# Pilgrims Pride Corp: Form 10-Q for the period ended Jun 28, 2020

- Company: [Pilgrims Pride Corp](/companies/ppc.md) (CIK 802481)
- Form: 10-Q
- Filed: 2020-07-30
- Accepted by EDGAR: Jul 29, 2020, 20:45 ET
- Period: 2020-06-28
- Accession: 0000802481-20-000069
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/802481/000080248120000069/ppc-20200628.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/802481/000080248120000069/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-28.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-03-30 to 2020-06-28 | $2.82bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-12-30 to 2020-06-28 | $5.90bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-03-30 to 2020-06-28 | $2.70bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2019-12-30 to 2020-06-28 | $5.60bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-03-30 to 2020-06-28 | $119.9m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2019-12-30 to 2020-06-28 | $297.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-03-30 to 2020-06-28 | $92.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2019-12-30 to 2020-06-28 | $185.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-03-30 to 2020-06-28 | $27.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-12-30 to 2020-06-28 | $111.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-03-30 to 2020-06-28 | $32.3m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-12-30 to 2020-06-28 | $65.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-03-30 to 2020-06-28 | −$3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-12-30 to 2020-06-28 | $35.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-03-30 to 2020-06-28 | −$6.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-12-30 to 2020-06-28 | $61.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-03-30 to 2020-06-28 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-12-30 to 2020-06-28 | $0.25 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-03-30 to 2020-06-28 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-12-30 to 2020-06-28 | $0.25 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-03-30 to 2020-06-28 | 247,018,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-12-30 to 2020-06-28 | 248,308,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-12-30 to 2020-06-28 | $140.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-12-30 to 2020-06-28 | $148.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2019-12-30 to 2020-06-28 | $77.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-06-28 | $507.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-28 | $2.80bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-28 | $7.16bn | us-gaap:Assets |
| Current liabilities | at 2020-06-28 | $1.49bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-28 | $4.78bn | us-gaap:Liabilities |
| Current portion of debt | at 2020-06-28 | $25.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-06-28 | $2.36bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,188 characters.

### Executive Summary

### Overview

We reported a net loss attributable to Pilgrim’s of $6.0 million, or $(0.02) per diluted common share, and a loss before tax totaling $9.4 million, for the three months ended June 28, 2020. These operating results included net sales of $2.8 billion, gross profit of $119.9 million and $119.6 million of cash generated from operations. We generated a consolidated operating margin of 1.0% with operating margins of 2.2%, 3.1% and (13.3)% in our United States (“U.S.”), United Kingdom (“U.K.”) and Europe, and Mexico reportable segments, respectively.

We reported net income attributable to Pilgrim’s of $61.2 million, or $0.25 per diluted common share, and profit before tax totaling $96.6 million, for the six months ended June 28, 2020. These operating results included net sales of $5.9 billion, gross profit of $297.0 million and $140.7 million of cash generated from operations. We generated a consolidated operating margin of 1.9% with operating margins of 3.3%, 2.9% and (10.0)% in our U.S., U.K. and Europe, and Mexico reportable segments, respectively.

### Impact of COVID-19

The extensive impact of the pandemic caused by the novel coronavirus (“COVID-19”) 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.

As the global spread of the virus began to accelerate late in March, we began to experience adverse impacts to our business and financial results. During the three months ended June 28, 2020, our cost of sales were negatively impacted, increasing 9.2 percentage points compared with the same period in 2019, due in part to increased costs per pound related to impacts of the COVID-19 pandemic. The impact of the COVID-19 pandemic included disruptions in supply chain, an increase in both broiler and chick costs and an increase in payroll and benefits costs. We believe that we will continue to experience disruptions to our business due to the COVID-19 pandemic in 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 provided appreciation bonuses to eligible employees during the three months ended June 28, 2020 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.* All of our 60 production facilities are operating, although some facilities have reduced production levels and outputs due to increased health and safety measures, employee absenteeism 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 six months ended June 28, 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 June 28, 2020 experienced higher than normal volatility and were well below the five-year average, but improved in May and June. The spread of COVID-19 and the resulting consumer reaction early in the three months ended June 28, 2020 triggered an unexpected shift in demand from foodservice to retail markets. This drove a short-term imbalance in supply and demand as some foodservice items could not be quickly reworked to retail products, leading to increased amounts of excess products in the market and a decline in unit pricing that was temporarily below cost. As the broiler industry reduced production and a disruption of supply chain for all proteins occurred due to COVID-19, market pricing rebounded back within the five-year range. As the meat industry worked through the disruptions caused by COVID-19, total meat production trended back toward levels experienced in 2019; meanwhile, the demand environment is still recovering. Market pricing has reverted to more normal seasonal patterns, but at levels below the five-year range, similar to levels seen at the beginning of the year. While chicken prices are reverting to more normal seasonal movements, prices will depend on the recovery of the foodservice industry, together with factors such as the evolution of the COVID-19 crisis, how governments impose and ease restrictions, uncertainty surrounding the general economy and unemployment rates, total protein supply, and how these elements affect consumers’ chicken consumption domestically and globally.

