# Pilgrims Pride Corp: Form 10-Q for the period ended Mar 29, 2020

- Company: [Pilgrims Pride Corp](/companies/ppc.md) (CIK 802481)
- Form: 10-Q
- Filed: 2020-04-30
- Accepted by EDGAR: Apr 29, 2020, 20:17 ET
- Period: 2020-03-29
- Accession: 0000802481-20-000041
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/802481/000080248120000041/ppc-20200329.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/802481/000080248120000041/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-12-30 to 2020-03-29 | $3.07bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-12-30 to 2020-03-29 | $2.90bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-12-30 to 2020-03-29 | $177.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-12-30 to 2020-03-29 | $92.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-12-30 to 2020-03-29 | $84.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-12-30 to 2020-03-29 | $32.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-12-30 to 2020-03-29 | $38.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-12-30 to 2020-03-29 | $67.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-12-30 to 2020-03-29 | $0.27 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-12-30 to 2020-03-29 | $0.27 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-12-30 to 2020-03-29 | 249,622,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-12-30 to 2020-03-29 | $21.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-12-30 to 2020-03-29 | $77.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2019-12-30 to 2020-03-29 | $27.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-03-29 | $511.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-03-29 | $2.86bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-03-29 | $7.25bn | us-gaap:Assets |
| Current liabilities | at 2020-03-29 | $1.52bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-03-29 | $4.78bn | us-gaap:Liabilities |
| Current portion of debt | at 2020-03-29 | $25.9m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-03-29 | $2.47bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,409 characters.

### Executive Summary

### Overview

We reported net income attributable to Pilgrim’s of $67.3 million, or $0.27 per diluted common share, and profit before tax totaling $106.0 million, for the three months ended March 29, 2020. These operating results included net sales of $3.1 billion, gross profit of $177.1 million and $21.1 million of cash generated from operations. We generated operating margins of 2.7% with operating margins of 4.4%, 2.8% and (7.3)% in our United States (“U.S.”), United Kingdom (“U.K.”) and Europe, and Mexico reportable segments, respectively.

### Impact of COVID-19

The novel Coronavirus (“COVID-19”), which has been declared a pandemic, has spread to multiple global regions, including the U.S., Mexico and Europe. The extensive impact of this pandemic has resulted and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. In an effort to halt the outbreak of COVID-19, a number of countries, states, counties and other jurisdictions have imposed various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations and extended closures of businesses. On April 28, 2020, President Trump signed an executive order directing the Department of Agriculture to ensure meat and poultry processors in the U.S. continue operations uninterrupted to the maximum extent possible and designating meat and poultry processing plants as critical infrastructure.

The disruptions caused by COVID-19 did not have a material impact on our financial results for the three months ended March 29, 2020; however, as the global spread of the virus began to accelerate late in the three months ended March 29, 2020, we began to experience adverse impacts to our business and financial results. We believe that we will continue to experience disruptions to our business due to the COVID-19 pandemic through the end of the second quarter, and the disruptions due to COVID-19 could also extend into the second half of 2020. The impact of COVID-19 and measures to prevent its spread are affecting our business in a number of ways.

- *Our workforce.* Employee health and safety is our priority. As an essential business in a critical infrastructure industry, we continue to produce chicken and pork products, while coordinating with and implementing guidance from the U.S. Centers for Disease Control and Prevention, the National Institute of Occupational Safety and Health, and local and regional Departments of Health in an effort to keep our employees safe and healthy. Measures we have implemented include, but are not limited to: increasing physical distancing of our employees, where possible, by staggering start and shift breaks, placing on-site tents to create more space for employees at break and at meal times, and installing physical barriers to distance employees while working on production lines; adding temperature and symptom screening stations for employees prior to entering our facilities; increasing personal hygiene practices and providing our employees additional personal protective equipment and sanitation stations; and increasing sanitation of our facilities. In the U.S., we have provided appreciation bonuses to eligible employees and expanded certain sick leave policies to provide more flexibility. In addition, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely.
- *Our operations.* As of April 10, 2020, all of our 60 production facilities except for three facilities in Europe (which are temporarily closed for commercial reasons) are operating, although some facilities have reduced production levels and outputs due to increased health and safety measures and as a consequence of the decline in demand by restaurants and other foodservice businesses. To date, we have not experienced a material impact from a plant closure and our facilities have largely been exempt from government closure orders.
- *Demand for our products.* COVID-19 and the implementation of restricted living have led to a shift in demand from restaurants to retail grocery stores, with consumers eating more at home due to stay-at-home orders. In our U.S. and Mexico businesses, demand for parts and whole-birds (typically bound for restaurants) and prepared foods (distributed, in part, to schools) has declined, while our U.K. and Europe business, which is more retail focused, has generally seen less of an impact. In an effort to counter the adverse effects of COVID-19, we have transitioned, where commercially reasonable and possible to do so, our business operations to be in the best position to supply COVID-19 market demands. These efforts have included transferring live supply to case ready, shifting production form and mix from foodservice to retail, increasing capacity utilization of retail packaging equipment, and analyzing export positions.
- *Liquidity.* Our liquidity position is strong and we have taken additional measures to increase liquidity to prepare for the challenging environment ahead. On March 20, 2020 and March 25, 2020, we elected to borrow $200.0 million and $150.0 million, respectively, under the U.S. Credit Facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. The draw-down proceeds are expected to be held on our balance sheet and may be used for general corporate purposes.
- *Foreign currency exchange rates and commodity prices.* During the three months ended March 29, 2020, we experienced increased volatility in foreign currency exchange rates and commodity prices, in part related to the uncertainty from COVID-19, as well as actions taken by governments and central banks in response to COVID-19. We expect continued volatility in foreign currency exchange rates and commodity prices during 2020, though we cannot reasonably estimate the duration, extent or impact of that volatility.
- *CARES Act.* On March 27, 2020, the U.S. government enacted the CARES Act, which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. We estimate the payment of approximately $51 million of employer payroll taxes otherwise due in 2020 will be delayed with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022.

### Raw Materials and Pricing

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, soybean meal and barley as the main ingredients for feed production.

Market prices for chicken products during the three months ended March 29, 2020 trended in-line with seasonality but near the bottom of the historical range as the industry experienced an increase in production compared to the three months ended March 31, 2019. Market prices were at levels higher than the costs of feed ingredients and sufficient to provide positive profits for the industry. However, the spread of COVID-19 and the subsequent market reactions in the latter part of the three months ended March 29, 2020 have resulted in an unexpected shift in demand from foodservice to retail markets. This has triggered a short-term imbalance in supply and demand as some foodservice items cannot be quickly reworked to retail products. As a result, market prices for fresh chicken products became volatile, and more recently, decreased production of poultry and other proteins due to worker absenteeism caused by the COVID-19 pandemic resulted in increased market prices. How quickly and to what levels chicken prices will return to normal price ranges will depend on the recovery of the foodservice industry, together with other factors beyond chicken supply, such as supply of other proteins and substitutions by consumers of non-protein foods because of uncertainty surrounding the general economy and unemployment rates.

### Potential Impact of Tariffs

We continue to monitor recent trade and tariff activity and its potential impact to exports and inputs costs across our reportable segments. Currently, we are experiencing impacts to domestic and export prices of chicken resulting from uncertainty in trade policies and increased tariffs. We are unable to give any assurance as to the scope, duration, or impact of any changes in trade policies or tariffs, how successful any mitigation efforts will be, or the extent to which mitigation will be necessary, and accordingly, changes in trade policies and increased tariffs could have a material adverse effect on our business and results of operations.

### Reportable Segments

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 the Mexico and U.K. and Europe reportable segments 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 19. Reportable Segments” of our Condensed Consolidated Financial Statements included in this quarterly report.

### Results of Operations

### Three Months Ended Ended March 29, 2020 Compared to Three Months Ended Ended March 31, 2019

*Net sales.* Net sales generated in the three months ended March 29, 2020 increased $350.3 million, or 12.9%, from net sales generated in the three months ended ended March 31, 2019. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Three Months Ended March 29, 2020 Percent | Change from Three Months Ended March 31, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $1,926,880 | $43,289 | 2.3% |
| U.K. and Europe | 822,262 | 307,300 | 59.7% |
| Mexico | 325,786 | (336) | (0.1)% |
| Total net sales | $3,074,928 | $350,253 | 12.9% |

*U.S. Reportable Segment.* U.S. net sales generated in the three months ended March 29, 2020 increased $43.3 million, or 2.3%, from U.S. net sales generated in the three months ended March 31, 2019 primarily because of increases in both net sales per pound and sales volume. The sales volume increase experienced by the U.S. segment contributed $26.7 million, or 1.4 percentage points, to the increase in net sales. The increase in net sales per pound contributed $16.6 million, or 0.9 percentage points, to the increase in net sales.

