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Item 7. Management’s Discussion and Analysis

2021-02-11 compared with 2020-02-21 · 319 added, 217 removed, 254 unchanged (68% of the section changed)

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Executive Summary

As a vertically integrated company, we’re able to better manage food quality and safety, allowing us to seek opportunities to diversify and grow our business, while meeting the needs of consumers, customers and team members.

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 of Tulip and Moy 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 GNP in 2017, we further solidified ourselves as a leading poultry company within the U.S.

Business Acquisitions” of our Consolidated and Combined Financial Statements included in this annual report for additional information relating to these acquisitions.

With the acquisition of Pilgrim’s Pride Ltd.

(“PPL”) and Moy 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 the U.S.

Business Acquisitions” of our Consolidated Financial Statements included in this annual report for additional information relating to these acquisitions.

We reported net income attributable to Pilgrim’s Pride Corporation of $94.8 million, or $0.39 per diluted common share, and profit before tax totaling $161.8 million, for 2020.

These operating results included gross profit of $1.1 billion and generated $666.5 million of cash from operations.

These operating results included gross profit of $838.2 million and generated $724.2 million of cash from operations.

We generated operating margins of 2.0% with operating margins of 0.9%, 3.1% and 5.5% in our U.S., U.K.

and Europe, and Mexico reportable segments, respectively.

During 2019, we generated EBITDA and Adjusted EBITDA of $1.0 billion and $973.8 million, respectively.

During 2020, we generated EBITDA and Adjusted EBITDA of $617.7 million and $788.1 million, respectively.

A reconciliation of net income to EBITDA and Adjusted EBITDA is included in “Item 6.

Selected Financial Data” in this annual report.

As discussed in “Note 20.

Commitments and Contingencies”, on October 13, 2020, we announced that we have entered into the Plea Agreement with the DOJ.

As a result of the Plea Agreement, we recognized a fine of $110,524,140 as expense during the third quarter of fiscal 2020.

On January 11, 2021, we announced that we have entered an agreement to settle all claims made by the putative Direct Purchaser Plaintiff Class in the In re Broiler Chicken Antitrust Litigation .

As a result of the settlement, we recognized a fine of $75.0 million as expense during the fourth quarter of fiscal 2020.

The Plea Agreement and Direct Purchaser Plaintiff Class settlement are included in Selling, general and administrative expense in the Consolidated Statements of Income for the year ended December 27, 2020.

In addition, as discussed below under “Hometown Strong Initiative”, we launched an initiative during 2020 to support the communities in which we operate with unexpected challenges, such as the novel coronavirus (“COVID-19”) pandemic, and as a result, we recorded $15.0 million in incremental donation expense related to this initiative during the third quarter of fiscal 2020.

Adjusted net income for the year ended December 27, 2020, which excludes the DOJ antitrust fine, the Direct Purchaser Plaintiff Class settlement, increase in donation expense and other items shown in the “Reconciliation of Adjusted Net Income”, was $250.4 million.

Selected Financial Data” section for a reconciliation of Net income attributable to Pilgrim's to Adjusted net income attributable to Pilgrim's.

We operate on the basis of a 52/53-week fiscal year that ends on the Sunday falling on or before December 31.

Any reference we make to a particular year applies to our fiscal year and not the calendar year.

Fiscal 2019 and 2018 were 52-week accounting cycles and fiscal 2017 was a 53-week accounting cycle.

Fiscal 2019 and 2018 were 52-week accounting cycles.

Impact of COVID-19

The extensive impact of the pandemic caused by 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, an executive order designated 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.

During the second quarter of 2020, the impact of the COVID-19 pandemic on our financial results generally decreased because of increased demand for our products at retail grocery stores and quick service restaurants and our ability to meet this demand through our transitioned business operations, as further discussed below.

We believe that we will continue to experience disruptions and other changes to our business due to the COVID-19 pandemic into 2021.

The impact of COVID-19 and measures to prevent its spread have affected and continue to affect our business in a number of ways.

• Our workforce .

Employee health and safety is our priority.

As an essential business in a critical infrastructure industry, we continue to produce chicken and pork products, while coordinating with and implementing guidance from the U.S.

Centers for Disease Control and Prevention, the National Institute of Occupational Safety and Health, and local and regional Departments of Health in an effort to keep our employees safe and healthy.

Measures we have implemented include, but are not limited to:

increasing physical distancing of our employees, where possible, by staggering start and shift breaks, placing on-site tents to create more space for employees at break and at meal times, and installing physical barriers to distance employees while working on production lines;

adding temperature and symptom screening stations for employees prior to entering our facilities;

increasing personal hygiene practices and providing our employees additional personal protective equipment and sanitation stations;

and increasing sanitation of our facilities.

In the U.S., we provided appreciation bonuses to eligible employees in April and May of 2020 and expanded certain sick leave policies to provide more flexibility.

In addition, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely.

• Our operations.

A ll of our 60 production facilities are operating , although some facilities have reduced production levels and outputs due to increased health and safety measures, employee absenteeism and as a consequence of the decline in demand by restaurants and other foodservice businesses.

To date, we have not experienced a material impact from a plant closure and our facilities have largely been exempt from government closure orders.

• Demand for our products.

COVID-19 and the implementation of restricted living have led to a shift in demand from restaurants to retail grocery stores, with consumers eating more at home due to stay-at-home orders.

and Mexico businesses, demand for parts and whole-birds (typically bound for restaurants) and prepared foods (distributed, in part, to schools) has declined, while our U.K.

and Europe business, which is more retail focused, has generally seen less of an impact.

In an effort to counter the adverse effects of COVID-19, we have transitioned, where commercially reasonable and possible to do so, our business operations to be in the best position to supply COVID-19 market demands.

These efforts have included transferring live supply to case ready, shifting production form and mix from foodservice to retail, increasing capacity utilization of retail packaging equipment, and analyzing export positions.

Our liquidity position is strong and we have taken additional measures to increase liquidity to prepare for the challenging environment ahead.

On March 20, 2020 and March 25, 2020, we elected to borrow $200.0 million and $150.0 million, respectively, under the U.S.

Credit Facility as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.

The draw-down proceeds borrowed on March 20, 2020 and March 25, 2020 were repaid during the fourth quarter of 2020.

• Foreign currency exchange rates and commodity prices.

During the year ended December 27, 2020, we experienced increased volatility in foreign currency exchange rates and commodity prices, in part related to the uncertainty from COVID-19, as well as actions taken by governments and central banks in response to COVID-19.

On March 27, 2020, the U.S.

government enacted the CARES Act, which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment.

We estimate the payment of approximately $51 million of employer payroll taxes otherwise due in 2020 will be delayed with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022.

Raw Materials

Our profitability is materially affected by the commodity prices of feed ingredients and chicken.

and Mexico reportable segments use corn and soybean meal as the main ingredients for feed production, while our U.K.

and Europe reportable segment uses wheat, soybean meal and barley as the main ingredients for feed production.

Market prices for animal-based protein products are currently at levels sufficient to offset the costs of feed ingredients.

However, there can be no assurance that animal-based protein prices will not decrease due to such factors as competition from plant-based proteins and substitutions by consumers of non-protein foods because of uncertainty surrounding the general economy, animal-based diseases and unemployment.