### 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 June 28, 2020 Compared to the Three Months Ended June 30, 2019

*Net sales.* Net sales generated in the three months ended June 28, 2020 decreased $19.1 million, or 0.7%, from net sales generated in the three months ended June 30, 2019. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Three Months Ended June 28, 2020 Percent | Change from Three Months Ended June 30, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $1,798,689 | $(118,265) | (6.2)% |
| U.K. and Europe | 757,201 | 221,299 | 41.3% |
| Mexico | 268,133 | (122,096) | (31.3)% |
| Total net sales | $2,824,023 | $(19,062) | (0.7)% |

*U.S. Reportable Segment.* U.S. net sales generated in the three months ended June 28, 2020 decreased $118.3 million, or 6.2%, from U.S. net sales generated in the three months ended June 30, 2019 primarily because of a decrease in net sales per pound, partially offset by an increase in sales volume. The decrease in net sales per pound contributed $120.5 million, or 6.3 percentage points, to the decrease in net sales, and resulted from reduced demand for foodservice products due to the COVID-19 pandemic. The sales volume increase experienced by the U.S. segment partially offset the decrease in net sales per pound by $2.2 million, or 0.1 percentage points, and resulted from increased export volume, particularly to China.

*U.K. and Europe Reportable Segment.* U.K. and Europe net sales generated in the three months ended June 28, 2020 increased $221.3 million, or 41.3%, from U.K. and Europe net sales generated in the three months ended June 30, 2019 primarily because of the Tulip operations, which were acquired in October 2019, partially offset by a decrease in net sales generated by our existing U.K. and Europe operations. The impact of the acquired Tulip operations contributed $336.2 million, or 62.7 percentage points, to the increase in net sales. The decrease in net sales by our existing U.K. and Europe operations offset the favorable impact of the Tulip operations on net sales by $114.9 million, or 21.4 percentage points. The decrease in net sales by our existing U.K. and Europe operations resulted from a decrease in sales volume, a decrease in net sales per pound and the unfavorable impact of foreign currency translation of $54.9 million, $45.5 million and $14.5 million, respectively. The decrease in net sales in our existing U.K and Europe operations is a result of reduced demand for foodservice products due to the COVID-19 pandemic.

*Mexico Reportable Segment.* Mexico net sales generated in the three months ended June 28, 2020 decreased $122.1 million, or 31.3%, from Mexico net sales generated in the three months ended June 30, 2019 primarily because of the unfavorable impact of foreign currency remeasurement, a decrease in net sales per pound and a decrease in sales volume. The unfavorable impact of foreign currency remeasurement contributed $59.1 million, or 15.1 percentage points, to the decrease in net sales. The decrease in net sales per pound and sales volume contributed $53.7 million, or 13.8 percentage points, and $9.3 million, or 2.4 percentage points, respectively, to the decrease in net sales, and resulted from reduced demand for foodservice products due to the COVID-19 pandemic.

*Gross profit.* Gross profit decreased by $248.0 million, or 67.4%, from $367.9 million generated in the three months ended June 30, 2019 to $119.9 million generated in the three months ended June 28, 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 June 28, 2020 Three Months Ended Percent | Change from Three Months Ended June 30, 2019 June 28, 2020 | June 30, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $2,824,023 | $(19,062) | (0.7)% | 100.0% | 100.0% |
| Cost of sales | 2,704,164 | 228,943 | 9.2% | 95.8% | 87.1% |
| Gross profit | $119,859 | $(248,005) | (67.4)% | 4.2% | 12.9% |

43

*(In thousands, except percent data)*

| Sources of gross profit Amount | Three Months Ended June 28, 2020 Percent | Change from Three Months Ended June 30, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $88,021 | $(158,549) | (64.3)% |
| U.K. and Europe | 56,648 | 13,132 | 30.2% |
| Mexico | (25,010) | (102,764) | (132.2)% |
| Elimination | 200 | 176 | 733.3% |
| Total gross profit | $119,859 | $(248,005) | (67.4)% |

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Three Months Ended June 28, 2020 Percent | Change from Three Months Ended June 30, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $1,710,668 | $40,284 | 2.4% |
| U.K. and Europe | 700,553 | 208,167 | 42.3% |
| Mexico | 293,143 | (19,332) | (6.2)% |
| Elimination | (200) | (176) | 733.3% |
| Total cost of sales | $2,704,164 | $228,943 | 9.2% |

