# Pilgrims Pride Corp: Form 10-Q for the period ended Sep 29, 2019

- Company: [Pilgrims Pride Corp](/companies/ppc.md) (CIK 802481)
- Form: 10-Q
- Filed: 2019-10-31
- Accepted by EDGAR: Oct 30, 2019, 20:04 ET
- Period: 2019-09-29
- Accession: 0000802481-19-000097
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/802481/000080248119000097/ppc-09292019x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/802481/000080248119000097/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-29 | $2.78bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-12-31 to 2019-09-29 | $8.35bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-07-01 to 2019-09-29 | $2.50bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-12-31 to 2019-09-29 | $7.48bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-07-01 to 2019-09-29 | $282.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-12-31 to 2019-09-29 | $869.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-07-01 to 2019-09-29 | $94.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-12-31 to 2019-09-29 | $264.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-07-01 to 2019-09-29 | $188.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-12-31 to 2019-09-29 | $604.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-07-01 to 2019-09-29 | $32.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-12-31 to 2019-09-29 | $99.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-29 | $46.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-12-31 to 2019-09-29 | $142.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-29 | $109.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-12-31 to 2019-09-29 | $363.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-29 | $0.44 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-12-31 to 2019-09-29 | $1.46 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-29 | $0.44 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-12-31 to 2019-09-29 | $1.46 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-29 | 249,729,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-12-31 to 2019-09-29 | 249,652,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-12-31 to 2019-09-29 | $535.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-12-31 to 2019-09-29 | $258.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-09-29 | $598.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-09-29 | $2.61bn | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-29 | $6.60bn | us-gaap:Assets |
| Current liabilities | at 2019-09-29 | $1.44bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-09-29 | $4.27bn | us-gaap:Liabilities |
| Current portion of debt | at 2019-09-29 | $26.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2019-09-29 | $2.32bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 64,615 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 and the Netherlands. As of September 29, 2019, we had approximately 52,700 employees and the capacity to process approximately 45.1 million birds per work week for a total of approximately 12.9 billion pounds of live chicken annually. Approximately 4,900 contract growers supply poultry for our operations. As of September 29, 2019, JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owned 78.3% of our outstanding common stock. See “Note 1. Description of Business and Basis of Presentation” of our Condensed Consolidated 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, 2019) in this quarterly report applies to our fiscal year and not the calendar year.

### Executive Summary

We reported net income attributable to Pilgrim’s Pride Corporation of $109.8 million, or $0.44 per diluted common share, for the thirteen weeks ended September 29, 2019. These operating results included gross profit of $282.2 million. During the thirteen weeks ended September 29, 2019, we generated $132.1 million of cash from operations.

We reported net income attributable to Pilgrim’s Pride Corporation of $363.8 million, or $1.46 per diluted common share, for the thirty-nine weeks ended September 29, 2019. These operating results included gross profit of $869.0 million. During the thirty-nine weeks ended September 29, 2019, we generated $535.5 million of cash from operations.

Our U.S. and Mexico segments use corn and soybean meal as the main ingredients for feed production, while our U.K. and Europe segment uses wheat as the main ingredient for feed production. The following table compares the highest and lowest prices reached on nearby futures for one bushel of corn, one ton of soybean meal and one metric ton of wheat during the current and previous years:

| 2019: | Corn(a) Highest Price | Lowest Price | Soybean Meal(a) Highest Price | Lowest Price | Wheat(a) Highest Price | Lowest Price |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Third Quarter | $4.59 | $3.54 | $321.50 | $293.00 | £172.03 | £153.43 |
| Second Quarter | 4.69 | 3.72 | 334.90 | 295.50 | 176.21 | 174.54 |
| First Quarter | 3.98 | 3.66 | 330.20 | 305.30 | 173.80 | 155.30 |
| 2018: |  |  |  |  |  |  |
| Fourth Quarter | 3.90 | 3.68 | 327.30 | 307.80 | 179.30 | 167.00 |
| Third Quarter | 3.87 | 3.43 | 341.40 | 303.30 | 194.65 | 165.75 |
| Second Quarter | 4.27 | 3.66 | 391.70 | 329.90 | 156.75 | 142.40 |
| First Quarter | 4.01 | 3.63 | 394.10 | 319.60 | 139.20 | 134.70 |

(a) We obtain corn and soybean meal prices from the Chicago Board of Trade, and we obtain wheat prices from the London International Financial Futures and Options Exchange.

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, soybean oil and natural gas. We will sometimes purchase a derivative instrument to minimize the impact of a commodity’s price volatility on our operating results. We will also 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 and euros. For additional information see “Note 6. Derivative Financial Instruments”.

During the thirteen weeks ended September 29, 2019 and September 30, 2018, we recognized net losses totaling $10.0 million and $7.4 million, respectively, related to changes in the fair value of our derivative financial instruments. During the thirty-nine weeks ended September 29, 2019 and September 30, 2018, we recognized net losses totaling $18.5 million and $25.0 million, respectively, related to changes in the fair value 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, these 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 such commodities. 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.

### Tulip Limited Acquisition

On October 15, 2019, we acquired 100% of the equity of Tulip Limited and its subsidiaries (together, “Tulip”) from Danish Crown AmbA for £290 million, subject to customary working capital adjustments. The acquisition was funded through cash on hand. Tulip Limited, a leading, integrated prepared pork supplier, is headquartered in Warwick, U.K., operates twelve fresh and value-added facilities in that country and employs approximately 6,100 people. The acquisition solidifies us as a leading European food company, creating one of the largest integrated prepared foods businesses in the U.K.

### Brexit

The anticipated exit of the U.K. from the European Union (“E.U.”) (commonly referred to as “Brexit”) and the resulting significant change to the relationship between the U.K. and the E.U., as well as relationships between the U.K. and countries outside the E.U., could disrupt the overall economic growth or stability of the U.K. and the E.U. and otherwise negatively impact our European operations. The U.K. is due to exit the E.U. on January 31, 2020. The U.K. could leave the E.U. prior to January 31, 2020 if a withdrawal agreement negotiated between the U.K. and the E.U. is approved by the U.K. Parliament. If the U.K. were to approve a withdrawal agreement, it would maintain the status quo regarding trade rights with the E.U. during a transition period in order to allow negotiation of a free trade agreement between the two governments. If the withdrawal agreement is not approved by January 31, 2020, the U.K. would either leave the E.U. immediately under World Trade Organization terms or would request and be reliant upon the E.U. approving a further extension to the exit date.

