# Pilgrims Pride Corp: Form 10-Q for the period ended Sep 26, 2021

- Company: [Pilgrims Pride Corp](/companies/ppc.md) (CIK 802481)
- Form: 10-Q
- Filed: 2021-10-28
- Accepted by EDGAR: Oct 27, 2021, 21:24 ET
- Period: 2021-09-26
- Accession: 0000802481-21-000105
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/802481/000080248121000105/ppc-20210926.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/802481/000080248121000105/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-09-26.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-06-28 to 2021-09-26 | $3.83bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-12-28 to 2021-09-26 | $10.74bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-06-28 to 2021-09-26 | $3.46bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2020-12-28 to 2021-09-26 | $9.73bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-06-28 to 2021-09-26 | $371.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-12-28 to 2021-09-26 | $1.01bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2021-06-28 to 2021-09-26 | $251.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-12-28 to 2021-09-26 | $857.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2021-06-28 to 2021-09-26 | $120.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-12-28 to 2021-09-26 | $156.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-06-28 to 2021-09-26 | $29.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-12-28 to 2021-09-26 | $110.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-06-28 to 2021-09-26 | $30.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-12-28 to 2021-09-26 | $55.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-06-28 to 2021-09-26 | $60.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-12-28 to 2021-09-26 | −$5.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-06-28 to 2021-09-26 | $0.25 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-12-28 to 2021-09-26 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-06-28 to 2021-09-26 | $0.25 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-12-28 to 2021-09-26 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-06-28 to 2021-09-26 | 244,195,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-12-28 to 2021-09-26 | 243,643,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-12-28 to 2021-09-26 | $327.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-12-28 to 2021-09-26 | $280.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2020-12-28 to 2021-09-26 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2021-09-26 | $511.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-09-26 | $3.24bn | us-gaap:AssetsCurrent |
| Total assets | at 2021-09-26 | $8.83bn | us-gaap:Assets |
| Current liabilities | at 2021-09-26 | $2.27bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-09-26 | $6.22bn | us-gaap:Liabilities |
| Current portion of debt | at 2021-09-26 | $19.9m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2021-09-26 | $2.60bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 53,227 characters.

### Executive Summary

### Overview

We are one of the largest chicken producers in the world, and as a vertically integrated chicken producer, we are able to control every phase of the production process, which helps us manage food safety and quality, control margins and improve customer service. This gives us the opportunity to continue to create growth and development opportunities, further increasing our position as a leading domestic and global protein company. With the acquisitions of Kerry Consumer Foods' specialty meats and ready meals businesses, Pilgrim’s Pride Limited (“PPL”) and Moy Park in 2021, 2019 and 2017, respectively, we solidified ourselves as a leading European food company while diversifying our product mix with introduction into the pork market. With the acquisition of GNP in 2017, we further solidified ourselves as a leading poultry company within the U.S.

We reported net loss attributable to Pilgrim’s of $5.8 million, or $0.02 per diluted common share, and income before tax totaling $50.7 million, for the nine months ended September 26, 2021. These operating results included net sales of $10.7 billion, gross profit of $1.0 billion and $327.5 million of cash provided by operating activities. We generated a consolidated operating margin of 1.5% with operating margins of (1.3)%, 1.2% and 16.0% in our U.S., U.K. and Europe, and Mexico reportable segments, respectively. For the nine months ended September 26, 2021, we generated EBITDA and Adjusted EBITDA of $431.4 million and $972.4 million, respectively. A reconciliation of net income to EBITDA and Adjusted EBITDA is included below.

### Kerry Meats and Meals Acquisition

On September 24, 2021, the Company acquired 100% of the equity of the Kerry Consumer Foods' specialty meats and ready meals businesses (the “Kerry Meats and Meals Acquisition”) for £695.3 million, or $954.1 million, subject to customary working capital adjustments. The acquisition was funded with the Company's recent senior notes offering and borrowings under the credit facility.

Kerry Consumer Foods' specialty meats business is a leading manufacturer of branded and private label meats, meat snacks and food-to-go products in the U.K. and Ireland. Kerry Consumer Foods' ready meals business is a leading ethnic chilled and frozen ready meals business in the U.K. The combined businesses produced over £725 million in annual sales during the year ended December 31, 2020 and have more than 4,000 team members.

The acquisition solidifies Pilgrim's as a leading European food company. The acquired operations are included in the Company's U.K. and Europe reportable segment.

### Unsolicited Offer from JBS S.A. to Purchase Outstanding Shares of PPC Common Stock

On September 20, 2021, the Company announced that its board of directors had formed a special committee of independent directors to review and evaluate the previously announced unsolicited proposal received on August 12, 2021 from JBS S.A. to acquire all of the outstanding shares of common stock of PPC that JBS does not currently own.

### U.K. Economic Conditions

During the third quarter of 2021, we experienced unprecedented challenges in the U.K. economic environment. We were confronted with sudden, serious labor shortages as European Union workers returned home following Brexit, affecting our ability to process, pack and transport products. In addition, we also faced significant cost pressure from feed ingredients – specifically oils and micronutrients – and increased costs for utilities, logistics, chemicals, labor and packaging. Our U.K. pork operations also had to overcome low hog prices resulting from an oversupply in Europe. Although chicken sales were robust during the quarter, pork foodservice sales increased to pre-COVID-19 (defined below) levels and pork retail sales remained stable from the prior year, these sales were generated at significantly reduced margins.

We have responded to these challenges by opening negotiations with customers to recoup extraordinary costs we have experienced. We also continue to focus on operational excellence initiatives that deliver labor efficiencies, better agricultural performance and improved yields. We’re also maintaining tight control over selling, general and administrative expenses.

### 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, former 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 of 2020, 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. With the uncertainty surrounding COVID-19, we believe that we will continue to experience certain disruptions to our business for the remainder of 2021.

During 2021, COVID-19 vaccinations have increased while daily COVID-19 case rates decreased, leading to gradual relaxations of COVID-19 restrictions, such as those directly affecting restaurants’ indoor dining capacities and increased consumer mobility. The delivery of the second and third COVID-19 direct relief packages to taxpayers, in addition to extended unemployment benefits, were supportive of consumer income. These same relief packages have been a factor in labor shortages and higher absenteeism at our facilities, which has caused a reduction in chicken production.