*U.S. Reportable Segment.* Cost of sales incurred by our U.S. operations during the three months ended June 28, 2020 increased $40.3 million, or 2.4%, from cost of sales incurred by our U.S. segment during the three months ended June 30, 2019. Cost of sales increased primarily because of the impact of increased cost per pound and increased sales volume, resulting in increases of $38.4 million, or 2.3 percentage points, and $1.9 million, or 0.1 percentage points, respectively. Included in the increase in cost per pound sold and increased sales volume was an increase in payroll and benefits costs of $13.4 million and live input costs of $11.3 million, which included increases in broiler costs and chick costs of $8.5 million and $3.7 million, respectively. The increase in payroll and benefits costs increased mainly due to bonuses to employees and the increase in live costs were mainly due to eggs scrapped as a result of supply chain issues during the COVID-19 pandemic. Also included in the increased cost per pound sold and sales volume were losses from derivative instruments and contract services contributing $9.4 million and $5.8 million, respectively, to the increase in cost of sales. Contract services increased mainly because of increased costs for processing labor and repair and maintenance services. 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 June 28, 2020 increased $208.2 million, or 42.3%, from cost of sales incurred by our U.K. and Europe segment during the three months ended June 30, 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 $318.8 million, 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 $110.6 million, or 22.5 percentage points, primarily from a decrease in sales volume, cost per pound sold and the favorable impact of foreign currency translation of $50.4 million, $47.1 million and $13.1 million, respectively. Included in the decrease in sales volume and decreased cost per pound sold in our existing U.K. and Europe operations was a $95.2 million decrease in direct production cost of sales due to lower production volume resulting from decreased foodservice demand, as a result of the COVID-19 pandemic, and a $6.9 million decrease in freight costs from decreased sales and increased efficiency in third party warehouse management. 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 June 28, 2020 decreased $19.3 million, or 6.2%, from cost of sales incurred by our Mexico segment during the three months ended June 30, 2019. This decrease was primarily because of the favorable impact of foreign currency remeasurement and a decrease in sales volume of $64.6 million, or 20.7 percentage points, and $7.5 million, or 2.4 percentage points, respectively. These decreases in cost of sales were partially offset by an increase in cost per pound sold of $52.8 million, or 16.9 percentage points. Included in the decrease in sales volume and increased cost per pound sold was a $25.5 million increase in direct production cost of sales, as a result of reduced demand due to the COVID-19 pandemic, $13.8 million increase in payroll costs and a $5.6 million increase in contracted grower pay. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income decreased by $252.3 million, or 90.2%, from $279.6 million generated in the three months ended June 30, 2019 to $27.3 million generated in the three months ended June 28, 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 June 28, 2020 Percent | Change from Three Months Ended June 30, 2019 June 28, 2020 | June 30, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $119,859 | $(248,005) | (67.4)% | 4.2% | 12.9% |
| SG&A expense | 92,570 | 4,213 | 4.8% | 3.3% | 3.1% |
| Administrative restructuring activity | — | 43 | (100.0)% | —% | —% |
| Operating income | $27,289 | $(252,261) | (90.2)% | 1.0% | 9.8% |

*(In thousands, except percent data)*

| Sources of operating income Amount | Three Months Ended June 28, 2020 Percent | Change from Three Months Ended June 30, 2019 |
| --- | ---: | ---: |
| U.S. | $39,448 | $(147,512) (78.9)% |
| U.K. and Europe | 23,185 | (1,009) (4.2)% |
| Mexico | (35,544) | (103,916) (152.0)% |
| Eliminations | 200 | 176 733.3% |
| Total operating income | $27,289 | $(252,261) (90.2)% |
| **Sources of SG&A expense** | **Three Months Ended June 28, 2020** | **Change from Three Months Ended June 30, 2019** |
| **Amount** | **Percent** |  |
|  | **(In thousands, except percent data)** |  |
| U.S. | $48,573 | $(11,080) (18.6)% |
| U.K. and Europe | 33,463 | 14,141 73.2% |
| Mexico | 10,534 | 1,152 12.3% |
| Total SG&A expense | $92,570 | $4,213 4.8% |

*U.S. Reportable Segment.* SG&A expense incurred by our U.S. reportable segment during the three months ended June 28, 2020 decreased $11.1 million, or 18.6%, from SG&A expense incurred by our U.S. reportable segment during the three months ended June 30, 2019. This aggregate decrease resulted primarily from a $2.8 million decrease in advertising and promotion expenses, a $2.1 million decrease in incentive compensation expense, a $1.9 million decrease in travel and entertainment expenses and a $1.4 million decrease in deferred compensation expenses. 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 June 28, 2020 increased $14.1 million, or 73.2%, from SG&A expense incurred by our U.K. and Europe segment during the three months ended June 30, 2019. SG&A expenses recognized by our U.K. and Europe reportable segment increased primarily due to expenses of $16.2 million incurred by the acquired Tulip operations. This increase was partially offset by a $2.1 million decrease in SG&A expenses incurred in our existing U.K. and Europe operations. Factors affecting SG&A expense in our existing U.K. and Europe operations were individually immaterial.

*Mexico Reportable Segment.* SG&A expense incurred by our Mexico reportable segment during the three months ended June 28, 2020 increased approximately $1.2 million, or 12.3%, from SG&A expense incurred by our Mexico segment during the three months ended June 30, 2019. Factors affecting our Mexico segment's SG&A expense were individually immaterial.