It is possible that Brexit could result in our European operations becoming subject to materially different, and potentially conflicting, laws, regulations or tariffs which could require costly new compliance initiatives. There could also be additional adverse impacts on immigration and trade between the U.K. and the E.U. or countries outside the E.U. Such impacts might directly increase our costs or could decrease demand for our goods. The completion of Brexit could also adversely affect the value of our British pound- and euro-denominated assets and obligations. Future fluctuations in the exchange rate between the British pound, the euro and other currencies of our suppliers may have the effect of increasing the cost of goods sold by our European operations. We might not be able to pass on such increases to our customers. Any one of these impacts could have an adverse effect on our results of operations and financial condition.

To prepare for the impacts of Brexit, our European operations have (i) engaged with various U.K. and E.U. government departments to highlight the issues of Brexit and to develop potential solutions to those issues, (ii) engaged with customers to formalize contingency plans to minimize business disruption should the U.K. exit the E.U. without an approved withdrawal agreement, (iii) analyzed product flows and reviewed meat availability to determine appropriate plans for customers, (iv) engaged with customers to commence post-Brexit business plans and to negotiate cost-sharing arrangements for such plans, and (v) increased stock levels where possible to help manage border delays that could occur following Brexit.

Significant uncertainty remains until the terms of the exit are known. We will continue to analyze and plan for the exit as information becomes available.

### 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 additional information, see “Note 20. Segment Reporting” of our Condensed Consolidated Financial Statements included in this quarterly report.

### Results of Operations

#### Thirteen Weeks Ended September 29, 2019 Compared to Thirteen Weeks Ended September 30, 2018

*Net sales.* Net sales generated in the thirteen weeks ended September 29, 2019 increased $80.4 million, or 3.0%, from net sales generated in the thirteen weeks ended September 30, 2018. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Thirteen Weeks Ended September 29, 2019 Percent | Change from Thirteen Weeks Ended September 30, 2018 |  |
| --- | ---: | ---: | ---: |
| U.S.(a) | $1,931,657 | $67,488 | 3.6% |
| U.K. and Europe(b) | 517,531 | (9,191) | (1.7)% |
| Mexico(c) | 328,782 | 22,069 | 7.2% |
| Total net sales | $2,777,970 | $80,366 | 3.0% |

(a) U.S. net sales generated in the thirteen weeks ended September 29, 2019 increased $67.5 million, or 3.6%, from U.S. net sales generated in the thirteen weeks ended September 30, 2018 primarily because of increases in both net sales per pound and sales volume. The increase in net sales per pound experienced by our U.S. segment contributed $47.0 million, or 2.5 percentage points, and the increase in sales volume contributed $20.4 million, or 1.1 percentage points, to the increase in net sales. Included in U.S. net sales generated during the thirteen weeks ended September 29, 2019 and September 30, 2018 were net sales to JBS USA Food Company totaling $3.8 million and $4.0 million, respectively.

(b) U.K. and Europe net sales generated in the thirteen weeks ended September 29, 2019 decreased $9.2 million, or 1.7%, from U.K. and Europe net sales generated in the thirteen weeks ended September 30, 2018 primarily because of the unfavorable impact of foreign currency translation and a decrease in sales volume, partially offset by an increase in net sales per pound. The unfavorable impact of foreign currency translation contributed $29.5 million, or 5.6 percentage points, and the decrease in sales volume contributed $7.3 million, or 1.4 percentage points, to the decrease in net sales. An increase in net sales per pound partially offset the impact that the unfavorable foreign currency translation and lower sales volume had on net sales by $27.6 million, or 5.2 percentage points.

(c) Mexico net sales generated in the thirteen weeks ended September 29, 2019 increased $22.1 million, or 7.2%, from Mexico net sales generated in the thirteen weeks ended September 30, 2018 primarily because of an increase in net sales per pound, partially offset by a decrease in sales volume and the unfavorable impact of foreign currency remeasurement. Increased net sales per pound contributed $66.0 million, or 21.5 percentage points, to the increase in net sales. Partially offsetting the increase in net sales per pound was a decrease in sales volume and the unfavorable impact of foreign currency remeasurement of $35.9 million, or 11.7 percentage points, and $8.1 million, or 2.6 percentage points, respectively.

*Gross profit.* Gross profit increased by $112.5 million, or 66.3%, from $169.7 million generated in the thirteen weeks ended September 30, 2018 to $282.2 million generated in the thirteen weeks ended September 29, 2019. 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 29, 2019 Thirteen Weeks Ended Amount | Change from Thirteen Weeks Ended September 30, 2018 Percent September 29, 2019 | September 30, 2018 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $2,777,970 | $80,366 | 3.0% | 100.0% | 100.0% |
| Cost of sales(a)(b)(c) | 2,495,773 | (32,090) | (1.3)% | 89.8% | 93.7% |
| Gross profit | $282,197 | $112,456 | 66.3% | 10.2% | 6.3% |

44

*(In thousands, except percent data)*

| Sources of gross profit Amount | Thirteen Weeks Ended September 29, 2019 Percent | Change from Thirteen Weeks Ended September 30, 2018 |  |
| --- | ---: | ---: | ---: |
| U.S. | $192,183 | $60,817 | 46.3% |
| U.K. and Europe | 43,041 | 1,754 | 4.2% |
| Mexico | 46,949 | 49,886 | 1,698.5% |
| Intersegment transactions, net | 24 | (1) | (4.0)% |
| Total gross profit | $282,197 | $112,456 | 66.3% |

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Thirteen Weeks Ended September 29, 2019 Percent | Change from Thirteen Weeks Ended September 30, 2018 |  |
| --- | ---: | ---: | ---: |
| U.S.(a) | $1,739,474 | $6,671 | 0.4% |
| U.K. and Europe(b) | 474,490 | (10,945) | (2.3)% |
| Mexico(c) | 281,833 | (27,817) | (9.0)% |
| Intersegment transactions, net | (24) | 1 | (4.0)% |
| Total cost of sales | $2,495,773 | $(32,090) | (1.3)% |

(a) Cost of sales incurred by our U.S. segment during the thirteen weeks ended September 29, 2019 increased $6.7 million, or 0.4%, from cost of sales incurred by our U.S. segment during the thirteen weeks ended September 30, 2018. Cost of sales increased primarily because of the $19.0 million impact of increased sales volume, partially offset by a $12.3 million impact from decreased net cost per pound sold. Included in the the impact of sales volume increases and decreased cost per pound sold in cost of sales is a $19.3 million increase in hourly labor costs due to increased pay rates, partially offset by a decrease in freight costs of $7.3 million and a $4.5 million decrease in employee healthcare benefit costs. Other factors affecting cost of sales were individually immaterial.