Tulip Acquisition

On October 15, 2019, we acquired 100% of the equity of Tulip Limited and its subsidiaries from Danish Crown AmbA for £310.0 million , or $391.5 million , subject to customary working capital adjustments.

The acquisition was funded with cash on hand.

Tulip Limited, a leading, integrated prepared pork supplier, is headquartered in Warwick, U.K., operates 14 fresh and value-added facilities in that country and employs approximately 5,400 people as of December 29, 2019 .

The acquisition solidifies us as a leading European food company, creating one of the largest integrated prepared foods businesses in the U.K.

The Tulip operations are included in our U.K.

and Europe reportable segment.

Business Acquisitions” of our Consolidated and Combined Financial Statements included in this annual report for additional information relating to this acquisition.

During fiscal 2020, chicken prices in the market were volatile, beginning the fiscal year on the low end and then subsequently stabilizing and improving by the end of the fiscal year.

In particular, during the first quarter of 2020, market prices for chicken trended near the bottom of the historical range while sustaining prices sufficiently higher than the cost of feed and ingredients to provide positive margins.

During this time, the industry experienced increased production compared to the first quarter of 2019.

The spread of COVID-19 and subsequent market reactions late into the first quarter of 2020 resulted in an unexpected shift in demand from foodservice to retail markets, triggering a shift in supply and demand, causing volatility in market prices.

The industry adjusted through reductions of egg sets and chick placements, which continued to trend throughout the year ended December 27, 2020, resulting in reduced broiler production in the last half of 2020.

Reduced broiler production coincided with robust retail demand, quickly recovering foodservice throughout the second half of 2020, which had

significantly improved over the low point during the second quarter of 2020.

As a result, chicken market prices stabilized moving into the third quarter, and even improved in the fourth quarter compared to the previous year.

While chicken prices have improved in the second half of 2020, prices in 2021 will depend on the recovery of the foodservice industry, influenced by factors such as the COVID-19 pandemic, government regulation, uncertainty surrounding the general economy and protein supply.

Hometown Strong Initiative

The Hometown Strong initiative was developed in order to help the communities in which we operate respond to the unexpected challenges on society, such as the COVID-19 pandemic.

We believe the Hometown Strong initiative will provide consequential investment projects for a lasting impact on these communities and help them prepare for unanticipated challenges and build for the future.

For 2020, we committed to Hometown Strong donations of $20.0 million and during the year ended December 27, 2020, we recorded $15.0 million in incremental donations expense relating to this initiative.

Potential Impact of Tariffs

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Currently, we are experiencing impacts to domestic and export prices of chicken resulting from uncertainty in trade policies and increased tariffs.

With the implementation of the EU-U.K Trade and Cooperation Agreement, there is uncertainty regarding the processing of imports and administration costs that will follow.

This could lead to potential new tariffs and regulations from both the European Union and the U.K.

We are unable to give any assurance as to the scope, duration, or impact of any changes in trade policies or tariffs, how successful any mitigation efforts will be, or the extent to which mitigation will be necessary, and accordingly, changes in trade policies and increased tariffs could have a material adverse effect on our business and results of operations.

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For additional information, see “Note 19.

Reportable Segments” of our Consolidated and Combined Financial Statements included in this annual report.

Reportable Segments” of our Consolidated Financial Statements included in this annual report.

Results of Operations

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Change from 2019

Sources of net sales

Sources of net sales 2020 Amount Percent

(In thousands, except percent data)

$ 7,496,017 $ (140,699) (1.8) %

and Europe 3,274,292 890,499 37.4 %

Mexico 1,321,592 (67,118) (4.8) %

Total net sales $ 12,091,901 $ 682,682 6.0 %

Reportable Segment.

net sales generated in 2019 increased $211.1 million , or 2.8% , from U.S.

net sales generated in 2018 primarily because of an increase in sales volume and an increase in net sales per pound.

The increase in sales volume contributed $139.6 million, or 1.8 percentage points, to the increase in net sales.

The increase in net sales per pound contributed $71.5 million, or 1.0 percentage points, to the increase in net sales.

net sales generated in 2020 decreased $140.7 million, or 1.8%, from U.S.

net sales generated in 2019 primarily because of a decrease in net sales per pound, contributing $188.2 million, or 2.4 percentage points, to the decrease in net sales.

This decrease in net sales per pound was partially offset by $47.5 million, or 0.6 percentage points, due to an increase in sales volume.

and Europe Reportable Segment.

and Europe sales generated in 2020 increased $890.5 million, or 37.4%, from U.K.

and Europe sales generated in 2018, primarily because of the recently acquired Tulip operations, partially offset by a decrease in net sales by our existing U.K.

and Europe sales generated in 2019, primarily because of the recently acquired PPL operations, partially offset by a decrease in net sales by our existing U.K.

and Europe operations.

The impact of the acquired business contributed $306.7 million, or 14.2 percentage points, to the increase in net sales.

The impact of the acquired business contributed $1.1 billion, or 44.3 percentage points, to the increase in net sales.

The decrease in our existing U.K.

and Europe operations was mainly due to the unfavorable impact of foreign currency translation of $94.4 million, or 4.4 percentage points.

The unfavorable impact of foreign currency translation was partially offset by an increase in sales volume and net sales per pound of $15.3 million, or 0.7 percentage points, and $7.6 million, or 0.4 percentage points, respectively.

and Europe operations was driven by a decrease in sales volume and a decrease in net sales per pound, contributing $159.6 million, or 6.7 percentage points, and $14.5 million, or 0.6 percentage points, respectively, to the decrease in net sales.

These decreases in sales volume and net sales

per pound were partially offset by $8.0 million, or 0.4 percentage points, due to the favorable impact of foreign currency translation.

Mexico Reportable Segment.

Mexico sales generated in 2019 increased $25.3 million , or 1.9% , from Mexico sales generated in 2018 primarily because of an increase in net sales per pound, partially offset by a decrease in sales volume and the unfavorable impact of foreign currency remeasurement.

The increase in net sales per pound contributed $59.2 million, or 4.4 percentage points, to the increase in Mexico net sales.

The decrease in sales volume and unfavorable impact of foreign currency remeasurement partially offset the increase in net sales per pound by $32.1 million, or 2.4 percentage points, and $1.8 million, or 0.1 percentage points, respectively.

Mexico sales generated in 2020 decreased $67.1 million, or 4.8%, from Mexico sales generated in 2019 primarily because of the unfavorable impact of foreign currency remeasurement and a decrease in sales volume, partially offset by an increase in net sales per pound.

The impact of the unfavorable impact of foreign currency remeasurement and decreased sales volume contributed $154.9 million, or 11.1 percentage points, and $22.1 million, or 1.6 percentage points, to the decrease in net sales.

Partially offsetting these decreases in net sales by $109.9 million, or 7.9 percentage points, was an increase in net sales per pound.

Gross profit.

Gross profit increased by $226.9 million , or 26.9% , from $843.5 million generated in 2018 to $1.1 billion generated in 2019.

Gross profit decreased by $232.2 million, or 21.7%, from $1.1 billion generated in 2019 to $838.2 million generated in 2020.