*U.K. and Europe Reportable Segment.* U.K. and Europe net sales generated in the three months ended March 29, 2020 increased $307.3 million, or 59.7%, from U.K. and Europe net sales generated in the three months ended March 31, 2019 primarily because of the recently acquired Tulip operations, partially offset by a decrease in net sales by our existing U.K. and Europe operations. The impact of the acquired Tulip operations contributed $321.1 million, or 62.4 percentage points, to the increase in net sales. The decrease in net sales by our existing U.K. and Europe operations was mainly due to the unfavorable impact of foreign currency translation and a decrease in net sales per pound of $8.9 million, or 1.7 percentage points, and $8.4 million, or 1.6 percentage points, respectively. Partially offsetting the unfavorable impact of foreign currency translation and the decrease in net sales per pound was an increase in sales volume of $3.5 million, or 0.7 percentage points.

*Mexico Reportable Segment.* Mexico net sales generated in the three months ended March 29, 2020 decreased $0.3 million, or 0.1%, from Mexico net sales generated in the three months ended March 31, 2019 primarily because of the unfavorable impact of foreign currency remeasurement of $12.4 million, or 3.8 percentage points. The unfavorable impact of foreign currency remeasurement was partially offset by an increase in net sales per pound and increase in sales volume of $6.7 million, or 2.0 percentage points, and $5.4 million, or 1.7 percentage points, respectively.

*Gross profit.* Gross profit decreased by $41.8 million, or 19.1%, from $218.9 million generated in the three months ended March 31, 2019 to $177.1 million generated in the three months ended March 29, 2020. The following tables provide information regarding gross profit and cost of sales information:

*(In thousands, except percent data)*

| Components of gross profit Amount | Three Months Ended March 29, 2020 Three Months Ended Percent | Change from Three Months Ended March 31, 2019 March 29, 2020 | March 31, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $3,074,928 | $350,253 | 12.9% | 100.0% | 100.0% |
| Cost of sales | 2,897,829 | 392,093 | 15.6% | 94.2% | 92.0% |
| Gross profit | $177,099 | $(41,840) | (19.1)% | 5.8% | 8.0% |

*(In thousands, except percent data)*

| Sources of gross profit Amount | Three Months Ended March 29, 2020 Percent | Change from Three Months Ended March 31, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $138,103 | $(32,069) | (18.8)% |
| U.K. and Europe | 52,128 | 22,544 | 76.2% |
| Mexico | (13,156) | (32,315) | (168.7)% |
| Elimination | 24 | — | —% |
| Total gross profit | $177,099 | $(41,840) | (19.1)% |

41

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Three Months Ended March 29, 2020 Percent | Change from Three Months Ended March 31, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $1,788,777 | $75,358 | 4.4% |
| U.K. and Europe | 770,134 | 284,756 | 58.7% |
| Mexico | 338,942 | 31,979 | 10.4% |
| Elimination | (24) | — | —% |
| Total cost of sales | $2,897,829 | $392,093 | 15.6% |

*U.S. Reportable Segment.* Cost of sales incurred by our U.S. operations during the three months ended March 29, 2020 increased $75.4 million, or 4.4%, from cost of sales incurred by our U.S. segment during the three months ended March 31, 2019. Cost of sales increased primarily because of the impact of increased cost per pound and increased sales volume, resulting in increases of $50.2 million, or 2.9 percentage points, and $24.3 million, or 1.4 percentage points, respectively. Included in the increase in cost per pound sold and increased sales volume was an increase in live input costs of $52.7 million, which included increases in feed cost, grower pay and chick costs of $30.9 million, $10.2 million and $8.6 million, respectively. An increase in payroll costs, mainly due to increased pay rates, contributed $21.5 million to the increase in cost of sales. Other factors affecting cost of sales were individually immaterial.

*U.K. and Europe Reportable Segment.* Cost of sales incurred by our U.K. and Europe operations during the three months ended March 29, 2020 increased $284.8 million, or 58.7%, from cost of sales incurred by our U.K. and Europe segment during the three months ended March 31, 2019, primarily because of costs incurred by the acquired Tulip operations, partially offset by a decrease in cost of sales incurred by our existing U.K. and Europe operations. Cost of sales incurred by the acquired Tulip operations contributed $314.5, or 64.8 percentage points, to the increase in cost of sales. Cost of sales related to the existing U.K. and Europe operations decreased $29.8 million, or 6.1 percentage points, primarily from a decrease in cost per pound sold and the favorable impact of foreign currency translation of $25.0 million, or 5.2 percentage points, and $8.1 million, or 1.7 percentage points, respectively. Partially offsetting the decrease in cost per pound sold and favorable impact of foreign currency translation was an increase in sales volume of $3.3 million, or 0.7 percentage points. Included in the increase in cost per pound and decreased sales volume was a $25.6 million decrease in feed costs mainly due to feed deflation during the three months ended March 29, 2020, partially offset by a $4.3 million increase in labor costs due to increased minimum wage and pension costs. Other factors affecting cost of sales were individually immaterial.

*Mexico Reportable Segment.* Cost of sales incurred by our Mexico operations during the three months ended March 29, 2020 increased $32.0 million, or 10.4%, from cost of sales incurred by our Mexico segment during the three months ended March 31, 2019. This increase was primarily because of an increase in cost per pound sold and increased sales volume contributing $39.8 million, or 13.0 percentage points, and $5.1 million, or 1.7 percentage points, respectively. Partially offsetting these increases to cost of sales by $12.9 million, or 4.2 percentage points, was the favorable impact of foreign currency remeasurement. Included in the increases in cost per pound sold and sales volume were costs and sales volume related to expanded operations in Monterrey and Veracruz and a $6.3 million increase in costs due to grain, labor and egg purchases. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income decreased by $52.7 million, or 38.4%, from $137.0 million generated in the three months ended March 31, 2019 to $84.4 million generated in the three months ended March 29, 2020. The following tables provide information regarding operating income and selling, general and administrative (“SG&A”) expense:

*(In thousands, except percent data)*

| Components of operating income Three Months Ended Amount | Three Months Ended March 29, 2020 Percent | Change from Three Months Ended March 31, 2019 March 29, 2020 | March 31, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $177,099 | $(41,840) | (19.1)% | 5.8% | 8.0% |
| SG&A expense | 92,713 | 10,789 | 13.2% | 3.0% | 3.0% |
| Administrative restructuring activity | — | 27 | (100.0)% | —% | —% |
| Operating income | $84,386 | $(52,656) | (38.4)% | 2.7% | 5.0% |

42

*(In thousands, except percent data)*

| Sources of operating income Amount | Three Months Ended March 29, 2020 Percent | Change from Three Months Ended March 31, 2019 |
| --- | ---: | ---: |
| U.S. | $85,052 | $(29,789) (25.9)% |
| U.K. and Europe | 23,190 | 10,477 82.4% |
| Mexico | (23,880) | (33,344) (352.3)% |
| Eliminations | 24 | — —% |
| Total operating income | $84,386 | $(52,656) (38.4)% |
| **Sources of SG&A expense** | **Three Months Ended March 29, 2020** | **Change from Three Months Ended March 31, 2019** |
| **Amount** | **Percent** |  |
|  | **(In thousands, except percent data)** |  |
| U.S. | $53,051 | $(2,307) (4.2)% |
| U.K. and Europe | 28,938 | 12,067 71.5% |
| Mexico | 10,724 | 1,029 10.6% |
| Total SG&A expense | $92,713 | $10,789 13.2% |

*U.S. Reportable Segment.* SG&A expense incurred by our U.S. reportable segment during the three months ended March 29, 2020 decreased $2.3 million, or 4.2%, from SG&A expense incurred by our U.S. reportable segment during the three months ended March 31, 2019. These decreases were primarily from a $3.8 million reduction in incentive compensation expenses, partially offset by a $1.7 million increase in legal fees due to increased litigation. Other factors affecting SG&A expense were individually immaterial.

*U.K. and Europe Reportable Segment.* SG&A expense incurred by our U.K. and Europe reportable segment during the three months ended March 29, 2020 increased $12.1 million, or 71.5%, from SG&A expense incurred by our U.K. and Europe segment during the three months ended March 31, 2019. SG&A expenses by our U.K. and Europe reportable segment increased primarily due to expenses incurred by the acquired Tulip operations and our existing U.K. and Europe operations by $8.5 million and $3.6 million, respectively. The increased expenses in our existing U.K. and Europe operations were primarily due to a $2.2 million increase in payroll expenses and a $2.0 million increase in bad debt expenses. Other factors affecting SG&A expense were individually immaterial.

