Pilgrim's(PPC) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Pilgrim's Pride Corporation's unaudited condensed consolidated financial statements and management's discussion and analysis for the reported periods Item 1. Condensed Consolidated Financial Statements This section presents Pilgrim's Pride Corporation's unaudited condensed consolidated financial statements and accompanying notes for the periods ended June 25, 2023, and December 25, 2022 Condensed Consolidated Balance Sheets Total assets increased by 7.2% to $9.92 billion, driven by higher cash, inventories, and property, plant and equipment | Metric | June 25, 2023 (In thousands) | December 25, 2022 (In thousands) | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | Cash and cash equivalents | $730,980 | $400,988 | $329,992 | 82.3% | | Total current assets | $4,364,834 | $3,891,618 | $473,216 | 12.2% | | Total assets | $9,922,511 | $9,255,769 | $666,742 | 7.2% | | Total current liabilities | $2,542,359 | $2,570,169 | $(27,810) | -1.1% | | Long-term debt, less current maturities | $3,699,607 | $3,166,432 | $533,175 | 16.8% | | Total liabilities | $6,849,923 | $6,402,493 | $447,430 | 7.0% | | Total stockholders' equity | $3,072,588 | $2,853,276 | $219,312 | 7.7% | Condensed Consolidated Statements of Income Net sales decreased by 7.0% for the three months and 4.5% for the six months ended June 25, 2023, leading to significant declines in gross profit and net income | Metric | Three Months Ended June 25, 2023 (In thousands) | Three Months Ended June 26, 2022 (In thousands) | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | Net sales | $4,308,091 | $4,631,648 | $(323,557) | -7.0% | | Gross profit | $278,425 | $676,771 | $(398,346) | -58.9% | | Operating income | $100,271 | $512,904 | $(412,633) | -80.5% | | Net income attributable to Pilgrim's Pride Corporation | $60,456 | $362,116 | $(301,660) | -83.3% | | Diluted EPS | $0.25 | $1.50 | $(1.25) | -83.3% | | Metric | Six Months Ended June 25, 2023 (In thousands) | Six Months Ended June 26, 2022 (In thousands) | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | Net sales | $8,473,719 | $8,872,043 | $(398,324) | -4.5% | | Gross profit | $451,472 | $1,218,751 | $(767,279) | -63.0% | | Operating income | $131,614 | $914,917 | $(783,303) | -85.6% | | Net income attributable to Pilgrim's Pride Corporation | $65,643 | $642,554 | $(576,911) | -89.8% | | Diluted EPS | $0.28 | $2.65 | $(2.37) | -89.4% | Condensed Consolidated Statements of Comprehensive Income Total comprehensive income for the three months ended June 25, 2023, was $163.6 million, a slight decrease from the prior year, while the six-month period saw a 45.9% decrease to $215.6 million | Metric | Three Months Ended June 25, 2023 (In thousands) | Three Months Ended June 26, 2022 (In thousands) | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | Net income | $60,908 | $362,021 | $(301,113) | -83.2% | | Foreign currency translation adjustment (Gains/Losses) | $101,281 | $(199,328) | $300,609 | 150.8% | | Total other comprehensive income (loss), net of tax | $102,700 | $(193,073) | $295,773 | 153.2% | | Comprehensive income | $163,608 | $168,948 | $(5,340) | -3.2% | | Metric | Six Months Ended June 25, 2023 (In thousands) | Six Months Ended June 26, 2022 (In thousands) | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | Net income | $66,539 | $642,581 | $(576,042) | -89.6% | | Foreign currency translation adjustment (Gains/Losses) | $143,925 | $(257,530) | $401,455 | 156.0% | | Total other comprehensive income (loss), net of tax | $149,106 | $(243,978) | $393,084 | 161.1% | | Comprehensive income | $215,645 | $398,603 | $(182,958) | -45.9% | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased by $219.3 million to $3.07 billion, driven by net income and a positive shift in other comprehensive income | Metric | Six Months Ended June 25, 2023 (In thousands) | Six Months Ended June 26, 2022 (In thousands) | Change (In thousands) | |:---|:---|:---|:---| | Balance at beginning of period | $2,853,276 | $2,588,934 | $264,342 | | Net income | $65,643 | $642,554 | $(576,911) | | Other comprehensive income (loss), net of tax | $149,106 | $(243,978) | $393,084 | | Stock-based compensation plans (recognition) | $3,667 | $4,536 | $(869) | | Common stock purchased under share repurchase program | $0 | $(119,989) | $119,989 | | Balance at end of period | $3,072,588 | $2,872,084 | $200,504 | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly decreased to $89.3 million, while financing activities surged to $500.4 million due to new long-term borrowings | Cash Flow Activity | Six Months Ended June 25, 2023 (In millions) | Six Months Ended June 26, 2022 (In millions) | Change (In millions) | % Change | |:---|:---|:---|:---|:---| | Cash provided by operating activities | $89.3 | $421.2 | $(331.9) | -78.8% | | Cash used in investing activities | $(250.9) | $(198.7) | $(52.2) | 26.3% | | Cash provided by financing activities | $500.4 | $56.0 | $444.4 | 793.6% | | Increase in cash, cash equivalents, restricted cash and restricted