# Pilgrims Pride Corp: Form 10-Q for the period ended Sep 27, 2020

- Company: [Pilgrims Pride Corp](/companies/ppc.md) (CIK 802481)
- Form: 10-Q
- Filed: 2020-10-29
- Accepted by EDGAR: Oct 28, 2020, 21:48 ET
- Period: 2020-09-27
- Accession: 0000802481-20-000080
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/802481/000080248120000080/ppc-20200927.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/802481/000080248120000080/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-27.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-06-29 to 2020-09-27 | $3.08bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-12-30 to 2020-09-27 | $8.97bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-06-29 to 2020-09-27 | $2.76bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2019-12-30 to 2020-09-27 | $8.36bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-06-29 to 2020-09-27 | $313.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2019-12-30 to 2020-09-27 | $610.8m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-06-29 to 2020-09-27 | $219.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-12-30 to 2020-09-27 | $404.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-06-29 to 2020-09-27 | $94.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-12-30 to 2020-09-27 | $206.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-06-29 to 2020-09-27 | $30.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-12-30 to 2020-09-27 | $95.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-06-29 to 2020-09-27 | $22.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-12-30 to 2020-09-27 | $57.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-06-29 to 2020-09-27 | $33.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-12-30 to 2020-09-27 | $94.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-06-29 to 2020-09-27 | $0.14 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-12-30 to 2020-09-27 | $0.38 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-06-29 to 2020-09-27 | $0.14 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-12-30 to 2020-09-27 | $0.38 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-06-29 to 2020-09-27 | 244,376,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-12-30 to 2020-09-27 | 246,898,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-12-30 to 2020-09-27 | $508.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-12-30 to 2020-09-27 | $242.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2019-12-30 to 2020-09-27 | $107.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-27 | $768.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-27 | $3.06bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-27 | $7.47bn | us-gaap:Assets |
| Current liabilities | at 2020-09-27 | $1.70bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-27 | $5.04bn | us-gaap:Liabilities |
| Current portion of debt | at 2020-09-27 | $25.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-27 | $2.42bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 51,715 characters.

### Executive Summary

### Overview

We reported a net income attributable to Pilgrim’s of $33.4 million, or $0.14 per diluted common share, and net income before tax totaling $56.0 million, for the three months ended September 27, 2020. These operating results included net sales of $3.1 billion, gross profit of $313.8 million and $367.6 million of cash generated from operations. We generated a consolidated operating margin of 3.1% with operating margins of 0.1%, 3.5% and 18.4% 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 $94.7 million, or $0.38 per diluted common share, and profit before tax totaling $152.6 million, for the nine months ended September 27, 2020. These operating results included net sales of $9.0 billion, gross profit of $610.8 million and $508.3 million of cash generated from operations. We generated a consolidated operating margin of 2.3% with operating margins of 2.3%, 3.1% and 0.2% in our U.S., U.K. and Europe, and Mexico reportable segments, respectively.

As discussed in “Note 20. Commitments and Contingencies”, on October 13, 2020, we announced that we have entered into a plea agreement (the “Plea Agreement”) with the U.S. Department of Justice (the “DOJ”). As a result of the Plea Agreement, we recognized a fine of $110,524,140 as expense, which is included in *Selling, general and administrative expense* in the Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2020. In addition, as discussed below under “Hometown Strong Initiative”, we launched an initiative during the third quarter to support the communities in which we operate with unexpected challenges, such as the COVID-19 pandemic, and as a result, we recorded $14.5 million in incremental donation expense related to this initiative during the third quarter. Adjusted net income for the three and nine months ended September 27, 2020, which excludes the DOJ antitrust fine, increase in donation expense and other items shown in the “Reconciliation of Adjusted Net Income” table below, was $161.7 million and $206.9 million, respectively. See “Reconciliation of Adjusted Net Income” section below for a reconciliation of Net income attributable to Pilgrim's to Adjusted net income attributable to Pilgrim's.

### 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. 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. During the three months ended September 27, 2020, the impact of the COVID-19 pandemic on our financial results decreased because of increased demand for our products at retail grocery stores and quick service restaurants and our ability to meet this demand through our transitioned business operations, as further discussed below. We believe that we will continue to experience disruptions to our business due to the COVID-19 pandemic for the remainder of 2020 and into 2021.

The impact of COVID-19 and measures to prevent its spread have affected and continue to affect 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 in April and May of 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 nine months ended September 27, 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.

The spread of COVID-19 and the resulting consumer reaction early in the second quarter triggered an unexpected shift in demand from foodservice to retail markets. While the industry redirected supply from foodservice to retail, not all foodservice items could be quickly reworked toward retail. This drove a sudden supply and demand imbalance during the second quarter, with increased amounts of excess products on the market and a decline in unit pricing temporarily below cost. The industry adjusted through reductions of egg sets and chick placements which continued throughout the three months ended September 27, 2020, resulting in lower levels of broiler production. Retail demand remained robust as consumers predominantly favored food at home consumption.

