Pilgrims Pride Corp: Form 10-Q for the period ended Sep 24, 2023

Executive Summary

Overview

We reported net income attributable to Pilgrim’s of $186.9 million, or $0.79 per diluted common share, and income before tax totaling $208.6 million, for the nine months ended September 24, 2023. These operating results included net sales of $12.8 billion, gross profit of $797.4 million and $399.6 million of cash provided by operating activities. We generated a consolidated operating margin of 2.6%. For the nine months ended September 24, 2023, we generated EBITDA and Adjusted EBITDA of $628.1 million and $724.7 million, respectively. A reconciliation of net income to EBITDA and Adjusted EBITDA is included below.

Global Economic Conditions

During the third quarter of 2023, we continued to experience challenges from inflation in commodity, labor and other operating costs across all our businesses. The global feed ingredient and energy markets continue to be impacted by the Russia-Ukraine war, driving up prices as supply out of the Black Sea region is disrupted and future production is at risk. Despite inflationary headwinds and subdued consumer demand throughout the U.K. and E.U., we have and will continue to invest in our people, implement supply chain solutions, and conduct customer negotiations for cost recovery. Mexico remains a volatile market given inflationary pressures, an evolving global protein industry, and overall business seasonality.

Russia-Ukraine War Impacts

The Russia-Ukraine war began in February 2022. The impact of the ongoing war and sanctions has not been limited to businesses that operate in Russia and Ukraine and has negatively impacted and will likely continue to negatively impact other global economic markets including where we operate. The impacts have included and may continue to include, but are not limited to, higher prices for commodities, such as food products, ingredients and energy products, increasing inflation in some countries, and disrupted trade and supply chains. The conflict has disrupted shipments of grains, vegetable oils, fertilizer and energy products. Russia’s recent suspension of the Black Sea Grain Initiative, which allowed Ukraine to export grain and other food items, will likely further exacerbate rising food prices and supply chain issues if not reinstated.

The impact on the agriculture markets falls into two main categories: (1) the effect on Ukrainian crop production, as the region is key in global grain production; and (2) the duration of the disruption in trade flows. Safety and financing concerns in the region are restricting export execution, which is in turn forcing grain and oil demand to find alternative supply. The duration of the war and related volatility makes global markets extremely sensitive to growing-season weather in other global grain producing regions and has led to a large risk premium in futures prices. The continued volatility in the global markets as a result of the war has adversely impacted our costs by driving up prices, raising inflation and increasing pressure on the supply of feed ingredients and energy products throughout the global markets. In the third quarter of 2023, Ukraine grain export volumes continued to recover, but still remain below pre-war volumes. Their supply constraints did not have a material impact on our costs during the third quarter. However, if the Black Sea Grain Initiative remains suspended, supply constraints may worsen materially.

In addition, the U.S. government and other governments in jurisdictions in which we operate have imposed sanctions and export controls against Russia, Belarus and interests therein and threatened additional sanctions and controls. The impact of these measures, now and in the future, could adversely affect our business, supply chain or customers.

Raw Materials and Pricing

Our U.S. and Mexico segments use corn and soybean meal as the main ingredients for feed production, while our U.K. and Europe segment uses wheat, soybean meal and barley as the main ingredients for feed production.

U.S. commodity market prices for chicken products during the third quarter of 2023 fluctuated as normal seasonal movements during July were followed by counter-seasonal improvements in August, before ending the quarter trending downwards as pricing reverted to historically average terms. Per the October 2023 U.S. Department of Agriculture (or “USDA”) reports on world agriculture supply and demand estimates (or “WASDE”) and poultry slaughter (or “Poultry Slaughter”), estimated industry ready-to-cook production decreased by 1.9% from the prior year levels. The decrease in ready-to-cook production is due to reduced chicken headcounts.

During the third quarter of 2023, the U.S. chicken market experienced volume demand growth. Retail volumes grew due to contributions from fresh, frozen, and deli. Foodservice distribution volume demand increased, but at relatively lower prices than prior year. Export volume in shipments also increased during the first two months of the third quarter of 2023. Chicken cold storage inventories decreased seasonally from the end of June to the end of September and remain below the five-year historical average. Meanwhile, estimated domestic availability of competing proteins tightened relative to the third quarter of 2022 due to contractions within beef and pork production.

U.S. chicken market prices began the quarter trending below the five-year historical average during the third quarter of 2023, but as production declined and volume demand improved, cold storage inventory positions declined, reflecting a tighter chicken supply, causing a slight improvement in market prices for chicken products before the end of the third quarter of 2023.

During the third quarter of 2023, the U.K. chicken market saw an increase in labor costs due to the national living wages change in April 2023. Through our current customer models and additional negotiations we have offset the majority of these cost increases. Our utilities and feed ingredient costs continued to decrease in the third quarter of 2023 from the beginning of the year. We continue to focus on managing costs, including labor and yield efficiencies, agricultural performance and increasing operational efficiency through investments in capital projects.

Commodity prices for chicken in Mexico were above prior year prices throughout the quarter, but steadily declining and ended the quarter below prior year levels.

Prices for the remainder of the year will depend on (1) the evolution of foodservice, retail and export meat demand and (2) factors such as government regulation, the ongoing Russia-Ukraine war, feed production input costs, further spread of avian influenza both domestically and abroad, uncertainty surrounding the general economy and overall protein supply.

U.K. market prices for pork products have continued to recover during the third quarter of 2023, with growth during the quarter continuing the upward trend from 2022, reflecting pig shortages from a 20% reduction of the English sow herd during 2022. This was underpinned by growth throughout the year of pig prices in the U.K. market, which also had a reduction in supply. U.K. pig prices have remained high during the third quarter, whereas E.U. pig prices decreased during the quarter and are now 6% below U.K. pig prices. Due to increased market pricing and stabilization of feed prices, U.K. pig farming became profitable in the second quarter of 2023 and remains profitable in the third quarter of 2023.

