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BUSINESS ACQUISITION | 6 Months Ended
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Jun. 25, 2017
Business Combinations [Abstract] |
BUSINESS ACQUISITION | BUSINESS ACQUISITION On 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 cash. GNP is a vertically integrated poultry business based in Saint Cloud, Minnesota. The acquired business has a production capacity of 2.1 million birds per five-day work week in its three plants and employs approximately 1,750 people. 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 |
The preliminary purchase price includes $2.5 million due to PPC from Maschhoff Family Foods, LLC for working capital adjustments. Transaction costs incurred in conjunction with the purchase were approximately $0.5 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 Condensed Consolidated Statements of Income. Net sales generated by the acquired business during the thirteen and twenty-six weeks ended June 25, 2017 totaled $115.9 million and $213.7 million, respectively The acquired business generated net income during the thirteen and twenty-six weeks ended June 25, 2017 totaling $10.2 million and $14.8 million, respectively. The assets acquired and liabilities assumed in the GNP acquisition were measured at their fair values at 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 (i) complementary product offerings, (ii) an enhanced footprint in the U.S., (iii) shared knowledge of innovative technologies such as gas stunning, aeroscalding and automated deboning, (iv) 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 Certified TM/No-Antibiotics-Ever product lines and (v) 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 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 goodwill. We continue to review inputs and assumptions used in the preliminary 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 | 123,220 |
Other long-lived assets | 829 |
Total assets acquired | 346,523 |
Accounts payable | 23,848 |
Other current liabilities | 11,866 |
Other long-term liabilities | 3,393 |
Total liabilities assumed | 39,107 |
Total identifiable net assets | 307,416 |
Goodwill | 49,836 |
Total net assets | $ | 357,252 |
The Company recognized certain identifiable intangible assets during the twenty-six weeks ended June 25, 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 | $ | 85,000 |  |  | 13.0
Trade names | 38,200 |  |  | 20.0
Non-compete agreement | 20 |  |  | 3.0
Total fair value | $ | 123,220 |  |  |
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 preliminary 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.
• | 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 (i) prior transactions involving GNP trade names, (ii) incomes derived from license agreements on comparable trade names within the food industry and (iii) 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%.
The Company recognized the following change in goodwill due to this acquisition during the twenty-six weeks ended June 25, 2017 (in thousands):
Balance, beginning of period | $ | 125,607 |
Preliminary purchase price attributed to goodwill | 49,836 |
Balance, end of period | $ | 175,443 |
During the thirteen weeks ended June 25, 2017, the Company recognized restructuring charges in the amounts of $0.7 million and $0.1 million related to the elimination of prepaid costs associated with obsolete GNP software and involuntary employee termination costs, respectively. These charges are reported in the line item Administrative restructuring charges on the Condensed Consolidated Statements of Income. The Company expects to incur additional involuntary employee termination costs of approximately $1.8 million during 2017. The following unaudited pro forma information presents the combined financial results for the Company and GNP as if the acquisition had been completed at the beginning of the Company’s prior year, December 28, 2015.
| Twenty-Six Weeks Ended June 25, 2017 |  | Twenty-Six Weeks Ended June 26, 2016
| (In thousands, except per share amount)
Net sales | $ | 4,277,896 |  |  | $ | 4,209,015 |
Net income attributable to Pilgrim's Pride Corporation | 325,179 |  |  | 266,341 |
Net income attributable to Pilgrim's Pride Corporation per common share - diluted | 1.31 |  |  | 1.04 |
The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the Company’s results of operations would have been had it completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisition.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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