*Net interest expense.* Net interest expense increased to $31.2 million recognized in the three months ended June 28, 2020 from $30.2 million recognized in the three months ended June 30, 2019. Average borrowings increased $320.7 million from the three months ended June 30, 2019 to the three months ended June 28, 2020. As a percent of net sales, interest expense in the three months ended June 28, 2020 and June 30, 2019 was 1.1% and 1.2%, respectively.

*Income taxes.* Income tax expense (benefit) fluctuated to $(3.0) million, a 31.6% effective tax rate, for the three months ended June 28, 2020 compared to income tax expense of $75.5 million, a 30.8% effective tax rate, for the three months ended June 30, 2019. The decrease in income tax expense (benefit) resulted primarily from a decrease in pre-tax income and the effects of foreign currency fluctuations.

### Six Months Ended June 28, 2020 Compared to the Six Months Ended June 30, 2019

*Net sales.* Net sales generated in the six months ended June 28, 2020 increased $331.2 million, or 5.9%, from net sales generated in the six months ended June 30, 2019. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Six Months Ended June 28, 2020 Percent | Change from Six Months Ended June 30, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $3,725,569 | $(74,975) | (2.0)% |
| U.K. and Europe | 1,579,463 | 528,598 | 50.3% |
| Mexico | 593,919 | (122,432) | (17.1)% |
| Total net sales | $5,898,951 | $331,191 | 5.9% |

*U.S. Reportable Segment.* U.S. net sales generated in the six months ended June 28, 2020 decreased $75.0 million, or 2.0%, from U.S. net sales generated in the six months ended June 30, 2019 primarily because of a decrease in net sales per pound, partially offset by an increase in sales volume. The decrease in net sales per pound contributed $104.0 million, or 2.7 percentage points, to the decrease in net sales, and resulted from reduced demand for foodservice products due to the COVID-19 pandemic. The sales volume increase experienced by the U.S. segment partially offset the decrease in net sales per pound by $29.0 million, or 0.7 percentage points, and resulted from increased export volume, particularly to China.

*U.K. and Europe Reportable Segment.* U.K. and Europe net sales generated in the six months ended June 28, 2020 increased $528.6 million, or 50.3%, from U.K. and Europe net sales generated in the six months ended June 30, 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 $657.3 million, or 62.5 percentage points, to the increase in net sales. The decrease in net sales by our existing U.K. and Europe operations offset the favorable impact of the Tulip operations on net sales by $128.7 million, or 12.2 percentage points. The decrease in net sales by our existing U.K. and Europe operations resulted from a decrease in net sales per pound, a decrease in sales volume and the unfavorable impact of foreign currency translation of $54.9 million, $49.7 million and $24.1 million, respectively. The decrease in net sales in our existing U.K and Europe operations is a result of reduced demand for foodservice products due to the COVID-19 pandemic.

*Mexico Reportable Segment.* Mexico net sales generated in the six months ended June 28, 2020 decreased $122.4 million, or 17.1%, from Mexico net sales generated in the six months ended June 30, 2019 primarily because of the unfavorable impact of foreign currency remeasurement, a decrease in net sales per pound and a decrease in sales volume. The unfavorable impact of foreign currency remeasurement contributed $76.6 million, or 10.7 percentage points, to the decrease in net sales. The decrease in net sales per pound and sales volume contributed $43.6 million, or 6.1 percentage points, and $2.2 million, or 0.3 percentage points, respectively, to the decrease in net sales. The decrease in net sales resulted from reduced demand for foodservice products due to the COVID-19 pandemic.

*Gross profit.* Gross profit decreased by $289.8 million, or 49.4%, from $586.8 million generated in the six months ended June 30, 2019 to $297.0 million generated in the six months ended June 28, 2020. The following tables provide information regarding gross profit and cost of sales information:

*(In thousands, except percent data)*

| Components of gross profit Amount | Six Months Ended June 28, 2020 Six Months Ended Percent | Change from Six Months Ended June 30, 2019 June 28, 2020 | June 30, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $5,898,951 | $331,191 | 5.9% | 100.0% | 100.0% |
| Cost of sales | 5,601,993 | 621,036 | 12.5% | 95.0% | 92.0% |
| Gross profit | $296,958 | $(289,845) | (49.4)% | 5.0% | 8.0% |

46

*(In thousands, except percent data)*

| Sources of gross profit Amount | Six Months Ended June 28, 2020 Percent | Change from Six Months Ended June 30, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $226,124 | $(190,617) | (45.7)% |
| U.K. and Europe | 108,776 | 35,675 | 48.8% |
| Mexico | (38,166) | (135,079) | (139.4)% |
| Elimination | 224 | 176 | 366.7% |
| Total gross profit | $296,958 | $(289,845) | (49.4)% |

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Six Months Ended June 28, 2020 Percent | Change from Six Months Ended June 30, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $3,499,445 | $115,642 | 3.4% |
| U.K. and Europe | 1,470,687 | 492,923 | 50.4% |
| Mexico | 632,085 | 12,647 | 2.0% |
| Elimination | (224) | (176) | 366.7% |
| Total cost of sales | $5,601,993 | $621,036 | 12.5% |

