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BUSINESS ACQUISITIONS

12 Months Ended

Dec. 29, 2019

Tulip

On October 15, 2019, the Company acquired 100% of the equity of Tulip from Danish Crown AmbA for £310.0 million, or $391.5 million, subject to customary working capital adjustments. The acquisition was funded with cash on hand. Tulip, a leading, integrated prepared pork supplier, is headquartered in Warwick, U.K., operates 14 fresh and value-added facilities in that country and employs approximately 5,400 people as of December 29, 2019. The acquisition solidifies Pilgrim's as a leading European food company, creating one of the largest integrated prepared foods businesses in the U.K. The Tulip operations are included in the Company’s U.K. and Europe reportable segment.

Transaction costs incurred in conjunction with the acquisition were approximately $1.3 million. These costs were expensed as incurred.

The results of operations of the acquired business since October 15, 2019 are included in the Company’s Consolidated and Combined Statements of Income. Net sales generated and net loss incurred by the acquired business during 2019 totaled $306.7 million and $2.7 million, respectively.

The assets acquired and liabilities assumed in the Tulip acquisition were measured at their fair values as of October 15, 2019 as set forth below. The excess of the fair values of the net tangible assets and identifiable intangible assets over the purchase price was recorded as gain on bargain purchase in the Company’s U.K. and Europe reportable segment. The fair values recorded were determined based upon various external and internal valuations. The preliminary fair values recorded were determined based upon a preliminary valuation. The estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of acquisition accounting that are not yet finalized relate to the preliminary nature of the valuation of property, plant and equipment, intangible assets and residual gain on bargain purchase as well as calculation of final working capital adjustments. We continue to review inputs and assumptions used in the preliminary valuations.

The fair values recorded for the assets acquired and liabilities assumed for Tulip are as follows (in thousands):



Cash and cash equivalents	$	6,854
Trade accounts and other receivables	146,423
Inventories	104,211
Prepaid expenses and other current assets	6,579
Operating lease assets	5,613
Property, plant and equipment	329,711
Identified intangible assets	40,418
Other assets	14,647
Total assets acquired	654,456

Accounts payable	110,296
Other current liabilities	55,830
Operating lease liabilities	5,613
Deferred tax liabilities	14,798
Pension obligations	18,435
Other long-term liabilities	1,056
Total liabilities assumed	206,028
Total identifiable net assets	448,428
Gain on bargain purchase	(56,880		)
Total consideration transferred	$	391,548

The Company performed a valuation of the assets and liabilities of Tulip as of October 15, 2019. Significant assumptions used in the valuation and the bases for their determination are summarized as follows:

•

Property, plant and equipment, net. Property, plant and equipment at fair value gave consideration to the highest and best use of the assets. The valuation of the Company's real property improvements and the majority of its personal property was based on the cost approach. The valuation of the Company's land, as if vacant, and certain personal property assets was based on the market or sales comparison approach.

•

Customer relationships. The Company valued Tulip customer relationships using the income approach, specifically the multi-period excess earnings model. Under this model, the fair value of the customer relationships asset was determined by estimating the net cash inflows from the relationships discounted to present value. In estimating the fair value of the customer relationships, net sales related to existing Tulip customers were estimated to grow at a rate of 2.0% annually, but we also anticipate losing existing Tulip customers at an attrition rate of 10.0%. Income taxes were estimated at 18.0% of pre-tax income in 2020 and 17.0% of pre-tax income thereafter and net cash flows attributable to our existing customers were discounted using a rate of 22.0%. The resulting customer relationships intangible asset has a fair value of $40.4 million and a useful life of 11 years.

See “Note 8. Goodwill and Intangible Assets” for additional information regarding the goodwill and intangible assets recognized by the Company in the Tulip acquisition.

Moy Park

On September 8, 2017, the Company purchased 100% of the issued and outstanding shares of Moy Park from JBS S.A. for cash of $301.3 million and a note payable to the seller in the amount of £562.5 million. Moy Park is one of the top-ten food companies in the U.K., Northern Ireland's largest private sector business and one of Europe's leading poultry producers. With four fresh processing plants, ten prepared foods cook plants, three feed mills, six hatcheries and one rendering facility in Northern Ireland, England, France, and the Netherlands, Moy Park processes 6.1 million birds per seven-day work week, in addition to producing around 462.0 million pounds of prepared foods per year. Its product portfolio comprises fresh and added-value poultry, ready-to-eat meals, breaded and multi-protein frozen foods, vegetarian foods and desserts, supplied to major food retailers and restaurant chains in Europe (including the U.K.). Moy Park has approximately 10,200 employees as of December 29, 2019. The Moy Park operations are included in our U.K. and Europe reportable segment.

The acquisition was treated as a common-control transaction under U.S. GAAP. A common-control transaction is a transfer of net assets or an exchange of equity interests between entities under the control of the same parent. The accounting and reporting for a transaction between entities under common control is not to be considered a business combination under U.S. GAAP. Since

there is no change in control over the net assets from the parent’s perspective, there is no change in basis in the assets or liabilities. Therefore, Pilgrim's, as the receiving entity, recognized the assets and liabilities received at their historical carrying amounts, as reflected in the parent’s financial statements. The difference between the proceeds transferred and the carrying amounts of the net assets on the date of the acquisition is recognized in equity.

Transaction costs incurred in conjunction with the acquisition were approximately $19.9 million. These costs were expensed as incurred.

