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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|
| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019 OR |
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File number 1-9273
PILGRIM’S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
|
| | |
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.)
|
| | | | |
Title of each class | | Trading Symbol | | Name of Exchange on Which Registered |
Common Stock, Par Value $0.01 | | PPC | | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | |
Large Accelerated Filer | ý | | Accelerated Filer | | ¨ |
Non-accelerated Filer | ¨ | | Smaller reporting company | | ¨ |
| | | Emerging growth company | | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Number of shares outstanding of the issuer’s common stock, $0.01 par value per share, as of May 1, 2019, was 249,419,815.
INDEX
PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES
|
| | |
| |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
| |
| |
PART I. | FINANCIAL INFORMATION |
| |
ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
|
| | | | | | | | |
PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(Unaudited) |
|
| | March 31, 2019 | | December 30, 2018 |
| | (In thousands) |
Cash and cash equivalents | | $ | 378,518 |
| | $ | 338,386 |
|
Restricted cash and cash equivalents | | 20,373 |
| | 23,192 |
|
Trade accounts and other receivables, less allowance for doubtful accounts | | 564,055 |
| | 561,549 |
|
Accounts receivable from related parties | | 854 |
| | 1,331 |
|
Inventories | | 1,166,002 |
| | 1,159,519 |
|
Income taxes receivable | | 31,985 |
| | 38,479 |
|
Prepaid expenses and other current assets | | 124,265 |
| | 112,023 |
|
Assets held for sale | | 178 |
| | 178 |
|
Total current assets | | 2,286,230 |
| | 2,234,657 |
|
Deferred tax assets | | 4,166 |
| | 4,248 |
|
Other long-lived assets | | 16,275 |
| | 16,717 |
|
Identified intangible assets, net | | 569,870 |
| | 564,128 |
|
Goodwill | | 970,640 |
| | 949,750 |
|
Operating lease assets, net | | 330,040 |
| | — |
|
Property, plant and equipment, net | | 2,195,706 |
| | 2,161,702 |
|
Total assets | | $ | 6,372,927 |
| | $ | 5,931,202 |
|
| | | | |
Accounts payable | | $ | 818,482 |
| | $ | 830,059 |
|
Accounts payable to related parties | | 5,550 |
| | 7,269 |
|
Revenue contract liability | | 25,812 |
| | 33,328 |
|
Accrued expenses and other current liabilities | | 472,365 |
| | 386,941 |
|
Income taxes payable | | 7,884 |
| | 8,221 |
|
Current maturities of long-term debt | | 27,637 |
| | 30,405 |
|
Total current liabilities | | 1,357,730 |
| | 1,296,223 |
|
Noncurrent operating lease liability, less current maturities | | 252,281 |
| | — |
|
Long-term debt, less current maturities | | 2,303,735 |
| | 2,295,190 |
|
Noncurrent income taxes payable | | 7,731 |
| | 7,731 |
|
Deferred tax liabilities | | 236,931 |
| | 237,422 |
|
Other long-term liabilities | | 70,019 |
| | 75,051 |
|
Total liabilities | | 4,228,427 |
| | 3,911,617 |
|
Common stock | | 2,609 |
| | 2,604 |
|
Treasury stock | | (231,994 | ) | | (231,994 | ) |
Additional paid-in capital | | 1,947,013 |
| | 1,945,136 |
|
Retained earnings | | 505,899 |
| | 421,888 |
|
Accumulated other comprehensive loss | | (88,926 | ) | | (127,834 | ) |
Total Pilgrim’s Pride Corporation stockholders’ equity | | 2,134,601 |
| | 2,009,800 |
|
Noncontrolling interest | | 9,899 |
| | 9,785 |
|
Total stockholders’ equity | | 2,144,500 |
| | 2,019,585 |
|
Total liabilities and stockholders’ equity | | $ | 6,372,927 |
| | $ | 5,931,202 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
|
| | | | | | | | |
PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
(Unaudited) |
| | | | |
| | Thirteen Weeks Ended |
| | March 31, 2019 | | April 1, 2018 |
| | (In thousands, except per share data) |
Net sales | | $ | 2,724,675 |
| | $ | 2,746,678 |
|
Cost of sales | | 2,505,736 |
| | 2,459,013 |
|
Gross profit | | 218,939 |
| | 287,665 |
|
Selling, general and administrative expense | | 81,924 |
| | 85,283 |
|
Administrative restructuring activity | | (27 | ) | | 789 |
|
Operating income | | 137,042 |
| | 201,593 |
|
Interest expense, net of capitalized interest | | 33,562 |
| | 50,300 |
|
Interest income | | (3,340 | ) | | (1,590 | ) |
Foreign currency transaction loss (gain) | | 2,636 |
| | (1,721 | ) |
Miscellaneous, net | | (357 | ) | | (1,617 | ) |
