PILGRIMS PRIDE CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Executive Summary Overview We are one of the largest protein companies in the world, and as a vertically integrated company, we are able to control every phase of the production process, which helps us manage food safety and quality, control margins and improve customer service. This gives us the opportunity to continue to create growth and development opportunities, further increasing our position as a leading domestic and global protein company. With the acquisition of the meats and meals operations of Kerry Consumer Foods (“Pilgrim’s Food Masters” or “PFM”) in September 2021, we further solidified ourselves as a leading European food company while diversifying our product mix through leading, branded protein products in the U.K. and the Republic of Ireland. See “Note 2. Business Acquisitions” of our Consolidated Financial Statements included in this annual report for additional information relating to this acquisition. We reported net income attributable to Pilgrim’s Pride Corporation of $745.9 million, or $3.10 per diluted common share, and profit before tax totaling $1.0 billion, for 2022. These operating results included gross profit of $1.8 billion and generated $669.9 million of cash from operations. We generated operating margins of 6.7% with operating margins of 10.2% and 4.5% in our U.S. and Mexico reportable segments, respectively, and break-even in our U.K. and Europe reportable segment. During 2022, we generated EBITDA and Adjusted EBITDA of $1.57 billion and $1.65 billion, respectively. A reconciliation of net income to EBITDA and Adjusted EBITDA is included later in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report. We operate on the basis of a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. Any reference we make to a particular year applies to our fiscal year and not the calendar year. Fiscal 2022 and 2021 were 52-week accounting cycles. Global Economic Conditions During 2022, we continued to experience solid recoveries in volume throughout the business from prior year levels as COVID-19 restrictions eased, but were confronted with significant 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. We continued to experience labor shortages in the U.K. as European Union (or “E.U.”) workers returned to their home countries following Brexit, thus affecting our ability to process, pack and transport products. Despite inflationary headwinds and softening 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. Our Mexico segment managed through significant challenges as Mexico remains a volatile market given inflationary pressures, implications of more significant bird disease, an evolving global protein industry, and overall business seasonality. We have responded to these challenges by continuing negotiations with customers to mitigate the impact of 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. Russia-Ukraine War Impacts The Russia-Ukraine war began in February 2022. The impact of the ongoing war and sanctions is not limited to businesses that operate in Russia and Ukraine and is negatively impacting 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. 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 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. Our U.K. and 24 Table of Contents Europe business may be impacted by the increase in energy prices and the availability of energy during the winter months. The impact of these measures, now and in the future, could adversely affect our business, supply chain or customers. Impact of COVID-19 The extensive impact of the pandemic caused by COVID-19 has resulted and may continue to result in disruptions to the global economy, as well as businesses and capital markets around the world. In an effort to halt the outbreak of COVID-19, a number of countries, states, counties and other jurisdictions imposed various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations and extended closures of businesses. As the global spread of the virus began to accelerate late in March 2020, we began to experience adverse impacts to our business and financial results. The impact of the COVID-19 pandemic included disruptions in supply chain, an increase in both broiler and chick costs and an increase in payroll and benefits costs. As the various mitigation efforts implemented across the globe began to take effect, the impact of the COVID-19 pandemic on our financial results generally decreased because of increased demand for our products at retail grocery stores and quick service restaurants and our ability to meet this demand through our transitioned business operations, as further discussed below. In 2022, we experienced intermittent impacts as noted above associated with the COVID-19 pandemic. We believe that we will continue to experience intermittent disruptions to our business due to the COVID-19 pandemic into 2023. The impact of COVID-19 and measures to prevent its spread have affected and continue to affect our business in a number of ways. • Our workforce . Employee health and safety is our priority. As an essential business in a critical infrastructure industry, we continue to produce chicken and pork products, while coordinating with and implementing guidance from the U.S. Centers for Disease Control and Prevention, the National Institute of Occupational Safety and Health, and local and regional Departments of Health in an effort to keep our employees safe and healthy. Measures we implemented during the height of the pandemic include, but are not limited to: increasing physical distancing of our employees, where possible, by staggering start and shift breaks, placing on-site tents to create more space for employees at break and at meal times, and installing physical barriers to distance employees while working on production lines; adding temperature and symptom screening stations for employees prior to entering our facilities; increasing personal hygiene practices and providing our employees additional personal protective equipment and sanitation stations; and increasing sanitation of our facilities. In the U.S., we provided appreciation bonuses to eligible employees in April and May of 2020 and expanded certain sick leave policies to provide more flexibility. In addition, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely. Finally, as COVID-19 vaccinations became more readily available in the first quarter of 2021, we strongly encouraged our employees to become vaccinated through sponsored vaccination clinics at our facilities and monetary bonuses to our employees once they completed the recommended vaccination regimen. • Our operations. A ll of our production facilities continued to operate , although some facilities reduced production levels and outputs due to increased health and safety measures, employee absenteeism, and as a consequence of the decline in demand by restaurants and other foodservice businesses. We have not experienced a material impact from a plant closure and our facilities have been exempt from government closure orders. • Demand for our products. In early 2021, COVID-19 continued to affect demand for our products. In our U.S. and Mexico businesses, demand for parts and whole-birds (typically bound for restaurants) and prepared foods (distributed, in part, to schools) declined, while our U.K. and Europe business, which is more retail focused, generally saw less of an impact. In an effort to counter the adverse effects of COVID-19, we have transitioned, where commercially reasonable and possible to do so, our business operations to be in the best position to supply COVID-19 market demands. Those efforts included transferring live supply to case ready, shifting production form and mix from foodservice to retail, increasing capacity utilization of retail packaging equipment, and analyzing export positions. However, as global vaccination levels increased and governmental restrictions eased, we noted the trend towards pre-pandemic levels of demand at retail grocery stores and restaurants. • Liquidity. Our liquidity position is strong and we took additional measures in 2020 to increase liquidity to prepare for the challenging environment. • Foreign currency exchange rates and commodity prices. During the year ended December 25, 2022, we experienced increased volatility in foreign currency exchange rates and commodity prices. 25 Table of Contents • CARES Act. On March 27, 2020, the U.S. government enacted the CARES Act, which included modifications to the limitation on business interest expense and net operating loss provisions, and provided a payment delay of employer payroll taxes during 2020 after the date of enactment. We delayed the payment of $52 million in employer payroll taxes otherwise due in 2020. The first 50% was paid on December 31, 2021 and the remaining 50% was paid on December 31, 2022. Raw Materials Our profitability is materially affected by the commodity prices of feed ingredients and chicken. Our U.S. and Mexico reportable segments use corn and soybean meal as the main ingredients for feed production, while our U.K. and Europe reportable segment uses wheat, soybean meal and barley as the main ingredients for feed production. During 2022, average chicken market prices were higher throughout the first half of the year before declining and settling below the five-year average by the end of the year. Supply grew at mild rates in the first half of 2022; however, production was impacted by poor hatchability that restricted further growth. During this time, stable demand and low amounts of chicken in cold storage led to higher chicken market pricing, which maintained historically high levels throughout the first half of 2022. During the third quarter of 2022, chicken production grew materially primarily due to increased head counts. Growth in head counts resulted from consistent industry growth in egg sets relative to prior year levels and further aided by year-over-year improvements in hatchability. Although foodservice and retail dollar sales continued to grow, volume growth slowed in foodservice and retail volumes were stagnant. The slower volume growth and sustained supply growth in the third quarter exacerbated the normal seasonal pricing declines. The fourth quarter of 2022 showed considerable supply growth as increased average liveweights added incremental growth on already increasing head counts. With only mild improvements in retail and foodservice, volume demand growth was not able to match the pace of increased availability of chicken. The result was rapidly growing cold storage chicken inventories and commodity chicken pricing levels near the bottom of the five-year average range at the end of 2022. In the first three quarters of 2022, the U.K. chicken market saw unprecedented cost increases in feed ingredients, utilities and labor. During the fourth quarter, the U.K. chicken market started to see stabilization of this inflation across all input costs. Through our current customer models and additional negotiations we were able to offset the majority of these cost increases throughout 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 increased during 2022 and remained well above prices from the prior year. The increase is primarily from increased demand that outpaced supply. The cost to produce also increased from the prior year due to significant increases in corn and soy, the two main ingredients used for feed in Mexico, as well as cost increases from purchasing eggs from outside sources to replace egg loss from avian influenza. While commodity market prices for chicken products declined, prices for 2023 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, 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 during 2022 recovered from the 2021 down slope and increased 44% over the course of the year. This was supported by recovery in the E.U. market as well as clearing pig backlogs which had arisen from labor shortages in abattoirs. Despite pig price recovery, the cost of production continued to exceed market prices, with pig farmers experiencing losses of well above £50 per pig in the first half of 2022. Although, the continuing price recovery reduced the pig farmer losses to less than £20 per pig by the end of the year. Input costs for feed and energy in the U.K. increased during the year consistent with global market conditions, albeit with the energy price growth capped in Q4 due to the U.K. government intervention, with the recovery of inflation through retailers a key area of focus throughout the year. Sustainability We believe sustainability involves continuously improving social responsibility, economic viability and environmental stewardship. We are committed to helping society meet the global challenge of feeding a growing population in a responsible matter. Environmental Stewardship . We were the first major meat and poultry