Beginning September 8, 2017, the results of operations and financial position of Moy Park have been included in the consolidated results of operations and financial position of the Company. The results of operations and financial position of Moy Park have been combined with the results of operations and financial position of Pilgrim's from September 30, 2015, the common control date, through September 7, 2017. Net sales and net income generated by the acquired business during 2019 totaled $2.1 billion and $70.7 million, respectively. Net sales and net income generated by the acquired business during 2018 totaled $2.1 billion and $52.1 million, respectively.

GNP

In January 6, 2017, the Company acquired 100% of the membership interests of JFC LLC and its subsidiaries (together, “GNP”) from Maschhoff Family Foods, LLC for $350.0 million, subject to customary working capital adjustments. The purchase was funded through cash on hand and borrowings under the U.S. Credit Facility. GNP is a vertically integrated poultry business located in Minnesota and Wisconsin. The acquired business has a production capacity of 2.1 million birds per five-day work week in its two plants and employed approximately 1,700 people as of December 29, 2019. The GNP operations are included in our U.S. reportable segment.

The following table summarizes the consideration paid for GNP (in thousands):



Negotiated sales price	$	350,000
Working capital adjustment	7,252
Preliminary purchase price	$	357,252

Transaction costs incurred in conjunction with the purchase were approximately $0.6 million. These costs were expensed as incurred.

The results of operations of the acquired business since January 6, 2017 are included in the Company’s Consolidated and Combined Statements of Income. Net sales and net income generated by the acquired business during 2019 totaled $422.1 million and $39.5 million, respectively. Net sales generated and net loss incurred by the acquired business during 2018 totaled $398.4 million and $1.4 million, respectively.

The assets acquired and liabilities assumed in the GNP acquisition were measured at their fair values as of January 6, 2017 as set forth below. The excess of the purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the acquisition as well the assembled workforce. These benefits include (1) complementary product offerings, (2) an enhanced footprint in the U.S., (3) shared knowledge of innovative technologies such as gas stunning, aeroscalding and automated deboning, (4) enhanced position in the fast-growing antibiotic-free and certified organic chicken segments due to the addition of GNP’s portfolio of Just BARE® Certified Organic and Natural/American Humane CertifiedTM/No-Antibiotics-Ever product lines and (5) attractive cost-reduction synergy opportunities and value creation. The Company has tax basis in the goodwill, and therefore, the goodwill is deductible for tax purposes. The fair values recorded were determined based upon various external and internal valuations.

The fair values recorded for the assets acquired and liabilities assumed for GNP are as follows (in thousands):



Cash and cash equivalents	$	10
Trade accounts and other receivables	18,453
Inventories	56,459
Prepaid expenses and other current assets	3,414
Property, plant and equipment	144,138
Identifiable intangible assets	131,120
Other long-lived assets	829
Total assets acquired	354,423
Accounts payable	23,848
Other current liabilities	11,866
Other long-term liabilities	3,393
Total liabilities assumed	39,107
Total identifiable net assets	315,316
Goodwill	41,936
Total net assets	$	357,252

The Company recognized certain identifiable intangible assets as of January 6, 2017 due to this acquisition. The following table presents the fair values and useful lives, where applicable, of these assets:



	Fair Value		Useful Life
	(In thousands)		(In years)
Customer relationships	$	92,900	13.0
Trade names	38,200		20.0
Non-compete agreement	20		3.0
Total fair value	$	131,120
Weighted average useful life			15.2

The Company performed a valuation of the assets and liabilities of GNP as of January 6, 2017. Significant assumptions used in the valuation and the bases for their determination are summarized as follows:

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Trade names. The Company valued two trade names using the income approach, specifically the relief from royalty method. Under this method, the asset value of each trade name was determined by estimating the hypothetical royalties that would have to be paid if it was not owned. Royalty rates were selected based on consideration of several factors, including (1) prior transactions involving GNP trade names, (2) incomes derived from license agreements on comparable trade names within the food industry and (3) the relative profitability and perceived contribution of each trade name. The royalty rate used in the determination of the fair values of the two trade names was 2.0% of expected net sales related to the respective trade names. In estimating the fair value of the trade names, net sales related to the respective trade names were estimated to grow at a rate of 2.5%. Income taxes were estimated at 39.3% of pre-tax income, a tax amortization benefit factor was estimated at 1.2098 and the hypothetical savings generated by avoiding royalty costs were discounted using a rate of 13.8%.

•

Customer relationships. The Company valued GNP customer relationships using the income approach, specifically the multi-period excess earnings model. Under this model, the fair value of the customer relationships asset was determined by estimating the net cash inflows from the relationships discounted to present value. In estimating the fair value of the customer relationships, net sales related to existing GNP customers were estimated to grow at a rate of 2.5% annually, but we also anticipate losing existing GNP customers at an attrition rate of 4.0%. Income taxes were estimated at 39.3% of pre-tax income, a tax amortization benefit factor was estimated at 1.2098 and net cash flows attributable to our existing customers were discounted using a rate of 13.8%.

See “Note 8. Goodwill and Intangible Assets” for additional information regarding the goodwill and intangible assets recognized by the Company in the GNP acquisition.

Unaudited Pro Forma Financial Information

The following unaudited pro forma information presents the combined financial results for the Company, Tulip, Moy Park and GNP as if the acquisitions had been completed at the beginning of 2017.



	2019		2018		2017
	(In thousands, except per share amounts)
Net sales	$	12,462,566	$	12,342,475	$	12,165,647
Net income attributable to Pilgrim's Pride Corporation	385,958		140,508		608,188
Net income attributable to Pilgrim's Pride Corporation per common share - diluted	1.55		0.56		2.44

The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the Company’s results of operations would have been had it completed the acquisitions on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisitions.