# Pilgrims Pride Corp: Form 10-Q for the period ended Sep 24, 2017

- Company: [Pilgrims Pride Corp](/companies/ppc.md) (CIK 802481)
- Form: 10-Q
- Filed: 2017-11-08
- Accepted by EDGAR: Nov 8, 2017, 10:01 ET
- Period: 2017-09-24
- Accession: 0000802481-17-000071
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/802481/000080248117000071/ppc-09242017x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/802481/000080248117000071/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-24.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 3 months, 2017-06-26 to 2017-09-24 | $478.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2016-12-26 to 2017-09-24 | $1.21bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2017-06-26 to 2017-09-24 | $102.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2016-12-26 to 2017-09-24 | $284.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-06-26 to 2017-09-24 | $372.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-12-26 to 2017-09-24 | $917.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-06-26 to 2017-09-24 | $24.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-12-26 to 2017-09-24 | $66.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-06-26 to 2017-09-24 | $113.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-12-26 to 2017-09-24 | $278.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-06-26 to 2017-09-24 | $232.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-12-26 to 2017-09-24 | $560.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-06-26 to 2017-09-24 | $0.93 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-12-26 to 2017-09-24 | $2.25 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-06-26 to 2017-09-24 | $0.94 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-12-26 to 2017-09-24 | $2.25 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-06-26 to 2017-09-24 | 248,988,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-12-26 to 2017-09-24 | 248,962,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-12-26 to 2017-09-24 | $618.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2016-12-26 to 2017-09-24 | $258.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2016-12-26 to 2017-09-24 | $0 | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2017-09-24 | $401.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-24 | $2.35bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-24 | $6.06bn | us-gaap:Assets |
| Current liabilities | at 2017-09-24 | $1.42bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-24 | $4.35bn | us-gaap:Liabilities |
| Long-term debt | at 2017-09-24 | $2.57bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-09-24 | $61.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-09-24 | $1.70bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 69,506 characters.

### Description of the Company

We are one of the largest chicken producers in the world, with operations in the United States (“U.S.”), United Kingdom (“U.K.”), Mexico, France, Puerto Rico, the Netherlands, and Ireland. We operate feed mills, hatcheries, processing plants and distribution centers in 14 U.S. states, the U.K., Mexico, France, Puerto Rico, The Netherlands, and Ireland. As of September 24, 2017, we had approximately 52,000 employees and the capacity to process approximately 45.2 million birds per work week for a total of approximately 12.8 billion pounds of live chicken annually. Approximately 5,100 contract growers supply poultry for our operations. As of September 24, 2017, JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owned 78.6% of our outstanding common stock. See “Note 1. Description of Business and Basis of Presentation” of our Condensed Consolidated and Combined Financial Statements included in this quarterly report for additional information.

We operate 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, 2017) in this report applies to our fiscal year and not the calendar year.

### Executive Summary

We reported net income attributable to Pilgrim’s Pride Corporation of $560.2 million, or $2.25 per diluted common share, for the thirty-nine weeks ended September 24, 2017. These operating results included gross profit of $1,209.8 million. During the thirty-nine weeks ended September 24, 2017, we generated $618.5 million of cash from operations.

Market prices for feed ingredients remain volatile. Consequently, there can be no assurance that our feed ingredients prices will not increase materially and that such increases would not negatively impact our financial position, results of operations and cash flow. The following table compares the highest and lowest prices reached on nearby futures for one bushel of corn and one ton of soybean meal during the current year and previous two years:

| 2017: | Corn Highest Price | Lowest Price | Soybean Meal Highest Price | Lowest Price |
| --- | ---: | ---: | ---: | ---: |
| Third Quarter | $4.15 | $3.46 | $346.20 | $296.50 |
| Second Quarter | 3.96 | 3.66 | 321.00 | 297.20 |
| First Quarter | 3.86 | 3.55 | 352.70 | 314.10 |
| 2016: |  |  |  |  |
| Fourth Quarter | 3.98 | 3.58 | 320.70 | 269.00 |
| Third Quarter | 3.94 | 3.16 | 401.00 | 302.80 |
| Second Quarter | 4.38 | 3.52 | 418.30 | 266.80 |
| First Quarter | 3.73 | 3.52 | 275.30 | 257.20 |
| 2015: |  |  |  |  |
| Fourth Quarter | 3.98 | 3.58 | 320.70 | 269.00 |
| Third Quarter | 4.34 | 3.48 | 374.80 | 302.40 |
| Second Quarter | 4.10 | 3.53 | 326.40 | 286.50 |
| First Quarter | 4.13 | 3.70 | 377.40 | 317.50 |

39

We purchase derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our anticipated consumption of commodity inputs such as corn, soybean meal, wheat, soybean oil and natural gas. We will sometimes take a short position on a derivative instrument to minimize the impact of a commodity’s price volatility on our operating results. We will also occasionally purchase derivative financial instruments in an attempt to mitigate currency exchange rate exposure related to the financial statements of our Mexico segment that are denominated in Mexican pesos and our U.K. and Europe segment that are denominated in British pounds. For our Mexico segment, we do not designate derivative financial instruments that we purchase to mitigate commodity purchase or currency exchange rate exposures as cash flow hedges; therefore, we recognize changes in the fair value of these derivative financial instruments immediately in earnings.

For our U.K. and Europe segment, we do designate certain derivative financial instruments that we have purchased to mitigate foreign currency transaction exposures as cash flow hedges; therefore, before the settlement date of the financial derivative instruments, we recognize changes in the fair value of the effective portion of the cash flow hedge in accumulated other comprehensive income (loss) while we recognize changes in the fair value of the ineffective portion immediately in earnings. When the derivative financial instruments associated with the effective portion are settled, the amount in accumulated other comprehensive income (loss) is then reclassified to earnings. Gains or losses related to these derivative financial instruments are included in the line item *Cost of sales* in the Condensed Consolidated and Combined Statements of Income.

During the thirteen weeks ended September 24, 2017 and September 25, 2016, we recognized net gains totaling $6.9 million and net losses totaling $16.7 million, respectively, related to changes in the fair values of our derivative financial instruments. During the thirty-nine weeks ended September 24, 2017 and September 25, 2016, we recognized net gains totaling $7.3 million and net losses totaling $10.5 million, respectively, related to changes in the fair values of our derivative financial instruments.

Although changes in the market price paid for feed ingredients impact cash outlays at the time we purchase the ingredients, such changes do not immediately impact cost of sales. The cost of feed ingredients is recognized in cost of sales, on a first-in-first-out basis, at the same time that the sales of the chickens that consume the feed grains are recognized. Thus, there is a lag between the time cash is paid for feed ingredients and the time the cost of such feed ingredients is reported in cost of goods sold. For example, corn delivered to a feed mill and paid for one week might be used to manufacture feed the following week. However, the chickens that eat that feed might not be processed and sold for another 42 to 63 days, and only at that time will the costs of the feed consumed by the chicken become included in cost of goods sold.

Commodities such as corn, soybean meal and soybean oil are actively traded through various exchanges with future market prices quoted on a daily basis. These quoted market prices, although a good indicator of the commodity’s base price, do not represent the final price for which we can purchase these commodities. There are several components in addition to the quoted market price, such as freight, storage and seller premiums, that are included in the final price that we pay for grain. Although changes in quoted market prices may be a good indicator of the commodity’s base price, the components mentioned above may have a significant impact on the total change in grain costs recognized from period to period.

Market prices for chicken products are currently at levels sufficient to offset the costs of feed ingredients. However, there can be no assurance that chicken prices will not decrease due to such factors as competition from other proteins and substitutions by consumers of non-protein foods because of uncertainty surrounding the general economy and unemployment.

### Moy Park Acquisition

On September 8, 2017, we acquired 100% of the issued and outstanding shares of Granite Holdings Sàrl and its subsidiaries (together, “Moy Park”) from JBS S.A. for cash of $301.3 million and a promissory note payable to seller 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 13 processing and manufacturing units in Northern Ireland, the U.K., France, the Netherlands and Ireland, the company processes 5.6 million birds per seven-day work week, in addition to producing around 200,000 tons of prepared foods per year. Moy Park currently has approximately 10,100 employees. See “Note 2. Business Acquisition” of our Condensed Consolidated and Combined Financial Statements included in this quarterly report for additional information relating to this acquisition. The Moy Park operations constitutes our U.K. and Europe 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. Accordingly, for the period from September 30, 2015 through September 7, 2017, the Condensed Consolidated and Combined Financial Statements includes the accounts of the Company and its majority-owned subsidiaries combined with the accounts of Moy Park. For the period from September 8, 2017 through September 24, 2017, the Condensed Consolidated and Combined Financial Statements includes the accounts of the Company and its majority-owned subsidiaries, including Moy Park.

### GNP Acquisition

On January 6, 2017, we acquired 100% of the membership interests of JFC LLC and its subsidiaries (together, “GNP”) from Maschhoff Family Foods, LLC for a cash purchase price of $350 million, subject to customary working capital adjustments. GNP is a vertically integrated poultry business based in St. Cloud, Minnesota. The acquired business has a production capacity of 2.1 million birds per five-day work week in its three plants and currently has approximately 1,700 employees. See “Note 2. Business Acquisition” of our Condensed Consolidated and Combined Financial Statements included in this quarterly report for additional information relating to this acquisition. GNP operations are included in our U.S. segment.

### Segment and Geographic Reporting

We operate in three reportable segments: U.S., U.K. and Europe, and Mexico. We measure segment profit as operating income. Corporate expenses are allocated to Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. For geographic reporting purposes, we include Puerto Rico within our U.S. segment and combine the U.K., France, the Netherlands, and Ireland operations into our U.K. and Europe segment.

### Results of Operations

#### Thirteen Weeks Ended September 24, 2017 Compared to Thirteen Weeks Ended September 25, 2016

*Net sales.* Net sales generated in the thirteen weeks ended September 24, 2017 increased $298.6 million, or 12.0%, from net sales generated in the thirteen weeks ended September 25, 2016. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Thirteen Weeks Ended September 24, 2017 Percent | Change from Thirteen Weeks Ended September 25, 2016 |  |  |
| --- | ---: | ---: | ---: | --- |
| United States | $1,938,542 | $213,917 | 12.4% | (a) |
| U.K. and Europe | 514,325 | 50,765 | 11.0% | (b) |
| Mexico | 341,018 | 33,922 | 11.0% | (c) |
| Total net sales | 2,793,885 | 298,604 | 12.0% |  |

(a) U.S. net sales generated in the thirteen weeks ended September 24, 2017 increased $213.9 million, or 12.4%, from U.S. net sales generated in the thirteen weeks ended September 25, 2016 primarily because of net sales generated by the recently acquired GNP operations and an increase in net sales per pound experienced by our existing operations. The impact of the acquired business contributed $108.6 million, or 6.3 percentage points, to the increase in net sales. The net sales per pound increase experienced by our existing U.S. segment contributed $199.7 million, or 11.5 percentage points, to the increase in net sales. A decrease in sales volume experienced by our existing U.S. segment partially offset the effect that the acquired business and the increase in net sales per pound had on U.S. net sales by $94.4 million, or 5.5 percentage points. Lower sales volume resulted primarily from decreased exported chicken products resulting from shipping delays at Southeastern U.S. ports following the recent hurricanes. Included in U.S. net sales generated during the thirteen weeks ended September 24, 2017 and September 25, 2016 were net sales to JBS USA Food Company totaling $11.5 million and $4.8 million, respectively.

