PILGRIM'S PRIDE CORPORATION Executive Summary Overview We are one of the largest chicken producers in the world, and as a vertically integrated company, 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 acquisition ofPilgrim's Pride Limited ("PPL") andMoy Park in 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$66.5 million , or$0.27 per diluted common share, and loss before tax totaling$40.5 million , for the six months endedJune 27, 2021 . These operating results included net sales of$6.9 billion , gross profit of$641.5 million and$115.0 million of cash used in operating activities. We generated a consolidated operating margin of 0.5% with operating margins of (3.7)%, 1.8% and 18.2% in ourU.S. ,U.K. andEurope , andMexico reportable segments, respectively. For the six months endedJune 27, 2021 , we generated EBITDA and Adjusted EBITDA of$219.5 million and$625.5 million , respectively. A reconciliation of net income to EBITDA and Adjusted EBITDA is included below. Cybersecurity Attack OnMay 30, 2021 , we determined 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, 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. 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. 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. 38 -------------------------------------------------------------------------------- •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 60 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. In ourU.S. andMexico businesses, demand for parts and whole-birds (typically bound for restaurants) and prepared foods (distributed, in part, to schools) has declined, while ourU.K. andEurope business, which is more retail focused, has generally seen less of an impact. However, 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 COVID-19 market demands. These efforts have included transferring live supply to case ready, shifting production form and mix from foodservice to retail, increasing capacity utilization of retail packaging equipment, and analyzing export positions. •Foreign currency exchange rates and commodity prices. During the six months endedJune 27, 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 theJune 27, 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 . 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." Announced Acquisition OnJune 17, 2021 , the Company announced that it has executed an acquisition agreement to acquire the Meats and Meals business ofKerry Consumer Foods in theUnited Kingdom andIreland (the "Acquisition"). The Acquisition, which was unanimously approved by Pilgrim's Board of Directors, values the acquired businesses at a £680 million (or approximately$952 million based on a1.40 USD /GBP exchange rate as ofJune 16, 2021 ) enterprise value.Kerry Meats is a leading manufacturer of branded and private label meats, meat snacks and food-to-go products in theUnited Kingdom andIreland .Kerry Meals is a leading ethnic chilled and frozen ready meals business in theUnited Kingdom . The combined businesses produced over £725 million in annual sales during the year endedDecember 31, 2020 and have more than 4,500 team members. 39 -------------------------------------------------------------------------------- The Acquisition is expected to close in the fourth quarter of 2021 and is subject to routine closing purchase price adjustments (including working capital and net debt adjustments), customer closing conditions and regulatory approvals. 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 endedJune 27, 2021 began the period slightly above the 5-year average and maintained levels well above historical norms throughout the period. During the second quarter of 2021, the industry saw higher levels of egg sets, chick placements and production than second quarter of 2020 due to the reductions in prior year resulting from the onset of the COVID-19 pandemic. The result of these increases drove an increase in broiler production relative to levels in the prior year. The continued easing of COVID-19 restrictions and increased vaccinations against COVID-19 throughout theU.S. drove a significantly improved foodservice demand environment for chicken. The retail environment maintained consistent levels as consumers continue to utilize chicken as a staple in their at-home meal preparation. Increased 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 endedJune 27, 2021 . While market prices for chicken products have improved thus far in 2021, prices for the remainder of the year will depend on the recovery 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. Results of Operations Three Months EndedJune 27, 2021 Compared to the Three Months EndedJune 28, 2020 Net sales. Net sales generated in the three months endedJune 27, 2021 increased$813.7 million , or 28.8%, from net sales generated in the three months endedJune 28, 2020 . The following table provides net sales information: Change from Three Months Ended June 28, Three Months 2020 Ended June 27, Sources of net sales 2021 Amount Percent (In thousands, except percent data) U.S.$ 2,248,470 $ 449,781 25.0 % U.K. and Europe 935,845 178,644 23.6 % Mexico 453,383 185,250 69.1 % Total net sales$ 3,637,698 $ 813,675 28.8 %U.S. Reportable Segment.U.S. net sales generated in the three months endedJune 27, 2021 increased$449.8 million , or 25.0%, fromU.S. net sales generated in the three months endedJune 28, 2020 primarily due to an increase in net sales per pound which contributed$447.7 million , or 24.9 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 endedJune 27, 2021 . Also contributing to the increase in net sales was an increase from sales volume of$2.1 million , or 0.1 percentage points. 40 --------------------------------------------------------------------------------U.K. and Europe Reportable Segment.U.K. andEurope net sales generated in the three months endedJune 27, 2021 increased$178.6 million , or 23.6%, fromU.K. andEurope net sales generated in the three months endedJune 28, 2020 primarily due to a favorable impact of foreign currency translation, an increase in net sales per pound and an increase in sales volume. The favorable impact of foreign currency translation contributed$103.6 million , or 13.7 percentage points, to the increase in net sales. The increase in sales volume contributed$61.5 million , or 8.1 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 increase in net sales per pound contributed$13.5 million , or 1.8 percentage points, to the increase in net sales and was primarily driven by changes to feed and other production input costs. Mexico Reportable Segment.Mexico net sales generated in the three months endedJune 27, 2021 increased$185.3 million , or 69.1%, fromMexico net sales generated in the three months endedJune 28, 2020 primarily due to an increase in net sales per pound of$119.9 million , or 44.7 percentage points, and a favorable impact of foreign currency remeasurement of$63.6 million , or 23.7 percentage points. This increase in net sales per pound was driven primarily by higher live chicken commodity prices inMexico during the three months endedJune 27, 2021 in comparison to the three months endedJune 28, 2020 . Also contributing to the increase in net sales was an increase from sales volume of$1.8 million , or 0.7 percentage points. Gross profit. Gross profit increased by$260.4 million , or 217.2%, from$119.9 million generated in the three months endedJune 28, 2020 to$380.2 million generated in the three months endedJune 27, 2021 . The following tables provide information regarding gross profit and cost of sales information: Three Months Change from Three Months Ended June 28, Percent of Net Sales Ended June 27, 2020 Three Months Ended Components of gross profit 2021 Amount Percent June 27, 2021 June 28, 2020 (In thousands, except percent data) Net sales$ 3,637,698 $ 813,675 28.8 % 100.0 % 100.0 % Cost of sales 3,257,457 553,293 20.5 % 89.5 % 95.8 % Gross profit$ 380,241 $ 260,382 217.2 % 10.5 % 4.2 % Change from Three Months Ended June Three Months 28, 2020 Ended June 27, Sources of gross profit 2021 Amount Percent (In thousands, except percent data) U.S.$ 240,348 $ 152,327 173.1 % U.K. and Europe 50,045 (6,603) (11.7) % Mexico 89,834 114,844 459.2 % Elimination 14 (186) (93.0) % Total gross profit$ 380,241 $ 260,382 217.2 % Change from Three Months Ended June 28, Three Months 2020 Ended June 27, Sources of cost of sales 2021 Amount Percent (In thousands, except percent data) U.S.$ 2,008,122 $ 297,454 17.4 % U.K. and Europe 885,800 185,247 26.4 % Mexico 363,549 70,406 24.0 % Elimination (14) 186 93.0 % Total cost of sales$ 3,257,457 $ 553,293 20.5 % 41