company in the world to set a net zero greenhouse gas emissions target by 2040, demonstrating our leadership and dedication to improving the efficiency of our operations and supporting producers to reduce our environmental footprint. In support of this initiative, in April 2021, we 26 Table of Contents issued $1.0 billion of sustainability-linked bonds, which require us to reduce our Scope 1 and 2 global greenhouse gas emissions intensity by 30% by 2030. Social Responsibility . Safety of our team members is a condition at Pilgrim’s. The health of our workforce was our top priority throughout the COVID-19 pandemic, and we implemented hundreds of safety measures within our facilities, constantly evolving our operations as needed. To support the communities where our team members live and work, we invested more than $20 million in local projects focused on alleviating food insecurity, strengthening long-term community infrastructure and well-being and aiding COVID-19 emergency response and relief efforts through our Hometown Strong initiative. Finally, ensuring the well-being of animals under our care is an uncompromising commitment at Pilgrims. We continually strive to improve our welfare efforts through the use of new technologies and the implementation of standards that meet and exceed regulatory requirements and industry guidelines. Governance . To cultivate discipline and drive accountability for Sustainability related matters, a series of key performance indicators have been established to evaluate and monitor progress. These performance indicators are linked with compensation for both senior executive and plant level personnel. As part of our business management processes, progress against these metrics are reviewed at least monthly. In addition, the Board of Directors has formed a Sustainability Committee to provide oversight and counsel on strategies, policies, and investments to reduce the impact of climate change. Reportable Segments We operate in three reportable segments: the U.S., the U.K. and Europe, and Mexico. We measure segment profit as operating income. 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 20. Reportable Segments” of our Consolidated Financial Statements included in this annual report. Results of Operations 2022 Compared to 2021 Net sales. Net sales for 2022 increased $2.7 billion, or 18.2%, from $14.8 billion generated in 2021 to $17.5 billion generated in 2022. The following table provides additional information regarding net sales: Change from 2021 Sources of net sales 2022 Amount Percent (In thousands, except percent data) U.S. $ 10,748,350 $ 1,634,471 17.9 % U.K. and Europe 4,874,738 940,676 23.9 % Mexico 1,845,289 115,772 6.7 % Total net sales $ 17,468,377 $ 2,690,919 18.2 % U.S. Reportable Segment. U.S. net sales generated in 2022 increased $1.6 billion, or 17.9%, from U.S. net sales generated in 2021 primarily because of an increase in net sales per pound, contributing $1.7 billion, or 18.2 percentage points, to the increase in net sales. Unit sales prices have increased during 2022 as we attempted to recover increased costs, primarily for feed ingredients, energy, transportation and packaging materials, that we have incurred in growing and processing chicken. This increase in net sales per pound was partially offset by a slight decrease in sales volume of $21.7 million, or 0.2 percentage points. U.K. and Europe Reportable Segment. U.K. and Europe sales generated in 2022 increased $940.7 million, or 23.9%, from U.K. and Europe sales generated in 2021, primarily from an increase in net sales per pound and an increase in sales volume of $867.9 million, or 22.1 percentage points, and $629.6 million, or 16.0 percentage points, respectively. The increase in net sales per pound was driven by price increases necessary to recover increased feed ingredients, labor, utilities and other operating costs. The increase in sales volume is primarily from the prior year acquisition of our PFM operations. The increases in net sales per pound and sales volumes were partially offset by the unfavorable impact of foreign currency translation of $556.8 million, or 14.2 percentage points, and a decrease in sales volume of $89.7 million, or 2.2 percentage points from the legacy businesses. Mexico Reportable Segment. Mexico sales generated in 2022 increased $115.8 million, or 6.7%, from Mexico sales generated in 2021 primarily because of an increase in net sales per pound and the favorable impact of foreign currency remeasurement, partially offset by a decrease in sales volume. The increase in net sales per pound and the impact of the favorable impact of foreign currency remeasurement contributed $203.9 million, or 11.8 percentage points, and $12.6 million, 27 Table of Contents or 0.7 percentage points, respectively, to the increase in net sales. The increase in net sales per pound was primarily due to demand driving up commodity chicken prices. Partially offsetting these increases in net sales was a decrease in sales volume of $100.7 million, or 5.8 percentage points, due to negative impacts associated with bird disease to our live operations. Gross profit. Gross profit increased by $446.0 million, or 32.7%, from $1.4 billion generated in 2021 to $1.8 billion generated in 2022. The following tables provide gross profit information: Change from 2021 Percent of Net Sales Components of gross profit 2022 Amount Percent 2022 2021 (In thousands, except percent data) Net sales $ 17,468,377 $ 2,690,919 18.2 % 100.0 % 100.0 % Cost of sales 15,656,574 2,244,943 16.7 % 89.6 % 90.8 % Gross profit $ 1,811,803 $ 445,976 32.7 % 10.4 % 9.2 % Sources of gross profit 2022 Change from 2021 Amount Percent (In thousands, except percent data) U.S. $ 1,435,905 $ 509,985 55.1 % U.K. and Europe 240,672 76,448 46.6 % Mexico 135,172 (140,457) (51.0) % Elimination 54 — — % Total gross profit $ 1,811,803 $ 445,976 32.7 % Sources of cost of sales 2022 Change from 2021 Amount Percent (In thousands, except percent data) U.S. $ 9,312,445 $ 1,124,486 13.7 % U.K. and Europe 4,634,066 864,228 22.9 % Mexico 1,710,117 256,229 17.6 % Elimination (a) (54) — — % Total cost of sales $ 15,656,574 $ 2,244,943 16.7 % (a) Our Consolidated Financial Statements include the accounts of our company and our majority owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation. U.S. Reportable Segment. Cost of sales incurred by our U.S. operations in 2022 increased $1.1 billion, or 13.7%, from cost of sales