  

Net sales

   $ 4,628,071      $ 340,098       $ 954,918      $ (216,697   $ 5,706,390   

Cost of sales

     4,758,734        314,542         1,011,536        (216,697     5,868,115   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (130,663     25,556         (56,618     —          (161,725

Selling, general and administrative expense

     135,332        —           22,009        —          157,341   

Administrative restructuring charges, net

     4,583        —           6,889        —          11,472   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     4,898,649        314,542         1,040,434        (216,697     6,036,928   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (270,578     25,556         (85,516     —          (330,538

Other expenses (income):

           

Interest expense

     82,344        —           519        —          82,863   

Interest income

     (354     —           (957     —          (1,311

Foreign currency transaction losses (gains)

     (59     —           11,294        —          11,235   

Miscellaneous, net

     77,401        3,477         (87,701     587        (6,236
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other expenses (income)

     159,332        3,477         (76,845     587        86,551   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (429,910     22,079         (8,671     (587     (417,089

Income tax expense (benefit)

     (19,229     8,335         4,432        —          (6,462
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of consolidated subsidiaries

     (410,681     13,744         (13,103     (587     (410,627

Equity in earnings of consolidated subsidiaries

     685        —           —          (685     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

     (409,996     13,744         (13,103     (1,272     (410,627

Less: Net income attributable to noncontrolling interest

     —          —           790        —          790   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Pilgrim’s Pride Corporation

   $ (409,996   $ 13,744       $ (13,893   $ (1,272   $ (411,417
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

44


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Thirty-Nine Weeks Ended September 26, 2010

(In thousands)

 

     Parent     Subsidiary
Guarantor
    Subsidiary
Non-Guarantors
    Eliminations/
Adjustments
    Consolidation  

Net sales

   $ 4,160,309      $ 355,148      $ 857,937      $ (303,058   $ 5,070,336   

Costs and expenses:

          

Cost of sales

     3,846,559        340,907        841,599        (303,058     4,726,007   

Operational restructuring charges, net

     2,525        —          —          —          2,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     311,225        14,241        16,338        —          341,804   

Selling, general and administrative expense

     150,145        (279     7,549        —          157,415   

Administrative restructuring charges, net

     48,115        —          3,580        —          51,695   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     4,047,344        340,628        852,728        (303,058     4,937,642   
  

 

 

   

 

 

   

 

 

   

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