Pilgrim’s Pride Corporation (PPC) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 26, 2022; comparisons are to periods ended June 27, 2021. Amounts are in U.S. dollars unless stated otherwise.
Business context and performance
PPC produces chicken, pork, prepared foods and related products across the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 81.7% of PPC’s common stock. Results include Pilgrim’s Food Masters (PFM), acquired in September 2021; its inclusion contributed materially to U.K. and Europe revenue growth.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $4.632B | $3.638B | $8.872B | $6.911B |
| Gross profit | $676.8M | $380.2M | $1.219B | $641.5M |
| Gross margin | 14.6% | 10.5% | 13.7% | 9.3% |
| Operating income (loss) | $512.9M | $(123.1)M | $914.9M | $35.3M |
| Operating margin | 11.1% | (3.4)% | 10.3% | 0.5% |
| Net income (loss) attributable to PPC | $362.1M | $(166.7)M | $642.6M | $(66.5)M |
| Diluted EPS | $1.50 | $(0.68) | $2.65 | $(0.27) |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $421.2M | $115.0M |
Financial position, cash flow and liquidity
- At June 26, cash and cash equivalents were $682.1M; restricted cash was another $40.5M. Total debt was approximately $3.428B, including $3.402B of long-term debt before financing costs and current maturities. Cash less total debt implies net debt of approximately $2.746B.
- Total assets were $9.323B and stockholders’ equity was $2.872B. Current assets were $3.999B versus current liabilities of $2.471B.
- First-half operating cash flow of $421.2M rose from $115.0M. Receivables and inventories used $216.5M and $309.4M of cash, respectively, reflecting higher sales prices and input costs.
- First-half capital expenditures were $196.2M; cash used in investing activities was $198.7M. Share repurchases used $120.0M. Cash, cash equivalents and restricted cash increased by $272.5M during the half.
- Reported available borrowings included $763.9M under the U.S. revolver, $13.5M under the U.S. term facility, $75.5M under the Mexico facility and $184.0M under the U.K. and Europe facility. Management said operating cash flow and available facilities were expected to cover obligations, working capital, debt maturities and capital spending for at least 12 months. PPC reported compliance with applicable credit-facility covenants.
Material changes and management commentary
- Q2 sales increased 27.3% year over year and first-half sales increased 28.4%. Higher prices and cost-recovery actions were major contributors; PFM added $265.8M of Q2 and $526.5M of first-half sales. U.K. and Europe sales also faced adverse currency translation.
- U.S. segment operating income was $453.2M in Q2 and $808.3M for the half, a substantial improvement from prior-year losses. Mexico remained profitable, but first-half segment operating income declined to $120.4M from $159.0M. U.K. and Europe recorded a first-half operating loss of $13.8M versus income of $32.3M a year earlier.
- Management cited elevated feed, energy, labor and other operating costs, with Russia’s war against Ukraine disrupting commodity supply and increasing price volatility. It also cited U.K. labor shortages following Brexit, inflation and softening consumer demand in parts of the U.K. and Europe. PPC was negotiating with customers to recover costs and pursuing labor, yield and efficiency improvements.
- Management reported steady U.S. demand overall, with chicken prices well above historical averages; Mexico prices also remained high. It cautioned that future prices and results depend on demand, supply, regulation, avian influenza, the economy and the war’s effects. No specific earnings or revenue guidance was provided.
- Adjusted EBITDA was $1.125B for the first half, versus GAAP net income of $642.6M. Adjusted EBITDA is a non-GAAP measure and includes specified adjustments, including foreign-currency losses and litigation costs.
Risks, contingencies and unusual items
- Prior-year comparisons are affected by significant legal settlement expenses recorded in SG&A; the company attributed much of the year-over-year SG&A decrease to those prior-period charges. The Q2 2022 result also includes $9.0M of litigation settlement expense in the first-half Adjusted EBITDA reconciliation.
- PPC disclosed Mexican tax assessments of approximately $248.4M related to the Tyson de México acquisition, which subsidiaries are appealing; no loss was recorded. Separate Mexican tax matters for 2009 and 2010 involve $33.0M and $20.2M under appeal, also with no loss recorded.
- Broiler-chicken antitrust matters remain significant, including claims by opt-out plaintiffs and state proceedings. PPC had recognized $489.3M of expenses for settlements with various opt-outs. The company also disclosed an ongoing DOJ civil investigation into human-resources antitrust matters. A related criminal retrial involving former employees was scheduled to begin October 31, 2022; the prior trial described in the filing ended with a not-guilty verdict for all defendants.
- The company repurchased 4.6M shares for approximately $120.0M under its $200.0M authorization, leaving approximately $80.0M available at quarter-end. Its 4.25% sustainability-linked notes may step up to 4.50% in October 2026 if the stated emissions target is not met and verified.
- First-half foreign-currency translation losses reduced other comprehensive income by $257.5M and contributed to accumulated other comprehensive loss of $292.0M at quarter-end. Management also identified commodity, interest-rate, currency, disease, labor, litigation, customer, cyber and supply-chain risks.
- Management excluded PFM’s internal control over financial reporting from its controls evaluation under the filing’s stated acquisition guidance; PPC said it was reviewing and integrating PFM’s control structure.
Important facts for investors to verify
- How much of the sales and earnings improvement reflects sustainable pricing, volume and operating performance versus PFM acquisition effects and prior-year legal charges.
- Whether higher feed, energy and labor costs can continue to be passed through to customers, particularly in U.K. and Europe and Mexico.
- Progress, potential additional costs and outcomes of the antitrust, grower, securities and Mexican tax matters, including matters for which no loss has been recorded.
- Working-capital needs and cash conversion as receivables and inventories grow, alongside capital spending, debt service and continued share repurchases.
- PFM integration and internal-control remediation, and the sustainability target requirements associated with the 2031 notes.