The following tables provide gross profit information:

Change from 2018

Percent of Net Sales

Components of gross profit

Change from 2019 Percent of Net Sales

Components of gross profit 2020 Amount Percent 2020 2019

(In thousands, except percent data)

Net sales $ 12,091,901 $ 682,682 6.0 % 100.0 % 100.0 %

Cost of sales 11,253,705 914,880 8.8 % 93.1 % 90.6 %

Sources of gross profit

Change from 2018

Gross profit $ 838,196 $ (232,198) (21.7) % 6.9 % 9.4 %

Sources of gross profit 2020 Change from 2019

Amount Percent

(In thousands, except percent data)

$ 500,465 $ (233,014) (31.8) %

and Europe 218,327 46,576 27.1 %

Mexico 118,931 (46,137) (28.0) %

Elimination 473 377 392.7 %

Total gross profit $ 838,196 $ (232,198) (21.7) %

Sources of cost of sales

Change from 2018

Sources of cost of sales 2020 Change from 2019

Amount Percent

(In thousands, except percent data)

$ 6,995,552 $ 92,315 1.3 %

and Europe 3,055,965 843,923 38.2 %

Mexico 1,202,661 (20,981) (1.7) %

Elimination (a)

(473) (377) 392.7 %

Total cost of sales $ 11,253,705 $ 914,880 8.8 %

Our Consolidated and Combined Financial Statements include the accounts of our company and our majority owned subsidiaries.

(a) Our Consolidated Financial Statements include the accounts of our company and our majority owned subsidiaries.

We eliminate all significant affiliate accounts and transactions upon consolidation.

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Cost of sales incurred by our U.S.

operations in 2019 decreased $6.5 million , or 0.1% , from cost of sales incurred by our U.S.

operations in 2020 increased $92.3 million, or 1.3%, from cost of sales incurred by our U.S.

operations in 2019.

Cost of sales primarily decreased because of reduced cost per pound sold, partially offset by increased poultry sales volume.

The decrease in cost per pound sold contributed $92.6 million to the decrease in cost of sales.

This decrease is partially offset by an increase in poultry sales volume of $86.0 million.

Included in the decrease in cost per pound sold and increased sales volume was an $81.2 million increase in hourly labor due to an increase in required labor for reduced use of third-party poultry processors and a $15.1 million increase in contracted processing labor.

Partially offsetting these increases in cost of sales was a $16.0 million decrease in freight cost due to decreased contract rates, $14.9 million in costs in 2018 relating to Hurricane Michael and Hurricane Maria, a $14.8 million decrease in commodity and currency derivative losses, an $11.3 million decrease in feed costs, a $9.2 million decrease in cost relating to third-party poultry processors and a $5.7 million decrease in property taxes.

Cost of sales increased primarily because of increased cost per pound sold and increased poultry sales volume of $49.3 million, or 0.7 percentage points, and $43.0 million, or 0.6 percentage points, respectively.

Included in the increase in cost per pound sold and increased sales volume was a $43.4 million increase in live input costs, a $34.6 million increase in benefits costs mainly due to the COVID-19 pandemic, an $18.0 million increase in depreciation costs, a $16.9 million increase in payroll costs due to higher pay rates, a $15.8 million increase in outside service costs from increased outside processing labor and a $15.6 million increase in insurance costs, mainly from higher workers’ compensation costs.

Partially offsetting these increases in cost per pound sold and increased sales volume was a decrease in derivative expense of $59.9 million resulting from higher realized losses on commodity derivatives in 2019.

Other factors affecting U.S.

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and Europe operations during 2020 increased $843.9 million, or 38.2%, from cost of sales incurred by the U.K.

and Europe operations during 2018 primarily because of costs incurred by the acquired Tulip operations, partially offset by decreases in cost of sales incurred by our existing U.K.

and Europe operations during 2019 primarily because of costs incurred by the acquired PPL operations, partially offset by decreases in cost of sales incurred by our existing U.K.

and Europe operations.

Cost of sales incurred by the acquired Tulip operations contributed $297.5 million to the increase in cost of sales.

Cost of sales incurred by the acquired PPL operations contributed $1.0 billion, or 45.9 percentage points, to the increase in cost of sales.

Cost of sales related to the existing U.K.

and Europe operations decreased due to the favorable impact of foreign currency translation of $87.1 million, partially offset by an increase in poultry sales volume of $14.1 million and an increase in cost per pound sold of $9.6 million.

Included in the increase in sales volume and cost per pound was a $22.8 million increase in payroll cost due to national minimum wage increases, a $7.8 million increase in maintenance costs due to additional equipment and production lines and a $4.4 million increase in utilities as a result of increased rates.

Partially offsetting these increases in cost of sales was a $12.7 million decrease in live costs mainly due to increased efficiencies.

and Europe operations decreased $169.7 million, or 7.7 percentage points, due to a decrease in poultry sales volume and a decrease in cost per pound sold of $147.1 million and

$29.9 million, respectively.

These decreases in cost of sales were partially offset by the $7.3 million unfavorable impact of foreign currency translation.

The decrease in cost per pound sold is due to the adjusted product mix from foodservice to retail due to the COVID-19 pandemic.

Other factors affecting cost of sales were individually immaterial.

Mexico Reportable Segment.

Cost of sales incurred by the Mexico operations during 2019 increased $16.8 million , or 1.4% , from cost of sales incurred by the Mexico operations during 2018 primarily because of increased cost per pound sold.

The increase in cost per pound sold was partially offset by a decrease in sales volume and the favorable impact of foreign currency remeasurement.

The increase in cost per pound sold contributed $46.8 million to the increase in cost of sales.

Partially offsetting this increase in cost of sales was the decrease in sales volume of $28.4 million and favorable impact of foreign currency remeasurement of $1.6 million.

Included in the increase in cost per pound sold and sales volume decrease was a $16.1 million increase in grower pay due to increased live operations and a $5.7 million increase in freight costs.

Partially offsetting these increases in cost of sales was a $6.6 million increase in gains on sale of assets during 2019.

Cost of sales incurred by the Mexico operations during 2020 decreased $21.0 million, or 1.7%, from cost of sales incurred by the Mexico operations during 2019 primarily because of the favorable impact of foreign currency remeasurement and decreased poultry sales volume of $141.0 million, or 11.5 percentage points, and $19.4 million, or 1.6 percentage points, respectively.

Partially offsetting these decreases in cost of sales was an increase of $139.4 million, or 11.4 percentage points in cost per pound sold.

Included in the decreased poultry sales volume and increased cost per pound sold was a $73.7 million increase in poultry input costs due to increased grain and ingredient costs.

Other factors affecting cost of sales were individually immaterial.

Operating income.

Operating income increased $194.9 million , or 39.3% , from $495.7 million generated for 2018 to $690.6 million generated for 2019.

Operating income decreased $445.1 million, or 64.5%, from $690.6 million generated for 2019 to $245.5 million generated for 2020.