*Mexico Reportable Segment.* SG&A expense incurred by our Mexico reportable segment during the three months ended March 29, 2020 increased approximately $1.0 million, or 10.6%, from SG&A expense incurred by our Mexico segment during the three months ended March 31, 2019. Factors affecting our Mexico segment's SG&A expense were individually immaterial.

*Net interest expense.* Net interest expense increased to $31.0 million recognized in the three months ended March 29, 2020 from $30.2 million recognized in the three months ended March 31, 2019. Average borrowings increased $81.9 million from the three months ended March 31, 2019 to the three months ended March 29, 2020 and the weighted average interest rate decreased from 5.4% in the three months ended March 31, 2019 to 5.1% in the three months ended March 29, 2020. As a percent of net sales, interest expense in the three months ended March 29, 2020 and March 31, 2019 was 1.1% and 1.2%, respectively.

*Income taxes.* Income tax expense increased to $38.5 million, a 36.3% effective tax rate, for the three months ended March 29, 2020 compared to income tax expense of $20.4 million, a 19.5% effective tax rate, for the three months ended March 31, 2019. The increase in income tax expense resulted primarily from the effects of foreign currency fluctuations.

### Liquidity and Capital Resources

The following table presents our available sources of liquidity as of March 29, 2020:

*(In millions)*

| Source of Liquidity | Facility Amount | Amount Outstanding | Amount Available |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $— | $— | $511.2 |
| Borrowing arrangements: |  |  |  |
| U.S. Credit Facility(a) | 750.0 | 350.0 | 359.6 |
| Mexico Credit Facility(b) | 64.3 | — | 64.3 |
| U.K. and Europe Credit Facilities(c) | 135.7 | — | 135.7 |

(a) Availability under the U.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at March 29, 2020 totaled $40.4 million.

(b) The U.S. dollar-equivalent of the amount available under the Mexico Credit Facility was $64.3 million. The Mexico Credit Facility provides for a loan commitment of $1.5 billion Mexican pesos.

(c) The U.K. and Europe Credit Facilities provide for aggregate loan commitments of £100.0 million (or $124.6 million U.S. dollar-equivalent) and €10.0 million (or $11.1 million U.S. dollar equivalent).

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.

### Historical Flow of Funds

### Three Months Ended March 29, 2020

Cash provided by operating activities was $21.1 million for the three months ended March 29, 2020. The cash flows provided by operating activities resulted primarily from net income of $67.4 million, net noncash expenses of $100.3 million, a change in inventory of $9.3 million and a change in other operating assets and liabilities of $7.0 million. These cash flows were offset by the use of $108.0 million related to accounts payable, accrued expenses and other current liabilities, the use of $26.3 million in cash related to trade accounts and other receivables, the use of $22.4 million in cash related to prepaid expenses and other current assets, and the use of $6.3 million in cash related to long-term pension and other postretirement obligations.

Net noncash expenses provided $100.3 million in cash related to operating activities for the three months ended March 29, 2020. Net noncash expense items included depreciation and amortization of $79.8 million, deferred income tax expense of $17.0 million, an adjustment to a previously recognized gain on a bargain purchase of $1.7 million, loan cost amortization of $1.2 million, share-based compensation expense of $0.7 million and a loss in equity-method investments and accretion of discounts related to Senior Notes of $0.3 million and $0.2 million, respectively. These expense items were partially offset by gains on property disposals and amortization of premiums related to Senior Notes of $0.5 million and $0.2 million, respectively.

The change in trade accounts and other receivables, including accounts receivable from related parties, represented $26.3 million use of cash related to operating activities for the three months ended March 29, 2020. This change is primarily due to customer payment timing.

The change in inventories represented a $9.3 million source of cash related to operating activities for the three months ended March 29, 2020. This change resulted primarily from a decrease in our processed and work-in-process inventories.

The change in prepaid expenses and other current assets represented a $22.4 million use of cash related to operating activities for the three months ended March 29, 2020. This change resulted primarily from a net increase in commodity and currency rate derivative assets 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 $108.0 million use of cash related to operating activities for the three months ended March 29, 2020. This change resulted primarily from the timing of payments and cash payment of incentive compensation.

Cash used in investing activities totaled $78.3 million for the three months ended March 29, 2020. Cash used to acquire property, plant and equipment totaled $77.2 million and cash used related to the purchase of Tulip totaled $1.7 million. Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs. These uses of cash were partially offset by proceeds generated from property disposals totaled $0.6 million during the three months ended March 29, 2020.