U.K. prices for prepared foods have remained at elevated levels from inflationary pressure, primarily from increased pork prices. We continue to focus on partnering with our Key Customers and increasing operational efficiency.

Reportable Segments

We operate in three reportable segments: U.S., U.K. and Europe, and Mexico. We measure segment profit as operating income. Certain corporate expenses are allocated to the Mexico and U.K. and Europe reportable segments based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. For additional information, see “Note 18. Reportable Segments” of our Condensed Consolidated Financial Statements included in this quarterly report.

Results of Operations

Three Months Ended September 24, 2023 Compared to the Three Months Ended September 25, 2022

Net sales. Net sales generated in the three months ended September 24, 2023 decreased $108.8 million, or 2.4%, from net sales generated in the three months ended September 25, 2022. The following table provides net sales information:

(In thousands, except percent data)

U.S. Reportable Segment. U.S. net sales generated in the three months ended September 24, 2023 decreased $348.6 million, or 12.3%, from U.S. net sales generated in the three months ended September 25, 2022 primarily due to a decrease in net sales per pound of $417.8 million, or 14.7 percentage points. The decrease in net sales per pound was partially offset by an increase in sales volume of $69.2 million, or 2.4 percentage points. The decrease in net sales per pound was driven primarily by market pricing that was below prior year levels.

U.K. and Europe Reportable Segment. U.K. and Europe net sales generated in the three months ended September 24, 2023 increased $109.1 million, or 9.1%, from U.K. and Europe net sales generated in the three months ended September 25, 2022 primarily due to a favorable impact of foreign currency translation of $88.6 million, or 7.4 percentage points, and an increase in net sales per pound of $33.9 million, or 2.8 percentage points, partially offset by a decrease in sales volume of $13.4 million, or 1.1 percentage points. The increase in net sales per pound was driven by price increases necessary to recover increased feed ingredients, labor, utilities and other operating costs.

Mexico Reportable Segment. Mexico net sales generated in the three months ended September 24, 2023 increased $130.7 million, or 30.5%, from Mexico net sales generated in the three months ended September 25, 2022 primarily due to an increase from the impact of foreign currency remeasurement of $88.1 million, or 20.6 percentage points, and an increase in sales volume of $46.1 million, or 10.7 percentage points, partially offset by a decrease in net sales per pound of $3.5 million, or 0.8 percentage points. The increase in sales volume was due to a shift in product mix related to market demands and recovery from challenges in bird disease in 2022. The decrease in net sales per pound resulted from a decrease in commodity prices.

Gross profit and cost of sales. Gross profit decreased by $151.4 million, or 30.4%, from $497.3 million generated in the three months ended September 25, 2022 to $345.9 million generated in the three months ended September 24, 2023. The following tables provide information regarding gross profit and cost of sales information:

(In thousands, except percent data)

(In thousands, except percent data)

(1) This Y/Y change is designated not meaningful (or “NM”).

(In thousands, except percent data)

38

U.S. Reportable Segment. Cost of sales incurred by our U.S. operations during the three months ended September 24, 2023 decreased $74.0 million, or 3.1%, from cost of sales incurred by our U.S. segment during the three months ended September 25, 2022. The decrease in cost of sales was primarily driven by a decrease in cost per pound sold of $132.4 million, or 5.5 percentage points, partially offset by an increase in sales volume of $58.4 million, or 2.4 percentage points. The decrease in cost per pound sold was driven by a decrease in live operations costs of $97.3 million, which resulted primarily from decreased feed ingredient costs. Prices for both corn and soy, our main ingredients in feed, were down versus prior year.

U.K. and Europe Reportable Segment. Cost of sales incurred by our U.K. and Europe operations during the three months ended September 24, 2023 increased $65.6 million, or 5.7%, from cost of sales incurred by our U.K. and Europe segment during the three months ended September 25, 2022. The increase in cost of sales was primarily driven by the unfavorable impact of foreign currency translation of $82.1 million, or 7.2 percentage points, partially offset by the impact of decreased sales volume of $11.6 million, or 1.1 percentage points, and a decrease in cost per pound sold of $4.9 million, or 0.4 percentage points.

Mexico Reportable Segment. Cost of sales incurred by our Mexico operations during the three months ended September 24, 2023 increased $50.9 million, or 11.9%, from cost of sales incurred by our Mexico segment during the three months ended September 25, 2022. This increase was driven by an unfavorable impact of foreign currency remeasurement and an increase in volume of $75.7 million, or 17.7 percentage points, and $46.1 million, or 10.7 percentage points, respectively. These increases in cost of sales were partially offset by a decrease in cost per pound sold of $70.9 million, or 16.5 percentage points. The increase in sales volume was due to a shift in product mix related to market demands. The decrease in cost per pound sold resulted from a decrease in commodity prices, hatchery egg costs, and the prior year recognition of additional costs related to bird diseases losses.

Operating income and SG&A expense. Operating income decreased by $132.8 million, or 39.2%, from income of $339.2 million generated in the three months ended September 25, 2022 to income of $206.4 million generated in the three months ended September 24, 2023. The following tables provide information regarding operating income and selling, general and administrative (“SG&A”) expense:

(In thousands, except percent data)

(In thousands, except percent data)

39

U.S. Reportable Segment. SG&A expense incurred by our U.S. reportable segment during the three months ended September 24, 2023 decreased $37.5 million, or 35.1%, from SG&A expense incurred by our U.S. reportable segment during the three months ended September 25, 2022. The decrease in SG&A expense resulted primarily from lower legal defense costs, lower incentive compensation expense, and a net decrease in one-time legal settlements recognized in the current year versus the prior year. Other factors affecting U.S. SG&A expense were individually immaterial.

