Pilgrim’s Pride Corporation (PPC) — Form 10-Q Summary
Reporting period: Fiscal third quarter ended September 26, 2021; comparisons are with the quarter ended September 27, 2020. Unless noted otherwise, financial amounts below are in U.S. dollars. PPC is a global poultry producer with pork and prepared-food operations, reporting U.S., U.K. and Europe, and Mexico segments. JBS beneficially owned 80.2% of PPC’s common stock.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $3.828 billion | $3.075 billion | $10.739 billion | $8.974 billion |
| Gross profit / margin | $371.8 million / 9.7% | $313.8 million / 10.2% | $1.013 billion / 9.4% | $610.8 million / 6.8% |
| Operating income / margin | $120.8 million / 3.2% | $94.3 million / 3.1% | $156.1 million / 1.5% | $206.0 million / 2.3% |
| Net income (loss) attributable to PPC | $60.7 million | $33.4 million | $(5.8) million | $94.7 million |
| Diluted earnings (loss) per share | $0.25 | $0.14 | $(0.02) | $0.38 |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $327.5 million | $508.3 million |
Q3 sales rose 24.5% year over year, while gross profit rose 18.5%; gross margin narrowed as costs rose faster than sales. For the first nine months, sales increased 19.7% and gross profit increased 65.9%, but operating income declined 24.2%, largely reflecting litigation-related SG&A expense. Management reported nine-month EBITDA of $431.4 million and Adjusted EBITDA of $972.4 million. Adjusted EBITDA adds back, among other items, $524.3 million for DOJ and litigation matters; it is a non-GAAP measure and is not a substitute for GAAP results.
- Segment operating income: Q3—U.S. $70.7 million, U.K. and Europe $0.4 million, Mexico $49.7 million. Nine months—U.S. loss of $85.4 million, U.K. and Europe income of $32.8 million, Mexico income of $208.7 million.
- Cash generation and investment: Nine-month operating cash flow was $327.5 million, down from $508.3 million. Capital expenditures were $280.8 million, leaving approximately $46.7 million of operating cash flow after capex, before acquisitions and other investing activity. Investing cash outflow totaled $1.212 billion, including $953.9 million for the Kerry acquisition.
- Balance sheet and liquidity: At September 26, cash and equivalents were $511.1 million; an additional $54.1 million was restricted and unavailable for daily operations. Current assets were $3.242 billion and current liabilities $2.271 billion (current ratio approximately 1.43). Long-term debt including current maturities was $3.247 billion; net of cash and equivalents, approximately $2.736 billion.
- Borrowing capacity: The filing lists $761.5 million available on the U.S. revolver, $193.7 million remaining under the U.S. term-loan commitment, $74.8 million under the Mexico facility and $136.8 million under U.K./Europe facilities. PPC said it was compliant with U.S. credit facility covenants and expected operating cash flow and facility availability to fund obligations, working capital and capital spending for at least the next 12 months.
Material changes and significant developments
- On September 24, 2021, PPC acquired Kerry Consumer Foods’ specialty meats and ready meals businesses for approximately $954.1 million, funded with new debt and credit-facility borrowings. The businesses had over £725 million in 2020 annual sales. Purchase accounting was preliminary, and the acquired operations’ contribution during the reporting period was described as insignificant.
- PPC issued $900 million of 3.50% senior notes due 2032 to help fund the acquisition and related costs. It also issued $1.0 billion of 4.25% sustainability-linked notes due 2031 and used proceeds plus cash to redeem its 5.75% notes due 2025. The 2031 notes’ rate increases to 4.50% from October 2026 if the stated emissions-intensity target and verification conditions are not met.
- In August 2021, PPC refinanced its U.S. credit facility, extending maturity to August 2026 and establishing an $800 million revolving commitment and term loans of up to $700 million.
- Q3 sales growth reflected higher chicken prices in the U.S. and Mexico, foreign-exchange effects and recovering U.K./Europe foodservice volumes. The filing also describes sharply higher feed and other input costs. The U.K. and Europe segment’s Q3 operating income fell to $0.4 million from $29.9 million.
Outlook, risks and unusual items
- No numerical earnings guidance is provided. Management cited continued uncertainty around chicken and feed prices, foreign exchange, COVID-19, labor availability and the broader economy. It expected COVID-related disruptions to continue during the remainder of 2021.
- Management reported severe U.K. labor shortages following Brexit and elevated costs for feed inputs, utilities, logistics, chemicals, labor and packaging. U.K. pork margins were pressured by low hog prices amid European oversupply. PPC said it was negotiating with customers to recover extraordinary costs and pursuing operational efficiencies.
- In the U.S., management said chicken prices remained above the five-year average during Q3, supported by demand and low cold-storage inventories, while noting that future pricing depended on foodservice and retail demand, pandemic conditions and protein supply. Feed-price increases materially raised costs in the U.S. and Mexico.
- Litigation is a major earnings and contingency exposure. PPC recorded $413.8 million in the U.S. segment for probable litigation losses during the first nine months, in addition to increased legal-defense expense. It agreed to $75.5 million and $45.0 million settlements with two indirect purchaser classes, with the latter subject to final court approval, and accrued $257.4 million for negotiated and potential opt-out settlements. The balance sheet included $312.5 million in current legal-settlement accruals. Other antitrust, securities, grower and labor matters remain pending; outcomes and ultimate costs are uncertain.
- PPC previously paid a $107.9 million DOJ antitrust fine. It continues to cooperate with the DOJ investigation, and the filing warns that pending litigation could result in materially adverse damages, penalties or other relief.
- 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 restored full operations within two days. It said it was not aware of evidence that customer, supplier, employee or financial data had been compromised.
- JBS made an unsolicited proposal in August to acquire shares of PPC it did not already own. PPC’s independent-director special committee was reviewing it; the filing provides no final outcome.
- Management concluded disclosure controls were effective, excluding Kerry’s internal controls from the evaluation because it had been acquired two days before quarter-end. The filing states no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How litigation accruals, settlement approvals and remaining opt-out claims evolve, and whether additional material charges or cash payments are required.
- Whether operating margins recover as PPC manages feed, labor, freight and other input costs—particularly in U.K. and Europe—and whether customer negotiations recover extraordinary costs.
- The acquired Kerry businesses’ post-close performance, final purchase-price allocation and integration costs, alongside the added debt and interest burden.
- Debt levels, covenant headroom, borrowing availability and cash conversion; nine-month operating cash flow declined and was substantially affected by working-capital movements.
- Progress toward the 2031 notes’ greenhouse-gas target, since failure to meet the target and verification requirements would raise the coupon beginning in October 2026.
- Developments in the JBS proposal, the Mexican tax authority’s assessment related to the 2015 acquisition, and continuing cyber-security and COVID-19 risks.