PPC-2014.09.28-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  _______ to _______            
Commission File number 1-9273
 
PILGRIM’S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
75-1285071
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1770 Promontory Circle,
Greeley, CO
 
80634-9038
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (970) 506-8000 
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-accelerated Filer
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ý    No  ¨
Number of shares outstanding of the issuer’s common stock, $0.01 par value per share, as of October 29, 2014, was 259,029,033.



INDEX
PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 5.
Item 6.




























1




2



PART I.
FINANCIAL INFORMATION
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PILGRIM’S PRIDE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
September 28, 2014
 
December 29, 2013
 
 
(Unaudited)
 
 
 
 
(In thousands)
Cash and cash equivalents
 
$
868,597

 
$
508,206

Investment in available-for-sale securities
 
—

 
96,902

Trade accounts and other receivables, less allowance for doubtful accounts
 
413,402

 
376,678

Account receivable from JBS USA, LLC
 
240

 
2,388

Inventories
 
817,892

 
808,832

Income taxes receivable
 
—

 
64,868

Current deferred tax assets
 
2,227

 
2,227

Prepaid expenses and other current assets
 
77,393

 
61,848

Assets held for sale
 
1,419

 
7,033

Total current assets
 
2,181,170

 
1,928,982

Deferred tax assets
 
85,213

 
18,921

Other long-lived assets
 
30,766

 
40,163

Identified intangible assets, net
 
28,219

 
32,525

Property, plant and equipment, net
 
1,180,414

 
1,151,811

Total assets
 
$
3,505,782

 
$
3,172,402

 
 
 
 
 
Accounts payable
 
$
383,779

 
$
370,360

Account payable to JBS USA, LLC
 
1,969

 
3,934

Accrued expenses and other current liabilities
 
307,153

 
283,355

Income taxes payable
 
176,153

 
—

Current deferred tax liabilities
 
15,070

 
15,515

Current maturities of long-term debt
 
260

 
410,234

Total current liabilities
 
884,384

 
1,083,398

Long-term debt, less current maturities
 
502,115

 
501,999

Deferred tax liabilities
 
—

 
13,944

Other long-term liabilities
 
88,490

 
80,459

Total liabilities
 
1,474,989

 
1,679,800

Common stock
 
2,590

 
2,590

Additional paid-in capital
 
1,656,623

 
1,653,119

Retained earnings (accumulated deficit)
 
424,305

 
(120,156
)
Accumulated other comprehensive loss
 
(55,815
)
 
(45,735
)
Total Pilgrim’s Pride Corporation stockholders’ equity
 
2,027,703

 
1,489,818

Noncontrolling interest
 
3,090

 
2,784

Total stockholders’ equity
 
2,030,793

 
1,492,602

Total liabilities and stockholders’ equity
 
$
3,505,782

 
$
3,172,402

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

3


PILGRIM’S PRIDE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
 
(In thousands, except per share data)
Net sales
 
$
2,268,048

 
$
2,142,815

 
$
6,472,929

 
$
6,363,863

Cost of sales
 
1,817,783

 
1,906,242

 
5,458,083

 
5,726,348

Gross profit
 
450,265

 
236,573

 
1,014,846

 
637,515

Selling, general and administrative expense
 
44,629

 
43,797

 
138,437

 
131,888

Administrative restructuring charges
 
135

 
3,658

 
2,286

 
4,622

Operating income
 
405,501

 
189,118

 
874,123

 
501,005

Interest expense, net of capitalized interest
 
11,372

 
20,413

 
45,407

 
68,199

Interest income
 
(1,171
)
 
(571
)
 
(2,974
)
 
(1,494
)
Foreign currency transaction loss
 
6,414

 
2,682

 
4,932

 
4,771

Miscellaneous, net
 
(610
)
 
(8
)
 
(2,609
)
 
(730
)
Income before income taxes
 
389,496

 
166,602

 
829,367

 
430,259

Income tax expense
 
133,693

 
5,578

 
284,932

 
24,216

Net income
 
255,803

 
161,024

 
544,435

 
406,043

Less: Net income (loss) attributable to noncontrolling interests
 
(181
)
 
107

 
(26
)
 
(161
)
Net income attributable to Pilgrim’s Pride Corporation
 
$
255,984

 
$
160,917

 
$
544,461

 
$
406,204

 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
 
Basic
 
258,999

 
258,826

 
258,966

 
258,825

Effect of dilutive common stock equivalents
 
523

 
560

 
482

 
341

Diluted
 
259,522

 
259,386

 
259,448

 
259,166

 
 
 
 
 
 
 
 
 
Net income attributable to Pilgrim's Pride Corporation per share of
common stock outstanding:
 
 
 
 
 
 
 
 
Basic
 
$
0.99

 
$
0.62

 
$
2.10

 
$
1.57

Diluted
 
$
0.99

 
$
0.62

 
$
2.10

 
$
1.57

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















4


PILGRIM’S PRIDE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
 
(In thousands)
Net income
 
$
255,803

 
$
161,024

 
$
544,435

 
$
406,043

Other comprehensive income:
 
 
 
 
 
 
 
 
Gain (loss) associated with available-for-sale securities,
net of tax expense of $(10), $0, $(30) and $0, respectively
 
17

 
—

 
(12
)
 
—

Gain (loss) associated with pension and other postretirement benefits, net of tax benefit of $396, $0, $6,105 and $0, respectively
 
(653
)
 
313

 
(10,068
)
 
36,114

Total other comprehensive income (loss), net of tax
 
(636
)
 
313

 
(10,080
)
 
36,114

Comprehensive income
 
255,167

 
161,337

 
534,355

 
442,157

Less: Comprehensive income (loss) attributable to noncontrolling interests
 
(181
)
 
107

 
(26
)
 
(161
)
Comprehensive income attributable to Pilgrim's Pride Corporation
 
$
255,348

 
$
161,230

 
$
534,381

 
$
442,318

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



5


PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
 
 
 
Pilgrim’s Pride Corporation Stockholders
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings (Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
 
 
Shares
 
Amount
 
 
 
(In thousands)
Balance at December 29, 2013
 
259,029

 
$
2,590

 
$
1,653,119

 
$
(120,156
)
 
$
(45,735
)
 
$
2,784

 
$
1,492,602

Net income
 
—

 
—

 
—

 
544,461

 
—

 
(26
)
 
544,435

Other comprehensive loss, net of tax
 
—

 
—

 
—

 
—

 
(10,080
)
 
—

 
(10,080
)
Issuance of subsidiary common stock
 
—

 
—

 
—

 
—

 
—

 
332

 
332

Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Requisite service period recognition
 
—

 
—

 
3,504

 
—

 
—

 
—

 
3,504

Balance at September 28, 2014
 
259,029

 
$
2,590

 
$
1,656,623

 
$
424,305

 
$
(55,815
)
 
$
3,090

 
$
2,030,793

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 30, 2012
 
258,999

 
$
2,590

 
$
1,642,003

 
$
(669,711
)
 
$
(68,511
)
 
$
2,626

 
$
908,997

Net income
 
—

 
—

 
—

 
406,204

 
—

 
(161
)
 
406,043

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
36,114

 
 
 
36,114

Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issued under compensation plans
 
30

 
—

 
—

 
—

 
—

 
—

 
—

Requisite service period recognition
 
—

 
—

 
2,415

 
—

 
—

 
—

 
2,415

Balance at September 29, 2013
 
259,029

 
2,590

 
$
1,644,418

 
$
(263,507
)
 
$
(32,397
)
 
$
2,465

 
$
1,353,569

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

6


PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Thirty-Nine Weeks Ended
 
 
September 28, 2014
 
September 29, 2013
 
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
544,435

 
$
406,043

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
112,740

 
113,853

Foreign currency transaction loss
 
8,585

 
3,734

Accretion of bond discount
 
342

 
342

Asset impairment
 
—

 
3,457

Gain on property disposals
 
(1,112
)
 