U.K. and Europe Reportable Segment. SG&A expense incurred by our U.K. and Europe reportable segment during the three months ended September 24, 2023 increased $13.9 million, or 36.4%, from SG&A expense incurred by our U.K. and Europe segment during the three months ended September 25, 2022. The increase in SG&A expense was the result of a one-time research and development tax credit recognized in the prior year, increase in payroll and benefit costs, and the unfavorable impact of foreign currency translation. Other factors affecting U.K. and Europe SG&A expense were individually immaterial.

Mexico Reportable Segment. SG&A expense incurred by our Mexico reportable segment during the three months ended September 24, 2023 increased approximately $4.1 million, or 31.1%, from SG&A expense incurred by our Mexico segment during the three months ended September 25, 2022. The primary driver of the increase in SG&A expense was increased payroll costs, fees and licenses, and the unfavorable impact of foreign currency remeasurement. Other factors affecting Mexico SG&A expense were individually immaterial.

Restructuring activities. Losses on restructuring activities of $0.9 million were recognized in the three months ended September 24, 2023. These losses were incurred by our U.K. and Europe reportable segment as a result of the implementation of multiple restructuring initiatives which began in the fourth quarter of 2022.

Net interest expense. Net interest expense decreased to $33.5 million recognized in the three months ended September 24, 2023 from $34.2 million recognized in the three months ended September 25, 2022. The decrease in net interest expense resulted primarily from an increase in interest income earned from investments in available-for-sale securities, partially offset by an increase in interest expense due to increased borrowings and increased rates of interest. Average borrowings increased by $0.4 billion from $3.4 billion during the three months ended September 25, 2022 to $3.8 billion during the three months ended September 24, 2023 and the weighted average rate of interest increased by 0.8 percentage points. As a percent of net sales, net interest expense in the three months ended September 24, 2023 and September 25, 2022 was 0.8%.

Income taxes. Income tax expense decreased to $44.6 million, a 26.8% effective tax rate, for the three months ended September 24, 2023 compared to an income tax expense of $65.7 million, a 20.2% effective tax rate, for the three months ended September 25, 2022. The decrease in income tax expense in 2023 resulted primarily from the decrease of profit before income taxes.

Nine Months Ended September 24, 2023 Compared to the Nine Months Ended September 25, 2022

Net sales. Net sales generated in the nine months ended September 24, 2023 decreased $507.1 million, or 3.8%, from net sales generated in the nine months ended September 25, 2022. The following table provides net sales information:

(In thousands, except percent data)

U.S. Reportable Segment. U.S. net sales generated in the nine months ended September 24, 2023 decreased $950.9 million, or 11.4%, from U.S. net sales generated in the nine months ended September 25, 2022 primarily due to a decrease in net sales per pound of $1.1 billion, or 12.8 percentage points. The decrease in net sales per pound was partially offset by an increase in sales volume of $114.2 million, or 1.4 percentage points. The decrease in net sales per pound was driven primarily by market pricing that was below prior year levels.

U.K. and Europe Reportable Segment. U.K. and Europe net sales generated in the nine months ended September 24, 2023 increased $222.1 million, or 6.1%, from U.K. and Europe net sales generated in the nine months ended September 25, 2022 primarily due to an increase in net sales per pound of $411.7 million, or 11.3 percentage points, partially offset by a decrease in sales volume of $140.2 million, or 3.9 percentage points, and the impact of foreign currency translation of $49.4 million, or 1.3 percentage points. The increase in net sales per pound was driven by price increases necessary to recover increased feed ingredients, labor, utilities and other operating costs.

Mexico Reportable Segment. Mexico net sales generated in the nine months ended September 24, 2023 increased $221.7 million, or 16.0%, from Mexico net sales generated in the nine months ended September 25, 2022 primarily due to an increase from the impact of foreign currency remeasurement of $191.0 million, or 13.8 percentage points, and an increase in sales volume of $35.7 million, or 2.6 percentage points, partially offset by a decrease in net sales per pound of $5.0 million, or 0.4 percentage points. The increase in sales volume was due to a shift in product mix related to market demands.

Gross profit and cost of sales. Gross profit decreased by $918.7 million, or 53.5%, from $1.7 billion generated in the nine months ended September 25, 2022 to $797.4 million generated in the nine months ended September 24, 2023. The following tables provide information regarding gross profit and cost of sales information:

(In thousands, except percent data)

(In thousands, except percent data)

(In thousands, except percent data)

41

U.S. Reportable Segment. Cost of sales incurred by our U.S. operations during the nine months ended September 24, 2023 increased $137.9 million, or 2.0%, from cost of sales incurred by our U.S. segment during the nine months ended September 25, 2022. The increase in cost of sales was primarily driven by an increase in sales volume of $94.8 million, or 1.4 percentage points, and an increase in cost per pound sold of $43.1 million, or 0.6 percentage points. The increase in cost per pound sold was primarily from an increase in live operations costs. The increase in live operations costs was from increased chick costs and grower costs.

U.K. and Europe Reportable Segment. Cost of sales incurred by our U.K. and Europe operations during the nine months ended September 24, 2023 increased $115.4 million, or 3.3%, from cost of sales incurred by our U.K. and Europe segment during the nine months ended September 25, 2022. The increase in cost of sales was primarily driven by an increase in cost per pound sold of $292.4 million, or 8.5 percentage points, partially offset by decreased sales volume of $131.1 million, or 3.9 percentage points, and the impact of foreign currency translation of $45.9 million, or 1.3 percentage points. The increase in cost per pound sold was driven by inflation in feed ingredients, labor, utilities and other operating costs.