The following tables provide operating income information:

Change from 2018

Percent of Net Sales

Components of operating income

Change from 2019 Percent of Net Sales

Components of operating income 2020 Amount Percent 2020 2019

(In thousands, except percent data)

Gross profit $ 838,196 $ (232,198) (21.7) % 6.9 % 9.4 %

SG&A expenses 592,610 212,700 56.0 % 4.9 % 3.3 %

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Change from 2019

Sources of operating income

Sources of operating income 2020 Amount Percent

(In thousands, except percent data)

$ 69,377 $ (417,898) (85.8) %

and Europe 102,734 23,552 29.7 %

Mexico 72,879 (51,136) (41.2) %

Elimination 473 377 392.7 %

Total operating income $ 245,463 $ (445,105) (64.5) %

Sources of SG&A expenses

Change from 2018

Sources of SG&A expenses 2020 Change from 2019

Amount Percent

(In thousands, except percent data)

$ 431,088 $ 184,800 75.0 %

and Europe 115,470 22,901 24.7 %

Mexico 46,052 4,999 12.2 %

Total SG&A expense $ 592,610 $ 212,700 56.0 %

Sources of administrative restructuring activities

Change from 2018

(In thousands, except percent data)

Total administrative restructuring activities

Reportable Segment.

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operations during 2020 increased $184.8 million, or 75.0%, from SG&A expense incurred by the U.S.

operations during 2018 primarily because of a $17.7 million increase in incentive compensation expenses and a $7.0 million increase in legal fees due to increased litigation.

operations during 2019 primarily from the $110.5 million DOJ agreement, the $75.0 million Direct Purchaser Plaintiff Class settlement, $15.0 million in incremental donations expense related to the Hometown Strong initiative and a $25.6 million increase in professional fees mainly due to increased legal representation services.

These increases in SG&A expense were partially offset by a $20.0 million decrease in payroll and benefit costs due to decreased incentive and stock-based compensation.

Other factors affecting SG&A expense were individually immaterial.

Administrative restructuring activities incurred by the U.S.

operations during 2019 decreased $2.2 million , or 103.9% , from administrative restructuring activities incurred during 2018.

Administrative restructuring activities incurred by the U.S.

reportable segment during 2019 included $84,000 of sublease income related to the termination of 40 North Foods operations.

Administrative restructuring activities incurred by the U.S.

reportable segment during 2018 included severance costs totaling $1.0 million related to GNP, facility closure costs totaling $0.5 million related to the Luverne, Minnesota facility and severance, asset impairment and lease obligations costs totaling $0.7 million that resulted from the termination of the 40 North Foods operation.

and Europe Reportable Segment.

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and Europe operations during 2020 increased $22.9 million, or 24.7%, from SG&A expense incurred by the U.K.

and Europe operations during 2018 primarily because of expenses incurred by the acquired Tulip operations, partially offset by a decrease in SG&A expense incurred from our existing U.K.

and Europe operations.

SG&A expense incurred by the acquired Tulip operations contributed $13.1 million to the increase in SG&A expense.

and Europe operations during 2019 primarily because of expenses incurred by the acquired PPL operations of $25.7 million, partially offset by a decrease in SG&A expense incurred from our existing U.K.

and Europe operations of $2.8 million.

The decrease in SG&A expense in our existing U.K.

and Europe was mainly due to favorable impact of foreign currency translation of $3.3 million.

and Europe was mainly due to a $2.1 million decrease in travel and entertainment expense due to the COVID-19 pandemic and a $2.0 million decrease in legal and other professional fees expense.

Other factors affecting SG&A expense were individually immaterial.

Administrative restructuring activities incurred by the U.K.

and Europe operations during 2019 decreased $2.6 million , or 100.0% , from administrative restructuring activities incurred during 2018.

During 2018, administrative restructuring activities represented impairment costs of $2.6 million related to Rose Energy Ltd.

Mexico Reportable Segment.

SG&A expense incurred by the Mexico operations during 2019 increased $4.1 million , or 11.0% , from SG&A expense incurred by the Mexico operations during 2018 primarily because of a $2.3 million increase in payroll mainly due to increased rates and a $1.1 million increase marketing expenses due to increased brand development.

SG&A expense incurred by the Mexico operations during 2020 increased $5.0 million, or 12.2%, from SG&A expense incurred by the Mexico operations during 2019 primarily because of a $2.4 million increase in employee relations expenses and a $1.5 million increase in professional fees expense.

Other factors affecting SG&A expense were individually immaterial.

Interest expense .

Consolidated and combined interest expense decreased 18.5% to $132.6 million in 2019 from $162.8 million in 2018, primarily because of a decrease in average borrowings to $2.3 billion in 2019 from $2.5 billion in 2018.

Consolidated interest expense decreased 4.9% to $126.1 million in 2020 from $132.6 million in 2019, primarily because of a decrease in weighted average interest rates to 4.7% in 2020 from 5.3% in 2019.

As a percent of net sales, interest expense in 2020 and 2019 was 1.0% and 1.2%, respectively.

Income taxes.

Our consolidated and combined income tax expense in 2019 was $161.0 million , compared to income tax expense of $85.4 million in 2018 .

The increase in income tax expense in 2019 resulted from an increase in pre-tax income during 2019.

Our consolidated income tax expense in 2020 was $66.8 million, compared to income tax expense of $161.0 million in 2019.

The decrease in income tax expense in 2020 resulted from a decrease in pre-tax income during 2020.

2019 Compared to 2018

Net sales for 2018 increased $169.9 million, or 1.6%, from 2017.

Net sales for 2019 increased $471.4 million, or 4.3%, from $10.9 billion generated in 2018 to $11.4 billion generated in 2019.

The following table provides additional information regarding net sales:

Change from 2018

Sources of net sales

Sources of net sales 2019 Amount Percent

(In thousands, except percent data)

$ 7,636,716 $ 211,055 2.8 %

and Europe 2,383,793 235,127 10.9 %

Mexico 1,388,710 25,253 1.9 %

Total net sales $ 11,409,219 $ 471,435 4.3 %

Reportable Segment.

net sales generated in 2018 decreased $17.6 million, or 0.2%, from U.S.

net sales generated in 2017 primarily because of a decrease in net sales per pound partially offset by an increase in sales volume.

The decrease in net sales per pound, which resulted primarily from lower market prices, contributed $120.5 million, or 1.6 percentage points, to the decrease in net sales.

This decrease in net sales per pound was partially offset by increased sales volume of $102.9 million, or 1.4 percentage points.

Included in U.S.

sales generated during 2018 and 2017 were sales to JBS USA Food Company totaling $13.8 million and $15.3 million, respectively.

net sales generated in 2019 increased $211.1 million, or 2.8%, from U.S.

net sales generated in 2018 primarily because of an increase in sales volume and an increase in net sales per pound.

The increase in sales volume contributed $139.6 million, or 1.8 percentage points, to the increase in net sales.

The increase in net sales per pound contributed $71.5 million, or 1.0 percentage points, to the increase in net sales.

and Europe Reportable Segment.

and Europe sales generated in 2019 increased $235.1 million, or 10.9%, from U.K.

and Europe sales generated in 2017, primarily because of the positive impact of foreign currency translation, an increase in net sales per pound and an increase in sales volume.

The positive impact of foreign currency translation contributed $74.4 million, or 3.7 percentage points to the increase in U.K.

and Europe net sales.

