Pilgrim’s Pride Corporation (PPC) — FY2022 Form 10-K
Reporting period: Fiscal year ended December 25, 2022 (52 weeks); comparisons are with the 52-week fiscal year ended December 26, 2021. PPC produces and sells chicken, pork and prepared foods across the U.S., U.K. and Europe, and Mexico. JBS indirectly owned 82.65% of PPC’s common stock.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $17.47 billion | $14.78 billion |
| Gross profit / margin | $1.81 billion / 10.4% | $1.37 billion / 9.2% |
| Operating income / margin | $1.18 billion / 6.7% | $211.2 million / 1.4% |
| Net income attributable to PPC | $745.9 million | $31.0 million |
| Diluted EPS | $3.10 | $0.13 |
| Cash from operations | $669.9 million | $326.5 million |
| Capital expenditures | $487.1 million | $381.7 million |
| Adjusted EBITDA | $1.65 billion | $1.29 billion |
Adjusted EBITDA is a non-GAAP measure. FY2022 reported net income included $26.4 million of business-interruption insurance income; operating income also included $30.5 million of restructuring expense. FY2021 results were substantially burdened by litigation-related expenses.
Segments and material changes
- U.S.: Sales rose 17.9% to $10.75 billion, mainly on higher prices. Operating income was $1.09 billion, versus an operating loss of $17.0 million in 2021.
- U.K. and Europe: Sales rose 23.9% to $4.87 billion, reflecting higher pricing and a full-year contribution from Pilgrim’s Food Masters (acquired in September 2021), partly offset by unfavorable currency translation. The segment recorded a small operating loss of $0.9 million, compared with a $0.6 million loss in 2021.
- Mexico: Sales increased 6.7% to $1.85 billion, but operating income fell 63.5% to $83.5 million. Bird disease reduced volumes and increased egg costs; higher feed and packaging costs also weighed on results.
Consolidated sales growth reflected higher selling prices and the acquired U.K. business. Gross margin improved, while operating income benefited particularly from lower year-over-year legal settlement expense in the U.S. Costs remained pressured by feed, labor, energy, transport and packaging inflation.
Cash, debt and liquidity
- Cash and cash equivalents were $401.0 million at year-end; including restricted cash, cash and cash equivalents totaled $434.8 million.
- Debt was approximately $3.22 billion at face value. The balance sheet reported $3.19 billion of long-term debt, net of financing costs and excluding current maturities. Major notes mature in 2027, 2031 and 2032; the U.S. term loan matures in 2026.
- Available borrowing capacity was approximately $967 million across U.S., Mexico, and U.K./Europe facilities, subject to facility terms and letters of credit. Management said expected operating cash flows and facility availability should fund obligations, working capital, debt maturities and capital spending for at least 12 months.
- Operating cash flow increased year over year, but inventory growth used $472.2 million of cash. Cash used in investing was $445.3 million; cash used in financing was $232.0 million, including $199.6 million of share repurchases.
- Current ratio was approximately 1.5x, based on reported current assets of $3.89 billion and current liabilities of $2.57 billion.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. PPC expects 2023 capital expenditures of $400 million to $500 million, primarily for growth, efficiency and cost reduction, funded with operating cash flow and borrowing availability.
- Management expected inflation in 2023 to be moderate compared with 2022, while noting continuing uncertainty around feed and energy costs, demand, foreign exchange, bird disease and the Russia-Ukraine war. Chicken supply growth and softer volume growth contributed to lower commodity chicken prices late in 2022.
- A U.K. and Europe restructuring, initiated in 2022 to reduce or phase out volumes at multiple facilities, is expected to cost about $58 million before tax, with approximately $53 million in cash outlays; completion was expected by the end of Q2 2023.
- Legal exposure remains material. PPC had settled specified broiler-chicken purchaser class claims for $195.5 million and recorded $514.4 million of expense for settlements with opt-out purchasers. Other broiler antitrust, grower, worker, state and shareholder matters remain pending; DOJ investigations into human-resources matters and grower contracts/payment practices were disclosed.
- Mexican tax authorities’ assessments of approximately $255 million related to PPC’s Tyson de México acquisition were under appeal, with no loss recorded. Separately, PPC accrued $39.2 million for Mexican tax claims concerning 2009–2010; the filing says the 2009 appeal was dismissed in January 2023.
- Principal risks include volatile feed and meat prices, labor shortages and wage inflation, avian influenza and other livestock diseases, food safety and recalls, litigation, climate and environmental requirements, foreign exchange, customer concentration, cybersecurity, and execution of the U.K. restructuring. Two U.S. customers together represented 12.8% of sales; no single customer exceeded 10%.
- The 2031 sustainability-linked notes may carry a higher interest rate if the specified emissions-intensity target is not met and verified. Management reported no goodwill impairment at year-end, but identified U.K. and Europe performance for continued monitoring; $1.1 billion of the $1.2 billion goodwill balance related to that segment.
Important facts for investors to verify
- How much of FY2022’s profit improvement is repeatable given commodity-price movements and the unusually high FY2021 litigation expense?
- What are the final cash costs, timing and operating benefits of the U.K. and Europe restructuring?
- What are the potential outcomes and timing of the $255 million Mexican tax assessments and remaining litigation, including DOJ investigations?
- Can PPC sustain operating cash generation while funding planned capital expenditures, debt service and working capital needs?
- Will U.K. and Europe operating performance support the carrying value of its substantial goodwill and acquired intangible assets?
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of December 25, 2022.