Mexico Reportable Segment. Cost of sales incurred by our Mexico operations during the nine months ended September 24, 2023 increased $157.9 million, or 12.7%, from cost of sales incurred by our Mexico segment during the nine months ended September 25, 2022. This increase was driven by the unfavorable impact of foreign currency remeasurement and increased sales volume of $166.4 million, or 13.4 percentage points, and $32.0 million, or 2.6 percentage points, respectively. These increases in cost of sales were partially offset by a decrease in cost per pound sold of $40.5 million, or 3.3 percentage points. The decrease in cost per pound sold was driven by reduced input costs, such as feed ingredients, and the prior year incurrence of increased costs related to the impacts of bird disease. The increase in sales volume was due to a shift in product mix related to market demands.

Operating income and SG&A expense. Operating income decreased by $916.1 million, or 73.0%, from income of $1,254.1 million generated in the nine months ended September 25, 2022 to income of $338.0 million generated in the nine months ended September 24, 2023. The following tables provide information regarding operating income and selling, general and administrative (“SG&A”) expense:

(In thousands, except percent data)

(In thousands, except percent data)

(1) This Y/Y change is designated not meaningful (or “NM”).

U.S. Reportable Segment. SG&A expense incurred by our U.S. reportable segment during the nine months ended September 24, 2023 decreased $52.6 million, or 19.8%, from SG&A expense incurred by our U.S. reportable segment during the nine months ended September 25, 2022. The decrease in SG&A expense resulted primarily from a decrease in recognition of legal defense costs and a decrease in incentive compensation expense, partially offset by a net increase in one-time legal settlements. Other factors affecting U.S. SG&A expense were individually immaterial.

U.K. and Europe Reportable Segment. SG&A expense incurred by our U.K. and Europe reportable segment during the nine months ended September 24, 2023 decreased $2.2 million, or 1.4%, from SG&A expense incurred by our U.K. and Europe segment during the nine months ended September 25, 2022. The decrease in SG&A expense was a result of targeted cost savings in general and administrative spend. Other factors affecting U.K. and Europe SG&A expense were individually immaterial.

Mexico Reportable Segment. SG&A expense incurred by our Mexico reportable segment during the nine months ended September 24, 2023 increased $13.6 million, or 37.0%, from SG&A expense incurred by our Mexico segment during the nine months ended September 25, 2022. The primary driver of the increase in SG&A expense was the unfavorable impact of foreign currency remeasurement, increased marketing costs ,and increased payroll costs. Other factors affecting Mexico SG&A expense were individually immaterial.

Restructuring activities. Losses on restructuring activities of $38.7 million were recognized in the nine months ended September 24, 2023. These losses were incurred by our U.K. and Europe reportable segment as a result of the implementation of multiple restructuring initiatives which began in the fourth quarter of 2022.

Net interest expense. Net interest expense increased to $112.1 million recognized in the nine months ended September 24, 2023 from $106.3 million recognized in the nine months ended September 25, 2022. The increase in net interest expense resulted primarily from interest expense on outstanding borrowings due to increased borrowings and increased rates and an increase of $1.7 million in amortization of capitalized loan costs related to the repayment of the U.S. term loans, partially offset by an increase in interest income earned on investments in available-for-sale securities. Average borrowings increased by $0.2 billion from $3.4 billion during the nine months ended September 25, 2022 to $3.6 billion during the nine months ended September 24, 2023 and the weighted average rate of interest increased by 0.8 percentage points. As a percent of net sales, net interest expense in the nine months ended September 24, 2023 and September 25, 2022 was 0.9% and 0.8%, respectively.

Income taxes. Income tax expense decreased to $20.5 million, a 9.8% effective tax rate, for the nine months ended September 24, 2023 compared to an income tax expense of $253.7 million, a 21.9% effective tax rate, for the nine months ended September 25, 2022. The decrease in income tax expense in 2023 resulted primarily from the decrease in profit before income taxes.

Liquidity and Capital Resources

The following table presents our available sources of liquidity as of September 24, 2023:

(In millions)

(a) Availability under the 2021 U.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at September 24, 2023 totaled $25.1 million.

(b) The U.S. dollar-equivalent of the facility amount under the Mexico Credit Facility is $87.2 million (Mex$1.5 billion).

(c) The U.S. dollar-equivalent of the facility amount under the Mexico BBVA Credit Facility is $64.5 million (Mex$1.1 billion).

(d) The U.S. dollar-equivalent of the facility amount under the U.K. and Europe Revolver Facility is $183.6 million (£150.0 million).

On October 12, 2023, we completed a sale of $500.0 million aggregate principal amount of unsecured, registered, senior notes due 2034 (“Senior Notes due 2034”). The issuance price of this offering to the public was 98.041%, which created gross proceeds of $490.2 million before transaction costs. We used the net proceeds from the offering of the Senior Notes due 2034, together with cash on hand, to purchase for cash the Senior Notes due 2027 through a tender offer and subsequent redemption of remaining outstanding notes. As of October 12, 2023, $812.8 million principal amount of the Senior Notes due

2027 had been validly tendered and purchased by us. The remaining outstanding Senior Notes due 2027 were purchased by us on October 16, 2023.

On October 4, 2023, we entered into a Revolving Syndicated Facility Agreement with CoBank, ACB as administrative agent and collateral agent (the “RCF”). The RCF replaced our 2021 U.S. Credit Facility. The RCF increased our availability under the revolving loan commitment from $800.0 million to $850.0 million and extended the maturity date from August 2026 to October 2028.

On August 15, 2023, we entered into an unsecured credit agreement (the “Mexico BBVA Credit Facility”) with BBVA México as lender. The loan commitment under the Mexico BBVA Credit Facility is Mex$1.1 billion and can be borrowed on a revolving basis. Outstanding borrowings under the Mexico BBVA Credit Facility accrue interest at a rate equal to TIIE plus 1.35%. The Mexico BBVA Credit Facility will be used for general corporate and working capital purposes. The Mexico BBVA Credit Facility will mature on August 15, 2026.

We expect cash flows from operations, combined with availability under our credit facilities, to provide sufficient liquidity to fund current obligations, projected working capital requirements, maturities of long-term debt and capital spending for at least the next twelve months.

Historical Flow of Funds

(In millions)

Net Noncash Expenses

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $269.4 million for the nine months ended September 24, 2023. Net noncash expense items included depreciation and amortization of $307.4 million, loan cost amortization of $6.1 million, stock-based compensation of $5.2 million, asset impairment of $4.0 million, accretion of discounts related to Senior Notes of $1.6 million, and loss on equity method investment of $0.3 million. These expense items were partially offset by a deferred income tax benefit of $46.8 million and gains on property disposals of $8.4 million.

Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $258.3 million for the nine months ended September 25, 2022. Net noncash expense items included depreciation and amortization of $301.0 million, stock-based compensation of $6.0 million, loan cost amortization of $4.3 million and accretion of discounts related to Senior Notes of $1.3 million. These expense items were partially offset by a deferred income tax benefit of $48.6 million and gains on property disposals of $5.6 million.

Changes in Operating Assets and Liabilities

The change in trade accounts and other receivables represented a $65.2 million use of cash related to operating activities for the nine months ended September 24, 2023. This change primarily resulted from an increase in trade accounts receivable from increased sales prices in the U.K. and Mexico and increased volumes. The change in trade accounts and other receivables represented a $211.8 million use of cash related to operating activities for the nine months ended September 25, 2022. This change primarily resulted from an increase in trade accounts receivable due to increased sales prices.

The change in inventories represented a $13.0 million use of cash related to operating activities for the nine months ended September 24, 2023. This change resulted primarily from increased finished goods inventories. The change in inventories represented a $455.5 million use of cash related to operating activities for the nine months ended September 25, 2022. This change resulted primarily from increased raw material costs, such as feed ingredients, and a build-up of our finished goods inventories.

The change in prepaid expenses and other current assets represented a $8.0 million use of cash related to operating activities for the nine months ended September 24, 2023. This change resulted primarily from a net increase in prepaid insurance and prepaid maintenance of information technology. The change in prepaid expenses and other current assets represented a $3.5 million use of cash related to operating activities for the nine months ended September 25, 2022. This change resulted primarily from a net decrease in commodity derivative assets.

The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities represented a $12.2 million source of cash related to operating activities for the nine months ended September 24, 2023. This change resulted primarily from timing of payments to our suppliers, a reduction in grain input costs, an increase in our revenue contract liabilities and year-to-date fair value fluctuations of our derivative instruments. The change in accounts payable, revenue contract liabilities, accrued expenses and other current liabilities represented a $297.3 million source of cash related to operating activities for the nine months ended September 25, 2022. This change resulted primarily from increased cost of feed ingredients and other input costs and the timing of payments.

The change in income taxes, which includes income taxes receivable, income taxes payable, deferred tax assets, deferred tax liabilities, reserves for uncertain tax positions, and the tax components within accumulated other comprehensive loss, represented a $40.5 million and $10.2 million source of cash related to improved operating results for the nine months ended September 24, 2023 and September 25, 2022, respectively.

(In millions)

Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs for the nine months ended September 24, 2023 and September 25, 2022. Capital expenditures in 2023 also included investments in the Athens, GA plant expansion, the South Georgia protein conversion plant and other automation projects. Proceeds from property disposals were primarily for the sale of a farm in Mexico. Proceeds from property insurance recoveries reflects cash received on insurance claims related to the property losses incurred from the Mayfield, Kentucky tornado that occurred in December 2021.

(In millions)

Proceeds from revolving line of credit and long-term borrowings include the $1.0 billion issuance of the U.S. Senior Notes Due 2033 in April 2023, less a $6.8 million discount, borrowings on the U.S. revolving credit facility of $235.0 million, and borrowings on the U.K. and Europe revolving credit facility of $49.9 million. Payments on revolving line of credit, long-term borrowings and finance lease obligations include a pay down of $480.1 million on the U.S. term loan, repayments of all $285.1 million borrowings under both the U.S. and U.K. revolving credit facilities, and $0.6 million in payments of finance lease obligations. Payments of capitalized loan costs include costs incurred in relation to the issuance of the U.S. Senior Notes due 2033. The distribution from Tax Sharing Agreement with JBS USA Holdings is payment of net tax incurred during the tax year 2022 under the tax sharing agreement.

Debt

Our long-term debt and other borrowing arrangements consist of senior notes, revolving credit facilities and other term loan agreements. For a description, refer to “Note 12. Debt.”

Collateral

Substantially all of our domestic inventories and domestic fixed assets are pledged as collateral to secure the obligations under the 2021 U.S. Credit Facility. See “Note 12. Debt” for changes to collateral for the Revolving Syndicated Facility Agreement entered into in October 2023.

Obligor Group Summarized Financial Information

All of the senior unsecured registered notes (collectively, the “Pilgrim’s Senior Notes”) issued by Pilgrim’s Pride Corporation prior to September 24, 2023 are fully and unconditionally guaranteed by Pilgrim’s Pride Corporation of West Virginia Inc., JFC LLC, Gold’n Plump Farms LLC and Gold’n Plump Poultry LLC (the “Subsidiary Guarantors”). See “Note 12. Debt” of our Condensed Consolidated Financial Statements included in this quarterly report for additional descriptions of these guarantees.

The following tables present summarized financial information for Pilgrim’s Pride Corporation parent company only (as issuer of the Pilgrim’s Senior Notes) and the Subsidiary Guarantors (together, the “Obligor Group”), on a combined basis after the elimination of all intercompany balances and transactions between Pilgrim’ Pride Corporation parent company only and the Subsidiary Guarantors and investments in any non-obligated subsidiary.

(In millions)

(a) Represents receivables and short-term lending due from and payables and short-term lending due to non-obligated subsidiaries.

(b) Represents receivables due from and payables due to JBS affiliates.

(In millions)

(a) For the nine months ended September 24, 2023, the Obligor Group recognized $127.0 million of net sales to the non-obligated subsidiaries and no purchases from the non-obligated subsidiaries.

Recent Accounting Pronouncements

See “Note 1. Business and Summary of Significant Accounting Policies” of our Condensed Consolidated Financial Statements included in this quarterly report for additional information relating to these recent accounting pronouncements.

Critical Accounting Policies and Estimates

As of the date of this report, there have been no significant changes to our critical accounting policies and estimates from those described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operations-Critical Accounting Policies and Estimates” in our annual report on Form 10-K for the fiscal year ended December 25, 2022, filed with the Securities and Exchange Commission (the “SEC”) on February 9, 2023 (the “2022 Annual Report”).

Reconciliation of Net Income to EBITDA and Adjusted EBITDA

“EBITDA” is defined as the sum of net income (loss) plus interest, taxes, depreciation and amortization. “Adjusted EBITDA” is calculated by adding to EBITDA certain items of expense and deducting from EBITDA certain items of income that we believe are not indicative of our ongoing operating performance consisting of: (1) foreign currency transaction losses, (2) costs related to litigation settlements, (3) restructuring activities losses, (4) property insurance recoveries for Mayfield, Kentucky tornado property damage losses, and (5) net income attributable to noncontrolling interests. EBITDA is presented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of results prepared in conformity with U.S. GAAP, to compare the performance of companies. We believe investors would be interested in our Adjusted EBITDA because this is how our management analyzes EBITDA applicable to continuing operations. We also believe that Adjusted EBITDA, in combination with our financial results calculated in accordance with U.S. GAAP, provides investors with additional perspective regarding the impact of certain significant items on EBITDA and facilitates a more direct comparison of our performance with our competitors. EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Some of the limitations of these measures are:

• They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
• They do not reflect changes in, or cash requirements for, our working capital needs;
• They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
• Although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
• They are not adjusted for all noncash income or expense items that are reflected in our statements of cash flows;
• EBITDA does not reflect the impact of earnings or charges attributable to noncontrolling interests;
• They do not reflect the impact of earnings or charges resulting from matters we consider to not be indicative of our ongoing operations; and
• They do not reflect limitations on or costs related to transferring earnings from our subsidiaries to us.

In addition, other companies in our industry may calculate these measures differently than we do, limiting their usefulness as a comparative measure. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with U.S. GAAP. You should compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only on a supplemental basis.

(In thousands)

48

Market Risk-Sensitive Instruments and Positions

The risk inherent in our market risk-sensitive instruments and positions is primarily the potential loss arising from adverse changes in commodity prices, foreign currency exchange rates, interest rates and the credit quality of available-for-sale securities as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions our management may take to mitigate our exposure to such changes. Actual results may differ from those described below.

Commodity Prices

We purchase certain commodities, primarily corn, soybean meal, soybean oil, and wheat, for use as ingredients in the feed we either sell commercially or consume in our live operations. As a result, our earnings are affected by changes in the price and availability of such feed ingredients. We have from time to time attempted to minimize our exposure to the changing price and availability of such feed ingredients using various techniques, including, but not limited to, (1) executing purchase agreements with suppliers for future physical delivery of feed ingredients at established prices and (2) purchasing or selling derivative financial instruments such as futures and options.

For this sensitivity analysis, market risk is estimated as a hypothetical 10% increase in the weighted-average cost of our primary feed ingredients as of the periods presented. The impact of this fluctuation, if realized, could be mitigated by related commodity hedging activity. However, fluctuations greater than 10% could occur.

(In thousands)

(a) Based on our feed consumption, a 10% increase in the price of our feed ingredient purchases would have increased cost of sales for the three months ended September 24, 2023.

(b) A 10% increase in ending feed ingredient prices would have increased inventories as of September 24, 2023.

(In thousands)

(a) We purchase commodity derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our anticipated consumption of commodity inputs for the next 12 months. A 10% increase in corn, soybean meal, soybean oil and wheat prices would have resulted in an increase in the fair value of our net commodity derivative asset position, including margin cash, as of September 24, 2023.

Interest Rates

Fixed-rate debt. Market risk for fixed-rate debt is estimated as the potential decrease in fair value resulting from a hypothetical increase in interest rates of 10%. Using a discounted cash flow analysis, a hypothetical 10% increase in interest rates would have decreased the fair value of our fixed-rate debt by $110.3 million as of September 24, 2023.

Foreign Currency

Mexico Subsidiaries

Our earnings are also affected by foreign exchange rate fluctuations related to the Mexican peso net monetary position of our Mexico subsidiaries. We manage this exposure primarily by attempting to minimize our Mexican peso net monetary position. We are also exposed to the effect of potential currency exchange rate fluctuations to the extent that amounts are repatriated from Mexico to the U.S. We currently anticipate that the future cash flows of our Mexico subsidiaries will be reinvested in our Mexico operations.

The Mexican peso exchange rate can directly and indirectly impact our financial condition and results of operations. For this sensitivity analysis, market risk is estimated as a hypothetical 10% change in the current exchange rate used to convert Mexican pesos to U.S. dollars as of September 24, 2023. However, fluctuations greater than 10% could occur. No assurance can be given as to how future movements in the Mexican peso could affect our future financial condition or results of operations.

(In thousands, except for exchange rate data)

U.K. and Europe Foreign Investments

We are exposed to foreign exchange-related variability of investments and earnings from our U.K. and Europe subsidiaries. Foreign currency market risk is the possibility that our financial results or financial position could be better or worse than planned because of changes in foreign currency exchange rates. For this sensitivity analysis, market risk is estimated as a hypothetical 10% change in exchange rates used to convert U.S. dollars to British pound and to euro, and the effect of this change on our U.K. and Europe foreign investments.

Net Assets. As of September 24, 2023, our U.K. and Europe subsidiaries that are denominated in British pounds had net assets of $4.0 billion. A 10% weakening in British pound against the U.S. dollar exchange rate would cause a decrease in the net assets of our U.K. and Europe subsidiaries by $366.2 million. A 10% strengthening in the British pound against the U.S dollar exchange rate would cause an increase in the net assets of our U.K. and Europe subsidiaries of $447.6 million.

Cash flow hedging transactions. We periodically enter into foreign currency forward contracts, which are designated and qualify as cash flow hedges, to hedge foreign currency risk on a portion of sales generated and purchases made by our U.K. and Europe subsidiary. A 10% weakening or strengthening of the U.S. dollar against the British pound and U.S. dollar against the euro would result in immaterial changes in the fair values of these derivative instruments. No assurance can be given as to how future movements in currency rates could affect our future financial condition or results of operations.

Quality of Investments

Certain retirement plans that we sponsor invest in a variety of financial instruments. We have analyzed our portfolios of investments and, to the best of our knowledge, none of our investments, including money market funds units, commercial paper and municipal securities, have been downgraded, and neither we nor any fund in which we participate hold significant amounts of structured investment vehicles, auction rate securities, collateralized debt obligations, credit derivatives, hedge funds investments, fund of funds investments or perpetual preferred securities. Certain postretirement funds in which we participate hold significant amounts of mortgage-backed securities. However, none of the mortgages collateralizing these securities are considered subprime.

Impact of Inflation

The U.S., Mexico and most of Europe recently experienced pronounced inflation. None of the locations in which we operate are experiencing hyperinflation. We have responded to these inflationary challenges by continuing negotiations with customers to recoup the extraordinary costs we have experienced. We also continue to focus on operational initiatives that aim to deliver labor efficiencies, better agricultural performance and improved yields.

Forward Looking Statements

Certain written and oral statements made by our Company and subsidiaries of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made herein, in our other filings with the SEC, in press releases, and in certain other oral and written presentations. Statements of our intentions, beliefs, expectations or predictions for the future, denoted by the words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “imply,” “intend,” “should,” “foresee” and similar expressions, are forward-looking statements that reflect our current views about future events and are subject to risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include the following:

• The impact of the COVID-19 pandemic, efforts to contain the pandemic and resulting economic downturn on our operations and financial condition;
• Matters affecting the chicken and pork industries generally, including fluctuations in the commodity prices of feed ingredients, pigs and chicken;
• Our ability to obtain and maintain commercially reasonable terms with vendors and service providers;
• Our ability to maintain contracts that are critical to our operations;
• Our ability to retain management and other key individuals;
• Outbreaks of avian influenza or other diseases, either in our own flock or elsewhere, affecting our ability to conduct our operations and/or demand for our poultry products;
• Contamination of our products, which has previously and can in the future lead to product liability claims and product recalls;
• Exposure to risks related to product liability, product recalls, property damage and injuries to persons, for which insurance coverage is expensive, limited and potentially inadequate;
• Changes in laws or regulations affecting our operations or the application thereof;
• Our ability to ensure that our directors, officers, employees, agents, third-party intermediaries and the companies to which we outsource certain of our business operations will comply with anti-corruption laws or other laws governing the conduct of business with government entities;
• New immigration legislation or increased enforcement efforts in connection with existing immigration legislation that cause our costs of business to increase, cause us to change the way in which we do business or otherwise disrupt our operations;
• Competitive factors, inflation and pricing pressures, or the loss of one or more of our largest customers;
• Inability to consummate, or effectively integrate, any acquisition or to realize the associated anticipated cost savings and operating synergies;
• Currency exchange rate fluctuations, trade barriers, exchange controls, expropriation and other risks associated with foreign segments, including risks associated with Brexit;
• Restrictions imposed by, and as a result of, Pilgrim’s leverage;
• Disruptions in international markets and distribution channels for various reasons, including, but not limited to, the ongoing Russia-Ukraine or Israel-Hamas wars;
• The impact of cyber-attacks, natural disasters, power losses, unauthorized access, telecommunication failures, and other problems on our information systems;
• Our ability to maintain favorable labor relations with our employees and our compliance with labor laws;
• Extreme weather or natural disasters;
• The impact of uncertainties in litigation; and
• Other risks described herein and under “Risk Factors” in our 2022 Annual Report.

Actual results could differ materially from those projected in these forward-looking statements as a result of these factors, among others, many of which are beyond our control.

The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made. In making these statements, we are not undertaking, and specifically decline to undertake, any obligation to address or update each or any factor in future filings or communications regarding our business or results, and we are not undertaking to address how any of these factors may have caused changes to information contained in previous filings or communications. Although we have attempted to list comprehensively these important cautionary risk factors, we must caution investors and others that other factors may in the future prove to be important and affect our business or results of operations.

Disclosure Controls and Procedures

Under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of September 24, 2023, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 24, 2023, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information we are required to disclose in our reports filed with the SEC is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, identified no change in the Company’s internal control over financial reporting that occurred during the three months ended September 24, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

For a discussion of our potential risks and uncertainties, please see “ Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, in each case as updated by the Company’s periodic filings with the SEC and the risk factors below.

Labor shortages and increased turnover or increases in employee and employee-related costs could have adverse effects on our profitability.

We and our third-party vendors have experienced increased labor shortages at some of our production facilities and other locations. Although we have historically experienced some level of ordinary course turnover of employees, the impact of the COVID-19 pandemic and resulting actions have exacerbated labor shortages and increased turnover. Several factors have had and may continue to have adverse effects on the labor force available to us and our third-party vendors, including government regulations, which include laws and regulations related to workers’ health and safety, wage and hour practices and work authorization. Labor shortages and increased turnover rates within the Company and our third-party vendors have led to and could in the future lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees and could negatively affect our ability to efficiently operate our production facilities or otherwise operate at full capacity and could result in downtime of our production facilities. An overall or prolonged labor shortage, lack of skilled labor, increased turnover or labor inflation for any of the foregoing reasons could have a material adverse impact on our operations, results of operations, reputation, liquidity or cash flows.

Our foreign operations and commerce in international markets pose special risks to our business and operations and subject us to additional regulatory frameworks and compliance costs.

We have significant operations and assets located in Mexico, the U.K. and continental Europe and may participate in or acquire operations and assets in other foreign countries in the future. Foreign operations are subject to a number of special risks such as currency exchange rate fluctuations, trade barriers, exchange controls, expropriation and changes in laws and policies, including tax laws and laws governing foreign-owned operations. Currency exchange rate fluctuations have adversely affected us in the past. Exchange rate fluctuations or one or more other risks may have a material adverse effect on our business or operations in the future. Our operations in Mexico, the U.K. and continental Europe are conducted through subsidiaries organized under non-U.S. laws. Claims of creditors of our subsidiaries, including trade creditors, will generally have priority as to the assets of our subsidiaries over our claims. Additionally, the ability of these subsidiaries to make payments and distributions to us can be limited by terms of subsidiary financing arrangements and will be subject to, among other things, the laws applicable to these subsidiaries. In the past, these laws have not had a material adverse effect on the ability of these subsidiaries to make these payments and distributions. However, laws such as these may have a material adverse effect on the ability of these subsidiaries to make these payments and distributions in the future.

Our operations in foreign jurisdictions also subject us to additional regulatory frameworks, which can increase costs of compliance and subject us to possible fines and penalties, some of which could be significant. In some cases, foreign regulatory frameworks are more stringent or complex than similar regimes in the United States. For example, the European Union’s Deforestation Regulation (the “EUDR”), which generally becomes effective on December 30, 2024, will require companies trading in cattle, cocoa, coffee, oil palm, rubber, soya, and wood, as well as products derived from these commodities, to conduct extensive diligence on the value chain to ensure the goods do not result from recent deforestation, forest degradation, or breaches of local laws in order to sell such products in the European Union market. The EUDR, and other current or proposed regulations in the European Union and elsewhere, are likely to increase our compliance costs, could depress sales in such markets if our products are not in compliance by applicable effective dates, and could result in fines and penalties or reputational harm if we do not fully comply.

Additionally, to conduct our operations, we regularly move data across national borders (including data related to business, financial, marketing and regulatory matters) and must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S. and elsewhere. For example, in 2018, the European Union (the “E.U.”) recently commenced enforcement of the General Data Protection Regulation (the “GDPR”). The GDPR imposes significant additional compliance obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. The GDPR grants enforcement powers to certain E.U. regulators including extra-territorial powers in some cases. These enforcement powers enable regulators to conduct investigations and dawn raids, to issue penalties up to the greater of €20 million or 4% of worldwide turnover for the most serious violations, and to require changes to the way that organizations (including the Company) use personal data. Due to the geographic scope of our operations, the GDPR may increase our responsibility and liability in relation to personal data that we process, and we may be required to put in place additional mechanisms to minimize the risk of non-compliance with applicable privacy laws and regulations. Privacy laws such as the GDPR and similar laws and regulations are increasing in complexity and number, change frequently and sometimes conflict. In particular, as the E.U. states reframe their national legislation to harmonize with the GDPR, we will need to monitor compliance with all relevant E.U. member states’ laws and regulations, including where permitted derivations from the GDPR are introduced. Additional laws may be enacted in U.S. states or at the U.S. federal level. Compliance with such existing, proposed and recently enacted laws and regulations can be costly and may necessitate the review and implementation of policies and processes relating to our collection, security, and use of data; any failure to comply with these regulatory standards could subject us to legal and reputational risks including proceedings against the Company by governmental entities or others, fines and penalties, damage to our reputation and credibility and could have a negative impact on our business and results of operations.

Historically, we have targeted international markets to generate additional demand for our products. In particular, given the general preference for white chicken meat by U.S. and U.K. consumers, we have targeted international markets for the sale of dark chicken meat and parts, such as chicken paws, which are generally not consumed in the U.S. or U.K. We have also targeted international markets for excess primary pork cuts and parts, such as hog heads and trotters, which are generally not consumed in the U.K. As part of this initiative, we have created a significant international distribution network into several markets in Mexico, the Middle East and Asia. Our success in these markets may be, and our success in recent periods has been, adversely affected by disruptions in export markets. A significant risk is disruption due to import restrictions and tariffs, other trade protection measures, and import or export licensing requirements regarding food products imposed by foreign countries. Significant political or regulatory developments in the jurisdictions in which we sell our products, such as those stemming from the presidential administration in the United States, are difficult to predict and may have a material adverse effect on us. For example, the implementation of new tariff schemes by various governments, such as those implemented by the United States and China in recent years, could increase the costs of our operations and ultimately increase the cost of products sold from one country into another country. In addition, disruptions may be caused by outbreaks of diseases, either in our flocks and herds or elsewhere in the world, and resulting changes in consumer preferences. One or more of these or other disruptions in the international markets and distribution channels could adversely affect our business.