(509
)
Gain on investment securities
 
(49
)
 
—

Share-based compensation
 
3,504

 
2,415

Deferred income tax benefit
 
(79,619
)
 
—

Changes in operating assets and liabilities:
 
 
 
 
Trade accounts and other receivables
 
(35,785
)
 
(25,458
)
Inventories
 
(10,339
)
 
39,421

Prepaid expenses and other current assets
 
(16,694
)
 
(17,304
)
Accounts payable, accrued expenses and other current liabilities
 
36,686

 
69,895

Income taxes
 
239,944

 
(1,818
)
Deposits
 
—

 
1,898

Long-term pension and other postretirement obligations
 
(1,764
)
 
(3,174
)
Other operating assets and liabilities
 
1,534

 
3,921

Cash provided by operating activities
 
802,408

 
596,716

Cash flows from investing activities:
 
 
 
 
Acquisitions of property, plant and equipment
 
(131,349
)
 
(76,293
)
Purchases of investment securities
 
(55,100
)
 
—

Proceeds from sale or maturity of investment securities
 
152,050

 
—

Proceeds from property disposals
 
8,422

 
3,330

Cash used in investing activities
 
(25,977
)
 
(72,963
)
Cash flows from financing activities:
 
 
 
 
Proceeds from revolving line of credit
 
—

 
505,600

Payments on revolving line of credit, long-term borrowings and capital lease
obligations
 
(410,199
)
 
(758,283
)
Sale of subsidiary common stock
 
332

 
—

Payment of capitalized loan costs
 
—

 
(5,006
)
Cash used in financing activities
 
(409,867
)
 
(257,689
)
Effect of exchange rate changes on cash and cash equivalents
 
(6,173
)
 
(3,928
)
Increase in cash and cash equivalents
 
360,391

 
262,136

Cash and cash equivalents, beginning of period
 
508,206

 
68,180

Cash and cash equivalents, end of period
 
$
868,597

 
$
330,316

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

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.     DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Business
Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “PPC,” “the Company,” “we,” “us,” “our,” or similar terms) is one of the largest chicken producers in the world, with operations in the United States (“U.S.”), Mexico and Puerto Rico. 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 United States and Puerto Rico and in the northern and central regions of Mexico. Additionally, the Company exports chicken products to approximately 80 countries. Pilgrim's fresh chicken products consist of refrigerated (nonfrozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. The Company's prepared chicken products include fully cooked, ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated. As a vertically integrated company, we control every phase of the production of our products. We operate feed mills, hatcheries, processing plants and distribution centers in 12 U.S. states, Puerto Rico and Mexico. Pilgrim's has approximately 35,400 employees and has the capacity to process more than 34 million birds per week for a total of more than 10 billion pounds of live chicken annually. Approximately 3,750 contract growers supply poultry for the Company's operations. As of September 28, 2014, JBS USA Holdings, Inc. (“JBS USA”), an indirect subsidiary of Brazil-based JBS S.A., beneficially owned 75.5% of the Company's outstanding common stock.
Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments unless otherwise disclosed) considered necessary for a fair presentation have been included. Operating results for the thirteen and thirty-nine weeks ended September 28, 2014 are not necessarily indicative of the results that may be expected for the year ending December 28, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2013.
Pilgrim’s operates on a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. The reader should assume any reference we make to a particular year (for example, 2014) in the notes to these Condensed Consolidated Financial Statements applies to our fiscal year and not the calendar year.
The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation.
The Company measures the financial statements of its Mexico subsidiaries as if the U.S. dollar were the functional currency. Accordingly, we remeasure assets and liabilities, other than non-monetary assets, of the Mexico subsidiaries at current exchange rates. We remeasure non-monetary assets using the historical exchange rate in effect on the date of each asset’s acquisition. We remeasure income and expenses at average exchange rates in effect during the period. Currency exchange gains or losses are included in the line item Foreign currency transaction loss in the Condensed Consolidated Statements of Income.
Reportable Segment
We operate in one reportable business segment, as a producer and seller of chicken products we either produce or purchase for resale.
Revenue Recognition
We recognize revenue when all of the following circumstances are satisfied: (i) persuasive evidence of an arrangement exists, (ii) price is fixed or determinable, (iii) collectability is reasonably assured and (iv) delivery has occurred. Delivery occurs in the period in which the customer takes title and assumes the risks and rewards of ownership of the products specified in the customer’s purchase order or sales agreement. Revenue is recorded net of estimated incentive offerings including special pricing agreements, promotions and other volume-based incentives. Revisions to these estimates are charged back to net sales in the period in which the facts that give rise to the revision become known.

8

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Book Overdraft
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 Condensed Consolidated Statements of Cash Flows.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. There is no option for early adoption. The provisions of the new guidance will be effective as of the beginning of our 2017 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected a transition approach to implement the standard.
2.     FAIR VALUE MEASUREMENTS
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities measured at fair value must be categorized into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation:
Level 1
  
Unadjusted quoted prices in active markets for identical assets or liabilities;
 
 
Level 2
  
Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
 
 
Level 3
  
Unobservable inputs, such as discounted cash flow models or valuations.
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.
As of September 28, 2014 and December 29, 2013, the Company held certain items that were required to be measured at fair value on a recurring basis. These included derivative assets and liabilities and deferred compensation plan assets. Derivative assets and liabilities consist of long and short positions on exchange-traded commodity futures instruments. The Company maintains nonqualified deferred compensation plans for executives and other highly compensated employees. Investments are maintained within a trust and include money market funds, mutual funds and life insurance policies. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The following items were measured at fair value on a recurring basis:
 
 
September 28, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Derivative assets - commodity futures instruments
 
$
5,125

 
$
—

 
$
—

 
$
5,125

Derivative assets - commodity options instruments
 
—

 
62

 
—

 
62

Derivative assets - foreign currency instruments
 
1,278

 
—

 
—

 
1,278

Deferred compensation plan assets
 
7,218

 
—

 
—

 
7,218

Derivative liabilities - commodity futures instruments
 
(5,350
)
 
—

 
—

 
(5,350
)
Derivative liabilities - commodity options instruments
 
—

 
(1,013
)
 
—

 
(1,013
)
Long-term debt and other borrowing arrangements:
 
 
 
 
 
 
 
 
Public bonds and notes
 
525,335

 
—

 
—

 
525,335

Capitalized lease obligations
 
—

 
—

 
627

 
627


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Table of Contents

 
 
December 29, 2013
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Short-term investments in available-for-sale securities
 
$
—

 
$
96,902

 
$
—

 
$
96,902

Derivative assets - commodity futures instruments
 
1,494

 
—

 
—

 
1,494

Derivative assets - commodity options instruments
 
—

 
1,395

 
—

 
1,395

Derivative assets - foreign currency instruments
 
1,214

 
—

 
—

 
1,214

Deferred compensation plan assets
 
7,208

 
—

 
—

 
7,208

Derivative liabilities - commodity futures instruments
 
(1,728
)
 
—

 
—

 
(1,728
)
Long-term debt and other borrowing arrangements:
 
 
 
 
 
 
 
 
Public bonds and notes
 
552,592

 
—

 
—

 
552,592

Term notes
 
—

 
—

 
424,650

 
424,650

Capitalized lease obligations
 
—

 
—

 
704

 
704

 
Term Notes and Revolver
 
Capitalized Lease Obligations
 
Thirty-Nine Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Change in Value of Level 3 Liabilities:
(In thousands)
Balance, beginning of period
$
424,650

 
$
686,435

 
$
704

 
$
880

Borrowings
—

 
509,500

 
—

 
—

Payments
(410,099
)
 
(762,091
)
 
(100
)
 
(92
)
Change in fair value inputs
(14,551
)
 
(6,983
)
 
