Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Overview
We are one of the largest protein companies in the world, and as a vertically integrated company, we are able to control every phase of the production process, which helps us manage food safety and quality, control margins and improve customer service. This gives us the opportunity to continue to create growth and development opportunities, further increasing our position as a leading domestic and global protein company. With the acquisition of the meats and meals operations of Kerry Consumer Foods (“Pilgrim’s Food Masters” or “PFM”) in September 2021, we further solidified ourselves as a leading European food company while diversifying our product mix through leading, branded protein products in the U.K. and the Republic of Ireland. See “Note 2. Business Acquisitions” of our Consolidated Financial Statements included in this annual report for additional information relating to this acquisition.
We reported net income attributable to Pilgrim’s Pride Corporation of $745.9 million, or $3.10 per diluted common share, and profit before tax totaling $1.0 billion, for 2022. These operating results included gross profit of $1.8 billion and generated $669.9 million of cash from operations. We generated operating margins of 6.7% with operating margins of 10.2% and 4.5% in our U.S. and Mexico reportable segments, respectively, and break-even in our U.K. and Europe reportable segment. During 2022, we generated EBITDA and Adjusted EBITDA of $1.57 billion and $1.65 billion, respectively. A reconciliation of net income to EBITDA and Adjusted EBITDA is included later in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report.
We operate on the basis of a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. Any reference we make to a particular year applies to our fiscal year and not the calendar year. Fiscal 2022 and 2021 were 52-week accounting cycles.
Global Economic Conditions
During 2022, we continued to experience solid recoveries in volume throughout the business from prior year levels as COVID-19 restrictions eased, but were confronted with significant challenges from inflation in commodity, labor and other operating costs across all our businesses. The global feed ingredient and energy markets continue to be impacted by the Russia-Ukraine war, driving up prices as supply out of the Black Sea region is disrupted and future production is at risk. We continued to experience labor shortages in the U.K. as European Union (or “E.U.”) workers returned to their home countries following Brexit, thus affecting our ability to process, pack and transport products. Despite inflationary headwinds and softening consumer demand throughout the U.K. and E.U., we have and will continue to invest in our people, implement supply chain solutions, and conduct customer negotiations for cost recovery. Our Mexico segment managed through significant challenges as Mexico remains a volatile market given inflationary pressures, implications of more significant bird disease, an evolving global protein industry, and overall business seasonality.
We have responded to these challenges by continuing negotiations with customers to mitigate the impact of extraordinary costs we have experienced. We also continue to focus on operational initiatives that aim to deliver labor efficiencies, better agricultural performance and improved yields.
Russia-Ukraine War Impacts
The Russia-Ukraine war began in February 2022. The impact of the ongoing war and sanctions is not limited to businesses that operate in Russia and Ukraine and is negatively impacting other global economic markets including where we operate. The impacts have included and may continue to include, but are not limited to, higher prices for commodities, such as food products, ingredients and energy products, increasing inflation in some countries, and disrupted trade and supply chains. The conflict has disrupted shipments of grains, vegetable oils, fertilizer and energy products.
The impact on the agriculture markets falls into two main categories: (1) the effect on Ukrainian crop production, as the region is key in global grain production; and (2) the duration of the disruption in trade flows. Safety and financing concerns in the region are restricting export execution, which is in turn forcing grain and oil demand to find alternative supply. The duration of the war and related volatility makes global markets extremely sensitive to growing-season weather in other global grain producing regions and has led to a large risk premium in futures prices. The continued volatility in the global markets as a result of the war has adversely impacted our costs by driving up prices, raising inflation and increasing pressure on the supply of feed ingredients and energy products throughout the global markets.
In addition, the U.S. government and other governments in jurisdictions in which we operate have imposed sanctions and export controls against Russia, Belarus and interests therein and threatened additional sanctions and controls. Our U.K. and
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Europe business may be impacted by the increase in energy prices and the availability of energy during the winter months. The impact of these measures, now and in the future, could adversely affect our business, supply chain or customers.
Impact of COVID-19
The extensive impact of the pandemic caused by COVID-19 has resulted and may continue to result in disruptions to the global economy, as well as businesses and capital markets around the world. In an effort to halt the outbreak of COVID-19, a number of countries, states, counties and other jurisdictions imposed various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations and extended closures of businesses.
As the global spread of the virus began to accelerate late in March 2020, we began to experience adverse impacts to our business and financial results. The impact of the COVID-19 pandemic included disruptions in supply chain, an increase in both broiler and chick costs and an increase in payroll and benefits costs. As the various mitigation efforts implemented across the globe began to take effect, the impact of the COVID-19 pandemic on our financial results generally decreased because of increased demand for our products at retail grocery stores and quick service restaurants and our ability to meet this demand through our transitioned business operations, as further discussed below. In 2022, we experienced intermittent impacts as noted above associated with the COVID-19 pandemic. We believe that we will continue to experience intermittent disruptions to our business due to the COVID-19 pandemic into 2023.
The impact of COVID-19 and measures to prevent its spread have affected and continue to affect our business in a number of ways.
•Our workforce. Employee health and safety is our priority. As an essential business in a critical infrastructure industry, we continue to produce chicken and pork products, while coordinating with and implementing guidance from the U.S. Centers for Disease Control and Prevention, the National Institute of Occupational Safety and Health, and local and regional Departments of Health in an effort to keep our employees safe and healthy. Measures we implemented during the height of the pandemic include, but are not limited to: increasing physical distancing of our employees, where possible, by staggering start and shift breaks, placing on-site tents to create more space for employees at break and at meal times, and installing physical barriers to distance employees while working on production lines; adding temperature and symptom screening stations for employees prior to entering our facilities; increasing personal hygiene practices and providing our employees additional personal protective equipment and sanitation stations; and increasing sanitation of our facilities. In the U.S., we provided appreciation bonuses to eligible employees in April and May of 2020 and expanded certain sick leave policies to provide more flexibility. In addition, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely. Finally, as COVID-19 vaccinations became more readily available in the first quarter of 2021, we strongly encouraged our employees to become vaccinated through sponsored vaccination clinics at our facilities and monetary bonuses to our employees once they completed the recommended vaccination regimen.
•Our operations. All of our production facilities continued to operate, although some facilities reduced production levels and outputs due to increased health and safety measures, employee absenteeism, and as a consequence of the decline in demand by restaurants and other foodservice businesses. We have not experienced a material impact from a plant closure and our facilities have been exempt from government closure orders.
•Demand for our products. In early 2021, COVID-19 continued to affect demand for our products. In our U.S. and Mexico businesses, demand for parts and whole-birds (typically bound for restaurants) and prepared foods (distributed, in part, to schools) declined, while our U.K. and Europe business, which is more retail focused, generally saw less of an impact. In an effort to counter the adverse effects of COVID-19, we have transitioned, where commercially reasonable and possible to do so, our business operations to be in the best position to supply COVID-19 market demands. Those efforts included transferring live supply to case ready, shifting production form and mix from foodservice to retail, increasing capacity utilization of retail packaging equipment, and analyzing export positions. However, as global vaccination levels increased and governmental restrictions eased, we noted the trend towards pre-pandemic levels of demand at retail grocery stores and restaurants.
•Liquidity.Our liquidity position is strong and we took additional measures in 2020 to increase liquidity to prepare for the challenging environment.
•Foreign currency exchange rates and commodity prices. During the year ended December 25, 2022, we experienced increased volatility in foreign currency exchange rates and commodity prices.
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•CARES Act. On March 27, 2020, the U.S. government enacted the CARES Act, which included modifications to the limitation on business interest expense and net operating loss provisions, and provided a payment delay of employer payroll taxes during 2020 after the date of enactment. We delayed the payment of $52 million in employer payroll taxes otherwise due in 2020. The first 50% was paid on December 31, 2021 and the remaining 50% was paid on December 31, 2022.
Raw Materials
Our profitability is materially affected by the commodity prices of feed ingredients and chicken. Our U.S. and Mexico reportable segments use corn and soybean meal as the main ingredients for feed production, while our U.K. and Europe reportable segment uses wheat, soybean meal and barley as the main ingredients for feed production.
During 2022, average chicken market prices were higher throughout the first half of the year before declining and settling below the five-year average by the end of the year. Supply grew at mild rates in the first half of 2022; however, production was impacted by poor hatchability that restricted further growth. During this time, stable demand and low amounts of chicken in cold storage led to higher chicken market pricing, which maintained historically high levels throughout the first half of 2022.
During the third quarter of 2022, chicken production grew materially primarily due to increased head counts. Growth in head counts resulted from consistent industry growth in egg sets relative to prior year levels and further aided by year-over-year improvements in hatchability. Although foodservice and retail dollar sales continued to grow, volume growth slowed in foodservice and retail volumes were stagnant. The slower volume growth and sustained supply growth in the third quarter exacerbated the normal seasonal pricing declines. The fourth quarter of 2022 showed considerable supply growth as increased average liveweights added incremental growth on already increasing head counts. With only mild improvements in retail and foodservice, volume demand growth was not able to match the pace of increased availability of chicken. The result was rapidly growing cold storage chicken inventories and commodity chicken pricing levels near the bottom of the five-year average range at the end of 2022.
In the first three quarters of 2022, the U.K. chicken market saw unprecedented cost increases in feed ingredients, utilities and labor. During the fourth quarter, the U.K. chicken market started to see stabilization of this inflation across all input costs. Through our current customer models and additional negotiations we were able to offset the majority of these cost increases throughout the year. We continue to focus on managing costs, including labor and yield efficiencies, agricultural performance and increasing operational efficiency through investments in capital projects.
Commodity prices for chicken in Mexico increased during 2022 and remained well above prices from the prior year. The increase is primarily from increased demand that outpaced supply. The cost to produce also increased from the prior year due to significant increases in corn and soy, the two main ingredients used for feed in Mexico, as well as cost increases from purchasing eggs from outside sources to replace egg loss from avian influenza.
While commodity market prices for chicken products declined, prices for 2023 will depend on (1) the evolution of foodservice, retail and export meat demand and (2) factors such as government regulation, the ongoing Russia-Ukraine war, further spread of avian influenza both domestically and abroad, uncertainty surrounding the general economy and overall protein supply.
U.K. market prices for pork products during 2022 recovered from the 2021 down slope and increased 44% over the course of the year. This was supported by recovery in the E.U. market as well as clearing pig backlogs which had arisen from labor shortages in abattoirs. Despite pig price recovery, the cost of production continued to exceed market prices, with pig farmers experiencing losses of well above £50 per pig in the first half of 2022. Although, the continuing price recovery reduced the pig farmer losses to less than £20 per pig by the end of the year. Input costs for feed and energy in the U.K. increased during the year consistent with global market conditions, albeit with the energy price growth capped in Q4 due to the U.K. government intervention, with the recovery of inflation through retailers a key area of focus throughout the year.
