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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-11 compared with 2020-02-21 · 64 added, 33 removed, 25 unchanged (80% of the section changed)

5 unchanged sentences

Commodity Prices

We purchase certain commodities, primarily corn, soybean meal and wheat, for use as ingredients in the feed we either sell commercially or consume in our live operations.

We purchase certain commodities, primarily corn, soybean meal, soybean oil, and wheat, for use as ingredients in the feed we either sell commercially or consume in our live operations.

As a result, our earnings are affected by changes in the price and availability of such feed ingredients.

In the past, we have from time to time attempted to minimize our exposure to the changing price and availability of such feed ingredients using various techniques, including, but not limited to, (1) executing purchase agreements with suppliers for future physical delivery of feed ingredients at established prices and (2) purchasing or selling derivative financial instruments such as futures and options.

For this sensitivity analysis, market risk is estimated as a hypothetical 10.0% change in the weighted-average cost of our primary feed ingredients as of December 29, 2019 and December 30, 2018 .

We have from time to time attempted to minimize our exposure to the changing price and availability of such feed ingredients using various techniques, including, but not limited to, (1) executing purchase agreements with suppliers for future physical delivery of feed ingredients at established prices and (2) purchasing or selling derivative financial instruments such as futures and options.

For this sensitivity analysis, market risk is estimated as a hypothetical 10% increase in the weighted-average cost of our primary feed ingredients as of the periods presented.

The impact of this fluctuation, if realized, could be mitigated by related commodity hedging activity.

However, fluctuations greater than 10% could occur.

Based on our feed consumption during 2019 and 2018 , such a change would have resulted in a change to cost of sales of approximately $301.1 million and $304.0 million respectively, excluding the impact of any feed ingredients derivative financial instruments in that period.

A 10.0% change in ending feed ingredients inventories as of December 29, 2019 and December 30, 2018 would be $15.2 million and $11.6 million , respectively, excluding any potential impact on the production costs of our chicken inventories.

We purchase commodity derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for the next 12 months.

A 10.0% increase in corn, soybean meal, and soybean oil prices on December 29, 2019 and December 30, 2018 would have resulted in an increase of approximately $1.6 million and $2.1 million , respectively, in the fair value of our net commodity derivative position, including margin cash, as of that date.

Year Ended December 27, 2020

Amount Impact of 10% Increase in Feed Ingredient Prices

(In thousands)

Feed purchases (a)

$ 2,989,963 $ 298,996

Feed inventory (b)

132,937 13,294

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

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

December 27, 2020

Amount Impact of 10% Increase to the Fair Value of Commodity Derivative Assets

(In thousands)

Commodity derivative assets (a)

$ 19,446 $ 1,945

(a) We purchase commodity derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our anticipated consumption of commodity inputs for the next 12 months.

A 10% increase in corn, soybean meal, soybean oil and wheat prices would have resulted in an increase in the fair value of our net commodity derivative asset position, including margin cash, as of December 27, 2020.

Interest Rates

Our variable-rate debt instruments represent approximately 20.4% and 21.3% of our total debt as of December 29, 2019 and December 30, 2018 , respectively.

Holding other variables constant, including levels of indebtedness, an increase in interest rates of 25 basis points would have increased our interest expense by less than $0.1 million in 2019 and 2018 .

Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a hypothetical decrease in interest rates of 10.0%.

Using a discounted cash flow analysis, a hypothetical 10.0% decrease in interest rates would have decreased the fair value of our fixed-rate debt by approximately $10.4 million and $12.9 million as of December 29, 2019 and December 30, 2018 , respectively.

Fixed-rate debt .

Market risk for fixed-rate debt is estimated as the potential decrease in fair value resulting from a hypothetical increase in interest rates of 10%.

Using a discounted cash flow analysis, a hypothetical 10% increase in interest rates would have decreased the fair value of our fixed-rate debt by $47.7 million as of December 27, 2020.

Variable-rate debt .

Our variable-rate debt instruments represent approximately 20.0% of our total debt as of December 27, 2020.

Holding other variables constant, including levels of indebtedness, an increase in interest rates of 25 basis points would have increased our interest expense by an immaterial amount for the year ended December 27, 2020.

Foreign Currency

Mexico Subsidiaries

Our earnings are also affected by foreign exchange rate fluctuations related to the Mexican peso net monetary position of our Mexico subsidiaries.

2 unchanged sentences

We currently anticipate that the future cash flows of our Mexico subsidiaries will be reinvested in our Mexico operations.

The Mexican peso exchange rate can directly and indirectly impact our financial condition and results of operations in several ways, including potential economic recession in Mexico because of a devaluation of its currency.

Foreign currency exchange gains, representing the change in the U.S.

dollar value of the net monetary assets in 2019 and 2017 of our Mexican subsidiaries denominated in Mexican pesos, were $4.9 million and $2.7 million , respectively.

Foreign currency exchange losses, representing the change in the U.S.

dollar value of the net monetary assets in 2018 of our Mexican subsidiaries was $15.9 million .

The average exchange rates for 2019, 2018, and 2017 were 19.25 Mexican pesos to 1 U.S.

dollar, 19.22 Mexican pesos to 1 U.S.

dollar, and 18.93 Mexican pesos to 1 U.S.

dollar, respectively.

For this sensitivity analysis, market risk is estimated as a hypothetical 10.0% deterioration in the current exchange rate used to convert Mexican pesos to U.S.

dollars as of December 29, 2019 and December 30, 2018 .

The Mexican peso exchange rate can directly and indirectly impact our financial condition and results of operations.

For this sensitivity analysis, market risk is estimated as a hypothetical 10% change in the current exchange rate used to convert Mexican pesos to U.S.

dollars as of December 27, 2020.

However, fluctuations greater than 10% could occur.

Based on the net monetary asset position of our Mexico operations as of December 29, 2019 and December 30, 2018 , such a change would have resulted in a decrease in foreign currency transaction gains recognized in 2019 and 2018 of approximately $0.1 million and $2.7 million , respectively.

No assurance can be given as to how future movements in the Mexican peso could affect our future financial condition or results of operations.

Additionally, we are exposed to foreign exchange-related variability of investments and earnings from our foreign investments in U.K.

Year Ended December 27, 2020

Impact of 10% Deterioration in

Exchange Rate (a)

Impact of 10% Appreciation in

Exchange Rate (b)

(In thousands, except for exchange rate data)

Foreign currency remeasurement gain (loss) $ (22,256) $ 27,201

Exchange rate of Mexican pesos to the U.S.

As reported 19.86 19.86

Hypothetical 10% change 21.85 17.87

(a) Based on the net monetary asset position of our Mexican subsidiaries, a 10% weakening in the exchange rate of Mexican pesos to U.S.

dollar will result in recognition of foreign currency remeasurement loss for the year ended December 27, 2020.

(b) Based on the net monetary asset position of our Mexican subsidiaries, a 10% strengthening in the exchange rate of Mexican pesos to U.S.

dollar will result in recognition of foreign currency remeasurement gain for the year ended December 27, 2020.

and Europe Subsidiaries

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

and Europe subsidiaries.

Foreign currency market risk is the possibility that our financial results or financial position could be better or worse than planned because of changes in foreign currency exchange rates.

As of December 29, 2019 and December 30, 2018 , our U.K.

and Europe reportable segment had net assets of approximately $1.1 billion and $1.5 billion , respectively, denominated in British pounds, after consideration of our derivative and nonderivative financial instruments.

Based on our sensitivity analysis, a 10% adverse change in exchange rates would have caused a reduction of $114.8 million and $151.7 million to our net assets for December 29, 2019 and December 30, 2018 , respectively.

As of December 29, 2019 and December 30, 2018 , we had foreign currency forward contracts, which were designated and qualify as cash flow hedges, with an aggregate notional amount of $30.4 million and $35.0 million , respectively, to hedge a portion of our investments in U.K.

On the basis of our sensitivity analysis, a weakening of the U.S.

dollar against the British pound by 10% would have resulted in a $3.8 million and $2.6 million negative change in our cash flow on settlement for December 29, 2019 and December 30, 2018 , respectively.

A weakening of the U.S.

dollar against the euro by 10% would result in a $0.7 million and $0.9 million negative change in our cash flows on settlement for December 29, 2019 and December 30, 2018 ,

respectively.

For this sensitivity analysis, market risk is estimated as a hypothetical 10% change in exchange rates used to convert U.S.

dollars to British pound and to euro, and the effect of this change on our U.K.

and Europe subsidiaries.

As of December 27, 2020, our U.K.

and Europe subsidiaries that are denominated in British pound had net assets of $2.2 billion.

A 10% weakening in U.S.

dollar against the British pound exchange rate would cause a decrease in the net assets of our U.K.

and Europe subsidiaries by $202.5 million.

A 10% strengthening in U.S.

dollar against the British pound exchange rate would cause an increase in the net assets of our U.K.

and Europe subsidiaries by $247.5 million.

Cash flow hedging transactions.

We periodically enter into foreign currency forward contracts, which are designated and qualify as cash flow hedges, to hedge foreign currency risk on a portion of sales generated and purchases made by our U.K.

and Europe subsidiaries.

A 10% weakening or strengthening of the U.S.

dollar against the British pound and U.S.

dollar against the euro would result in immaterial changes in the fair values of these derivative instruments.

No assurance can be given as to how future movements in currency rates could affect our future financial condition or results of operations.

7 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 7A. Quantitative and Qualitative Disclosures About Market Risk