cash equivalents | $342.2 | $272.5 | $69.7 | 25.6% | | Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period | $777.0 | $722.6 | $54.4 | 7.5% | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures for the condensed consolidated financial statements, covering business operations, accounting policies, and various financial accounts 1. Business and Summary of Significant Accounting Policies Pilgrim's Pride Corporation is a global chicken producer with extensive operations and JBS S.A. holding a majority ownership stake - Pilgrim's Pride Corporation is one of the largest chicken producers globally, with operations in the U.S., U.K., Mexico, France, Puerto Rico, the Netherlands, and the Republic of Ireland[25] - As of June 25, 2023, the company had approximately 61,900 employees and the capacity to process approximately 42.1 million birds and 33,500 pigs per 5-day work week[25] - JBS S.A. beneficially owned 82.6% of the Company's outstanding common stock as of June 25, 2023[25] Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents (In thousands) | Metric | June 25, 2023 (In thousands) | December 25, 2022 (In thousands) | |:---|:---|:---| | Cash and cash equivalents | $730,980 | $400,988 | | Restricted cash and restricted cash equivalents | $46,030 | $33,771 | | Total cash, cash equivalents, restricted cash and restricted cash equivalents | $777,010 | $434,759 | 2. Revenue Recognition Revenue is recognized upon transfer of product control, with total net sales decreasing for both the three and six months ended June 25, 2023 - Revenue is recognized when control of products transfers to the customer, typically upon destination or customer pick-up[37] Net Sales by Segment and Product Type (Three Months Ended, In thousands) | Segment | Prepared (In thousands) | Fresh (In thousands) | Export (In thousands) | Other (In thousands) | Total (In thousands) | |:---|:---|:---|:---|:---|:---| | June 25, 2023 | | | | | | | U.S. | $1,992,208 | $221,655 | $139,498 | $92,847 | $2,446,208 | | U.K. and Europe | $280,707 | $878,720 | $117,103 | $34,220 | $1,310,750 | | Mexico | $473,742 | $49,848 | $0 | $27,543 | $551,133 | | Total Net Sales | $2,746,657 | $1,150,223 | $256,601 | $154,610 | $4,308,091 | | June 26, 2022 | | | | | | | U.S. | $2,312,418 | $303,963 | $141,015 | $142,483 | $2,899,879 | | U.K. and Europe | $232,045 | $791,189 | $184,862 | $36,956 | $1,245,052 | | Mexico | $425,849 | $39,338 | $0 | $21,530 | $486,717 | | Total Net Sales | $2,970,312 | $1,134,490 | $325,877 | $200,969 | $4,631,648 | Revenue Contract Liabilities (In thousands) | Metric | Amount | |:---|:---| | Balance as of December 25, 2022 | $34,486 | | Revenue recognized | $(21,699) | | Cash received, excluding amounts recognized as revenue during the period | $48,446 | | Balance as of June 25, 2023 | $61,233 | 3. Derivative Financial Instruments The company uses derivatives to manage commodity price and foreign currency risks, reporting net derivative liabilities and a $30.0 million loss from undesignated derivatives - The Company uses exchange-traded futures and options to mitigate price risk related to anticipated consumption of commodity inputs (corn, soybean meal, soybean oil, wheat, natural gas, electricity, diesel fuel)[45] - Foreign currency forward contracts are purchased to manage translational foreign exchange risk from operations in Mexico, the U.K., France, the Netherlands, and the Republic of Ireland[46] Fair Values of Derivative Instruments (In thousands) | Metric | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | Commodity derivative assets | $10,706 | $17,922 | | Commodity derivative liabilities | $(34,882) | $(9,042) | | Foreign currency derivative assets | $1,312 | $555 | | Foreign currency derivative liabilities | $(4,484) | $(6,170) | | Sales contract derivative liabilities | $(1,178) | $(3,705) | | Cash collateral posted with brokers | $46,030 | $33,771 | | Corn derivatives coverage | 11.8% (through March 2024) | 14.4% (through December 2023) | | Soybean meal derivatives coverage | 18.2% (through March 2024) | 10.1% (through December 2023) | Gains (Losses) from Undesignated Derivative Instruments (In thousands) | Type of Contract | Three Months Ended June 25, 2023 | Three Months Ended June 26, 2022 | Six Months Ended June 25, 2023 | Six Months Ended June 26, 2022 | Affected Line Item | |:---|:---|:---|:---|:---|:---| | Foreign currency derivatives | $(28,551) | $(5,260) | $(47,654) | $(18,560) | Foreign currency transaction losses | | Commodity derivatives | $188 | $(12,517) | $(16,347) | $19,023 | Cost of sales | | Sales contract derivative liabilities | $(1,637) | $16,849 | $2,528 | $8,182 | Net sales | | Total | $(30,000) | $(928) | $(61,473) | $8,645 | | 4. Trade Accounts and Other Receivables Net receivables increased to $1.16 billion, with a stable allowance for credit losses, and a new $265.0 million receivables purchase agreement was established Trade Accounts and Other Receivables (In thousands) | Metric | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | Trade accounts receivable | $1,051,942 | $984,332 | | Notes receivable from third parties | $48,586 | $33,477 | | Other receivables | $72,544 | $88,962 | | Receivables, gross | $1,173,072 | $1,106,771 | | Allowance for credit losses | $(9,647) | $(9,559) | | Receivables, net | $1,163,425 | $1,097,212 | | Accounts receivable from related parties | $1,697 | $2,512 | Activity in Allowance for Credit Losses (Six Months Ended June 25, 2023, In thousands) | Metric | Amount | |:---|:---| | Balance, beginning of period | $(9,559) | | Provision charged to operating results | $(576) | | Account write-offs and recoveries | $1,166 | | Effect of exchange rate | $(678) | | Balance, end of period | $(9,647) | - In June 2023, the Company entered into a receivables purchase agreement for an uncommitted facility with a maximum capacity of $265.0 million, allowing the sale of eligible trade receivables without recourse[62] 5. Inventories Total inventories increased by 2.9% to $2.05 billion, primarily driven by higher finished products and maintenance materials and parts Inventories (In thousands) | Metric | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | Raw materials and work-in-process | $1,219,819 | $1,204,092 | | Finished products | $651,061 | $596,375 | | Operating supplies | $73,679 | $95,367 | | Maintenance materials and parts | $103,258 | $94,350 | | Total inventories | $2,047,817 | $1,990,184 | 6. Investments in Securities Available-for-sale securities increased to $308.7 million, generating gross realized gains of $4.4 million and $6.3 million for the three and six months ended June 25, 2023, respectively Available-for-Sale Securities (Cash Equivalents, In thousands) | Metric | June 25, 2023 (Fair Value) | December 25, 2022 (Fair Value) | |:---|:---|:---| | Fixed income securities | $308,722 | $167,430 | - Gross realized gains from available-for-sale securities were $4.4 million for the three months and $6.3 million for the six months ended June 25, 2023[65] 7. Goodwill and Intangible Assets Goodwill increased by $55.0 million to $1.28 billion, primarily due to currency translation, while net intangible assets also rose to $868.1 million Goodwill by Segment (Six Months Ended June 25, 2023, In thousands) | Segment | December 25, 2022 | Currency Translation | June 25, 2023 | |:---|:---|:---|:---| | U.S. | $41,936 | $0 | $41,936 | | U.K. and Europe | $1,058,204 | $55,002 | $1,113,206 | | Mexico | $127,804 | $0 | $127,804 | | Total | $1,227,944 | $55,002 | $1,282,946 | Intangible Assets, Net (In thousands) | Metric | December 25, 2022 | Amortization | Currency Translation | June 25, 2023 | |:---|:---|:---|:---|:---| | Trade names not subject to amortization | $549,024 | $0 | $29,591 | $578,615 | | Trade names subject to amortization | $112,057 | $0 | $874 | $112,931 | | Customer relationships | $427,662 | $0 | $13,217 | $440,879 | | Accumulated amortization (Trade names) | $(53,708) | $(1,898) | $(139) | $(55,745) | | Accumulated amortization (Customer relationships) | $(189,015) | $(14,821) | $(4,749) | $(208,585) | | Intangible assets, net | $846,020 | $(16,719) | $38,794 | $868,095 | 8. Property, Plant and Equipment Net property, plant and equipment increased by 4.9% to $3.09 billion, with $286.6 million in capital expenditures and a $4.0 million impairment loss due to restructuring Property, Plant and Equipment, Net (In thousands) | Metric | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | Land | $270,474 | $263,494 | | Buildings | $2,113,264 | $2,065,042 | | Machinery and equipment | $3,746,044 | $3,651,464 | | Autos and trucks | $86,388 | $77,865 | | Finance lease assets | $5,710 | $5,710 | | Construction-in-progress | $474,532 | $358,819 | | PP&E, gross | $6,696,412 | $6,422,394 | | Accumulated depreciation | $(3,610,873) | $(3,481,548) | | PP&E, net | $3,085,539 | $2,940,846 | - Depreciation expense was $96.4 million for the three months and $186.4 million for the six months ended June 25, 2023[68] - Capital expenditures totaled $286.6 million for the six months ended June 25, 2023, including investments in plant expansion and automation projects[69][221] - An additional impairment loss on PP&E of $4.0 million was recognized during the six months ended June 25, 2023, due to restructuring activities in the U.K. and Europe segment[71] 9. Current Liabilities Total current liabilities increased by 1.6% to $2.53 billion, driven by higher revenue contract liabilities, accrued sales rebates, and other accrued expenses Current Liabilities (Excluding Income Taxes and Current Maturities of Long-Term Debt, In thousands) | Metric | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | Trade accounts payable | $1,408,842 | $1,476,552 | | Accounts payable to related parties | $14,718 | $12,155 | | Revenue contract liabilities | $61,233 | $34,486 | | Compensation and benefits | $239,399 | $258,098 | | Litigation settlements | $93,130 | $99,230 | | Accrued sales rebates | $91,195 | $55,002 | | Current maturities of operating lease liabilities | $73,593 | $79,222 | | Insurance and self-insured claims | $67,417 | $72,453 | | Interest