--------------------------------------------------------------------------------U.S. Reportable Segment. Cost of sales incurred by ourU.S. operations during the three months endedJune 27, 2021 increased$297.5 million , or 17.4%, from cost of sales incurred by ourU.S. segment during the three months endedMarch 29, 2020 . Cost of sales increased primarily because of the impact of increased cost per pound sold of$281.0 million , or 16.4 percentage points, and increased cost from sales volume of$16.5 million , or 1.0 percentage point. Included in the increased cost of sales was an$248.9 million increase in live operations costs and a$14.0 million increase in payroll expenses. The increase in live operations costs includes an increase in feed costs of$216.0 million driven primarily from higher corn and soy commodity prices, one of our main ingredients in feed, an increase of$20.6 million in chick costs and an increase of$17.1 million in contract grower costs. Other factors affecting cost of sales were individually immaterial.U.K. and Europe Reportable Segment. Cost of sales incurred by ourU.K. andEurope operations during the three months endedJune 27, 2021 increased$185.2 million , or 26.4%, from cost of sales incurred by ourU.K. andEurope segment during the three months endedJune 28, 2020 . The increase in cost of sales was primarily from the unfavorable impact of foreign currency translation, increased sales volume and increased cost per pound sold, contributing$98.0 million , or 14.0 percentage points,$56.9 million , or 8.1 percentage points, and$30.3 million , or 4.3 percentage points, respectively, to the increase in cost of sales. 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 net sales per pound is primarily from changes to feed and other input costs. Other factors affecting cost of sales were individually immaterial. Mexico Reportable Segment. Cost of sales incurred by ourMexico operations during the three months endedMarch 28, 2021 increased$70.4 million , or 24.0%, from cost of sales incurred by ourMexico segment during the three months endedJune 28, 2020 . This increase was driven by an unfavorable impact of foreign currency remeasurement, increased cost per pound sold and an increase in sales volume of$51.0 million , or 17.3 percentage points,$17.5 million , or 6.0 percentage points, and$1.9 million , or 0.7 percentage points, respectively. The increase in cost per pound sold was primarily driven by increases in corn and soy costs, which are used as feed. Other factors affecting cost of sales were individually immaterial. Operating income. Operating income decreased by$150.4 million , or 551.2%, from$27.3 million generated in the three months endedJune 28, 2020 to$123.1 million generated in the three months endedJune 27, 2021 . The following tables provide information regarding operating income and selling, general and administrative ("SG&A") expense: Three Months Change from Three Months Ended June 28, Percent of Net Sales Ended June 27, 2020 Three Months Ended Components of operating income 2021 Amount Percent June 27, 2021 June 28, 2020 (In thousands, except percent data) Gross profit$ 380,241 $ 260,382 217.2 % 10.5 % 4.2 % SG&A expense 503,372 410,802 443.8 % 13.8 % 3.3 % Operating income$ (123,131) $ (150,420) (551.2) % (3.4) % 1.0 % Change from Three Months Ended June 28, Three Months Ended June 2020 Sources of operating income 27, 2021 Amount Percent (In thousands, except percent data) U.S.$ (224,171) $ (263,619) (668.3) % U.K. and Europe 21,831 (1,354) (5.8) % Mexico 79,195 114,739 322.8 % Eliminations 14 (186) (93.0) % Total operating income$ (123,131) $ (150,420) (551.2) % Change from Three Months Ended June 28, Three Months Ended June 2020 Sources of SG&A expense 27, 2021 Amount Percent (In thousands, except percent data) U.S.$ 464,519 $ 415,946 856.3 % U.K. and Europe 28,214 (5,249) (15.7) % Mexico 10,639 105 1.0 % Total SG&A expense$ 503,372 $ 410,802 443.8 % 42
--------------------------------------------------------------------------------U.S. Reportable Segment. SG&A expense incurred by ourU.S. reportable segment during the three months endedJune 27, 2021 increased$415.9 million , or 856.3%, from SG&A expense incurred by ourU.S. reportable segment during the three months endedJune 28, 2020 . This increase in SG&A expense resulted primarily from an increase in legal fees of$12.0 million and$395.9 million recognized in anticipation of probable settlements of ongoing litigation. Other factors affecting SG&A expense were individually immaterial.U.K. and Europe Reportable Segment. SG&A expense incurred by ourU.K. andEurope reportable segment during the three months endedJune 27, 2021 decreased$5.2 million , or 15.7%, from SG&A expense incurred by ourU.K. andEurope segment during the three months endedJune 28, 2020 . The decrease in SG&A expense was driven primarily by a reduction of$2.8 million in third-party hardware and software support expenses. Other factors affecting SG&A expense were individually immaterial. Mexico Reportable Segment. SG&A expense incurred by ourMexico reportable segment during the three months endedJune 27, 2021 increased approximately$105,000 , or 1.0%, from SG&A expense incurred by ourMexico segment during the three months endedJune 28, 2020 . Factors affecting ourMexico segment's SG&A expense were individually immaterial. Net interest expense. Net interest expense increased to$49.8 million recognized in the three months endedJune 27, 2021 from$31.2 million recognized in the three months endedJune 28, 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$24.3 million , partially offset by a decrease in interest expense on outstanding borrowings of$5.7 million . Average borrowings decreased by$337.8 million from$2.66 billion during the three months endedJune 28, 2020 to$2.33 billion during the three months endedJune 27, 2021 . As a percent of net sales, interest expense in the three months endedJune 27, 2021 andJune 28, 2020 was 1.4% and 1.1%, respectively. Income taxes. Income tax benefit increased to$9.8 million , a 5.6% effective tax rate, for the three months endedJune 27, 2021 compared to an income tax benefit of$3.0 million , a 31.6% effective tax rate, for the three months endedJune 28, 2020 . The increase in income tax benefit resulted primarily from the recognition of deferred tax expense of$32.2 million related to enactment of theU.K. tax rate change to 25% effectiveApril 1, 2023 , partially offset by a decrease in pre-tax income. Six Months EndedJune 27, 2021 Compared to the Six Months EndedJune 28, 2020 Net sales. Net sales generated in the six months endedJune 27, 2021 increased$1.0 billion , or 17.2%, from net sales generated in the six months endedJune 28, 2020 . The following table provides net sales information: Change from Six Months Ended June 28, Six Months Ended 2020 Sources of net sales June 27, 2021 Amount Percent (In thousands, except percent data) U.S.$ 4,248,029 $ 522,460 14.0 % U.K. and Europe 1,790,579 211,116 13.4 % Mexico 872,515 278,596 46.9 % Total net sales$ 6,911,123 $ 1,012,172 17.2 %U.S. Reportable Segment.U.S. net sales generated in the six months endedJune 27, 2021 increased$522.5 million , or 14.0%, fromU.S. net sales generated in the six months endedJune 28, 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$511.3 million , or 13.7 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 six months endedJune 27, 2021 . The increase in sales volume contributed$11.2 million , or 0.3 percentage points to the increase in net sales.U.K. and Europe Reportable Segment.U.K. andEurope net sales generated in the six months endedJune 27, 2021 increased$211.1 million , or 13.4%, fromU.K. andEurope net sales generated in the six months endedJune 28, 2020 primarily because of a favorable impact of foreign currency translation of$163.6 million , or 10.4 percentage points, an increase in sales volume of$41.0 million , or 2.6 percentage points, and an increase in net sales per pound of$6.5 million , or 0.4 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. 43 -------------------------------------------------------------------------------- Mexico Reportable Segment.Mexico net sales generated in the six months endedJune 27, 2021 increased$278.6 million , or 46.9%, fromMexico net sales generated in the six months endedJune 28, 2020 primarily because of an increase in net sales per pound of$260.7 million , or 43.9 percentage points, and the favorable impact of foreign currency remeasurement of$58.8 million , or 9.9 percentage points. The increase in net sales per pound was driven primarily by higher live chicken commodity prices inMexico during the six months endedJune 27, 2021 in comparison to the six months endedJune 28, 2020 . The increases from foreign currency remeasurement and net sales per pound were partially offset by a decrease in sales volume of$40.9 million , or 6.9 percentage points. Gross profit. Gross profit increased by$344.5 million , or 116.0%, from$297.0 million generated in the six months endedJune 28, 2020 to$641.5 million generated in the six months endedJune 27, 2021 . The following tables provide information regarding gross profit and cost of sales information: Change from Six Months Ended June 28, Percent of Net Sales Six Months Ended 2020 Six Months Ended Components of gross profit June 27, 2021 Amount Percent June 27, 2021 June
28, 2020
(In thousands, except percent data)
Net sales $ 6,911,123 $ 1,012,172 17.2 % 100.0 % 100.0 %
Cost of sales 6,269,639 667,646 11.9 % 90.7 % 95.0 %
Gross profit $ 641,484 $ 344,526 116.0 % 9.3 % 5.0 %
Change from Six Months Ended June 28,
Six Months Ended 2020
Sources of gross profit June 27, 2021 Amount Percent
(In thousands, except percent data)
U.S. $ 373,207 $ 147,083 65.0 %
U.K. and Europe 87,853 (20,923) (19.2) %
Mexico 180,396 218,562 572.7 %
Elimination 28 (196) (87.5) %
Total gross profit $ 641,484 $ 344,526 116.0 %
Change from Six Months Ended June 28,
Six Months Ended 2020
Sources of cost of sales June 27, 2021 Amount Percent
(In thousands, except percent data)
U.S. $ 3,874,822 $ 375,377 10.7 %
U.K. and Europe 1,702,726 232,039 15.8 %
Mexico 692,119 60,034 9.5 %
Elimination (28) 196 87.5 %
Total cost of sales $ 6,269,639 $ 667,646 11.9 %
U.S. Reportable Segment. Cost of sales incurred by our U.S. operations during
the six months ended June 27, 2021 increased $375.4 million , or 10.7%, from cost
of sales incurred by our U.S. segment during the six months ended June 28, 2020 .
Cost of sales increased primarily because of the impact of increased cost per
pound sold of $364.9 million , or 10.4 percentage points, and increased cost from
sales volume of $10.5 million , or 0.3 percentage points. Included in the
increased cost of sales were a $296.7 million increase in feed costs, $30.2
million in chick costs and an increase in contract grower costs of $21.2
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 six months ended June 27, 2021 increased $232.0
million , or 15.8%, from cost of sales incurred by our U.K. and Europe segment
during the six months ended June 28, 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 $155.6 million , or 10.6
percentage points, $38.3 million , or 2.6 percentage points, and $38.1 million ,
or 2.6 percentage points, respectively, to the increase in cost of sales. Other
factors affecting cost of sales were individually immaterial.
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Mexico Reportable Segment. Cost of sales incurred by our Mexico operations
during the six months ended June 27, 2021 increased $60.0 million , or 9.5%, from
cost of sales incurred by our Mexico segment during the six months ended
June 28, 2020 . This increase was primarily because of an increase in cost per
pound sold and the unfavorable impact of foreign currency remeasurement of $57.0
million , or 9.0 percentage points, and $46.6 million , or 7.4 percentage points,
respectively. The increase in cost per pound sold was primarily driven by the
cost of grains used as feed. These increases were partially offset by a decrease
in sales volume of $43.6 million , or 6.9 percentage points. Other factors
affecting cost of sales were individually immaterial.
Operating income. Operating income decreased by $76.3 million , or 68.4%, from
$111.7 million generated in the six months ended June 28, 2020 to $35.3 million
generated in the six months ended June 27, 2021 . The following tables provide
information regarding operating income and selling, general and administrative
("SG&A") expense:
Change from Six Months Ended June 28, Percent of Net Sales
Six Months Ended 2020 Six Months Ended
Components of operating income June 27, 2021 Amount Percent June 27, 2021 June 28, 2020
(In thousands, except percent data)
Gross profit $ 641,484 $ 344,526 116.0 % 9.3 % 5.0 %
SG&A expense 606,151 420,868 227.1 % 8.8 % 3.1 %
Operating income $ 35,333 $ (76,342) (68.4) % 0.5 % 1.9 %
Change from Six Months Ended June 28,
Six Months Ended June 27, 2020
Sources of operating income 2021 Amount Percent
(In thousands, except percent data)
U.S. $ (156,046) $ (280,546) (225.3) %
U.K. and Europe 32,326 (14,049) (30.3) %
Mexico 159,025 218,449 367.6 %
Eliminations 28 (196) (87.5) %
Total operating income $ 35,333 $ (76,342) (68.4) %
Change from Six Months Ended June 28,
Six Months Ended June 27, 2020
Sources of SG&A expense 2021 Amount Percent
(In thousands, except percent data)
U.S. $ 529,253 $ 427,629 420.8 %
U.K. and Europe 55,527 (6,874) (11.0) %
Mexico 21,371 113 0.5 %
Total SG&A expense $ 606,151 $ 420,868 227.1 %
U.S. Reportable Segment. SG&A expense incurred by our U.S. reportable segment
during the six months ended June 27, 2021 increased $427.6 million , or 420.8%,
from SG&A expense incurred by our U.S. reportable segment during the six months
ended June 28, 2020 . This increase in SG&A expense resulted primarily from an
increase of $18.1 million in legal fees and $398.3 million recognized in
anticipation of probable settlements in 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 six months ended June 27, 2021 decreased $6.9
million , or 11.0%, from SG&A expense incurred by our U.K. and Europe segment
during the six months ended June 28, 2020 . The decrease in SG&A expense was
driven primarily by a reduction of $3.4 million in third-party hardware and
software support expenses. 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 six months ended June 27, 2021 increased approximately
$113,000 , or 0.5%, from SG&A expense incurred by our Mexico segment during the
six months ended June 28, 2020 . Factors affecting our Mexico segment's SG&A
expense were individually immaterial.
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Net interest expense. Net interest expense increased to $77.8 million recognized
in the six months ended June 27, 2021 from $62.2 million recognized in the six
months ended June 28, 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 $24.3 million , partially offset by a decrease in interest
expense on average outstanding borrowings of $8.7 million . Average borrowings
decreased by $206.7 million from $2.5 billion during the six months ended June
28, 2020 to $2.3 billion during the six months ended June 27, 2021 . As a percent
of net sales, interest expense in the six months ended June 27, 2021 and
June 28, 2020 was 1.2% and 1.1%, respectively.
Income taxes. Income tax expense decreased to $25.5 million , a (63.1)% effective
tax rate, for the six months ended June 27, 2021 compared to income tax expense
of $35.6 million , a 36.8% effective tax rate, for the six months ended June 28,
2020 . The decrease in income tax expense resulted primarily from a decrease in
pre-tax income partially offset by 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 June 27,
2021 :
Facility Amount Amount
Sources of Liquidity Amount Outstanding Available
(In millions)
Cash and cash equivalents $ - $ - $ 391.8
Borrowing arrangements:
U.S. Credit Facility(a) 750.0 40.5 671.0
Mexico Credit Facility(b) 75.7 - 75.7
U.K. and Europe Credit Facilities(c) 138.8 - 138.8
(a)Availability under theU.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding atJune 27, 2021 totaled$38.5 million . (b)TheU.S. dollar-equivalent of the facility amount under the Mexico Credit Facility is$75.7 million (MX$1.5 billion). (c)The U.S. dollar-equivalent of the facility amount under the Europe Credit Facilities is$138.8 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. Additionally, we have executed an agreement to acquire the meats and meals businesses ofKerry Consumer Foods in theU.K. andIreland (the "Acquisition"). The Acquisition has valued the acquired businesses at a £680 million (or approximately$952 million based on a1.40 USD /GBP exchange rate as ofJune 16, 2021 ) enterprise value. The Acquisition is expected to close in the fourth quarter of 2021 and is subject to routine closing purchase price adjustments, customer closing conditions and regulatory approvals. We intend to fund the acquisition through a mix of cash on hand, existing credit facilities and debt issuance. InJuly 2021 , one of our Mexican subsidiaries received an observation letter from theMexican Tax Authority 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. 46
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