23

 
—

Balance, end of period
$
—

 
$
426,861

 
$
627

 
$
788

The valuation of financial assets and liabilities classified in Level 1 is determined using a market approach, taking into account current interest rates, creditworthiness, and liquidity risks in relation to current market conditions, and is based upon unadjusted quoted prices for identical assets in active markets. The valuation of financial assets and liabilities in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable for substantially the full term of the financial instrument. The valuation of financial assets in Level 3 is determined using an income approach based on unobservable inputs such as discounted cash flow models or valuations.
In addition to the fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods or significant assumptions from prior periods are also required to be disclosed. The carrying amounts and estimated fair values of financial assets and liabilities recorded in the Condensed Consolidated Balance Sheets consisted of the following:
 
 
September 28, 2014
 
December 29, 2013
 
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Note Reference
 
 
 
 
(In thousands)
 
 
 
 
Short-term investments in available-for-sale securities
 
$
—

 
$
—

 
$
96,902

 
$
96,902

 
5
Derivative assets - commodity futures instruments
 
5,125

 
5,125

 
1,494

 
1,494

 
6
Derivative assets - commodity options instruments
 
62

 
62

 
1,395

 
1,395

 
6
Derivative assets - foreign currency instruments
 
1,278

 
1,278

 
1,214

 
1,214

 
6
Deferred compensation plan assets
 
7,218

 
7,218

 
7,208

 
7,208

 
 
Derivative liabilities - commodity futures instruments
 
(5,350
)
 
(5,350
)
 
(1,728
)
 
(1,728
)
 
6
Derivative liabilities - commodity options instruments
 
(1,013
)
 
(1,013
)
 
—

 
—

 
6
Long-term debt and other borrowing arrangements
 
(502,376
)
 
(525,962
)
 
(912,233
)
 
(977,946
)
 
9

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Derivative assets were recorded at fair value based on quoted market prices and are included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet. Deferred compensation plan assets were recorded at fair value based on quoted market prices and are included in the line item Other assets in the Condensed Consolidated Balance Sheets. Derivative liabilities were recorded at fair value based on quoted market prices and are included in the line item Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet. The fair values of the Company’s long-term debt and other borrowing arrangements were estimated by calculating the net present value of future payments for each debt obligation or borrowing by: (i) using a risk-free rate applicable for an instrument with a life similar to the remaining life of each debt obligation or borrowing plus the current estimated credit risk spread for the Company or (ii) using the quoted market price at September 28, 2014 or December 29, 2013, as applicable.
 In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges when required by U.S. GAAP. There were no significant fair value measurement losses recognized for such assets and liabilities in the periods reported.
3.     TRADE ACCOUNTS AND OTHER RECEIVABLES
Trade accounts and other receivables, less allowance for doubtful accounts, consisted of the following:
 
 
September 28, 2014
 
December 29, 2013
 
 
(In thousands)
Trade accounts receivable
 
$
405,520

 
$
369,715

Account receivable from JBS USA, LLC
 
240

 
2,388

Employee receivables
 
—

 
14

Notes receivable - current
 
1,145

 
—

Other receivables
 
9,467

 
11,005

Receivables, gross
 
416,372

 
383,122

Allowance for doubtful accounts
 
(2,730
)
 
(4,056
)
Receivables, net
 
$
413,642

 
$
379,066

4.     INVENTORIES
Inventories consisted of the following:
 
September 28, 2014
 
December 29, 2013
 
(In thousands)
Live chicken and hens
$
384,120

 
$
368,582

Feed, eggs and other
213,035

 
216,045

Finished chicken products
220,157

 
223,932

Total chicken inventories
817,312

 
808,559

Commercial feed and other
580

 
273

Total inventories
$
817,892

 
$
808,832

5.
INVESTMENTS IN SECURITIES
We recognize investments in available-for-sale securities as cash equivalents, current investments or long-term investments depending upon each security's length to maturity. Additionally, those securities identified by management at the time of purchase for funding operations in less than one year are classified as current.

11


The following table summarizes our investments in available-for-sale securities:
 
 
September 28, 2014
 
December 29, 2013
 
 
Amortized Cost
 
Fair
Value
 
Amortized Cost
 
Fair
Value
 
 
(In thousands)
Cash equivalents:
 
 
 
 
 
 
 
 
Fixed income securities
 
$
433,413

 
$
433,413

 
$
103,121

 
$
103,124

Other
 
19,577

 
19,577

 
56

 
56

Short-term investments:
 
 
 
 
 
 
 
 
Fixed income securities
 
$
—

 
$
—

 
$
96,902

 
$
96,902

All of the fixed income securities classified as cash and cash equivalents above mature within 90 days and all of the fixed income securities classified as short-term investments above mature within one year. The specific identification method is used to determine the cost of each security sold and each amount reclassified out of accumulated other comprehensive loss to earnings. Gross realized gains recognized during the thirteen and thirty-nine weeks ended September 28, 2014 related to the Company's available-for-sale securities totaled approximately $0.1 million and $0.3 million, respectively. Gross realized losses recognized during the thirteen and thirty-nine weeks ended September 28, 2014 related to the Company's available-for-sale securities totaled approximately $7,700 and $8,100, respectively. No gross realized gains or losses were recognized during the thirteen and thirty-nine weeks ended September 29, 2013. Proceeds received from the sale or maturity of available-for-sale securities during the thirty-nine weeks ended September 28, 2014 and September 29, 2013 are disclosed in the Condensed Consolidated Statements of Cash Flows. Net unrealized holding gains and losses on the Company's available-for-sale securities recognized during the thirty-nine weeks ended September 28, 2014 and September 29, 2013 that have been included in accumulated other comprehensive loss and the net amount of gains and losses reclassified out of accumulated other comprehensive loss to earnings during the thirty-nine weeks ended September 28, 2014 and September 29, 2013 are disclosed in “Note 12. Stockholders' Equity.”
6.     DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil, sorghum and energy, such as natural gas, electricity and diesel fuel, which are all considered commodities. The Company considers these raw materials generally available from a number of different sources and believes it can obtain them to meet its requirements. These commodities are subject to price fluctuations and related price risk due to factors beyond our control, such as economic and political conditions, supply and demand, weather, governmental regulation and other circumstances. Generally, the Company purchases derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for approximately the next 12 months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate.
The Company has operations in Mexico and, therefore, has exposure to translational foreign exchange risk when the financial results of those operations are translated to U.S. dollars. Generally, the Company purchases derivative financial instruments such as foreign currency forward contracts to manage this translational foreign exchange risk.
The fair value of derivative assets is included in the line item Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets while the fair value of derivative liabilities is included in the line item Accrued expenses and other current liabilities on the same statements. Our counterparties require that we post cash collateral for changes in the net fair value of the derivative contracts.
We have not designated the derivative financial instruments that we have purchased to mitigate commodity purchase transaction exposures as cash flow hedges. Therefore, we recognized changes in the fair value of these derivative financial instruments immediately in earnings. Gains or losses related to these derivative financial instruments are included in the line item Cost of sales in the Condensed Consolidated Statements of Income. The Company recognized net gains of $28.0 million and $8.0 million related to changes in the fair value of its derivative financial instruments during the thirteen weeks ended September 28, 2014 and September 29, 2013, respectively. We also recognized net gains of $14.0 million and $21.9 million related to changes in the fair value of our derivative financial instruments during the thirty-nine weeks ended September 28, 2014 and September 29, 2013, respectively. Information regarding the Company’s outstanding derivative instruments and cash collateral posted with (owed to) brokers is included in the following table:

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September 28, 2014
 
December 29, 2013
 
(Fair values in thousands)
Fair values:
 
 
 
Commodity derivative assets
$
5,187

 
$
2,889

Commodity derivative liabilities
(6,363
)
 
(1,728
)
Cash collateral posted with brokers
8,040

 
4,142

Foreign currency derivative assets
1,278

 
1,214

Derivatives coverage(a):
 
 
 
Corn
2.0
%
 
1.1
 %
Soybean meal
1.3
%
 
(3.6
)%
Period through which stated percent of needs are covered:
 
 
 