Sustainability
We believe sustainability involves continuously improving social responsibility, economic viability and environmental stewardship. We are committed to helping society meet the global challenge of feeding a growing population in a responsible matter.
Environmental Stewardship. We were the first major meat and poultry company in the world to set a net zero greenhouse gas emissions target by 2040, demonstrating our leadership and dedication to improving the efficiency of our operations and supporting producers to reduce our environmental footprint. In support of this initiative, in April 2021, we
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issued $1.0 billion of sustainability-linked bonds, which require us to reduce our Scope 1 and 2 global greenhouse gas emissions intensity by 30% by 2030.
Social Responsibility. Safety of our team members is a condition at Pilgrim’s. The health of our workforce was our top priority throughout the COVID-19 pandemic, and we implemented hundreds of safety measures within our facilities, constantly evolving our operations as needed. To support the communities where our team members live and work, we invested more than $20 million in local projects focused on alleviating food insecurity, strengthening long-term community infrastructure and well-being and aiding COVID-19 emergency response and relief efforts through our Hometown Strong initiative. Finally, ensuring the well-being of animals under our care is an uncompromising commitment at Pilgrims. We continually strive to improve our welfare efforts through the use of new technologies and the implementation of standards that meet and exceed regulatory requirements and industry guidelines.
Governance. To cultivate discipline and drive accountability for Sustainability related matters, a series of key performance indicators have been established to evaluate and monitor progress. These performance indicators are linked with compensation for both senior executive and plant level personnel. As part of our business management processes, progress against these metrics are reviewed at least monthly. In addition, the Board of Directors has formed a Sustainability Committee to provide oversight and counsel on strategies, policies, and investments to reduce the impact of climate change.
Reportable Segments
We operate in three reportable segments: the U.S., the U.K. and Europe, and Mexico. We measure segment profit as operating income. Corporate expenses are allocated to the Mexico and U.K. and Europe reportable segments based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. For additional information, see “Note 20. Reportable Segments” of our Consolidated Financial Statements included in this annual report.
Results of Operations
2022 Compared to 2021
Net sales. Net sales for 2022 increased $2.7 billion, or 18.2%, from $14.8 billion generated in 2021 to $17.5 billion generated in 2022. The following table provides additional information regarding net sales:
Sources of net sales 2022 Amount Percent
(In thousands, except percent data)
U.S. Reportable Segment. U.S. net sales generated in 2022 increased $1.6 billion, or 17.9%, from U.S. net sales generated in 2021 primarily because of an increase in net sales per pound, contributing $1.7 billion, or 18.2 percentage points, to the increase in net sales. Unit sales prices have increased during 2022 as we attempted to recover increased costs, primarily for feed ingredients, energy, transportation and packaging materials, that we have incurred in growing and processing chicken. This increase in net sales per pound was partially offset by a slight decrease in sales volume of $21.7 million, or 0.2 percentage points.
U.K. and Europe Reportable Segment. U.K. and Europe sales generated in 2022 increased $940.7 million, or 23.9%, from U.K. and Europe sales generated in 2021, primarily from an increase in net sales per pound and an increase in sales volume of $867.9 million, or 22.1 percentage points, and $629.6 million, or 16.0 percentage points, respectively. The increase in net sales per pound was driven by price increases necessary to recover increased feed ingredients, labor, utilities and other operating costs. The increase in sales volume is primarily from the prior year acquisition of our PFM operations. The increases in net sales per pound and sales volumes were partially offset by the unfavorable impact of foreign currency translation of $556.8 million, or 14.2 percentage points, and a decrease in sales volume of $89.7 million, or 2.2 percentage points from the legacy businesses.
Mexico Reportable Segment. Mexico sales generated in 2022 increased $115.8 million, or 6.7%, from Mexico sales generated in 2021 primarily because of an increase in net sales per pound and the favorable impact of foreign currency remeasurement, partially offset by a decrease in sales volume. The increase in net sales per pound and the impact of the favorable impact of foreign currency remeasurement contributed $203.9 million, or 11.8 percentage points, and $12.6 million,
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or 0.7 percentage points, respectively, to the increase in net sales. The increase in net sales per pound was primarily due to demand driving up commodity chicken prices. Partially offsetting these increases in net sales was a decrease in sales volume of $100.7 million, or 5.8 percentage points, due to negative impacts associated with bird disease to our live operations.
Gross profit. Gross profit increased by $446.0 million, or 32.7%, from $1.4 billion generated in 2021 to $1.8 billion generated in 2022. The following tables provide gross profit information:
Change from 2021 Percent of Net Sales
(In thousands, except percent data)
Sources of gross profit 2022 Change from 2021
Amount Percent
(In thousands, except percent data)
Elimination 54 — — %
Sources of cost of sales 2022 Change from 2021
Amount Percent
(In thousands, except percent data)
Elimination(a) (54) — — %
(a)Our Consolidated Financial Statements include the accounts of our company and our majority owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation.
U.S. Reportable Segment. Cost of sales incurred by our U.S. operations in 2022 increased $1.1 billion, or 13.7%, from cost of sales incurred by our U.S. operations in 2021. Cost of sales increased primarily because of increased cost per pound sold of $1.1 billion, or 14.0 percentage points, partially offset by a slight decrease in sales volume of $19.5 million, or 0.2 percentage points. Included in the increase in cost per pound sold and increased sales volume was an $650.0 million increase in live input costs, a $150.7 million increase in payroll costs, a $148.1 million increase in prepared foods input costs, a $78.1 million increase in outside service costs primarily from increased outside processing labor, a $52.6 million increase in utilities costs and a $43.1 million increase in supplies costs. Included in the $650.0 million increase in live input costs were a $503.2 million increase in feed costs, $101.6 million increase in chick costs, and a $36.1 million increase in contract grower costs. Other factors affecting U.S. cost of sales were individually immaterial.
U.K. and Europe Reportable Segment. Cost of sales incurred by the U.K. and Europe operations during 2022 increased $864.2 million, or 22.9%, from cost of sales incurred by the U.K. and Europe operations during 2021 primarily because of increases in cost per pound sold and sales volume of $845.7 million, or 22.5 percentage points, and $548.8 million, or 16.0% percentage points. The increase in cost per pound was driven by increased feed ingredients, labor, utilities and other operating costs. The increase in sales volume is primarily from the prior year acquisition of our PFM operations. Partially offsetting these increases was the favorable impact of foreign currency translation of $529.4 million, or 14.0 percentage points. Other factors affecting cost of sales were individually immaterial.
Mexico Reportable Segment. Cost of sales incurred by the Mexico operations during 2022 increased $256.2 million, or 17.6%, from cost of sales incurred by the Mexico operations during 2021 primarily because of an increase in cost per pound sold and the unfavorable impact of foreign currency remeasurement of $328.8 million, or 22.6 percentage points, and $12.2 million, or 0.8 percentage points, respectively. The increase in cost per pound sold was primarily driven by increased feed ingredients, hatchery egg costs and packaging costs. Hatchery costs increased due to the cost to import eggs from outside sources to offset the impacts of bird disease in our live operations. Partially offsetting these increases in cost of sales was a
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decrease in sales volume of $84.8 million, or 5.8 percentage points. Other factors affecting cost of sales were individually immaterial.
Operating income. Operating income increased $965.4 million, or 457.2%, from $211.2 million generated for 2021 to $1.2 billion generated for 2022. The following tables provide operating income information:
Change from 2021 Percent of Net Sales
(In thousands, except percent data)
Sources of operating income 2022 Amount Percent
(In thousands, except percent data)
Eliminations 54 — — %
Sources of SG&A expenses (defined below) 2022 Change from 2021
Amount Percent
(In thousands, except percent data)
Sources of restructuring activities charges 2022 Change from 2021
Amount Percent
(In thousands, except percent data)
U.S. Reportable Segment. Selling, general and administrative (“SG&A”) expense incurred by the U.S. operations during 2022 decreased $601.1 million, or 63.7%, from SG&A expense incurred by the U.S. operations during 2021 primarily from a net decrease in the recognition of legal settlements of $622.1 million. Also contributing to the net decrease in SG&A expense was a net decrease in acquisition costs, partially offset by increases in employee relation costs, incentive compensation costs, and consulting fees. Other factors affecting SG&A expense were individually immaterial.
U.K. and Europe Reportable Segment. SG&A expense incurred by the U.K. and Europe operations during 2022 increased $52.1 million, or 32.8%, from SG&A expense incurred by the U.K. and Europe operations during 2021 primarily because of expenses incurred by the acquired PFM operations and an increase in SG&A expense incurred from our legacy U.K. and Europe operations. The increase in SG&A expense in our legacy U.K. and Europe was mainly due to increased advertising costs, increased payroll costs, and an increase in contract labor services. Other factors affecting SG&A expense were individually immaterial.
Mexico Reportable Segment. SG&A expense incurred by the Mexico operations during 2022 increased $4.9 million, or 10.4%, from SG&A expense incurred by the Mexico operations during 2021. SG&A expense increased primarily from increased marketing costs and payroll-related costs. Factors affecting SG&A expense were individually immaterial.
Interest expense. Consolidated interest expense increased 4.7% to $152.7 million in 2022 from $145.8 million in 2021, primarily due to an increase in interest expense on outstanding borrowings of $27.3 million. This increase in interest expense on outstanding borrowings was primarily due to the impacts of the September 2021 issuance of $900.0 million of bonds for the PFM acquisition and the increase in variable rate debt interest expense, partially offset by the impact of $24.7 million loss on
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early extinguishment of debt recognized in 2021. As a percent of net sales, interest expense in 2022 and 2021 was 0.9% and 1.0%, respectively.
Income taxes. Our consolidated income tax expense in 2022 was $278.9 million, compared to income tax expense of $61.1 million in 2021. The increase in income tax expense in 2022 resulted from an increase in pre-tax income during 2022.
2021 Compared to 2020
For discussion of 2021 results of operations in comparison to 2020 results of operations, see the 2021 annual report on Form 10-K filed on February 18, 2022.
Liquidity and Capital Resources
Our principal sources of liquidity are cash generated from operations, funds from borrowings, and existing cash on hand. The following table presents our available sources of liquidity as of December 25, 2022:
Sources of Liquidity(a) FacilityAmount AmountOutstanding Available
(In millions)
Cash and cash equivalents $ — $ — $ 434.8
Borrowing arrangements:
U.S. Credit Facility Revolving Note Payable(a) 800.0 — 765.0
U.S. Credit Facility Term Loans(b) 700.0 480.1 —
Mexico Credit Facility(c) 77.5 — 77.5
U.K. and Europe Revolver Facility(d) 124.5 — 124.5
(a)Availability under the U.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at December 25, 2022 totaled $35.0 million.
(b)For more information on the U.S. Credit Facility Term Loans, refer to “Note 13. Debt.”
(c)As of December 25, 2022, the U.S. dollar-equivalent of the amount available under the Mexican Credit Facility was $77.5 million ($1.5 billion Mexican pesos).
