Pilgrim’s Pride Corporation — Q2 2023 Form 10-Q
Reporting period: Fiscal quarter and six months ended June 25, 2023; comparisons are to the periods ended June 26, 2022. Dollar amounts below are in millions unless stated otherwise. The unaudited company operates in the U.S., U.K. and Europe, and Mexico, producing chicken, pork, prepared foods and related products. JBS beneficially owned 82.6% of its common stock.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $4,308.1 | $4,631.6 | $8,473.7 | $8,872.0 |
| Gross profit / margin | $278.4 / 6.5% | $676.8 / 14.6% | $451.5 / 5.3% | $1,218.8 / 13.7% |
| Operating income / margin | $100.3 / 2.3% | $512.9 / 11.1% | $131.6 / 1.6% | $914.9 / 10.3% |
| Net income | $60.9 | $362.0 | $66.5 | $642.6 |
| Net income attributable to PPC / diluted EPS | $60.5 / $0.25 | $362.1 / $1.50 | $65.6 / $0.28 | $642.6 / $2.65 |
| Cash provided by operating activities | Not presented quarterly | Not presented quarterly | $89.3 | $421.2 |
Q2 sales fell 7.0% year over year, principally as U.S. market prices declined. U.S. segment sales decreased 15.6%; U.K. and Europe sales rose 5.3%, and Mexico sales rose 13.2%. Q2 operating income declined 80.5%. For the first half, sales decreased 4.5% and operating income declined 85.6%. The U.S. segment’s first-half operating income fell to $9.2 million from $808.3 million; U.K. and Europe reported $27.8 million versus a $13.8 million loss, while Mexico reported $94.9 million versus $120.4 million.
First-half EBITDA was $324.2 million and Adjusted EBITDA was $400.7 million, both non-GAAP measures. Adjusted EBITDA included adjustments for foreign currency losses, litigation settlements, restructuring, tornado-related insurance recoveries and noncontrolling interests; it should not be viewed as a substitute for GAAP results.
Cash, debt and liquidity
- Cash and cash equivalents were $731.0 million at June 25, 2023, up from $401.0 million at December 25, 2022; restricted cash was another $46.0 million.
- Net cash from operations was $89.3 million, down from $421.2 million in the prior-year half. Capital expenditures were $286.6 million versus $196.2 million, resulting in $250.9 million of cash used in investing activities.
- Long-term debt, net of financing costs and including current maturities, was approximately $3.70 billion, compared with approximately $3.22 billion at year-end 2022. The company issued $1.0 billion of 6.25% senior notes due 2033, using proceeds to repay U.S. term loans and revolving borrowings and for general corporate purposes.
- No borrowings were outstanding under the U.S., U.K. and Europe, or Mexico revolving facilities at quarter-end. Reported available capacity was $774.7 million, $190.7 million and $87.3 million, respectively. Management said operating cash flow and facility availability should fund obligations, working capital, debt maturities and capital spending for at least the next 12 months. The company reported compliance with applicable credit facility covenants.
Management commentary, outlook and notable items
- Management cited inflation in feed, labor, energy and other operating costs, softening U.K. and EU consumer demand, and volatile Mexican market conditions. It described customer pricing negotiations, operational efficiencies, yield improvements and capital investment as responses. U.K. and Europe input costs began easing from Q1, while U.K. pig farming returned to profitability in Q2 as prices recovered and feed costs stabilized.
- U.S. chicken prices were below prior-year levels and the five-year average in Q2; management said production growth and available cold-storage stocks met demand. It warned that suspended Black Sea grain exports could worsen supply constraints, although the disruption did not materially affect Q2 costs.
- U.K. and Europe restructuring initiatives are expected to generate about $71.2 million of total pre-tax charges, including an estimated $45.7 million in cash outlays, and were expected to be substantially completed by the end of Q3 2023. Charges incurred through June 25 were $68.2 million; $37.7 million was recognized in the first half.
- The company received $53.7 million of business-interruption insurance proceeds in the first half and recognized $35.9 million of related income in cost of sales. This and restructuring charges affect period comparability.
- Commodity derivatives are used to manage a portion of anticipated input needs. At quarter-end, disclosed coverage was 11.8% of anticipated corn needs and 18.2% of soybean meal needs through March 2024. The filing highlights exposure to feed prices, foreign exchange and interest rates.
- No specific earnings or full-year financial guidance is provided in the filing. Management’s statements about liquidity and operational plans are forward-looking and subject to risks.
Legal, tax and other contingencies
- Broiler chicken antitrust class settlements total $195.5 million and received final court approval. The company has recognized $527.4 million of expense for settlements with various opt-out plaintiffs; it continues to defend other opt-out claims. A separate poultry-worker class settlement of $29.0 million remains subject to final court approval.
- The company is cooperating with DOJ civil investigations concerning human-resources antitrust matters and grower contracts and payment practices. DOJ indicated it is likely to file a civil complaint in at least one investigation. Washington and Alaska state claims were settled for $11.2 million; the Washington amount was paid in Q2.
- In Mexico, the company paid $25.9 million relating to a 2009 tax dispute and recorded a $17.0 million reserve for the 2010 matter still under appeal. Two separate assessments of approximately $287.5 million each related to the Tyson de México acquisition were nullified by a tax court, but the tax authorities appealed; no loss was recorded for these assessments.
- The company reported that the Tenth Circuit reversed a procedural dismissal in a shareholder lawsuit and remanded the matter for consideration on the merits. Management cautions that adverse litigation outcomes, including possible fines, damages or injunctive relief, could materially affect results.
Most important facts for investors to verify
- Whether lower U.S. chicken pricing, cost inflation and weaker margins persist, and how segment profitability develops.
- Cash generation relative to elevated capital spending, debt service and the company’s reliance on available credit facilities.
- Actual restructuring costs, cash outlays and completion timing, and the durability of insurance-related income.
- Developments and potential additional costs in broiler antitrust, DOJ, grower, shareholder and Mexican tax matters.
- Exposure to feed and energy prices, avian influenza, labor availability, foreign exchange and disruption to global grain supply.
- The filing’s MD&A contains an inconsistent first-half sales comparison in one passage: the financial statements show a $398.3 million, or 4.5%, decrease, while that passage repeats the quarter’s $323.6 million, or 7.0%, decrease. The reported financial statement figures support the 4.5% first-half decline.