*U.S. Reportable Segment.* Cost of sales incurred by our U.S. operations during the six months ended June 28, 2020 increased $115.6 million, or 3.4%, from cost of sales incurred by our U.S. segment during the six months ended June 30, 2019. Cost of sales increased primarily because of the impact of increased cost per pound and increased sales volume, resulting in increases of $89.8 million, or 2.6 percentage points, and $25.8 million, or 0.8 percentage points, respectively. Included in the increase in cost per pound sold and increased sales volume was an increase in live input costs of $63.9 million, which included increases in feed cost, chick costs and grower pay of $28.6 million, $12.3 million and $12.3 million, respectively. An increase in payroll costs, mainly due to increased pay rates, contributed $31.9 million to the increase in cost of sales. There were also increases in losses related to derivatives and increased contract services costs, mainly due to outsourced processing labor, contributing $11.4 million and $9.9 million, respectively. 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 six months ended June 28, 2020 increased $492.9 million, or 50.4%, from cost of sales incurred by our U.K. and Europe segment during the six months ended June 30, 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 $633.4 million, 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 $140.5 million, or 14.4 percentage points, primarily from a decrease in cost per pound sold, a decrease in sales volume and the favorable impact of foreign currency translation contributing $72.3 million, $46.3 million and $21.9 million, respectively. Included in the decrease in cost per pound and decreased sales volume in our existing U.K. and Europe operations was a $126.6 million decrease in direct production cost of sales due to lower production volume resulting from decreased foodservice demand, as a result of the COVID-19 pandemic, and a $8.7 million decrease in freight costs from decreased sales and increased efficiency in third party warehouse management. Other factors affecting cost of sales were individually immaterial.

*Mexico Reportable Segment.* Cost of sales incurred by our Mexico operations during the six months ended June 28, 2020 increased $12.6 million, or 2.0%, from cost of sales incurred by our Mexico segment during the six months ended June 30, 2019. This increase was primarily because of an increase in cost per pound sold of $96.0 million, or 15.5 percentage points. The increase in cost per pound sold was partially offset by the favorable impact of foreign currency remeasurement and a decrease in sales volume of $81.5 million, or 13.2 percentage points, and $1.9 million, or 0.3 percentage points, respectively. Included in the increased cost per pound sold and decrease in sales volume was a $57.8 million increase in direct production cost of sales, $17.5 million increase in payroll costs, a $12.1 million increase in contracted grower pay and a $5.7 million increase in warehouse costs. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income decreased by $304.9 million, or 73.2%, from $416.6 million generated in the six months ended June 30, 2019 to $111.7 million generated in the six months ended June 28, 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 Six Months Ended Amount | Change from Six Months Ended June 30, 2019 Percent | Change from Six Months Ended June 30, 2019 June 28, 2020 | June 30, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $296,958 | $(289,845) | (49.4)% | 5.0% | 10.5% |
| SG&A expense | 185,283 | 15,002 | 8.8% | 3.1% | 3.1% |
| Administrative restructuring activity | — | 70 | (100.0)% | —% | —% |
| Operating income | $111,675 | $(304,917) | (73.2)% | 1.9% | 7.5% |

*(In thousands, except percent data)*

| Sources of operating income Amount | Six Months Ended June 28, 2020 Percent | Change from Six Months Ended June 30, 2019 |
| --- | ---: | ---: |
| U.S. | $124,500 | $(177,300) (58.7)% |
| U.K. and Europe | 46,375 | 9,467 25.7% |
| Mexico | (59,424) | (137,260) (176.3)% |
| Eliminations | 224 | 176 366.7% |
| Total operating income | $111,675 | $(304,917) (73.2)% |
| **Sources of SG&A expense** | **Six Months Ended June 28, 2020** | **Change from Six Months Ended June 30, 2019** |
| **Amount** | **Percent** |  |
|  | **(In thousands, except percent data)** |  |
| U.S. | $101,624 | $(13,387) (11.6)% |
| U.K. and Europe | 62,401 | 26,208 72.4% |
| Mexico | 21,258 | 2,181 11.4% |
| Total SG&A expense | $185,283 | $15,002 8.8% |

*U.S. Reportable Segment.* SG&A expense incurred by our U.S. reportable segment during the six months ended June 28, 2020 decreased $13.4 million, or 11.6%, from SG&A expense incurred by our U.S. reportable segment during the six months ended June 30, 2019. These decreases were primarily from a $5.9 million reduction in incentive compensation expenses, a $2.7 million increase in advertising and promotion expense, and a $2.4 million increase in payroll and benefits expenses. 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 six months ended June 28, 2020 increased $26.2 million, or 72.4%, from SG&A expense incurred by our U.K. and Europe segment during the six months ended June 30, 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 $24.7 million and $1.5 million, respectively. Factors affecting SG&A expense in our existing U.K. and Europe operations were individually immaterial

*Mexico Reportable Segment.* SG&A expense incurred by our Mexico reportable segment during the six months ended June 28, 2020 increased approximately $2.2 million, or 11.4%, from SG&A expense incurred by our Mexico segment during the six months ended June 30, 2019, mainly from an increase in outside service expenses of $2.8 million. Other factors affecting our Mexico segment's SG&A expense were individually immaterial.