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.
- *Our operations.* All of our 69 production facilities are operating. 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 pandemic restrictions. Two PPL plants had their export licenses to China suspended due to pandemic issues. 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 changing COVID-19 market demands.
- *Foreign currency exchange rates and commodity prices.* During the nine months ended September 26, 2021, 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 2021, 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. As of the September 26, 2021, we have delayed approximately $52.3 million of employer payroll taxes with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022.

### U.S. Credit Facility

On August 9, 2021, we, and certain of our subsidiaries entered into a Fifth Amended and Restated Credit Agreement (the “U.S. Credit Facility”) with CoBank, ACB, as administrative agent and collateral agent, and the other lenders party thereto. The U.S. Credit Facility provides for a $800.0 million revolving credit commitment and a term loan commitment of up to $700.0 million. The maturity date of the revolving loan commitment and the term loans was extended from July 20, 2023 to August 9, 2026.

Additional information regarding the U.S. Credit Facility is included in “Note 11. Debt.”

### Senior Notes due 2032

On September 2, 2021, we completed a sale of $900.0 million aggregate principal amount of 3.50% senior notes due 2032 (“Senior Notes due 2032”). We used the proceeds, together with borrowings under the delayed draw term loan under the U.S. Credit Facility, to finance the Kerry Meats and Meals Acquisition and to pay related fees and expenses. The remaining proceeds will be used to repay outstanding revolver borrowings under the U.S. Credit Facility and for general corporate purposes.

Additional information regarding the Senior Notes due 2032 is included in “Note 11. Debt.”

### Senior Notes due 2031

On April 8, 2021, we completed a sale of $1.0 billion aggregate principal amount of 4.25% sustainability-linked senior notes due 2031 (“Senior Notes due 2031”). We used the net proceeds of the sale, together with cash on hand, to redeem our 5.75% senior notes due 2025 (“Senior Notes due 2025”). From and including October 15, 2026, the interest rate payable on the notes will increase to 4.50% per annum unless we timely notify the related indenture trustee that our greenhouse gas emissions intensity reduction target has been satisfied and that the satisfaction of the target has been confirmed by a qualified provider of third-party assurance or attestation services appointed by us to review our statement of the greenhouse gas emissions intensity in accordance with its customary procedures.

Additional information regarding the Senior Notes due 2031 is included in “Note 11. Debt.”

### 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 September 26, 2021 remained above the 5-year average and maintained levels well above historical norms throughout the period. During the third quarter of 2021, industry chick placements were flat relative to levels from a year as declining hatchability rates offset increased egg sets. The result was mild growth of +1.8% primarily driven by both increased liveweights and head counts. While the U.S. experienced a renewed wave of COVID-19 cases in the third quarter of 2021, foodservice demand remained consistent. The retail environment maintained its consistency as consumers continued to use chicken as a cost effective staple in home meal preparation. As a result, robust chicken demand coincided with mild production growth and already pressured cold storage inventory levels, which entered the quarter well below the 5-year average, resulting in the continued strength of market prices for chicken products in the three months ended September 26, 2021.

While market prices for chicken products have improved thus far in 2021, prices for the remainder of the year will depend on the status of the foodservice industry and the evolution of retail meat demand, influenced by factors such as the COVID-19 pandemic, government regulation and uncertainty surrounding both the general economy and protein supply.

### 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 17. Reportable Segments” of our Condensed Consolidated Financial Statements included in this quarterly report.

### Results of Operations

### Three Months Ended September 26, 2021 Compared to the Three Months Ended September 27, 2020

*Net sales.* Net sales generated in the three months ended September 26, 2021 increased $752.4 million, or 24.5%, from net sales generated in the three months ended September 27, 2020. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Three Months Ended September 26, 2021 Percent | Change from Three Months Ended September 27, 2020 |  |
| --- | ---: | ---: | ---: |
| U.S. | $2,466,850 | $572,628 | 30.2% |
| U.K. and Europe | 930,440 | 84,763 | 10.0% |
| Mexico | 430,276 | 95,054 | 28.4% |
| Total net sales | $3,827,566 | $752,445 | 24.5% |

*U.S. Reportable Segment.* U.S. net sales generated in the three months ended September 26, 2021 increased $572.6 million, or 30.2%, from U.S. net sales generated in the three months ended September 27, 2020 primarily due to an increase in net sales per pound which contributed $582.4 million, or 30.7 percentage points, to the increase in net sales. The increase in net sales per pound was driven primarily from higher than average chicken commodity prices in the U.S. during the three months ended September 26, 2021. The increase in net sales was partially offset by a decrease in sales volume of $9.8 million, or 0.5 percentage points.

*U.K. and Europe Reportable Segment.* U.K. and Europe net sales generated in the three months ended September 26, 2021 increased $84.8 million, or 10.0%, from U.K. and Europe net sales generated in the three months ended September 27, 2020 primarily due to a favorable impact of foreign currency translation and an increase in sales volume, partially offset by a decrease in net sales per pound. The favorable impact of foreign currency translation contributed $61.7 million, or 7.3 percentage points, to the increase in net sales. The increase in sales volume contributed $25.8 million, or 3.0 percentage points, to the increase in net sales and was primarily driven by market recoveries in foodservice from the lessening of restrictions due to the COVID-19 pandemic from prior year. The decrease in net sales per pound of $2.8 million, or 0.3 percentage points, partially offset the increase in net sales and was primarily driven by falling pork prices in the U.K.

*Mexico Reportable Segment.* Mexico net sales generated in the three months ended September 26, 2021 increased $95.1 million, or 28.4%, from Mexico net sales generated in the three months ended September 27, 2020 primarily due to an increase in net sales per pound of $46.5 million, or 13.9 percentage points, and a favorable impact of foreign currency remeasurement of $40.9 million, or 12.2 percentage points. This increase in net sales per pound was driven primarily by higher live chicken commodity prices in Mexico from increased demand during the three months ended September 26, 2021 in comparison to the three months ended September 27, 2020. Also contributing to the increase in net sales was an increase from sales volume of $7.7 million, or 2.3 percentage points.

