INCOME TAXES

12 Months Ended

Dec. 25, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income (loss) before income taxes by jurisdiction is as follows:

	Year Ended
	December 25, 2022		December 26, 2021		December 27, 2020
	(In thousands)
U.S.	$	928,709	$	(141,940)	$	(27,095)
Foreign	96,764		234,330		188,920
Total	$	1,025,473	$	92,390	$	161,825

The components of income tax expense (benefit) are set forth below:

	Year Ended
	December 25, 2022		December 26, 2021		December 27, 2020
	(In thousands)
Current:
Federal	$	169,660	$	22,591	$	(8,800)
Foreign	52,995		115,772		28,985
State and other	34,985		9,150		9,234
Total current	257,640		147,513		29,419
Deferred:
Federal	14,654		(52,147)		13,864
Foreign	5,694		(16,225)		19,622
State and other	947		(18,019)		3,850
Total deferred	21,295		(86,391)		37,336
Total	$	278,935	$	61,122	$	66,755

The effective tax rate for 2022 was 27.2% compared to 66.2% for 2021 and 41.2% for 2020.

The following table reconciles the statutory U.S. federal income tax rate to the Company’s effective income tax rate:

	Year Ended
	December 25, 2022		December 26, 2021		December 27, 2020
Federal income tax rate	21.0	%	21.0	%	21.0	%
State tax rate, net	3.2		(4.5)		6.7
Global intangible low-taxed income	—		—		(7.3)
DOJ agreement	—		—		14.3
Mexico tax audit	3.8		—		—
Intercompany financing	(1.9)		(14.1)		(9.5)
Permanent items	(0.9)		1.7		1.2
Difference in U.S. statutory tax rate and foreign country effective tax rate	1.2		22.3		5.4
Rate change	(0.9)		26.6		5.2
Foreign currency translation	(0.9)		10.6		3.0
Tax credits	(0.4)		(4.1)		(1.4)
Change in reserve for unrecognized tax benefits	(0.4)		7.3		0.3
Change in valuation allowance	2.8		(0.2)		1.2
Other	0.6		(0.4)		1.1
Total	27.2	%	66.2	%	41.2	%

Included in the Mexico tax audit is an increase of 3.8% in the effective tax rate related to the Mexican tax authority’s claim that Avicola Pilgrim’s Pride de Mexico, S.A. de C.V. should have considered dividends paid out of its subsidiaries as partially taxable in tax years 2009 and 2010. The amount was recorded during the year ended December 25, 2022. Included in the change in reserve for unrecognized tax benefits is an increase of 7.0% in the effective tax rate related to interest deductions in the U.K. for tax years 2017 through 2021. The amount was recorded during the year ended December 26, 2021.

Significant components of the Company’s deferred tax liabilities and assets are as follows:

	December 25, 2022		December 26, 2021
	(In thousands)
Deferred tax liabilities:
PP&E and identified intangible assets	$	547,113	$	518,641
Inventories	99,889		26,590
Insurance claims and losses	—		33,416
Incentive compensation	11,138		11,444
Operating lease assets	76,914		88,028
Other	7,867		11,373
Total deferred tax liabilities	742,921		689,492
Deferred tax assets:
U.S. net operating losses	12,297		2,693
Foreign net operating losses	53,801		53,227
Credit carry forwards	18,102		19,026
Allowance for credit losses	9,197		6,996
Accrued liabilities	127,714		103,482
Workers’ compensation	4,192		37,681
Pension and other postretirement benefits	3,351		28,083
Operating lease liabilities	76,914		88,028
Advance payments	68,361		—
Interest expense limitations	37,353		—
Other	33,785		10,666
Total deferred tax assets	445,067		349,882
Valuation allowance	(64,361)		(24,261)
Net deferred tax assets	380,706		325,621
Net deferred tax liabilities	$	362,215	$	363,871

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 December 25, 2022, the Company believes it has sufficient positive evidence to conclude that realization of its federal, state and foreign net deferred tax assets are more likely than not to be realized. As of December 25, 2022, the Company’s valuation allowance is $64.4 million, of which $3.9 million relates to Moy Park operations, $6.9 million relates to PPL operations, $0.4 million relates to Mexico operations, $30.5 million relates to Onix Investments UK Limited, an indirect subsidiary of Pilgrim’s, $10 million relates to Puerto Rico operations, $11.8 million relates to U.S. foreign tax credits and $0.9 million relates to state net operating losses.

As of December 25, 2022, the Company had state net operating loss carry forwards of approximately $76.8 million that begin to expire in 2023. The Company also had Mexico net operating loss carry forwards as of December 25, 2022 of approximately $1.4 million that begin to expire in 2028. The Company also had U.K. net operating loss carry forwards as of December 25, 2022 of approximately $192.8 million that may be carried forward indefinitely.

As of December 25, 2022, the Company had approximately $6.1 million of state tax credit carry forwards that begin to expire in 2023.

For the years ended December 25, 2022 and December 26, 2021, there is a tax effect of $(2.5) million and $(8.2) million, respectively, reflected in other comprehensive loss.

For the years ended December 25, 2022 and December 26, 2021, there are immaterial tax effects reflected in income tax expense due to excess tax benefits and shortfalls related to stock-based compensation. See “Note 1. Business and Summary of Significant Accounting Policies” for additional information.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

	December 25, 2022		December 26, 2021
	(In thousands)
Unrecognized tax benefits, beginning of year	$	20,242	$	13,271
Increase as a result of tax positions taken during the current year	—		6,472
Increase as a result of tax positions taken during prior years	13,950		1,156
Decrease for lapse in statute of limitations	(6,473)		(657)
Decrease for tax positions of prior years	(134)		—
Unrecognized tax benefits, end of year	$	27,585	$	20,242

Included in unrecognized tax benefits of $27.6 million as of December 25, 2022, was $0.9 million of tax benefits that, if recognized, would reduce the Company’s effective tax rate. It is not practicable at this time to estimate the amount of unrecognized tax benefits that will change in the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. As of December 25, 2022, the Company had recorded a liability of $3.2 million for interest and penalties. During 2022, accrued interest and penalty amounts related to uncertain tax positions increased by $2.9 million.

The Company operates in the U.S. (including multiple state jurisdictions), Puerto Rico and several foreign locations including Mexico, the U.K. and the Republic of Ireland. With few exceptions, the Company is no longer subject to examinations by taxing authorities for years prior to 2018 in U.S. federal, state and local jurisdictions, for years prior to 2011 in Mexico, and for years prior to 2017 in the U.K.

As of July 27, 2020, JBS owns in excess of 80% of the outstanding common stock of Pilgrim’s. JBS USA Holdings has a federal tax election to file a consolidated tax return with subsidiaries in which it holds an ownership of at least 80%.

The Company has a tax sharing agreement with JBS USA Holdings effective for tax years beginning 2010. The net tax payable for year 2022 of $1.6 million was accrued in 2022 as a capital distribution and an account payable to a related party in our Consolidated Balance Sheet. The tax sharing agreement was updated during 2020 to consider the impact of Pilgrim’s joining the JBS consolidated tax return.