The increase in net sales per pound contributed $53.5 million, or 2.7 percentage points, to the increase in U.K.

and Europe net sales.

The increase in sales volume contributed $24.5 million, or 1.2 percentage points, to the increase in U.K.

and Europe net sales.

and Europe sales generated in 2018, primarily because of the recently acquired PPL operations, partially offset by a decrease in net sales by our existing U.K.

and Europe operations.

The impact of the acquired business contributed $306.7 million, or 14.2 percentage points, to the increase in net sales.

The decrease in our existing U.K.

and Europe operations was mainly due to the unfavorable impact of foreign currency translation of $94.4 million, or 4.4 percentage points.

Mexico Reportable Segment.

Mexico sales generated in 2018 increased $35.1 million, or 2.6%, from Mexico sales generated in 2017 primarily because of an increase in net sales per pound and an increase in sales volume, partially offset by the impact of foreign currency translation.

Mexico sales generated in 2019 increased $25.3 million, or 1.9%, from Mexico sales generated in 2018 primarily because of an increase in net sales per pound, partially offset by a decrease in sales volume and the unfavorable impact of foreign currency remeasurement.

The increase in net sales per pound contributed $59.2 million, or 4.4 percentage points, to the increase in Mexico net sales.

The increase in sales volume contributed $10.0 million, or 0.8 percentage points, to the increase in Mexico net sales.

The impact of foreign currency translation partially offset the overall net sales increase by $21.0 million, or 1.6 percentage points.

Gross profit.

Gross profit decreased by $628.1 million, or 42.7%, from $1.5 billion generated in 2017 to $843.5 million generated in 2018.

Gross profit increased by $226.9 million, or 26.9%, from $843.5 million generated in 2018 to $1.1 billion generated in 2019.

The following tables provide gross profit information:

Change from 2017

Percent of Net Sales

Components of gross profit

Change from 2018 Percent of Net Sales

Components of gross profit 2019 Amount Percent 2019 2018

(In thousands, except percent data)

Net sales $ 11,409,219 $ 471,435 4.3 % 100.0 % 100.0 %

Cost of sales 10,338,825 244,517 2.4 % 90.6 % 92.3 %

Sources of gross profit

Change from 2017

Gross profit $ 1,070,394 $ 226,918 26.9 % 9.4 % 7.7 %

Sources of gross profit 2019 Change from 2018

Amount Percent

(In thousands, except percent data)

$ 733,479 $ 217,597 42.2 %

and Europe 171,751 923 0.5 %

Mexico 165,068 8,434 5.4 %

Elimination 96 (36) (27.3) %

Total gross profit $ 1,070,394 $ 226,918 26.9 %

Sources of cost of sales

Change from 2017

Sources of cost of sales 2019 Change from 2018

Amount Percent

(In thousands, except percent data)

$ 6,903,237 $ (6,542) (0.1) %

and Europe 2,212,042 234,204 11.8 %

Mexico 1,223,642 16,819 1.4 %

Elimination (a)

(96) 36 (27.3) %

Total cost of sales $ 10,338,825 $ 244,517 2.4 %

Our Consolidated and Combined Financial Statements include the accounts of our company and our majority owned subsidiaries.

(a) Our Consolidated Financial Statements include the accounts of our company and our majority owned subsidiaries.

We eliminate all significant affiliate accounts and transactions upon consolidation.

1 unchanged sentence

Cost of sales incurred by our U.S.

operations in 2018 increased $561.4 million, or 8.8%, from cost of sales incurred by our U.S.

operations in 2019 decreased $6.5 million, or 0.1%, from cost of sales incurred by our U.S.

operations in 2018.

Cost of sales primarily increased because of increased cost per pound sold, increased poultry sales volume, increased freight and storage costs, and increased grower costs.

Increased cost per pound contributed $353.0 million mainly due to increased feed costs of $143.2 million and increased poultry sales volume contributed $78.2 million to the increase in cost of sales.

The increased freight and storage costs contributed $77.2 million mainly due to driver shortages and the impact of new federal regulations.

The increased grower costs contributed $51.8 million to the increase in cost of sales, mainly due to increased grower pay rates, feed delivery costs and utility costs.

Cost of sales primarily decreased because of reduced cost per pound sold, partially offset by increased poultry sales volume.

The decrease in cost per pound sold contributed $92.6 million to the decrease in cost of sales.

This decrease is partially offset by an increase in poultry sales volume of $86.0 million.

Other factors affecting U.S.

3 unchanged sentences

and Europe operations during 2019 increased $234.2 million, or 11.8%, from cost of sales incurred by the U.K.

and Europe operations during 2017 primarily because of increased sales volume and a $74.3 million increase in feed ingredient and raw material costs.

and Europe cost of sales also increased because of a $68.0 million increase in payroll costs resulting from an increase in minimum wage and a $25.1 million increase in freight and storage costs.

and Europe operations during 2018 primarily because of costs incurred by the acquired PPL operations, partially offset by decreases in cost of sales incurred by our existing U.K.

and Europe operations.

Cost of sales incurred by the acquired PPL operations contributed $297.5 million to the increase in cost of sales.

Cost of sales related to the existing U.K.

Partially offsetting these increases in cost of sales was a $12.7 million decrease in live costs mainly due to increased efficiencies.

Other factors affecting cost of sales were individually immaterial.

Mexico Reportable Segment.

Cost of sales incurred by the Mexico operations during 2018 increased $67.0 million, or 5.9%, from cost of sales incurred by the Mexico operations during 2017 primarily because of increased sales volume and increased cost per pound with a $34.7 million increase in feed costs.

Mexico cost of sales also increased because of a $14.1 million increase in grower costs, a $10.4 million increase in freight costs, a $4.0 million increase in natural gas costs, a $4.0 million increase in transportation costs and a $2.0 million increase in employee relations costs.

Cost of sales incurred by the Mexico operations during 2019 increased $16.8 million, or 1.4%, from cost of sales incurred by the Mexico operations during 2018 primarily because of increased cost per pound sold.

The increase in cost per pound sold was partially offset by a decrease in sales volume and the favorable impact of foreign currency remeasurement.

The increase in cost per pound sold contributed $46.8 million to the increase in cost of sales.

Partially offsetting this increase in cost of sales was the decrease in sales volume of $28.4 million and favorable impact of foreign currency remeasurement of $1.6 million.

Included in the increase in cost per pound sold and sales volume decrease was a $16.1 million increase in grower pay due to increased live operations and a $5.7 million increase in freight costs.

Partially offsetting these increases in cost of sales was a $6.6 million increase in gains on sale of assets during 2019.

Other factors affecting cost of sales were individually immaterial.

Operating income.

Operating income decreased $576.6 million, or 53.8%, from $1.1 billion generated for 2017 to $495.7 million generated for 2018.

Operating income increased $194.9 million, or 39.3%, from $495.7 million generated for 2018 to $690.6 million generated for 2019.