(d)As of December 25, 2022, the U.S. dollar-equivalent of the amount available under the U.K. and Europe Revolver Facility was $124.5 million (£150.0 million).
Historical Flow of Funds
Year Ended
Cash Flows from Operating Activities December 25, 2022 December 26, 2021
(In millions)
Changes in operating assets and liabilities:
Trade accounts and other receivables (149.6) (259.4)
Prepaid expenses and other current assets 18.3 (53.8)
Accounts payable and accrued expenses 263.3 359.6
Long-term pension and other postretirement obligations (4.1) (18.5)
Other operating assets and liabilities (12.3) (5.8)
Cash provided by operating activities $ 669.9 $ 326.5
Net Noncash Expenses
Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $422.5 million for the year ended December 25, 2022. Net noncash expense items included $403.1 million of depreciation and amortization, $21.3 million of deferred income tax expense, $7.0 million of stock-based compensation expense, loan cost amortization of $4.8 million, asset impairment of $3.6 million and accretion of bond discount of $1.7 million. Partially offsetting the net noncash expenses was an $18.9 million gain on property disposals. Other items affecting net noncash expenses were individually immaterial.
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Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $335.8 million for the year ended December 26, 2021. Net noncash expense items included $380.8 million of depreciation and amortization, a $24.7 million loss on early extinguishment of debt, $11.7 million of stock-based compensation expense and loan cost amortization of $5.1 million. Partially offsetting the net noncash expenses was $86.4 million of deferred income tax benefit and a $1.5 million gain on property disposals. Other items affecting net noncash expenses were individually immaterial.
Changes in Operating Assets and Liabilities
The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $149.6 million use of cash in 2022. The change in cash was primarily due to the timing of customer payments and the increase in sales prices. The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $259.4 million use of cash in 2021. The change in cash was primarily due to the timing of customer payments.
The change in inventories represented a $472.2 million use of cash in 2022. The change in cash resulted from an increase in our raw materials and work-in-process inventory values due to higher input costs. The change in inventories represented a $177.9 million use of cash in 2021. The change in cash resulted from an increase in our raw materials and work-in-process inventory.
The change inprepaid expenses and other current assets represented a $18.3 million source of cash in 2022. This change resulted primarily from a net decrease in value-added tax receivables and prepaid property insurance. The change in prepaid expenses and other current assets represented a $53.8 million use of cash in 2021. This change resulted primarily from a net increase in value-added tax receivables and prepaid property insurance.
Accounts payable and accrued expenses, including accounts payable to related parties, represented a $263.3 million source of cash in 2022. This change resulted primarily from the timing of payments as well as increased prices for feed ingredients, transportation and packaging materials. Accounts payable and accrued expenses, including accounts payable to related parties, represented a $359.6 million source of cash in 2021. This change resulted primarily from the timing of payments as well as increased prices for feed ingredients, transportation and packaging materials.
The change in income taxes, which includes income taxes receivables, income taxes payable, deferred tax assets, deferred tax liabilities, reserves for uncertain tax positions and the tax components within accumulated other comprehensive loss, represented a $142.5 million use of cash in 2022. This change resulted primarily from the timing of estimated tax payments and higher profitability in 2022. The change in income taxes, which includes income taxes receivables, income taxes payable, deferred tax assets, deferred tax liabilities, reserves for uncertain tax positions and the tax components within accumulated other comprehensive loss, represented a $115.2 million source of cash in 2021. This change resulted primarily from the timing of estimated tax payments.
Year Ended
Cash Flows from Investing Activities December 25, 2022 December 26, 2021
(In millions)
Acquisitions of property, plant and equipment $ (487.1) $ (381.7)
Proceeds from property disposals 35.5 24.7
Proceeds from insurance recoveries 16.0 —
Purchase of acquired businesses, net of cash acquired (9.7) (966.8)
Cash used in investing activities $ (445.3) $ (1,323.7)
Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs for the years ended December 25, 2022 and December 26, 2021. Proceeds from property disposals were primarily for the sale of farms in Mexico. Proceeds from insurance recoveries reflects cash received on property insurance recoveries related to the Mayfield, Kentucky tornado that occurred in December 2021. Purchase of acquired businesses, net of cash acquired primarily represents a payment for a working capital adjustment related to the acquisitions of PFM and Randall Parker Foods.
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Year Ended
Cash Flows from Financing Activities December 25, 2022 December 26, 2021
(In millions)
Proceeds from revolving line of credit and long-term borrowings 362.5 2,951.7
Purchase of common stock under share repurchase program (199.6) —
Payment of capitalized loan costs (4.7) (22.3)
Payment on early extinguishment of debt — (21.3)
Cash provided by (used in) financing activities $ (232.0) $ 901.3
Proceeds from revolving line of credit and long-term borrowings and payments on revolving line of credit and long-term borrowings are mainly due to borrowings and payments on our U.S. Credit Facility and Mexico Credit Facility. During 2022, 7.5 million shares were repurchased under the share repurchase program. The payment of capitalized loan costs relate to the consent solicitation of the 2031 and 2032 Senior Notes and the execution of a new U.K. revolving line of credit. The distribution of equity under the Tax Sharing Agreement is the 2021 distribution of equity that is paid in the first quarter of 2022. For further information on the share repurchase program, refer to Part II, Item 8, Notes to Consolidated Financial Statements, “Note 14. Stockholders’ Equity.”
Long-Term Debt and Other Borrowing Arrangements
Our long-term debt and other borrowing arrangements consist of senior notes, revolving credit facilities and other term loan agreements. For a description, refer to Part II, Item 8, Notes to Consolidated Financial Statements, “Note 13. Debt.”
Collateral
Substantially all of our domestic inventories and domestic fixed assets are pledged as collateral to secure the obligations under the U.S. Credit Facility.
Capital Expenditures
We anticipate spending between $400 million and $500 million on the acquisition of property, plant and equipment in 2023. Capital expenditures will primarily be incurred to grow our operations, improve efficiencies and to reduce costs. We expect to fund these capital expenditures with cash flow from operations and proceeds from the revolving lines of credit under our various debt facilities.
Contractual Obligations
In addition to our debt commitments at December 25, 2022, we had other commitments and contractual obligations that require us to make specified payments in the future. The following table summarizes the total amounts due as of December 25, 2022 under all debt agreements, commitments and other contractual obligations. The table indicates the years in which payments are due under the contractual obligations.
Payments Due By Period
(In thousands)
(a)The total amount of unrecognized tax benefits at December 25, 2022 was $27.6 million. We did not include this amount in the contractual obligations table above as reasonable estimates cannot be made at this time of the amounts or timing of future cash outflows.
(b)Long-term debt is presented at face value and excludes $35.0 million in letters of credit outstanding related to normal business transactions.
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(c)Interest expense in the table above assumes the continuation of interest rates and outstanding borrowings as of December 25, 2022.
(d)Includes agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction.
We expect cash flows from operations, combined with availability under the U.S. Credit Facility, the Mexico Credit Facility and the U.K. and Europe Credit Facility to provide sufficient liquidity to fund current obligations, projected working capital requirements, maturities of long-term debt and capital spending for at least the next twelve months.
Recent Accounting Pronouncements
Refer to Part II, Item 8, Notes to Consolidated Financial Statements, “Note 1. Business and Summary of Significant Accounting Policies.”
Critical Accounting Policies and Estimates
General. Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventory, goodwill and other intangible assets, litigation and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition. The vast majority of our revenue is derived from contracts which are based upon a customer ordering our products. While there may be master agreements, the contract is only established when the customer’s order is accepted by us. We account for a contract, which may be verbal or written, when it is approved and committed by both parties, the rights of the parties are identified along with payment terms, the contract has commercial substance and collectability is probable.
We evaluate the transaction for distinct performance obligations, which are the sale of our products to customers. Since our products are commodity market-priced, the sales price is representative of the observable, standalone selling price. Each performance obligation is recognized based upon a pattern of recognition that reflects the transfer of control to the customer at a point in time, which is upon destination (customer location or port of destination) and depicts the transfer of control and recognition of revenue. There are instances of customer pick-up at our facilities, in which case control transfers to the customer at that point and we recognize revenue. Our performance obligations are typically fulfilled within days to weeks of the acceptance of the order.
We make judgments regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from revenue and cash flows with customers. Determination of a contract requires evaluation and judgment along with the estimation of the total contract value and if any of the contract value is constrained. Due to the nature of our business, there is minimal variable consideration, as the contract is established at the acceptance of the order from the customer. When applicable, variable consideration is estimated at contract inception and updated on a regular basis until the contract is completed. Allocating the transaction price to a specific performance obligation based upon the relative standalone selling prices includes estimating the standalone selling prices including discounts and variable consideration.
Inventories. Live chicken and pig inventories are stated at the lower of cost or net realizable value and breeder hen, breeder sow and boar inventories at the lower of cost, less accumulated amortization, or net realizable value. The costs associated with breeder hen inventories are accumulated up to the production stage and amortized over their productive lives using the unit-of-production method. The costs associated with breeder sow inventories are accumulated up to the production stage and amortized on a straight-line basis over their productive lives to the estimated residual cull value. The costs associated with finished poultry products, finished pork products, feed, eggs and other inventories are stated at the lower of cost (average) or net realizable value. Inventory typically transfers from one stage of production to another at a standard cost, where it accumulates additional cost directly incurred with the production of inventory, including overhead. The standard cost at which each type of inventory transfers is set by management to reflect the actual costs incurred in the prior steps. We monitor and adjust standard costs throughout the year to ensure that standard costs reasonably reflect the actual average cost of the inventory produced.
We allocate meat costs between our various finished chicken products based on a by-product costing technique that reduces the cost of the whole bird by estimated yields and amounts to be recovered for certain by-product parts. This primarily
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includes leg quarters, wings, tenders and offal, which are carried in inventory at the estimated recovery amounts, with the remaining amount being reflected as our breast meat cost. We allocate meat costs between our various finished pork products based on a by-product costing technique that allocates the cost of the whole pig into the primal cuts by estimated yields and amounts to be recovered for certain by-product parts. This primarily includes legs, shoulders, bellies, offal and fifth quarter parts, which are carried in inventory at the estimated recoverable amounts, with the remaining amount being reflected as our loin meat cost.
For our prepared foods inventories, raw materials and packaging materials are valued at the lower of weighted average cost and net realizable value, work in progress is valued at the latest production cost (raw materials, packaging), finished goods are valued at the lower of the latest actual monthly production cost (raw materials, packaging and direct labor) and attributable overheads and net realizable value, and engineering spares and consumables are valued at cost with an appropriate provision for obsolete engineering spares consistent with historical practice.