*Net interest expense.* Net interest expense increased to $62.2 million recognized in the six months ended June 28, 2020 from $60.4 million recognized in the six months ended June 30, 2019. Average borrowings increased $201.3 million from the six months ended June 30, 2019 to the six months ended June 28, 2020. As a percent of net sales, interest expense in the six months ended June 28, 2020 and June 30, 2019 was 1.1% and 1.2%, respectively.

*Income taxes.* Income tax expense decreased to $35.6 million, a 36.8% effective tax rate, for the six months ended June 28, 2020 compared to income tax expense of $96.0 million, a 27.4% effective tax rate, for the six months ended June 30, 2019. The decrease in income tax expense resulted primarily from a decrease in pre-tax income and the effects of foreign currency fluctuations.

### Liquidity and Capital Resources

The following table presents our available sources of liquidity as of June 28, 2020:

*(In millions)*

| Sources of Liquidity | Facility Amount | Amount Outstanding | Amount Available |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $— | $— | $507.4 |
| Borrowing arrangements: |  |  |  |
| U.S. Credit Facility(a) | 750.0 | 350.0 | 359.6 |
| Mexico Credit Facilities(b) | 80.3 | 11.9 | 68.4 |
| U.K. and Europe Credit Facilities(c) | 134.6 | — | 134.6 |

(a) Availability under the U.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at June 28, 2020 totaled $40.4 million.

(b) The U.S. dollar-equivalent of the facility amounts under the Mexico Credit Facilities are $65.1 million ($1.5 billion Mexican pesos) and $15.2 million ($350.0 million Mexican pesos).

(c) The U.K. and Europe Credit Facilities provide for aggregate loan commitments of £100.0 million (or $123.4 million U.S. dollar-equivalent) and €10.0 million (or $11.2 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

*(In millions)*

| Cash Flows from Operating Activities | Six Months Ended June 28, 2020 | June 30, 2019 |
| --- | ---: | ---: |
| Net income | $61.0 | $254.2 |
| Net noncash expenses | 196.1 | 143.2 |
| Changes in operating assets and liabilities: |  |  |
| Trade accounts and other receivables | 29.9 | (20.4) |
| Inventories | 16.4 | (27.2) |
| Prepaid expenses and other current assets | (22.1) | (1.3) |
| Accounts payable, accrued expenses and other current liabilities | (122.2) | 20.7 |
| Income taxes | (27.4) | 34.0 |
| Long-term pension and other postretirement obligations | (1.9) | (1.1) |
| Other operating assets and liabilities | 10.8 | 1.4 |
| Cash provided by operating activities | $140.6 | $403.5 |

### Net Noncash Expenses

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $196.1 million for the six months ended June 28, 2020. Net noncash expense items included depreciation and amortization of $164.4 million, deferred income tax expense of $25.3 million, stock-based compensation expense of $3.5 million, loan cost amortization of $2.4 million, an adjustment to a previously recognized gain on a bargain purchase of $1.7 million, accretion of discounts related to Senior Notes and a loss in equity-method investments and of $0.5 million and $0.3 million, respectively. These expense items were partially offset by gains on property disposals and amortization of premiums related to Senior Notes of $1.6 million and $0.3 million, respectively.

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $143.2 million for the six months ended June 30, 2019. Net noncash expense items included depreciation and amortization of $138.5 million, share based compensation of $5.2 million, loan cost amortization of $2.4 million, accretion of discount related to Senior Notes of $0.5 million and loss on property disposals of $0.2 million. These expense items were partially offset by a deferred income tax benefit of $3.4 million and amortization of premium related to Senior Notes of $0.3 million.

### Changes in Operating Assets and Liabilities

The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $29.9 million source of cash related to operating activities for the six months ended June 28, 2020. The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $20.4 million use of cash related to operating activities for the six months ended June 30, 2019. These changes are primarily due to customer payment timing.

The change in inventories represented a $16.4 million source of cash related to operating activities for the six months ended June 28, 2020. This change resulted primarily from a decrease in our semi-processed and work-in-process inventories, partially offset by foreign currency fluctuations in our U.K. and Europe reporting segment. The change in inventories represented a $27.2 million use of cash related to operating activities for the six months ended June 30, 2019. This change resulted primarily from an increase in our finished products inventory.