(b) Cost of sales incurred by our U.K. and Europe segment during the thirteen weeks ended September 29, 2019 decreased $10.9 million, or 2.3%, from cost of sales incurred by our U.K. and Europe segment during the thirteen weeks ended September 30, 2018. U.K. and Europe cost of sales decreased primarily because of the $6.8 million impact of reduced sales volume and the $27.0 million favorable impact of foreign currency translation. Partially offsetting the decreases in sales volume and impact of foreign currency translation was an increase in cost per pound sold of $22.8 million. Included in the impact of reduced sales volume, foreign currency translation and increased cost per pound sold on the decrease in cost of sales was a reduction of live bird input costs of $12.0 million, mainly driven by the cost of feed. Other factors affecting cost of sales were individually immaterial.

(c) Cost of sales incurred by our Mexico segment during the thirteen weeks ended September 29, 2019 decreased $27.8 million, or 9.0%, from cost of sales incurred by our Mexico segment during the thirteen weeks ended September 30, 2018. Mexico cost of sales decreased primarily because of the $36.2 million impact of reduced sales volume and the $6.9 million favorable impact of foreign currency remeasurement. Partially offsetting the decreases in sales volume and impact of foreign currency remeasurement was an increase in cost per pound sold of $15.3 million. Included in the impact of reduced sales volume, foreign currency remeasurement and increased cost per pound sold on the decrease in cost of sales was a $10.0 million gain from the sale of two broiler farms and a $17.9 million decrease in overall production costs due to reduced production volume. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income increased by $102.8 million, or 120.5%, from $85.3 million generated in the thirteen weeks ended September 30, 2018 to $188.2 million generated in the thirteen weeks ended September 29, 2019. 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 29, 2019 Percent | Change from Thirteen Weeks Ended September 30, 2018 September 29, 2019 | September 30, 2018 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $282,197 | $112,456 | 66.3% | 10.2% | 6.3% |
| SG&A expense(a)(b)(c) | 94,032 | 9,894 | 11.8% | 3.4% | 3.1% |
| Administrative restructuring activities(d) | (20) | (277) | (107.8)% | —% | —% |
| Operating income | $188,185 | $102,839 | 120.5% | 6.8% | 3.2% |

45

*(In thousands, except percent data)*

| Sources of operating income Thirteen Weeks Ended September 29, 2019 Amount Percent | Change from Thirteen Weeks Ended September 30, 2018 |
| --- | ---: |
| U.S. $125,169 | $50,963 68.7% |
| U.K. and Europe 25,325 | 1,855 7.9% |
| Mexico 37,667 | 50,022 404.9% |
| Intersegment transactions, net 24 | (1) (4.0)% |
| Total operating income $188,185 | $102,839 120.5% |
| **Sources of SG&A expense** **Thirteen Weeks Ended September 29, 2019** | **Change from Thirteen Weeks Ended September 30, 2018** |
| **Amount** **Percent** |  |
| **(In thousands, except percent data)** |  |
| U.S.(a) $67,034 | $10,131 17.8% |
| U.K. and Europe(b) 17,717 | (101) (0.6)% |
| Mexico(c) 9,281 | (136) (1.4)% |
| Total SG&A expense $94,032 | $9,894 11.8% |
| **Sources of administrative restructuring activities** **Thirteen Weeks Ended September 29, 2019** | **Change from Thirteen Weeks Ended September 30, 2018** |
| **Amount** **Percent** |  |
| **(In thousands, except percent data)** |  |
| U.S.(d) $(20) | $(277) (107.8)% |
| U.K. and Europe — | — —% |
| Mexico — | — —% |
| Total administrative restructuring activities $(20) | $(277) (107.8)% |

(a) SG&A expense incurred by our U.S. segment during the thirteen weeks ended September 29, 2019 increased $10.1 million, or 17.8%, from SG&A expense incurred by our U.S. segment during the thirteen weeks ended September 30, 2018, primarily because of a $5.2 million increase in compensation expenses due to increases in incentive compensation and benefits, a $2.9 million increase in legal expenses due to ongoing litigation and a $2.7 million increase in advertising and promotion expenses as a result of increased Internet promotions. 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 29, 2019 decreased $0.1 million, or 0.6%, from SG&A expense incurred by our U.K. and Europe segment during the thirteen weeks ended September 30, 2018. SG&A expense incurred by our U.K. and Europe segment decreased primarily because of a $3.5 million decrease in acquisition expenses and a $0.9 million decrease in advertising and promotion expenses. These decreases in SG&A expense were partially offset by a $4.4 million increase in employee compensation expenses mainly due to severance costs. Other factors affecting SG&A expense were individually immaterial.

(c) SG&A expense incurred by our Mexico segment during the thirteen weeks ended September 29, 2019 decreased $0.1 million, or 1.4%, from SG&A expense incurred by our Mexico segment during the thirteen weeks ended September 30, 2018. Factors affecting SG&A expenses by our Mexico segment were individually immaterial.

(d) Administrative restructuring activities incurred by our U.S. segment during the thirteen weeks ended September 29, 2019 included $20,000 of sublease income related to the termination of 40 North Foods operations. Administrative restructuring charges incurred by our U.S. segment during the thirteen weeks ended September 30, 2018 included impairment costs of $0.3 million related to the closure of our Luverne, Minnesota processing plant.

*Net interest expense.* Net interest expense decreased 12.1% to $27.3 million recognized in the thirteen weeks ended September 29, 2019 from $31.1 million recognized in the thirteen weeks ended September 30, 2018. Average borrowings decreased from $2.4 billion in the thirteen weeks ended September 30, 2018 to $2.3 billion in the thirteen weeks ended September 29, 2019. There was no change in weighted average interest rate in the thirteen weeks ended September 29, 2019 as compared to the thirteen weeks ended September 30, 2018.

*Income taxes.* Income tax expense increased to $46.4 million, a 29.6% effective tax rate, for the thirteen weeks ended September 29, 2019 compared to income tax expense of $30.8 million, a 51.1% effective tax rate, for the thirteen weeks ended September 30, 2018. The increase in income tax expense in 2019 resulted primarily from an increase in pre-tax income and an increase in unrecognized tax benefits in Mexico, partially offset by the recognition of the one-time transition tax for the thirteen weeks ended September 30, 2018.