Generally, we perform an evaluation of whether any lower of cost or market adjustments are required at the country level based on a number of factors, including: (1) pools of related inventory, (2) product continuation or discontinuation, (3) estimated market selling prices and (4) expected distribution channels. If actual market conditions or other factors are less favorable than those projected by management, additional inventory adjustments may be required. We also record valuation adjustments, when necessary, for estimated obsolescence at or equal to the difference between the cost of inventory and the estimated market value based upon known conditions affecting inventory obsolescence, including significantly aged products, discontinued product lines, or damaged or obsolete products.
Goodwill and Other Intangibles, net. Goodwill represents the excess of the aggregate purchase price over the fair value of the net identifiable assets acquired in a business combination. Identified intangible assets represent trade names, customer relationships and non-compete agreements arising from acquisitions that are recorded at fair value as of the date acquired less accumulated amortization, if any. We use various market valuation techniques to determine the fair value of its identified intangible assets.
Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis in the fourth quarter of each fiscal year or more frequently if impairment indicators arise. For goodwill, an impairment loss is recognized for any excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill. Management first reviews relevant qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent), that the fair value of a reporting unit is less than the unit’s carrying amount (including goodwill). If management determines it is more likely than not that the carrying amount of a reporting unit goodwill might be impaired, a quantitative analysis is performed. Management performed a qualitative analysis noting that is was not more likely than not that there was goodwill impairment in any of its reporting units as of December 25, 2022. However, management will be closely monitoring the performance of its reporting units within the U.K. and Europe for sustained declines in operating results that miss projected operating performance as it relates to possible future goodwill impairment indicators. For indefinite-lived intangible assets, an impairment loss is recognized if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value of that intangible asset. Management first reviews relevant qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that an intangible asset is impaired. If management determines there is an indication that the carrying amount of the intangible asset might be impaired, and quantitative analysis is performed. Management performed a qualitative analysis noting that it was not more likely than not that there was impairment for any of its indefinite-lived intangible assets as of December 25, 2022. Management will be closely monitoring the performance of its branded products within the U.K. and Europe for sustained declines in operating results as it relates to possible future impairment to those identifiable intangible assets.
Identifiable intangible assets with definite lives, such as customer relationships, non-compete agreements and trade names that we expect to use for a limited amount of time, are amortized over their estimated useful lives on a straight-line basis. The useful lives range from three to 20 years for non-compete agreements and trade names and three to 16 years for customer relationships. Identified intangible assets with definite lives are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Management assessed if events or changes in circumstances indicated that the aggregate carrying amount of its identified intangible assets with definite lives might not be recoverable and determined that there were no impairment indicators during the year ended December 25, 2022 and year ended December 26, 2021.
Litigation and Contingent Liabilities. We are subject to lawsuits, investigations and other claims related to employment, environmental, product, and other matters. We are required to assess the likelihood of any adverse judgments or outcomes, as well as potential ranges of probable losses, to these matters. We estimate the amount of reserves required for these contingencies when losses are determined to be probable and after considerable analysis of each individual issue. We expense legal costs related to such loss contingencies as they are incurred. With respect to our environmental remediation obligations,
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the accrual for environmental remediation liabilities is measured on an undiscounted basis. These reserves may change in the future due to changes in our assumptions, the effectiveness of strategies, or other factors beyond our control.
Income Taxes. We follow provisions under ASC No. 740-10-30-27 in the Expenses-Income Taxes topic with regard to members of a group that file a consolidated tax return but issue separate financial statements. We file our U.S. federal tax return and certain state unitary returns with JBS USA Holdings. Our income tax expense is computed using the separate return method. The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. For the unitary states, we have an obligation to make tax payments to JBS USA Holdings for our share of the unitary taxable income, which is included in taxes payable in our Consolidated Balance Sheets. Under this approach, deferred income taxes reflect the net tax effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carry forwards. The amount of deferred tax on these temporary differences is determined using the tax rates expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on the tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date. We recognize potential interest and penalties related to income tax positions as a part of the income tax provision.
Business Combination Accounting. We allocate the consideration of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the consideration over the amount allocated to the assets and liabilities, if any, is recorded to goodwill. We use all available information to estimate fair values. We use various models to determine the value of assets acquired and liabilities assumed such as net realizable value to value inventory, cost method and market approach to value property, relief-from-royalty and multi-period excess earnings to value intangibles and discounted cash flow to value goodwill. We typically engage third-party valuation specialists to assist in the fair value determination of tangible long-lived assets and intangible assets other than goodwill. The fair value of acquired inventories is typically determined by extending physical counts of the inventories taken at or near the acquisition date to market pricing in effect for such inventories at or near the acquisition date. The carrying values of acquired receivables and accounts payable have historically approximated their fair values as of the business combination date. As necessary, we may engage third-party specialists to assist in the estimation of fair value for certain liabilities. We adjust the preliminary acquisition accounting, as necessary, typically up to one year after the acquisition closing date for those items that existed at the acquisition date and were provisionally accounted for at that time, as we obtain more information regarding asset valuations and liabilities assumed.
Our acquisition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including changes in assumptions regarding industry economic factors and business strategies. If actual results are materially different than the assumptions used to determine fair value of the assets and liabilities acquired through a business combination, it is possible that adjustments to the carrying values of such assets and liabilities will have an impact on our net earnings. See Part II. Item 8. Notes to Consolidated Financial Statements, “2. Business Acquisitions” in this annual report for the acquisition-related information associated with significant acquisitions completed in the last three fiscal years.
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
“EBITDA” is defined as the sum of net income (loss) plus interest, taxes, depreciation and amortization. “Adjusted EBITDA” is calculated by adding to EBITDA certain items of expense and deducting from EBITDA certain items of income that we believe are not indicative of our ongoing operating performance consisting of: (1) foreign currency transaction losses (gains), (2) transaction costs related to business acquisitions, (3) expenses recognized for the DOJ agreement and litigation settlements, (4) restructuring activities losses, (5) Hometown Strong initiative expenses, (6) consumption of the PFM inventory fair value step-up increment, (7) property insurance recoveries on Mayfield tornado losses, (8) gain recognized on deconsolidation of a subsidiary and (9) net income attributable to noncontrolling interest. EBITDA is presented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of results prepared in conformity with U.S. GAAP, to compare the performance of companies. We believe investors would be interested in our Adjusted EBITDA because this is how our management analyzes EBITDA applicable to continuing operations. We also believe that Adjusted EBITDA, in combination with our financial results calculated in accordance with U.S. GAAP, provides investors with additional perspective regarding the impact of certain significant items on EBITDA and facilitates a more direct comparison of our performance with our competitors. EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Some of the limitations of these measures are:
•They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
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•They do not reflect changes in, or cash requirements for, our working capital needs;
•They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
•Although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
•They are not adjusted for all noncash income or expense items that are reflected in our statements of cash flows;
•EBITDA does not reflect the impact of earnings or charges attributable to noncontrolling interests;
•They do not reflect the impact of earnings or charges resulting from matters we consider to not be indicative of our ongoing operations; and
•They do not reflect limitations on or costs related to transferring earnings from our subsidiaries to us.
In addition, other companies in our industry may calculate these measures differently than we do, limiting their usefulness as a comparative measure. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with U.S. GAAP. You should compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only on a supplemental basis.
(Unaudited) Year Ended
(In thousands)
Add:
Add:
Foreign currency transaction losses (gains) 30,817 (9,382)
Transaction costs related to acquisitions 948 18,858
Expenses related to the DOJ agreement and litigation settlements 34,086 656,225
Hometown Strong commitment expenses — 1,000
Minus:
Property insurance recoveries on Mayfield tornado losses 19,580 —
Gain recognized on deconsolidation of subsidiary — 1,131
Net income attributable to noncontrolling interest 608 268
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Reconciliation of Adjusted Net Income
(Unaudited)
Year Ended
(In thousands, except per share data)
Adjustments:
Foreign currency transaction losses (gains) 30,817 (9,382)
Transaction costs related to acquisitions 948 18,858
Hometown Strong commitment expenses — 1,000
Gain recognized on deconsolidation of subsidiary — (1,131)
Net tax expense (benefit) of adjustments(a) (19,115) (174,619)
Adjusted net income attributable to Pilgrim's $ 803,552 $ 557,381
Weighted average diluted shares of common stock outstanding 240,394 244,129
(a)Net tax impact of adjustments represents the tax impact of all adjustments shown above with the exclusion of the DOJ agreement as this item is non-deductible for tax purposes.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
Market Risk-Sensitive Instruments and Positions
The risk inherent in our market risk-sensitive instruments and positions is primarily the potential loss arising from adverse changes in commodity prices, foreign currency exchange rates, interest rates and the credit quality of available-for-sale securities as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions our management may take to mitigate our exposure to such changes. Actual results may differ from those described below.
Commodity Prices
We purchase certain commodities, primarily corn, soybean meal, soybean oil, and wheat, for use as ingredients in the feed we either sell commercially or consume in our live operations. As a result, our earnings are affected by changes in the price and availability of such feed ingredients. We have from time to time attempted to minimize our exposure to the changing price and availability of such feed ingredients using various techniques, including, but not limited to, (1) executing purchase agreements with suppliers for future physical delivery of feed ingredients at established prices and (2) purchasing or selling derivative financial instruments such as futures and options.
For this sensitivity analysis, market risk is estimated as a hypothetical 10% increase in the weighted-average cost of our primary feed ingredients as of the periods presented. The impact of this fluctuation, if realized, could be mitigated by related commodity hedging activity. However, fluctuations greater than 10% could occur.
Amount Impact of 10% Increase in Feed Ingredient Prices
(In thousands)
(a)Based on our feed consumption, a 10% increase in the price of our feed ingredient purchases will have increased cost of sales for the year ended December 25, 2022.
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(b)A 10% increase in ending feed ingredient prices would have increased inventories as of December 25, 2022.
Amount Impact of 10% Increase to the Fair Value of Commodity Derivative Assets
(In thousands)
Commodity derivative assets(a) $ 42,651 $ 4,265
(a)We purchase commodity derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our anticipated consumption of commodity inputs for the next 12 months. A 10% increase in corn, soybean meal, soybean oil and wheat prices would have resulted in an increase in the fair value of our net commodity derivative asset position, including margin cash, as of December 25, 2022.
Interest Rates
Fixed-rate debt. Market risk for fixed-rate debt is estimated as the potential decrease in fair value resulting from a hypothetical increase in interest rates of 10%. Using a discounted cash flow analysis, a hypothetical 10% increase in interest rates would have decreased the fair value of our fixed-rate debt by $73.5 million as of December 25, 2022.
Variable-rate debt. Our variable-rate debt instruments represent approximately 15.2% of our total debt as of December 25, 2022. Holding other variables constant, including levels of indebtedness, an increase in interest rates of 100 basis points would have increased our interest expense by an $7.2 million for the year ended December 25, 2022.
Foreign Currency
Mexico Subsidiaries
Our earnings are also affected by foreign exchange rate fluctuations related to the Mexican peso net monetary position of our Mexico subsidiaries. We manage this exposure primarily by attempting to minimize our Mexican peso net monetary position. We are also exposed to the effect of potential currency exchange rate fluctuations to the extent that amounts are repatriated from Mexico to the U.S. We currently anticipate that the future cash flows of our Mexico subsidiaries will be reinvested in our Mexico operations.
The Mexican peso exchange rate can directly and indirectly impact our financial condition and results of operations. For this sensitivity analysis, market risk is estimated as a hypothetical 10% change in the current exchange rate used to convert Mexican pesos to U.S. dollars as of December 25, 2022. However, fluctuations greater than 10% could occur. No assurance can be given as to how future movements in the Mexican peso could affect our future financial condition or results of operations.
(In thousands, except for exchange rate data)
Foreign currency remeasurement gain (loss) $ (4,672) $ 5,710
Exchange rate of Mexican pesos to the U.S. dollar:
U.K. and Europe Subsidiaries
We are exposed to foreign exchange-related variability of investments and earnings from our U.K. and Europe subsidiaries. Foreign currency market risk is the possibility that our financial results or financial position could be better or worse than planned because of changes in foreign currency exchange rates. For this sensitivity analysis, market risk is estimated as a hypothetical 10% change in exchange rates used to convert U.S. dollars to British pound and to euro, and the effect of this change on our U.K. and Europe subsidiaries.
Net Assets. As of December 25, 2022, our U.K. and Europe subsidiaries that are denominated in the British pound had net assets of $2.6 billion. A 10% weakening in the British pound against the U.S. dollar exchange rate would cause a decrease in the net assets of our U.K. and Europe subsidiaries by $240.9 million. A 10% strengthening in the British pound against the U.S. dollar exchange rate would cause an increase in the net assets of our U.K. and Europe subsidiaries by $294.4 million.
Cash flow hedging transactions. We periodically enter into foreign currency forward contracts, which are designated and qualify as cash flow hedges, to hedge foreign currency risk on a portion of sales generated and purchases made by our U.K.
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and Europe subsidiaries. A 10% weakening or strengthening of the U.S. dollar against the British pound and U.S. dollar against the euro would result in immaterial changes in the fair values of these derivative instruments. No assurance can be given as to how future movements in currency rates could affect our future financial condition or results of operations.
Quality of Investments
Certain retirement plans that we sponsor invest in a variety of financial instruments. We have analyzed our portfolios of investments and, to the best of our knowledge, none of our investments, including money market funds units, commercial paper and municipal securities, have been downgraded, and neither we nor any fund in which we participate hold significant amounts of structured investment vehicles, auction rate securities, collateralized debt obligations, credit derivatives, hedge funds investments, fund of funds investments or perpetual preferred securities. Certain postretirement funds in which we participate hold significant amounts of mortgage-backed securities. However, none of the mortgages collateralizing these securities are considered subprime.
Impact of Inflation
Our global operations were significantly impacted by inflation during 2022. Our global businesses negotiated with our customers to increase prices to mitigate the impacts of the increase in input costs such as feed ingredients, labor, utilities, freight and other input costs. Prior to 2022, inflation was significantly less impactful to our operations. We anticipate inflation in 2023 will be moderate compared to 2022 based on the monetary policy measures implemented in the jurisdictions in which we operate.
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Item 8.Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Pilgrim's Pride Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Pilgrim's Pride Corporation and subsidiaries (the Company) as of December 25, 2022 and December 26, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 25, 2022, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 25, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 25, 2022 and December 26, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 25, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 25, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of qualitative goodwill impairment assessment
As discussed in Notes 1 and 9 to the consolidated financial statements, the goodwill balance as of December 25, 2022 was $1.2 billion, of which $1.1 billion related to reporting units within the Company’s U.K. and Europe reportable segment. The Company performs qualitative or quantitative goodwill impairment assessments at least annually in the fourth quarter of each fiscal year or more frequently whenever circumstances indicate that the fair value of a reporting unit may be less than its carrying value. When a qualitative assessment is performed, the Company assesses relevant qualitative factors to determine whether it is more likely than not that the fair value of its reporting units are less than their carrying amounts.
We identified the evaluation of the Company’s qualitative goodwill impairment assessment of the goodwill related to the reporting units in the Company’s U.K. and Europe segment as a critical audit matter. A higher degree of subjective auditor judgment was required to evaluate the factors utilized by management in the Company’s qualitative goodwill impairment assessment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of an internal control related to the Company’s qualitative goodwill impairment assessment, including the identification and assessment of the factors impacting the fair value of the reporting units. We evaluated the Company’s assessment of qualitative factors by:
•analyzing the reasonableness of macroeconomic, industry, and market conditions identified by the Company by assessing the relevance and reliability of the assumptions and data selected by the Company and comparing them to publicly available economic data
•assessing the reasonableness of forecasted financial performance of the reporting units based on historical results as well as the macroeconomic, industry and market conditions considered by the Company
In addition, we involved a valuation specialist with specialized skills and knowledge, who assisted in evaluating the overall financial performance of the reporting units by comparing current valuation multiples of the Company and the reporting units in the Company’s U.K. and Europe segment to comparable guideline companies.
/s/ KPMG LLP
We have served as the Company’s auditor since 2012.
Denver, Colorado
February 9, 2023
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PILGRIM’S PRIDE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)
Accounts receivable from related parties 2,512 1,345
Accrued expenses and other current liabilities 850,899 859,885
Noncurrent operating lease liabilities, less current maturities 230,701 271,366
Total Pilgrim’s Pride Corporation stockholders’ equity 2,840,814 2,577,080
The accompanying notes are an integral part of these Consolidated Financial Statements.
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PILGRIM’S PRIDE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
(In thousands, except per share data)
Foreign currency transaction losses (gains) 30,817 (9,382) 760
Reduction in gain on bargain purchase — — 3,746
Less: Net income attributable to noncontrolling interest 608 268 313
Weighted average shares of Pilgrim’s Pride Corporation common stock outstanding:
Effect of dilutive common stock equivalents 628 477 180
The accompanying notes are an integral part of these Consolidated Financial Statements.
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PILGRIM’S PRIDE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
(In thousands)
Other comprehensive income (loss):
Foreign currency translation adjustment
Derivative financial instruments designated as cash flow hedges
Gains (losses) arising during the period (2,915) 398 3,719
Income tax effect — 22 160
Income tax effect (24) (157) —
Available-for-sale securities
Gains (losses) arising during the period (3) — 73
Income tax effect 2 — (18)
Reclassification to net earnings for gains realized (17) — (73)
Income tax effect 4 — 18
Defined benefit plans
Reclassification to net earnings of losses realized 1,381 2,278 1,502
Less: Comprehensive income attributable to noncontrolling interests 608 268 313
The accompanying notes are an integral part of these Consolidated Financial Statements.
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PILGRIM’S PRIDE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Pilgrim’s Pride Corporation Stockholders
Shares Amount Shares Amount
(In thousands)
Comprehensive income:
Stock-based compensation plans:
Common stock issued under compensation plans 66 1 — — (1) — — — —
Requisite service period recognition — — — — (276) — — — (276)
Dissolution of subsidiary — — — — — — — 876 876
Comprehensive income:
Capital distribution under TSA — — — — (1,961) — — — (1,961)
Stock-based compensation plans:
Common stock issued under compensation plans 162 2 — — (2) — — — —
Requisite service period recognition — — — — 11,657 — — — 11,657
Comprehensive income:
Capital distribution under TSA — — — — (1,592) — — — (1,592)
Stock-based compensation plans:
Common stock issued under compensation plans 264 3 — — (3) — — — —
Requisite service period recognition — — — — 7,400 — — — 7,400
The accompanying notes are an integral part of these Consolidated Financial Statements.
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PILGRIM’S PRIDE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
(In thousands)
Cash flows from operating activities
Adjustments to reconcile net income to cash provided by operating activities:
Asset impairment 3,559 — —
Loss (gain) on equity method investments (2) (16) 291
Amortization of bond premium — (167) (668)
Gain on bargain purchase — — 3,746
Noncash gain on subsidiary dissolution — — 115
Changes in operating assets and liabilities
Long-term pension and other postretirement obligations (4,128) (18,461) (7,883)
Cash flows from investing activities
Proceeds from insurance recoveries 16,034 — —
Purchase of acquired businesses, net of cash acquired (9,692) (966,766) (4,216)
Cash flows from financing activities
Purchase of common stock under share repurchase program (199,553) — (110,242)
Payment of capitalized loan costs (4,741) (22,293) —
Distribution of capital under the TSA (1,961) (650) —
Payment on early extinguishment of debt — (21,258) —
Supplemental Disclosure Information
The accompanying notes are an integral part of these Consolidated Financial Statements.
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1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “PPC,” “the Company,” “we,” “us,” “our,” or similar terms) is one of the largest chicken producers in the world, with operations in the United States (“U.S.”), the United Kingdom (“U.K.”), Mexico, France, Puerto Rico, the Netherlands and the Republic of Ireland. Pilgrim’s products are sold to foodservice, retail and frozen entrée customers. The Company’s primary distribution is through retailers, foodservice distributors and restaurants throughout the countries listed above. Additionally, the Company exports chicken and pork products to over 120 countries. Our fresh products consist of refrigerated (nonfrozen) whole or cut-up chicken, selected chicken parts that are either marinated or non-marinated, primary pork cuts, added value pork and pork ribs. The Company’s prepared products include fully cooked, ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, processed sausages, bacon, smoked meat, gammon joints, pre-packed meats, sandwich and deli counter meats and meat balls. The Company’s other products include plant-based protein offerings, ready-to-eat meals, multi-protein frozen foods, vegetarian foods and desserts. The Company also provides direct-to-consumer meals and hot food to-go solutions in the U.K. and the Republic of Ireland. We operate feed mills, hatcheries, processing plants and distribution centers in 14 U.S. states, the U.K., Mexico, France, Puerto Rico, the Netherlands and the Republic of Ireland.
Consolidated Financial Statements
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 in the notes to these Consolidated Financial Statements applies to our fiscal year and not the calendar year.
On September 24, 2021, the Company acquired 100.0% of the equity of the Kerry Consumer Foods’ meats and meals businesses, collectively known as Pilgrim’s Food Masters (or “PFM”), for cash of £698.8 million, or $958.9 million. The acquired operations are included in the Company’s U.K. and Europe reportable segment. For the periods subsequent to September 24, 2021, the Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries, including PFM. We eliminate all significant affiliate accounts and transactions upon consolidation.
The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the (“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 credit losses, 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., Malta and the Republic of 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, the Netherlands and the Republic of Ireland 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 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 are reflected in Foreign currency transaction losses (gains) in the Consolidated Statements of Income.
The Company or its subsidiaries may use derivatives for the purpose of mitigating exposure to changes in foreign currency exchange rates. Foreign currency transaction gains or losses are reported in the Consolidated Statements of Income.