The following tables provide operating income information:

Change from 2017

Percent of Net Sales

Components of operating income

Change from 2018 Percent of Net Sales

Components of operating income 2019 Amount Percent 2019 2018

(In thousands, except percent data)

Gross profit $ 1,070,394 $ 226,918 26.9 % 9.4 % 7.7 %

SG&A expenses 379,910 36,885 10.8 % 3.3 % 3.1 %

2 unchanged sentences

Change from 2018

Sources of operating income

Sources of operating income 2019 Amount Percent

(In thousands, except percent data)

Elimination (a)

$ 487,275 $ 195,894 67.2 %

and Europe 79,182 (5,342) (6.3) %

Mexico 124,015 4,366 3.6 %

Elimination 96 (36) (27.3) %

Total operating income $ 690,568 $ 194,882 39.3 %

Our Consolidated and Combined Financial Statements include the accounts of our company and our majority owned subsidiaries.

We eliminate all significant affiliate accounts and transactions upon consolidation.

Sources of SG&A expenses

Change from 2017

Sources of SG&A expenses 2019 Change from 2018

Amount Percent

(In thousands, except percent data)

$ 246,288 $ 23,927 10.8 %

and Europe 92,569 8,890 10.6 %

Mexico 41,053 4,068 11.0 %

Total SG&A expense $ 379,910 $ 36,885 10.8 %

Sources of administrative restructuring activities

Change from 2017

Sources of administrative restructuring activities 2019 Change from 2018

Amount Percent

(In thousands, except percent data)

$ (84) $ (2,224) (103.9) %

and Europe — (2,625) (100.0) %

Total administrative restructuring activities $ (84) $ (4,849) (101.8) %

Reportable Segment.

SG&A expense incurred by the U.S.

operations during 2018 decreased $22.7 million, or 9.3%, from SG&A expense incurred by the U.S.

operations during 2017 primarily because of an $18.4 million decrease in transaction costs associated with the Moy Park acquisition and a $17.9 million decrease in benefit expenses, partially offset by an increase in legal fees of $9.5 million related to pending litigation and a $7.2 million increase in payroll expenses.

Selling, general and administrative (“SG&A”) expense incurred by the U.S.

operations during 2019 increased $23.9 million, or 10.8%, from SG&A expense incurred by the U.S.

operations during 2018 primarily because of a $17.7 million increase in incentive compensation expenses and a $7.0 million increase in legal fees due to increased litigation.

Other factors affecting SG&A expense were individually immaterial.

2 unchanged sentences

Administrative restructuring activities incurred by the U.S.

reportable segment during 2018 included severance costs totaling $1.0 million related to GNP, facility closure costs totaling $0.5 million related to the Luverne, Minnesota facility and severance, asset and impairment and lease obligations costs totaling $0.7 million that resulted from the termination of the 40 North Foods operation.

reportable segment during 2019 included $84,000 of sublease income related to the termination of 40 North Foods operations.

Administrative restructuring activities incurred by the U.S.

reportable segment during 2017 included asset impairment costs of $3.5 million related to the Athens, Alabama facility, severance costs of $2.6 million related to GNP, the elimination of prepaid costs totaling $0.7 million related to obsolete software assumed in the GNP acquisition, and facility closure costs totaling $0.9 million related to the Luverne, Minnesota facility.

and Europe Reportable Segment.

SG&A expense incurred by the U.K.

and Europe operations during 2018 decreased $25.9 million, or 23.6%, from SG&A expense incurred by the U.K.

and Europe operations during 2017 primarily because of a $10.6 million decrease in payroll expenses, a $7.2 million decrease in storage expenses, a $4.0 million decrease in pallet expenses, a $3.8 million decrease in management fees charged for administrative functions shared with JBS S.A.

and a $2.3 million decrease in vehicle expenses.

These decreases to SG&A expense were partially offset by a $2.6 million increase in expenses related to severance.

and Europe operations during 2019 increased $8.9 million, or 10.6%, from SG&A expense incurred by the U.K.

and Europe operations during 2018 primarily because of expenses incurred by the acquired PPL operations, partially offset by a decrease in SG&A expense incurred from our existing U.K.

and Europe operations.

SG&A expense incurred by the acquired PPL operations contributed $13.1 million to the increase in SG&A expense.

The decrease in SG&A expense in our existing U.K.

and Europe was mainly due to favorable impact of foreign currency translation of $3.3 million.

Other factors affecting SG&A expense were individually immaterial.

Administrative restructuring activities incurred by the U.K.

and Europe operations during 2018 increased $1.1 million, or 73.2%, from administrative restructuring activities incurred during 2017.

and Europe operations during 2019 decreased $2.6 million, or 100.0%, from administrative restructuring activities incurred during 2018.

During 2018, administrative restructuring activities represented impairment costs of $2.6 million related to Rose Energy Ltd.

During 2017, administrative restructuring activities represented impairment costs of $1.5 million related to a property in Dublin, Ireland.

Mexico Reportable Segment.

SG&A expense incurred by the Mexico operations during 2018 increased $2.1 million, or 6.0%, from SG&A expense incurred by the Mexico operations during 2017 primarily because of a $1.8 million increase in employee

relations expenses and a $1.4 million increase in media marketing expenses.

These increases to SG&A expense were partially offset by a $1.1 million decrease in the loss from sale of assets.

SG&A expense incurred by the Mexico operations during 2019 increased $4.1 million, or 11.0%, from SG&A expense incurred by the Mexico operations during 2018 primarily because of a $2.3 million increase in payroll mainly due to increased rates and a $1.1 million increase marketing expenses due to increased brand development.

Other factors affecting SG&A expense were individually immaterial.

Interest expense .

Consolidated and combined interest expense increased 51.9% to $162.8 million in 2018 from $107.2 million in 2017, primarily because of an increase in the weighted average interest rate to 5.20% in 2018 from 4.54% in 2017 and an increase in average borrowings of $2.5 billion in 2018 from $2.0 billion in 2017.

Consolidated interest expense decreased 18.5% to $132.6 million in 2019 from $162.8 million in 2018, primarily because of a decrease in average borrowings to $2.3 billion in 2019 from $2.5 billion in 2018.

As a percent of net sales, interest expense in 2019 and 2018 was 1.2% and 1.5%, respectively.

Income taxes.

Our consolidated and combined income tax expense in 2018 was $85.4 million, compared to income tax expense of $263.9 million in 2017.

The decrease in income tax expense in 2018 resulted from a decrease in pre-tax income during 2018.

Our consolidated income tax expense in 2019 was $161.0 million, compared to income tax expense of $85.4 million in 2018.

The increase in income tax expense in 2019 resulted from an increase in pre-tax income during 2019.

Liquidity and Capital Resources

2 unchanged sentences

Sources of Liquidity (a)

Amount Amount

Outstanding Available

(In millions)

2 unchanged sentences

Credit Facility (a)

750.0 39.7 710.3

Mexico Credit Facility (b)

and Europe Credit Facilities (c)

Availability under the U.S.

147.8 — 147.8

(a) Availability under the U.S.

Credit Facility is also reduced by our outstanding standby letters of credit.

Standby letters of credit outstanding at December 27, 2020 totaled $39.7 million.

As of December 29, 2019 , the U.S.

dollar-equivalent of the amount available under the Mexican Credit Facility was $79.6 million .

The Mexican Credit Facility provides for a loan commitment of $1.5 billion Mexican pesos.

As of December 29, 2019 , the U.S.