#### Thirty-Nine Weeks Ended September 29, 2019 Compared to Thirty-Nine Weeks Ended September 30, 2018

*Net sales.* Net sales generated in the thirty-nine weeks ended September 29, 2019 increased $64.7 million, or 0.8%, from net sales generated in the thirty-nine weeks ended September 30, 2018. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Thirty-Nine Weeks Ended September 29, 2019 Percent | Change from Thirty-Nine Weeks Ended September 30, 2018 |  |
| --- | ---: | ---: | ---: |
| U.S.(a) | $5,732,201 | $127,492 | 2.3% |
| U.K. and Europe(b) | 1,568,396 | (65,729) | (4.0)% |
| Mexico(c) | 1,045,133 | 2,972 | 0.3% |
| Total net sales | $8,345,730 | $64,735 | 0.8% |

(a) U.S. net sales generated in the thirty-nine weeks ended September 29, 2019 increased $127.5 million, or 2.3%, from U.S. net sales generated in the thirty-nine weeks ended September 30, 2018, primarily because of an increase in sales volume and an increase in net sales per pound. The increases in sales volume and net sales per pound experienced by our U.S. segment contributed $68.4 million, or 1.2 percentage points, and $59.1 million, or 1.1 percentage points, respectively, to the increase in net sales. Included in U.S. net sales generated during the thirty-nine weeks ended September 29, 2019 and September 30, 2018 were net sales to JBS USA Food Company totaling $11.0 million and $10.0 million, respectively.

(b) U.K. and Europe net sales generated in the thirty-nine weeks ended September 29, 2019 decreased $65.7 million, or 4.0%, from U.K. and Europe net sales generated in the thirty-nine weeks ended September 30, 2018, primarily because of the unfavorable impact of foreign currency translation and a decrease in sales volume, partially offset by an increase in net sales per pound. The unfavorable impact of foreign currency translation and decrease in sales volume contributed $95.9 million, or 5.9 percentage points, and $70.7 million, or 4.3 percentage points, respectively, to the decrease in net sales. These decreases were partially offset by an increase in net sales per pound of $101.0 million, or 6.2 percentage points.

(c) Mexico net sales generated in the thirty-nine weeks ended September 29, 2019 increased $3.0 million, or 0.3%, from Mexico net sales generated in the thirty-nine weeks ended September 30, 2018, primarily because of an increase net sales per pound, partially offset by a decrease in sales volume and the unfavorable impact of foreign currency remeasurement. The increase in net sales per pound contributed $60.5 million, or 5.8 percentage points, to the increase in net sales. Partially offsetting the increase in net sales per pound was a decrease in sales volume and the unfavorable impact of foreign currency remeasurement of $45.8 million, or 4.4 percentage points, and $11.8 million, or 1.1 percentage points, respectively.

*Gross profit.* Gross profit increased by $137.4 million, or 18.8%, from $731.6 million generated in the thirty-nine weeks ended September 30, 2018 to $869.0 million generated in the thirty-nine weeks ended September 29, 2019. 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 29, 2019 Thirty-Nine Weeks Ended Amount | Change from Thirty-Nine Weeks Ended September 30, 2018 Percent September 29, 2019 | September 30, 2018 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $8,345,730 | $64,735 | 0.8% | 100.0% | 100.0% |
| Cost of sales(a)(b)(c) | 7,476,731 | (72,636) | (1.0)% | 89.6% | 91.2% |
| Gross profit | $868,999 | $137,371 | 18.8% | 10.4% | 8.8% |

*(In thousands, except percent data)*

| Sources of gross profit Amount | Thirty-Nine Weeks Ended September 29, 2019 Percent | Change from Thirty-Nine Weeks Ended September 30, 2018 |  |
| --- | ---: | ---: | ---: |
| U.S. | $608,923 | $141,263 | 30.2% |
| U.K. and Europe | 116,142 | (16,989) | (12.8)% |
| Mexico | 143,862 | 13,059 | 10.0% |
| Intersegment transactions, net | 72 | 38 | 111.8% |
| Total gross profit | $868,999 | $137,371 | 18.8% |

47

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Thirty-Nine Weeks Ended September 29, 2019 Percent | Change from Thirty-Nine Weeks Ended September 30, 2018 |  |
| --- | ---: | ---: | ---: |
| U.S.(a) | $5,123,278 | $(13,771) | (0.3)% |
| U.K. and Europe(b) | 1,452,254 | (48,740) | (3.2)% |
| Mexico(c) | 901,271 | (10,087) | (1.1)% |
| Intersegment transactions, net | (72) | (38) | 111.8% |
| Total cost of sales | $7,476,731 | $(72,636) | (1.0)% |

(a) Cost of sales incurred by our U.S. segment during the thirty-nine weeks ended September 29, 2019 decreased $13.8 million, or 0.3%, from cost of sales incurred by our U.S. segment during the thirty-nine weeks ended September 30, 2018. Cost of sales decreased primarily because of a $76.5 million impact of decreased cost per pound sold, partially offset by a $62.7 million impact of increased sales volume. Included in the decreased cost per pound sold and increased sales volume was a $14.1 million realized gain related to commodity derivatives. Other factors affecting cost of sales were individually immaterial.

(b) Cost of sales incurred by our U.K. and Europe segment during the thirty-nine weeks ended September 29, 2019 decreased $48.7 million, or 3.2%, from cost of sales incurred by our U.K. and Europe segment during the thirty-nine weeks ended September 30, 2018. U.K. and Europe cost of sales decreased primarily because of a $88.8 million impact of foreign currency translation and the $65.0 million impact due to a reduction in sales volume. These decreases in cost of sales were partially offset by an increase in cost per pound sold of $105.1 million. Included in the impact of foreign currency translation, reduced sales volume and increased cost per pound sold on the decrease in cost of sales was a reduction in live bird input costs of $66.1 million. The impact of reduced live bird input costs on cost of sales was partially offset by a $15.8 million increase in deprecation costs. Other factors affecting cost of sales were individually immaterial.

(c) Cost of sales incurred by our Mexico segment during the thirty-nine weeks ended September 29, 2019 decreased $10.1 million, or 1.1%, from cost of sales incurred by our Mexico segment during the thirty-nine weeks ended September 30, 2018. Mexico cost of sales decreased primarily because of the $40.0 million impact of reduced sales volume and a $10.2 million favorable impact of foreign currency remeasurement. These decreases in cost of sales were partially offset by increased cost per pound sold of $40.1 million. Included in the impact of decreased sales volume, favorable foreign currency remeasurement and impact of increased cost per pound sold was a $21.4 million decrease in overall production costs due to reduced production volume and a $10.0 million gain from the sale of two broiler farms, partially offset by an $8.8 million increase in grower costs mainly due to contract pay increases, a $7.4 million increase in direct labor costs, a $3.1 million increase in electricity costs due to increased rates and a $2.8 million increase in freight costs. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income increased by $132.7 million, or 28.1%, from $472.1 million generated in the thirty-nine weeks ended September 30, 2018 to $604.8 million generated in the thirty-nine weeks ended September 29, 2019. 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 29, 2019 Percent | Change from Thirty-Nine Weeks Ended September 30, 2018 September 29, 2019 | September 30, 2018 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $868,999 | $137,371 | 18.8% | 10.4% | 8.8% |
| SG&A expense(a)(b)(c) | 264,313 | 6,917 | 2.7% | 3.2% | 3.1% |
| Administrative restructuring activities(d) | (90) | (2,271) | (104.1)% | —% | —% |
| Operating income | $604,776 | $132,725 | 28.1% | 7.2% | 5.7% |