(b) U.K. and Europe net sales generated in the thirteen weeks ended September 24, 2017 increased $50.8 million, or 11.0%, from U.K. and Europe net sales generated in the thirteen weeks ended September 25, 2016 primarily because of an increase in sales volume. Increased sales volume resulted in an increase in net sales by $66.3 million, or 14.3 percentage points. The increase in net sales from increased sales volume was partially offset by the negative impact of foreign currency translation and a decrease in net sales per pound of $2.1 million, or 0.5 percentage points, and $13.4 million, or 2.9 percentage points, respectively.

(c) Mexico net sales generated in the thirteen weeks ended September 24, 2017 increased $33.9 million, or 11.0%, from Mexico net sales generated in the thirteen weeks ended September 25, 2016 primarily because of the increase in net sales per pound and the positive impact of foreign currency remeasurement. Increased net sales per pound, which resulted primarily from higher market prices, and impact of foreign currency remeasurement resulted in an increase in net sales by $15.0 million, or 4.9 percentage points, and $16.5 million, or 5.4 percentage points, respectively. An increase in sales volume also contributed to the increase in net sales by $2.4 million, or 0.8 percentage points.

*Gross profit.* Gross profit increased by $225.5 million, or 89.1%, from $253.1 million generated in the thirteen weeks ended September 25, 2016 to $478.6 million generated in the thirteen weeks ended September 24, 2017. The following tables provide information regarding gross profit and cost of sales information:

*In thousands, except percent data*

| Components of gross profit | Thirteen Weeks Ended September 24, 2017 Thirteen Weeks Ended Amount | Change from Thirteen Weeks Ended September 25, 2016 Percent September 24, 2017 | September 25, 2016 | Percent of Net Sales |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | --- |
| Net sales | $2,793,885 | $298,604 | 12.0% | 100.0% | 100.0% |  |
| Cost of sales | 2,315,301 | 73,080 | 3.3% | 82.9% | 89.9% | (a)(b)(c) |
| Gross profit | $478,584 | $225,524 | 89.1% | 17.1% | 10.1% |  |

*(In thousands, except percent data)*

| Sources of gross profit Amount | Thirteen Weeks Ended September 24, 2017 Percent | Change from Thirteen Weeks Ended September 25, 2016 |  |  |
| --- | ---: | ---: | ---: | --- |
| United States | $377,209 | $197,873 | 110.3% | (a) |
| U.K. and Europe | 46,951 | 3,981 | 9.3% | (b) |
| Mexico | 54,401 | 23,671 | 77.0% | (c) |
| Elimination | 23 | (1) | (4.2)% |  |
| Total gross profit | $478,584 | $225,524 | 89.1% |  |

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Thirteen Weeks Ended September 24, 2017 Percent | Change from Thirteen Weeks Ended September 25, 2016 |  |  |
| --- | ---: | ---: | ---: | --- |
| United States | $1,561,333 | $16,044 | 1.0% | (a) |
| U.K. and Europe | 467,374 | 46,784 | 11.1% | (b) |
| Mexico | 286,617 | 10,251 | 3.7% | (c) |
| Elimination | (23) | 1 | (4.2)% |  |
| Total cost of sales | $2,315,301 | $73,080 | 3.3% |  |

(a) Cost of sales incurred by our U.S. segment during the thirteen weeks ended September 24, 2017 increased $16.0 million, or 1.0%, from cost of sales incurred by our U.S. segment during the thirteen weeks ended September 25, 2016. Cost of sales increased primarily because of costs incurred by the acquired GNP operations. Cost of sales incurred by the acquired GNP operations contributed $89.1 million, or 5.8 percentage points, to the increase in U.S. cost of sales. An decrease in cost of sales incurred by our existing U.S. segment partially offset the impact that the GNP operations had on cost of sales by $72.9 million, or 4.7 percentage points. Cost of sales incurred by our existing U.S. segment decreased primarily because of a $63.7 million decrease in feed costs, a $23.9 million net increase in derivative gains, a $4.2 million decrease in repair and maintenance costs, partially offset by a $22.4 million increase in compensation costs and $1.9 million in damages to our Puerto Rico assets resulting from Hurricane Maria.

(b) Cost of sales incurred by our U.K. and Europe segment during the thirteen weeks ended September 24, 2017 increased $46.8 million, or 11.1%, from cost of sales incurred by our U.K. and Europe segment during the thirteen weeks ended September 25, 2016. U.K. and Europe cost of sales increased primarily because of a $37.8 million increase in raw material costs, a $4.2 million increase in labor costs, and a $2.4 million increase in freight costs.

(c) Cost of sales incurred by our Mexico segment during the thirteen weeks ended September 24, 2017 increased $10.3 million, or 3.7%, from cost of sales incurred by our Mexico segment during the thirteen weeks ended September 25, 2016. Mexico cost of sales increased primarily because of a $14.6 million increase in contracted grower pay, partially offset by a $1.4 million decrease in catching costs, a $1.1 million decrease in depreciation expense on machinery and equipment, a $1.2 increase in other income, and a $0.6 million decrease in travel and entertainment costs.

*Operating income.* Operating income increased by $195.4 million, or 110.5%, from $176.8 million generated in the thirteen weeks ended September 25, 2016 to $372.2 million generated in the thirteen weeks ended September 24, 2017. The following tables provide information regarding operating income and SG&A expense:

*(In thousands, except percent data)*

| Components of operating income Thirteen Weeks Ended Amount | Thirteen Weeks Ended September 24, 2017 Percent | Change from Thirteen Weeks Ended September 25, 2016 September 24, 2017 | September 25, 2016 | Percent of Net Sales |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | --- |
| Gross profit | $478,584 | $225,524 | 89.1% | 17.1% | 10.1% |  |
| SG&A expense | 102,191 | 26,257 | 34.6% | 3.7% | 3.0% | (a)(b)(c) |
| Administrative restructuring charges | 4,147 | 3,869 | 1,386.4% | 0.1% | —% | (d)(e) |
| Operating income | $372,246 | $195,398 | 110.5% | 13.3% | 7.1% |  |

*(In thousands, except percent data)*

| Sources of operating income Thirteen Weeks Ended September 24, 2017 Amount Percent | Change from Thirteen Weeks Ended September 25, 2016 |  |
| --- | ---: | --- |
| United States $307,962 | $166,767 118.1% |  |
| U.K. and Europe 18,569 | 5,542 42.5% |  |
| Mexico 45,692 | 23,089 102.2% |  |
| Elimination 23 | — —% |  |
| Total operating income $372,246 | $195,398 110.5% |  |
| **Sources of SG&A expense** **Thirteen Weeks Ended September 24, 2017** | **Change from Thirteen Weeks Ended September 25, 2016** |  |
| **Amount** **Percent** |  |  |
| **(In thousands, except percent data)** |  |  |
| United States $66,793 | $28,930 76.4% | (a) |
| U.K. and Europe 26,689 | (3,255) (10.9)% | (b) |
| Mexico 8,709 | 582 7.2% | (c) |
| Total SG&A expense $102,191 | $26,257 34.6% |  |
| **Sources of administrative restructuring charges** **Thirteen Weeks Ended September 24, 2017** | **Change from Thirteen Weeks Ended September 25, 2016** |  |
| **Amount** **Percent** |  |  |
| **(In thousands, except percent data)** |  |  |
| United States $2,454 | $2,176 779.6% | (d) |
| U.K. and Europe 1,693 | 1,693 100.0% | (e) |
| Mexico — | — —% |  |
| Total administrative restructuring charges $4,147 | $3,869 1,386.4% |  |

(a) SG&A expense incurred by our U.S. segment during the thirteen weeks ended September 24, 2017 increased $28.9 million, or 76.4%, from SG&A expense incurred by our U.S. segment during the thirteen weeks ended September 25, 2016, primarily because of expenses incurred by the acquired GNP operations and by increases in SG&A expenses incurred by our existing operations. Expenses incurred by the acquired GNP business contributed $7.3 million, or 19.2 percentage points, to the overall increase in SG&A expenses. Expenses incurred by our existing U.S. segment contributed $21.6 million, or 57.2 percentage points, to the overall increase in SG&A expenses. SG&A expense incurred by our existing U.S. segment increased primarily because of $14.0 million in transaction costs related to the Moy Park acquisition, a $2.1 million increase in wages and benefits, a $1.8 million increase in legal fees, a $1.0 million increase in charitable contributions, and a $1.0 million increase in depreciation expenses. Other factors affecting SG&A expense were individually immaterial.

(b) SG&A expense incurred by our U.K. and Europe segment during the thirteen weeks ended September 24, 2017 decreased $3.3 million, or 10.9%, from SG&A expense incurred by our U.K. and Europe segment during the thirteen weeks ended September 25, 2016. SG&A expense incurred by our U.K. and Europe segment decreased primarily because of a $5.9 million decrease in management fees paid to JBS S.A., a $0.9 million increase in other selling expenses, a $0.6 million increase in personnel expenses and a $.6 million increase in amortization expense. Other factors affecting SG&A expense were individually immaterial.

(c) SG&A expense incurred by our Mexico segment during the thirteen weeks ended September 24, 2017 increased $0.6 million, or 7.2%, from SG&A expense incurred by our Mexico segment during the thirteen weeks ended September 25, 2016. SG&A expense incurred by our existing Mexico segment increased primarily because of a $0.9 million increase in employee relations, offset by a $0.2 million decrease in contracted security expenses. Other factors affecting SG&A expense were individually immaterial.

(d) Administrative restructuring charges incurred by our U.S. segment during the thirteen weeks ended September 24, 2017 included $2.5 million in severance costs related to the GNP acquisition.

(e) Administrative restructuring charges incurred by the U.K. and Europe segment during the thirteen weeks ended September 24, 2017 included a $1.7 million impairment of property in Dublin, Ireland.

*Net interest expense.* Net interest expense increased 19.3% to $22.5 million recognized in the thirteen weeks ended September 24, 2017 from $18.9 million recognized in the thirteen weeks ended September 25, 2016 primarily because of an increase in average borrowings compared to the same period in the prior year. Average borrowings increased from $1.5 billion in the thirteen weeks ended September 25, 2016 to $1.9 billion in the thirteen weeks ended September 24, 2017 due to increased borrowings necessary to fund the GNP acquisition. The weighted average interest rate increased from 4.4% in the thirteen weeks ended September 25, 2016 to 4.5% in the thirteen weeks ended September 24, 2017.