Cash proceeds from financing activities totaled $315.2 million for the three months ended March 29, 2020. Cash proceeds from revolving line of credit and long-term debt totaled $356.5 million. These cash proceeds were partially offset by cash used to purchase common stock under the share repurchase program of $27.9 million and payments on revolving line of credit and long-term debt of $13.4 million.

### Three Months Ended March 31, 2019

Cash provided by operating activities was $120.4 million for the three months ended March 31, 2019. The cash flows provided by operating activities resulted primarily from net income of $84.1 million and net noncash expenses of $65.1 million, a change in accounts payable, accrued expenses and other current liabilities of $22.0 million and a change in prepaid expenses and other current assets of $11.5 million. These cash flows were partially offset by $6.6 million in cash provided by income taxes and $2.4 million in cash provided by trade accounts and other receivables.

The change in trade accounts and other receivables, including accounts receivable from related parties, represented $2.4 million source of cash related to operating activities for the three months ended March 31, 2019. This change is primarily due to customer payment timing.

The change in inventories represented a $1.4 million use of cash related to operating activities for the three months ended March 31, 2019. This change resulted primarily from a decrease in our finished chicken products.

The change in prepaid expenses and other current assets represented a $11.5 million use of cash related to operating activities for the three months ended March 31, 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 $22.0 million use of cash related to operating activities for the three months ended March 31, 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 loss, represented a $6.6 million source of cash related to operating activities for the three months ended March 31, 2019. This change resulted primarily from the timing of estimated tax payments.

Net noncash expenses provided $65.1 million in cash related to operating activities for the three months ended March 31, 2019. Net noncash expense items included depreciation and amortization of $67.2 million, share-based compensation of $1.9 million and loan cost amortization of $1.2 million, which were partially offset by a deferred income tax benefit of $4.1 million and a foreign currency transaction gain related to borrowing arrangements of $1.0 million.

Cash used in investing activities totaled $87.4 million for the three months ended March 31, 2019. Cash used to acquire property, plant and equipment totaled $87.9 million. Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs. Cash proceeds generated from property disposals totaled $0.5 million during the thirteen weeks ended March 31, 2019.

Cash proceeds from financing activities totaled $3.9 million for the three months ended March 31, 2019. Cash proceeds from revolving line of credit and long-term debt totaled $67.2 million. These cash proceeds were offset by cash payments on revolving line of credit and long-term debt of $62.3 million, a cash distribution under our tax sharing agreement with JBS USA Food Company Holdings of $0.5 million and cash used to pay capitalized loan costs of $0.5 million.

### Debt

Our long-term debt and other borrowing arrangements consist of senior notes, revolving credit facilities and other term loan agreements. For a description, refer to “Note 13. Debt.”

### 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.

### Contractual Obligations

Contractual obligations at March 29, 2020 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) | $2,669,187 | $25,408 | $50,029 | $1,743,750 | $850,000 |
| Interest(c) | 752,112 | 127,832 | 253,444 | 221,023 | 149,813 |
| Finance leases | 2,267 | 562 | 988 | 717 | — |
| Operating leases | 324,473 | 76,240 | 119,335 | 76,186 | 52,712 |
| Derivative liabilities | 18,086 | 18,086 | — | — | — |
| Purchase obligations(d) | 318,529 | 318,529 | — | — | — |
| Total | $4,084,654 | $566,657 | $423,796 | $2,041,676 | $1,052,525 |

(a) The total amount of unrecognized tax benefits at March 29, 2020 was $12.8 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 $40.4 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 March 29, 2020.

(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.

### Recent Accounting Pronouncements

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

### Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our 2019 Annual Report.

## Market risk

As filed, 12,409 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, soybean oil, 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. 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, (1) executing purchase agreements with suppliers for future physical delivery of feed ingredients at established prices and (2) 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 the periods presented. However, fluctuations greater than 10.0% could occur.

*(In thousands)*

|  | Three Months Ended March 29, 2020 Amount | Impact of 10% Change to Cost of Sales |
| --- | ---: | ---: |
| Feed purchases(a) | $778,496 | $77,850 |
| Feed inventory(b) | 159,132 | (15,913) |

(a) Based on our feed consumption, a 10% increase in the price of our feed purchases will increase cost of sales, excluding the impact of any feed ingredients derivative financial instruments in that period.