The change in prepaid expenses and other current assets represented a $22.1 million use of cash related to operating activities for the six months ended June 28, 2020. This change resulted primarily from a net increase in currency rate derivative assets and an increase in prepaid inventory in our Mexico reporting segment, partially offset by a decrease in value-added tax receivables. The change in prepaid expenses and other current assets represented a $1.3 million use of cash related to operating activities for the six months ended June 30, 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 $122.2 million use of cash related to operating activities for the six months ended June 28, 2020. This change resulted primarily from the timing of receipt of invoicing and payments, and cash payment of incentive compensation, partially offset by an increase in commodity derivative liabilities. The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities, including accounts payable to related parties, represented a $20.7 million source of cash related to operating activities for the six months ended June 30, 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 $27.4 million use of cash related to operating activities for the six months ended June 28, 2020. This change resulted primarily from the timing of estimated tax payments. The change in income taxes represented a $34.0 million source of cash related to operating activities for the six months ended June 30, 2019. This change resulted primarily from the timing of estimated tax payments and an increase in unrecognized tax benefits in Mexico.

*(In millions)*

| Cash Flows from Investing Activities | Six Months Ended June 28, 2020 | June 30, 2019 |
| --- | ---: | ---: |
| Acquisitions of property, plant and equipment | $(148.2) | $(177.6) |
| Proceeds from property disposals | 9.9 | 1.7 |
| Business acquisition | (4.2) | — |
| Cash used in investing activities | $(142.5) | $(175.9) |

Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs for the six months ended June 28, 2020 and June 30, 2019.

*(In millions)*

| Cash Flows from Financing Activities | Six Months Ended June 28, 2020 | June 30, 2019 |
| --- | ---: | ---: |
| Proceeds from revolving line of credit and long-term borrowings | $356.5 | $99.6 |
| Purchase of common stock under share repurchase program | (77.9) | (2.9) |
| Payments on revolving line of credit, long-term borrowings and finance lease obligations | (20.1) | (113.1) |
| Payment of capitalized loan costs | — | (0.6) |
| Distributions from Tax Sharing Agreement with JBS USA Food Company Holdings | — | (0.5) |
| Cash provided by (used in) financing activities | $258.5 | $(17.5) |

The cash provided by financing activities during the six months ended June 28, 2020 included $356.5 million in proceeds, mainly due to borrowings on our revolving loan commitment under the U.S. Credit Facility, partially offset by purchase of common stock under our share repurchase program of $77.9 million and payments on debt obligations of $20.1 million. 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. Shares repurchased under the share repurchase program during the six months ended June 28, 2020 totaled 4.1 million. For further information relating to the share repurchase program, refer to “Note 14. Stockholders' Equity.”

### 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 June 28, 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) | $2,662,799 | $25,279 | $50,020 | $1,737,500 | $850,000 |
| Interest(c) | 696,291 | 118,929 | 236,764 | 215,754 | 124,844 |
| Finance leases | 2,118 | 537 | 988 | 593 | — |
| Operating leases | 318,376 | 78,204 | 119,688 | 73,252 | 47,232 |
| Derivative liabilities | 26,759 | 26,759 | — | — | — |
| Purchase obligations(d) | 335,875 | 335,798 | 77 | — | — |
| Total | $4,042,218 | $585,506 | $407,537 | $2,027,099 | $1,022,076 |

(a) The total amount of unrecognized tax benefits at June 28, 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 June 28, 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 annual report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on February 21, 2020 (the “2019 Annual Report”).

## Market risk

As filed, 12,998 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% change in the weighted-average cost of our primary feed ingredients as of the periods presented. However, fluctuations greater than 10% could occur.

*(In thousands)*

|  | Three Months Ended June 28, 2020 Amount | Impact of 10% Change to Cost of Sales |
| --- | ---: | ---: |
| Feed purchases(a) | $698,951 | $69,895 |
| Feed inventory(b) | 132,383 | 13,238 |

(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 for the three months ended June 28, 2020.

(b) A 10% 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)*

|  | June 28, 2020 Amount | Impact of 10% Change to the Fair Value of Commodity Derivative Assets |
| --- | ---: | ---: |
| Commodity derivative assets(a) | $25,664 | $2,566 |

(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% increase in corn, soybean meal, soybean oil and wheat prices would have resulted in an increase in the fair value of our net commodity derivative asset position, including margin cash, as of June 28, 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%. Using a discounted cash flow analysis, a hypothetical 10% increase in interest rates would have decreased the fair value of our fixed-rate debt by $51.4 million as of June 28, 2020.

*Variable-rate debt.* Our variable-rate debt instruments represent approximately 31.1% of our total debt as of June 28, 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 June 28, 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% change in the current exchange rate used to convert Mexican pesos to U.S. dollars as of June 28, 2020. However, fluctuations greater than 10% 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 June 28, 2020 Impact of 10% Deterioration in Exchange Rate(a) | Impact of 10% Appreciation in Exchange Rate(b) |
| --- | ---: | ---: |
| Foreign currency remeasurement gain (loss) | $(10,609) | $12,967 |
| Exchange rate of Mexican peso to the U.S. dollar: |  |  |
| As reported | 23.05 | 23.05 |
| Hypothetical 10% change | 25.36 | 20.75 |

(a) Based on the net monetary asset position of our Mexican subsidiaries, a 10% weakening in the exchange rate of Mexican pesos to U.S. dollar will result in recognition of foreign currency remeasurement loss for the three months ended June 28, 2020.