*Gross profit.* Gross profit increased by $58.0 million, or 18.5%, from $313.8 million generated in the three months ended September 27, 2020 to $371.8 million generated in the three months ended September 26, 2021. 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 26, 2021 Three Months Ended Percent | Change from Three Months Ended September 27, 2020 September 26, 2021 | September 27, 2020 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $3,827,566 | $752,445 | 24.5% | 100.0% | 100.0% |
| Cost of sales | 3,455,723 | 694,444 | 25.1% | 90.3% | 89.8% |
| Gross profit | $371,843 | $58,001 | 18.5% | 9.7% | 10.2% |

43

*(In thousands, except percent data)*

| Sources of gross profit Amount | Three Months Ended September 26, 2021 Percent | Change from Three Months Ended September 27, 2020 |  |
| --- | ---: | ---: | ---: |
| U.S. | $278,028 | $94,895 | 51.8% |
| U.K. and Europe | 32,324 | (28,006) | (46.4)% |
| Mexico | 61,477 | (8,667) | 12.4% |
| Elimination | 14 | (221) | (94.0)% |
| Total gross profit | $371,843 | $58,001 | 18.5% |

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Three Months Ended September 26, 2021 Percent | Change from Three Months Ended September 27, 2020 |  |
| --- | ---: | ---: | ---: |
| U.S. | $2,188,822 | $477,733 | 27.9% |
| U.K. and Europe | 898,116 | 112,769 | 14.4% |
| Mexico | 368,799 | 103,721 | 39.1% |
| Elimination | (14) | 221 | 94.0% |
| Total cost of sales | $3,455,723 | $694,444 | 25.1% |

*U.S. Reportable Segment.* Cost of sales incurred by our U.S. operations during the three months ended September 26, 2021 increased $477.7 million, or 27.9%, from cost of sales incurred by our U.S. segment during the three months ended March 29, 2020. Cost of sales increased primarily because of the impact of increased cost per pound sold of $486.6 million, or 28.4 percentage points, and was partially offset by a decrease in sales volume of $8.9 million, or 0.5 percentage points. Included in the increased cost of sales was a $307.0 million in live operations costs, a $65.0 million increase in payroll costs, $57.0 million increase in prepared foods purchases, and $38.0 million in freight costs. The increase in live operations costs includes an increase of $277.6 million in feed costs and an $18.2 increase in chick costs. The increase in feed costs was driven primarily from higher corn and soy commodity prices, our main ingredients in feed. 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 26, 2021 increased $112.8 million, or 14.4%, from cost of sales incurred by our U.K. and Europe segment during the three months ended September 27, 2020. The increase in cost of sales was primarily from an unfavorable impact of foreign currency translation of $59.5 million, or 7.6 percentage points, increased cost per pound sold of $29.3 million, or 3.7 percentage points, and increased sales volume of $24.0 million, or 3.1 percentage points. The increase in sales volume is primarily from market recoveries in foodservice from the lessening of restrictions due to the COVID-19 pandemic from prior year. The increase in cost per pound sold is primarily from increases in feed costs and inflationary pressures. Other factors affecting cost of sales were individually immaterial.

*Mexico Reportable Segment.* Cost of sales incurred by our Mexico operations during the three months ended March 28, 2021 increased $103.7 million, or 39.1%, from cost of sales incurred by our Mexico segment during the three months ended September 27, 2020. This increase was driven by increased cost per pound sold of $62.6 million, or 23.6 percentage points, an unfavorable impact of foreign currency remeasurement of $35.0, or 13.2 percentage points and an increase in sales volume of $6.1 million, or 2.3 percentage points. The increase in cost per pound sold was primarily driven by increases in corn and soy commodity prices, our main ingredients in feed, and by increased hatchery egg costs. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income increased by $26.5 million, or 28.1%, from $94.3 million generated in the three months ended September 27, 2020 to $120.8 million generated in the three months ended September 26, 2021. 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 26, 2021 Percent | Change from Three Months Ended September 27, 2020 September 26, 2021 | September 27, 2020 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $371,843 | $58,001 | 18.5% | 9.7% | 10.2% |
| SG&A expense | 251,066 | 31,512 | 14.4% | 6.6% | 7.1% |
| Operating income | $120,777 | $26,489 | 28.1% | 3.2% | 3.1% |

*(In thousands, except percent data)*

| Sources of operating income Amount | Three Months Ended September 26, 2021 Percent | Change from Three Months Ended September 27, 2020 |
| --- | ---: | ---: |
| U.S. | $70,666 | $68,215 2,783.1% |
| U.K. and Europe | 445 | (29,504) (98.5)% |
| Mexico | 49,652 | (12,001) 19.5% |
| Eliminations | 14 | (221) (94.0)% |
| Total operating income | $120,777 | $26,489 28.1% |
| **Sources of SG&A expense** | **Three Months Ended September 26, 2021** | **Change from Three Months Ended September 27, 2020** |
| **Amount** | **Percent** |  |
|  | **(In thousands, except percent data)** |  |
| U.S. | $207,362 | $26,680 14.8% |
| U.K. and Europe | 31,879 | 1,498 4.9% |
| Mexico | 11,825 | 3,334 39.3% |
| Total SG&A expense | $251,066 | $31,512 14.4% |

*U.S. Reportable Segment.* SG&A expense incurred by our U.S. reportable segment during the three months ended September 26, 2021 increased $26.7 million, or 14.8%, from SG&A expense incurred by our U.S. reportable segment during the three months ended September 27, 2020. This increase in SG&A expense resulted primarily from an increase in legal defense costs of $8.7 million and $15.5 million recognized in anticipation of probable losses related to ongoing litigation. Other factors affecting SG&A expense were individually immaterial.

*U.K. and Europe Reportable Segment.* SG&A expense incurred by our U.K. and Europe reportable segment during the three months ended September 26, 2021 increased $1.5 million, or 4.9%, from SG&A expense incurred by our U.K. and Europe segment during the three months ended September 27, 2020. Factors affecting SG&A expense were individually immaterial.