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Revenue Recognition
The vast majority of the Company’s revenue is derived from contracts which are based upon a customer ordering its products. While there may be master agreements, the contract is only established when the customer’s order is accepted by the Company. The Company accounts for a contract, which may be verbal or written, when it is approved and committed by both parties, the rights of the parties are identified along with payment terms, the contract has commercial substance and collectability is probable.
The Company evaluates the transaction for distinct performance obligations, which are the sale of its products to customers. Since its products are commodity market-priced, the sales price is representative of the observable, standalone selling price. Each performance obligation is recognized based upon a pattern of recognition that reflects the transfer of control to the customer at a point in time, which is upon destination (customer location or port of destination), and depicts the transfer of control and recognition of revenue. There are instances of customer pick-up at the Company’s facilities, in which case control transfers to the customer at that point and the Company recognizes revenue. The Company’s performance obligations are typically fulfilled within days to weeks of the acceptance of the order.
The Company makes judgments regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from revenue and cash flows with customers. Determination of a contract requires evaluation and judgment along with the estimation of the total contract value and if any of the contract value is constrained. Due to the nature of our business, there is minimal variable consideration, as the contract is established at the acceptance of the order from the customer. When applicable, variable consideration is estimated at contract inception and updated on a regular basis until the contract is completed. Allocating the transaction price to a specific performance obligation based upon the relative standalone selling prices includes estimating the standalone selling prices including discounts and variable consideration.
Shipping and Handling Costs
In the rare case when shipping and handling activities are performed after a customer obtains control of the good, the Company has elected to account for shipping and handling as activities to fulfill the promise to transfer the good. When revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued. Shipping and handling costs are recorded within cost of sales.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs are included in Selling, general and administrative (“SG&A”) expense and totaled $58.0 million, $32.4 million and $20.2 million for 2022, 2021 and 2020, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs totaled $12.5 million, $5.1 million and $5.4 million for 2022, 2021 and 2020, respectively.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original maturity of three months or less when acquired to be cash equivalents. The majority of the Company’s disbursement bank accounts are zero balance accounts where cash needs are funded as checks are presented for payment by the holder. Checks issued pending clearance that result in overdraft balances for accounting purposes are classified as accounts payable and the change in the related balance is reflected in operating activities on the Consolidated Statements of Cash Flows.
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, restricted cash and restricted cash equivalents as reported in the Consolidated Balance Sheets to the total of the same amounts shown in the Consolidated Statements of Cash Flows:
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(In thousands)
Restricted cash and restricted cash equivalents 33,771 22,460
Investments
The Company’s current investments are all highly liquid investments with an original maturity of three months or less when acquired and are, therefore, considered cash equivalents. The Company’s current investments are comprised of fixed income securities, primarily commercial paper and a money market fund. These investments are classified as available-for-sale. These securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a separate component of accumulated other comprehensive loss. Investments in fixed income securities with remaining maturities of less than one year and those identified by management at the time of purchase for funding operations in less than one year are classified as current assets. Investments in fixed income securities with remaining maturities in excess of one year that management has not identified at the time of purchase for funding operations in less than one year are classified as long-term assets. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary. Management reviews several factors to determine whether a loss is other than temporary, such as the length of time a security is in an unrealized loss position, the extent to which fair value is less than amortized cost, the impact of changing interest rates in the short and long term, and the Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The Company determines the cost of each security sold and each amount reclassified out of accumulated other comprehensive loss into earnings using the specific identification method. Purchases and sales are recorded on a settlement date basis.
Investments in entities in which the Company has an ownership interest greater than 50% and exercises control over the entity are consolidated in the Consolidated Financial Statements. Investments in entities in which the Company has an ownership interest between 20% and 50% and exercises significant influence are accounted for using the equity method. The Company invests from time to time in ventures in which its ownership interest is less than 20% and over which it does not exercise significant influence. Such investments are accounted for under the cost method. The fair values for investments not traded on a quoted exchange are estimated based upon the historical performance of the ventures, the ventures’ forecasted financial performance and management’s evaluation of the ventures’ viability and business models. To the extent the book value of an investment exceeds its assessed fair value, the Company will record an appropriate impairment charge.
Accounts Receivable
The Company records accounts receivable when revenue is recognized. We record an allowance for expected credit losses, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for credit losses are based on historical collection experience, current trends, aging of accounts receivable, and periodic credit evaluations of our customers’ financial condition. We write off accounts receivable when it becomes apparent, based upon age or customer circumstances, that such amounts will not be collected. Generally, the Company does not require collateral for its accounts receivable.
Inventories
Live chicken and pig inventories are stated at the lower of cost or net realizable value and breeder hen, breeder sow and boar inventories are stated at the lower of cost, less accumulated amortization, or net realizable value. The costs associated with breeder hen inventories are accumulated up to the production stage and amortized over their productive lives using the unit-of-production method. The costs associated with breeder sow inventories are accumulated up to the production stage and amortized on a straight-line basis over their productive lives to the estimated residual cull value. Finished poultry products, finished pork products, feed, eggs and other inventories are stated at the lower of cost (average) or net realizable value. Inventory typically transfers from one stage of production to another at a standard cost, where it accumulates additional cost directly incurred with the production of inventory, including overhead. The standard cost at which each type of inventory transfers is set by management to reflect the actual costs incurred in the prior steps. We monitor and adjust standard costs throughout the year to ensure that standard costs reasonably reflect the actual average cost of the inventory produced.
The Company allocates meat costs between its various finished chicken products based on a by-product costing technique that reduces the cost of the whole bird by estimated yields and amounts to be recovered for certain by-product parts. This primarily includes leg quarters, wings, tenders and offal, which are carried in inventory at the estimated recovery amounts, with the remaining amount being reflected as its breast meat cost. The Company allocates meat costs between its various
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finished pork products based on a by-product costing technique that allocates the cost of the whole pig into the primal cuts by estimated yields and amounts to be recovered for certain by-product parts. This primarily includes legs, shoulders, bellies, offal and fifth quarter parts, which are carried in inventory at the estimated recoverable amounts, with the remaining amount being reflected as our loin meat cost.
The Company values its other prepared foods products, raw materials and packaging materials at the lower of weighted average cost and net realizable value. Work in progress is valued at the latest production cost (raw materials, packaging), finished goods are valued at the lower of the latest actual monthly production cost (raw materials, packaging and direct labor) and attributable overheads and net realizable value, and engineering spares and consumables are valued at cost with an appropriate provision for obsolete engineering spares consistent with historical practice.
Generally, the Company performs an evaluation of whether any lower of cost or market adjustments are required at the country level based on a number of factors, including: (1) pools of related inventory, (2) product continuation or discontinuation, (3) estimated market selling prices and (4) expected distribution channels. If actual market conditions or other factors are less favorable than those projected by management, additional inventory adjustments may be required. The Company also records valuation adjustments, when necessary, for estimated obsolescence at or equal to the difference between the cost of inventory and the estimated market value based upon known conditions affecting inventory obsolescence, including significantly aged products, discontinued product lines, or damaged or obsolete products.
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 liability, less current maturities, in our Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment, net, Current maturities of long-term debt and Long-term debt, less current maturities in our Consolidated Balance Sheets.
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 the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate (“IBR”) based on the information available at commencement date in determining the present value of future payments. IBR is derived from the Company’s credit facility’s margin as a basis with adjustments to periodically updated LIBOR swap rate and foreign currency curve. The operating lease asset also includes any lease payments made, including upfront costs and prepayments, and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate a lease when it is reasonably certain that it 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. Lease and non-lease components are generally accounted for separately. For certain equipment leases, such as vehicles, the Company accounts for the lease and non-lease components as a single lease component.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, and repair and maintenance costs are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of these assets. Estimated useful lives for building, machinery and equipment are five to 33 years and for automobiles and trucks are three to ten years. The charge to income resulting from amortization of assets recorded under capital leases is included with depreciation expense.
The Company records impairment charges on long-lived assets held for use when events and circumstances indicate that the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. When the above is true, the impairment charge is determined based upon the amount the net book value of the assets exceeds their fair market value. In making these determinations, the Company utilizes certain assumptions, including, but not limited to: (1) future cash flows estimated to be generated by these assets, which are based on additional assumptions such as asset utilization, remaining length of service and estimated salvage values, (2) estimated fair market value of the assets and (3) determinations with respect to the lowest level of cash flows relevant to the respective impairment test, generally groupings of related operational facilities. Given the interdependency of the Company’s individual facilities during the production process, which operate as a vertically integrated network, it evaluates impairment of assets held for use at the country level (i.e., the U.S. and Mexico). Management believes this is the lowest level of identifiable cash flows for its assets that are held for use in production activities. At the present time, the Company’s forecasts indicate that it can recover the carrying value of its assets held for use based on the projected undiscounted cash flows of the operations.
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The Company records impairment charges on long-lived assets held for sale when the carrying amount of those assets exceeds their fair value less appropriate selling costs. Fair value is based on amounts documented in sales contracts or letters of intent accepted by the Company, amounts included in counteroffers initiated by the Company, or, in the absence of current contract negotiations, amounts determined using a sales comparison approach for real property and amounts determined using a cost approach for personal property. Under the sales comparison approach, sales and asking prices of reasonably comparable properties are considered to develop a range of unit prices within which the current real estate market is operating. Under the cost approach, a current cost to replace the asset new is calculated and then the estimated replacement cost is reduced to reflect the applicable decline in value resulting from physical deterioration, functional obsolescence and economic obsolescence. Appropriate selling costs includes reasonable broker’s commissions, costs to produce title documents, filing fees, legal expenses and the like.
Goodwill and Other Intangibles, net
Goodwill represents the excess of the aggregate purchase price over the fair value of the net identifiable assets acquired in a business combination. Identified intangible assets represent trade names, customer relationships and non-compete agreements arising from acquisitions that are recorded at fair value as of the date acquired less accumulated amortization, if any. The Company uses various market valuation techniques to determine the fair value of its identified intangible assets.
Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis in the fourth quarter of each fiscal year or more frequently if impairment indicators arise. For goodwill, an impairment loss is recognized for any excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill. Management first reviews relevant qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent), that the fair value of a reporting unit is less than the unit’s carrying amount (including goodwill).. If management determines it is more likely than not that the carrying amount of a reporting unit goodwill might be impaired, a quantitative analysis is performed. Management performed a qualitative analysis noting that is was not more likely than not that there was goodwill impairment in any of its reporting units as of December 25, 2022. For indefinite-lived intangible assets, an impairment loss is recognized if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value of that intangible asset. Management first reviews relevant qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that an intangible asset is impaired. If management determines there is an indication that the carrying amount of the intangible asset might be impaired, and quantitative analysis is performed. Management performed a qualitative analysis noting that it was not more likely than not that there was impairment for any of its indefinite-lived intangible assets as of December 25, 2022.
