Pilgrim’s Pride Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 25, 2022; comparisons are to the periods ended September 26, 2021. Pilgrim’s Pride is a global poultry and prepared-food producer operating in the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 82.7% of its outstanding common stock.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $4.469 billion | $3.828 billion | $13.341 billion | $10.739 billion |
| Gross profit / margin | $497.3 million / 11.1% | $371.8 million / 9.7% | $1.716 billion / 12.9% | $1.013 billion / 9.4% |
| Operating income / margin | $339.2 million / 7.6% | $120.8 million / 3.2% | $1.254 billion / 9.4% | $156.1 million / 1.5% |
| Net income attributable to PPC | $258.4 million | $60.7 million | $900.9 million | Loss of $5.8 million |
| Diluted EPS | $1.08 | $0.25 | $3.73 | Loss of $0.02 |
| Cash provided by operations | Not separately stated | Not separately stated | $790.6 million | $327.5 million |
- Q3 sales rose 16.8% year over year; nine-month sales rose 24.2%. Growth reflected higher selling prices and, in U.K. and Europe, the acquired Pilgrim’s Food Masters (PFM) business.
- Q3 operating income increased 180.8%. The U.S. segment generated $338.5 million, U.K. and Europe $14.2 million, while Mexico recorded an operating loss of $13.6 million. Nine-month segment operating income was $1.147 billion in the U.S., $0.4 million in U.K. and Europe, and $106.9 million in Mexico.
- Nine-month adjusted EBITDA, a non-GAAP measure, was $1.585 billion. Management cautions that EBITDA and adjusted EBITDA are supplemental measures, not substitutes for GAAP results.
- At September 25, cash and cash equivalents were $654.2 million; total debt, including current maturities, was approximately $3.210 billion, implying net debt of about $2.556 billion. Available borrowing capacity was $990.1 million across U.S., U.K./Europe and Mexico facilities. Management expected operating cash flow and facility availability to cover obligations and planned spending for at least 12 months.
- Capital expenditures were $342.6 million for the first nine months. Operating cash flow less capital expenditures was approximately $448.0 million. Cash, cash equivalents and restricted cash totaled $684.1 million.
Material changes and management commentary
- Higher prices helped offset inflation in feed, labor, utilities and other inputs. Management cited the Russia-Ukraine war, disrupted commodity supply chains, inflation, and labor shortages in the U.K. as continuing pressures. U.S. chicken prices fell from early-July highs during the quarter as supply increased; Mexico faced higher input costs and bird-disease impacts.
- PFM contributed $247.6 million of Q3 sales and $774.1 million of nine-month sales. The acquisition materially expanded U.K. and Europe prepared-food operations; reported comparisons also reflect currency translation.
- Nine-month operating cash flow more than doubled year over year, but working capital absorbed substantial cash: receivables used $211.8 million and inventories used $455.5 million, partly offset by a $297.3 million source from payables and accrued liabilities.
- On March 8, 2022, the board authorized $200 million of share repurchases. The company had repurchased approximately 7.5 million shares for $199.6 million by September 25, leaving about $0.4 million authorized.
- Foreign currency translation drove a $573.0 million nine-month loss before related effects and was the principal contributor to the $557.0 million decline in other comprehensive income. Goodwill fell to $1.124 billion, largely reflecting currency translation.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said results depend on demand, commodity prices, disease conditions, general economic conditions, and the company’s ability to recover costs through customer pricing and improve operating efficiencies.
- Key exposures include volatile feed and energy costs, avian influenza and other disease, labor availability, foreign exchange, interest rates, weather and power disruptions, and the effects of the Russia-Ukraine war. A possible U.K. winter power shortage was identified as a risk.
- Antitrust and other litigation remains significant. PPC disclosed $508.6 million of recognized expense for settlements with opt-out plaintiffs in the broiler-chicken litigation; additional claims remain unresolved. The filing says adverse outcomes could materially affect results, and outcomes cannot be predicted.
- Mexican tax assessments of approximately $244.4 million, along with separate appeals of $32.4 million and $19.8 million relating to earlier tax years, were disclosed; no loss was recorded for these amounts. These are disputed claims, not reported liabilities.
- Following a tornado at a Kentucky facility in December 2021, the company recognized $12.2 million of business-interruption insurance income during the first nine months and received $5.5 million of proceeds during the period.
- A U.K. subsidiary proposed closing two facilities, putting approximately 610 jobs at risk. Estimated exit or disposal costs were about £7.9 million; the amount may change and recognition was pending completion of consultation proceedings.
- The company was in compliance with its disclosed credit-facility covenants. It amended senior-note indentures to eliminate certain restrictive covenants following its investment-grade status.
Important facts for investors to verify
- Whether cost inflation, commodity-price movements and customer price recovery sustain or erode the improved margins, especially in Mexico and U.K. and Europe.
- How much of reported sales and profit growth reflects underlying operations versus PFM acquisition effects, foreign exchange and prior-year litigation or transaction expenses.
- Working-capital needs, particularly inventory and receivables, and the sustainability of operating cash flow after capital spending and share repurchases.
- Developments, potential exposure and remaining accruals for broiler antitrust litigation, DOJ investigations and disputed Mexican tax assessments.
- Final costs and timing of the proposed U.K. facility closures, and any material impact from U.K. energy availability or other operational disruptions.