Corn
July 2016

 
September 2015

Soybean meal
July 2015

 
July 2014

(a)
Derivatives coverage is the percent of anticipated commodity needs covered by outstanding derivative instruments through a specified date.
7.     PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (“PP&E”), net consisted of the following:
 
September 28, 2014
 
December 29, 2013
 
(In thousands)
Land
$
66,283

 
$
66,071

Buildings
1,083,380

 
1,077,859

Machinery and equipment
1,530,264

 
1,502,968

Autos and trucks
55,083

 
55,779

Construction-in-progress
130,229

 
66,926

PP&E, gross
2,865,239

 
2,769,603

Accumulated depreciation
(1,684,825
)
 
(1,617,792
)
PP&E, net
$
1,180,414

 
$
1,151,811

The Company recognized depreciation expense of $33.9 million and $34.3 million during the thirteen weeks ended September 28, 2014 and September 29, 2013, respectively. We also recognized depreciation expense of $101.1 million and $102.3 million during the thirty-nine weeks ended September 28, 2014 and September 29, 2013, respectively.
During the thirty-nine weeks ended September 28, 2014, we spent $131.3 million on capital projects and transferred $67.3 million of completed projects from construction-in-progress to depreciable assets. Capital expenditures were primarily incurred during the thirty-nine weeks ended September 28, 2014 to improve efficiencies and reduce costs in the U.S. and to expand capacity in Mexico.
During the thirteen and thirty-nine weeks ended September 28, 2014, the Company sold certain PP&E for cash of $4.1 million and $8.4 million, respectively, and recognized a net loss of $26,700 and a net gain of $1.1 million, respectively. PP&E sold in 2014 included a warehouse, a commercial building and a vehicle maintenance center in Texas, an office building in Mexico City, a processing plant in Franconia, Pennsylvania, and miscellaneous equipment. During the thirteen and thirty-nine weeks ended September 29, 2013, the Company sold certain PP&E for cash of $0.4 million and $3.3 million, respectively, and recognized net gains on these sales of $0.1 million and $2.0 million, respectively. PP&E sold in 2013 included vehicle maintenance centers in Arkansas and Texas and miscellaneous equipment.
     Management has committed to the sale of certain properties and related assets, including, but not limited to, a processing plant in Louisiana and other miscellaneous assets, which no longer fit into the operating plans of the Company. The Company is actively marketing these properties and related assets for immediate sale and believes a sale of each property can be consummated within the next 12 months. At September 28, 2014 and December 29, 2013, the Company reported properties and related assets totaling $1.4 million and $7.0 million, respectively, in the line item Assets held for sale on its Condensed Consolidated Balance Sheets. The Company tested the recoverability of its assets held for sale and determined that the aggregate carrying amount of each asset group was recoverable over the remaining life of the primary asset in that asset group.

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The Company has closed or idled various processing complexes, processing plants, hatcheries, broiler farms, and feed mills throughout the U.S. Neither the Board of Directors nor JBS USA has determined if it would be in the best interest of the Company to divest any of these idled assets. Management is therefore not certain that it can or will divest any of these assets within one year, is not actively marketing these assets and, accordingly, has not classified them as assets held for sale. The Company continues to depreciate these assets. At September 28, 2014, the carrying amount of these idled assets was $73.0 million based on depreciable value of $184.6 million and accumulated depreciation of $111.6 million.
The Company last tested the recoverability of its long-lived assets held and used in December 2013. At that time, the Company determined that the carrying amount of its long-lived assets held and used was recoverable over the remaining life of the primary asset in the group and that long-lived assets held and used passed the Step 1 recoverability test under ASC 360-10-35, Impairment or Disposal of Long-Lived Assets. There were no indicators present during the thirty-nine weeks ended September 28, 2014 that required the Company to test its long-lived assets held and used for recoverability.
8.     CURRENT LIABILITIES
Current liabilities, other than income taxes and current maturities of long-term debt, consisted of the following components:
 
September 28, 2014
 
December 29, 2013
 
(In thousands)
Accounts payable:
 
 
 
Trade accounts
$
331,832

 
$
313,266

Book overdrafts
50,045

 
55,378

Other payables
1,902

 
1,716

Total accounts payable
383,779

 
370,360

Accounts payable to JBS USA, LLC
1,969

 
3,934

Accrued expenses and other current liabilities:
 
 
 
Compensation and benefits
106,329

 
100,965

Interest and debt-related fees
12,094

 
7,558

Insurance and self-insured claims
88,679

 
99,244

Derivative liabilities:
 
 
 
Futures
5,350

 
1,729

Options
1,012

 
—

Other accrued expenses
93,689

 
73,859

Total accrued expenses and other current liabilities
307,153

 
283,355

 
$
692,901

 
$
657,649

9.
LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term debt and other borrowing arrangements consisted of the following components: 
 
Maturity
 
September 28, 2014
 
December 29, 2013
 
 
 
(In thousands)
Senior notes, at 7 7/8%, net of unaccreted discount
2018
 
$
498,098

 
$
497,757

U.S. Credit Facility (defined below):
 
 
 
 
 
The U.S. Credit Facility Term B-1 note payable at
2.4375%
2014
 
—

 
204,880

The U.S. Credit Facility Term B-2 note payable at
9.00%
2014
 
—

 
205,219

Other
Various
 
4,277

 
4,377

Long-term debt
 
 
502,375

 
912,233

Less: Current maturities of long-term debt
 
 
(260
)
 