Identifiable intangible assets with definite lives, such as customer relationships, non-compete agreements and trade names that the Company expects to use for a limited amount of time, are amortized over their estimated useful lives on a straight-line basis. The useful lives range from three to 20 years for non-compete agreements and trade names and three to 18 years for customer relationships. Identified intangible assets with definite lives are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Management assessed if events or changes in circumstances indicated that the aggregate carrying amount of its identified intangible assets with definite lives might not be recoverable and determined that there were no impairment indicators during the years ended December 25, 2022 and December 26, 2021.
Litigation and Contingent Liabilities
The Company is subject to lawsuits, investigations and other claims related to employment, environmental, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes, as well as potential ranges of probable losses, to these matters. The Company estimates the amount of reserves required for these contingencies when losses are determined to be probable and after considerable analysis of each individual issue. The Company expenses legal costs related to such loss contingencies as they are incurred. The accrual for environmental remediation liabilities is measured on an undiscounted basis. These reserves may change in the future due to changes in the Company’s assumptions, the effectiveness of strategies, or other factors beyond the Company’s control.
Accrued Self Insurance
Insurance expense for casualty claims and employee-related health care benefits are estimated using historical and current experience and actuarial estimates. Stop-loss coverage is maintained with third-party insurers to limit the Company’s total exposure. Certain categories of claim liabilities are actuarially determined. The assumptions used to arrive at periodic expenses are reviewed regularly by management. However, actual expenses could differ from these estimates and could result in adjustments to be recognized.
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Asset Retirement Obligations
The Company monitors certain asset retirement obligations in connection with its operations. These obligations relate to clean-up, removal or replacement activities and related costs for “in-place” exposures only when those exposures are moved or modified, such as during renovations of our facilities. These in-place exposures include asbestos, refrigerants, wastewater, oil, lubricants and other contaminants common in manufacturing environments. Under existing regulations, the Company is not required to remove these exposures and there are no plans to undertake a renovation that would require removal of the asbestos or the remediation of the other in-place exposures at this time. The facilities are expected to be maintained and repaired by activities that will not result in the removal or disruption of these in-place exposures at this time. As a result, there is an indeterminate settlement date for these asset retirement obligations because the range of time over which the Company may incur these liabilities is unknown and cannot be reasonably estimated. Therefore, the Company has not recorded the fair value of any potential liability.
Income Taxes
The Company follows provisions under ASC No. 740-10-30-27 in the Expenses-Income Taxes topic with regard to members of a group that file a consolidated tax return but issue separate financial statements. The Company files its U.S. federal tax return and certain state unitary returns with JBS USA Food Company Holdings (“JBS USA Holdings”). The income tax expense of the Company is computed using the separate return method. The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. For the unitary states, we have an obligation to make tax payments to JBS USA Holdings for our share of the unitary taxable income, which is included in taxes payable in our Consolidated Balance Sheets. Under this approach, deferred income taxes reflect the net tax effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carry forwards. The amount of deferred tax on these temporary differences is determined using the tax rates expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on the tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date.
The Company reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, potential for carry back of tax losses, projected future taxable income, applicable tax strategies, and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets will not be realized. Valuation allowances have been established primarily for net operating loss carry forwards of certain foreign subsidiaries.
The Company deems its earnings from Mexico, Puerto Rico, the U.K., the Republic of Ireland, France, the Netherlands, Luxembourg and Malta as of December 25, 2022 to be permanently reinvested. As such, U.S. deferred income taxes have not been provided on these earnings. If such earnings were not considered indefinitely reinvested, certain deferred foreign and U.S. income taxes would be provided.
The Company follows provisions under ASC No. 740-10-25 that provide a recognition threshold and measurement criteria for the financial statement recognition of a tax benefit taken or expected to be taken in a tax return. Tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. Tax benefits that meet the more-likely-than-not recognition threshold are measured using a probability weighting of the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a particular tax benefit is a matter of judgment based on the individual facts and circumstances evaluated in light of all available evidence as of the balance sheet date. See “Note 12. Income Taxes” to the Consolidated Financial Statements.
Pension and Other Postemployment Benefits
Our pension and other postemployment benefit costs and obligations are dependent on the various actuarial assumptions used in calculating such amounts. These assumptions relate to discount rates, long-term return on plan assets and other factors. We base the discount rate assumptions on current investment yields on high-quality corporate long-term bonds. We determine the long-term return on plan assets based on historical portfolio results and management’s expectation of the future economic environment. Actual results that differ from our assumptions are accumulated and, if in excess of the lesser of 10% of the projected benefit obligation or the fair market value of plan assets, amortized over either (1) the estimated average future service period of active plan participants if the plan is active or (2) the estimated average future life expectancy of all plan participants if the plan is frozen.
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Derivative Financial Instruments
The Company uses derivative financial instruments (e.g., futures, forwards options and swaps) for the purpose of mitigating exposure to changes in commodity prices, foreign currency exchange rates and interest rates.
•Commodity Price Risk - The Company utilizes various raw materials, which are all considered commodities, in its operations, including corn, soybean meal, soybean oil, wheat, natural gas, electricity and diesel fuel. The Company considers these raw materials to be 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 enters into derivative contracts such as physical forward contracts and exchange-traded futures or option contracts in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for periods up to 12 months. The Company may enter into longer-term derivatives on particular commodities if deemed appropriate.
•Foreign Currency Risk - The Company has foreign operations and, therefore, has exposure to foreign exchange risk when the financial results of those operations are translated to U.S. dollars. The Company will occasionally purchase derivative financial instruments such as foreign currency forward contracts in an attempt to mitigate currency exchange rate exposure related to the net assets of its Mexico reportable segment that are denominated in Mexican pesos. The Company’s U.K. and Europe reportable segment also attempts to mitigate foreign currency exposure on certain transactions denominated in foreign currencies through the use of derivative financial instruments.
•Interest Rate Risk - The Company has exposure to variability in cash flows from interest payments due to the use of variable interest rates on certain long-term debt arrangements. The Company has purchased in the past an interest rate swap contract to convert the variable interest rate to a fixed interest rate on a portion of its outstanding long-term debt arrangements in order to manage this interest rate risk and add stability to interest expense and cash flows.
Pilgrim’s recognizes all commodity derivative instruments that qualify for derivative accounting treatment as either assets or liabilities and measures those instruments at fair value unless they qualify for, and we elect, the normal purchases and normal sales scope exception (“NPNS”). The permitted accounting treatments include: cash flow hedge; fair value hedge; and undesignated contracts. Undesignated contract accounting is the default accounting treatment for all derivatives unless they qualify, and we specifically designate them, for one of the other accounting treatments. Derivatives designated for any of the elective accounting treatments must meet specific, restrictive criteria both at the time of designation and on an ongoing basis.
The Company has generally applied the NPNS exception for certain of its forward physical grain purchase contracts. NPNS contracts are accounted for using the accrual method of accounting; therefore, there were no amounts recorded in the Consolidated Financial Statements at December 25, 2022 and December 26, 2021.
Undesignated contracts may include contracts not designated as a hedge or for which the NPNS exception was not elected, contracts that do not qualify for hedge accounting and derivatives that do not or no longer qualify for the NPNS scope exception. The fair value of these derivatives is recognized in the Consolidated Balance Sheets within Prepaid expenses and other current assets or Accrued expenses and other current liabilities. Changes in fair value of these derivatives are recognized immediately in the Consolidated Statements of Income within Net sales, Cost of sales or SG&A expense, depending on the risk they are intended to mitigate. While management believes these instruments help mitigate various market risks, they are not designated nor accounted for as hedges as a result of the extensive record keeping requirements.
Business Combination Accounting
Pilgrim’s allocates the consideration of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the consideration over the amount allocated to the assets and liabilities, if any, is recorded to goodwill. The Company uses all available information to estimate fair values. Pilgrim’s uses various models to determine the value of assets acquired and liabilities assumed such as net realizable value to value inventory, cost method and market approach to value property, relief-from-royalty and multi-period excess earnings to value intangibles and discounted cash flow to value goodwill. The Company typically engages third-party valuation specialists to assist in the fair value determination of tangible long-lived assets and intangible assets other than goodwill. The fair value of acquired inventories is determined by extending physical counts of the inventories taken at or near the acquisition date to market pricing in effect for such inventories at or near the acquisition date. The carrying values of acquired receivables and accounts payable have historically approximated their fair values as of the business combination date. As necessary, Pilgrim’s may engage third-party specialists to assist in the estimation of fair value for certain liabilities. The Company adjusts the preliminary acquisition accounting, as necessary,
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typically up to one year after the acquisition closing date for those items that existed at the acquisition date and were provisionally accounted for at that time, as it obtains more information regarding asset valuations and liabilities assumed.
The Company’s acquisition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of the Company’s fair value estimates, including changes in assumptions regarding industry economic factors and business strategies. If actual results are materially different than the assumptions used to determine fair value of the assets and liabilities acquired through a business combination, it is possible that adjustments to the carrying values of such assets and liabilities will have an impact on the Company’s net earnings.
See “Note 2. Business Acquisitions” to the Consolidated Financial Statements for the acquisition-related information associated with significant acquisitions completed in the last three fiscal years.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We make significant estimates in regard to realization of deferred tax assets; valuation of long-lived assets; valuation of contingent liabilities, liabilities subject to compromise and self-insurance liabilities; and valuation of acquired businesses.
Recent Accounting Pronouncements Adopted in 2022
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires annual disclosures for transactions with a government authority that are accounted for by a grant or contribution model. The guidance requires disclosure about the nature of certain government assistance received, the accounting treatment for the transactions and the effect of the transactions on the financial statements. The guidance is effective for annual periods beginning after December 15, 2021, with early adoption permitted. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements.
Recent Accounting Pronouncements Adopted in 2021
The Company adopted no accounting pronouncements in 2021.
Recent Accounting Pronouncements Not Yet Adopted as of December 25, 2022
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to the application of current GAAP to existing contracts, hedging relationships and other transactions affected by reference rate reform. The new guidance will ease the transition to new reference rates by allowing entities to update contracts and hedging relationships without applying many of the contract modification requirements specific to those contracts. The provisions of the new guidance are effective beginning March 12, 2020, extending through December 31, 2022 with the option to apply the guidance at any point during that time period. In March 2021, the U.K. Financial Conduct Authority announced that the intended cessation date of USD LIBOR would be June 30, 2023. As a result, in December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Topic 848, which extends the sunset date of Reference Rate Reform (Topic 848) from December 31, 2022 to December 31, 2024. We currently have debt agreements that reference LIBOR and we will apply the new guidance as these contracts are modified to reference other rates. The Company does not expect implementation to have a material impact on our Condensed Consolidated Financial Statements.