*Mexico Reportable Segment.* SG&A expense incurred by our Mexico reportable segment during the three months ended September 26, 2021 increased approximately $3.3 million, or 39.3%, from SG&A expense incurred by our Mexico segment during the three months ended September 27, 2020. The primary driver of the increase in SG&A expense was payroll and bonus costs. Other factors affecting our Mexico segment’s SG&A expense were individually immaterial.

*Net interest expense.* Net interest expense decreased to $28.6 million recognized in the three months ended September 26, 2021 from $28.8 million recognized in the three months ended September 27, 2020. The decrease in net interest expense resulted primarily due to a decrease in interest expense on outstanding borrowings of $0.6 million, partially offset by a loss on early extinguishment of debt recognized as a component of interest expense of $0.4 million. Average borrowings decreased by $21.3 million from $2.66 billion during the three months ended September 27, 2020 to $2.64 billion during the three months ended September 26, 2021. As a percent of net sales, interest expense in the three months ended September 26, 2021 and September 27, 2020 was 0.8% and 1.0%, respectively.

*Income taxes.* Income tax expense increased to $30.4 million, a 33.3% effective tax rate, for the three months ended September 26, 2021 compared to an income tax expense of $22.3 million, a 39.9% effective tax rate, for the three months ended September 27, 2020. The increase in income tax expense resulted primarily from an increase in pre-tax income as well as the recognition of a $6.1 million reserve recognized against certain U.K. interest deductions and $3.8 million in adjustments to tax returns.

### Nine Months Ended September 26, 2021 Compared to the Nine Months Ended September 27, 2020

*Net sales.* Net sales generated in the nine months ended September 26, 2021 increased $1.8 billion, or 19.7%, from net sales generated in the nine months ended September 27, 2020. The following table provides net sales information:

*(In thousands, except percent data)*

| Sources of net sales Amount | Nine Months Ended September 26, 2021 Percent | Change from Nine Months Ended September 27, 2020 |  |
| --- | ---: | ---: | ---: |
| U.S. | $6,714,879 | $1,095,088 | 19.5% |
| U.K. and Europe | 2,721,019 | 295,879 | 12.2% |
| Mexico | 1,302,791 | 373,650 | 40.2% |
| Total net sales | $10,738,689 | $1,764,617 | 19.7% |

*U.S. Reportable Segment.* U.S. net sales generated in the nine months ended September 26, 2021 increased $1.1 billion, or 19.5%, from U.S. net sales generated in the nine months ended September 27, 2020 primarily because of an increase in net sales per pound and an increase in sales volume. The increase in net sales per pound contributed $1.1 billion, or 19.5 percentage points, to the increase in net sales. This increase in net sales per pound was driven primarily from higher than average chicken commodity prices in the U.S. during the nine months ended September 26, 2021. There was also an increase in sales volume that contributed $1.2 million to the increase in net sales.

*U.K. and Europe Reportable Segment.* U.K. and Europe net sales generated in the nine months ended September 26, 2021 increased $295.9 million, or 12.2%, from U.K. and Europe net sales generated in the nine months ended September 27, 2020 primarily because of a favorable impact of foreign currency translation of $226.2 million, or 9.3 percentage points, an increase in sales volume of $66.7 million, or 2.8 percentage points, and an increase in net sales per pound of $3.0 million, or 0.1 percentage points. The increase in sales volume was primarily driven by market recoveries in foodservice from the lessening of restrictions due to the COVID-19 pandemic from prior year. The increase in net sales per pound was driven by increased feed costs.

*Mexico Reportable Segment.* Mexico net sales generated in the nine months ended September 26, 2021 increased $373.7 million, or 40.2%, from Mexico net sales generated in the nine months ended September 27, 2020 primarily because of an increase in net sales per pound of $310.4 million, or 33.4 percentage points, and the favorable impact of foreign currency remeasurement of $100.0 million, or 10.8 percentage points. The increase in net sales per pound was driven primarily by higher live chicken commodity prices in Mexico during the nine months ended September 26, 2021 in comparison to the nine months ended September 27, 2020. The increases from foreign currency remeasurement and net sales per pound were partially offset by a decrease in sales volume of $36.7 million, or 4.0 percentage points.

*Gross profit.* Gross profit increased by $402.5 million, or 65.9%, from $610.8 million generated in the nine months ended September 27, 2020 to $1,013.3 million generated in the nine months ended September 26, 2021. 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 26, 2021 Nine Months Ended Percent | Change from Nine Months Ended September 27, 2020 September 26, 2021 | September 27, 2020 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $10,738,689 | $1,764,617 | 19.7% | 100.0% | 100.0% |
| Cost of sales | 9,725,362 | 1,362,090 | 16.3% | 90.6% | 93.2% |
| Gross profit | $1,013,327 | $402,527 | 65.9% | 9.4% | 6.8% |

*(In thousands, except percent data)*

| Sources of gross profit Amount | Nine Months Ended September 26, 2021 Percent | Change from Nine Months Ended September 27, 2020 |  |
| --- | ---: | ---: | ---: |
| U.S. | $651,235 | $241,978 | 59.1% |
| U.K. and Europe | 120,177 | (48,929) | (28.9)% |
| Mexico | 241,873 | 209,895 | 656.4% |
| Elimination | 42 | (417) | (90.8)% |
| Total gross profit | $1,013,327 | $402,527 | 65.9% |

46

*(In thousands, except percent data)*

| Sources of cost of sales Amount | Nine Months Ended September 26, 2021 Percent | Change from Nine Months Ended September 27, 2020 |  |
| --- | ---: | ---: | ---: |
| U.S. | $6,063,644 | $853,110 | 16.4% |
| U.K. and Europe | 2,600,842 | 344,808 | 15.3% |
| Mexico | 1,060,918 | 163,755 | 18.3% |
| Elimination | (42) | 417 | 90.8% |
| Total cost of sales | $9,725,362 | $1,362,090 | 16.3% |

*U.S. Reportable Segment.* Cost of sales incurred by our U.S. operations during the nine months ended September 26, 2021 increased $853.1 million, or 16.4%, from cost of sales incurred by our U.S. segment during the nine months ended September 27, 2020. Cost of sales increased primarily because of the impact of increased cost per pound sold of $852.0 million, or 16.4 percentage points, and increased sales volume of $1.1 million. Included in the increased cost of sales was a $621.6 million in live operations costs, a $101.0 increase in prepared foods purchases, and a $97.0 million increase in payroll costs. The primary drivers of the increase in live operations costs are a $555.4 million increase in feed costs, $45.1 million in chick costs and an increase in contract grower costs of $17.3 million. The increase in feed costs is driven primarily from higher corn and soy commodity prices, our main ingredients in feed. 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 26, 2021 increased $344.8 million, or 15.3%, from cost of sales incurred by our U.K. and Europe segment during the nine months ended September 27, 2020. The increase in cost of sales was driven by the unfavorable impact of foreign currency translation, increased cost per pound sold and increased sales volume contributing $216.2 million, or 9.6 percentage points, $66.6 million, or 3.0 percentage points, and $62.0 million, or 2.7 percentage points, respectively, to the increase in cost of sales. The increase in cost per pound sold is driven by increased feed and other input costs. The increase in sales volume is primarily from market recoveries in foodservice from the lessening of restrictions due to the COVID-19 pandemic from prior year. 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 26, 2021 increased $163.8 million, or 18.3%, from cost of sales incurred by our Mexico segment during the nine months ended September 27, 2020. This increase was primarily because of an increase in cost per pound sold and the unfavorable impact of foreign currency remeasurement of $117.8 million, or 13.2 percentage points, and $81.4 million, or 9.1 percentage points, respectively. The increase in cost per pound sold was primarily driven by an increase in corn and soy commodity prices, which are our main feed ingredients. These increases were partially offset by a decrease in sales volume of $35.4 million, or 4.0 percentage points. Other factors affecting cost of sales were individually immaterial.

*Operating income.* Operating income decreased by $49.9 million, or 24.2%, from $206.0 million generated in the nine months ended September 27, 2020 to $156.1 million generated in the nine months ended September 26, 2021. 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 | Nine Months Ended September 26, 2021 Percent | Change from Nine Months Ended September 27, 2020 September 26, 2021 | September 27, 2020 | Percent of Net Sales |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $1,013,327 | $402,527 | 65.9% | 9.4% | 6.8% |
| SG&A expense | 857,217 | 452,380 | 111.7% | 8.0% | 4.5% |
| Operating income | $156,110 | $(49,853) | (24.2)% | 1.5% | 2.3% |

47

*(In thousands, except percent data)*

| Sources of operating income Amount | Nine Months Ended September 26, 2021 Percent | Change from Nine Months Ended September 27, 2020 |
| --- | ---: | ---: |
| U.S. | $(85,380) | $(212,331) (167.3)% |
| U.K. and Europe | 32,771 | (43,553) (57.1)% |
| Mexico | 208,677 | 206,448 (9,261.9)% |
| Eliminations | 42 | (417) (90.8)% |
| Total operating income | $156,110 | $(49,853) (24.2)% |
| **Sources of SG&A expense** | **Nine Months Ended September 26, 2021** | **Change from Nine Months Ended September 27, 2020** |
| **Amount** | **Percent** |  |
|  | **(In thousands, except percent data)** |  |
| U.S. | $736,615 | $454,309 160.9% |
| U.K. and Europe | 87,406 | (5,376) (5.8)% |
| Mexico | 33,196 | 3,447 11.6% |
| Total SG&A expense | $857,217 | $452,380 111.7% |

*U.S. Reportable Segment.* SG&A expense incurred by our U.S. reportable segment during the nine months ended September 26, 2021 increased $454.3 million, or 160.9%, from SG&A expense incurred by our U.S. reportable segment during the nine months ended September 27, 2020. This increase in SG&A expense resulted primarily from an increase of $26.5 million in legal defense costs and $413.8 million recognized in anticipation of probable losses related to ongoing litigation. Other factors affecting SG&A expense were individually immaterial.

*U.K. and Europe Reportable Segment.* SG&A expense incurred by our U.K. and Europe reportable segment during the nine months ended September 26, 2021 decreased $5.4 million, or 5.8%, from SG&A expense incurred by our U.K. and Europe segment during the nine months ended September 27, 2020. The decrease in SG&A expense was driven primarily by a reduction in bonus expenses and reduced information technology costs. Other factors affecting SG&A expense in our 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 26, 2021 increased approximately $3.4 million, or 11.6%, from SG&A expense incurred by our Mexico segment during the nine months ended September 27, 2020. The primary driver of the increase in SG&A expense was payroll and bonus costs. Other factors affecting our Mexico segment’s SG&A expense were individually immaterial.

*Net interest expense.* Net interest expense increased to $106.4 million recognized in the nine months ended September 26, 2021 from $91.0 million recognized in the nine months ended September 27, 2020. The increase in net interest expense resulted primarily from a loss on early extinguishment of debt recognized as a component of interest expense of $24.7 million, partially offset by a decrease in interest expense on average outstanding borrowings of $9.3 million. Average borrowings decreased by $144.9 million from $2.6 billion during the nine months ended September 27, 2020 to $2.4 billion during the nine months ended September 26, 2021. As a percent of net sales, interest expense in the nine months ended September 26, 2021 and September 27, 2020 was 1.0% and 1.1%, respectively.

*Income taxes.* Income tax expense decreased to $55.9 million, a 110.3% effective tax rate, for the nine months ended September 26, 2021 compared to income tax expense of $57.9 million, a 37.9% effective tax rate, for the nine months ended September 27, 2020. The decrease in income tax expense resulted primarily from a decrease in pre-tax income partially offset by the recognition of a $6.1 million reserve recognized against certain U.K. interest deductions, $3.8 million in adjustments to tax returns and the recognition of deferred tax expense of $32.2 million related to enactment of the U.K. tax rate change to 25% effective April 1, 2023.

### Liquidity and Capital Resources

The following table presents our available sources of liquidity as of September 26, 2021:

*(In millions)*

| Sources of Liquidity | Facility Amount | Amount Outstanding | Amount Available |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $— | $— | $511.1 |
| Borrowing arrangements: |  |  |  |
| U.S. Credit Facility Revolving Note Payable(a) | 800.0 | — | 761.5 |
| U.S. Credit Facility Term Loans(b) | 700.0 | 506.3 | 193.7 |
| Mexico Credit Facility(c) | 74.8 | — | 74.8 |
| U.K. and Europe Credit Facilities(d) | 136.8 | — | 136.8 |

(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 26, 2021 totaled $38.5 million.

(b) For more information on the U.S. Credit Facility Term Loans, refer to “Note 11. Debt.”

(c) The U.S. dollar-equivalent of the facility amount under the Mexico Credit Facility is $74.8 million (MX$1.5 billion).

(d) The U.S. dollar-equivalent of the facility amount under the Europe Credit Facilities is $136.8 million (£100.0 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.

In July 2021, one of our Mexican subsidiaries received an observation letter from the Mexican Tax Authority (the “MTA”) asserting a withholding tax liability due in connection with our 2015 acquisition of Provemex Holding LLC and its subsidiaries. Although we do not expect any claims or assessments set forth in the observation letter to result in future cash outlays, we are currently evaluating the claims and assessments as set forth in the observation letter. We responded to the observation letter in August 2021 and are awaiting further response from the MTA.

### Historical Flow of Funds

*(In millions)*

| Cash Flows from Operating Activities | Nine Months Ended September 26, 2021 | September 27, 2020 |
| --- | ---: | ---: |
| Net income (loss) | $(5.2) | $94.7 |
| Net noncash expenses | 282.1 | 285.0 |
| Changes in operating assets and liabilities: |  |  |
| Trade accounts and other receivables | (138.9) | 44.6 |
| Inventories | (149.7) | 41.3 |
| Prepaid expenses and other current assets | 13.7 | (29.3) |
| Accounts payable, accrued expenses and other current liabilities | 274.9 | 93.1 |
| Income taxes | 66.4 | (30.9) |
| Long-term pension and other postretirement obligations | (13.5) | (0.8) |
| Other operating assets and liabilities | (2.4) | 10.6 |
| Cash provided by operating activities | $327.4 | $508.3 |

### Net Noncash Expenses

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $282.1 million for the nine months ended September 26, 2021. Net noncash expense items included depreciation and amortization of $274.3 million, loss on early extinguishment of debt of $24.7 million, stock-based compensation of $8.4 million, loan cost amortization of $3.8 million and accretion of discounts related to Senior Notes of $1.1 million. These expense items were partially offset by deferred income tax benefit of $26.4 million, gains on property disposals of $3.6 million and amortization of premiums related to Senior Notes of $0.2 million.

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 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.

### Changes in Operating Assets and Liabilities

The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $138.9 million use of cash related to operating activities for the nine months ended September 26, 2021. This change primarily resulted from an increase in trade accounts receivable due to customer payment timing and increased sales. 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 inventories represented a $149.7 million use of cash related to operating activities for the nine months ended September 26, 2021. This change resulted primarily from an increase in our raw materials and work-in-process inventories due to increased feed and chick costs. 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 prepaid expenses and other current assets represented a $13.7 million source of cash related to operating activities for the nine months ended September 26, 2021. This change resulted primarily from a net increase in commodity derivative assets. 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 accounts payable, revenue contract liabilities, accrued expenses and other current liabilities, including accounts payable to related parties, represented a $274.9 million source of cash related to operating activities for the nine months ended September 26, 2021. This change resulted primarily from an accrual for probable losses related to ongoing litigation. 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 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 $66.4 million source of cash related to operating activities for the nine months ended September 26, 2021. 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.

*(In millions)*

| Cash Flows from Investing Activities | Nine Months Ended September 26, 2021 | September 27, 2020 |
| --- | ---: | ---: |
| Acquisitions of property, plant and equipment | $(280.9) | $(242.6) |
| Proceeds from property disposals | 22.9 | 21.7 |
| Business acquisition | (953.9) | (4.2) |
| Cash used in investing activities | $(1,211.9) | $(225.1) |

Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs for the nine months ended September 26, 2021 and September 27, 2020. Proceeds from property disposals were primarily from sales of two processing plants in our U.K. and Europe reportable segment and a broiler farm in our Mexico reportable segment during the nine months ended September 26, 2021. Cash used for the Kerry Meats and Meals Acquisition, less cash acquired, totaled $953.9 million.

*(In millions)*

| Cash Flows from Financing Activities | Nine Months Ended September 26, 2021 | September 27, 2020 |
| --- | ---: | ---: |
| Proceeds from revolving line of credit and long-term borrowings | $2,951.9 | $386.7 |
| Payments on revolving line of credit, long-term borrowings and finance lease obligations | (2,006.0) | (56.8) |
| Payments on early extinguishment of debt | (21.3) | — |
| Payments of capitalized loan costs | (22.3) | — |
| Distribution from Tax Sharing Agreement with JBS USA Food Company Holdings | (0.7) | — |
| Purchase of common stock under share repurchase program | — | (107.8) |
| Cash provided by financing activities | $901.6 | $222.1 |

Proceeds from revolving line of credit and long-term borrowings include the sale of $1.0 billion of sustainability-linked senior notes due 2031, the sale of the $900.0 million senior notes due 2032 and $431.3 million from the refinancing of the U.S. Credit Facility with the remaining primarily from borrowings on our revolving loan commitments under our U.S. and Mexico Credit Facilities. The net proceeds of the senior notes due 2031 were used, together with cash on hand, to redeem the senior notes due 2025. This redemption of the senior notes due 2025 of $1.0 billion is the primary driver of the payments on long-term borrowings with the remaining amount primarily from payments on our revolving loan commitments under our U.S. and Mexico Credit Facilities and finance lease obligations. The net proceeds of the senior notes due 2032 were used to finance the Kerry Meats and Meals Acquisition and to pay related fees and expenses. The net proceeds of the U.S. Credit Facility refinancing were used to pay the balance due on the Fourth U.S. Credit Facility and the fees and expenses for the refinancing transaction.

The payment on early extinguishment of debt is the early tender consideration paid as a result of the redemption of the senior notes due 2025, the repayment of the Fourth U.S. Credit Facility with the refinancing and repayments on our revolving loan commitments under our U.S. and Mexico Credit Facilities. The payment of capitalized loan costs were those loan costs incurred as a part of the sale of the senior notes due 2031, the sale of the senior notes due 2032 and the fees and expenses for the refinancing of the U.S. Credit Facility. The Distribution from Tax Sharing Agreement with JBS USA Food Company Holdings is payment of net tax incurred during the tax year 2020 under the tax sharing agreement. During the nine months ended September 27, 2020, 4.1 million shares were repurchased under the share repurchase program. For further information relating to the share repurchase program, refer to “Note 12. 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 11. 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.

### 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 27, 2020, filed with the Securities and Exchange Commission (the “SEC”) on February 11, 2021 (the “2020 Annual Report”).

### Reconciliation of Net Income to EBITDA and Adjusted EBITDA

“EBITDA” is defined as the sum of net income (loss) plus interest, taxes, depreciation and amortization. “Adjusted EBITDA” is calculated by adding to EBITDA certain items of expense and deducting from EBITDA certain items of income that we believe are not indicative of our ongoing operating performance consisting of: (1) foreign currency transaction losses, (2) transaction costs related to business acquisitions, (3) costs related to the DOJ agreement and litigation settlements, (4) deconsolidation of a subsidiary and (5) net income attributable to noncontrolling interests. EBITDA is presented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of results prepared in conformity with U.S. GAAP, to compare the performance of companies. We believe investors would be interested in our Adjusted EBITDA because this is how our management analyzes EBITDA applicable to continuing operations. We also believe that Adjusted EBITDA, in combination with our financial results calculated in accordance with U.S. GAAP, provides investors with additional perspective regarding the impact of certain significant items on EBITDA and facilitates a more direct comparison of its performance with its competitors. EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Some of the limitations of these measures are:

- They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
- They do not reflect changes in, or cash requirements for, our working capital needs;
- They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
- Although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
- They are not adjusted for all noncash income or expense items that are reflected in our statements of cash flows;
- EBITDA does not reflect the impact of earnings or charges attributable to noncontrolling interests;
- They do not reflect the impact of earnings or charges resulting from matters we consider to not be indicative of our ongoing operations; and
- They do not reflect limitations on or costs related to transferring earnings from our subsidiaries to us.

In addition, other companies in our industry may calculate these measures differently than we do, limiting their usefulness as a comparative measure. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with U.S. GAAP. You should compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only on a supplemental basis.

*(In thousands)*

|  | Nine Months Ended September 26, 2021 |
| --- | ---: |
| Net loss | $(5,200) |
| Add: |  |
| Interest expense, net | 106,366 |
| Income tax expense | 55,931 |
| Depreciation and amortization | 274,336 |
| EBITDA | 431,433 |
| Add: |  |
| Foreign currency transaction losses | 9,018 |
| Transaction costs related to business acquisitions | 9,318 |
| DOJ agreement and litigation settlements | 524,285 |
| Minus: |  |
| Deconsolidation of a subsidiary | 1,131 |
| Net income attributable to noncontrolling interest | 554 |
| Adjusted EBITDA | $972,369 |

53

## Market risk

As filed, 12,123 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.

*(In thousands)*

|  | Three Months Ended September 26, 2021 Amount | Impact of 10% Increase in Feed Ingredient Prices |
| --- | ---: | ---: |
| Feed purchases(a) | $1,071,132 | $107,113 |
| Feed inventory(b) | 167,943 | 16,794 |

(a) Based on our feed consumption, a 10% increase in the price of our feed purchases would have increased cost of sales for the three months ended September 26, 2021.

(b) A 10% increase in ending feed ingredient prices would have increased inventories as of September 26, 2021.

The impact of this fluctuation, if realized, could be mitigated by related commodity hedging activity. However, fluctuations greater than 10% could occur.

*(In thousands)*

|  | September 26, 2021 Amount | Impact of 10% Increase in Commodity Prices |
| --- | ---: | ---: |
| Net commodity derivative assets(a) | $32,810 | $3,281 |

(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 26, 2021.

### 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 $86.0 million as of September 26, 2021.

*Variable-rate debt.* Our variable-rate debt instruments represent approximately 15.7% of our total debt as of September 26, 2021. 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 26, 2021.

### 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 26, 2021. 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 26, 2021 Impact of 10% Deterioration in Exchange Rate | Impact of 10% Appreciation in Exchange Rate |
| --- | ---: | ---: |
| Foreign currency remeasurement gain (loss) | $(4,723) | $5,772 |
| Exchange rate of Mexican peso to the U.S. dollar: |  |  |
| As reported | 20.05 | 20.05 |
| Hypothetical 10% change | 22.06 | 18.05 |

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

We are exposed to foreign exchange-related variability of investments and earnings from our U.K. and Europe subsidiaries. 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.

*Net Assets.* As of September 26, 2021, our U.K. and Europe subsidiaries that are denominated in British pound had net assets of $2.9 billion. A 10% deterioration in the British pound to U.S. dollar exchange rate would cause a decrease in the net assets of our U.K. and Europe subsidiaries of $262.9 million. A 10% appreciation in the British pound to U.S. dollar exchange rate would cause an increase in the net assets of our U.K. and Europe subsidiaries of $321.4 million.

*Cash flow hedging transactions.* We periodically enter into foreign currency forward contracts, which are designated and qualify as cash flow hedges, to hedge foreign currency risk on a portion of sales generated and purchases made by our U.K. and Europe subsidiary. A 10% weakening or strengthening of the U.S. dollar against the British pound and U.S. dollar against the euro would result in immaterial changes in the fair values of these derivative instruments. No assurance can be given as to how future movements in currency rates could affect our future financial condition or results of operations.

### Quality of Investments

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

### Impact of Inflation

The U.S., Mexico and most of Europe are currently experiencing low to moderate inflation. The U.K. is currently experiencing more pronounced inflation. None of the locations in which we operate are experiencing hyperinflation. Due to this 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 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;
- The impact of cyber-attacks, natural disasters, power losses, unauthorized access, telecommunication failures, and other problems on our information systems;
- 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 27, 2020 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, 2,814 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.

As of September 26, 2021, 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. Consistent with guidance issued by the SEC for a recently acquired business, management is excluding the internal control over financial reporting of Kerry Meats and Meals from its evaluation of the effectiveness of the Company’s disclosure controls and procedures as of September 26, 2021. Total assets of Kerry Meats and Meals, which the company acquired on September 24, 2021, included in our Condensed Consolidated Financial Statements as of and for the three months ended September 26, 2021 were $1.1 billion.

Based on that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 26, 2021, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information we are required to disclose in our reports filed with the SEC is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, identified no change in the Company’s internal control over financial reporting that occurred during the three months ended September 26, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 8,865 characters.

For a discussion of the Company’s potential risks and uncertainties, please see “ Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s annual report on Form 10-K for the year ended December 27, 2020 and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, in each case as updated by the Company’s periodic filings with the SEC. Material changes to the risk factors disclosed in “ Part I—Item 1A—Risk Factors” in the annual report on Form 10-K for the year ended December 27, 2020 are included below:

**We are increasingly dependent on information technology, and our business and reputation could suffer if we are unable to protect our information technology systems against, or effectively respond to, cyber-attacks, other cyber incidents or security breaches or if our information technology systems are otherwise disrupted.**

The proper functioning of our information systems is critical to the successful operation of our business. We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic and financial information, to manage a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers, and suppliers. Although our information systems are protected with robust backup systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to cyber-attacks, natural disasters, power losses, unauthorized access, telecommunication failures, and other problems. In addition, certain software used by us is licensed from, and certain services related to our information systems are provided by, third parties who could choose to discontinue their relationship with us. If critical information systems fail or these systems or related software or services are otherwise unavailable, our ability to process orders, maintain proper levels of inventories, collect accounts receivable, pay expenses, and maintain the security of Company and customer data could be adversely affected. Cyber-attacks and other cyber incidents are occurring more frequently and are constantly evolving in nature and sophistication. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our information technology systems or networks. To date, none of these actual or attempted cyber-attacks has had a material effect on our operations or financial condition.

For example, we determined on May 30, 2021 that we were the target of an organized cybersecurity attack (the “Cyberattack”) affecting some of the servers supporting our global IT systems. Upon learning of the intrusion, we contacted federal officials and activated our cybersecurity protocols, including voluntarily shutting down all affected systems to isolate the intrusion, limit the potential infection and preserve core systems. Restoring systems critical to production was prioritized. In addition, encrypted backup servers, which were not affected by the Cyberattack, allowed for a return to full operations within two days. We incurred a loss of approximately $10.0 million related to the Cyberattack during the second quarter of 2021, which included an allocation of $2.4 million of the total $11.0 million ransom paid by our parent company.

Our response, IT systems and encrypted backup servers allowed for a rapid recovery from the Cyberattack. As a result, the loss of food produced was limited to less than one day of production. We continue to cooperate with government officials regarding this incident. We are not aware of any evidence that any customer, supplier, employee or financial data has been compromised or misused as a result of the Cyberattack.

Our failure to maintain our cyber-security measures and keep abreast of new and evolving threats may make our systems vulnerable. The potential consequences of a material cyber-security incident include reputational damage, litigation with third parties, regulatory actions, disruption of plant operations, and increased cyber-security protection and remediation costs. There can be no assurance that we will be able to prevent all of the rapidly evolving forms of increasingly sophisticated and frequent cyber-attacks. Moreover, our efforts to address network security vulnerabilities may not be successful, resulting potentially in the theft, loss, destruction or corruption of information we store electronically, as well as unexpected interruptions, delays or cessation of service, any of which would cause harm to our business operations. The vulnerability of our systems and our failure to identify or respond timely to cyber incidents could have an adverse effect on our operations and reputation and expose us to liability or regulatory enforcement actions.

### 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. 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.

For example, between September 2, 2016 and October 13, 2016, a series of purported class action lawsuits were brought against PPC and 19 other defendants by and on behalf of direct and indirect purchasers of broiler chickens alleging violations of federal and state antitrust and unfair competition laws. The complaints sought, 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. The class plaintiffs filed three consolidated amended complaints: one on behalf of direct purchasers and two on behalf of distinct groups of indirect purchasers. In March 2021, PPC paid the direct purchasers $75.0 million, which PPC recognized as an expense during the fourth quarter of fiscal 2020. In June 2021, PPC announced that it had entered into agreements to settle all claims made by the two distinct groups of indirect purchasers. Pursuant to these agreements, PPC agreed to pay the two distinct groups of indirect purchasers an aggregate $120.5 million, which PPC recognized as an expense during the second quarter of fiscal 2021. PPC also recognized expense of $183.9 million for probable losses to opt-out plaintiffs in the broiler chicken antitrust litigation during the second and third quarters of 2021.

Between August 30, 2019 and October 16, 2019, four purported class action lawsuits were brought against PPC, a number of other chicken producers and various other defendants on behalf of a nationwide class of processing plant production and maintenance workers alleging that the defendants conspired to fix and depress the compensation paid to these workers in violation of the Sherman Act and sought damages from January 1, 2009 to the present. In June 2021, PPC announced that it had entered into an agreement to settle all claims made by the workers. Pursuant to this agreement, PPC agreed to pay the workers an aggregate $29.0 million, which PPC recognized as an expense during the second quarter of fiscal 2021.

In addition, on October 13, 2020, PPC announced that it had entered into a plea agreement with the U.S. Department of Justice pursuant to which the it agreed to plead guilty to one count of conspiracy in restraint of competition involving sales of broiler chicken products in the U.S. in violation of the Sherman Antitrust Act. In March 2021, PPC paid a fine of $107.9 million.

For additional information, see Part I, Item 1, Notes to Condensed Consolidated Financial Statements, “Note 18. Commitments and Contingencies” in this quarterly report.

The consequences of the litigation matters PPC faces are inherently uncertain, and adverse actions, judgments or settlements in some or all of these matters has resulted and may in the future result in materially adverse monetary damages, fines, penalties, or injunctive relief against PPC. Any claims or litigation, even if fully indemnified or insured, could damage PPC’s reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.

Filed Oct 28, 2021.
Source: SEC EDGAR, the filing index for accession 0000802481-21-000105. Last ingested by Listed: Oct 29, 2026, 06:16 ET. No prices; not investment advice.