(410,234
)
Long-term debt, less current maturities
 
 
$
502,115

 
$
501,999


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Senior and Subordinated Notes
At September 28, 2014, the Company had an aggregate principal balance of $500.0 million of 7 7/8% senior unsecured notes due 2018 (the “2018 Notes”) outstanding that are registered under the Securities Act of 1933. The 2018 Notes are unsecured obligations of the Company and are guaranteed by one of the Company’s subsidiaries. Interest is payable on December 15 and June 15 of each year, commencing on June 15, 2011. Additionally, the Company had an aggregate principal balance of $3.6 million of 7 5/8% senior unsecured notes due 2015 and 8 3/8% senior subordinated unsecured notes due 2017 outstanding at September 28, 2014.
On June 23, 2011, the Company entered into a Subordinated Loan Agreement with JBS USA (the “Subordinated Loan Agreement”). Pursuant to the terms of the Subordinated Loan Agreement, the Company agreed to reimburse JBS USA up to $56.5 million for draws upon any letters of credit issued for JBS USA's account that support certain obligations of the Company or its subsidiaries. JBS USA agreed to arrange for letters of credit to be issued on its account in the amount of $56.5 million to an insurance company serving the Company in order to allow that insurance company to return cash it held as collateral against potential workers compensation, auto and general liability claims. In return for providing this letter of credit, the Company has agreed to reimburse JBS USA for the letter of credit cost the Company would otherwise incur under its U.S. Credit Facility (as defined below). In the thirteen and thirty-nine weeks ended September 28, 2014, the Company reimbursed JBS USA $0.3 million and $1.0 million, respectively, for letter of credit costs. As of September 28, 2014, the Company has accrued an obligation of $0.1 million to reimburse JBS USA for letter of credit costs incurred on its behalf. There remains no other commitment to make advances by JBS USA under the Subordinated Loan Agreement.
U.S. Credit Facility
Pilgrim’s and certain of its subsidiaries entered into a credit agreement (the “U.S. Credit Facility”) with CoBank, ACB, as administrative agent and collateral agent, and other lenders party thereto, which was amended and restated on August 7, 2013. As of September 28, 2014, the U.S. Credit Facility provided for a $700.0 million revolving credit facility and a delayed draw term loan commitment of up to $400 million (the “Delayed Draw Term Loans”). The Company can draw upon the Delayed Draw Term Loan commitment in one or more advances until December 28, 2014. The U.S. Credit Facility also includes an accordion feature that allows us, at any time, to increase the aggregate revolving loan commitment by up to an additional $250.0 million and to increase the aggregate Delayed Draw Term Loan commitment by up to an additional $500.0 million, in each case subject to the satisfaction of certain conditions, including obtaining the lenders’ agreement to participate in the increase and an aggregate limit on all commitments under the U.S. Credit Facility of $1.85 billion. The U.S. Credit Facility also provides for a $100 million sub-limit for swingline loans and a $200 million sub-limit for letters of credit. The revolving loan commitment under the U.S. Credit Facility matures on August 7, 2018. Any Delayed Draw Term Loans would be payable in quarterly installments beginning in fiscal year 2015 equal to 1.875% of the principal outstanding as of December 28, 2014, with all remaining principal and interest due at maturity on August 7, 2018.
On December 28, 2009, the Company paid loan costs totaling $50.0 million related to the U.S. Credit Facility that it recognized as an asset on its balance sheet. On August 7, 2013, the Company paid loan costs totaling $5.0 million related to the amendment and restatement to the U.S. Credit Facility that is recognized as an asset on its balance sheet. The Company amortizes these capitalized costs to interest expense over the life of the U.S. Credit Facility.
Subsequent to the end of each fiscal year, a portion of our cash flow was required to be used to repay outstanding principal amounts under the Term B loans. With respect to 2013, the Company paid $204.9 million of its cash flow toward the outstanding principal under the Term B-1 loans on December 30, 2013 and paid $205.2 million of its cash flow toward the outstanding principal under the Term B-2 loans on April 28, 2014. Following the April 28, 2014 payment, the Company had no outstanding principal under the Term B loans. The U.S. Credit Facility also requires us to use the proceeds we receive from certain asset sales and specified debt or equity issuances and upon the occurrence of other events to repay outstanding borrowings under the U.S. Credit Facility.
    Actual borrowings by the Company under the revolving credit commitment component of the U.S. Credit Facility are subject to a borrowing base, which is a formula based on certain eligible inventory, eligible receivables and restricted cash under the control of CoBank ACB. As of September 28, 2014, the amount available for borrowing under the revolving loan commitment was $679.9 million. The Company had letters of credit of $20.1 million and no outstanding borrowings under the revolving loan commitment as of September 28, 2014.
The U.S. Credit Facility contains financial covenants and various other covenants that may adversely affect our ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make certain restricted payments, consummate certain assets sales, enter into certain transactions with JBS USA and our other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of our assets. The U.S. Credit Facility requires the Company to comply with a minimum level of tangible net worth covenant. The Company is currently in compliance with this financial covenant. All other financial covenants were

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eliminated in connection with the August 7, 2013 amendment and restatement to the U.S. Credit Facility. The U.S. Credit Facility also provides that the Company may not incur capital expenditures in excess of $350.0 million in any fiscal year.
All obligations under the U.S. Credit Facility are unconditionally guaranteed by certain of the Company’s subsidiaries and are secured by a first priority lien on (i) the accounts receivable and inventories of the Company and its non-Mexico subsidiaries, (ii) 65% of the equity interests in the Company’s direct foreign subsidiaries and 100% of the equity interests in the Company’s other subsidiaries, (iii) substantially all of the personal property and intangibles of the borrowers and guarantors under the U.S. Credit Facility and (iv) substantially all of the real estate and fixed assets of the Company and the guarantor subsidiaries under the U.S. Credit Facility.
Mexico Credit Facility
On July 23, 2014, Avícola and certain Mexican subsidiaries entered into an unsecured credit agreement (the “Mexico Credit Facility”) with BBVA Bancomer, S.A. Institución de Banca Multiple, Grupo Financiero BBVA Bancomer, as lender. The loan commitment under the Mexico Credit Facility is 560.0 million Mexican pesos. Outstanding borrowings under the Mexico Credit Facility will accrue interest at a rate equal to the TIIE rate plus 1.05%. The Mexico Credit Facility will mature on July 23, 2017. As of September 28, 2014, the U.S. dollar-equivalent of the loan commitment under the Mexico Credit Facility was $41.7 million. There are currently no outstanding borrowings under the Mexico Credit Facility. The Mexico Credit facility replaced our amended and restated credit agreement with ING Bank (México), S.A. Institucíon de Banca Múltiple, ING Grupo Financiero, as lender and ING Capital LLC, as administrative agent, which was terminated on July 23, 2014.
10.
INCOME TAXES
The Company recorded income tax expense of $284.9 million, a 34.4% effective tax rate, for the thirty-nine weeks ended September 28, 2014 compared to income tax expense of $24.2 million, a 5.6% effective tax rate, for the thirty-nine weeks ended September 29, 2013. The income tax expense recognized for the thirty-nine weeks ended September 28, 2014 was primarily the result of the tax expense recorded on the Company's year-to-date income. The income tax expense recognized for the thirty-nine weeks ended September 29, 2013 was primarily the result of the tax expense recorded on the company's year-to-date income offset by a decrease in valuation allowance as a result of year-to-date earnings.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and tax-planning strategies in making this assessment. As of September 28, 2014, the Company did not believe it had sufficient positive evidence to conclude that realization of its federal capital loss carry forwards and a portion of its foreign net deferred tax assets are more likely than not to be realized.

For the thirty-nine weeks ended September 28, 2014, there is tax benefit of $6.1 million reflected in other comprehensive income. There was no tax benefit reflected in other comprehensive income for the thirty-nine weeks ended September 29, 2013 because the Company had a valuation allowance.

With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by taxing authorities for years prior to 2008 and is no longer subject to Mexico income tax examinations by taxing authorities for years prior to 2009.

The Company is pursuing the IRS' amended proof of claim relating to the tax year ended June 26, 2004 for Gold Kist Inc. (“Gold Kist”). See “Note 15. Commitments and Contingencies” for additional information.
11.
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors programs that provide retirement benefits to most of its employees. These programs include qualified defined benefit pension plans, nonqualified defined benefit retirement plans, a defined benefit postretirement life insurance plan and defined contribution retirement savings plans. Expenses recognized under all of these retirement plans totaled $1.5 million and $1.9 million in the thirteen weeks ended September 28, 2014 and September 29, 2013, respectively. Expenses recognized under all of these retirement plans totaled $4.3 million and $5.7 million in the thirty-nine weeks ended September 28, 2014 and September 29, 2013, respectively.

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Net defined benefit pension and other postretirement costs included the following components:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
Pension Benefits
 
Other Benefits
 
Pension Benefits
 
Other Benefits
 
Pension Benefits
 
Other Benefits
 
Pension Benefits
 
Other Benefits
 
(In thousands)
Service cost
$
—

 
$
—

 
$
(20
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Interest cost
2,026

 
20

 
1,988

 
20

 
6,078

 
60

 
5,965

 
59

Estimated return on
     plan assets
(1,593
)
 
—

 
(1,349
)
 
—

 
(4,780
)
 
—

 
(4,048
)
 
—

Amortization of net
     loss (gain)
14

 
—

 
250

 
—

 
42

 
—

 
751

 
—

Net costs
$
447

 
$
20

 
$
869

 
$
20

 
$
1,340

 
$
60

 
$
2,668

 
$
59

During the thirteen and thirty-nine weeks ended September 28, 2014, the Company contributed $8.2 million and $11.6 million, respectively, to its defined benefit plans.
The Company remeasures both plan assets and obligations on a quarterly basis.
The Company and certain retirement plans that it sponsors invest in a variety of financial instruments. Certain postretirement funds in which the Company participates hold significant amounts of mortgage-backed securities. However, none of the mortgages collateralizing these securities are considered subprime.
12.
STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
The following tables provide information regarding the changes in accumulated other comprehensive loss:
 
Thirty-Nine Weeks Ended September 28, 2014(a)
 
Thirty-Nine Weeks Ended
September 29, 2013(a)
 
Losses Related to Pension and Other Postretirement Benefits
 
Unrealized Holding Gains on Available-for-Sale Securities
 
Total
 
Losses Related to Pension and Other Postretirement Benefits
 
(In thousands)
Balance, beginning of period
$
(45,797
)
 
$
62

 
$
(45,735
)
 
$
(68,511
)
Other comprehensive income (loss) before
reclassifications
(10,094
)
 
169

 
(9,925
)
 
35,363

Amounts reclassified from accumulated other
comprehensive loss to net income
26

 
(181
)
 
(155
)
 
751

Net current period other comprehensive income (loss)
(10,068
)
 
(12
)
 
(10,080
)
 
36,114

Balance, end of period
$
(55,865
)
 
$
50

 
$
(55,815
)
 
$
(32,397
)
(a)
All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive loss.

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Table of Contents

 
 
Amount Reclassified from Accumulated Other Comprehensive Loss(a)
 
 
Details about Accumulated Other Comprehensive Loss Components
 
Thirty-Nine Weeks Ended
September 28, 2014
 
Thirty-Nine Weeks Ended
September 29, 2013
 
Affected Line Item in the Condensed Consolidated Statements of Operations
 
 
(In thousands)
 
 
Realized gain on sale of securities
 
$
290

 
$
—

 
Selling, general and administrative expense
Amortization of defined benefit pension and
     other postretirement plan actuarial losses:
 
 
 
 
 
 
Union employees pension plan(b)(d)
 
—

 
(27
)
 
Cost of sales
Legacy Gold Kist plans(c)(d)
 
(42
)
 
(724
)
 
Selling, general and administrative expense
Total before tax
 
248

 
(751
)
 
 
Tax benefit (expense)
 
(93
)
 
—

 
 
Total reclassification for the period
 
$
155

 
(751
)
 
 
(a)
Amounts in parentheses represent debits to results of operations.
(b)
The Company sponsors the Pilgrim's Pride Retirement Plan for Union Employees, a qualified defined benefit pension plan covering certain locations or work groups with collective bargaining agreements.
(c)
The Company sponsors the Pilgrim's Pride Plan for Legacy Gold Kist Employees, a qualified defined benefit pension plan covering certain eligible U.S. employees who were employed at locations that the Company purchased through its acquisition of Gold Kist in 2007, the Former Gold Kist Inc. Supplemental Executive Retirement Plan, a nonqualified defined benefit retirement plan covering certain former Gold Kist executives, the Former Gold Kist Inc. Directors' Emeriti Plan, a nonqualified defined benefit retirement plan covering certain former Gold Kist directors, and the Gold Kist Inc. Retiree Life Insurance Plan, a defined benefit postretirement life insurance plan covering certain retired Gold Kist employees.
(d)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See “Note 11. Pension and Other Postretirement Benefits” to the Condensed Consolidated Financial Statements.
Restrictions on Retained Earnings
Both the U.S. Credit Facility and the indenture governing the 2018 Notes restrict, but do not prohibit, the Company from declaring dividends.
13.
INCENTIVE COMPENSATION
The Company sponsors a short-term incentive plan that provides the grant of either cash or share-based bonus awards payable upon achievement of specified performance goals (the “STIP”). Full-time, salaried exempt employees of the Company and its affiliates who are selected by the administering committee are eligible to participate in the STIP. The Company has accrued $22.6 million in costs related to the STIP at September 28, 2014 related to cash bonus awards that could potentially be awarded during the remainder of 2014 and 2015.
The Company also sponsors a performance-based, omnibus long-term incentive plan that provides for the grant of a broad range of long-term equity-based and cash-based awards to the Company's officers and other employees, members of the Board of Directors and any consultants (the “LTIP”). The equity-based awards that may be granted under the LTIP include “incentive stock options,” within the meaning of the Internal Revenue Code, nonqualified stock options, stock appreciation rights, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). At September 28, 2014, we have reserved approximately 6.6 million shares of common stock for future issuance under the LTIP.
The following awards existed during the thirty-nine weeks ended September 28, 2014:
Award Type
 
Benefit Plan
 
Award Quantity
 
Grant Date
 
Vesting Condition
 
Vesting Date
 
Estimated Forfeiture Rate
 
Settlement Method
RSA
 
Employment Agreement
 
100,000

 
January 14, 2011
 
Service
 
January 3, 2014
 
—
%
 
Stock
RSA
 
LTIP
 
72,675

 
August 27, 2012
 
Service
 
April 27, 2014
 
—
%
 
Stock
RSU
 
LTIP
 
608,561

 
February 4, 2013
 
Service
 
December 31, 2014
 
9.66
%
 
Stock
RSA
 
LTIP
 
15,000

 
February 25, 2013
 
Service
 
February 24, 2015
 
—
%
 
Stock
RSA
 
LTIP
 
15,000

 
February 25, 2013
 
Service
 
February 24, 2016
 
—
%
 
Stock
RSU
 
LTIP
 
206,933

 
February 26, 2013
 
Service
 
December 31, 2014
 
—
%
 
Stock
RSU
 
LTIP
 
462,518

 
February 19, 2014
 
Service
 
December 31, 2016
 
13.49
%
 
Stock

18


The fair value of each RSA and RSU granted represents the closing price of the Company's common stock on the respective grant date.
Compensation costs and the income tax benefit recognized for our share-based compensation arrangements are included below:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
(In thousands)
Share-based compensation cost:
 
 
 
 
 
 
 
Cost of sales
$
60

 
$
102

 
$
231

 
$
255

Selling, general and administrative expense
1,067

 
711

 
3,273

 
2,160

Total
$
1,127

 
$
813

 
$
3,504

 
$
2,415

 
 
 
 
 
 
 
 
Income tax benefit
$
156

 
$
151

 
$
672

 
$
488

The Company’s RSA and RSU activity is included below:
 
Thirty-Nine Weeks Ended September 28, 2014
 
Thirty-Nine Weeks Ended September 29, 2013
 
Number
 
Weighted Average Grant Date Fair Value
 
Number
 
Weighted Average Grant Date Fair Value
 
(In thousands, except weighted average fair values)
RSAs:
 
 
 
 
 
 
 
Outstanding at beginning of period
203

 
$
6.59

 
273

 
$
6.54

Granted
—

 
—

 
30

 
8.72

Vested
(173
)
 
6.22

 
(100
)
 
7.10

Outstanding at end of period
30

 
$
8.72

 
203

 
$
6.59

 
 
 
 
 
 
 
 
RSUs:
 
 
 
 
 
 
 
Outstanding at beginning of period
729

 
$
8.81

 
—

 
$
—

Granted
462

 
16.70

 
815

 
8.82

Vested
—

 
—

 
—

 
—

Forfeited
(71
)
 
10.34

 
(72
)
 
8.89

Outstanding at end of period
1,120

 
$
11.97

 
743

 
$
8.81

The total fair value of shares vested during the thirty-nine weeks ended September 28, 2014 and September 29, 2013 was $1.1 million and $0.7 million, respectively.
At September 28, 2014, the total unrecognized compensation cost related to all nonvested awards was $7.1 million. That cost is expected to be recognized over a weighted average period of 2.05 years.
Historically, we have issued new shares to satisfy award conversions.
14.     RELATED PARTY TRANSACTIONS
Pilgrim's has been and, in some cases, continues to be a party to certain transactions with affiliated persons and our current and former directors and executive officers. Company management has analyzed the terms of all contracts executed with related parties and believes that they are substantially similar to, and contain terms no less favorable to us than, those obtainable from unaffiliated parties.
On December 28, 2009, JBS USA became the holder of the majority of the common stock of the Company. As of September 28, 2014, JBS USA beneficially owned 75.5% of the total outstanding shares of our common stock.

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Transactions with JBS USA and JBS USA, LLC (a JBS USA subsidiary) recognized in the Condensed Consolidated Statements of Income are summarized below:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
(In thousands)
JBS USA:
 
 
 
 
 
 
 
Letter of credit fees(a)
335

 
513

 
1,005

 
1,697

JBS USA, LLC:
 
 
 
 
 
 
 
Purchases from JBS USA, LLC(b)
31,994

 
19,155

 
85,333

 
59,945

Expenditures paid by JBS USA, LLC on behalf of Pilgrim’s Pride Corporation(c)
2,099

 
11,281

 
21,013

 
34,659

Sales to JBS USA, LLC(b)
2,763

 
13,996

 
36,234

 
49,263

Expenditures paid by Pilgrim’s Pride Corporation on behalf of JBS USA, LLC(c)
891

 
630

 
2,197

 
1,313

(a)
Beginning on October 26, 2011, JBS USA arranged for letters of credit to be issued on its account in the amount of $56.5 million to an insurance company on our behalf in order to allow that insurance company to return cash it held as collateral against potential liability claims. We agreed to reimburse JBS USA up to $56.5 million for potential draws upon these letters of credit. We reimburse JBS USA for the letter of credit costs we would have otherwise incurred under our credit facilities. During 2014, we have paid JBS USA $1.0 million for letter of credit costs. As of September 28, 2014, the Company has accrued an obligation of $0.1 million to reimburse JBS USA for letter of credit costs incurred on its behalf.
(b)
We routinely execute transactions to both purchase products from JBS USA, LLC and sell products to them. As of September 28, 2014 and December 29, 2013, the outstanding payable to JBS USA, LLC was $2.0 million and $3.9 million, respectively. As of September 28, 2014 and December 29, 2013, the outstanding receivable from JBS USA, LLC was $0.2 million and $2.4 million, respectively. As of September 28, 2014, approximately $1.0 million of goods from JBS USA, LLC were in transit and not reflected on our Condensed Consolidated Balance Sheet.
(c)
On January 19, 2010, the Company entered into an agreement with JBS USA, LLC in order to allocate costs associated with JBS USA, LLC's procurement of SAP licenses and maintenance services for its combined companies. Under this agreement, the fees associated with procuring SAP licenses and maintenance services are allocated between the Company and JBS USA, LLC in proportion to the percentage of licenses used by each company. The agreement expires on the date of expiration, or earlier termination, of the underlying SAP license agreement. On May 5, 2010, the Company also entered into an agreement with JBS USA, LLC in order to allocate the costs of supporting the business operations by one consolidated corporate team, which have historically been supported by their respective corporate teams. Expenditures paid by JBS USA, LLC on behalf of the Company will be reimbursed by the Company and expenditures paid by the Company on behalf of JBS USA, LLC will be reimbursed by JBS USA, LLC. This agreement expires on May 5, 2015.
On June 13, 2013, PPC entered into an inventory purchase agreement with two of its Mexican subsidiaries, Incubadora Hidalgo S. de R. L. de C.V. (“Incubadora”), and Pilgrim's Pride S. de R.L. de C.V. (“PPSRLCV”), under which Incubadora, and PPSRLCV disbursed $100.0 million to PPC as a non-refundable advance payment towards the purchase of inventory. The agreement expired on June 13, 2014. During the term of this agreement, Incubadora, and PPSRLCV purchased inventory from PPC through the ordinary course of business. The price for the inventory was determined as the fair market value of the inventory at the time of the purchase less a discount of 2.1863%. These purchases reduced the advance payment until the advance payment amount was exhausted. On June 13, 2014, the inventory purchase agreement was amended to increase the discount to 3.21% and extend the maturity date to June 13, 2015. Transactions and balances resulting from this agreement eliminate upon consolidation.
15.    COMMITMENTS AND CONTINGENCIES
We are a party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks. Among other considerations, we have not recorded a liability for any of these indemnities as based upon the likelihood of payment, the fair value of such indemnities would not have a material impact on our financial condition, results of operations and cash flows.
The Company is subject to various legal proceedings and claims which arise in the ordinary course of business. In the Company’s opinion, it has made appropriate and adequate accruals for claims where necessary; however, the ultimate liability for these matters is uncertain, and if significantly different than the amounts accrued, the ultimate outcome could have a material effect on the financial condition or results of operations of the Company. For a discussion of the material legal proceedings and claims, see Part II, Item 1. “Legal Proceedings.” Below is a summary of some of these material proceedings and claims. The Company believes it has substantial defenses to the claims made and intends to vigorously defend these cases.
On December 1, 2008, Pilgrim’s and six of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Northern District of Texas, Fort Worth Division (“Bankruptcy Court”). The cases were jointly administered under Case No. 08-45664. The Company emerged from Chapter 11 on December 28, 2009. The Company is the named defendant in several pre-petition lawsuits that, as of June 29, 2014, have not been resolved. Among the claims presently pending are claims brought against certain current and former directors, executive officers and employees of the

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Company, the Pilgrim’s Pride Administrative Committee and the Pilgrim’s Pride Pension Committee seeking unspecified damages under section 502 of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132. These claims were brought by individual participants in the Pilgrim’s Pride Retirement Savings Plan, individually and on behalf of a putative class, alleging that the defendants breached fiduciary duties to plan participants and beneficiaries or otherwise violated ERISA. Although the Company is not a named defendant in these claims, our bylaws require us to indemnify our current and former directors and officers from any liabilities and expenses incurred by them in connection with actions they took in good faith while serving as an officer or director. In these actions the plaintiffs assert claims in excess of $35.0 million. The likelihood of an unfavorable outcome or the amount or range of any possible loss to the Company cannot be determined at this time.
Other claims presently pending against the Company are claims seeking unspecified damages brought by current or former contract chicken growers who allege, along with other assertions, that the Company breached grower contracts and made false representations to induce the plaintiffs into building chicken farms and entering into chicken growing agreements with the Company. In the case styled Shelia Adams, et al. v. Pilgrim’s Pride Corporation, on September 30, 2011, the trial court issued its findings of fact and conclusions of law stating that the Company violated section 192(e) of the Packers and Stockyards Act of 1921 by purportedly attempting to manipulate the price of chicken by idling the El Dorado, Arkansas complex and rejecting the El Dorado growers’ contracts. The trial court awarded damages in the amount of $25.8 million. Afterward, the Company filed post-judgment motions attacking the trial court’s findings of fact and conclusions of law, which, on December 28, 2011, were granted in part and resulted in a reduction of the damages award from $25.8 million to $25.6 million. On January 19, 2012, the Company appealed the findings of fact and conclusions of law and decision concerning the post-judgment motions to the United States Fifth Circuit Court of Appeals (the "Fifth Circuit"). Oral argument occurred December 3, 2012. On August 27, 2013, the Fifth Circuit reversed the judgment, and entered a judgment in favor of the Company. Plaintiffs thereafter filed a petition for rehearing en banc. Plaintiffs’ petition for rehearing was denied on October 15, 2013. On January 13, 2014, Plaintiffs filed a Petition for a Writ of Certiorari requesting the Supreme Court of the United States to accept their case for review. Plaintiff’s petition for a Writ of Certiorari was denied on February 24, 2014. The Fifth Circuit's decision and prior favorable trial court rulings regarding the El Dorado growers' claims suggest that the likelihood of any recovery by growers remaining in the case is too remote to maintain the previously-recorded loss accrual. Therefore, the Company reversed the accrual on September 1, 2013.
As for the remaining chicken grower claims, the bench trial relating to the allegations asserted by the plaintiffs from the Farmerville, Louisiana complex began on July 16, 2012. That bench trial concluded on August 2, 2012, but the Marshall Court postponed its ruling until the appeals process regarding the allegations asserted by the El Dorado growers was exhausted. The bench trial relating to the claims asserted by the plaintiffs from the Nacogdoches, Texas complex began on September 12, 2012, but was also postponed until the appeals process regarding the allegations asserted by the El Dorado growers was exhausted. The remaining bench trial for the plaintiffs from the De Queen and Batesville, Arkansas complexes was scheduled for October 29, 2012, but that trial date was canceled. Following the denial by the Supreme Court of the United States for a Writ of Certiorari related to the claims asserted by the plaintiffs from the El Dorado, Arkansas complex, the Marshall Court requested briefing on the allegations asserted by the plaintiffs from the Farmerville, Louisiana complex and scheduled trial proceedings for allegations asserted by the plaintiffs from the Nacogdoches complex on August 25, 2014 and allegations asserted by the plaintiffs from the De Queen and Batesville, Arkansas complexes on October 27, 2014. Prior to commencing the trial proceedings on the allegations asserted by the plaintiffs from the De Queen and Batesville, Arkansas complexes, the Marshall Court announced it would enter judgment in PPC’s favor on all remaining federal causes of action, and plaintiffs from the De Queen and Batesville complexes were given additional time to brief Arkansas state law claims. The court-imposed deadline passed with no briefs filed by plaintiffs. At this time, the Marshall Court has not memorialized its decision in writing.
The United States Department of Treasury, IRS filed an amended proof of claim in the Bankruptcy Court pursuant to which the IRS asserted claims that total $74.7 million. We entered into two Stipulations with the IRS on December 12, 2012 that accounted for approximately $29.3 million of the amended proof of claim and should result in no additional tax due.
In connection with the remaining claim for approximately $45.4 million included in the amended proof of claim, we filed a petition in Tax Court on May 26, 2010 in response to a Notice of Deficiency that was issued to the Company as the successor in interest to Gold Kist. The Notice of Deficiency and the Tax Court proceeding relate to a loss that Gold Kist claimed for its tax year ended June 26, 2004. On December 11, 2013, the Tax Court issued its opinion in the Tax Court case holding the loss that Gold Kist claimed for its tax year ended June 26, 2004 is capital in nature. On January 10, 2014, PPC filed both a Motion for Reconsideration and a Motion for Full Tax Court review of both its Motion for Reconsideration and any order issued in response to such motion. On March 10, 2014, the Tax Court denied both the Motion for Reconsideration and the Motion for Full Tax Court review. On April 14, 2014, the Company appealed the findings of fact and conclusions of law and decision concerning the post-judgment motions to the Fifth Circuit. The Company filed an opening brief with the Fifth Circuit on June 30, 2014. The IRS filed a response brief with the Fifth Circuit on August 15, 2014. The Company then filed their reply brief with the Fifth Circuit on September 2, 2014. The Fifth Circuit has tentatively scheduled oral argument for the first full week of January 2015.