During the third quarter, foodservice demand, while not yet at pre-COVID-19 levels, has improved since the onset of the COVID-19 pandemic and the low point of demand experienced April 2020. As a result, the market prices for the three months ended September 27, 2020 have become relatively more stable and settled at a level within the five-year range, moving with seasonal norms. While chicken prices have reverted to more normal seasonal levels and movements, prices for the remainder of 2020 and into 2021 will depend on the continued 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.

### Hometown Strong Initiative

The Hometown Strong initiative was developed in order to help the communities in which we operate respond to the unexpected challenges on society, such as the COVID-19 pandemic. We believe the Hometown Strong initiative will provide consequential investment projects for a lasting impact on these communities and help them prepare for unanticipated challenges and build for the future. For 2020, we committed to Hometown Strong donations of $20.0 million, and during the three months and nine months ended September 27, 2020, we recorded $14.5 million in incremental donations expense relating to this initiative.

### 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 September 27, 2020 Compared to the Three Months Ended September 29, 2019

*Net sales.* Net sales generated in the three months ended September 27, 2020 increased $297.2 million, or 10.7%, from net sales generated in the three months ended September 29, 2019. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Three Months Ended September 27, 2020 Percent | Change from Three Months Ended September 29, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $1,894,222 | $(37,435) | (1.9)% |
| U.K. and Europe | 845,677 | 328,146 | 63.4% |
| Mexico | 335,222 | 6,440 | 2.0% |
| Total net sales | $3,075,121 | $297,151 | 10.7% |

*U.S. Reportable Segment.* U.S. net sales generated in the three months ended September 27, 2020 decreased $37.4 million, or 1.9%, from U.S. net sales generated in the three months ended September 29, 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 $57.2 million, or 2.9 percentage points, to the decrease in net sales, and resulted from reduced demand for foodservice products and commodity pricing volatility 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 $19.8 million, or 1.0 percentage points. When compared with the three months ended June 28, 2020, however, U.S. net sales generated in the three months ended September 27, 2020 increased $95.5 million, or 5.3 percentage points, as a result of increasing demand for foodservice products and the stabilizing of commodity pricing due to recent developments in the COVID-19 pandemic.

*U.K. and Europe Reportable Segment.* U.K. and Europe net sales generated in the three months ended September 27, 2020 increased $328.1 million, or 63.4%, from U.K. and Europe net sales generated in the three months ended September 29, 2019 primarily because of the acquired Pilgrim's Pride Ltd. (“PPL”) 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 PPL operations contributed $341.8 million, or 66.0 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 PPL operations on net sales by $13.6 million, or 2.6 percentage points. The decrease in net sales by our existing U.K. and Europe operations primarily resulted from a decrease in sales volume of $38.0 million. This decrease in sales volume was partially offset by the favorable impact of foreign currency translation and an increase in net sales per pound of $21.3 million and $3.1 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 three months ended September 27, 2020 increased $6.4 million, or 2.0%, from Mexico net sales generated in the three months ended September 29, 2019 primarily because of an increase in net sales per pound and an increase in sales volume. These increases in net sales were partially offset by the unfavorable impact of foreign currency remeasurement. The increase in net sales per pound and sales volume contributed $47.5 million, or 14.5 percentage points, and $5.2 million, or 1.6 percentage points, respectively, to the increase in net sales. The unfavorable impact of foreign currency remeasurement partially offset these increases with a decrease to net sales of $46.3 million, or 14.1 percentage points.

*Gross profit.* Gross profit increased by $31.6 million, or 11.2%, from $282.2 million generated in the three months ended September 29, 2019 to $313.8 million generated in the three months ended September 27, 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 September 27, 2020 Three Months Ended Percent | Change from Three Months Ended September 29, 2019 September 27, 2020 | September 29, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $3,075,121 | $297,151 | 10.7% | 100.0% | 100.0% |
| Cost of sales | 2,761,279 | 265,506 | 10.6% | 89.8% | 89.8% |
| Gross profit | $313,842 | $31,645 | 11.2% | 10.2% | 10.2% |

*(In thousands, except percent data)*

| Sources of gross profit Amount | Three Months Ended September 27, 2020 Percent | Change from Three Months Ended September 29, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $183,133 | $(9,050) | (4.7)% |
| U.K. and Europe | 60,330 | 17,289 | 40.2% |
| Mexico | 70,144 | 23,195 | 49.4% |
| Elimination | 235 | 211 | 879.2% |
| Total gross profit | $313,842 | $31,645 | 11.2% |

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Three Months Ended September 27, 2020 Percent | Change from Three Months Ended September 29, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $1,711,089 | $(28,385) | (1.6)% |
| U.K. and Europe | 785,347 | 310,857 | 65.5% |
| Mexico | 265,078 | (16,755) | (5.9)% |
| Elimination | (235) | (211) | 879.2% |
| Total cost of sales | $2,761,279 | $265,506 | 10.6% |

*U.S. Reportable Segment.* Cost of sales incurred by our U.S. operations during the three months ended September 27, 2020 decreased $28.4 million, or 1.6%, from cost of sales incurred by our U.S. segment during the three months ended September 29, 2019. Cost of sales decreased primarily because of the impact of decreased cost per pound sold of $46.3 million, or 2.6 percentage points, partially offset by increased sales volume of $17.9 million, or 1.0 percentage points. Included in the decrease in cost per pound sold was a decrease in feed costs of $39.3 million, primarily due to a $44.5 million decrease in feed ingredient costs. Also included in the decrease in cost per pound sold was a decrease in derivative expense of $31.8 million resulting from higher realized losses in commodity derivatives in the three months ended September 29, 2019. Partially offsetting these decreases in cost per pound sold were increases in other live costs, benefit costs and outside services of $19.8 million, $15.7 million and $4.4 million, respectively. Benefits increased mainly because of increases related to the COVID-19 pandemic and the increased live costs were mainly a result of an increase in grower costs due to higher contract rates. The increase in outside services resulted from an increase in outside processing labor. 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 September 27, 2020 increased $310.9 million, or 65.5%, from cost of sales incurred by our U.K. and Europe segment during the three months ended September 29, 2019, primarily because of costs incurred by the acquired PPL 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 PPL operations contributed $325.6 million, or 68.6 percentage points, to the increase in cost of sales. Cost of sales related to the existing U.K. and Europe operations decreased $14.8 million, or 3.1 percentage points, primarily from a decrease in sales volume of $34.8 million, partially offset by the unfavorable impact of foreign currency translation and an increase in cost per pound sold of $19.4 million and $0.6 million, respectively. Included in the increased cost per pound sold in our existing U.K. and Europe operations was a $4.0 million increase in payroll costs from increased pay rates and bonuses during the COVID-19 pandemic. 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 September 27, 2020 decreased $16.8 million, or 5.9%, from cost of sales incurred by our Mexico segment during the three months ended September 29, 2019. This decrease was primarily because of the favorable impact of foreign currency remeasurement of $36.6 million, or 13.0 percentage points. The favorable impact of foreign currency remeasurement was partially offset by increases in cost per pound sold and sales volume of $15.3 million, or 5.5 percentage points, and $4.5 million, or 1.6 percentage points, respectively. Included in the increased cost per pound sold was a $6.5 million increase in utility costs due to increased natural gas costs from increased rates and a $3.2 million increase in contracted grower pay due to increased pay rates. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income decreased by $93.9 million, or 49.9%, from $188.2 million generated in the three months ended September 29, 2019 to $94.3 million generated in the three months ended September 27, 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 September 27, 2020 Percent | Change from Three Months Ended September 29, 2019 September 27, 2020 | September 29, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $313,842 | $31,645 | 11.2% | 10.2% | 10.2% |
| SG&A expense | 219,554 | 125,522 | 133.5% | 7.1% | 3.4% |
| Administrative restructuring activity | — | 20 | (100.0)% | —% | —% |
| Operating income | $94,288 | $(93,897) | (49.9)% | 3.1% | 6.8% |

*(In thousands, except percent data)*

| Sources of operating income Amount | Three Months Ended September 27, 2020 Percent | Change from Three Months Ended September 29, 2019 |
| --- | ---: | ---: |
| U.S. | $2,451 | $(122,718) (98.0)% |
| U.K. and Europe | 29,949 | 4,625 18.3% |
| Mexico | 61,653 | 23,985 63.7% |
| Eliminations | 235 | 211 879.2% |
| Total operating income | $94,288 | $(93,897) (49.9)% |
| **Sources of SG&A expense** | **Three Months Ended September 27, 2020** | **Change from Three Months Ended September 29, 2019** |
| **Amount** | **Percent** |  |
|  | **(In thousands, except percent data)** |  |
| U.S. | $180,682 | $113,648 169.5% |
| U.K. and Europe | 30,381 | 12,664 71.5% |
| Mexico | 8,491 | (790) (8.5)% |
| Total SG&A expense | $219,554 | $125,522 133.5% |

*U.S. Reportable Segment.* SG&A expense incurred by our U.S. reportable segment during the three months ended September 27, 2020 increased $113.6 million, or 169.5%, from SG&A expense incurred by our U.S. reportable segment during the three months ended September 29, 2019. This increase in SG&A expense incurred resulted primarily from the $110.5 million DOJ antitrust fine, $14.5 million in incremental donations expense related to the Hometown Strong initiative and a $7.3 million increase in professional fees due to increased legal fees. Partially offsetting these increases in SG&A expense was a $7.8 million decrease in benefit expenses primarily from decreased incentive compensation, a $3.7 million decrease in payroll expenses primarily from decreased stock-based compensation and a $3.7 million decrease in marketing costs mainly due to decreased internet media 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 September 27, 2020 increased $12.7 million, or 71.5%, from SG&A expense incurred by our U.K. and Europe segment during the three months ended September 29, 2019. SG&A expenses recognized by our U.K. and Europe reportable segment increased primarily due to expenses of $11.7 million incurred by the acquired PPL operations. Our existing U.K. and Europe operation's SG&A expense increased $1.0 million. 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 September 27, 2020 decreased approximately $0.8 million, or 8.5%, from SG&A expense incurred by our Mexico segment during the three months ended September 29, 2019. Factors affecting our Mexico segment's SG&A expense were individually immaterial.

*Net interest expense.* Net interest expense increased to $28.8 million recognized in the three months ended September 27, 2020 from $27.3 million recognized in the three months ended September 29, 2019. Average borrowings increased by $323.5 million from $2.3 billion during the three months ended September 29, 2019 to $2.7 billion during the three months ended September 27, 2020. As a percent of net sales, interest expense in the three months ended September 27, 2020 and September 29, 2019 was 1.0% and 1.2%, respectively.

*Income taxes.* Income tax expense decreased to $22.3 million, a 39.9% effective tax rate, for the three months ended September 27, 2020 compared to income tax expense of $46.4 million, a 29.6% effective tax rate, for the three months ended September 29, 2019. The decrease in income tax expense resulted primarily from a decrease in pre-tax income and the effects of foreign currency fluctuations partially offset by the recognition of the non-deductible DOJ antitrust fine of $110.5 million, refer to “Note 20. Commitments and Contingencies” for more information. In addition, we recognized deferred tax expense of $10.6 million related to the repeal of the previously enacted reduction of the U.K corporate tax rate to 17.0%. Therefore, the current corporate tax rate is maintained at 19.0%.

### Nine Months Ended September 27, 2020 Compared to the Nine Months Ended September 29, 2019

*Net sales.* Net sales generated in the nine months ended September 27, 2020 increased $628.3 million, or 7.5%, from net sales generated in the nine months ended September 29, 2019. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Nine Months Ended September 27, 2020 Percent | Change from Nine Months Ended September 29, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $5,619,791 | $(112,410) | (2.0)% |
| U.K. and Europe | 2,425,140 | 856,744 | 54.6% |
| Mexico | 929,141 | (115,992) | (11.1)% |
| Total net sales | $8,974,072 | $628,342 | 7.5% |

*U.S. Reportable Segment.* U.S. net sales generated in the nine months ended September 27, 2020 decreased $112.4 million, or 2.0%, from U.S. net sales generated in the nine months ended September 29, 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 $161.3 million, or 2.9 percentage points, to the decrease in net sales, and resulted from a decrease in net sales per pound in both our fresh and prepared foods lines of business. The sales volume increase experienced by the U.S. segment partially offset the decrease in net sales per pound by $48.9 million, or 0.9 percentage points.

*U.K. and Europe Reportable Segment.* U.K. and Europe net sales generated in the nine months ended September 27, 2020 increased $856.7 million, or 54.6%, from U.K. and Europe net sales generated in the nine months ended September 29, 2019 primarily because of the recently acquired PPL operations, partially offset by a decrease in net sales by our existing U.K. and Europe operations. The impact of the acquired PPL operations contributed $999.1 million, or 63.7 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 PPL operations on net sales by $142.4 million, or 9.1 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 $88.2 million, $50.4 million and $3.8 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 nine months ended September 27, 2020 decreased $116.0 million, or 11.1%, from Mexico net sales generated in the nine months ended September 29, 2019 primarily because of the unfavorable impact of foreign currency remeasurement, offset by an increase in net sales per pound and an increase in sales volume. The unfavorable impact of foreign currency remeasurement contributed $122.7 million, or 11.7 percentage points, to the decrease in net sales. This decrease in net sales was partially offset by the increase net sales per pound and sales volume of $3.6 million, or 0.3 percentage points, and $3.1 million, or 0.3 percentage points, respectively.

*Gross profit.* Gross profit decreased by $258.2 million, or 29.7%, from $869.0 million generated in the nine months ended September 29, 2019 to $610.8 million generated in the nine months ended September 27, 2020. The following tables provide information regarding gross profit and cost of sales information:

*(In thousands, except percent data)*

| Components of gross profit Amount | Nine Months Ended September 27, 2020 Nine Months Ended Percent | Change from Nine Months Ended September 29, 2019 September 27, 2020 | September 29, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $8,974,072 | $628,342 | 7.5% | 100.0% | 100.0% |
| Cost of sales | 8,363,272 | 886,541 | 11.9% | 93.2% | 89.6% |
| Gross profit | $610,800 | $(258,199) | (29.7)% | 6.8% | 10.4% |

*(In thousands, except percent data)*

| Sources of gross profit Amount | Nine Months Ended September 27, 2020 Percent | Change from Nine Months Ended September 29, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $409,257 | $(199,666) | (32.8)% |
| U.K. and Europe | 169,106 | 52,964 | 45.6% |
| Mexico | 31,978 | (111,884) | (77.8)% |
| Elimination | 459 | 387 | 537.5% |
| Total gross profit | $610,800 | $(258,199) | (29.7)% |

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Nine Months Ended September 27, 2020 Percent | Change from Nine Months Ended September 29, 2019 |  |
| --- | ---: | ---: | ---: |
| U.S. | $5,210,534 | $87,256 | 1.7% |
| U.K. and Europe | 2,256,034 | 803,780 | 55.3% |
| Mexico | 897,163 | (4,108) | (0.5)% |
| Elimination | (459) | (387) | 537.5% |
| Total cost of sales | $8,363,272 | $886,541 | 11.9% |

*U.S. Reportable Segment.* Cost of sales incurred by our U.S. operations during the nine months ended September 27, 2020 increased $87.3 million, or 1.7%, from cost of sales incurred by our U.S. segment during the nine months ended September 29, 2019. Cost of sales increased primarily because of the impact of increased sales volume and increased cost per pound sold, resulting in increases of $43.7 million, or 0.9 percentage points, and $43.5 million, or 0.8 percentage points, respectively. Included in increased cost per pound sold was an increase in live input costs of $53.8 million, which resulted from increased grower pay costs due to higher contract rates. An increase in payroll costs, mainly due to increased pay rates, contributed $19.0 million to the increase in cost of sales. There were also increases in contract services costs, mainly due to outsourced processing labor, and increased benefit costs, mainly due to the COVID-19 pandemic, contributing $15.2 million and $11.0 million, respectively. These increases in cost of sales were partially offset by a $20.4 million decrease in derivative losses compared to the nine months ended September 29, 2019. 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 nine months ended September 27, 2020 increased $803.8 million, or 55.3%, from cost of sales incurred by our U.K. and Europe segment during the nine months ended September 29, 2019, primarily because of costs incurred by the acquired PPL 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 PPL operations contributed $959.0 million, or 66.0 percentage points, to the increase in cost of sales. Cost of sales related to the existing U.K. and Europe operations decreased $155.2 million, or 10.7 percentage points, primarily from a decrease in sales volume, a decrease in cost per pound sold and the favorable impact of foreign currency translation contributing $81.6 million, $70.2 million and $3.4 million, respectively. Included in the decrease in cost per pound in our existing U.K. and Europe operations was a $9.9 million decrease in freight costs resulting 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 nine months ended September 27, 2020 decreased $4.1 million, or 0.5%, from cost of sales incurred by our Mexico segment during the nine months ended September 29, 2019. This decrease in cost of sales was primarily because of the favorable impact of foreign currency remeasurement of $118.4 million, or 13.2 percentage points. Partially offsetting the favorable impact of foreign currency remeasurement was an increase in cost per pound sold and sales volume of $111.7 million, or 12.4 percentage points, and $2.6 million, or 0.3 percentage points, respectively. Included in the increased cost per pound sold was a $17.3 million increase in payroll costs resulting from increased direct labor costs, a $15.4 million increase in contracted grower pay due to higher rates, a $6.1 million increase in utilities due to higher natural gas rates and a $5.9 million increase in warehouse costs. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income decreased by $398.8 million, or 65.9%, from $604.8 million generated in the nine months ended September 29, 2019 to $206.0 million generated in the nine months ended September 27, 2020. The following tables provide information regarding operating income and SG&A expense:

*(In thousands, except percent data)*

| Components of operating income Nine Months Ended Amount | Nine Months Ended September 27, 2020 Percent | Change from Nine Months Ended September 29, 2019 September 27, 2020 | September 29, 2019 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $610,800 | $(258,199) | (29.7)% | 6.8% | 10.4% |
| SG&A expense | 404,837 | 140,524 | 53.2% | 4.5% | 3.2% |
| Administrative restructuring activity | — | 90 | (100.0)% | —% | —% |
| Operating income | $205,963 | $(398,813) | (65.9)% | 2.3% | 7.2% |

*(In thousands, except percent data)*

| Sources of operating income Amount | Nine Months Ended September 27, 2020 Percent | Change from Nine Months Ended September 29, 2019 |
| --- | ---: | ---: |
| U.S. | $126,951 | $(300,017) (70.3)% |
| U.K. and Europe | 76,324 | 14,091 22.6% |
| Mexico | 2,229 | (113,274) (98.1)% |
| Eliminations | 459 | 387 537.5% |
| Total operating income | $205,963 | $(398,813) (65.9)% |
| **Sources of SG&A expense** | **Nine Months Ended September 27, 2020** | **Change from Nine Months Ended September 29, 2019** |
| **Amount** | **Percent** |  |
|  | **(In thousands, except percent data)** |  |
| U.S. | $282,306 | $100,261 55.1% |
| U.K. and Europe | 92,782 | 38,873 72.1% |
| Mexico | 29,749 | 1,390 4.9% |
| Total SG&A expense | $404,837 | $140,524 53.2% |

*U.S. Reportable Segment.* SG&A expense incurred by our U.S. reportable segment during the nine months ended September 27, 2020 increased $100.3 million, or 55.1%, from SG&A expense incurred by our U.S. reportable segment during the nine months ended September 29, 2019. This increase in SG&A expense incurred resulted primarily from the $110.5 million DOJ antitrust fine, a $14.5 million increase in donations expense resulting primarily from the Hometown Strong initiative and a $10.3 million increase in professional fees due to increased legal fees. These increases in SG&A expense were partially offset by a $13.5 million decrease in benefit expenses resulting from lower incentive compensation, a $7.0 million decrease in marketing costs mainly due to reduced internet media expenses, a $6.0 million decrease in payroll costs resulting from reduced stock-based compensation expenses and a $3.9 million decrease in travel and entertainment expenses due to less travel during the COVID-19 pandemic. 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 nine months ended September 27, 2020 increased $38.9 million, or 72.1%, from SG&A expense incurred by our U.K. and Europe segment during the nine months ended September 29, 2019. SG&A expenses by our U.K. and Europe reportable segment increased primarily due to expenses incurred by the acquired PPL operations and our existing U.K. and Europe operations by $36.4 million and $1.7 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 nine months ended September 27, 2020 increased approximately $1.4 million, or 4.9%, from SG&A expense incurred by our Mexico segment during the nine months ended September 29, 2019, mainly from an increase in employee relations expenses of $1.6 million. Other factors affecting our Mexico segment's SG&A expense were individually immaterial.

*Net interest expense.* Net interest expense increased to $91.0 million recognized in the nine months ended September 27, 2020 from $87.7 million recognized in the nine months ended September 29, 2019. Average borrowings increased by $242.0 million from $2.3 billion during the nine months ended September 29, 2019 to $2.6 billion during the nine months ended September 27, 2020. As a percent of net sales, interest expense in the nine months ended September 27, 2020 and September 29, 2019 was 1.1% and 1.2%, respectively.

*Income taxes.* Income tax expense decreased to $57.9 million, a 37.9% effective tax rate, for the nine months ended September 27, 2020 compared to income tax expense of $142.3 million, a 28.1% effective tax rate, for the nine months ended September 29, 2019. The decrease in income tax expense resulted primarily from a decrease in pre-tax income and the effects of foreign currency fluctuation, partially offset by the recognition of the non-deductible DOJ antitrust fine of $110.5 million, refer to “Note 20. Commitments and Contingencies” for more information. In addition, we recognized deferred tax expense of $10.6 million related to the repeal of the previously enacted reduction of the U.K corporate tax rate to 17.0%. Therefore, the current corporate tax rate is maintained at 19.0%.

### Liquidity and Capital Resources

The following table presents our available sources of liquidity as of September 27, 2020:

*(In millions)*

| Sources of Liquidity | Facility Amount | Amount Outstanding | Amount Available |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $— | $— | $768.0 |
| Borrowing arrangements: |  |  |  |
| U.S. Credit Facility(a) | 750.0 | 350.0 | 359.6 |
| Mexico Credit Facility(b) | 67.2 | — | 67.2 |
| U.K. and Europe Credit Facilities(c) | 139.1 | — | 139.1 |

(a) Availability under the U.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at September 27, 2020 totaled $40.4 million.

(b) The U.S. dollar-equivalent of the facility amount under the Mexico Credit Facility is $67.2 million ($1.5 billion Mexican pesos).

(c) The U.S. dollar-equivalent of the facility amounts under the U.K. and Europe Credit Facilities are $127.5 million (£100.0 million) and $11.6 million (€10.0 million).

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 | Nine Months Ended September 27, 2020 | September 29, 2019 |
| --- | ---: | ---: |
| Net income | $94.7 | $364.3 |
| Net noncash expenses | 285.0 | 215.6 |
| Changes in operating assets and liabilities: |  |  |
| Trade accounts and other receivables | 44.6 | (46.6) |
| Inventories | 41.3 | (108.1) |
| Prepaid expenses and other current assets | (29.3) | 3.5 |
| Accounts payable, accrued expenses and other current liabilities | 93.1 | 67.3 |
| Income taxes | (30.9) | 40.5 |
| Long-term pension and other postretirement obligations | (0.8) | (1.5) |
| Other operating assets and liabilities | 10.6 | 0.5 |
| Cash provided by operating activities | $508.3 | $535.5 |

### Net Noncash Expenses

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $285.0 million for the nine months ended September 27, 2020. Net noncash expense items included depreciation and amortization of $248.6 million, deferred income tax expense of $37.7 million, an adjustment to a previously recognized gain on a bargain purchase of $3.7 million, loan cost amortization of $3.6 million, accretion of discounts related to Senior Notes and a loss in equity-method investments and of $0.7 million and $0.3 million, respectively. These expense items were partially offset by gains on property disposals, stock-based compensation and amortization of premiums related to Senior Notes of $8.0 million, $1.3 million and $0.5 million, respectively.

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $215.6 million for the nine months ended September 29, 2019. Net noncash expense items included depreciation and amortization of $210.4 million, share based compensation of $7.3 million, loan cost amortization of $3.6 million, deferred income tax expense of $2.4 million, foreign currency transaction loss related to borrowing arrangements of $1.3 million and accretion of discount related to Senior Notes of $0.7 million. These expense items were partially offset by a gain on property disposals of $9.5 million and amortization of premium related to Senior Notes of $0.5 million.

### Changes in Operating Assets and Liabilities

The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $44.6 million source of cash related to operating activities for the nine months ended September 27, 2020. The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $46.6 million use of cash related to operating activities for the nine months ended September 29, 2019. These changes are primarily due to customer payment timing.

The change in inventories represented a $41.3 million source of cash related to operating activities for the nine months ended September 27, 2020. This change resulted primarily from a decrease in our semi-processed and work-in-process inventories. The change in inventories represented a $108.1 million use of cash related to operating activities for the nine months ended September 29, 2019. This change resulted primarily from an increase in our finished products inventory.

The change in prepaid expenses and other current assets represented a $29.3 million use of cash related to operating activities for the nine months ended September 27, 2020. This change resulted primarily from an increase in prepaid inventory in our Mexico reporting segment. The change in prepaid expenses and other current assets represented a $3.5 million source of cash related to operating activities for the nine months ended September 29, 2019. This change resulted primarily from a net decrease 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 $93.1 million source of cash related to operating activities for the nine months ended September 27, 2020. This change resulted primarily from the timing of receipt of invoicing and payments as well as the accrual of the $110.5 million DOJ antitrust fine. The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities, including accounts payable to related parties, represented a $67.3 million source of cash related to operating activities for the nine months ended September 29, 2019. This change resulted primarily from the timing of payments.

The change in income taxes, which includes income taxes receivable, income taxes payable, deferred tax assets, deferred tax liabilities, reserves for uncertain tax positions, and the tax components within accumulated other comprehensive loss, represented a $30.9 million use of cash related to operating activities for the nine months ended September 27, 2020. This change resulted primarily from the timing of estimated tax payments. The change in income taxes represented a $40.5 million source of cash related to operating activities for the nine months ended September 29, 2019. This change resulted primarily from the timing of estimated tax payments.

*(In millions)*

| Cash Flows from Investing Activities | Nine Months Ended September 27, 2020 | September 29, 2019 |
| --- | ---: | ---: |
| Acquisitions of property, plant and equipment | $(242.6) | $(258.7) |
| Proceeds from property disposals | 21.7 | 15.1 |
| Business acquisition | (4.2) | — |
| Cash used in investing activities | $(225.1) | $(243.6) |

Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs for the nine months ended September 27, 2020 and September 29, 2019.

*(In millions)*

| Cash Flows from Financing Activities | Nine Months Ended September 27, 2020 | September 29, 2019 |
| --- | ---: | ---: |
| Proceeds from revolving line of credit and long-term borrowings | $386.7 | $99.6 |
| Purchase of common stock under share repurchase program | (107.8) | (2.9) |
| Payments on revolving line of credit, long-term borrowings and finance lease obligations | (56.8) | (123.3) |
| 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 | $222.1 | $(27.7) |

Proceeds from revolving line of credit and long-term borrowings is mainly due to borrowings on our revolving loan commitment under the U.S. Credit Facility. Payments on debt obligations primarily represent payments under the Mexico Credit Facility and the U.S. Credit Facility. Shares repurchased under the share repurchase program during the nine months ended September 27, 2020 totaled 6.1 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 September 27, 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) | $2,656,314 | $25,052 | $781,262 | $1,000,000 | $850,000 |
| Interest(c) | 664,162 | 118,666 | 234,527 | 186,125 | 124,844 |
| Finance leases | 1,970 | 513 | 988 | 469 | — |
| Operating leases | 321,293 | 78,963 | 120,264 | 71,621 | 50,445 |
| Derivative liabilities | 7,175 | 7,175 | — | — | — |
| DOJ antitrust fine | 110,524 | 110,524 | — | — | — |
| Purchase obligations(d) | 219,074 | 216,820 | 2,254 | — | — |
| Total | $3,980,512 | $557,713 | $1,139,295 | $1,258,215 | $1,025,289 |

(a) The total amount of unrecognized tax benefits at September 27, 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 September 27, 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 Securities and Exchange Commission (the “SEC”) on February 21, 2020 (the “2019 Annual Report”).

### Reconciliation of Adjusted Net Income

Adjusted net income attributable to Pilgrim's is calculated by adding to *Net income attributable to Pilgrim's* certain items of expense and deducting from *Net income attributable to Pilgrim's* certain items of income. Management believes that presentation of Adjusted net income attributable to Pilgrim's provides useful supplemental information about our operating performance and enables comparison of our performance between periods because certain costs shown below are not indicative of our current operating performance. A reconciliation of Net income attributable to Pilgrim's to Adjusted net income attributable to Pilgrim's is as follows:

*PILGRIM'S PRIDE CORPORATION*

*Reconciliation of Adjusted Net Income*

*(Unaudited)*

*(In thousands)*

|  | Three Months Ended September 27, 2020 | September 29, 2019 | Nine Months Ended September 27, 2020 | September 29, 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net income attributable to Pilgrim's | $33,446 | $109,765 | $94,678 | $363,844 |
| Adjustments: |  |  |  |  |
| Acquisition charges and restructuring activity | — | 43 | 134 | (26) |
| DOJ agreement | 110,524 | — | 110,524 | — |
| Hometown Strong commitment | 14,506 | — | 14,506 | — |
| Foreign currency transaction losses (gains) | 9,092 | 3,027 | (3,768) | 7,923 |
| Net tax benefit of adjustments(a) | (5,916) | (747) | (9,158) | (1,923) |
| Adjusted net income attributable to Pilgrim's | $161,652 | $112,088 | $206,916 | $369,818 |

(a) Net tax benefit of adjustments represents the tax impact of all adjustments shown above with the exclusion of the DOJ antitrust fine as this item is non-deductible for tax purposes.

## Market risk

As filed, 13,021 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% increase in the weighted-average cost of our primary feed ingredients as of the periods presented. The impact of this fluctuation, if realized, could be mitigated by related commodity hedging activity. However, fluctuations greater than 10% could occur.

*(In thousands)*

|  | Three Months Ended September 27, 2020 Amount | Impact of 10% Increase in Feed Ingredient Prices |
| --- | ---: | ---: |
| Feed purchases(a) | $674,470 | $67,447 |
| Feed inventory(b) | 120,074 | 12,007 |

(a) Based on our feed consumption, a 10% increase in the price of our feed purchases will increase cost of sales for the three months ended September 27, 2020.

(b) A 10% increase in ending feed ingredient prices will increase inventories as of September 27, 2020.

*(In thousands)*

|  | September 27, 2020 Amount | Impact of 10% Increase to the Fair Value of Commodity Derivative Assets |
| --- | ---: | ---: |
| Commodity derivative assets(a) | $30,489 | $3,049 |

(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 September 27, 2020.

### Interest Rates

*Fixed-rate debt.* Market risk for fixed-rate debt is estimated as the potential decrease 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 $48.9 million as of September 27, 2020.

*Variable-rate debt.* Our variable-rate debt instruments represent approximately 30.9% of our total debt as of September 27, 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 September 27, 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 September 27, 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 September 27, 2020 Impact of 10% Deterioration in Exchange Rate(a) | Impact of 10% Appreciation in Exchange Rate(b) |
| --- | ---: | ---: |
| Foreign currency remeasurement gain (loss) | $(14,849) | $18,149 |
| Exchange rate of Mexican peso to the U.S. dollar: |  |  |
| As reported | 22.34 | 22.34 |
| Hypothetical 10% change | 24.57 | 20.11 |

(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 September 27, 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 September 27, 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 to euro, and the effect of this change on our U.K. and Europe foreign investments:

*(In thousands)*

|  | September 27, 2020 Amount | Impact of 10% Deterioration in Exchange Rates | Impact of 10% Appreciation in Exchange Rates |
| --- | ---: | ---: | ---: |
| Net assets(a) | $2,071,602 | $(188,327) | $230,178 |
| Foreign currency forward contracts(b): |  |  |  |
| British pound to U.S. dollar | (22,255) | 2,473 | (2,023) |
| Euro to U.S. dollar | (28,775) | 3,197 | (2,616) |

(a) A 10% weakening 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 September 27, 2020. A 10% strengthening 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 September 27, 2020.

(a) We had foreign currency forward contracts, which were designated and qualify as cash flow hedges, with an aggregate notional amount of $51.0 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 September 27, 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 September 27, 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.

### 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 PPL (formerly 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, 2,542 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 SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our Company in the reports that it files 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 September 27, 2020. Consistent with guidance issued by the SEC for a recently acquired business, management is excluding the internal control over financial reporting of PPL, formerly known as Tulip, from its evaluation of the effectiveness of the Company’s disclosure controls and procedures as of September 27, 2020. Total assets and net sales of PPL, which the Company acquired on October 15, 2019, included in our Condensed Consolidated Financial Statements as of and for the nine months ended September 27, 2020 were $691.2 million and $999.1 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 September 27, 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 quarter ended September 27, 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 PPL, on October 15, 2019. The Company is in the process of reviewing the internal control structure of PPL and, if necessary, will make appropriate changes as it integrates PPL into the Company's overall internal control over financial reporting process.

## Risk factors

As filed, 6,003 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 October 28, 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 have taken and continue to take 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.

*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 Oct 29, 2020.
Source: SEC EDGAR, the filing index for accession 0000802481-20-000080. Last ingested by Listed: Oct 29, 2026, 06:16 ET. No prices; not investment advice.