48

*(In thousands, except percent data)*

| Sources of operating income Thirty-Nine Weeks Ended September 29, 2019 Amount Percent | Change from Thirty-Nine Weeks Ended September 30, 2018 |
| --- | ---: |
| U.S. $426,968 | $126,008 41.9% |
| U.K. and Europe 62,233 | (6,312) (9.2)% |
| Mexico 115,503 | 12,991 12.7% |
| Intersegment transactions, net 72 | 38 111.8% |
| Total operating income $604,776 | $132,725 28.1% |
| **Sources of SG&A expense** **Thirty-Nine Weeks Ended September 29, 2019** | **Change from Thirty-Nine Weeks Ended September 30, 2018** |
| **Amount** **Percent** |  |
| **(In thousands, except percent data)** |  |
| U.S.(a) $182,045 | $17,526 10.7% |
| U.K. and Europe(b) 53,909 | (10,677) (16.5)% |
| Mexico(c) 28,359 | 68 0.2% |
| Total SG&A expense $264,313 | $6,917 2.7% |
| **Sources of administrative restructuring activities** **Thirty-Nine Weeks Ended September 29, 2019** | **Change from Thirty-Nine Weeks Ended September 30, 2018** |
| **Amount** **Percent** |  |
| **(In thousands, except percent data)** |  |
| U.S.(d) $(90) | $(2,271) (104.1)% |
| U.K. and Europe — | — —% |
| Mexico — | — —% |
| Total administrative restructuring activities $(90) | $(2,271) (104.1)% |

(a) SG&A expense incurred by our U.S. segment during the thirty-nine weeks ended September 29, 2019 increased $17.5 million, or 10.7%, from SG&A expense incurred by our U.S. segment during the thirty-nine weeks ended September 30, 2018, primarily because of a $12.6 million increase in incentive compensation expenses, a $6.0 million increase in advertising and promotion expenses due to Internet promotions and a $4.0 million increase in legal expenses due to increased litigation. These increases in SG&A expenses were partially offset by a $5.4 million decrease in professional fees mainly due to a reduction in consulting 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 29, 2019 decreased $10.7 million, or 16.5%, from SG&A expense incurred by our U.K. and Europe segment during the thirty-nine weeks ended September 30, 2018. SG&A expense incurred by our U.K. and Europe segment decreased primarily because of a $3.5 million decrease in acquisition expenses, a $2.8 million decrease in severance expenses, a $2.1 million decrease in legal expenses and a $1.5 million decrease in advertising and promotion expenses. Other factors affecting SG&A expense were individually immaterial.

(c) SG&A expense incurred by our Mexico segment during the thirty-nine weeks ended September 29, 2019 increased $0.1 million, or 0.2%, from SG&A expense incurred by our Mexico segment during the thirty-nine weeks ended September 30, 2018. Factors affecting SG&A expenses by our Mexico segment were individually immaterial.

(d) Administrative restructuring activities incurred by our U.S. segment during the thirty-nine weeks ended September 29, 2019 included $90,000 of sublease income related to the termination of 40 North Foods operations. Administrative restructuring activities incurred by our U.S. segment during the thirty-nine weeks ended September 30, 2018 included $1.0 million in severance costs related to the GNP acquisition, $0.7 million in severance, asset impairment and lease obligations resulting from termination of 40 North Foods operations and $0.5 million in costs related to the closure of the Luverne, Minnesota facility.

*Net interest expense.* Net interest expense decreased 23.9% to $87.7 million recognized in the thirty-nine weeks ended September 29, 2019 from $115.2 million recognized in the thirty-nine weeks ended September 30, 2018. Average borrowings decreased from $2.6 billion in the thirty-nine weeks ended September 30, 2018 to $2.3 billion in the thirty-nine weeks ended September 29, 2019. The weighted average interest rate increased from 5.2% in the thirty-nine weeks ended September 30, 2018 to 5.4% thirty-nine weeks ended September 29, 2019.

*Income taxes.* Income tax expense increased to $142.3 million, a 28.1% effective tax rate, for the thirty-nine weeks ended September 29, 2019 compared to income tax expense of $106.4 million, a 29.4% effective tax rate, for the thirty-nine weeks ended September 30, 2018. The increase in income tax expense in 2019 resulted primarily from an increase in pre-tax income and an increase in unrecognized tax benefits in Mexico, partially offset by the recognition of the one-time transition tax for the thirty-nine weeks ended September 30, 2018.

### Liquidity and Capital Resources

The following table presents our available sources of liquidity as of September 29, 2019:

*(In millions)*

| Source of Liquidity | Facility Amount | Amount Outstanding | Amount Available |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents |  |  | $598.1 |
| Borrowing arrangements: |  |  |  |
| U.S. Credit Facility(a) | $750.0 | $— | 708.4 |
| Mexico Credit Facility(b) | 74.8 | — | 74.8 |
| U.K. and Europe Credit Facilities(c) | 133.8 | — | 133.8 |

(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 29, 2019 totaled $41.6 million.

(b) As of September 29, 2019, the U.S. dollar-equivalent of the amount available under the Mexico Credit Facility (as described below) was $74.8 million. The Mexico Credit Facility provides for a loan commitment of $1.5 billion Mexican pesos.

(c) As of September 29, 2019, the U.S. dollar-equivalent of the amount available under the U.K. and Europe Credit Facilities (as described below) were $133.8 million. The U.K. and Europe Credit Facilities provide for loan commitments of £100.0 million (or $122.9 million U.S. dollar equivalent) under the Bank of Ireland Facility Agreement (as described below) and €10.0 million (or $10.9 million U.S. dollar equivalent) under the Invoice Discounting Facility (as described below).

### Long-Term Debt and Other Borrowing Arrangements

### U.S. Senior Notes

On March 11, 2015, we completed a sale of $500.0 million aggregate principal amount of our 5.75% senior notes due 2025. On September 29, 2017, we completed an add-on offering of $250.0 million of these senior notes. The issuance price of this add-on offering was 102.0%, which created gross proceeds of $255.0 million. The additional $5.0 million will be amortized over the remaining life of the senior notes. On March 7, 2018, we completed another add-on offering of $250.0 million of these senior notes (together with the senior notes issued in March 2015 and September 2017, the “Senior Notes due 2025”). The issuance price of this add-on offering was 99.25%, which created gross proceeds of $248.1 million. The $1.9 million discount will be amortized over the remaining life of the senior notes. Each issuance of the Senior Notes due 2025 is treated as a single class for all purposes under the 2015 Indenture (defined below) and have the same terms.