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Upon the initial filing of the Gold Kist tax return for the year ended June 26, 2004, the Company assessed the likelihood that the position related to the proceeding would be sustained upon examination and determined that it met the recognition threshold and the full amount of benefit was recognized. We continue to believe the position is more likely than not of being sustained. If adversely determined, the outcome could have a material effect on the Company's operating results and financial position.
16.     SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
On December 15, 2010, the Company sold the 2018 Notes. The 2018 Notes are unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by Pilgrim’s Pride Corporation of West Virginia, Inc., a wholly owned subsidiary of the Company (the “Guarantor”). In accordance with Rule 3-10 of Regulation S-X promulgated under the Securities Act of 1933, the following condensed consolidating financial statements present the financial position, results of operations and cash flows of the Company (referred to as “Parent” for the purpose of this note only) on a Parent-only basis, the Guarantor on a Guarantor-only basis, the combined non-Guarantor subsidiaries and elimination entries necessary to arrive at the information for the Parent, the Guarantor and non-Guarantor subsidiaries on a consolidated basis. Investments in subsidiaries are accounted for by the Company using the equity method for this presentation.
The tables below present the condensed consolidating balance sheets as of September 28, 2014 and December 29, 2013, as well as the condensed consolidating statements of operations and comprehensive income for the thirteen and thirty-nine weeks ended September 28, 2014 and September 29, 2013, and the condensed consolidated statements of cash flows for the thirty-nine weeks ended September 28, 2014 based on the guarantor structure.

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Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS
September 28, 2014
 
 
Parent
 
Subsidiary
Guarantor
 
Subsidiary
Non-Guarantors
 
Eliminations/
Adjustments
 
Consolidation
 
 
(In thousands)
Cash and cash equivalents
 
$
604,990

 
$
—

 
$
263,607

 
$
—

 
$
868,597

Trade accounts and other receivables, less allowance for
   doubtful accounts
 
367,848

 
1,419

 
44,135

 
—

 
413,402

Account receivable from JBS USA, LLC
 
240

 
—

 
—

 
—

 
240

Inventories
 
696,989

 
20,639

 
100,264

 
—

 
817,892

Income taxes receivable
 
588

 
—

 
—

 
(588
)
 
—

Current deferred tax assets
 
—

 
9,902

 
506

 
(8,181
)
 
2,227

Prepaid expenses and other current assets
 
38,519

 
208

 
38,666

 
—

 
77,393

Assets held for sale
 
1,419

 
—

 
—

 
—

 
1,419

Total current assets
 
1,710,593

 
32,168

 
447,178

 
(8,769
)
 
2,181,170

Intercompany receivable
 
(66,101
)
 
123,514

 
—

 
(57,413
)
 
—

Investment in subsidiaries
 
669,742

 
—

 
—

 
(669,742
)
 
—

Deferred tax assets
 
75,260

 
—

 
13,466

 
(3,513
)
 
85,213

Other long-lived assets
 
29,741

 
—

 
181,025

 
(180,000
)
 
30,766

Identified intangible assets, net
 
20,521

 
—

 
7,698

 
—

 
28,219

Property, plant and equipment, net
 
1,029,532

 
45,682

 
109,966

 
(4,766
)
 
1,180,414

Total assets
 
$
3,469,288

 
$
201,364

 
$
759,333

 
$
(924,203
)
 
$
3,505,782

Accounts payable
 
318,106

 
17,501

 
48,172

 
—

 
383,779

Account payable to JBS USA, LLC
 
1,969

 
—

 
—

 
—

 
1,969

Accrued expenses and other current liabilities
 
246,759

 
37,318

 
23,076

 
—

 
307,153

Income taxes payable
 
151,714

 
—

 
25,027

 
(588
)
 
176,153

Current deferred tax liabilities
 
7,189

 
—

 
15,070

 
(7,189
)
 
15,070

Current maturities of long-term debt
 
260

 
—

 
—

 
—

 
260

Total current liabilities
 
725,997

 
54,819

 
111,345

 
(7,777
)
 
884,384

Long-term debt, less current maturities
 
527,115

 
—

 
—

 
(25,000
)
 
502,115

Intercompany payable
 
—

 
3,561

 
53,852

 
(57,413
)
 
—

Deferred tax liabilities
 
—

 
4,204

 
301

 
(4,505
)
 
—

Other long-term liabilities
 
85,140

 
—

 
3,350

 
—

 
88,490

Total liabilities
 
1,338,252

 
62,584

 
168,848

 
(94,695
)
 
1,474,989

Total Pilgrim’s Pride Corporation stockholders’
   equity
 
2,131,036

 
138,780

 
587,395

 
(829,508
)
 
2,027,703

Noncontrolling interest
 
—

 
—

 
3,090

 
—

 
3,090

Total stockholders’ equity
 
2,131,036

 
138,780

 
590,485

 
(829,508
)
 
2,030,793

Total liabilities and stockholders’ equity
 
$
3,469,288

 
$
201,364

 
$
759,333

 
$
(924,203
)
 
$
3,505,782



23

Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS
December 29, 2013
 
Parent
 
Subsidiary
Guarantor
 
Subsidiary
Non-Guarantors
 
Eliminations/
Adjustments
 
Consolidation
 
(In thousands)
Cash and cash equivalents
$
413,092

 
$
—

 
$
95,114

 
$
—

 
$
508,206

Investment in available-for-sale securities
96,902

 
—

 
—

 
—

 
96,902

Trade accounts and other receivables, less
    allowance for doubtful accounts
327,367

 
1,380

 
47,931

 
—

 
376,678

Account receivable from JBS USA, LLC
2,388

 
—

 
—

 
—

 
2,388

Inventories
696,604