and debt-related fees | $43,084 | $32,433 | | Derivative liabilities | $40,543 | $18,917 | | Taxes | $38,752 | $33,550 | | Other accrued expenses | $247,283 | $201,994 | | Total | $2,525,887 | $2,485,479 | 10. Supplier Finance Programs The outstanding balance of confirmed invoices under supplier finance programs significantly decreased to $112.5 million as of June 25, 2023 Outstanding Balance of Confirmed Invoices (In millions) | Metric | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | Outstanding balance of confirmed invoices | $112.5 | $239.6 | 11. Income Taxes The company recorded an income tax benefit of $24.1 million for the six months ended June 25, 2023, resulting in a (56.7)% effective tax rate - For the six months ended June 25, 2023, the Company recorded an income tax benefit of $24.1 million, with a (56.7)% effective tax rate, compared to an income tax expense of $187.9 million (22.6% effective tax rate) in the prior year[76] - The decrease in income tax expense was primarily due to a decrease in profit before income taxes and amplified routine tax adjustments on discrete items due to multi-jurisdictional results[76] - The Company did not believe it had sufficient positive evidence to conclude that realization of a portion of its foreign net deferred tax assets are more likely than not to be realized as of June 25, 2023[77] 12. Debt Long-term debt increased by 16.8% to $3.70 billion, driven by the issuance of $1.0 billion in 6.25% Senior Notes due 2033 Long-Term Debt Components (In thousands) | Metric | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | Senior notes payable, net of discount, at 6.25% (2033) | $993,239 | $0 | | Senior notes payable at 3.50% (2032) | $900,000 | $900,000 | | Senior notes payable, net of discount, at 4.25% (2031) | $992,195 | $991,692 | | Senior notes payable, net of discount, at 5.875% (2027) | $846,941 | $846,582 | | U.S. Credit Facility (Term note payable) | $0 | $480,078 | | Finance lease obligations | $3,149 | $3,624 | | Long-term debt, less current maturities, net of capitalized financing costs | $3,699,607 | $3,166,432 | - On April 19, 2023, the Company completed a sale of $1.0 billion aggregate principal amount of its 6.25% unsecured, registered senior notes due 2033, with proceeds used to repay term loans under the U.S. Credit Facility and for general corporate purposes[89] - As of June 25, 2023, there were no outstanding borrowings under the U.S. Credit Facility, U.K. and Europe Revolving Facility, or Mexico Credit Facility[92][98][100] 13. Stockholders' Equity Accumulated other comprehensive loss decreased significantly to $(187.3) million, primarily due to a positive foreign currency translation adjustment Changes in Accumulated Other Comprehensive Loss (Six Months Ended June 25, 2023, In thousands) | Component | Balance, beginning of period | Other comprehensive income (loss) before reclassifications | Amounts reclassified to net income | Currency translation | Net current period other comprehensive income (loss) | Balance, end of period | |:---|:---|:---|:---|:---|:---|:---| | Losses Related to Foreign Currency Translation | $(269,825) | $143,925 | $0 | $0 | $143,925 | $(125,900) | | Losses on Derivative Financial Instruments Classified as Cash Flow Hedges | $(1,162) | $(1,648) | $(349) | $(11) | $(2,008) | $(3,170) | | Losses Related to Pension and Other Postretirement Benefits | $(65,447) | $7,207 | $342 | $(341) | $7,208 | $(58,239) | | Losses on Available-for-Sale Securities | $(14) | $(41) | $22 | $0 | $(19) | $(33) | | Total | $(336,448) | $149,443 | $15 | $(352) | $149,106 | $(187,342) | Amounts Reclassified from Accumulated Other Comprehensive Loss to Net Income (Six Months Ended, In thousands) | Component | June 25, 2023 | June 26, 2022 | Affected Line Item | |:---|:---|:---|:---| | Realized gains (losses) on settlement of foreign currency derivatives (Net sales) | $335 | $(933) | Net sales | | Realized gains (losses) on settlement of foreign currency derivatives (Cost of sales) | $14 | $(288) | Cost of sales | | Realized losses on sale of securities | $(29) | $0 | Interest income | | Realized losses on settlement of interest rate swap derivatives | $0 | $(98) | Interest expense, net of capitalized interest | | Amortization of pension and other postretirement plan actuarial losses | $(448) | $(577) | Miscellaneous, net | | Total before tax | $(128) | $(1,896) | | | Tax benefit | $113 | $165 | | | Total reclassification for the period | $(15) | $(1,731) | | - Both the U.S. Credit Facility and the indentures governing the Company's senior notes restrict, but do not prohibit, the Company from declaring dividends[105] 14. Pension and Other Postretirement Benefits Total retirement plan expenses decreased, and the unfunded benefit obligation for defined benefit plans also saw a reduction - Total expenses recognized under all retirement plans were $7.8 million for the three months and $15.4 million for the six months ended June 25, 2023[107] Funded Status of Defined Benefit Plans (In thousands) | Metric | June 25, 2023 (Pension