(b) As of December 27, 2020, the U.S.

dollar-equivalent of the amount available under the Mexican Credit Facility was $75.5 million ($1.5 billion Mexican pesos).

dollar-equivalent of the amount available under the U.K.

and Europe Credit Facilities were $141.9 million .

and Europe Credit Facilities provide for loan commitments of £100.0 million (or $130.8 million U.S.

dollar-equivalent) under the Bank of Ireland Facility Agreement and €10.0 million (or $11.1 million U.S.

dollar-equivalent) under the Invoice Discounting Facility.

Historical Flow of Funds

Calendar Year 2019

Cash provided by operating activities was $666.5 million during 2019 .

The cash flows provided by operating activities resulted primarily from net income of $456.5 million , net noncash expenses of $272.2 million , a change in accounts payable and accrued expenses of $119.9 million and a change of $5.8 million related to other operating assets and liabilities.

These cash flows were partially offset by the use of cash of $111.7 million related to inventories, $26.4 million related to income taxes, use of cash of $25.0 million related to trade accounts and other receivables, the use of cash of $15.5 million related to prepaid expenses and other current assets and the use of cash of $9.2 million related to long-term pension and other postretirement obligations.

Accounts payable and accrued expenses, including accounts payable to related parties, had proceeds of $119.9 million related to operating activities during 2019 .

and Europe Credit Facilities are $135.6 million (£100.0 million) and $12.2 million (€10.0 million).

Cash Flows from Operating Activities December 27, 2020 December 29, 2019

(In millions)

Net income $ 95.1 $ 456.5

Net noncash expenses 369.7 272.2

Changes in operating assets and liabilities:

Trade accounts and other receivables 29.1 (25.0)

Inventories 26.0 (111.8)

Prepaid expenses and other current assets (50.3) (15.5)

Accounts payable and accrued expenses 295.3 119.9

Income taxes (39.4) (26.4)

Long-term pension and other postretirement obligations (7.9) (9.2)

Other operating assets and liabilities 6.6 5.8

Cash provided by operating activities $ 724.2 $ 666.5

Net Noncash Expenses

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $369.7 million for the year ended December 27, 2020.

Net noncash expense items included $337.1 million of depreciation and amortization, $37.3 million of deferred income tax expense, loan cost amortization of $4.8 million, and a $3.7 million negative adjustment to a previously recognized gain on bargain purchase from the PPL acquisition.

Partially offsetting the net noncash expenses was a $13.8 million gain on property disposals.

Other items affecting net noncash expenses were individually immaterial.

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $272.2 million for the year ended December 29, 2019.

Net noncash expenses included depreciation and amortization of $287.2 million, $42.5 million of deferred income tax expense, stock-based compensation of $10.1 million and

loan cost amortization of $4.8 million.

Partially offsetting the net noncash expenses are a $56.9 million gain on bargain purchase from the PPL acquisition, a $10.9 million net gain on property disposals and foreign currency transaction gain related to borrowing arrangements of $5.0 million.

Other items affecting net noncash expenses were individually immaterial.

Changes in Operating Assets and Liabilities

Accounts payable and accrued expenses, including accounts payable to related parties, represented a $295.3 million source of cash in 2020.

This change resulted primarily from the accrual of the $110.5 million DOJ agreement, the accrual of the $75.0 million Direct Purchaser Plaintiff Class settlement and the timing of payments.

Accounts payable and accrued expenses, including accounts payable to related parties, represented a $119.9 million source of cash in 2019.

This change resulted primarily from the timing of payments.

The change in inventories represented a $111.7 million use of cash related to operating activities during 2019 .

The change in inventories represented a $26.0 million source of cash in 2020.

The change in cash related to a decrease in our finished products inventory.

The change in inventories represented a $111.7 million use of cash in 2019.

The change in cash related to an increase in our finished products inventory.

Trade accounts and other receivables, including accounts receivable from related parties, used cash of $25.0 million related to operating activities during 2019 .

This change is primarily due to the timing of customer payments.

Prepaid expenses and other current assets had uses of cash of $15.5 million related to operating activities during 2019 .

The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $29.1 million source of cash in 2020.

The change in cash is primarily due to the timing of customer payments and receipt of insurance claims.

The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $25.0 million use of cash in 2019.

The change is primarily due to the timing of customer payments.

The change in prepaid expenses and other current assets represented a $50.3 million use of cash in 2020.

This change resulted primarily from a net increase in both commodity derivatives and value-added tax receivables.

Income taxes, which includes income taxes receivables, income taxes payable, deferred tax assets, deferred tax liabilities, reserves for uncertain tax positions and the tax components within accumulated other comprehensive loss, had uses of cash of $26.4 million .

The change in prepaid expenses and other current assets represented a $15.5 million use of cash in 2019.

The change resulted primarily from a net increase in both commodity derivatives and value-added tax receivables.

The change in income taxes, which includes income taxes receivables, 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 $39.4 million use of cash in 2020.

This change resulted primarily from the timing of estimated tax payments.

Net noncash expenses totaled $272.2 million in 2019 , with net noncash expense items increasing primarily because of $287.2 million related to depreciation and amortization, $42.5 million related to deferred income tax expense, share-based compensation of $10.1 million and loan cost amortization of $4.8 million .

Partially offsetting the net noncash expenses are a $56.9 million gain on bargain purchase related to the Tulip acquisition, $10.9 million gain on property disposals and foreign currency transaction gain related to borrowing arrangements of $5.0 million .

Cash used in investing activities was $717.1 million during 2019 .

Cash used to acquire Tulip totaled $384.7 million and cash used to acquire property, plant and equipment totaled $348.1 million .

Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs.

Capital expenditures for 2019 could not exceed $500.0 million under the terms of our U.S.

credit facility.

Cash proceeds generated from property disposals for the period totaled $15.8 million .

Cash used in financing activities was $34.5 million during 2019 .

Cash used for payments on revolving lines of credit, long-term borrowings and capital lease obligations totaled $289.9 million , cash used to purchase common stock under the share repurchase program totaled $2.9 million , cash used to pay capitalized loan costs $0.7 million and cash used to make equity distributions under a tax sharing agreement with JBS USA Food Company Holdings totaled $0.5 million .

These uses of cash were offset by cash proceeds from long-term debt that totaled $259.5 million .

Calendar Year 2018

Cash provided by operating activities was $491.7 million during 2018.

The cash flows provided by operating activities resulted primarily from net income of $246.8 million , net noncash expenses of $348.1 million , a change in accounts payable, accrued expenses and other current liabilities of $86.8 million and a change in inventories of $83.2 million .

These cash flows were partially offset by the use of $248.5 million in cash related to income taxes, the use of $11.6 million in cash related to prepaid expenses and other current assets, the use of $10.9 million in cash related to trade accounts and other receivables and the use of $6.8 million in cash related to long-term pension and other postretirement obligations.

Accounts payable and accrued expenses, including accounts payable to related parties, had proceeds of $86.8 million related to operating activities during 2018.

This change resulted primarily from the timing of payments.

The change in inventories represented a $83.2 million source of cash related to operating activities during 2018.

The change in cash related to a decrease in our finished products inventory.