Income before income taxes | | 104,541 |
| | 156,221 |
|
Income tax expense | | 20,416 |
| | 36,997 |
|
Net income | | 84,125 |
| | 119,224 |
|
Less: Net income (loss) attributable to noncontrolling interests | | 114 |
| | (194 | ) |
Net income attributable to Pilgrim’s Pride Corporation | | $ | 84,011 |
| | $ | 119,418 |
|
| | | | |
Weighted average shares of Pilgrim's Pride Corporation common stock outstanding: | | | | |
Basic | | 249,167 |
| | 248,838 |
|
Effect of dilutive common stock equivalents | | 390 |
| | 151 |
|
Diluted | | 249,557 |
| | 248,989 |
|
| | | | |
Net income attributable to Pilgrim’s Pride Corporation per share of common stock outstanding: | | | | |
Basic | | $ | 0.34 |
| | $ | 0.48 |
|
Diluted | | $ | 0.34 |
| | $ | 0.48 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
|
| | | | | | | | | |
PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(Unaudited) |
|
| | Thirteen Weeks Ended |
| | March 31, 2019 | | April 1, 2018 |
| | (In thousands) |
Net income | | $ | 84,125 |
| | $ | 119,224 | |
Other comprehensive income: | | | | |
Foreign currency translation adjustment | | | | |
Gains arising during the period | | 37,442 |
| | 52,565 | |
Income tax effect | | — |
| | (37 | ) |
Derivative financial instruments designated as cash flow hedges | | | | |
Losses arising during the period | | (898 | ) | | (15 | ) |
Reclassification to net earnings for losses (gains) realized | | (221 | ) | | 250 | |
Available-for-sale securities | | | | |
Gains arising during the period | | 22 |
| | 374 | |
Income tax effect | | (5 | ) | | (91 | ) |
Reclassification to net earnings for gains realized | | (135 | ) | | (172 | ) |
Income tax effect | | 34 |
| | 42 | |
Defined benefit plans | | | | |
Gains arising during the period | | 3,200 |
| | 5,899 | |
Income tax effect | | (779 | ) | | (1,434 | ) |
Reclassification to net earnings of losses realized | | 328 |
| | 301 | |
Income tax effect | | (80 | ) | | (73 | ) |
Total other comprehensive income, net of tax | | 38,908 |
| | 57,609 | |
Comprehensive income | | 123,033 |
| | 176,833 | |
Less: Comprehensive income (loss) attributable to noncontrolling interests | | 114 |
| | (194 | ) |
Comprehensive income attributable to Pilgrim's Pride Corporation | | $ | 122,919 |
| | $ | 177,027 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
(Unaudited) |
|
| | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total |
| | Shares | | Amount | | Shares | | Amount | |
| | (In thousands) |
Balance at December 30, 2018 | | 260,396 |
| | $ | 2,604 |
| | (11,431 | ) | | $ | (231,994 | ) | | $ | 1,945,136 |
| | $ | 421,888 |
| | $ | (127,834 | ) | | $ | 9,785 |
| | $ | 2,019,585 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 84,011 |
| | — |
| | 114 |
| | 84,125 |
|
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 38,908 |
| | — |
| | 38,908 |
|
Share-based compensation plans: | | | | | | | | | | | | | | | | | | |
Common stock issued under compensation plans | | 459 |
| | 5 |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
|
Requisite service period recognition | | — |
| | — |
| | — |
| | — |
| | 1,882 |
| | — |
| | — |
| | — |
| | 1,882 |
|
Balance at March 31, 2019 | | 260,855 |
| | $ | 2,609 |
| | (11,431 | ) | | $ | (231,994 | ) | | $ | 1,947,013 |
| | $ | 505,899 |
| | $ | (88,926 | ) | | $ | 9,899 |
| | $ | 2,144,500 |
|
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | 260,168 |
| | $ | 2,602 |
| | (11,416 | ) | | $ | (231,758 | ) | | $ | 1,932,509 |
| | $ | 173,943 |
| | $ | (31,140 | ) | | $ | 9,505 |
| | $ | 1,855,661 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 119,418 |
| | — |
| | (194 | ) | | 119,224 |
|
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 57,609 |
| | — |
| | 57,609 |
|
Share-based compensation plans: | | | | | | | | | | | | | | | | | | |
Common stock issued under compensation plans | | 228 |
| | 2 |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Requisite service period recognition | | — |
| | — |
| | — |
| | — |
| | 1,273 |
| | — |
| | — |
| | — |
| | 1,273 |
|
Balance at April 1, 2018 | | 260,396 |
| | $ | 2,604 |
| | (11,416 | ) | | $ | (231,758 | ) | | $ | 1,933,780 |
| | $ | 293,361 |
| | $ | 26,469 |
| | $ | 9,311 |
| | $ | 2,033,767 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
|
| | | | | | | | |
PILGRIM’S PRIDE CORPORATION |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
|
| | Thirteen Weeks Ended |