Benefits) | June 25, 2023 (Other Benefits) | December 25, 2022 (Pension Benefits) | December 25, 2022 (Other Benefits) | |:---|:---|:---|:---|:---| | Unfunded benefit obligation, end of period | $(13,325) | $(1,110) | $(26,014) | $(1,169) | Net Periodic Benefit Costs (Six Months Ended, In thousands) | Component | June 25, 2023 (Pension Benefits) | June 25, 2023 (Other Benefits) | June 26, 2022 (Pension Benefits) | June 26, 2022 (Other Benefits) | |:---|:---|:---|:---|:---| | Interest cost | $5,097 | $22 | $3,224 | $10 | | Estimated return on plan assets | $(4,753) | $0 | $(5,014) | $0 | | Settlement loss | $0 | $0 | $1,167 | $0 | | Expenses paid from assets | $146 | $0 | $188 | $0 | | Amortization of net loss | $440 | $0 | $568 | $0 | | Amortization of past service cost | $8 | $0 | $9 | $0 | | Net costs | $938 | $22 | $142 | $10 | - The Company's expenses related to its defined contribution plans totaled $6.9 million for the three months and $13.7 million for the six months ended June 25, 2023[114] 15. Fair Value Measurement The company measures derivative assets and liabilities at fair value, primarily using Level 1 inputs for derivatives and Level 2 for fixed-rate senior notes Financial Instruments Measured at Fair Value on a Recurring Basis (June 25, 2023, In thousands) | Metric | Level 1 | Level 2 | Total | |:---|:---|:---|:---| | Commodity derivative assets | $10,706 | $0 | $10,706 | | Foreign currency derivative assets | $1,312 | $0 | $1,312 | | Commodity derivative liabilities | $(34,882) | $0 | $(34,882) | | Foreign currency derivative liabilities | $(4,484) | $0 | $(4,484) | | Sales contract derivative liabilities | $0 | $(1,178) | $(1,178) | Carrying Amounts and Estimated Fair Values of Debt Obligations (June 25, 2023, In thousands) | Debt Type | Carrying Amount | Fair Value | |:---|:---|:---| | Fixed-rate senior notes payable at 3.50% (Level 2) | $(900,000) | $(713,439) | | Fixed-rate senior notes payable at 4.25% (Level 2) | $(992,195) | $(849,990) | | Fixed-rate senior notes payable at 5.875% (Level 2) | $(846,940) | $(834,122) | | Fixed-rate senior notes payable at 6.25% (Level 2) | $(993,238) | $(975,490) | | Variable-rate term note payable at 5.00% (Level 3) | $0 | $0 | 16. Restructuring-Related Activities The company initiated restructuring in the U.K. and Europe segment, incurring $68.2 million of the estimated $71.2 million pre-tax charges as of June 25, 2023 - The Company began restructuring initiatives in 2022 to phase out and reduce processing volumes at multiple production facilities throughout the U.K. and Europe reportable segment[125] - Total estimated pre-tax charges are approximately $71.2 million, with $45.7 million estimated to result in cash outlays[126] These activities are expected to be substantially completed by the end of Q3 2023[126] Restructuring Costs Incurred and Expected to be Incurred (In thousands) | Cost Type | Moy Park | Pilgrim's Pride Ltd. | Pilgrim's Food Masters | Total | |:---|:---|:---|:---|:---| | Employee-related costs | $10,972 | $18,546 | $13,120 | $42,638 | | Asset impairment costs | $3,236 | $0 | $4,216 | $7,452 | | Contract termination costs | $248 | $708 | $371 | $1,327 | | Other exit and disposal costs | $7,414 | $6,425 | $5,968 | $19,807 | | Total exit and disposal costs | $21,870 | $25,679 | $23,675 | $71,224 | Costs Incurred Since Earliest Implementation Date (In thousands) | Cost Type | Moy Park | Pilgrim's Pride Ltd. | Pilgrim's Food Masters | Total | |:---|:---|:---|:---|:---| | Employee-related costs | $10,972 | $18,546 | $12,450 | $41,968 | | Asset impairment costs | $3,236 | $0 | $4,141 | $7,377 | | Contract termination costs | $248 | $0 | $0 | $248 | | Other exit and disposal costs | $6,224 | $6,425 | $5,968 | $18,617 | | Total exit and disposal costs | $20,680 | $24,971 | $22,559 | $68,210 | Restructuring Expenses and Cash Outlays (Six Months Ended June 25, 2023, In thousands) | Initiative | Expenses | Cash Outlays | |:---|:---|:---| | Moy Park | $1,355 | $6,174 | | Pilgrim's Pride Ltd. | $14,831 | $6,507 | | Pilgrim's Food Masters | $21,558 | $17,643 | | Total | $37,744 | $30,324 | 17. Related Party Transactions Transactions with related parties, primarily JBS USA Food Company, showed increased sales to $19.9 million and increased cost of goods purchased to $149.9 million Sales to Related Parties (Six Months Ended, In thousands) | Related Party | June 25, 2023 | June 26, 2022 | |:---|:---|:---| | JBS USA Food Company | $16,524 | $9,597 | | JBS Australia Pty. Ltd | $1,690 | $1,396 | | JBS Chile Ltd. | $1,128 | $179 | | Other related parties | $543 | $856 | | Total sales to related parties | $19,885 | $12,028 | Cost of Goods Purchased from Related Parties (Six Months Ended, In thousands) | Related Party | June 25, 2023 | June 26, 2022 | |:---|:---|:---| | JBS USA Food Company | $128,414 | $113,154 | | Seara Meat B.V. | $9,638 | $13,131 | | Penasul UK LTD | $8,290 | $6,423 | | JBS Asia Co Limited | $1,639 | $3,921 | | Other related parties | $1,888 | $463 | | Total cost of goods purchased from related parties | $149,869 | $137,092 | Accounts Receivable and Payable from Related Parties (In thousands) | Metric | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | Accounts receivable from related parties | $1,697 | $2,512 | | Accounts payable to related parties | $14,718 | $12,155 | 18. Reportable Segments The U.S. segment experienced an 11.0% net sales decrease and a 98.9% operating income decline, while U.K. and Europe and Mexico segments saw sales increases Net Sales by Reportable Segment (Six Months Ended, In thousands) | Segment | June 25, 2023 | June 26, 2022 | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | U.S. | $4,878,776 | $5,481,087 | $(602,311) | -11.0% | | U.K. and Europe | $2,550,014 | $2,437,034 | $112,980 | 4.6% | | Mexico | $1,044,929 | $953,922 | $91,007 | 9.5% | | Total | $8,473,719 | $8,872,043 | $(398,324) | -4.5% | Reportable Segment Profit (Operating Income, Six Months Ended, In thousands) | Segment | June 25, 2023 | June 26, 2022 | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | U.S. | $9,159 | $808,273 | $(799,114) | -98.9% | | U.K. and Europe | $27,774 | $(13,792) | $41,566 | -301.4% | | Mexico | $94,894 | $120,408 | $(25,514) | -21.2% | | Total operating income | $131,614 | $914,917 | $(783,303) | -85.6% | Total Assets by Reportable Segment (In thousands) | Segment | June 25, 2023 | December 25, 2022 | |:---|:---|:---| | U.S. | $7,215,483 | $6,847,209 | | U.K. and Europe | $4,297,959 | $4,033,990 | | Mexico | $1,429,248 | $1,292,056 | | Eliminations | $(3,020,179) | $(2,917,486) | | Total assets | $9,922,511 | $9,255,769 | 19. Commitments and Contingencies The company faces various legal proceedings, including antitrust litigation and tax claims, with ongoing settlements and civil investigations by the DOJ - The Company is subject to various legal proceedings and claims, including antitrust and unfair competition lawsuits related to broiler chickens (Broiler Antitrust Litigation) and poultry worker compensation (Poultry Workers Class)[146][149][151] - PPC has settled all claims made by the Broiler DPPs, Broiler CIIPPs, and Broiler EUCPs for an aggregate total of $195.5 million, which have received final court approval[150] - The DOJ has opened civil investigations into human resources antitrust matters and grower contracts and payment practices, and has informed the Company that it is likely to file a civil complaint pursuant to at least one of these investigations[156][157] - In Mexico, the company paid $25.9 million for a 2009 tax claim and is appealing a $287.5 million tax assessment related to the acquisition of Tyson de México[147][148] 20. Business Interruption Insurance The company received $52.5 million and $53.7 million in business interruption insurance proceeds for the three and six months ended June 25, 2023, respectively - The Company received $52.5 million and $53.7 million in proceeds from business interruption insurance for the three and six months ended June 25, 2023, respectively[158] - For the six months ended June 25, 2023, $35.9 million in income from business interruption insurance was recognized in Cost of sales, with $25.3 million in the U.S. segment and $10.6 million in the U.K. and Europe segment[158] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, condition, and operational results, including an executive summary, segment results, liquidity, and EBITDA reconciliation Executive Summary Pilgrim's Pride reported $65.6 million net income and $8.5 billion net sales for the six months ended June 25, 2023, facing inflation and geopolitical impacts while focusing on operational efficiencies Key Financial Highlights (Six Months Ended June 25, 2023, In millions, except per share data) | Metric | Amount | |:---|:---| | Net income attributable to Pilgrim's | $65.6 | | Diluted common share | $0.28 | | Income before tax | $42.5 | | Net sales | $8,473.7 | | Gross profit | $451.5 | | Cash provided by operating activities | $89.3 | | Consolidated operating margin | 1.6% | | EBITDA | $324.2 | | Adjusted EBITDA | $400.7 | - The company continued to experience challenges from inflation in commodity, labor, and other operating costs across all businesses during Q2 2023[161] - The Russia-Ukraine war continued to impact global feed ingredient and energy markets, driving up prices and disrupting supply chains, with Russia's suspension of the Black Sea Grain Initiative potentially exacerbating food prices[161][163][164] - U.K. market prices for pork products continued to recover in Q2 2023, reflecting pig shortages and leading to profitability in U.K. pig farming[174] Results of Operations The company experienced a significant decline in profitability for both the three and six months ended June 25, 2023, driven by decreased U.S. sales and increased costs Three Months Ended June 25, 2023 Compared to the Three Months Ended June 26, 2022 Total net sales decreased by 7.0% to $4.31 billion, with U.S. sales declining by 15.6%, while gross profit fell by 58.9% and operating income by 80.5% Net Sales by Segment (Three Months Ended, In thousands) | Segment | June 25, 2023 | June 26, 2022 | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | U.S. | $2,446,208 | $2,899,879 | $(453,671) | -15.6% | | U.K. and Europe | $1,310,750 | $1,245,052 | $65,698 | 5.3% | | Mexico | $551,133 | $486,717 | $64,416 | 13.2% | | Total net sales | $4,308,091 | $4,631,648 | $(323,557) | -7.0% | Gross Profit by Segment (Three Months Ended, In thousands) | Segment | June 25, 2023 | June 26, 2022 | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | U.S. | $114,105 | $544,636 | $(430,531) | -79.0% | | U.K. and Europe | $87,028 | $68,955 | $18,073 | 26.2% | | Mexico | $77,518 | $63,166 | $14,352 | 22.7% | | Total gross profit | $278,425 | $676,771 | $(398,346) | -58.9% | Operating Income by Segment (Three Months Ended, In thousands) | Segment | June 25, 2023 | June 26, 2022 | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | U.S. | $37,265 | $453,198 | $(415,933) | -91.8% | | U.K. and Europe | $2,513 | $7,848 | $(5,335) | -68.0% | | Mexico | $60,719 | $51,844 | $8,875 | 17.1% | | Total operating income | $100,271 | $512,904 | $(412,633) | -80.5% | - Restructuring activities resulted in losses of $29.7 million for the three months ended June 25, 2023, incurred by the U.K. and Europe reportable segment[190] Six Months Ended June 25, 2023 Compared to the Six Months Ended June 26, 2022 Total net sales decreased by 4.5% to $8.47 billion, with U.S. sales down 11.0%, while gross profit declined by 63.0% and operating income by 85.6% Net Sales by Segment (Six Months Ended, In thousands) | Segment | June 25, 2023 | June 26, 2022 | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | U.S. | $4,878,776 | $5,481,087 | $(602,311) | -11.0% | | U.K. and Europe | $2,550,014 | $2,437,034 | $112,980 | 4.6% | | Mexico | $1,044,929 | $953,922 | $91,007 | 9.5% | | Total net sales | $8,473,719 | $8,872,043 | $(398,324) | -4.5% | Gross Profit by Segment (Six Months Ended, In thousands) | Segment | June 25, 2023 | June 26, 2022 | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | U.S. | $152,434 | $966,640 | $(814,206) | -84.2% | | U.K. and Europe | $171,221 | $108,034 | $63,187 | 58.5% | | Mexico | $128,030 | $144,049 | $(16,019) | -11.1% | | Total gross profit | $451,472 | $1,218,751 | $(767,279) | -63.0% | Operating Income by Segment (Six Months Ended, In thousands) | Segment | June 25, 2023 | June 26, 2022 | Change (In thousands) | % Change | |:---|:---|:---|:---|:---| | U.S. | $9,159 | $808,273 | $(799,114) | -98.9% | | U.K. and Europe | $27,774 | $(13,792) | $41,566 | -301.4% | | Mexico | $94,894 | $120,408 | $(25,514) | -21.2% | | Total operating income | $131,614 | $914,917 | $(783,303) | -85.6% | - Restructuring activities resulted in losses of $37.7 million for the six months ended June 25, 2023, incurred by the U.K. and Europe reportable segment[206] Liquidity and Capital Resources Operating cash flow significantly decreased to $89.3 million, while financing activities provided $500.4 million from new long-term debt, with domestic assets pledged as collateral Available Sources of Liquidity (June 25, 2023, In millions) | Source | Facility Amount | Amount Outstanding | Amount Available | |:---|:---|:---|:---| | Cash and cash equivalents | $0 | $0 | $731.0 | | U.S. Credit Facility | $800.0 | $0 | $774.7 | | Mexico Credit Facility | $87.3 | $0 | $87.3 | | U.K. and Europe Revolver Facility | $190.7 | $0 | $190.7 | Cash Flows from Operating Activities (Six Months Ended, In millions) | Metric | June 25, 2023 | June 26, 2022 | |:---|:---|:---| | Net income | $66.5 | $642.6 | | Net noncash expenses | $151.0 | $177.2 | | Changes in operating assets and liabilities | $(128.9) | $(396.6) | | Cash provided by operating activities | $89.3 | $421.2 | Cash Flows from Investing Activities (Six Months Ended, In millions) | Metric | June 25, 2023 | June 26, 2022 | |:---|:---|:---| | Acquisitions of property, plant and equipment | $(286.6) | $(196.2) | | Proceeds from property insurance recoveries | $20.7 | $0 | | Proceeds from property disposals | $15.0 | $2.4 | | Purchase of acquired businesses, net of cash acquired | $0 | $(4.9) | | Cash used in investing activities | $(250.9) | $(198.7) | Cash Flows from Financing Activities (Six Months Ended, In millions) | Metric | June 25, 2023 | June 26, 2022 | |:---|:---|:---| | Proceeds from revolving line of credit and long-term borrowings | $1,078.1 | $351.1 | | Payments on revolving line of credit, long-term borrowings and finance lease obligations | $(565.7) | $(170.0) | | Payments of capitalized loan costs | $(10.4) | $(3.1) | | Distribution from Tax Sharing Agreement with JBS USA Holdings | $(1.6) | $(2.0) | | Purchase of common stock under share repurchase program | $0 | $(120.0) | | Cash provided by financing activities | $500.4 | $56.0 | - Substantially all domestic inventories and domestic fixed assets are pledged as collateral to secure the obligations under the U.S. Credit Facility[223] Reconciliation of Net Income to EBITDA and Adjusted EBITDA For the six months ended June 25, 2023, EBITDA was $324.2 million and Adjusted EBITDA was $400.7 million, reflecting