(b) Based on the net monetary asset position of our Mexican subsidiaries, a 10% strengthening in the exchange rate of Mexican pesos to U.S. dollar will result in recognition of foreign currency remeasurement gain for the three months ended June 28, 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% change in exchange rates used to convert U.S. dollars to British pound and euro would cause the following effect on our U.K. and Europe foreign investments:

*(In thousands)*

|  | June 28, 2020 Amount | Impact of 10% Deterioration in Exchange Rates | Impact of 10% Appreciation in Exchange Rates |
| --- | ---: | ---: | ---: |
| Net assets(a) | $1,983,669 | $(180,334) | $220,408 |
| Foreign currency forward contracts(b): |  |  |  |
| British pound to U.S. dollar | (31,106) | 3,456 | (2,828) |
| Euro to U.S. dollar | (6,178) | 686 | (562) |

(a) A 10% deterioration in exchange rate, after consideration of our derivative and nonderivative financial instruments, would cause a decrease in the net assets of our U.K. and Europe foreign investments that are denominated in British pound as of June 28, 2020. A 10% appreciation in exchange rate, after consideration of our derivative and nonderivative financial instruments, would cause an increase in the net assets of our U.K. and Europe foreign investments that are denominated in British pound as of June 28, 2020.

(a) We had foreign currency forward contracts, which were designated and qualify as cash flow hedges, with an aggregate notional amount of $37.3 million, to hedge a portion of our investments in U.K. and Europe. On the basis of our sensitivity analysis, the weakening of the U.S. dollar against the British pound and U.S. dollar against the euro would result in positive changes in our cash flows on settlement for June 28, 2020 while the strengthening of the U.S. dollar against the British pound and U.S. dollar against the euro would result in negative changes in our cash flows on settlement for June 28, 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 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, 2,571 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 interim 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 interim 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 June 28, 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 June 28, 2020. Total assets and net sales of Tulip, which the Company acquired on October 15, 2019, included in our Condensed Consolidated Financial Statements as of and for the six months ended June 28, 2020 were $650.3 million and $657.3 million, respectively. Based on that evaluation and subject to the foregoing, the Company’s interim Chief Executive Officer and Chief Financial Officer, concluded that, as of June 28, 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 three months ended June 28, 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, 9,623 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 have negatively affected, and could continue to 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 July 29, 2020, all of our 60 production facilities are operating, although some facilities have reduced production levels and outputs due to increased health and safety measures and 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.

### Our operations are subject to general risks of litigation.

We are involved on an ongoing basis in litigation relating to alleged antitrust violations or arising in the ordinary course of business or otherwise. For example, between September 2, 2016 and October 13, 2016, a series of purported class action lawsuits were brought against Pilgrim’s and 13 other producers by and on behalf of direct and indirect purchasers of broiler chickens. The complaints, which were filed with the U.S. District Court for the Northern District of Illinois, seek, among other relief, treble damages for an alleged conspiracy among defendants to reduce output and increase prices of broiler chickens from the period of January 2008 to the present. For additional information, see “Part II, Item 1. Legal Proceedings” and Note 20. “Commitments and Contingencies” of this report. Trends in litigation may include class actions involving consumers, shareholders, employees or injured persons, and claims relating to commercial, labor, employment, antitrust, securities or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty, and adverse litigation trends and outcomes could result in material damages, which could adversely affect our financial condition and results of operations.

On June 3, 2020, PPC learned of an indictment by a Grand Jury in the United States District Court for the District of Colorado against Jayson Penn, the chief executive officer and president of PPC, in addition to two former employees of PPC and a former employee of a different company (the “Indictment”). The Indictment alleges that they had entered into and engaged in a conspiracy to suppress and eliminate competition by rigging bids and fixing prices and other price-related terms for broiler chicken products sold in the United States, in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. Section 1. On June 4, 2020, PPC learned that Mr. Penn pleaded not guilty to the charges. Effective June 15, 2020, Mr. Penn began a paid leave of absence from PPC. In connection with Mr. Penn’s leave of absence, PPC’s Board of Directors appointed the chief financial officer of PPC, Fabio Sandri, to serve in the additional role of PPC’s interim president and chief executive officer.

The consequences of the criminal indictment against Mr. Penn, as well as consequences of any governmental investigation or lawsuit of any related or unrelated matter, could have a material adverse effect on our business, results of operations and stock price. Moreover, the results of *In re Broiler Chicken Antitrust Litigation*, the DOJ antitrust investigation into alleged price fixing and other anticompetitive conduct in the broiler chicken industry, and other litigation matters are inherently uncertain, and adverse actions, judgments or settlements in some or all of these legal matters may result in materially adverse monetary damages, fines, penalties or injunctive relief against us. Any claims or litigation, even if fully indemnified or insured, could damage our reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.

Filed Jul 30, 2020.
Source: SEC EDGAR, the filing index for accession 0000802481-20-000069. Last ingested by Listed: Oct 29, 2026, 06:16 ET. No prices; not investment advice.