| | March 31, 2019 | | April 1, 2018 |
| | (In thousands) |
Cash flows from operating activities: | | | | |
Net income | | $ | 84,125 |
| | $ | 119,224 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | | |
Depreciation and amortization | | 67,182 |
| | 67,444 |
|
Loan cost amortization | | 1,201 |
| | 1,757 |
|
Share-based compensation | | 1,882 |
| | 1,273 |
|
Foreign currency transaction loss (gain) related to borrowing arrangements | | (1,034 | ) | | 5,745 |
|
Deferred income tax benefit | | (4,089 | ) | | (4,735 | ) |
Accretion of discount related to Senior Notes | | 246 |
| | 76 |
|
Amortization of premium related to Senior Notes | | (167 | ) | | (167 | ) |
Loss (gain) on property disposals | | (108 | ) | | 80 |
|
Gain on equity-method investments | | (16 | ) | | (16 | ) |
Noncash loss on early extinguishment of debt | | — |
| | 3,918 |
|
Asset impairment | | — |
| | 470 |
|
Changes in operating assets and liabilities: | | | | |
Trade accounts and other receivables | | 2,381 |
| | (61,945 | ) |
Inventories | | (1,368 | ) | | 19,541 |
|
Prepaid expenses and other current assets | | (11,479 | ) | | (20,777 | ) |
Accounts payable, accrued expenses and other current liabilities | | (21,968 | ) | | (29,171 | ) |
Income taxes | | 6,579 |
| | (98,784 | ) |
Long-term pension and other postretirement obligations | | (1,315 | ) | | (2,759 | ) |
Other operating assets and liabilities | | (1,683 | ) | | (534 | ) |
Cash provided by operating activities | | 120,369 |
| | 640 |
|
Cash flows from investing activities: | | | | |
Acquisitions of property, plant and equipment | | (87,941 | ) | | (76,681 | ) |
Proceeds from property disposals | | 539 |
| | 1,021 |
|
Cash used in investing activities | | (87,402 | ) | | (75,660 | ) |
Cash flows from financing activities: | | | | |
Proceeds from revolving line of credit and long-term borrowings | | 67,193 |
| | 502,341 |
|
Payments on revolving line of credit, long-term borrowings and capital lease obligations | | (62,293 | ) | | (433,550 | ) |
Proceeds (payment) from equity contribution (distribution) under Tax Sharing Agreement between JBS USA Food Company Holdings and Pilgrim’s Pride Corporation | | (525 | ) | | 5,558 |
|
Payment of capitalized loan costs | | (458 | ) | | (4,061 | ) |
Cash provided by financing activities | | 3,917 |
| | 70,288 |
|
Effect of exchange rate changes on cash and cash equivalents | | 429 |
| | 6,669 |
|
Increase in cash, cash equivalents and restricted cash | | 37,313 |
| | 1,937 |
|
Cash, cash equivalents and restricted cash, beginning of period | | 361,578 |
| | 589,531 |
|
Cash, cash equivalents and restricted cash, end of period | | $ | 398,891 |
| | $ | 591,468 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
1. | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
Business
Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “PPC,” “the Company,” “we,” “us,” “our,” or similar terms) is one of the largest chicken producers in the world, with operations in the United States (“U.S.”), the United Kingdom (“U.K.”), Mexico, France, Puerto Rico and the Netherlands. Pilgrim’s products are sold to foodservice, retail and frozen entrée customers. The Company’s primary distribution is through retailers, foodservice distributors and restaurants throughout the countries listed above. Additionally, the Company exports chicken products to approximately 100 countries. Pilgrim’s fresh chicken products consist of refrigerated (nonfrozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. The Company’s prepared chicken products include fully cooked, ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated. The Company’s other products include ready-to-eat meals, multi-protein frozen foods, vegetarian foods and desserts. As a vertically integrated company, we control every phase of the production of our products. We operate feed mills, hatcheries, processing plants and distribution centers in 14 U.S. states, the U.K., Mexico, France, Puerto Rico and the Netherlands. As of March 31, 2019, Pilgrim’s had approximately 52,100 employees and the capacity to process approximately 45.3 million birds per work week for a total of more than 13.0 billion pounds of live chicken annually. Approximately 5,000 contract growers supply poultry for the Company’s operations. As of March 31, 2019, JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owned 78.4% of the Company’s outstanding common stock.
Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments unless otherwise disclosed) considered necessary for a fair presentation have been included. Operating results for the thirteen weeks ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 29, 2019. For further information, refer to the consolidated and combined financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 30, 2018.
The Company operates on the basis of a 52/53 week fiscal year ending on the Sunday falling on or before December 31. Any reference we make to a particular year (for example, 2019) in the notes to these Condensed Consolidated Financial Statements applies to our fiscal year and not the calendar year.
The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation.
The Condensed Consolidated Financial Statements have been prepared in conformity with U.S. GAAP using management’s best estimates and judgments. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments. Significant estimates made by the Company include the allowance for doubtful accounts, reserves related to inventory obsolescence or valuation, useful lives of long-lived assets, goodwill, valuation of deferred tax assets, insurance accruals, valuation of pension and other postretirement benefits obligations, income tax accruals, certain derivative positions and valuations of acquired businesses.
The functional currency of the Company's U.S. and Mexico operations and certain holding-company subsidiaries in Luxembourg, the U.K. and Ireland is the U.S. dollar. The functional currency of its U.K. operations is the British pound. The functional currency of the Company's operations in France and the Netherlands is the euro. For foreign currency-denominated entities other than the Company's Mexico operations, translation from local currencies into U.S. dollars is performed for most assets and liabilities using the exchange rates in effect as of the balance sheet date. Income and expense accounts are remeasured using average exchange rates for the period. Adjustments resulting from translation of these financial records are reflected as a separate component of Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets. For the Company's Mexico operations, remeasurement from the Mexican peso to U.S. dollars is performed for monetary assets and liabilities using the exchange rate in effect as of the balance sheet date. Remeasurement is performed for non-monetary assets using the historical
exchange rate in effect on the date of each asset’s acquisition. Income and expense accounts are remeasured using average exchange rates for the period. Net adjustments resulting from remeasurement of these financial records, as well as foreign currency transaction gains and losses, are reflected in Foreign currency transaction loss (gain) in the Condensed Consolidated Statements of Income.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease assets, net, Accrued expenses and other current liabilities, and Noncurrent operating lease liabilities, less current maturities, in our Condensed Consolidated Balance Sheet. Finance leases are included in Property, plant and equipment, net, Current portion of long-term debt, and Long-term debt, less current maturities, in our Condensed Consolidated Balance Sheet.
Beginning with the adoption of Accounting Standards Update (“ASU”) 2016-02 on December 31, 2018, operating lease assets and operating lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease asset also includes any lease payments made, including upfront costs and prepayments, and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate a lease when it is reasonably certain that we will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with a corresponding reduction to the operating lease asset.
The Company has lease agreements with lease and non-lease components. Beginning in 2019, lease and non-lease components are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. The Company's finance lease agreements are immaterial.
Restricted Cash
The Company is required to maintain cash balances with a broker as collateral for exchange traded futures contracts. These balances are classified as restricted cash as they are not available for use by the Company to fund daily operations. The balance of restricted cash may also include investments in U.S. Treasury Bills that qualify as cash equivalents, as required by the broker, to offset the obligation to return cash collateral.
The following table reconciles cash, cash equivalents and restricted cash as reported in the Condensed Consolidated Balance Sheets to the total of the same amounts shown in the Condensed Consolidated Statements of Cash Flows:
|
| | | | | | | | |
| | March 31, 2019 | | December 30, 2018 |
| | (In thousands) |
Cash and cash equivalents | | $ | 378,518 |
| | $ | 338,386 |
|
Restricted cash | | 20,373 |
| | 23,192 |
|
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | | $ | 398,891 |
| | $ | 361,578 |
|
Recent Accounting Pronouncements Adopted as of March 31, 2019
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842), along with several updates, which, in an effort to increase transparency and comparability among organizations utilizing leasing, requires an entity that is a lessee to recognize the assets and liabilities arising from operating leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. In transition, the entity may elect to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach or the beginning of the period of adoption using a cumulative-effect adjustment approach. We adopted the new standard on December 31, 2018 and recognized and measured leases at the beginning of the period of adoption. We elected the package of practical expedients available under the transition guidance which, among other things, allows the carry-forward of historical lease classification. The Company also elected the practical expedient allowing use of hindsight in assessing the lease term. We made an accounting policy election to not apply the new guidance to leases with a term of 12 months or less and will recognize those payments in the Condensed Consolidated Statement of Income on a straight-line basis over the lease term. We implemented a system solution for administering our leases and facilitating compliance with the new guidance. Adoption of the standard had a material impact on our Condensed Consolidated Balance Sheet as a result of the increase in assets and liabilities from recognition of operating lease assets and operating lease liabilities. However, the standard did not have a material impact on our Condensed Consolidated Statement of Income.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, an accounting standard update that simplifies the application of hedge accounting guidance in current GAAP and improves the reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. Among the simplification updates, the standard eliminates the requirement in current GAAP to separately recognize periodic hedge ineffectiveness. Mismatches between the changes in value of the hedged item and hedging instrument may still occur but they will no longer be separately reported. The standard requires the presentation of the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The standard is effective for annual and interim reporting periods beginning after December 15, 2018, but early adoption is permitted. We have adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, an accounting standard update that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. The Company will not reclassify the stranded tax effects associated with the U.S. Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. We adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
In July 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, an accounting standard update to improve non-employee share-based payment accounting. The accounting standard update more closely aligns the accounting for employee and non-employee share based payments. The accounting standards update is effective as of the beginning of our 2019 calendar year with early adoption permitted. We adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.
Recent Accounting Pronouncements Not Yet Adopted as of March 31, 2019
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which, in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. The provisions of the new guidance will be effective as of the beginning of our 2020 fiscal year. Early adoption is permitted after our 2018 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, new accounting guidance to improve the effectiveness of disclosures related to fair value measurements. The new guidance removes certain disclosure requirements related to transfers between Level 1 and Level 2 of the fair value hierarchy along with the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. Additions to the disclosure requirements include more quantitative information related to significant unobservable inputs used in Level 3 fair value measurements and gains and losses included in other comprehensive income. The new guidance will be effective as of our 2020 fiscal year with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, new accounting guidance to improve the effectiveness of disclosures related to defined benefit plans by eliminating certain required disclosures, clarifying existing disclosures, and adding new disclosures. Changes include removing disclosures related to the amounts in accumulated other comprehensive income expected to be recognized in the next fiscal year, adding narrative disclosure of the reasons for significant gains and losses related to changes in the defined benefit obligation, and clarifying the disclosures required for plans with projected and accumulated benefit obligations in excess of plan assets. The new guidance will be effective as of our 2020 fiscal year with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected an adoption date.
| |
2. | FAIR VALUE MEASUREMENTS |
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities measured at fair value must be categorized into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation:
|
| | |
Level 1 | | Unadjusted quoted prices in active markets for identical assets or liabilities; |
| |
Level 2 | | Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
| |
Level 3 | | Unobservable inputs, such as discounted cash flow models or valuations. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.
As of March 31, 2019 and December 30, 2018, the Company held derivative assets and liabilities that were required to be measured at fair value on a recurring basis. Derivative assets and liabilities consist of long and short positions on exchange-traded commodity futures instruments, commodity options instruments and foreign currency instruments to manage translation and remeasurement risk.
The following items were measured at fair value on a recurring basis:
|
| | | | | | | | |
| | March 31, 2019 |
| | Level 1 | | Total |
| | (In thousands) |
Fair value assets: | | | | |
Commodity futures instruments | | $ | 2,207 |
| | $ | 2,207 |
|
Commodity options instruments | | 1,384 |
| | 1,384 |
|
Foreign currency instruments | | 1,009 |
| | 1,009 |
|
Fair value liabilities: | | | | |
Commodity futures instruments | | (7,677 | ) | | (7,677 | ) |
Commodity options instruments | | (3,439 | ) | | (3,439 | ) |
Foreign currency instruments | | (2,034 | ) | | (2,034 | ) |
|
| | | | | | | | |
| | December 30, 2018 |
| | Level 1 | | Total |
| | (In thousands) |
Fair value assets: | | | | |
Commodity futures instruments | | $ | 2,244 |
| | $ | 2,244 |
|
Foreign currency instruments | | 1,311 |
| | 1,311 |
|
Fair value liabilities: | | | | |
Commodity futures instruments | | (1,479 | ) | | (1,479 | ) |
Commodity option instruments | | (3,312 | ) | | (3,312 | ) |
Foreign currency instruments | | (6,649 | ) | | (6,649 | ) |
See “Note 6. Derivative Financial Instruments” for additional information.
The valuation of financial assets and liabilities classified in Level 1 is determined using a market approach, taking into account current interest rates, creditworthiness, and liquidity risks in relation to current market conditions, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of financial assets and liabilities in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable for substantially the full term of the financial instrument. The valuation of financial assets in Level 3 is determined using an income approach based on unobservable inputs such as discounted cash flow models or valuations. For each class of assets and liabilities not measured at fair value in the Condensed Consolidated Balance Sheets but for which fair value is disclosed, the Company is not required to provide the quantitative disclosure about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy.
In addition to the fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods or significant assumptions from prior periods are also required to be disclosed.
The carrying amounts and estimated fair values of our fixed-rate debt obligation recorded in the Condensed Consolidated Balance Sheets consisted of the following:
|
| | | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 30, 2018 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | | (In thousands) | | |
Fixed-rate senior notes payable at 5.75%, at Level 1 inputs | | $ | (1,002,396 | ) | | $ | (1,014,930 | ) | | $ | (1,002,497 | ) | | $ | (937,300 | ) |
Fixed-rate senior notes payable at 5.875%, at Level 1 inputs | | (843,896 | ) | | (856,333 | ) | | (843,717 | ) | | (768,188 | ) |
Secured loans, at Level 3 inputs | | (2,990 | ) | | (2,936 | ) | | (319 | ) | | (319 | ) |
See “Note 11. Long-Term Debt and Other Borrowing Arrangements” for additional information.
The carrying amounts of our cash and cash equivalents, derivative trading accounts' margin cash, restricted cash and cash equivalents, accounts receivable, accounts payable and certain other liabilities approximate their fair values due to their relatively short maturities. Derivative assets were recorded at fair value based on quoted market prices and are included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. Derivative liabilities were recorded at fair value based on quoted market prices and are included in the line item Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The fair value of the Company’s Level 1 fixed-rate debt obligations was based on the quoted market price at March 31, 2019 or December 30, 2018, as applicable. The fair value of the Company’s Level 3 fixed-rate debt obligation was based on discounted cash flows at March 31, 2019 or December 30, 2018, as applicable.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges when required by U.S. GAAP. The Company recognized impairment charges during the thirteen weeks ended April 1, 2018 of $0.5 million within the U.S. segment on such assets. There were no impairment charges on such assets during the thirteen weeks ended March 31, 2019. See “Note 9. Property, Plant and Equipment” for additional detail.
| |
3. | TRADE ACCOUNTS AND OTHER RECEIVABLES |
Trade accounts and other receivables, less allowance for doubtful accounts, consisted of the following:
|
| | | | | | | | |
| | March 31, 2019 | | December 30, 2018 |
| | (In thousands) |
Trade accounts receivable | | $ | 524,466 |
| | $ | 533,645 |
|
Notes receivable - current | | 4,630 |
| | 4,630 |
|
Other receivables | | 43,114 |
| | 31,331 |
|
Receivables, gross | | 572,210 |
| | 569,606 |
|
Allowance for doubtful accounts | | (8,155 | ) | | (8,057 | ) |
Receivables, net | | $ | 564,055 |
| | $ | 561,549 |
|
| | | | |
Accounts receivable from related parties(a) | | $ | 854 |
| | $ | 1,331 |
|
(a) Additional information regarding accounts receivable from related parties is included in “Note 19. Related Party Transactions.”
Activity in the allowance for doubtful accounts for the thirteen weeks ended March 31, 2019 was as follows (in thousands):
|
| | | | |
Balance, beginning of period | | $ | (8,057 | ) |
Provision charged to operating results | | (261 | ) |
Account write-offs and recoveries | | 78 |
|
Effect of exchange rate | | 85 |
|
Balance, end of period | | $ | (8,155 | ) |
Inventories consisted of the following:
|
| | | | | | | |
| March 31, 2019 | | December 30, 2018 |
| (In thousands) |
Raw materials and work in process | $ | 744,811 |
| | $ | 747,801 |
|
Finished products | 324,604 |
| | 317,410 |
|
Operating supplies | 43,966 |
| | 43,825 |
|
Maintenance materials and parts | 52,621 |
| | 50,483 |
|
Total inventories | $ | 1,166,002 |
| | $ | 1,159,519 |
|
| |
5. | INVESTMENTS IN SECURITIES |
We recognize investments in available-for-sale securities as cash equivalents, current investments or long-term investments depending upon each security's length to maturity. Additionally, those securities identified by management at the time of purchase for funding operations in less than one year are classified as current.
The following table summarizes our investments in available-for-sale securities:
|
| | | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 30, 2018 |
| | Cost | | Fair Value | | Cost | | Fair Value |
| | (In thousands) |
Cash equivalents: | | | | | | | | |
Fixed income securities | | $ | 150,812 |
| | $ | 150,812 |
| | $ | 135,286 |
| | $ | 135,286 |
|
Other | | 88,151 |
| | 88,151 |
| | 67,474 |
| | 67,474 |
|
Securities classified as cash and cash equivalents mature within 90 days. Securities classified as short-term investments mature between 91 and 365 days. Securities classified as long-term investments mature after 365 days. The specific identification method is used to determine the cost of each security sold and each amount reclassified out of accumulated other comprehensive loss to earnings. Gross realized gains during the thirteen weeks ended March 31, 2019 related to the Company’s available-for-sale securities totaled $2.3 million while gross realized losses were immaterial. Gross realized gains during the thirteen weeks ended April 1, 2018 related to the Company’s available-for-sale securities totaled $0.2 million, while gross realized losses were immaterial. Proceeds received from the sale or maturity of available-for-sale securities recognized as either short- or long-term investments are historically disclosed in the Condensed Consolidated Statements of Cash Flows. No proceeds were received from the sale or maturity of available-for-sale securities recognized as either short- or long-term investments during the thirteen weeks ended March 31, 2019 and April 1, 2018, respectively. Net unrealized holding gains and losses on the Company’s available-for-sale securities recognized during the thirteen weeks ended March 31, 2019 and April 1, 2018 that have been included in accumulated other comprehensive loss and the net amount of gains and losses reclassified out of accumulated other comprehensive loss to earnings during the thirteen weeks ended March 31, 2019 and April 1, 2018 are disclosed in “Note 15. Stockholders’ Equity”.
| |
6. | DERIVATIVE FINANCIAL INSTRUMENTS |
The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil, wheat, natural gas, electricity and diesel fuel, which are all considered commodities. The Company considers these raw materials generally available from a number of different sources and believes it can obtain them to meet its requirements. These commodities are subject to price fluctuations and related price risk due to factors beyond our control, such as economic and political conditions, supply and demand, weather, governmental regulation and other circumstances. Generally, the Company purchases derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated
consumption of commodity inputs for approximately the next 12 months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate.
The Company has operations in Mexico and U.K. and Europe and, therefore, has exposure to foreign currency exchange risk when the financial results of those operations are remeasured in U.S. dollars. The Company has purchased foreign currency forward contracts to manage this foreign currency exchange risk.
The fair value of derivative assets is included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets while the fair value of derivative liabilities is included in the line item Accrued expenses and other current liabilities on the same statements. Our counterparties require that we post cash collateral for changes in the net fair value of the derivative contracts. This cash collateral is reported in the line item Restricted cash and cash equivalents on the Condensed Consolidated Balance Sheets.
We have not designated certain derivative financial instruments that we have purchased to mitigate commodity purchase or foreign currency transaction exposures on our Mexico operations as cash flow hedges. Items designated as cash flow hedges are disclosed and described further below. Therefore, we recognized changes in the fair value of these derivative financial instruments immediately in earnings. Gains or losses related to these derivative financial instruments are included in the line item Foreign currency transaction loss (gain) in the Condensed Consolidated Statements of Income.
We have designated certain derivative financial instruments related to our U.K. and Europe segment that we have purchased to mitigate foreign currency transaction exposures as cash flow hedges. Before the settlement date of the financial derivative instruments, we recognize changes in the fair value of the cash flow hedge into accumulated other comprehensive income (“AOCI”). When each derivative financial instrument for which we have designated a cash flow hedge is settled, the amount in AOCI is then reclassified to earnings. Gains or losses related to these derivative financial instruments are included in the line item Cost of sales in the Condensed Consolidated Statements of Income.
The Company recognized net losses of $8.0 million and net gains of $6.4 million related to changes in the fair value of its derivative financial instruments during the thirteen weeks ended March 31, 2019 and April 1, 2018, respectively. Information regarding the Company’s outstanding derivative instruments and cash collateral posted with brokers is included in the following table:
|
| | | | | | | |
| March 31, 2019 | | December 30, 2018 |
| (Fair values in thousands) |
Fair values: | | | |
Commodity derivative assets | $ | 3,591 |
| | $ | 2,263 |
|
Commodity derivative liabilities | (11,116 | ) | | (4,791 | ) |
Foreign currency derivative assets | 1,009 |
| | 1,311 |
|
Foreign currency derivative liabilities | (2,034 | ) | | (6,649 | ) |
Cash collateral posted with brokers(a) | 20,373 |
| | 23,192 |
|
Derivatives coverage(b): | | | |
Corn | 12.0 | % | | 6.0 | % |
Soybean meal | 7.0 | % | | 6.0 | % |
Period through which stated percent of needs are covered: | | | |
Corn | March 2020 |
| | March 2020 |
|
Soybean meal | December 2019 |
| | December 2019 |
|
| |
(a) | Collateral posted with brokers consists primarily of cash, short-term treasury bills, or other cash equivalents. |
| |
(b) | Derivatives coverage is the percent of anticipated commodity needs covered by outstanding derivative instruments through a specified date. |
The following tables present the components of the gain or loss on derivatives that qualify as cash flow hedges:
|
| | | | | | | |
| Gain (Loss) Recognized in Other Comprehensive Income on Derivative |
| Thirteen Weeks Ended |
| March 31, 2019 | | April 1, 2018 |
| (In thousands) |
Foreign currency derivatives | $ | (915 | ) | | $ | 1 |
|
Total | $ | (915 | ) | | $ | 1 |
|
| | | |
| Gain (Loss) Reclassified from AOCI into Income |
| Thirteen Weeks Ended |
| March 31, 2019 | | April 1, 2018 |
| (In thousands) |
Foreign currency derivatives | $ | 221 |
| | $ | (250 | ) |
Total | $ | 221 |
| | $ | (250 | ) |
At March 31, 2019, the pre-tax deferred net gains on derivatives recorded in AOCI that are expected to be reclassified to the Condensed Consolidated Statements of Income during the next twelve months are $0.9 million. This expectation is based on the anticipated settlements on the hedged investments in foreign currencies that will occur over the next twelve months, at which time the Company will recognize the deferred gains (losses) to earnings.
| |
7. | GOODWILL AND INTANGIBLE ASSETS |
The activity in goodwill by segment for the thirteen weeks ended March 31, 2019 was as follows: |
| | | | | | | | | | | | |
| | December 30, 2018 | | Currency Translation | | March 31, 2019 |
| | (In thousands) |
U.S. | | $ | 41,936 |
| | $ | — |
| | $ | 41,936 |
|
U.K. and Europe | | 782,207 |
| | 20,890 |
| | 803,097 |
|
Mexico | | 125,607 |
| | — |
| | 125,607 |
|
Total | | $ | 949,750 |
| | $ | 20,890 |
| | $ | 970,640 |
|
Identified intangible assets consisted of the following:
|
| | | | | | | | | | | | | | | | |
| | December 30, 2018 | | Amortization | | Currency Translation | | March 31, 2019 |
| (In thousands) |
Cost: | | | | | | | | |
& |