PILGRIM'S PRIDE CORPORATION 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 ofKerry Consumer Foods' specialty meats and ready meals businesses,Pilgrim's Pride Limited ("PPL") andMoy 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 theU.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 endedSeptember 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 ourU.S. ,U.K. andEurope , andMexico reportable segments, respectively. For the nine months endedSeptember 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 OnSeptember 24, 2021 , the Company acquired 100% of the equity of theKerry 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 theU.K. andIreland .Kerry Consumer Foods' ready meals business is a leading ethnic chilled and frozen ready meals business in theU.K. The combined businesses produced over £725 million in annual sales during the year endedDecember 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'sU.K. andEurope reportable segment. Unsolicited Offer from JBS S.A. to Purchase Outstanding Shares of PPC Common Stock OnSeptember 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 onAugust 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 theU.K. economic environment. We were confronted with sudden, serious labor shortages asEuropean 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. OurU.K. pork operations also had to overcome low hog prices resulting from an oversupply inEurope . 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. 40
-------------------------------------------------------------------------------- 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. OnApril 28, 2020 , formerPresident Trump signed an executive order directing theDepartment of Agriculture to ensure meat and poultry processors in theU.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 theU.S. Centers for Disease Control and Prevention , theNational 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 toChina 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 endedSeptember 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. OnMarch 27, 2020 , theU.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 theSeptember 26, 2021 , we have delayed approximately$52.3 million of employer payroll taxes with 50% due byDecember 31, 2021 and the remaining 50% byDecember 31, 2022 .U.S. Credit Facility OnAugust 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. TheU.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 fromJuly 20, 2023 toAugust 9, 2026 . 41
-------------------------------------------------------------------------------- Additional information regarding theU.S. Credit Facility is included in "Note 11. Debt." Senior Notes due 2032 OnSeptember 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 theU.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 theU.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 OnApril 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 includingOctober 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 OurU.S. andMexico segments use corn and soybean meal as the main ingredients for feed production, while ourU.K. andEurope segment uses wheat, soybean meal and barley as the main ingredients for feed production. Market prices for chicken products during the three months endedSeptember 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 theU.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 endedSeptember 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. andEurope , andMexico . We measure segment profit as operating income. Corporate expenses are allocated to theMexico andU.K. andEurope reportable segments based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to theU.S. For additional information, see "Note 17. Reportable Segments" of our Condensed Consolidated Financial Statements included in this quarterly report. 42 -------------------------------------------------------------------------------- Results of Operations Three Months EndedSeptember 26, 2021 Compared to the Three Months EndedSeptember 27, 2020 Net sales. Net sales generated in the three months endedSeptember 26, 2021 increased$752.4 million , or 24.5%, from net sales generated in the three months endedSeptember 27, 2020 . The following table provides net sales information: Change from Three Months Ended Three Months Ended September 27, 2020 Sources of net sales September 26, 2021 Amount Percent (In thousands, except percent data) U.S.$ 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 endedSeptember 26, 2021 increased$572.6 million , or 30.2%, fromU.S. net sales generated in the three months endedSeptember 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 theU.S. during the three months endedSeptember 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. andEurope net sales generated in the three months endedSeptember 26, 2021 increased$84.8 million , or 10.0%, fromU.K. andEurope net sales generated in the three months endedSeptember 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 theU.K. Mexico Reportable Segment.Mexico net sales generated in the three months endedSeptember 26, 2021 increased$95.1 million , or 28.4%, fromMexico net sales generated in the three months endedSeptember 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 inMexico from increased demand during the three months endedSeptember 26, 2021 in comparison to the three months endedSeptember 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 endedSeptember 27, 2020 to$371.8 million generated in the three months endedSeptember 26, 2021 . The following tables provide information regarding gross profit and cost of sales information: Three Months Change from Three Months Ended Percent of Net Sales Ended September September 27, 2020 Three Months Ended Components of gross profit 26, 2021 Amount Percent September 26, 2021
(In thousands, except percent data)
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 %
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Change from Three Months Ended
Three Months Ended September 27, 2020
Sources of gross profit September 26, 2021 Amount Percent
(In thousands, except percent data)
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 %
Change from Three Months Ended
Three Months September 27, 2020
Ended September
Sources of cost of sales 26, 2021 Amount Percent
(In thousands, except percent data)
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:
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Three Months Change from Three Months Ended Percent of Net Sales
Ended September September 27, 2020 Three Months Ended
Components of operating income 26, 2021 Amount Percent September 26, 2021 September 27, 2020
(In thousands, except percent data)
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 %
Change from Three Months Ended September
Three Months Ended September 27, 2020
Sources of operating income 26, 2021 Amount Percent
(In thousands, except percent data)
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 %
Change from Three Months Ended September
Three Months Ended September 27, 2020
Sources of SG&A expense 26, 2021 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.
45
-------------------------------------------------------------------------------- Nine Months EndedSeptember 26, 2021 Compared to the Nine Months EndedSeptember 27, 2020 Net sales. Net sales generated in the nine months endedSeptember 26, 2021 increased$1.8 billion , or 19.7%, from net sales generated in the nine months endedSeptember 27, 2020 . The following table provides net sales information: Change from Nine Months Ended September Nine Months Ended 27, 2020 September 26, Sources of net sales 2021 Amount Percent (In thousands, except percent data) U.S.$ 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 endedSeptember 26, 2021 increased$1.1 billion , or 19.5%, fromU.S. net sales generated in the nine months endedSeptember 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 theU.S. during the nine months endedSeptember 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. andEurope net sales generated in the nine months endedSeptember 26, 2021 increased$295.9 million , or 12.2%, fromU.K. andEurope net sales generated in the nine months endedSeptember 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 endedSeptember 26, 2021 increased$373.7 million , or 40.2%, fromMexico net sales generated in the nine months endedSeptember 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 inMexico during the nine months endedSeptember 26, 2021 in comparison to the nine months endedSeptember 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 endedSeptember 27, 2020 to$1,013.3 million generated in the nine months endedSeptember 26, 2021 . The following tables provide information regarding gross profit and cost of sales information: Nine Months Ended Change from Nine Months Ended September Percent of Net Sales September 26, 27, 2020 Nine Months Ended Components of gross profit 2021 Amount Percent September 26, 2021
(In thousands, except percent data)
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 %
Change from Nine Months Ended
Nine Months Ended September 27, 2020
September 26,
Sources of gross profit 2021 Amount Percent
(In thousands, except percent data)
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 %
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Change from Nine Months Ended September
Nine Months Ended 27, 2020
September 26,
Sources of cost of sales 2021 Amount Percent
(In thousands, except percent data)
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:
Nine Months Ended Change from Nine Months Ended September Percent of Net Sales
September 26, 27, 2020 Six Months Ended
Components of operating income 2021 Amount Percent September 26, 2021 September 27, 2020
(In thousands, except percent data)
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 %
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Change from Nine Months Ended September 27,
Nine Months Ended 2020
Sources of operating income September 26, 2021 Amount Percent
(In thousands, except percent data)
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) %
Change from Nine Months Ended September 27,
Nine Months Ended 2020
Sources of SG&A expense September 26, 2021 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 .
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Liquidity and Capital Resources
The following table presents our available sources of liquidity as ofSeptember 26, 2021 : Facility Amount Amount Sources of Liquidity Amount Outstanding Available (In millions) 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 theU.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding atSeptember 26, 2021 totaled$38.5 million . (b)For more information on theU.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)TheU.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. InJuly 2021 , one of our Mexican subsidiaries received an observation letter from theMexican Tax Authority (the "MTA") asserting a withholding tax liability due in connection with our 2015 acquisition ofProvemex 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 inAugust 2021 and are awaiting further response from the MTA.
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