Trade accounts and other receivables, including accounts receivable from related parties, used cash of $10.9 million related to operating activities during 2018.

This change is primarily due to customer payment timing.

Prepaid expenses and other current assets had uses of cash of $11.6 million related to operating activities during 2018.

This change resulted primarily from a net increase in both commodity derivatives and value-added tax receivables.

This change resulted primarily from the timing of estimated tax payments.

Net noncash expenses totaled $348.1 million in 2018, increasing primarily because of $274.1 million related to depreciation and amortization, $32.5 million related to deferred income tax expense, noncash loss on early extinguishment of debt of $15.8 million , share-based compensation of $13.2 million , and foreign currency transaction loss related to borrowing arrangements of $5.3 million .

Cash used in investing activities was $338.9 million during 2018.

Cash used to acquire property, plant and equipment totaled $348.7 million .

Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs.

Capital expenditures for 2018 could not exceed $500.0 million under the terms of our U.S.

credit facility.

Cash proceeds generated from property disposals for the period totaled $9.8 million .

Cash used in financing activities was $384.2 million during 2018.

Cash proceeds from long-term debt totaled $748.4 million , cash proceeds from equity contributions under a tax sharing agreement with JBS USA Food Company Holdings totaled $5.6 million and capital contributions to subsidiary by noncontrolling stockholders totaled $1.4 million .

These sources of cash were offset by $1.1 billion in cash used for payments on revolving lines of credit, long-term borrowings and capital lease obligations, $12.6 million in cash used to pay capitalized loan costs, $9.8 million in cash used for payments relating to early extinguishment of debt and $0.2 million in cash used to purchase common stock under the share repurchase program.

Cash Flows from Investing Activities December 27, 2020 December 29, 2019

(In millions)

Acquisitions of property, plant and equipment $ (354.8) $ (348.1)

Proceeds from property disposals 32.0 15.8

Purchase of acquired business, net of cash acquired (4.2) (384.8)

Cash used in investing activities $ (327.0) $ (717.1)

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

Cash Flows from Financing Activities December 27, 2020 December 29, 2019

(In millions)

Payments on revolving line of credit and long-term borrowings $ (431.0) $ (289.9)

Proceeds from revolving line of credit and long-term borrowings 404.5 259.5

Purchase of common stock under share repurchase program (110.2) (2.9)

Payment of capitalized loan costs — (0.7)

Distribution of equity under Tax Sharing Agreement between JBS USA Food Company

Holdings and Pilgrim's Pride Corporation — (0.5)

Cash used in financing activities $ (136.7) $ (34.5)

Proceeds from revolving line of credit and long-term borrowings and payments on revolving line of credit and long-term borrowings are mainly due to borrowings and payments on our U.S.

Credit Facility and Mexico Credit Facility.

Shares repurchased under the share repurchase program during the year ended December 27, 2020 totaled 6.3 million.

For further information on the share repurchase program, refer to Part II, Item 8, Notes to Consolidated Financial Statements, “Note 14.

Stockholders’ Equity.”

Long-Term Debt and Other Borrowing Arrangements

1 unchanged sentence

For a description, refer to Part II, Item 8, Notes to Consolidated Financial Statements, “Note 13.

Long-Term Debt and other Borrowing Arrangements.”

Substantially all of our domestic inventories and domestic fixed assets are pledged as collateral to secure the obligations under the U.S.

5 unchanged sentences

Contractual Obligations

In addition to our debt commitments at December 29, 2019 , we had other commitments and contractual obligations that obligate us to make specified payments in the future.

In addition to our debt commitments at December 27, 2020, we had other commitments and contractual obligations that require us to make specified payments in the future.

The following table summarizes the total amounts due as of December 27, 2020 under all debt agreements, commitments and other contractual obligations.

2 unchanged sentences

Contractual Obligations (a)

Total Less than

One Year One to

Three Years Three to

Five Years Greater than

(In thousands)

Long-term debt (b)

$ 2,300,038 $ 25,035 $ 425,003 $ 1,000,000 $ 850,000

623,566 113,620 223,946 186,125 99,875

Finance leases 1,829 494 988 347 —

2 unchanged sentences

Purchase obligations (d)

The total amount of unrecognized tax benefits at December 29, 2019 was $12.8 million.

450,558 450,356 202 — —

Total $ 3,709,793 $ 680,220 $ 774,747 $ 1,258,061 $ 996,765

(a) The total amount of unrecognized tax benefits at December 27, 2020 was $13.3 million.

We did not include this amount in the contractual obligations table above as reasonable estimates cannot be made at this time of the amounts or timing of future cash outflows.

Long-term debt is presented at face value and excludes $41.6 million in letters of credit outstanding related to normal business transactions.

Interest expense in the table above assumes the continuation of interest rates and outstanding borrowings as of December 29, 2019 .

Includes agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased;

(b) Long-term debt is presented at face value and excludes $39.7 million in letters of credit outstanding related to normal business transactions.

(c) Interest expense in the table above assumes the continuation of interest rates and outstanding borrowings as of December 27, 2020.

(d) Includes agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased;

fixed, minimum, or variable price provisions;

5 unchanged sentences

Refer to Part II, Item 8, Notes to Consolidated Financial Statements, “Note 1.

Business and Summary of Significant Accounting Policies.”

Critical Accounting Policies and Estimates

2 unchanged sentences

On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventory, goodwill and other intangible assets, litigation and income taxes.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We base our estimates on historical experience and on various other assumptions that are believed

to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

32 unchanged sentences

For goodwill, an impairment loss is recognized for any excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill.

Management first reviews relevant qualitative factors to determine if an indication of impairment exists for a reporting unit.

Management first reviews relevant qualitative factors to determine if an indication of impairment exists for a

reporting unit.

If management determines there is an indication that the carrying amount of reporting unit goodwill might be impaired, a quantitative analysis is performed.

5 unchanged sentences

Identifiable intangible assets with definite lives, such as customer relationships, non-compete agreements and trade names that we expect to use for a limited amount of time, are amortized over their estimated useful lives on a straight-line basis.

The useful lives range from three to 20 years for trade names and non-compete agreements and 5 to 16 years for customer relationships.

The useful lives range from three to 20 years for non-compete agreements and trade names and three to 16 years for customer relationships.

Identified intangible assets with definite lives are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

Management assessed if events or changes in circumstances indicated that the aggregate carrying amount of its identified intangible assets with definite lives might not be recoverable and determined that there were no impairment indicators during the fifty-two weeks ended December 29, 2019 and fifty-two weeks ended December 31, 2018.

Management assessed if events or changes in circumstances indicated that the aggregate carrying amount of its identified intangible assets with definite lives might not be recoverable and determined that there were no impairment indicators during the year ended December 27, 2020 and year ended December 29, 2019.

Litigation and Contingent Liabilities.

8 unchanged sentences

740-10-30-27 in the Expenses-Income Taxes topic with regard to members of a group that file a consolidated tax return but issue separate financial statements.

We file our own U.S.

federal tax return, but we are included in certain state unitary returns with JBS USA Holdings.

We file our U.S.

federal tax return and certain state unitary returns with JBS USA Holdings.

Our income tax expense is computed using the separate return method.

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis