Pilgrim’s Pride Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 24, 2023; comparisons are with the quarter ended September 25, 2022 unless noted. The company produces chicken, pork, prepared foods and related products across the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 82.5% of its common stock.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $4,360.2m | $4,469.0m | $12,833.9m | $13,341.0m |
| Gross profit | $345.9m | $497.3m | $797.4m | $1,716.0m |
| Operating income | $206.4m | $339.2m | $338.0m | $1,254.1m |
| Net income attributable to PPC | $121.3m | $258.4m | $186.9m | $900.9m |
| Diluted EPS | $0.51 | $1.08 | $0.79 | $3.73 |
| Gross margin | 7.9% | 11.1% | 6.2% | 12.9% |
| Operating margin | 4.7% | 7.6% | 2.6% | 9.4% |
- Q3 sales decreased 2.4%; gross profit fell 30.4% and operating income fell 39.2%. Nine-month sales declined 3.8%, while operating income fell 73.0%.
- Q3 segment operating income: U.S. $101.4m (down 70.1%); U.K. and Europe $42.8m (up from $14.2m); Mexico $62.2m (compared with a $13.6m loss). For the nine months, segment operating income was U.S. $110.5m, U.K. and Europe $70.6m, and Mexico $157.1m.
- Management reported nine-month EBITDA of $628.1m and Adjusted EBITDA of $724.7m. These are non-GAAP measures; Adjusted EBITDA adds back specified items, including foreign currency losses, litigation and restructuring costs, and deducts specified insurance recoveries and noncontrolling-interest income.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $399.6m, down from $790.6m. Capital expenditures were $432.3m, versus $342.6m; investing cash outflow was $394.5m. Financing provided $500.3m, compared with a $212.4m outflow in the prior-year period.
- At September 24, cash and cash equivalents were $899.5m, with another $39.7m of restricted cash. Long-term debt, including current maturities and before financing costs, was $3.736bn. Cash less reported debt implies approximate net debt of $2.84bn, excluding restricted cash.
- At period-end, the company reported $774.9m available on its U.S. revolving facility, $183.6m on its U.K. and Europe facility, and $87.2m and $64.5m on two Mexican facilities. It reported no borrowings on those facilities; U.S. letters of credit reduced availability by $25.1m. Management said cash flow and facility availability should be sufficient for obligations, working capital, debt maturities and capital spending for at least the next 12 months.
- Subsequent to quarter-end, an October 4, 2023 unsecured U.S. revolving facility replaced the prior facility, increased commitment from $800m to $850m, and extended maturity to October 2028. On October 12, the company issued $500m of 6.875% notes due 2034 and used the proceeds, with cash, to repurchase all 5.875% notes due 2027 by October 16.
Drivers, outlook and material items
- The principal earnings pressure was weaker U.S. chicken pricing compared with the prior year. U.S. Q3 sales fell 12.3%, primarily from lower sales prices, despite higher volume. U.S. segment profit also faced higher year-to-date chick and grower costs.
- U.K. and Europe sales rose 9.1% in Q3, partly reflecting currency translation and price increases to recover higher input costs. Management cited inflation in labor and other costs, subdued U.K. and E.U. consumer demand, and ongoing efforts to recover costs through customer negotiations and improve operating efficiency.
- Mexico sales rose 30.5% in Q3, reflecting currency remeasurement and higher volume; lower commodity prices reduced sales per pound. Management described the market as volatile and dependent on demand, input costs, disease conditions, regulation and broader economic factors.
- Management said U.S. chicken demand and volumes improved during Q3 as production and cold-storage inventories tightened; prices improved slightly late in the quarter but ended trending downward toward historical averages. It noted continued uncertainty in commodity markets related to the Russia-Ukraine war and suspension of the Black Sea Grain Initiative. No quantified earnings or revenue guidance was provided.
- Nine-month restructuring charges were $38.7m, within initiatives expected to total about $69.7m, with approximately $45.1m expected to be cash outlays. The initiatives were nearing completion by the end of Q3. The company also recorded $35.9m of nine-month business-interruption insurance income in cost of sales and received $60.4m of insurance proceeds.
- Legal matters remain significant. The company has approved settlements totaling $195.5m for three broiler antitrust class actions and has recorded $537.4m of expense for settlements with various opt-out plaintiffs to date. It continues to face other litigation and investigations; the DOJ told the company it is likely to file a civil complaint in at least one investigation. A Mexican tax assessment appeal involving approximately $287.1m for each of two assessments was granted by the tax court, but tax authorities appealed; no loss was recorded. A separate Mexican tax matter resulted in a $25.9m payment, and a $17.0m reserve remains for another year under appeal.
- Other key exposures include feed and energy price volatility, foreign-exchange movements, labor availability and costs, avian influenza and other disease, export-market disruptions, and litigation outcomes. The company said its annual goodwill and indefinite-lived trade-name impairment tests were scheduled for Q4 2023 and that an impairment, if any, could be material.
Important facts for investors to verify
- Whether U.S. chicken pricing and margins stabilized after the quarter, and whether improved demand translated into sustained profitability.
- Progress and final cash costs of U.K. and Europe restructuring, including any impairment or effects on capacity and operations.
- Subsequent-period debt balances, interest expense and liquidity following the 2034 notes issuance, 2027 note repurchase and new revolving facility.
- Developments in broiler antitrust litigation, DOJ investigations and Mexican tax appeals, including any changes to recorded reserves or potential exposure.
- Whether commodity, currency, labor and disease risks, and the company’s cost-recovery efforts, materially change margins or cash flow.