(b) A 10.0% increase in ending feed ingredient inventories will decrease cost of sales, excluding any potential impact on the production costs of our chicken inventories.

*(In thousands)*

|  | March 29, 2020 Amount | Impact of 10% Change to the Fair Value of Commodity Derivative Assets |
| --- | ---: | ---: |
| Commodity derivative assets(a) | $31,745 | $3,175 |

(a) 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% increase in corn, soybean meal, soybean oil prices and wheat would have resulted in an increase in the fair value of our net commodity derivative asset position, including margin cash, as of March 29, 2020.

### Interest Rates

*Fixed-rate debt.* Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a hypothetical increase in interest rates of 10.0%. Using a discounted cash flow analysis, a hypothetical 10.0% increase in interest rates would have decreased the fair value of our fixed-rate debt by $52.5 million as of March 29, 2020.

*Variable-rate debt.* Our variable-rate debt instruments represent approximately 31.2% of our total debt as of March 29, 2020. Holding other variables constant, including levels of indebtedness, an increase in interest rates of 25 basis points would have increased our interest expense by an immaterial amount for the three months ended March 29, 2020.

### Foreign Currency

#### Mexico Subsidiaries

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 operations.

The Mexican peso exchange rate can directly and indirectly impact our financial condition and results of operations. 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 March 29, 2020. However, fluctuations greater than 10.0% could occur. No assurance can be given as to how future movements in the Mexican peso could affect our future financial condition or results of operations.

*(In thousands, except for exchange rate data)*

|  | Three Months Ended March 29, 2020 |
| --- | ---: |
| Foreign currency remeasurement gain(a) | $4,447 |
| Average exchange rate of Mexican pesos to U.S. dollar: |  |
| As reported | 19.94 |
| Hypothetical 10% change | 21.94 |
| Foreign currency transaction loss(b) | 15,374 |

(a) Based on the net monetary asset position of our Mexican subsidiaries, a 10% change on the average exchange rate of Mexican pesos to U.S. dollar will result in recognition of additional foreign currency remeasurement gain for the three months ended March 29, 2020.

(b) Based on the net monetary asset position of our Mexico segment, a 10% change in exchange rates would have resulted in foreign currency transaction loss recognized in the three months ended March 29, 2020.

#### U.K. and Europe Foreign Investments

We are exposed to foreign exchange-related variability of investments and earnings from our foreign investments in the U.K. and Europe. 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. For this sensitivity analysis, market risk is estimated as a hypothetical 10% adverse change in exchange rates would cause the following effect on our U.K. and Europe foreign investments:

*(In thousands)*

|  | March 29, 2020 Amount | Impact of 10% Change in Exchange Rates |
| --- | ---: | ---: |
| Net assets(a) | $2,005,410 | $(182,310) |
| Foreign currency forward contracts(b): |  |  |
| British pound to U.S. dollar | (36,743) | 4,083 |
| Euro to U.S. dollar | (1,762) | (186) |

(a) A 10% adverse change in exchange rate, after consideration of our derivative and nonderivative financial instruments, would cause a reduction in the net assets of our U.K. and Europe foreign investments that are denominated in British pound as of March 29, 2020.

(a) We had foreign currency forward contracts, which were designated and qualify as cash flow hedges, with an aggregate notional amount of $38.5 million, to hedge a portion of our investments in U.K. and Europe. On the basis of our sensitivity analysis, a weakening of the U.S. dollar against the British pound would result in a positive change in our cash flows on settlement for March 29, 2020 and a weakening of the U.S. dollar against the euro would result in a negative change in our cash flows on settlement for March 29, 2020. 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

We and 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., the U.K. and Europe, 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:

- The impact of the COVID-19 pandemic, efforts to contain the pandemic and resulting economic downturn on our operations and financial condition;
- 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 flock 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, 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 29, 2019 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, 2,569 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 or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) 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 or submits under the Exchange Act 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.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 29, 2020. Consistent with guidance issued by the SEC for a recently acquired business, management is excluding the internal control over financial reporting of Tulip from its evaluation of the effectiveness of the Company’s disclosure controls and procedures as of March 29, 2020. Total assets and net sales of Tulip, which the company acquired in the fourth quarter of 2019, included in our Condensed Consolidated Financial Statements as of and for the three months ended March 29, 2020 were $648.3 million and $321.1 million, respectively. Based on that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer, concluded that, as of March 29, 2020, the Company’s disclosure controls and procedures were effective.

### Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s quarter ended March 29, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. As mentioned above, the Company acquired Tulip on October 15, 2019. The Company is in the process of reviewing the internal control structure of Tulip and, if necessary, will make appropriate changes as it integrates Tulip into the Company's overall internal control over financial reporting process.

## Risk factors

As filed, 6,495 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 29, 2019, 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 outbreak of COVID-19 and its impact on business and economic conditions could negatively affect our business, results of operations, financial condition and the trading value of our securities.***

The outbreak of COVID-19, which surfaced in Wuhan, China in December 2019, has since been declared a global pandemic. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. In an effort to halt the outbreak of COVID-19, a number of countries, states, counties and other jurisdictions have imposed a number of measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations and extended closures of businesses. On April 28, 2020, President Trump signed an executive order directing the Department of Agriculture to ensure meat and poultry processors in the U.S. continue operations uninterrupted to the maximum extent possible and designating meat and poultry processing plants as critical infrastructure.

The COVID-19 outbreak has had, and a continuing outbreak or future outbreaks are likely to have, numerous adverse effects on our business and operations.

*If COVID-19 continues to spread, we may be required to temporarily close one or more of our production facilities.* As of April 10, 2020, all of our 60 production facilities except for three facilities in Europe (which are temporarily closed for commercial reasons) are operating, although some facilities have reduced production levels and outputs due to increased health and safety measures and as a consequence of the decline in demand by restaurants and other foodservice businesses. There can be no assurance that the health and safety measures we have taken (which include adding temperature and symptom screening stations for employees prior to entering our facilities and increasing physical distancing of our employees) will eradicate the risks associated with working in a critical infrastructure industry, including but not limited to, infection of our employees or the temporary closure of a facility, which could, in turn, have a material adverse impact on our reputation, business, results of operations and financial condition.

*We may experience decreased production and sales due to the changing demand for food products.* COVID-19 and the implementation of restricted living have led to a shift in demand from restaurants to retail grocery stores, with consumers eating more at home due to stay-at-home orders. In our U.S. and Mexico businesses, demand for parts and whole-birds (typically bound for restaurants) and prepared foods (distributed, in part, to schools) has declined, while our U.K. and European business, which is more retail focused, has generally seen less of an impact. Although we are taking steps to shift our production and meet this changing demand, we may be unable to effectively implement our plans to adjust our supply of products, which could materially adversely impact our business and results of operations.

*We may face a significant increase in delayed payments from our customers.* As a result of the increased financial pressures on our suppliers and customers, we have begun to see an increasing number of requests to delay payments from our customers. If the number of such requests significantly increases, we may face a material increase in uncollectible accounts and write-offs, which could materially adversely affect our financial condition.

*Our brand or reputation could be negatively impacted.* The meat production industry has recently been the focus of negative press reports in light of the spread of COVID-19 at certain companies’ facilities. Although we have not been the focus of such reports, our brand or reputation could be negatively impacted by such reports.

In addition to the risks described above, the COVID-19 pandemic could have additional adverse effects on our business and financial condition, including, but not limited to, the following:

- a significant increase in the cost or the difficulty to obtain debt or equity financing, or to refinance our debt in the future, or the risk that we may be unable to meet the requirements of the covenants in our existing credit facilities, which could negatively affect our liquidity position and our ability to fund operations or future investment opportunities;
- an impairment in the carrying value of goodwill or intangible assets or a change in the useful life of definite-lived intangible assets;
- significant volatility or decline in the trading price of our securities; and
- our inability to execute strategic business activities including acquisitions and divestiture.

The potential effects of COVID-19 could also impact or heighten many of the risks described in our risk factors included in Part 1, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 29, 2019, filed with the SEC on February 21, 2020, including, but not limited to: increased risk of cyber-attacks, other cyber incidents or security breaches; litigation risks; deterioration in labor relations with our employees; increase in employee turnover; and our dependence on contract growers.

The situation surrounding COVID-19 remains fluid and the likelihood of impacts on the Company that could be material increases the longer the virus impacts activity levels in the countries where we operate, including the U.S., the U.K. and Mexico. Therefore, it is difficult to predict with certainty the potential impact of the virus on the Company’s business, operations and financial condition.

Filed Apr 30, 2020.
Source: SEC EDGAR, the filing index for accession 0000802481-20-000041. Last ingested by Listed: Oct 29, 2026, 06:16 ET. No prices; not investment advice.