*Income taxes.* Income tax expense increased to $113.4 million, a 32.2% effective tax rate, for the thirteen weeks ended September 24, 2017 compared to income tax expense of $53.8 million, a 34.5% effective tax rate, for the thirteen weeks ended September 25, 2016. The increase in income tax expense in 2017 resulted primarily from an increase in pre-tax income.

#### Thirty-Nine Weeks Ended September 24, 2017 Compared to Thirty-Nine Ended September 25, 2016

*Net sales.* Net sales generated in the thirty-nine weeks ended September 24, 2017 increased $517.8 million, or 6.9%, from net sales generated in the thirty-nine weeks ended September 25, 2016. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Thirty-Nine Weeks Ended September 24, 2017 Percent | Change from Thirty-Nine Weeks Ended September 25, 2016 |  |  |
| --- | ---: | ---: | ---: | --- |
| United States | $5,557,089 | $484,737 | 9.6% | (a) |
| U.K. and Europe | 1,473,854 | (10,854) | (0.7)% | (b) |
| Mexico | 994,568 | 43,946 | 4.6% | (c) |
| Total net sales | $8,025,511 | $517,829 | 6.9% |  |

(a) U.S. net sales generated in the thirty-nine weeks ended September 24, 2017 increased $484.7 million, or 9.6%, from U.S. net sales generated in the thirty-nine weeks ended September 25, 2016 primarily because of net sales generated by the recently acquired GNP operations and an increase in net sales per pound experienced by our existing operations. The impact of the acquired business contributed $322.4 million, or 6.4 percentage points, to the increase in net sales. The net sales per pound increase experienced by our existing U.S. segment contributed $332.0 million, or 6.5 percentage points, to the increase in net sales. A decrease in sales volume experienced by our existing U.S. segment partially offset the effect that the acquired business and the increase in net sales per pound had on U.S. net sales by $169.6 million, or 3.3 percentage points. Decreased sales volume resulted primarily from lower demand for exported chicken products and domestic prepared foods products. Included in U.S. net sales generated during the thirty-nine weeks ended September 24, 2017 and September 25, 2016 were net sales to JBS USA Food Company totaling $37.4 million and $12.2 million, respectively.

(b) U.K. and Europe net sales generated in the thirty-nine weeks ended September 24, 2017 decreased $10.9 million, or 0.7%, from U.K. and Europe net sales generated in the thirty-nine weeks ended September 25, 2016 primarily because of the negative impact of foreign currency translation and increased sales volume. The negative impact of foreign currency translation contributed to the decrease in net sales by $135.3 million, or 9.1 percentage points. The negative impacts of foreign currency translation were offset by increased sales volume and net sales per pound by $51.7 million, or 3.5 percentage points, and $72.7 million, or 4.9 percentage points, respectively.

(c) Mexico net sales generated in the thirty-nine weeks ended September 24, 2017 increased $43.9 million, or 4.6%, from Mexico net sales generated in the thirty-nine weeks ended September 25, 2016 primarily because of the increase in net sales per pound and increased sales volume. Higher net sales per pound, which resulted primarily from higher market prices, and increased sales volume resulted in increases in net sales of $68.3 million, or 7.2 percentage points, and $14.0 million, or 1.5 percentage points, respectively. The negative impact of foreign currency remeasurement partially offset the increase in net sales by $38.3 million, or 4.0 percentage points. Other factors affecting the decrease in Mexico net sales were immaterial.

*Gross profit.* Gross profit increased by $334.7 million, or 38.2%, from $875.1 million generated in the thirty-nine weeks ended September 25, 2016 to $1,209.8 million generated in the thirty-nine weeks ended September 24, 2017. The following tables provide information regarding gross profit and cost of sales information:

*In thousands, except percent data*

| Components of gross profit | Thirty-Nine Weeks Ended September 24, 2017 Thirty-Nine Weeks Ended Amount | Change from Thirty-Nine Weeks Ended September 25, 2016 Percent September 24, 2017 | September 25, 2016 | Percent of Net Sales |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | --- |
| Net sales | $8,025,511 | $517,829 | 6.9% | 100.0% | 100.0% |  |
| Cost of sales | 6,815,701 | 183,133 | 2.8% | 84.9% | 88.3% | (a)(b) |
| Gross profit | $1,209,810 | $334,696 | 38.2% | 15.1% | 11.7% |  |

44

*(In thousands, except percent data)*

| Sources of gross profit Amount | Thirty-Nine Weeks Ended September 24, 2017 Percent | Change from Thirty-Nine Weeks Ended September 25, 2016 |  |  |
| --- | ---: | ---: | ---: | --- |
| United States | $900,262 | $298,560 | 49.6% | (a) |
| U.K. and Europe | 137,734 | (3,732) | (2.6)% | (b) |
| Mexico | 171,745 | 39,871 | 30.2% | (c) |
| Elimination | 69 | (1) | (1.4)% |  |
| Total gross profit | $1,209,810 | $334,696 | 38.2% |  |

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Thirty-Nine Weeks Ended September 24, 2017 Percent | Change from Thirty-Nine Weeks Ended September 25, 2016 |  |  |
| --- | ---: | ---: | ---: | --- |
| United States | $4,656,825 | $186,177 | 4.2% | (a) |
| U.K. and Europe | 1,336,123 | (7,120) | (0.5)% | (b) |
| Mexico | 822,822 | 4,073 | 0.5% | (c) |
| Elimination | (69) | 2 | (2.8)% |  |
| Total cost of sales | $6,815,701 | $183,133 | 2.8% |  |

(a) Cost of sales incurred by our U.S. segment during the thirty-nine weeks ended September 24, 2017 increased $186.2 million, or 4.2%, from cost of sales incurred by our U.S. segment during the thirty-nine weeks ended September 25, 2016. Cost of sales increased primarily because of costs incurred by the acquired GNP operations. Cost of sales incurred by the acquired GNP operations contributed $267.3 million, or 6.0 percentage points, to the increase in U.S. cost of sales. A decrease in cost of sales incurred by our existing U.S. segment partially offset the impact that the acquired business had on cost of sales by $80.9 million, or 1.8 percentage points. Cost of sales incurred by our existing operations decreased primarily because of a $103.1 million decrease in feed costs, an $18.4 million net increase in derivative gains, a $7.3 million decrease in scrapped materials, partially offset by a $49.5 million increase in compensation and benefit costs and $1.9 million in damages to our Puerto Rico assets resulting from Hurricane Maria.

(b) Cost of sales incurred by our U.K. and Europe segment during the thirty-nine weeks ended September 24, 2017 decreased $7.1 million, or 0.5%, from cost of sales incurred by our U.K. and Europe segment during the thirty-nine weeks ended September 25, 2016. The decrease in cost of sales was due to a $23.9 million increase in cost of raw materials, offset by a $16.3 million decrease in labor costs, a $12.5 million decrease in other cost of sales, and a $3.4 million decrease in bird amortization costs.

(c) Cost of sales incurred by our Mexico segment during the thirty-nine weeks ended September 24, 2017 increased $4.1 million, or 0.5%, from cost of sales incurred by our Mexico segment during the thirty-nine weeks ended September 25, 2016. The increase in cost of sales was primarily due to a $29.4 million increase in grower pay and a $6.0 million increase in utility costs that were partially offset by the $27.6 million impact of inventory valuation adjustments resulting from currency rate movement and a $3.8 million decrease in catching costs.

*Operating income.* Operating income increased by $272.3 million, or 42.2%, from $645.0 million generated in the thirty-nine weeks ended September 25, 2016 to $917.3 million generated in the thirty-nine weeks ended September 24, 2017. The following tables provide information regarding operating income and SG&A expense:

*(In thousands, except percent data)*

| Components of operating income Thirty-Nine Weeks Ended Amount | Thirty-Nine Weeks Ended September 24, 2017 Percent | Change from Thirty-Nine Weeks Ended September 25, 2016 September 24, 2017 | September 25, 2016 | Percent of Net Sales |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | --- |
| Gross profit | $1,209,810 | $334,696 | 38.2% | 15.1% | 11.7% |  |
| SG&A expense | 284,009 | 54,223 | 23.6% | 3.5% | 3.1% | (a)(b)(c) |
| Administrative restructuring charges | 8,496 | 8,217 | 2,945.2% | 0.1% | —% | (d)(e) |
| Operating income | $917,305 | $272,256 | 42.2% | 11.5% | 8.6% |  |

45

*(In thousands, except percent data)*

| Sources of operating income Thirty-Nine Weeks Ended September 24, 2017 Amount Percent | Change from Thirty-Nine Weeks Ended September 25, 2016 |  |
| --- | ---: | --- |
| United States $719,121 | $238,841 49.7% |  |
| U.K. and Europe 51,874 | (3,967) (7.1)% |  |
| Mexico 146,241 | 37,385 34.3% |  |
| Elimination 69 | (3) (2.8)% |  |
| Total operating income $917,305 | $272,256 42.2% |  |
| **Sources of SG&A expense** **Thirty-Nine Weeks Ended September 24, 2017** | **Change from Thirty-Nine Weeks Ended September 25, 2016** |  |
| **Amount** **Percent** |  |  |
| **(In thousands, except percent data)** |  |  |
| United States $174,340 | $53,196 43.9% | (a) |
| U.K. and Europe 84,165 | (1,460) (1.7)% | (b) |
| Mexico 25,504 | 2,487 10.8% | (c) |
| Total SG&A expense $284,009 | $54,223 23.6% |  |
| **Sources of administrative restructuring charges** **Thirty-Nine Weeks Ended September 24, 2017** | **Change from Thirty-Nine Weeks Ended September 25, 2016** |  |
| **Amount** **Percent** |  |  |
| **(In thousands, except percent data)** |  |  |
| United States $6,803 | $6,524 2,338.4% | (d) |
| U.K. and Europe 1,693 | 1,693 —% | (e) |
| Mexico — | — —% |  |
| Total administrative restructuring charges $8,496 | $8,217 2,945.2% |  |

(a) SG&A expense incurred by our U.S. segment during the thirty-nine weeks ended September 24, 2017 increased $53.2 million, or 43.9%, from SG&A expense incurred by our U.S. segment during the thirty-nine weeks ended September 25, 2016, primarily because of expenses incurred by the acquired GNP operations and, to a lesser extent, by increases in SG&A expense incurred by our existing U.S. segment. Expenses incurred by the acquired GNP business contributed $27.4 million, or 22.6 percentage points, to the overall increase in SG&A expenses. Expenses incurred by our existing U.S. segment contributed $25.8 million, or 21.3 percentage points, to the overall increase in SG&A expenses. SG&A expenses incurred by our existing U.S. segment increased primarily because of $14.0 million in transaction costs related to the Moy Park acquisition, a $4.8 million increase in allocated costs charged for administrative functions shared with JBS USA Food Company, a $2.8 million increase in legal fees and a $2.1 million increase in advertising and promotion expenses. Other factors affecting SG&A expense were individually immaterial.

(b) SG&A expense incurred by our U.K. and Europe segment during the thirty-nine weeks ended September 24, 2017 decreased $1.5 million, or 1.7%, from SG&A expense incurred by our U.K. and Europe segment during the thirty-nine weeks ended September 25, 2016 primarily because of a $2.3 million decrease in advertising expenses and a $2.2 million decrease in management fees paid to JBS S.A. that were partially offset by a $1.2 million increase in amortization expenses and a $1.3 million increase in miscellaneous income from sale of assets.

(c) SG&A expense incurred by our Mexico segment during the thirty-nine weeks ended September 24, 2017 increased $2.5 million, or 10.8%, from SG&A expense incurred by our Mexico segment during the thirty-nine weeks ended September 25, 2016 because of a $1.9 million increase in employee relations expenses and a $1.4 million increase advertising and promotion expenses that were partially offset by a $0.8 million decrease in contract service expenses. Other factors affecting SG&A expense were individually immaterial.

(d) Administrative restructuring charges incurred by the U.S. segment during the thirty-nine weeks ended September 24, 2017 included a $3.5 million impairment of the aggregate carrying amount of an asset group held for sale in Alabama, $2.6 million in severance costs related to the GNP acquisition and the elimination of prepaid costs totaling $0.7 million related to obsolete software assumed in the GNP acquisition,

(e) Administrative restructuring charges incurred by the U.K. and Europe segment during the thirty-nine weeks ended September 24, 2017 included a $1.7 million impairment of property in Dublin, Ireland.

*Net interest expense.* Net interest expense increased 11.1% to $62.8 million recognized in the thirty-nine weeks ended September 24, 2017 from $56.5 million million recognized in the thirty-nine weeks ended September 25, 2016 primarily because of an increase in average borrowings compared to the same period in the prior year. Average borrowings increased from $1.5 billion in the thirty-nine weeks ended September 25, 2016 to $1.8 billion in the thirty-nine weeks ended September 24, 2017 due to increased borrowings necessary to fund the GNP acquisition. The weighted average interest rate increased from 4.4% in the thirty-nine weeks ended September 25, 2016 to 4.5% in the thirty-nine weeks ended September 24, 2017.

*Income taxes.* Income tax expense increased to $278.0 million, a 32.2% effective tax rate, for the thirty-nine weeks ended September 24, 2017 compared to income tax expense of $203.0 million, a 34.0% effective tax rate, for the thirty-nine weeks ended September 25, 2016. The increase in income tax expense in 2017 resulted primarily from an increase in pre-tax income.

### Liquidity and Capital Resources

The following table presents our available sources of liquidity as of September 24, 2017:

*(In millions)*

| Source of Liquidity | Facility Amount | Amount Outstanding | Amount Available |  |
| --- | ---: | ---: | ---: | --- |
| Cash and cash equivalents |  |  | $401.8 |  |
| Borrowing arrangements: |  |  |  |  |
| U.S. Credit Facility | $750.0 | $73.3 | 631.9 | (a) |
| Mexico Credit Facility(b) | 84.5 | 84.5 | — | (b) |
| U.K. and Europe Credit Facilities(c) | 122.8 | 13.9 | 108.9 |  |

(a) Availability under the U.S. Credit Facility (as described below) is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at September 24, 2017 totaled $44.8 million.

(b) As of September 24, 2017, the U.S. dollar-equivalent of the amount available under the Mexico Credit Facility (as described below) was $5,636. The Mexico Credit Facility provides for a loan commitment of $1.5 billion Mexican pesos.

(c) As of September 24, 2017, the U.S. dollar-equivalent of the amount available under the U.K. and Europe Credit Facilities (as described below) was $108.9 million. The U.K. and Europe Credit Facilities provide for loan commitments of £45.0 million (or $60.1 million U.S. dollar equivalent), £20.0 million (or $26.8 million U.S. dollar equivalent) and €30.0 million (or $35.7 million U.S. dollar equivalent).

### Long-Term Debt and Other Borrowing Arrangements

### U.S. Senior Notes

On March 11, 2015, the Company completed a sale of $500.0 million aggregate principal amount of its 5.75% senior notes due 2025 (the “Senior Notes due 2025”). The Company used the net proceeds from the sale of the Senior Notes due 2025 to repay $350.0 million and $150.0 million of the term loan indebtedness under the U.S. Credit Facility (defined below) on March 12, 2015 and April 22, 2015, respectively. On September 29, 2017, the Company completed an add-on offering of $250.0 million of the Senior Notes due 2025 (the “Additional Senior Notes due 2025”). The Additional Senior Notes due 2025 will be treated as a single class with the existing Senior Notes due 2025 for all purposes under the 2015 Indenture (defined below) and will have the same terms as those of the existing Senior Notes due 2025. The Additional Senior Notes due 2025 were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.

The Senior Notes due 2025 and the Additional Senior Notes due 2025 are governed by, and were issued pursuant to, an indenture dated as of March 11, 2015 by and among the Company, its guarantor subsidiary and Wells Fargo Bank, National Association, as trustee (the “2015 Indenture”). The 2015 Indenture provides, among other things, that the Senior Notes due 2025 and the Additional Senior Notes due 2025 bear interest at a rate of 5.75% per annum from the date of issuance until maturity, payable semi-annually in cash in arrears, beginning on September 15, 2015 for the Senior Notes due 2025 and March, 15 2018 for the Additional Senior Notes due 2025. The Senior Notes due 2025 and the Additional Senior Notes due 2025 are guaranteed on a senior unsecured basis by the Company’s guarantor subsidiary. In addition, any of the Company’s other existing or future domestic restricted subsidiaries that incur or guarantee any other indebtedness (with limited exceptions) must also guarantee the Senior Notes due 2025 and the Additional Senior Notes due 2025. The Senior Notes due 2025 and the Additional Senior Notes due 2025 and related guarantees are unsecured senior obligations of the Company and its guarantor subsidiary and rank equally with all of the Company’s and its guarantor subsidiary’s other unsubordinated indebtedness. The Senior Notes due 2025 and the Additional Senior Notes due 2025 and the 2015 Indenture also contain customary covenants and events of default, including failure to pay principal or interest on the Senior Notes due 2025 and the Additional Senior Notes due 2025 when due, among others.

On September 29, 2017, the Company completed a sale of $600.0 million aggregate principal amount of its 5.875% senior notes due 2027 (the “Senior Notes due 2027”). The Company used the net proceeds from the sale of the Senior Notes due 2027 to repay in full the JBS S.A. Promissory Note (defined below) issued as part of the Moy Park acquisition. The Senior Notes due 2027 were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.

The Senior Notes due 2027 are governed by, and were issued pursuant to, an indenture dated as of September 29, 2017 by and among the Company, its guarantor subsidiary and U.S. Bank National Association, as trustee (the “2017 Indenture”). The 2017 Indenture provides, among other things, that the Senior Notes due 2027 bear interest at a rate of 5.875% per annum from the date of issuance until maturity, payable semi-annually in cash in arrears, beginning on March 30, 2018. The Senior Notes due 2027 are guaranteed on a senior unsecured basis by the Company’s guarantor subsidiary. In addition, any of the Company’s other existing or future domestic restricted subsidiaries that incur or guarantee any other indebtedness (with limited exceptions) must also guarantee the Senior Notes due 2027. The Senior Notes due 2027 and related guarantees are unsecured senior obligations of the Company and its guarantor subsidiary and rank equally with all of the Company’s and its guarantor subsidiary’s other unsubordinated indebtedness. The Senior Notes due 2027 and the 2017 Indenture also contain customary covenants and events of default, including failure to pay principal or interest on the Senior Notes due 2027 when due, among others.

### Moy Park Senior Notes

On May 29, 2014, Moy Park (Bondco) Plc completed the sale of a £200.0 million aggregate principal amount of its 6.25% senior notes due 2021 (the “Moy Park Notes”). On April 17, 2015, an add-on offering of £100.0 million of the Moy Park Notes (the “Additional Moy Park Notes”) was completed. The Moy Park Notes and the Additional Moy Park Notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.

The Moy Park Notes and the Additional Moy Park Notes are governed by, and were issued pursuant to, an indenture dated as of May 29, 2014 by Moy Park (Bondco) Plc, as issuer, Moy Park Holdings (Europe) Limited, Moy Park (Newco) Limited, Moy Park Limited, O’Kane Poultry Limited, as guarantors, and The Bank of New York Mellon, as trustee (the “Moy Park Indenture”). The Moy Park Indenture provides, among other things, that the Moy Park Notes and the Additional Moy Park Notes bear interest at a rate of 6.25% per annum from the date of issuance until maturity, payable semiannually in cash in arrears, beginning on November 29, 2014 for the Moy Park Notes and May 28, 2015 for the Additional Moy Park Notes. The Moy Park Notes and the Additional Moy Park Notes are guaranteed by each of the subsidiary guarantors described above. The Moy Park Indenture contains customary covenants and events of default that may limit Moy Park (Bondco) Plc’s ability and the ability of certain subsidiaries to incur additional debt, declare or pay dividends or make certain investments, among others.

On November 2, 2017, Moy Park (Bondco) Plc announced the final results of its previously announced tender offer to purchase for cash any and all of its issued and outstanding Moy Park Notes and Moy Park Additional Notes. As of November 2, 2017, £1,185,000 principal amount of Moy Park Notes and Moy Park Additional Notes had been validly tendered (and not validly withdrawn). Moy Park (Bondco) Plc has purchased all validly tendered (and not validly withdrawn) Moy Park Notes and Moy Park Additional Notes on or prior to November 2, 2017, with such settlement occurring on November 3, 2017.

### U.S. Credit Facility

On May 8, 2017, the Company and certain of its subsidiaries entered into a Third Amended and Restated Credit Agreement (the “U.S. Credit Facility”) with Coöperatieve Rabobank U.A., New York Branch (“Rabobank”), as administrative agent and collateral agent, and the other lenders party thereto. The U.S. Credit Facility provides for a revolving loan commitment of up to $750.0 million and a term loan commitment of up to $800.0 million (the “Term Loans”). The U.S. Credit Facility also includes an accordion feature that allows the Company, at any time, to increase the aggregate revolving loan and term loan commitments by up to an additional $1.0 billion, subject to the satisfaction of certain conditions, including obtaining the lenders’ agreement to participate in the increase.

The revolving loan commitment under the U.S. Credit Facility matures on May 6, 2022. All principal on the Term Loans is due at maturity on May 6, 2022. Installments of principal are required to be made, in an amount equal to 1.25% of the original principal amount of the Term Loans, on a quarterly basis prior to the maturity date of the Term Loans. Covenants in the U.S. Credit Facility also require the Company to use the proceeds it receives 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. As of September 24, 2017, the company had Term Loans outstanding totaling $790.0 million and the amount available for borrowing under the revolving loan commitment was $631.9 million. The Company had letters of credit of $44.8 million and borrowings of $73.3 million outstanding under the revolving loan commitment as of September 24, 2017.

The U.S. Credit Facility includes a $75.0 million sub-limit for swingline loans and a $125.0 million sub-limit for letters of credit. Outstanding borrowings under the revolving loan commitment and the Term Loans bear interest at a per annum rate equal to (i) in the case of LIBOR loans, LIBOR plus 1.50% through September 24, 2017 and, thereafter, based on the Company’s net senior secured leverage ratio, between LIBOR plus 1.25% and LIBOR plus 2.75% and (ii) in the case of alternate base rate loans, the base rate plus 0.50% through September 24, 2017 and, based on the Company’s net senior secured leverage ratio, between the base rate plus 0.25% and base rate plus 1.75% thereafter.

The U.S. Credit Facility contains financial covenants and various other covenants that may adversely affect the Company’s 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 and the Company’s 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 U.S. Credit Facility also provides that we may not incur capital expenditures in excess of $500.0 million in any fiscal year. The Company is currently in compliance with the covenants under the U.S. Credit Facility.

All obligations under the U.S. Credit Facility continue to be unconditionally guaranteed by certain of the Company’s subsidiaries and continue to be secured by a first priority lien on (i) the accounts receivable and inventory of our company and its non-Mexico subsidiaries, (ii) 100% of the equity interests in our domestic subsidiaries, To-Ricos, Ltd. and To-Ricos Distribution, Ltd., and 65% of the equity interests in our direct foreign subsidiaries and (iii) substantially all of the assets of the Company and the guarantors under the U.S. Credit Facility.

### Mexico Credit Facility

On September 27, 2016, certain of our Mexican subsidiaries entered into an unsecured credit agreement (the “Mexico Credit Facility”) with BBVA Bancomer, S.A. Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, as lender. The loan commitment under the Mexico Credit Facility was $1.5 billion Mexican pesos. Outstanding borrowings under the Mexico Credit Facility accrued interest at a rate equal to the Interbank Equilibrium Interest Rate plus 0.95%. The Mexico Credit Facility is scheduled to mature on September 27, 2019. As of September 24, 2017, the U.S. dollar-equivalent loan commitment under the Mexico Credit Facility was $84.5 million, and there were $84.5 million outstanding borrowings under the Mexico Credit Facility that bear interest at a per annum rate of 8.33%. As of September 24, 2017, the U.S. dollar-equivalent borrowing availability was less than $0.1 million.

### U.K. and Europe Credit Facilities

#### Moy Park Multicurrency Revolving Facility Agreement

On March 19, 2015, Moy Park Holdings (Europe) Limited, a subsidiary of Granite Holdings Sàrl, and its subsidiaries, entered into an agreement with Barclays Bank plc which matures on March 19, 2018. The agreement provides for a multicurrency revolving loan commitment of up to £20.0 million. As of September 24, 2017, the U.S. dollar-equivalent loan commitment under Moy Park multicurrency revolving facility was $26.8 million and there were $10.0 million outstanding borrowings. Outstanding borrowings under the facility bear interest at a per annum rate equal to LIBOR plus a margin determined by Company’s Net Debt to EBITDA ratio. The current margin stands at 2.5%. As of September 24, 2017, the U.S. dollar-equivalent borrowing availability was $16.8 million.

The facility contains financial covenants and various other covenants that may adversely affect Moy Park's ability to, among other things, incur additional indebtedness, consummate certain assets sales, enter into certain transactions with JBS and the Company's other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of the Moy Park's assets.

#### Moy Park Receivables Finance Agreement

Moy Park Limited, a subsidiary of Granite Holdings Sàrl, entered into a £45.0 million receivables finance agreement on January 29, 2016 (the “Receivables Finance Agreement”), with Barclays Bank plc, which matures on January 29, 2020. As of September 24, 2017, the U.S. dollar-equivalent loan commitment under the Receivables Finance Agreement was $60.3 million and there were no outstanding borrowings. Outstanding borrowings under the facility bear interest at a per annum rate equal to LIBOR plus 1.5%. The Receivables Finance Agreement includes an accordion feature that allows us, at any time, to increase the commitments by up to an additional £15.0 million (U.S. dollar-equivalent $20.1 million as of September 24, 2017), subject to the satisfaction of certain conditions.

The Receivables Finance Agreement contains financial covenants and various other covenants that may adversely affect Moy Park's ability to, among other things, incur additional indebtedness, consummate certain asset sales, enter into certain transactions with JBS and the Company's other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of Moy Park's assets.

#### Moy Park France Invoice Discounting Facility

In June 2009, Moy Park France Sàrl, a subsidiary of Granite Holdings Sàrl, entered into a €20.0 million invoice discounting facility with GE De Facto (the “Invoice Discounting Facility”). The facility limit was increased €10.0 million in September 2016 to €30.0 million. The Invoice Discounting Facility is payable on demand and the term is extended on an annual basis. The agreement can be terminated with three months’ notice. As of September 24, 2017, the U.S. dollar-equivalent loan commitment under the Invoice Discounting Facility was $35.7 million and there were $3.9 million outstanding borrowings. As of September 24, 2017, the U.S. dollar-equivalent borrowing availability was $31.8 million. Outstanding borrowings under the Invoice Discounting Facility bear interest at a per annum rate equal to EURIBOR plus a margin of 0.80%.

The Invoice Discounting Facility contains financial covenants and various other covenants that may adversely affect Moy Park's ability to, among other things, incur additional indebtedness, consummate certain asset sales, enter into certain transactions with JBS and the Company's other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of Moy Park's assets.

### JBS S.A. Promissory Note

On September 8, 2017, Onix Investments UK Ltd., a wholly owned subsidiary of Pilgrim’s Pride Corporation, executed a subordinated promissory note payable to JBS S.A. (the “JBS S.A. Promissory Note”) for £562.5 million, which had a maturity date of September 6, 2018. Interest on the outstanding principal balance of the JBS S.A. Promissory Note accrued at the rate per annum equal to (i) from and after November 8, 2017 and prior to January 7, 2018, 4.00%, (ii) from and after January 7, 2018 and prior to March 8, 2018, 6.00% and (iii) from and after March 8, 2018, 8.00%. The JBS S.A. Promissory Note was repaid in full on October 2, 2017 using the net proceeds from the sale of Senior Notes due 2027 and the Additional Senior Notes due 2025.

### Off-Balance Sheet Arrangements

We maintain operating leases for various types of equipment, some of which contain residual value guarantees for the market value of assets at the end of the term of the lease. The terms of the lease maturities range from one to ten years. We estimate the maximum potential amount of the residual value guarantees is approximately $11.0 million; however, the actual amount would be offset by any recoverable amount based on the fair market value of the underlying leased assets. No liability has been recorded related to this contingency as the likelihood of payments under these guarantees is not considered to be probable, and the fair value of the guarantees is immaterial. We historically have not experienced significant payments under similar residual guarantees.

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.

### Historical Flow of Funds

Cash provided by operating activities was $618.5 million and $552.0 million for the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. The increase in cash flows provided by operating activities was primarily a result of increased net income for the thirty-nine weeks ended September 24, 2017 as compared to the thirty-nine weeks ended September 25, 2016 and an increase in net operating assets of $209.8 million for the thirty-nine weeks ended September 24, 2017 as compared to an increase in net operating assets of $15.1 million for the thirty-nine weeks ended September 25, 2016. The impact of net income and net operating assets movement on cash provided by operating activities was partially offset by increased net noncash expenses for the thirty-nine weeks ended September 24, 2017 as compared to the thirty-nine weeks ended September 25, 2016.

Trade accounts and other receivables, including accounts receivable from related parties, increased $176.2 million, or 39.2%, to $625.8 million at September 24, 2017 from $449.6 million at December 25, 2016. The change resulted primarily from an increase in sales generated in the two weeks ended September 24, 2017 as compared to sales generated in the two weeks ended December 25, 2016 and $67.6 million in increased receivables related to the GNP acquisition. Trade accounts and other receivables, including accounts receivable from related parties, increased $51.4 million, or 11.9%, to $482.9 million at September 25, 2016 from $431.5 million at December 27, 2015. The change resulted primarily from a increase in sales generated in the two weeks ended September 25, 2016 as compared to sales generated in the two weeks ended December 27, 2015.

Inventories increased $220.6 million, or 22.6%, to $1,196.2 million at September 24, 2017 from $975.6 million at December 25, 2016. This change resulted primarily from an increase of $132.8 million for build up of freezer inventories, a $46.5 million increase in inventory related to the GNP acquisition and increased work-in-process inventories of $25.1 million. Inventories decreased $4.9 million, or 0.5%, to $968.4 million at September 25, 2016 from $973.3 million at December 27, 2015.

Prepaid expenses and other current assets increased $21.0 million, or 25.6%, to $102.9 million at September 24, 2017 from $81.9 million at December 25, 2016. This increase resulted primarily from a $22.5 million net increase in value-added tax receivables. Prepaid expenses and other current assets decreased $5.6 million, or 5.2%, to $101.1 million at September 25, 2016 from $106.7 million at December 27, 2015. This change resulted primarily from a $6.1 million net decrease in value-added tax receivables and a $6.5 million decrease in prepaid workers compensation reserves, primarily offset by a $5.9 million increase in margin cash.

Accounts payable, including accounts payable to related parties, decreased $44.2 million, or 5.6%, to $750.6 million at September 24, 2017 from $794.8 million at December 25, 2016. This change resulted primarily from a $46.9 million decrease in trade payables, partially offset by a $2.6 million increase in the payable to related parties. Accounts payable, including accounts payable to related parties, increased $8.8 million, or 1.2%, to $755.2 million at September 25, 2016 from $746.4 million at December 27, 2015. This change resulted primarily from a $4.1million increase in trade payables and a $4.7 million increase in the payables to related parties.

Accrued expenses and other current liabilities increased $69.5 million, or 20.0%, to $416.5 million at September 24, 2017 from $347.0 million at December 25, 2016. This change resulted primarily from accrued expenses of $22.0 million related to the acquired GNP business, a $24.4 million increase in sales and marketing liabilities and a $20.5 million increase in contract services. Accrued expenses and other current liabilities decreased $17.4 million, or 4.7%, to $351.6 at September 25, 2016 from $369.0 million at December 27, 2015. This change resulted primarily from a $19.4 million decrease in incentive pay accruals.

Income taxes, which includes income taxes receivable, income taxes payable, deferred tax assets, deferred tax liabilities reserves for uncertain tax positions, and the tax components within accumulated other comprehensive loss, increased by $186.8 million, or 65.7%, to a net liability position of $471.4 million at September 24, 2017 from a net liability position of $284.6 million at December 25, 2016. This change resulted primarily from tax expense recorded on our year-to-date income and the timing of estimated tax payments. Income taxes increased by $5.4 million, or 2.3%, to a net liability position of $239.1 million at September 25, 2016 from a net liability position of $233.6 million at December 27, 2015. This change resulted primarily from tax expense recorded on our year-to-date income and the timing of estimated tax payments.

Net noncash expenses totaled $244.0 million and $172.4 million for the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. Net noncash expenses for the thirty-nine weeks ended September 24, 2017 included depreciation and amortization expense of $204.6 million, deferred income tax expense of $25.8 million and other net noncash expenses totaling $13.6 million. Net noncash expenses for the thirty-nine weeks ended September 25, 2016 included depreciation and amortization expense of $174.1 million, a net gain on property disposals of $7.3 million and other net noncash expenses totaling $5.6 million.

Cash used in investing activities was $914.3 million and $208.1 million for the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. The increase was primarily attributable to funding of the GNP and Moy Park acquisitions and an increase in capital spending. Cash of $357.2 million and $301.3 million was used to acquire GNP and Moy Park, respectively, net of cash acquired, during the thirty-nine weeks ended September 24, 2017. Capital expenditures totaled $258.4 million and $221.0 million in the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. Capital expenditures increased by $37.3 million primarily because of the number of projects that were active during the thirty-nine weeks ended weeks ended September 24, 2017 as compared to the thirty-nine weeks ended September 25, 2016. Capital expenditures for 2017 cannot exceed $500.0 million under the U.S. Credit Facility. Cash proceeds from property disposals in the thirty-nine weeks ended September 24, 2017 and September 25, 2016 were $2.6 million and $13.0 million, respectively.

Cash provided by financing activities was $389.8 million and cash used in financing activities was $743.4 million in the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. During the thirty-nine weeks ended September 24, 2017, cash of $609.7 million was used for payments on our revolving lines of credit and capital lease obligations, cash of $14.6 million was used to purchase common stock under the share repurchase program and cash of $4.6 million was used to pay capitalized loan costs. During the thirty-nine weeks ended September 24, 2017, cash of $1.0 billion, including $272.0 million used to purchase GNP, was provided through our revolving lines of credit and cash of $5.0 million was provided from a tax sharing agreement with JBS USA Holdings. During the thirty-nine weeks ended September 25, 2016, cash of $715.7 million was used to fund a special cash dividend, cash of $504.1 million was used for payments on our revolving lines of credit and capital lease obligations, cash of $65.6 million was used for payments on a current note payable to bank, cash of $20.3 million was used to purchase common stock under the share repurchase program and cash of $0.7 million was used to pay capitalized loan costs. During the thirty-nine weeks ended September 24, 2017, cash of $515.3 million was provided through our revolving lines of credit and cash of $36.8 million was provided through a current note payable.

### Contractual Obligations

Contractual obligations at September 24, 2017 were as follows:

*(In thousands)*

| Contractual Obligations(a) | Total | Less than One Year | One to Three Years | Three to Five Years | Greater than Five Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-term debt(b) | $2,618,378 | $809,734 | $164,987 | $1,143,657 | $500,000 |
| Interest(c) | 431,220 | 83,945 | 155,926 | 119,474 | 71,875 |
| Capital leases | 10,803 | 5,780 | 4,999 | 24 | — |
| Operating leases | 230,887 | 50,444 | 78,295 | 51,915 | 50,233 |
| Derivative liabilities | 4,169 | 4,169 | — | — | — |
| Purchase obligations(d) | 122,505 | 122,505 | — | — | — |
| Total | $3,417,962 | $1,076,577 | $404,207 | $1,315,070 | $622,108 |

(a) The total amount of unrecognized tax benefits at September 24, 2017 was $15.9 million. We did not include this amount in the contractual obligations table above as reasonable estimates cannot be made at this time of the amounts or timing of future cash outflows.

(b) Long-term debt is presented at face value and excludes $44.8 million in letters of credit outstanding related to normal business transactions. Included in the long-term debt maturing in less than one year is the $753.8 million JBS S.A. Promissory Note, which was paid off on October 2, 2017 using the net proceeds from the sale of Senior Notes due 2027 on September 29, 2017 and the $250.0 million add-on to existing Senior Notes.

(c) Interest expense in the table above assumes the continuation of interest rates and outstanding borrowings as of September 24, 2017.

(d) Includes agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction.

We expect cash flows from operations, combined with availability under the U.S. Credit Facility, to provide sufficient liquidity to fund current obligations, projected working capital requirements, maturities of long-term debt and capital spending for at least the next twelve months.

On September 29, 2017, the Company completed an offering of $250.0 million Additional Senior Notes due 2025 and a sale of $600.0 million aggregate principal amount of the Senior Notes due 2027. The Company used the net proceeds from the sale of the Additional Senior Notes due 2025 and the Senior Notes due 2027 to repay in full the JBS S.A. Promissory Note issued as part of the Moy Park acquisition. See “Note 11. Long-Term Debt and Other Borrowing Arrangements” for additional information.

### 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.

In July 2015, the FASB issued new accounting guidance on the subsequent measurement of inventory, which, in an effort to simplify unnecessarily complicated accounting guidance that can result in several potential outcomes, requires an entity to measure inventory at the lower of cost or net realizable value.

In February 2016, the FASB issued new accounting guidance on lease arrangements, which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet.

In March 2016, the FASB issued new accounting guidance on employee share-based payments, which requires an entity to amend accounting and reporting methodology for areas such as the income tax consequences of share-based payments, classification of share-based awards as either equity or liabilities, and classification of share-based payment transactions in the statement of cash flows.

In June 2016, the FASB issued new accounting guidance on the measurement of credit losses on financial instruments, which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

In November 2016, the FASB issued new accounting guidance on the classification and presentation of restricted cash in the statement of cash flows in order to eliminate the discrepancies that currently exist in how companies present these changes.

In March 2017, the FASB issued new accounting guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost, which requires the service cost component of net benefit cost to be reported in the same line of the income statement as other compensation costs earned by the employee and the other components of net benefit cost to be reported below income from operations.

In August 2017, the FASB issued an accounting standard update that simplifies the application of hedge accounting guidance in current GAAP and improves the reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements.

See “Note 1. Description of Business and Basis of Presentation” of our Condensed Consolidated and Combined Financial Statements included in this quarterly report for additional information relating to these new accounting pronouncements.

### Critical Accounting Policies

During the thirteen weeks ended September 24, 2017, (i) we did not change any of our existing critical accounting policies, (ii) no existing accounting policies became critical accounting policies because of an increase in the materiality of associated transactions or changes in the circumstances to which associated judgments and estimates relate and (iii) there were no significant changes in the manner in which critical accounting policies were applied or in which related judgments and estimates were developed.

## Market risk

As filed, 12,035 characters.

### Market Risk-Sensitive Instruments and Positions

The risk inherent in our market risk-sensitive instruments and positions is primarily the potential loss arising from adverse changes in commodity prices, foreign currency exchange rates, interest rates and the credit quality of available-for-sale securities as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions our management may take to mitigate our exposure to such changes. Actual results may differ.

### Commodity Prices

We purchase certain commodities, primarily corn and soybean meal, for use as ingredients in the feed we either sell commercially or consume in our live operations. As a result, our earnings are affected by changes in the price and availability of such feed ingredients. In the past, we have from time to time attempted to minimize our exposure to the changing price and availability of such feed ingredients using various techniques, including, but not limited to, (i) executing purchase agreements with suppliers for future physical delivery of feed ingredients at established prices and (ii) purchasing or selling derivative financial instruments such as futures and options.

For this sensitivity analysis, market risk is estimated as a hypothetical 10.0% change in the weighted-average cost of our

primary feed ingredients as of September 24, 2017. However, fluctuations greater than 10.0% could occur. Based on our feed consumption during the thirteen weeks ended September 24, 2017, such a change would have resulted in a change to cost of sales of approximately $108.7 million, excluding the impact of any feed ingredients derivative financial instruments in that period. A 10.0% change in ending feed ingredient inventories at September 24, 2017 would be $12.1 million, excluding any potential impact on the production costs of our chicken inventories.

The Company purchases commodity 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 the next 12 months. A 10.0% change in corn, soybean meal and soybean oil prices on September 24, 2017 would have resulted in a change of approximately $0.4 million in the fair value of our net commodity derivative asset position, including margin cash, as of that date.

### Interest Rates

Our variable-rate debt instruments represent approximately 36.1% of our total debt at September 24, 2017. Holding other variables constant, including levels of indebtedness, an increase in interest rates of 25 basis points would have increased our interest expense by $0.6 million for the thirteen weeks ended September 24, 2017.

Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a hypothetical decrease in interest rates of 10.0%. Using a discounted cash flow analysis, a hypothetical 10.0% decrease in interest rates would have decreased the fair value of our fixed-rate debt by approximately $5.4 million as of September 24, 2017.

### Foreign Currency

Our earnings are also affected by foreign exchange rate fluctuations related to the Mexican peso net monetary position of our Mexico subsidiaries. We manage this exposure primarily by attempting to minimize our Mexican peso net monetary position.

We are also exposed to the effect of potential currency exchange rate fluctuations to the extent that amounts are repatriated from Mexico to the U.S. We currently anticipate that the future cash flows of our Mexico subsidiaries will be reinvested in our Mexico segment.

The Mexican peso exchange rate can directly and indirectly impact our financial condition and results of operations in

several ways, including potential economic recession in Mexico because of devaluation of their currency. Foreign currency exchange gains, representing the change in the U.S. dollar value of the net monetary assets of our Mexican subsidiaries denominated in Mexican pesos, were a gain of $1.2 million and a loss of $4.1 million in the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively. Foreign currency exchange gains, representing the change in the U.S. dollar value of the net monetary assets of our Mexican subsidiaries denominated in Mexican pesos, were a gain of $2.4 million and a gain of $0.8 million in the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. The average exchange rates for the thirteen weeks ended September 24, 2017 and September 25, 2016 were 17.81 Mexican pesos to 1 U.S. dollar and 18.73 Mexican pesos to 1 U.S. dollar, respectively. For this sensitivity analysis, market risk is estimated as a hypothetical 10.0% deterioration in the current exchange rate used to convert Mexican pesos to U.S. dollars as of September 24, 2017 and September 25, 2016. However, fluctuations greater than 10.0% could occur. Based on the net monetary asset position of our Mexico segment at September 24, 2017, such a change would have resulted in a decrease in foreign currency transaction gains recognized in the thirteen weeks ended September 24, 2017 of approximately $2.0 million. Based on the net monetary asset position of our Mexico segment at September 25, 2016, such a change would have resulted in a decrease in foreign currency transaction gains recognized in the thirteen weeks ended September 25, 2016 of approximately $1.1 million. No assurance can be given as to how future movements in the Mexican peso could affect our future financial condition or results of operations.

Additionally, we are exposed to foreign exchange-related variability of investments and earnings from our foreign investments in Europe (including the U.K.). Foreign currency market risk is the possibility that our financial results or financial position could be better or worse than planned because of changes in foreign currency exchange rates. At September 24, 2017, our U.K. and Europe segment had net equity of approximately $617.7 million, or 35.2% of total net equity, denominated in British pounds, after consideration of our derivative and nonderivative financial instruments. Based on our sensitivity analysis, a 10% adverse change in exchange rates would cause a reduction of $61.8 million to our net equity.

At September 24, 2017, we had foreign currency forward contracts, which were designated and qualify as cash flow hedges, with an aggregate notional amount of $22.7 million to hedge a portion of our investments in Europe (including the U.K.). On the basis of our sensitivity analysis, a weakening of the U.S. dollar against the British pound by 10% would result in a $2.3 million negative change in our cash flows on settlement. No assurance can be given as to how future movements in currency rates could affect our future financial condition or results of operations.

### Quality of Investments

Certain retirement plans that we sponsor invest in a variety of financial instruments. We have analyzed our portfolios of investments and, to the best of our knowledge, none of our investments, including money market funds units, commercial paper and municipal securities, have been downgraded, and neither we nor any fund in which we participate hold significant amounts of structured investment vehicles, auction rate securities, collateralized debt obligations, credit derivatives, hedge funds investments, fund of funds investments or perpetual preferred securities. Certain postretirement funds in which we participate hold significant amounts of mortgage-backed securities. However, none of the mortgages collateralizing these securities are considered subprime.

### Impact of Inflation

Due to low to moderate inflation in the U.S., Europe (including the U.K.) and Mexico and our rapid inventory turnover rate, the results of operations have not been significantly affected by inflation during the past three-year period.

### Forward Looking Statements

Certain written and oral statements made by our Company and subsidiaries of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made herein, in our other filings with the SEC, in press releases, and in certain other oral and written presentations. Statements of our intentions, beliefs, expectations or predictions for the future, denoted by the words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “imply,” “intend,” “should,” “foresee” and similar expressions, are forward-looking statements that reflect our current views about future events and are subject to risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include the following:

- Matters affecting the chicken industry generally, including fluctuations in the commodity prices of feed ingredients and chicken;
- Our ability to obtain and maintain commercially reasonable terms with vendors and service providers;
- Our ability to maintain contracts that are critical to our operations;
- Our ability to retain management and other key individuals;
- Outbreaks of avian influenza or other diseases, either in our own flocks or elsewhere, affecting our ability to conduct our operations and/or demand for our poultry products;
- Contamination of our products, which has previously and can in the future lead to product liability claims and product recalls;
- Exposure to risks related to product liability, product recalls, property damage and injuries to persons, for which insurance coverage is expensive, limited and potentially inadequate;
- Changes in laws or regulations affecting our operations or the application thereof;
- Our ability to ensure that our directors, officers, employees, agents, third-party intermediaries and the companies to which we outsource certain of our business operations will comply with anti-corruption laws or other laws governing the conduct of business with government entities;
- New immigration legislation or increased enforcement efforts in connection with existing immigration legislation that cause our costs of business to increase, cause us to change the way in which we do business or otherwise disrupt our operations;
- Competitive factors and pricing pressures or the loss of one or more of our largest customers;
- Inability to consummate, or effectively integrate, any acquisition, including the acquisitions of Moy Park and GNP, or to realize the associated anticipated cost savings and operating synergies;
- Currency exchange rate fluctuations, trade barriers, exchange controls, expropriation and other risks associated with foreign segments;
- Restrictions imposed by, and as a result of, Pilgrim's Pride's leverage;
- Disruptions in international markets and distribution channels;
- Our ability to maintain favorable labor relations with our employees and our compliance with labor laws;
- Extreme weather or natural disasters;
- The impact of uncertainties in litigation; and
- Other risks described herein and under “Risk Factors” in our annual report on Form 10-K for the year ended December 25, 2016 as filed with the SEC.

Actual results could differ materially from those projected in these forward-looking statements as a result of these factors, among others, many of which are beyond our control.

In making these statements, we are not undertaking, and specifically decline to undertake, any obligation to address or update each or any factor in future filings or communications regarding our business or results, and we are not undertaking to address how any of these factors may have caused changes to information contained in previous filings or communications. Although we have attempted to list comprehensively these important cautionary risk factors, we must caution investors and others that other factors may in the future prove to be important and affect our business or results of operations.

## Controls and procedures

As filed, 3,123 characters.

### Disclosure Controls and Procedures

Under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files with the U.S. Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files with the SEC is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of September 24, 2017, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information we are required to disclose in our reports filed with the SEC is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the evaluation described above, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, identified no change in the Company’s internal control over financial reporting that occurred during the thirteen weeks ended September 24, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company's evaluation of internal control over financial reporting did not include the internal control of GNP, which the Company acquired in the first quarter of 2017. The amount of total assets and revenue of GNP included in our Condensed Consolidated and Combined Financial Statements as of and for the thirty-nine weeks ended September 24, 2017 was $428.4 million and $322.4 million, respectively. Also, our evaluation of internal control over financial reporting did not include the internal control of Moy Park, which the Company acquired in the third quarter of 2017. The amount of total assets and revenue of Moy Park included in our Condensed Consolidated and Combined Financial Statements as of and for the thirty-nine weeks ended September 24, 2017 was $2.2 billion and $1.5 billion, respectively.

## Risk factors

As filed, 21,714 characters.

In addition to the other information set forth in this quarterly report, you should carefully consider the risks discussed in our annual report on Form 10-K for the year ended December 25, 2016, including under the heading “Item 1A. Risk Factors”, which, along with risks disclosed in this report, are risks we believe could materially affect the Company’s business, financial condition or future results. These risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition or future results. The following risk factors either update or supplement those contained in our annual report on Form 10-K for the year ended December 25, 2016:

**We may not be able to successfully integrate the operations of companies we acquire, including Moy Park or GNP, or benefit from growth opportunities.**

We intend to pursue additional selected growth opportunities in the future. These opportunities, including the Moy Park acquisition and the GNP acquisition, may expose us to successor liability relating to actions involving any acquired entities, their respective management or contingent liabilities incurred prior to our involvement and will expose us to liabilities associated with ongoing operations, in particular to the extent we are unable to adequately and safely manage such acquired operations. A material liability associated with these types of opportunities, or our failure to successfully integrate any acquired entities into our business, could adversely affect our reputation and have a material adverse effect on us.

Undisclosed liabilities from our acquisitions may harm our financial condition and operating results. If we make acquisitions in the future, these transactions may be structured in such a manner that would result in our assumption of undisclosed liabilities or liabilities not identified during our pre-acquisition due diligence. These obligations and liabilities could adversely affect our financial condition and operating results.

We may not be able to successfully integrate any growth opportunities we may undertake in the future, including the Moy Park acquisition and the GNP acquisition, or successfully implement appropriate operational, financial and administrative systems and controls to achieve the benefits that we expect to result therefrom. These risks include: (1) failure of the acquired entities to achieve expected results; (2) possible inability to retain or hire key personnel of the acquired entities; and (3) possible inability to achieve expected synergies and/or economies of scale. In addition, the process of integrating businesses could cause interruption of, or loss of momentum in, the activities of our existing business. The diversion of our management’s attention and any delays or difficulties encountered in connection with the integration of these businesses could adversely affect our business, results of operations and prospects.

### Our foreign operations pose special risks to our business and operations.

We have significant operations and assets located in Mexico and Europe and may participate in or acquire operations and assets in other foreign countries in the future. Foreign operations are subject to a number of special risks such as currency exchange rate fluctuations, trade barriers, exchange controls, expropriation and changes in laws and policies, including tax laws and laws governing foreign-owned operations.

Currency exchange rate fluctuations have adversely affected us in the past. Exchange rate fluctuations or one or more other risks may have a material adverse effect on our business or operations in the future.

Our operations in Mexico are conducted through subsidiaries organized under the laws of Mexico. Claims of creditors of our subsidiaries, including trade creditors, will generally have priority as to the assets of our subsidiaries over our claims. Additionally, the ability of our Mexican subsidiaries to make payments and distributions to us may be limited by the terms of our Mexico Credit Facility and will be subject to, among other things, Mexican law. In the past, these laws have not had a material adverse effect on the ability of our Mexican subsidiaries to make these payments and distributions. However, laws such as these may have a material adverse effect on the ability of our Mexican subsidiaries to make these payments and distributions in the future.

The terms of the Moy Park Indenture restrict Moy Park’s ability and the ability of certain of Moy Park’s subsidiaries to, among other things, make payments and distributions to us. These restrictions may have a material adverse effect on Moy Park’s ability to make these payments and distributions in the future.

**J&F Investimentos S.A. is investigating improper payments made in Brazil in connection with admissions of illicit conduct to the Brazilian Federal Prosecutor’s Office and the outcome of this investigation and related investigations by the Brazilian government could have a material adverse effect on us.**

On May 3, 2017, certain officers of J&F Investimentos S.A. (“J&F,” and the companies controlled by J&F, the “J&F Group”) (including two former directors of the Company), a company organized in Brazil and an indirect controlling stockholder of the Company, entered into plea bargain agreements (the “Plea Bargain Agreements”) with the Brazilian Federal Prosecutor’s Office (*Ministério Público Federal) (“*MPF”) in connection with certain illicit conduct involving improper payments made to Brazilian politicians, government officials and other individuals in Brazil committed by or on behalf of J&F and certain J&F Group companies. The details of such illicit conduct are set forth in separate annexes to the Plea Bargain Agreements, and include admissions of improper payments to politicians and political parties in Brazil over the last 10 years in exchange for receiving, or attempting to receive, favorable treatment for certain J&F Group companies in Brazil.

Pursuant to the terms of the Plea Bargain Agreements, the MPF agreed to grant immunity to the officers in exchange for such officers agreeing, among other considerations, to: (1) pay fines totaling R$225.0 million; (2) cooperate with the MPF, including providing supporting evidence of the illicit conduct identified in the annexes to the Plea Bargain Agreements; and (3) present any previously undisclosed illicit conduct within 120 days following the execution of the Plea Bargain Agreements as long as the description of such conduct had not been omitted in bad faith. In addition, the Plea Bargain Agreements provide that the MPF may terminate any Plea Bargain Agreement and request that the Supreme Court of Brazil (*Supremo Tribunal Federal) (“*STF”) ratify such termination if any illicit conduct is identified that was not included in the annexes to the Plea Bargain Agreements.

On June 5, 2017, J&F, in its role as the controlling shareholder of the J&F Group, entered into a leniency agreement (the “Leniency Agreement”) with the MPF, whereby J&F assumed responsibility for the conduct that was described in the annexes to the Plea Bargain Agreements. In connection with the Leniency Agreement, J&F has agreed to pay a fine of R$10.3 billion, adjusted for inflation, over a 25-year period. In exchange, the MPF agreed not to initiate or propose any criminal, civil or administrative actions against J&F, the companies of the J&F Group or those officers of J&F with respect to such conduct. Pursuant to the terms of the Leniency Agreement, if the Plea Bargain Agreement is annulled by the STF, then the Leniency Agreement may also be terminated by the Fifth Chamber of Coordination and Reviews of the MPF or, solely with respect to the criminal related provisions of the Leniency Agreement, by the 10th Federal Court of the Federal District in Brasília, the authorities responsible for the ratification of the Leniency Agreement.

On August 24, 2017, the Fifth Chamber ratified the Leniency Agreement. On September 8, 2017, the 10th Federal Court ratified the Leniency Agreement. In compliance with the terms of the Leniency Agreement, J&F is conducting an internal investigation involving improper payments made in Brazil by or on behalf of J&F, certain companies of the J&F Group and certain officers of J&F (including two former directors of the Company). J&F has engaged outside advisors to assist it in conducting the investigation, including an assessment as to whether any of the misconduct disclosed to Brazilian authorities had any connection to the Company or Moy Park, or resulted in a violation of U.S. law. The internal investigation is ongoing and the Company is fully cooperating with J&F in connection with the investigation. We cannot predict when the investigation will be completed or the

results of the investigation, including the outcome or impact of any government investigations or any resulting litigation.

On September 8, 2017, at the request of the MPF, the STF issued an order temporarily revoking the immunity from prosecution previously granted to Joesley Mendonça Batista and another executive of J&F in connection with the Plea Bargain Agreements. The MPF requested the revocation of their immunity following public disclosure of certain voice recordings involving them in which they discussed certain alleged illicit activities the MPF claims were not covered by the annexes to their respective Plea Bargain Agreements. On September 10, 2017, Joesley Mendonça Batista voluntarily turned himself into police in Brazil. On

September 11, 2017, the 10th Federal Court suspended its ratification of the criminal provisions of the Leniency Agreement as a result of the STF’s temporary revocation of Joesley Mendonça Batista immunity under his Plea Bargain Agreement. The provisions of the Leniency Agreement related to criminal conduct will remain suspended until the STF issues a final decision on the validity of the Plea Bargain Agreements.

We cannot predict whether the Plea Bargain Agreements will be upheld or terminated by the STF, and, if terminated, whether the Leniency Agreement will be also terminated by either the Fifth Chamber and/or the 10th Federal Court, and to what extent. If the Leniency Agreement is terminated, in whole or in part, as a result of any Plea Bargain Agreement being terminated, this may materially adversely affect the public perception or reputation of the J&F Group, including the Company, and could have a material adverse effect on the J&F Group’s business, financial condition, results of operations and prospects. Furthermore, the termination of the Leniency Agreement may cause the termination of certain stabilization agreements entered into by JBS S.A.

and certain of its subsidiaries, which would permit the lenders of the debt that is the subject to the terms of the stabilization agreements to accelerate their debt, which could have a material adverse effect on JBS S.A. and its subsidiaries (including the Company).

Separately, Wesley Mendonça Batista (the former Chief Executive Officer of JBS S.A.) was arrested on September 13, 2017, as a result of a separate investigation by Brazil’s federal police alleging that Joesley Mendonça Batista and Wesley Mendonça Batista carried out insider trading transactions involving the sale of shares of JBS S.A. and foreign exchange futures contracts prior to the announcement of the Plea Bargain Agreements. The Securities and Exchange Commission of Brazil (*Comissão de Valores Mobiliários*) is also investigating these insider trading transactions. On September 21, 2017, the Brazilian federal police formally requested that the federal prosecutor bring charges against Joesley Mendonça Batista and Wesley Mendonça Batista as a result of this investigation. These investigations, possible indictments and any further developments in this matter may materially adversely affect the public perception or reputation of JBS S.A. and its subsidiaries (including the Company) and could have a material adverse effect on JBS S.A. and its subsidiaries (including the Company).

**We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act and the UK Bribery Act.**

We are subject to a number of anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and the UK Bribery Act.

The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments or improperly providing anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or keeping business and/or other benefits. Some of these laws have legal effect outside the jurisdictions in which they are adopted under certain circumstances. The FCPA also requires maintenance of adequate record-keeping and internal accounting practices to accurately reflect transactions. Under the FCPA, companies operating in the United States may be held liable for actions taken by their strategic or local partners or representatives.

The UK Bribery Act is broader in scope than the FCPA in that it directly prohibits commercial bribery (i.e. bribing others than government officials) in addition to bribery of government officials and it does not recognize certain exceptions, notably for facilitation payments, that are permitted by the FCPA. The UK Bribery Act also has wide jurisdiction. It covers any offense committed in the United Kingdom, but proceedings can also be brought if a person who has a close connection with the United Kingdom commits the relevant acts or omissions outside the United Kingdom. The UK Bribery Act defines a person with a close connection to include British citizens, individuals ordinarily resident in the United Kingdom and bodies incorporated in the United Kingdom.

The UK Bribery Act also provides that any organization that conducts part of its business in the United Kingdom, even if it is not incorporated in the United Kingdom, can be prosecuted for the corporate offense of failing to prevent bribery by an associated person, even if the bribery took place entirely outside the United Kingdom and the associated person had no connection with the United Kingdom. Other jurisdictions in which we operate have adopted similar anti-corruption, anti-bribery and anti-kickback laws to which we are subject. Civil and criminal penalties may be imposed for violations of these laws.

Although the code of ethics and standards of conduct adopted by JBS S.A. in late 2015 requires our employees to comply with the FCPA and the UK Bribery Act, we are still implementing a formal compliance program and policies that cover our employees and consultants. We operate in some countries which are viewed as high risk for corruption. Despite our ongoing efforts to ensure compliance with the FCPA, the UK Bribery Act and similar laws, there can be no assurance that our directors, officers, employees, agents, third-party intermediaries and the companies to which we outsource certain of our business operations, will comply with those laws and our anti-corruption policies, and we may be ultimately held responsible for any such non-compliance. If we or our directors or officers violate anti-corruption laws or other laws governing the conduct of business with government entities (including local laws), we or our directors or officers may be subject to criminal and civil penalties or other remedial measures, which could harm our reputation and have a material adverse impact on our business, financial condition, results of operations and prospects. Any actual or alleged violations of such laws could also harm our reputation or have an adverse impact on our business, financial condition, results of operations and prospects.

**Our future financial and operating flexibility may be adversely affected by significant leverage.**

On a consolidated basis, as of September 24, 2017, we had approximately $1.6 billion in secured indebtedness, $991.0 million of unsecured indebtedness and had the ability to borrow approximately $744.8 million under our credit agreements. Significant amounts of cash flow will be necessary to make payments of interest and repay the principal amount of such indebtedness.

The degree to which we are leveraged could have important consequences because:

- It could affect our ability to satisfy our obligations under our credit agreements and any other financing arrangements;
- A substantial portion of our cash flow from operations is required to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;
- Our ability to obtain additional financing and to fund working capital, capital expenditures and other general corporate requirements in the future may be impaired;
- We may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;
- Our flexibility in planning for, or reacting to, changes in our business may be limited;
- It may limit our ability to pursue acquisitions and sell assets; and
- It may make us more vulnerable in the event of a continued or new downturn in our business or the economy in general.

Our ability to make payments on and to refinance our debt, including our credit facilities, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to various business factors (including, among others, the commodity prices of feed ingredients and chicken) and general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control.

There can be no assurance that we will be able to generate sufficient cash flow from operations or that future borrowings will be available under our credit facilities in an amount sufficient to enable us to pay our debt obligations, including obligations under our credit facilities, or to fund our other liquidity needs. We may need to refinance all or a portion of their debt on or before maturity. There can be no assurance that we will be able to refinance any of their debt on commercially reasonable terms or at all.

**Assumption of unknown liabilities in acquisitions may harm our financial condition and operating results.**

Acquisitions may be structured in such a manner that would result in the assumption of unknown liabilities not disclosed by the seller or uncovered during pre-acquisition due diligence. For example, our acquisitions of GNP and Moy Park were structured as a stock purchase in which we effectively assumed all of the liabilities of GNP and Moy Park, respectively, including liabilities that may be unknown. Such unknown obligations and liabilities could harm our financial condition and operating results.

**The vote by the U.K. electorate in favor of having the U.K. exit the European Union could adversely impact our business, results of operations and financial condition.**

In a referendum held in the United Kingdom on June 23, 2016, a majority of those voting voted for the United Kingdom to leave the European Union (referred to as “Brexit”). For now, the United Kingdom remains a member of the European Union and there will not be any immediate change in either European Union or U.K. law as a consequence of the vote. European Union law does not govern contracts and the United Kingdom is not part of the European Union’s monetary union. However, Brexit vote signals the beginning of a lengthy process under which the terms of the United Kingdom’s withdrawal from, and future relationship with, the European Union will be negotiated and legislation to implement the United Kingdom’s withdrawal from the European

Union will be enacted. The ultimate impact of Brexit vote will depend on the terms that are negotiated in relation to the United Kingdom’s future relationship with the European Union. Although the timetable for U.K. withdrawal is not at all clear at this stage, it is likely that the withdrawal of the United Kingdom from the European Union will take more than two years to be negotiated and conclude.

Brexit could impair our ability to transact business in the United Kingdom and in countries in the European Union. Brexit has already and could continue to adversely affect European and/or worldwide economic and market conditions and could continue to contribute to instability in the global financial markets. The long-term effects of Brexit will depend in part on any agreements the United Kingdom makes to retain access to markets in the European Union following the United Kingdom’s withdrawal from the European Union. In addition, we expect that Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replicate or replace. If the United Kingdom were to significantly alter its regulations affecting the food industry, we could face significant new costs. It may also be time-consuming and expensive for us to alter our internal operations in order to comply with new regulations. Additionally, Moy Park’s results of operations may be adversely affected if the United Kingdom is unable to secure replacement trade agreements and arrangements on terms as favorable as those currently enjoyed by the United Kingdom. Any of the effects of Brexit could adversely affect our business, business opportunities, results of operations, financial condition and cash flows.

Filed Nov 8, 2017.
Source: SEC EDGAR, the filing index for accession 0000802481-17-000071. Last ingested by Listed: Oct 29, 2026, 06:16 ET. No prices; not investment advice.