The Senior Notes due 2025 are governed by, and were issued pursuant to, an indenture dated as of March 11, 2015 by and among us, our 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 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 that were issued in March 2015 and beginning on March 15, 2018 for the Senior Notes due 2025 that were issued in September 2017 and March 2018.

On September 29, 2017, we completed a sale of $600.0 million aggregate principal amount of our 5.875% senior notes due 2027. On March 7, 2018, we completed an add-on offering of $250.0 million of these senior notes (together with the senior notes issued in September 2017, the “Senior Notes due 2027”). The issuance price of this add-on offering was 97.25%, which created gross proceeds of $243.1 million. The $6.9 million discount will be amortized over the remaining life of the Senior Notes due 2027. Each issuance of the Senior Notes due 2027 is treated as a single class for all purposes under the 2017 Indenture (defined below) and have the same terms.

The Senior Notes due 2027 are governed by, and were issued pursuant to, an indenture dated as of September 29, 2017 by and among us, our 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 for the Senior Notes due 2027 that were issued in September 2017 and beginning on March 15, 2018 for the Senior Notes due 2027 that were issued in March 2018.

The Senior Notes due 2025 and the Senior Notes due 2027 are each guaranteed on a senior unsecured basis by our guarantor subsidiary. In addition, any of our 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 Senior Notes due 2027. The Senior Notes due 2025 and the Senior Notes due 2027 and related guarantees are unsecured senior obligations of us and our guarantor subsidiary and rank equally with all of our and our guarantor subsidiary’s other unsubordinated indebtedness. The

Senior Notes due 2025, the 2015 Indenture, 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 2025 and the Senior Notes due 2027 when due, among others.

### U.S. Credit Facility

On July 20, 2018, we, and certain of our subsidiaries entered into a Fourth Amended and Restated Credit Agreement (the “U.S. Credit Facility”) with CoBank, ACB, as administrative agent and collateral agent, and the other lenders party thereto. The U.S. Credit Facility provides for a $750.0 million revolving credit commitment and a term loan commitment of up to $500.0 million (the “Term Loans”). We used the proceeds from the term loan commitment under the U.S. Credit Facility, together with cash on hand, to repay the outstanding loans under our previous credit agreement with Coöperatieve Rabobank U.A., New York Branch, as administrative agent, and the other lenders and financial institutions party thereto.

The U.S. Credit Facility includes an accordion feature that allows us, at any time, to increase the aggregate revolving loan and term loan commitments by up to an additional $1.25 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 July 20, 2023. All principal on the Term Loans is due at maturity on July 20, 2023. 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 us to use the proceeds we receive from certain asset sales and specified debt or equity issuances and upon the occurrence of other events to repay outstanding borrowings under the U.S. Credit Facility. As of September 29, 2019, we had Term Loans outstanding totaling $481.3 million and the amount available for borrowing under the revolving loan commitment was $708.4 million. We had letters of credit of $41.6 million and no borrowings outstanding under the revolving loan commitment as of September 29, 2019.

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 1.25% through August 2, 2018 and, thereafter, based on our 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 0.25% through August 2, 2018 and, based on our 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 customary financial and other various covenants for transactions of this type, including restrictions on our ability to incur additional indebtedness, incur liens, pay dividends, make certain restricted payments, consummate certain asset sales, enter into certain transactions with our affiliates, or merge, consolidate and/or sell or dispose of all or substantially all of our assets, among other things. The U.S. Credit Facility requires us 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.

All obligations under the U.S. Credit Facility continue to be unconditionally guaranteed by certain of our subsidiaries and continue to be secured by a first priority lien on (i) the accounts receivable and inventory of us and our 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 us and our guarantors under the U.S. Credit Facility. We are currently in compliance with the covenants under the U.S. Credit Facility.

### U.K. and Europe Credit Facilities

#### Moy Park France Invoice Discounting Facility

In June 2009, Moy Park France Sàrl entered into a €20.0 million invoice discounting facility with GE De Facto (the “Invoice Discounting Facility”). The facility limit was decreased by 50 percent in June 2018. The Invoice Discounting Facility is payable on demand and the term is extended on an annual basis. The agreement can be terminated by either party with three months’ notice. Outstanding borrowings under the Invoice Discounting Facility bear interest at a per annum rate equal to EURIBOR plus a margin of 0.80%. As of September 29, 2019, the U.S. dollar-equivalent loan commitment and borrowing availability under the Invoice Discounting Facility were $10.9 million. As of September 29, 2019, there were no outstanding borrowings under the Invoice Discounting Facility.

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 our other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of Moy Park's assets.

#### Moy Park Credit Agricole Bank Overdraft

On December 3, 2018, Moy Park entered into an unsecured €0.5 million bank overdraft agreement (the “Overdraft Agreement”) with Credit Agricole. The Overdraft Agreement is payable on demand and can be cancelled anytime by us or Credit Agricole. Outstanding borrowings under the Overdraft Agreement bear interest at a per annum rate equal to EURIBOR plus 1.50%. As of September 29, 2019, there were no outstanding borrowings under the Overdraft Agreement.

#### Moy Park Bank of Ireland Revolving Facility Agreement

On June 2, 2018, Moy Park Holdings (Europe) Ltd. and its subsidiaries entered into an unsecured multicurrency revolving facility agreement (the “Bank of Ireland Facility Agreement”) with the Governor and Company of the Bank of Ireland, as agent, and the other lenders party thereto. The Bank of Ireland Facility Agreement provides for a multicurrency revolving loan commitment of up to £100.0 million. The multicurrency revolving loan commitments under the Bank of Ireland Facility Agreement mature on June 2, 2023. Outstanding borrowings under the Bank of Ireland Facility Agreement bear interest at a rate per annum equal to the sum of (i) LIBOR or, in relation to any loan in euros, EURIBOR, plus (ii) a margin, ranging from 1.25% to 2.00% based on Leverage (as defined in the Bank of Ireland Facility Agreement). All obligations under the Bank of Ireland Facility Agreement are guaranteed by certain of Moy Park's subsidiaries. As of September 29, 2019, both the U.S. dollar-equivalent loan commitment and borrowing availability under the Bank of Ireland Facility Agreement were $122.9 million. As of September 29, 2019, there were no outstanding borrowings under the Bank of Ireland Facility Agreement.

The Bank of Ireland Facility Agreement contains representations and warranties, covenants, indemnities and conditions that we believe are customary for transactions of this type. Pursuant to the terms of the Bank of Ireland Facility Agreement, Moy Park is required to meet certain financial and other restrictive covenants. Additionally, Moy Park is prohibited from taking certain actions without consent of the lenders, including, without limitation, incurring additional indebtedness, entering into certain mergers or other business combination transactions, permitting liens or other encumbrances on its assets and making restricted payments, including dividends, in each case except as expressly permitted under the Bank of Ireland Facility Agreement. The Bank of Ireland Facility Agreement contains events of default that we believe are customary for transactions of this type. If a default occurs, any outstanding obligations under the Bank of Ireland Facility Agreement may be accelerated.

### Mexico Credit Facility

On December 14, 2018, certain of our Mexican subsidiaries entered into an unsecured credit agreement (the “Mexico Credit Facility”) with Banco del Bajio, Sociedad Anónima, Institución de Banca Múltiple, as lender. The loan commitment under the Mexico Credit Facility is $1.5 billion Mexican pesos and can be borrowed on a revolving basis. The U.S. dollar-equivalent of the loan commitment under the Mexico Credit Facility is $74.8 million. Outstanding borrowings under the Mexico Credit Facility accrue interest at a rate equal to the 28-Day Interbank Equilibrium Interest Rate plus 1.50%. The Mexico Credit Facility contains covenants and defaults that we believe are customary for transactions of this type. The Mexico Credit Facility will be used for general corporate and working capital purposes. The Mexico Credit Facility will mature on December 14, 2023. As of September 29, 2019, there were no outstanding borrowings under the Mexico Credit Facility.

### Collateral

Substantially all of our domestic inventories and domestic fixed assets are pledged as collateral to secure the obligations under the U.S. Credit Facility. The U.K. and Europe and Mexico credit facilities are unsecured.

### Historical Flow of Funds

### Thirty-Nine Weeks Ended September 29, 2019

Cash provided by operating activities was $535.5 million for the thirty-nine weeks ended September 29, 2019. The cash flows provided by operating activities resulted primarily from net income of $364.3 million, net noncash expenses of $215.6 million, a change in accounts payable, accrued expenses and other current liabilities of $67.3 million and changes in income taxes of $40.5 million. These cash flows were offset by the use of $108.1 million in cash related to inventories and $46.6 million use of cash related to trade accounts and other receivables.

The change in trade accounts and other receivables, including accounts receivable from related parties, represented a$46.6 million use of cash related to operating activities for the thirty-nine weeks ended September 29, 2019. This change is primarily due to customer payment timing.

The change in inventories represented a $108.1 million use of cash related to operating activities for the thirty-nine weeks ended September 29, 2019. This change resulted primarily from an increase in our finished products inventory.

The change in prepaid expenses and other current assets represented a $3.5 million use of cash related to operating activities for the thirty-nine weeks ended September 29, 2019. This change resulted primarily from a net increase in value-added tax receivables.

The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities, including accounts payable to related parties, represented a $67.3 million source of cash related to operating activities for the thirty-nine weeks ended September 29, 2019. This change resulted primarily from the timing of payments.

The change in 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 income, represented a $40.5 million source of cash related to operating activities for the thirty-nine weeks ended September 29, 2019. This change resulted primarily from the timing of estimated tax payments.

Net noncash expenses provided $215.6 million of cash related to operating activities for the thirty-nine weeks ended ended September 29, 2019. Net noncash expense items included depreciation and amortization of $210.4 million, share-based compensation of $7.3 million and loan cost amortization of $3.6 million, which were partially offset by a deferred income tax benefit of $2.4 million.

Cash used in investing activities totaled $243.6 million for the thirty-nine weeks ended September 29, 2019. Cash used to acquire property, plant and equipment totaled $258.7 million. Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs. Cash proceeds generated from property disposals totaled $15.2 million during the thirty-nine weeks ended September 29, 2019.

Cash used by financing activities totaled $27.7 million for the thirty-nine weeks ended September 29, 2019. Uses of cash included payments on revolving lines of credit, long-term borrowings and finance lease obligations totaling $123.3 million, the purchase of common stock under share repurchase program totaling $2.9 million, capitalized loan costs totaling $0.7 million and a $0.5 million cash payment from equity distributions under a tax sharing agreement with JBS USA Food Company Holdings. These uses of cash were partially offset by proceeds from revolving line of credit and long-term debt totaling $99.6 million.

### Thirty-Nine Weeks Ended September 30, 2018

Cash provided by operating activities was $425.3 million for the thirty-nine weeks ended September 30, 2018. The cash flows provided by operating activities resulted primarily from net income of $255.0 million, net noncash expenses of $229.3 million, a $78.1 million source of cash related to accounts payable, accrued expenses and other current liabilities and a $64.8 million source of cash related to inventories. These cash flows were partially offset by the use of $175.6 million in cash related to income taxes, the use of $3.4 million in cash related to trade accounts and other receivables and the use of $15.4 million in cash related to prepaid expenses and other current assets.

The change in trade accounts and other receivables, including accounts receivable from related parties, represented a$3.4 million use of cash related to operating activities for the thirty-nine weeks ended September 30, 2018. This change was primarily due to customer payment timing.

The change in inventories represented a $64.8 million source of cash related to operating activities for the thirty-nine weeks ended September 30, 2018. This change resulted primarily from a decrease in our finished products inventory.

The change in prepaid expenses and other current assets represented a $15.4 million use of cash related to operating activities for the thirty-nine weeks ended September 30, 2018. This change resulted primarily from a net increase in both commodity derivatives and value-added tax receivables.

The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities, including accounts payable to related parties, represented a $78.1 million source of cash related to operating activities for the thirty-nine weeks ended September 30, 2018. This change resulted primarily from the timing of payments.

The change in 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, represented a $175.6 million use of cash related to operating activities for the thirty-nine weeks ended September 30, 2018. This change resulted primarily from the timing of estimated tax payments.

Net noncash expenses provided $229.3 million of cash related to operating activities for the thirty-nine weeks ended September 30, 2018. Net noncash expense items included depreciation and amortization of $211.5 million, share-based compensation of $9.3 million, noncash loss on early extinguishment of debt of $6.0 million and foreign currency transaction loss related to borrowing arrangements of $4.2 million, which were partially offset by a deferred income tax benefit of $2.1 million.

Cash used in investing activities totaled $229.2 million for the thirty-nine weeks ended September 30, 2018. Cash used to acquire property, plant and equipment totaled $231.9 million. Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs. Cash proceeds generated from property disposals totaled $2.7 million during the thirty-nine weeks ended September 30, 2018.

Cash used by financing activities totaled $373.9 million for the thirty-nine weeks ended September 30, 2018. Cash proceeds from long-term debt totaled $703.1 million and cash proceeds from equity contributions under a tax sharing agreement with JBS USA Food Company Holdings totaled $5.6 million. These sources of cash were offset by $1.1 billion in cash used for payments on revolving lines of credit, long-term borrowings and capital lease obligations and $11.1 million in cash used to pay capitalized loan costs.

### Contractual Obligations

Contractual obligations at September 29, 2019 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) | $2,332,583 | $26,284 | $50,049 | $406,250 | $1,850,000 |
| Interest(c) | 799,653 | 123,366 | 243,982 | 228,774 | 203,531 |
| Finance leases | 1,688 | 423 | 669 | 596 | — |
| Operating leases | 346,246 | 82,269 | 120,518 | 81,181 | 62,278 |
| Derivative liabilities | 14,350 | 14,350 | — | — | — |
| Purchase obligations(d) | 350,215 | 344,882 | 5,333 | — | — |
| Total | $3,844,735 | $591,574 | $420,551 | $716,801 | $2,115,809 |

(a) The total amount of unrecognized tax benefits at September 29, 2019 was $12.3 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 $41.6 million in letters of credit outstanding related to normal business transactions.

(c) Interest expense in the table above assumes the continuation of interest rates and outstanding borrowings as of September 29, 2019.

(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 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.

We expect cash flows from operations, combined with availability under our credit facilities, 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.

### Recent Accounting Pronouncements Adopted as of September 29, 2019

In February 2016, the Financial Accounting Standards Board (“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. We adopted the standard as of December 31, 2018. Adoption of the standard had a material impact on our Condensed Consolidated Balance Sheet as a result of the increase in assets and liabilities from recognition of operating assets and lease liabilities. However, the standard did not have a material impact on our Condensed Consolidated Statement of Income.

In August 2017, the FASB issued an accounting standard update that simplifies the application of hedge accounting guidance in current accounting principles generally accepted in the U.S. and improves the reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. We adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.

In February 2018, the FASB issued an accounting standard update that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. We adopted this standard as of December 31, 2018, and elected not to reclassify the stranded tax effects. The adoption of this guidance did not have a material impact on our financial statements.

In July 2018, the FASB issued an accounting standard update to improve non-employee share-based payment accounting. The accounting standard update more closely aligns the accounting for employee and non-employee share based payments. We adopted this standard as of December 31, 2018. The adoption of this guidance did not have a material impact on our financial statements.

### Recent Accounting Pronouncements Not Yet Adopted as of September 29, 2019

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. We will adopt the provisions of the new guidance effective December 30, 2019, the beginning of our 2020 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements.

In August 2018, the FASB issued an accounting standard update to improve the effectiveness of disclosures related to fair value measurements. This accounting standard update removes certain disclosure requirements related to transfers between fair value hierarchy levels and the valuation processes used for certain fair value measurements. The update requires additional disclosures as to significant unobservable inputs used in certain fair value measurements and gains and losses included in other comprehensive income. We will adopt the provisions of the new guidance effective December 30, 2019, the beginning of our 2020 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements.

In August 2018, the FASB issued an accounting standard update to improve the effectiveness of disclosures related to defined benefit plans. The update removes disclosures related to the amounts in accumulated other comprehensive income expected to be recognized in the next fiscal year, adds narrative disclosure of the reasons for significant gains and losses related to changes in the defined benefit obligation, and clarifies the disclosures required for plans with projected and accumulated benefit obligations in excess of plan assets. We will adopt the provisions of the new guidance effective December 30, 2019, the beginning of our 2020 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements.

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

### Critical Accounting Policies

During the thirty-nine weeks ended September 29, 2019, (i) 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 (ii) 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, 11,946 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, soybean meal and wheat, 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 29, 2019. However, fluctuations greater than 10.0% could occur. Based on our feed consumption during the thirteen weeks ended September 29, 2019, such a change would have resulted in a change to cost of sales of approximately $78.8 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 29, 2019 would be $14.0 million, excluding any potential impact on the production costs of our chicken inventories.

We purchase commodity derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our anticipated consumption of commodity inputs for the next 12 months. A 10.0% change in corn and soybean meal prices on September 29, 2019 would have resulted in a change of approximately $2.1 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 20.6% of our total debt at September 29, 2019. Holding other variables constant, including levels of indebtedness, an increase in interest rates of 25 basis points would have increased our interest expense by less than $0.1 million for the thirteen weeks ended September 29, 2019.

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 $2.8 million as of September 29, 2019.

### 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 losses, representing the change in the U.S. dollar value of the net monetary assets of our Mexican subsidiaries denominated in Mexican pesos, were a loss of $3.7 million and a gain of $6.8 million in the thirteen weeks ended September 29, 2019 and September 30, 2018, respectively. Foreign currency exchange losses, representing the change in the U.S. dollar value of the net monetary assets of our Mexican subsidiaries denominated in Mexican pesos, were gains of $0.7 million and $3.1 million in the thirty-nine weeks ended September 29, 2019 and September 30, 2018, respectively. The average exchange rates for the thirteen weeks ended September 29, 2019 and September 30, 2018 were 19.58 Mexican pesos to 1 U.S. dollar and 18.95 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 29, 2019 and September 30, 2018. However, fluctuations greater than 10.0% could occur. Based on the net monetary asset position of our Mexico segment at September 29, 2019, such a change would have resulted in a increase in foreign currency transaction losses recognized in the thirteen weeks ended September 29, 2019 and September 30, 2018 of approximately $16.1 million and $5.9 million, respectively. 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 29, 2019, our U.K. and Europe segment had net assets of approximately $1.5 billion, 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 $154.0 million to our net assets.

At September 29, 2019, we had foreign currency forward contracts, which were designated and qualify as cash flow hedges, with an aggregate notional amount of $0.9 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 $1.8 million negative change in our cash flows on settlement while a weakening of the U.S. dollar against the euro by 10% would result in a $1.7 million increase 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 acquisition of Tulip, 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, including risks associated with Brexit;
- Restrictions imposed by, and as a result of, the leverage of Pilgrim's Pride;
- 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 30, 2018 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, 2,536 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 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 29, 2019, 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, made changes during the thirty-nine weeks ended September 29, 2019 to the Company's internal controls over financial reporting for the implementation of a new information technology system relating to the adoption of Accounting Standards Update 2016-02, *Leases (Topic 842).* No other changes to the Company's internal control over financial reporting occurred during the thirty-nine weeks ended September 29, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 674 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 30, 2018, 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.

Filed Oct 31, 2019.
Source: SEC EDGAR, the filing index for accession 0000802481-19-000097. Last ingested by Listed: Oct 29, 2026, 06:16 ET. No prices; not investment advice.