adjustments for non-recurring items Reconciliation of Net Income to EBITDA and Adjusted EBITDA (Six Months Ended June 25, 2023, In thousands) | Metric | Amount | |:---|:---| | Net income | $66,539 | | Add: Interest expense, net | $78,586 | | Add: Income tax benefit | $(24,065) | | Add: Depreciation and amortization | $203,114 | | EBITDA | $324,174 | | Add: Foreign currency transaction losses | $34,538 | | Add: Litigation settlements | $24,200 | | Add: Restructuring activities losses | $37,744 | | Minus: Property insurance recoveries for Mayfield tornado losses | $(19,086) | | Minus: Net income attributable to noncontrolling interest | $(896) | | Adjusted EBITDA | $400,674 | - Adjusted EBITDA is a non-GAAP measure calculated by adding back certain expenses and deducting certain income items that are not indicative of ongoing operating performance, such as foreign currency transaction losses, litigation settlements, restructuring activities losses, and property insurance recoveries[231] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the company's exposure to market risks from commodity prices, interest rates, and foreign currency exchange rates, and management's mitigation strategies Impact of 10% Increase in Feed Ingredient Prices (Three Months Ended June 25, 2023, In thousands) | Metric | Amount | Impact of 10% Increase | |:---|:---|:---| | Feed ingredient purchases | $1,088,645 | $108,865 | | Feed ingredient inventory | $224,940 | $22,494 | | Net commodity derivative assets | $58,047 | $5,805 | - A hypothetical 10% increase in interest rates would have decreased the fair value of the company's fixed-rate debt by $113.3 million as of June 25, 2023[242] Impact of 10% Change in Mexican Peso Exchange Rate (Three Months Ended June 25, 2023, In thousands) | Metric | Impact of 10% Deterioration | Impact of 10% Appreciation | |:---|:---|:---| | Foreign currency remeasurement gain (loss) | $(15,306) | $18,708 | | Exchange rate of Mexican peso to the U.S. dollar (As reported) | 17.17 | 17.17 | | Exchange rate of Mexican peso to the U.S. dollar (Hypothetical 10% change) | 18.89 | 15.46 | - A 10% weakening in the British pound against the U.S. dollar exchange rate would cause a decrease of $385.2 million in the net assets of the U.K. and Europe subsidiaries, while a 10% strengthening would cause an increase of $470.8 million[248] - The company is experiencing pronounced inflation in the U.S., Mexico, and most of Europe, and is responding by negotiating with customers for cost recovery and focusing on operational efficiencies[251] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 25, 2023, with no material changes in internal control over financial reporting - As of June 25, 2023, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective[258] - No change in the Company's internal control over financial reporting occurred during the three months ended June 25, 2023, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting[259] PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, other information, and a list of exhibits filed with the quarterly report Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 19, 'Commitments and Contingencies,' in Part I, Item 1 of this quarterly report - Information regarding legal proceedings is incorporated by reference from Note 19, 'Commitments and Contingencies,' in Part I, Item 1 of this quarterly report[261] Item 1A. Risk Factors This section highlights potential risks, specifically emphasizing that labor shortages or rising employee-related costs could materially and adversely impact the company's operations - Labor shortages and increased turnover or increases in employee and employee-related costs could have adverse effects on the company's profitability, ability to operate efficiently, and overall financial condition[263] - Additional potential risks and uncertainties are discussed in 'Part I—Item 1A—Risk Factors' and 'Part II—Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations' in the company's 2022 Annual Report[262] Item 5. Other Information No directors or executive officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the fiscal quarter ended June 25, 2023 - None of the Company's directors or executive officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company's fiscal quarter ended June 25, 2023[264] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, indentures for senior notes, and executive officer certifications - The exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, Indentures for Senior Notes (including the 6.25% notes due 2033), the First Amendment to the Fifth Amended and Restated Credit Agreement, and certifications from the Principal Executive Officer and Principal Financial Officer[267] SIGNATURES The report is duly signed on behalf of Pilgrim's Pride Corporation by Matthew Galvanoni, Chief Financial Officer and Chief Accounting Officer, on July 26, 2023 - The report was signed on July 26, 2023, by Matthew Galvanoni, Chief Financial Officer and Chief Accounting Officer of Pilgrim's Pride Corporation[270]