Pilgrim’s Pride Corporation (PPC) — FY2021 Form 10-K
Reporting period: Fiscal year ended December 26, 2021 (52 weeks; not a standalone Q4 filing). PPC produces, processes and sells chicken, pork and prepared foods in the U.S., the U.K. and Europe, and Mexico. JBS beneficially owned 80.21% of PPC’s common stock.
Financial performance and liquidity
- Revenue: $14.78 billion, up 22.2% from $12.09 billion in FY2020. Growth reflected higher selling prices, foreign exchange effects and the September 2021 acquisition of Pilgrim’s Food Masters (PFM).
- Profitability: Gross profit was $1.37 billion, up 62.9%; gross margin improved to 9.2% from 6.9%. Operating income declined 14.0% to $211.2 million, with a 1.4% operating margin versus 2.0% in FY2020. Net income attributable to PPC was $31.0 million, or $0.13 per diluted share, compared with $94.8 million, or $0.39 per share. Net margin was approximately 0.2%.
- Adjusted measures: EBITDA was $613.0 million, compared with $617.7 million. Adjusted EBITDA was $1.29 billion versus $788.1 million, and adjusted net income was $557.4 million versus $250.4 million. These non-GAAP measures exclude substantial litigation and other items; they should not be read as GAAP earnings.
- Segments: U.S. sales were $9.11 billion and operating loss was $17.0 million; U.K. and Europe sales were $3.93 billion and operating loss was $0.6 million; Mexico sales were $1.73 billion and operating income was $228.8 million. Segment results reflect litigation expense in the U.S. and cost and labor pressures in the U.K. and Europe.
- Cash flow and investment: Operating cash flow was $326.5 million, down from $724.2 million. Capital expenditures were $381.7 million. Investing activities used $1.32 billion, mainly for acquisitions and capital spending; financing activities provided $901.3 million.
- Liquidity: Year-end cash and cash equivalents were $427.7 million, plus $22.5 million of restricted cash. The company reported $450.1 million of cash, cash equivalents and restricted cash for cash-flow purposes, and approximately $1.16 billion of undrawn borrowing capacity across its facilities. Management said expected operating cash flows and available facilities should cover obligations, working capital, debt maturities and planned capital spending for at least 12 months.
- Debt: Long-term debt was $3.25 billion at face value (approximately $3.22 billion net of current maturities and financing costs on the balance sheet). The company issued $1.0 billion of 4.25% notes due 2031 and $900 million of 3.50% notes due 2032, refinanced its U.S. credit facility, and redeemed its 5.75% notes due 2025. Debt-related costs included a $24.7 million early-extinguishment loss.
- Taxes: Income tax expense was $61.1 million on $92.4 million of pretax income, an effective rate of 66.2%, affected by U.K. tax-rate changes and uncertain tax positions.
Material changes versus FY2020
- Revenue increased 22.2%, while gross margin improved, but operating income fell as SG&A expense nearly doubled to $1.15 billion. The increase was principally due to litigation settlements and related costs.
- PPC recorded $656.2 million of DOJ and litigation-related expense in its adjusted EBITDA reconciliation. Separately, management cited $609.8 million for consolidated-class settlements, direct-action settlements and probable future direct-action settlements; the filing also reports other legal matters and expenses.
- The PFM acquisition added $293.6 million of sales and $2.3 million of net income after its September 24, 2021 closing. The $954.1 million purchase was funded with a senior-note offering and credit-facility borrowings. Acquisition accounting, including certain acquired asset valuations, remained provisional.
- Operating cash flow declined by $397.8 million, in part from increased receivables and inventories. Cash used in investing increased substantially due to the PFM and Randall Parker Foods acquisitions.
Outlook, commentary and risks
- Outlook: PPC did not provide specific earnings or revenue guidance. It expects to spend $400–$425 million on property, plant and equipment in 2022, primarily for efficiency and cost reduction, funded by operating cash flow and credit facilities.
- Management commentary: U.K. operations faced severe labor shortages following Brexit and higher feed, utility, logistics, packaging and labor costs, alongside low hog prices from European oversupply. PPC said it was negotiating with customers to recover extraordinary costs and pursuing labor efficiencies, better agricultural performance and improved yields.
- Commodity and operating risks: Results are sensitive to feed and livestock prices, chicken and pork market prices, labor availability, disease outbreaks, weather, supply-chain and freight disruptions, and changing foodservice and retail demand. COVID-19-related workforce and operating disruption could continue.
- Legal contingencies: Broiler-chicken antitrust litigation remains a significant exposure despite several class settlements. Other pending matters include grower, securities, worker and government proceedings. In a separate DOJ criminal case against former employees, a 2021 trial ended in a mistrial; the filing reported a retrial expected in February 2022. The company also disclosed a new DOJ civil investigation into human-resources antitrust matters.
- Other unusual items: A Mayfield, Kentucky tornado caused a $3.8 million impairment charge. A May 2021 cyberattack disrupted some IT systems; PPC reported approximately $10 million of related loss, limited production loss to less than one day, and said it was not aware of compromised customer, supplier, employee or financial data.
- Sustainability-linked debt: The 2031 notes’ coupon may rise from 4.25% to 4.50% beginning October 2026 if PPC does not meet the stated 2025 greenhouse-gas-intensity reduction target and obtain third-party verification. The company also stated a net-zero emissions target for 2040.
- Control and capital allocation: JBS’s August 2021 proposal to acquire the remaining PPC shares was withdrawn on February 17, 2022 after PPC’s special committee said the revised $28.50-per-share offer did not appropriately value minority shares. PPC said it had no current intention to pay dividends.
Important facts for investors to verify
- Track whether litigation accruals and settlements prove sufficient, and monitor the remaining broiler, grower, worker and securities cases and related government investigations.
- Assess whether U.K. and Europe operations can recover cost inflation and improve margins amid labor constraints, Brexit-related disruption and weak pork-market conditions.
- Evaluate acquisition integration and returns from PFM, including final purchase-price allocation, goodwill and intangible-asset valuations, and debt-funded financing.
- Monitor operating cash generation, working-capital needs, leverage, covenant headroom and refinancing costs; note that $193.7 million of delayed-draw term borrowing was taken on February 8, 2022.
- Compare GAAP results with adjusted EBITDA and adjusted net income, especially the large litigation adjustments and their cash and tax treatment.
- Confirm progress against the sustainability-linked notes’ emissions target and the potential effect on interest expense if the target is missed.