In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which requires disclosure of the existence of supplier financing programs. The guidance requires disclosure about the nature of the supplier financing agreements, including key terms and payment timing and determination of amounts, the accounting treatment for the transactions and the effect of the transactions on the financial statements, as well as any assets pledged or guarantees provided to the providers of the financing programs. The provisions of the new guidance will be effective for years beginning after December 15, 2022 with the requirement to add rollforward disclosures for years beginning after December 15, 2023. The Company plans to adopt this guidance effective December 26, 2022 and is assessing the impacts on our Condensed Consolidated Financial Statements.
2. BUSINESS ACQUISITIONS
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Pilgrim’s Food Masters
On September 24, 2021, the Company acquired 100.0% of the equity of the Kerry Consumer Foods’ meats and meals businesses, collectively known as PFM, for cash of £698.8 million, or $958.9 million. The acquisition was funded with the Company’s recent senior notes offering and borrowings under the credit facility. The acquisition solidifies Pilgrim’s as a leading European food company. The specialty meats business is a leading manufacturer of branded and private label meats, meat snacks and food-to-go products in the U.K. and the Republic of Ireland. The ready meals business is a leading ethnic chilled and frozen ready meals business in the U.K. The acquired operations are included in the Company’s U.K. and Europe reportable segment.
Transaction costs incurred in conjunction with this acquisition were approximately $19.3 million. These costs were expensed as incurred and are reflected within SG&A expense in the Company’s Consolidated Statements of Income.
The results of operations of the acquired business since September 24, 2021 are included in the Company’s Consolidated Statements of Income. Net sales and net income generated by the acquired business during 2022 totaled $1.0 billion and $8.4 million, respectively.
The assets acquired and liabilities assumed in the acquisition were measured at their estimated fair values as of September 24, 2021 as set forth below. The excess of the purchase price over the fair value of the identified net assets was recorded as goodwill in the Company’s U.K. and Europe reportable segment. The factors contributing to the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the acquisition as well as the assembled workforce. Benefits include (1) complementary product offerings, (2) an enhanced footprint in the U.K. and the Republic of Ireland and (3) an enhanced position in the fast-growing plant-based protein, direct-to-consumer and hot food-to-go markets. The goodwill is not expected to be tax deductible for tax purposes.
The fair values recorded for the assets acquired and liabilities assumed for the acquisition are as follows (in thousands):
Cash and cash equivalents $ 113
Trade accounts and other receivables 7,387
Prepaid expenses and other current assets 1,727
Operating lease assets 14,648
Property, plant and equipment 247,133
Identified intangible assets 415,157
Other assets 335
Accounts payable 4,615
Other current liabilities 407
Operating lease liabilities 18,996
Deferred tax liabilities 114,701
Other long-term liabilities 2,612
Total liabilities assumed 141,331
Total consideration transferred $ 958,907
The valuation of intangible assets of $415.2 million consisted of: 1) trade names with indefinite lives of $214.0 million; 2) trade names of $36.8 million with useful lives ranging from 15 years to 20 years; and 3) customer and distributor relationships of $164.3 million with useful lives ranging from 15 years to 18 years.
The following unaudited pro forma information presents the combined financial results for the Company and PFM for 2022, 2021 and 2020 as if the acquisition had been completed at the beginning of 2020:
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(In thousands, except per share amounts)
The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the Company’s results of operations would have been had it completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments include depreciation on the provisional values of acquired property, plant and equipment, amortization on the provisional values of acquired intangible assets, interest expense on debt issued to finance the acquisition, acquisition-related costs incurred by Pilgrim’s and its subsidiaries and the related income tax effect of these adjustments. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisition.
Randall Parker Foods Limited
On November 12, 2021, the Company acquired 100.0% of the equity of Randall Parker Foods Limited and its subsidiaries (together “RPF”) from several sellers for £10.0 million, or $13.4 million. The acquisition was funded with cash on hand. Transaction costs were immaterial, these costs were expensed as incurred and are reflected within SG&A expense in the Company’s Consolidated Statements of Income. The acquired operations include lamb processing and retail packaging operations and will connect the Company’s existing lamb supply chain, bringing its farmers and customers closer together. The RPF operations are included in the Company’s U.K. and Europe reportable segment.
3. REVENUE RECOGNITION
The vast majority of the Company’s revenue is derived from contracts which are based upon a customer ordering our products. While there may be master agreements, the contract is only established when the customer’s order is accepted by the Company. The Company accounts for a contract, which may be verbal or written, when it is approved and committed by both parties, the rights of the parties are identified along with payment terms, the contract has commercial substance and collectability is probable.
The Company evaluates the transaction for distinct performance obligations, which are the sale of its products to customers. Since its products are commodity market-priced, the sales price is representative of the observable, standalone selling price. Each performance obligation is recognized based upon a pattern of recognition that reflects the transfer of control to the customer at a point in time, which is upon destination (customer location or port of destination), which faithfully depicts the transfer of control and recognition of revenue. There are instances of customer pick-up at the Company’s facility, in which case control transfers to the customer at that point and the Company recognizes revenue. The Company’s performance obligations are typically fulfilled within days to weeks of the acceptance of the order.
The Company makes judgments regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from revenue and cash flows with customers. Determination of a contract requires evaluation and judgment along with the estimation of the total contract value and if any of the contract value is constrained. Due to the nature of our business, there is minimal variable consideration, as the contract is established at the acceptance of the order from the customer. When applicable, variable consideration is estimated at contract inception and updated on a regular basis until the contract is completed. Allocating the transaction price to a specific performance obligation based upon the relative standalone selling prices includes estimating the standalone selling prices including discounts and variable consideration.
Disaggregated Revenue
Revenue has been disaggregated into the following categories below to show how economic factors affect the nature, amount, timing and uncertainty of revenue and cash flows:
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Fresh Prepared Export Other Total
(In thousands)
Fresh Prepared Export Other Total
(In thousands)
Fresh Prepared Export Other Total
(In thousands)
Contract Costs
The Company can incur incremental costs to obtain or fulfill a contract such as broker expenses that are not expected to be recovered. The amortization period for such expenses is less than one year; therefore, the costs are expensed as incurred.
Taxes
The Company excludes all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added and some excise taxes) from the transaction price.
Contract Balances
The Company receives payment from customers based on terms established with the customer. Payments are typically due within 14 to 30 days of delivery. Revenue contract liabilities relate to payments received in advance of satisfying the performance under the customer contract. The revenue contract liabilities relate to customer prepayments and the advanced consideration, such as cash, received from governmental agency contracts for which performance obligations to the end customer have not been satisfied.
Changes in the revenue contract liability balances for the years ended December 25, 2022 and December 26, 2021 were as follows:
(In thousands)
4. LEASES
The Company is party to operating lease agreements for warehouses, office space, vehicle maintenance facilities and livestock growing farms in the U.S., distribution centers, hatcheries and office space in Mexico and farms, processing facilities and office space in the U.K. and Europe. Additionally, the Company leases equipment, over-the-road transportation vehicles
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and other assets in all three reportable segments. The Company is also party to a limited number of finance lease agreements in the U.S.
The Company’s leases have remaining lease terms of less than one year to 18 years, some of which may include options to extend the lease for up to ten years and some of which may include options to terminate the lease within one year. The exercise of options to extend lease terms is at the Company’s sole discretion. Certain leases also include options to purchase the leased property.
Certain lease agreements include rental payment increases over the lease term that can be either fixed or variable. Fixed payment increases and variable payment increases based on an index or rate are included in the initial lease liability using the index or rate at commencement date. Variable payment increases not based on an index are recognized as incurred. Certain lease agreements contain residual value guarantees, primarily vehicle and transportation equipment leases.
The following table presents components of lease expense (in thousands). Operating lease cost, finance lease amortization and finance lease interest are respectively included in Cost of sales, SG&A expense and Interest expense, net of capitalized interest in the Consolidated Statements of Income.
For the Year Ended
Amortization of finance lease assets 472 745
Interest on finance leases 132 128
(a)Sublease income is immaterial and not included in operating lease costs.
The weighted-average remaining lease term and discount rate for lease liabilities included in our Consolidated Balance Sheets are as follows:
Weighted-average remaining lease term (years):
Weighted-average discount rate:
Supplemental cash flow information related to leases is as follows (in thousands):
Year Ended
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases $ 69,349 $ 77,113
Operating cash flows - finance leases 132 124
Financing cash flows - finance leases 924 76
Finance lease assets obtained in exchange for finance lease liabilities — 3,527
Future minimum lease payments under noncancelable leases as of December 25, 2022 are as follows (in thousands):
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Operating Leases Finance Leases
For the fiscal years ending December:
Present value of lease liabilities $ 309,923 $ 3,624
Lease liabilities are included in our Consolidated Balance Sheets as follows (in thousands):
Operating Leases Finance Leases Operating Leases Finance Leases
Accrued expenses and other current liabilities $ 79,222 $ — $ 82,947 $ —
Current maturities of long-term debt — 966 — 930
Long-term debt, less current maturities — 2,658 — 3,618
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil, wheat, natural gas, electricity and diesel fuel, which are all considered commodities. The Company considers these raw materials generally available from a number of different sources and believes it can obtain them to meet its requirements. These commodities are subject to price fluctuations and related price risk due to factors beyond our control, such as economic and political conditions, supply and demand, weather, governmental regulation and other circumstances. Generally, the Company purchases derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for approximately the next twelve months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate.
The Company has operations in Mexico, the U.K., France, the Netherlands and the Republic of Ireland. Therefore, it has exposure to translational foreign exchange risk when the financial results of those operations are remeasured in U.S. dollars. The Company has purchased foreign currency forward contracts to manage this translational foreign exchange risk.
The Company has exposure to variability in cash flows from interest payments due to the use of variable interest rates on certain long-term debt arrangements in the U.S. reportable segment. The Company has purchased an interest rate swap contract to convert the variable interest rate to a fixed interest rate on a portion of its outstanding long-term debt arrangements in order to manage this interest rate risk and add stability to interest expense and cash flows. There is not an outstanding interest rate swap contract at the end of the reporting year because this interest rate contract expired during the second quarter.
The fair value of derivative assets is included in the line item Prepaid expenses and other current assets on the Consolidated Balance Sheets while the fair value of derivative liabilities is included in the line item Accrued expenses and other current liabilities on the same statements. The Company’s counterparties require that it post collateral for changes in the net fair value of the derivative contracts. This cash collateral is reported in the line item Restricted cash and cash equivalents on the Consolidated Balance Sheets.
Undesignated contracts may include contracts not designated as a hedge or for which the normal purchase normal sales (“NPNS”) exception was not elected, contracts that do not qualify for hedge accounting and derivatives that do not or no longer qualify for the NPNS scope exception. The fair value of each of these derivatives is recognized in the Consolidated Balance Sheets within Prepaid expenses and other current assets or Accrued expenses and other current liabilities. Changes in fair value of each derivative are recognized immediately in the Consolidated Statements of Income within Net sales, Cost of sales, SG&A expense, or Foreign currency transaction losses (gains) depending on the risk the derivative is intended to mitigate. While management believes these instruments help mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive record keeping requirements.
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