incurred by our U.S. operations in 2021. Cost of sales increased primarily because of increased cost per pound sold of $1.1 billion, or 14.0 percentage points, partially offset by a slight decrease in sales volume of $19.5 million, or 0.2 percentage points. Included in the increase in cost per pound sold and increased sales volume was an $650.0 million increase in live input costs, a $150.7 million increase in payroll costs, a $148.1 million increase in prepared foods input costs, a $78.1 million increase in outside service costs primarily from increased outside processing labor, a $52.6 million increase in utilities costs and a $43.1 million increase in supplies costs. Included in the $650.0 million increase in live input costs were a $503.2 million increase in feed costs, $101.6 million increase in chick costs, and a $36.1 million increase in contract grower costs. Other factors affecting U.S. cost of sales were individually immaterial. U.K. and Europe Reportable Segment. Cost of sales incurred by the U.K. and Europe operations during 2022 increased $864.2 million, or 22.9%, from cost of sales incurred by the U.K. and Europe operations during 2021 primarily because of increases in cost per pound sold and sales volume of $845.7 million, or 22.5 percentage points, and $548.8 million, or 16.0% percentage points. The increase in cost per pound was driven by increased feed ingredients, labor, utilities and other operating costs. The increase in sales volume is primarily from the prior year acquisition of our PFM operations. Partially offsetting these increases was the favorable impact of foreign currency translation of $529.4 million, or 14.0 percentage points. Other factors affecting cost of sales were individually immaterial. Mexico Reportable Segment. Cost of sales incurred by the Mexico operations during 2022 increased $256.2 million, or 17.6%, from cost of sales incurred by the Mexico operations during 2021 primarily because of an increase in cost per pound sold and the unfavorable impact of foreign currency remeasurement of $328.8 million, or 22.6 percentage points, and $12.2 million, or 0.8 percentage points, respectively. The increase in cost per pound sold was primarily driven by increased feed ingredients, hatchery egg costs and packaging costs. Hatchery costs increased due to the cost to import eggs from outside sources to offset the impacts of bird disease in our live operations. Partially offsetting these increases in cost of sales was a 28 Table of Contents decrease in sales volume of $84.8 million, or 5.8 percentage points. Other factors affecting cost of sales were individually immaterial. Operating income. Operating income increased $965.4 million, or 457.2%, from $211.2 million generated for 2021 to $1.2 billion generated for 2022. The following tables provide operating income information: Change from 2021 Percent of Net Sales Components of operating income 2022 Amount Percent 2022 2021 (In thousands, except percent data) Gross profit $ 1,811,803 $ 445,976 32.7 % 10.4 % 9.2 % SG&A expenses 604,742 (544,119) (47.4) % 3.5 % 7.8 % Restructuring activities 30,466 24,664 425.1 % 0.2 % — % Operating income $ 1,176,595 $ 965,431 457.2 % 6.7 % 1.4 % Change from 2021 Sources of operating income 2022 Amount Percent (In thousands, except percent data) U.S. $ 1,094,025 $ 1,111,061 6,521.8 % U.K. and Europe (934) (307) (49.0) % Mexico 83,450 (145,323) (63.5) % Eliminations 54 — — % Total operating income $ 1,176,595 $ 965,431 457.2 % Sources of SG&A expenses (defined below) 2022 Change from 2021 Amount Percent (In thousands, except percent data) U.S. $ 341,880 $ (601,076) (63.7) % U.K. and Europe 211,140 52,091 32.8 % Mexico 51,722 4,866 10.4 % Total SG&A expense $ 604,742 $ (544,119) (47.4) % Sources of restructuring activities charges 2022 Change from 2021 Amount Percent (In thousands, except percent data) U.K. and Europe $ 30,466 $ 24,664 425.1 % U.S. Reportable Segment. Selling, general and administrative (“SG&A”) expense incurred by the U.S. operations during 2022 decreased $601.1 million, or 63.7%, from SG&A expense incurred by the U.S. operations during 2021 primarily from a net decrease in the recognition of legal settlements of $622.1 million. Also contributing to the net decrease in SG&A expense was a net decrease in acquisition costs, partially offset by increases in employee relation costs, incentive compensation costs, and consulting fees. Other factors affecting SG&A expense were individually immaterial. U.K. and Europe Reportable Segment. SG&A expense incurred by the U.K. and Europe operations during 2022 increased $52.1 million, or 32.8%, from SG&A expense incurred by the U.K. and Europe operations during 2021 primarily because of expenses incurred by the acquired PFM operations and an increase in SG&A expense incurred from our legacy U.K. and Europe operations. The increase in SG&A expense in our legacy U.K. and Europe was mainly due to increased advertising costs, increased payroll costs, and an increase in contract labor services. Other factors affecting SG&A expense were individually immaterial. Mexico Reportable Segment. SG&A expense incurred by the Mexico operations during 2022 increased $4.9 million, or 10.4%, from SG&A expense incurred by the Mexico operations during 2021. SG&A expense increased primarily from increased marketing costs and payroll-related costs. Factors affecting SG&A expense were individually immaterial. Interest expense . Consolidated interest expense increased 4.7% to $152.7 million in 2022 from $145.8 million in 2021, primarily due to an increase in interest expense on outstanding borrowings of $27.3 million. This increase in interest expense on outstanding borrowings was primarily due to the impacts of the September 2021 issuance of $900.0 million of bonds for the PFM acquisition and the increase in variable rate debt interest expense, partially offset by the impact of $24.7 million loss on 29 Table of Contents early extinguishment of debt recognized in 2021. As a percent of net sales, interest expense in 2022 and 2021 was 0.9% and 1.0%, respectively. Income taxes. Our consolidated income tax expense in 2022 was $278.9 million, compared to income tax expense of $61.1 million in 2021. The increase in income tax expense in 2022 resulted from an increase in pre-tax income during 2022. 2021 Compared to 2020 For discussion of 2021 results of operations in comparison to 2020 results of operations, see the 2021 annual report on Form 10-K filed on February 18, 2022. Liquidity and Capital Resources Our principal sources of liquidity are cash generated from operations, funds from borrowings, and existing cash on hand. The following table presents our available sources of liquidity as of December 25, 2022: Sources of Liquidity (a) Facility Amount Amount Outstanding Available (In millions) Cash and cash equivalents $ — $ — $ 434.8 Borrowing arrangements: U.S. Credit Facility Revolving Note Payable (a) 800.0 — 765.0 U.S. Credit Facility Term Loans (b) 700.0 480.1 — Mexico Credit Facility (c) 77.5 — 77.5 U.K. and Europe Revolver Facility (d) 124.5 — 124.5 (a) Availability under the U.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at December 25, 2022 totaled $35.0 million. (b) For more information on the U.S. Credit Facility Term Loans, refer to “Note 13. Debt.” (c) As of December 25, 2022, the U.S. dollar-equivalent of the amount available under the Mexican Credit Facility was $77.5 million ($1.5 billion Mexican pesos). (d) As of December 25, 2022, the U.S. dollar-equivalent of the amount available under the U.K. and Europe Revolver Facility was $124.5 million (£150.0 million). Historical Flow of Funds Year Ended Cash Flows from Operating Activities December 25, 2022 December 26, 2021 (In millions) Net income $ 746.5 $ 31.3 Net noncash expenses 422.5 335.8 Changes in operating assets and liabilities: Trade accounts and other receivables (149.6) (259.4) Inventories (472.2) (177.9) Prepaid expenses and other current assets 18.3 (53.8) Accounts payable and accrued expenses 263.3 359.6 Income taxes (142.5) 115.2 Long-term pension and other postretirement obligations (4.1) (18.5) Other operating assets and liabilities (12.3) (5.8) Cash provided by operating activities $ 669.9 $ 326.5 Net Noncash Expenses Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $422.5 million for the year ended December 25, 2022. Net noncash expense items included $403.1 million of depreciation and amortization, $21.3 million of deferred income tax expense, $7.0 million of stock-based compensation expense, loan cost amortization of $4.8 million, asset impairment of $3.6 million and accretion of bond discount of $1.7 million. Partially offsetting the net noncash expenses was an $18.9 million gain on property disposals. Other items affecting net noncash expenses were individually immaterial. 30 Table of Contents Items necessary to reconcile from net income to cash flow provided by operating activities included net noncash expenses of $335.8 million for the year ended December 26, 2021. Net noncash expense items included $380.8 million of depreciation and amortization, a $24.7 million loss on early extinguishment of debt, $11.7 million of stock-based compensation expense and loan cost amortization of $5.1 million. Partially offsetting the net noncash expenses was $86.4 million of deferred income tax benefit and a $1.5 million gain on property disposals. Other items affecting net noncash expenses were individually immaterial. Changes in Operating Assets and Liabilities The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $149.6 million use of cash in 2022. The change in cash was primarily due to the timing of customer payments and the increase in sales prices. The change in trade accounts and other receivables, including accounts receivable from related parties, represented a $259.4 million use of cash in 2021. The change in cash was primarily due to the timing of customer payments. The change in inventories represented a $472.2 million use of cash in 2022. The change in cash resulted from an increase in our raw materials and work-in-process inventory values due to higher input costs. The change in inventories represented a $177.9 million use of cash in 2021. The change in cash resulted from an increase in our raw materials and work-in-process inventory. The change in prepaid expenses and other current assets represented a $18.3 million source of cash in 2022. This change resulted primarily from a net decrease in value-added tax receivables and prepaid property insurance. The change in prepaid expenses and other current assets represented a $53.8 million use of cash in 2021. This change resulted primarily from a net increase in value-added tax receivables and prepaid property insurance. Accounts payable and accrued expenses, including accounts payable to related parties, represented a $263.3 million source of cash in 2022. This change resulted primarily from the timing of payments as well as increased prices for feed ingredients, transportation and packaging materials. Accounts payable and accrued expenses, including accounts payable to related parties, represented a $359.6 million source of cash in 2021. This change resulted primarily from the timing of payments as well as increased prices for feed ingredients, transportation and packaging materials. The change in income taxes, which includes income taxes receivables, 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 $142.5 million use of cash in 2022. This change resulted primarily from the timing of estimated tax payments and higher profitability in 2022. The change in income taxes, which includes income taxes receivables, 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 $115.2 million source of cash in 2021. This change resulted primarily from the timing of estimated tax payments. Year Ended Cash Flows from Investing Activities December 25, 2022 December 26, 2021 (In millions) Acquisitions of property, plant and equipment $ (487.1) $ (381.7) Proceeds from property disposals 35.5 24.7 Proceeds from insurance recoveries 16.0 — Purchase of acquired businesses, net of cash acquired (9.7) (966.8) Cash used in investing activities $ (445.3) $ (1,323.7) Capital expenditures were primarily incurred to improve operational efficiencies and reduce costs for the years ended December 25, 2022 and December 26, 2021. Proceeds from property disposals were primarily for the sale of farms in Mexico. Proceeds from insurance recoveries reflects cash received on property insurance recoveries related to the Mayfield, Kentucky tornado that occurred in December 2021. Purchase of acquired businesses, net of cash acquired primarily represents a payment for a working capital adjustment related to the acquisitions of PFM and Randall Parker Foods. 31 Table of Contents Year Ended Cash Flows from Financing Activities December 25, 2022 December 26, 2021 (In millions) Payments on revolving line of credit and long-term borrowings $ (388.3) $ (2,006.2) Proceeds from revolving line of credit and long-term borrowings 362.5 2,951.7 Purchase of common stock under share repurchase program (199.6) — Payment of capitalized loan costs (4.7) (22.3) Distribution of equity under Tax Sharing Agreement between JBS USA Food Company Holdings and Pilgrim’s Pride Corporation (2.0) (0.7) Payment on early extinguishment of debt — (21.3) Cash provided by (used in) financing activities $ (232.0) $ 901.3 Proceeds from revolving line of credit and long-term borrowings and payments on revolving line of credit and long-term borrowings are mainly due to borrowings and payments on our U.S. Credit Facility and Mexico Credit Facility. During 2022, 7.5 million shares were repurchased under the share repurchase program. The payment of capitalized loan costs relate to the consent solicitation of the 2031 and 2032 Senior Notes and the execution of a new U.K. revolving line of credit. The distribution of equity under the Tax Sharing Agreement is the 2021 distribution of equity that is paid in the first quarter of 2022. For further information on the share repurchase program, refer to Part II, Item 8, Notes to Consolidated Financial Statements, “Note 14. Stockholders’ Equity.” Long-Term Debt and Other Borrowing Arrangements 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 Part II, Item 8, Notes to Consolidated Financial Statements, “Note 13. Debt.” Collateral Substantially all of our domestic inventories and domestic fixed assets are pledged as collateral to secure the obligations under the U.S. Credit Facility. Capital Expenditures We anticipate spending between $400 million and $500 million on the acquisition of property, plant and equipment in 2023. Capital expenditures will primarily be incurred to grow our operations, improve efficiencies and to reduce costs. We expect to fund these capital expenditures with cash flow from operations and proceeds from the revolving lines of credit under our various debt facilities. Contractual Obligations In addition to our debt commitments at December 25, 2022, we had other commitments and contractual obligations that require us to make specified payments in the future. The following table summarizes the total amounts due as of December 25, 2022 under all debt agreements, commitments and other contractual obligations. The table indicates the years in which payments are due under the contractual obligations. Payments Due By Period Contractual Obligations (a) Total Less than One Year One to Three Years Three to Five Years Greater than Five Years (In thousands) Long-term debt (b) $ 3,230,078 $ 24,453 $ 50,625 $ 1,255,000 $ 1,900,000 Interest (c) 931,235 130,195 259,369 251,171 290,500 Finance leases 3,867 1,064 1,471 1,079 253 Operating leases 345,183 90,356 122,993 71,651 60,183 Derivative liabilities 18,917 18,917 — — — Purchase obligations (d) 721,753 588,077 117,279 3,890 12,507 Total $ 5,251,033 $ 853,062 $ 551,737 $ 1,582,791 $ 2,263,443 (a) The total amount of unrecognized tax benefits at December 25, 2022 was $27.6 million. We did not include this amount in the contractual obligations table above as reasonable estimates cannot be made at this time of the amounts or timing of future cash outflows. (b) Long-term debt is presented at face value and excludes $35.0 million in letters of credit outstanding related to normal business transactions. 32 Table of Contents (c) Interest expense in the table above assumes the continuation of interest rates and outstanding borrowings as of December 25, 2022. (d) Includes agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. W e expect cash flows from operations, combined with availability under the U.S. Credit Facility, the Mexico Credit Facility and the U.K. and Europe Credit Facility 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. Recent Accounting Pronouncements Refer to Part II, Item 8, Notes to Consolidated Financial Statements, “Note 1. Business and Summary of Significant Accounting Policies.” Critical Accounting Policies and Estimates General . Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventory, goodwill and other intangible assets, litigation and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Revenue Recognition. The vast majority of our revenue is derived from contracts which are based upon a customer ordering our products. While there may be master agreements, the contract is only established when the customer’s order is accepted by us. We account for a contract, which may be verbal or written, when it is approved and committed by both parties, the rights of the parties are identified along with payment terms, the contract has commercial substance and collectability is probable. We evaluate the transaction for distinct performance obligations, which are the sale of our products to customers. Since our products are commodity market-priced, the sales price is representative of the observable, standalone selling price. Each performance obligation is recognized based upon a pattern of recognition that reflects the transfer of control to the customer at a point in time, which is upon destination (customer location or port of destination) and depicts the transfer of control and recognition of revenue. There are instances of customer pick-up at our facilities, in which case control transfers to the customer at that point and we recognize revenue. Our performance obligations are typically fulfilled within days to weeks of the acceptance of the order. We make judgments regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from revenue and cash flows with customers. Determination of a contract requires evaluation and judgment along with the estimation of the total contract value and if any of the contract value is constrained. Due to the nature of our business, there is minimal variable consideration, as the contract is established at the acceptance of the order from the customer. When applicable, variable consideration is estimated at contract inception and updated on a regular basis until the contract is completed. Allocating the transaction price to a specific performance obligation based upon the relative standalone selling prices includes estimating the standalone selling prices including discounts and variable consideration. Inventories. Live chicken and pig inventories are stated at the lower of cost or net realizable value and breeder hen, breeder sow and boar inventories at the lower of cost, less accumulated amortization, or net realizable value. The costs associated with breeder hen inventories are accumulated up to the production stage and amortized over their productive lives using the unit-of-production method. The costs associated with breeder sow inventories are accumulated up to the production stage and amortized on a straight-line basis over their productive lives to the estimated residual cull value. The costs associated with finished poultry products, finished pork products, feed, eggs and other inventories are stated at the lower of cost (average) or net realizable value. Inventory typically transfers from one stage of production to another at a standard cost, where it accumulates additional cost directly incurred with the production of inventory, including overhead. The standard cost at which each type of inventory transfers is set by management to reflect the actual costs incurred in the prior steps. We monitor and adjust standard costs throughout the year to ensure that standard costs reasonably reflect the actual average cost of the inventory produced. We allocate meat costs between our various finished chicken products based on a by-product costing technique that reduces the cost of the whole bird by estimated yields and amounts to be recovered for certain by-product parts. This primarily 33 Table of Contents includes leg quarters, wings, tenders and offal, which are carried in inventory at the estimated recovery amounts, with the remaining amount being reflected as our breast meat cost. We allocate meat costs between our various finished pork products based on a by-product costing technique that allocates the cost of the whole pig into the primal cuts by estimated yields and amounts to be recovered for certain by-product parts. This primarily includes legs, shoulders, bellies, offal and fifth quarter parts, which are carried in inventory at the estimated recoverable amounts, with the remaining amount being reflected as our loin meat cost. For our prepared foods inventories, raw materials and packaging materials are valued at the lower of weighted average cost and net realizable value, work in progress is valued at the latest production cost (raw materials, packaging), finished goods are valued at the lower of the latest actual monthly production cost (raw materials, packaging and direct labor) and attributable overheads and net realizable value, and engineering spares and consumables are valued at cost with an appropriate provision for obsolete engineering spares consistent with historical practice. Generally, we perform an evaluation of whether any lower of cost or market adjustments are required at the country level based on a number of factors, including: (1) pools of related inventory, (2) product continuation or discontinuation, (3) estimated market selling prices and (4) expected distribution channels. If actual market conditions or other factors are less favorable than those projected by management, additional inventory adjustments may be required. We also record valuation adjustments, when necessary, for estimated obsolescence at or equal to the difference between the cost of inventory and the estimated market value based upon known conditions affecting inventory obsolescence, including significantly aged products, discontinued product lines, or damaged or obsolete products. Goodwill and Other Intangibles, net. Goodwill represents the excess of the aggregate purchase price over the fair value of the net identifiable assets acquired in a business combination. Identified intangible assets represent trade names, customer relationships and non-compete agreements arising from acquisitions that are recorded at fair value as of the date acquired less accumulated amortization, if any. We use various market valuation techniques to determine the fair value of its identified intangible assets. Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis in the fourth quarter of each fiscal year or more frequently if impairment indicators arise. For goodwill, an impairment loss is recognized for any excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill. Management first reviews relevant qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent), that the fair value of a reporting unit is less than the unit’s carrying amount (including goodwill). If management determines it is more likely than not that the carrying amount of a reporting unit goodwill might be impaired, a quantitative analysis is performed. Management performed a qualitative analysis noting that is was not more likely than not that there was goodwill impairment in any of its reporting units as of December 25, 2022. However, management will be closely monitoring the performance of its reporting units within the U.K. and Europe for sustained declines in operating results that miss projected operating performance as it relates to possible future goodwill impairment indicators. For indefinite-lived intangible assets, an impairment loss is recognized if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value of that intangible asset. Management first reviews relevant qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that an intangible asset is impaired. If management determines there is an indication that the carrying amount of the intangible asset might be impaired, and quantitative analysis is performed. Management performed a qualitative analysis noting that it was not more likely than not that there was impairment for any of its indefinite-lived intangible assets as of December 25, 2022. Management will be closely monitoring the performance of its branded products within the U.K. and Europe for sustained declines in operating results as it relates to possible future impairment to those identifiable intangible assets. Identifiable intangible assets with definite lives, such as customer relationships, non-compete agreements and trade names that we expect to use for a limited amount of time, are amortized over their estimated useful lives on a straight-line basis. The useful lives range from three to 20 years for non-compete agreements and trade names and three to 16 years for customer relationships. Identified intangible assets with definite lives are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Management assessed if events or changes in circumstances indicated that the aggregate carrying amount of its identified intangible assets with definite lives might not be recoverable and determined that there were no impairment indicators during the year ended December 25, 2022 and year ended December 26, 2021. Litigation and Contingent Liabilities. We are subject to lawsuits, investigations and other claims related to employment, environmental, product, and other matters. We are required to assess the likelihood of any adverse judgments or outcomes, as well as potential ranges of probable losses, to these matters. We estimate the amount of reserves required for these contingencies when losses are determined to be probable and after considerable analysis of each individual issue. We expense legal costs related to such loss contingencies as they are incurred. With respect to our environmental remediation obligations, 34 Table of Contents the accrual for environmental remediation liabilities is measured on an undiscounted basis. These reserves may change in the future due to changes in our assumptions, the effectiveness of strategies, or other factors beyond our control. Income Taxes. We follow provisions under ASC No. 740-10-30-27 in the Expenses-Income Taxes topic with regard to members of a group that file a consolidated tax return but issue separate financial statements. We file our U.S. federal tax return and certain state unitary returns with JBS USA Holdings. Our income tax expense is computed using the separate return method. The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. For the unitary states, we have an obligation to make tax payments to JBS USA Holdings for our share of the unitary taxable income, which is included in taxes payable in our Consolidated Balance Sheets. Under this approach, deferred income taxes reflect the net tax effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carry forwards. The amount of deferred tax on these temporary differences is determined using the tax rates expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on the tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date. We recognize potential interest and penalties related to income tax positions as a part of the income tax provision. Business Combination Accounting . We allocate the consideration of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the consideration over the amount allocated to the assets and liabilities, if any, is recorded to goodwill. We use all available information to estimate fair values. We use various models to determine the value of assets acquired and liabilities assumed such as net realizable value to value inventory, cost method and market approach to value property, relief-from-royalty and multi-period excess earnings to value intangibles and discounted cash flow to value goodwill. We typically engage third-party valuation specialists to assist in the fair value determination of tangible long-lived assets and intangible assets other than goodwill. The fair value of acquired inventories is typically determined by extending physical counts of the inventories taken at or near the acquisition date to market pricing in effect for such inventories at or near the acquisition date. The carrying values of acquired receivables and accounts payable have historically approximated their fair values as of the business combination date. As necessary, we may engage third-party specialists to assist in the estimation of fair value for certain liabilities. We adjust the preliminary acquisition accounting, as necessary, typically up to one year after the acquisition closing date for those items that existed at the acquisition date and were provisionally accounted for at that time, as we obtain more information regarding asset valuations and liabilities assumed. Our acquisition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including changes in assumptions regarding industry economic factors and business strategies. If actual results are materially different than the assumptions used to determine fair value of the assets and liabilities acquired through a business combination, it is possible that adjustments to the carrying values of such assets and liabilities will have an impact on our net earnings. See Part II. Item 8. Notes to Consolidated Financial Statements, “2. Business Acquisitions” in this annual report for the acquisition-related information associated with significant acquisitions completed in the last three fiscal years. 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 (gains), (2) transaction costs related to business acquisitions, (3) expenses recognized for the DOJ agreement and litigation settlements, (4) restructuring activities losses, (5) Hometown Strong initiative expenses, (6) consumption of the PFM inventory fair value step-up increment, (7) property insurance recoveries on Mayfield tornado losses, (8) gain recognized on deconsolidation of a subsidiary and (9) net income attributable to noncontrolling interest. 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; 35 Table of Contents • 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. (Unaudited) Year Ended December 25, 2022 December 26, 2021 (In thousands) Net income $ 746,538 $ 31,268 Add: Interest expense, net 143,644 139,736 Income tax expense 278,935 61,122 Depreciation and amortization 403,110 380,824 EBITDA 1,572,227 612,950 Add: Foreign currency transaction losses (gains) 30,817 (9,382) Transaction costs related to acquisitions 948 18,858 Expenses related to the DOJ agreement and litigation settlements 34,086 656,225 Restructuring activities losses 30,466 5,802 Hometown Strong commitment expenses — 1,000 Consumption of Pilgrim’s Food Masters inventory fair value step-up increment — 4,974 Minus: Property insurance recoveries on Mayfield tornado losses 19,580 — Gain recognized on deconsolidation of subsidiary — 1,131 Net income attributable to noncontrolling interest 608 268 Adjusted EBITDA $ 1,648,356 $ 1,289,028 36 Table of Contents Reconciliation of Adjusted Net Income (Unaudited) Year Ended December 25, 2022 December 26, 2021 (In thousands, except per share data) Net income attributable to Pilgrim's $ 745,930 $ 31,000 Adjustments: Foreign currency transaction losses (gains) 30,817 (9,382) Restructuring activities losses 30,466 5,802 Transaction costs related to acquisitions 948 18,858 DOJ agreement and litigation settlements 34,086 656,225 Hometown Strong commitment expenses — 1,000 Consumption of Pilgrim’s Food Masters inventory fair value step-up increment — 4,974 Loss on early extinguishment of debt recognized as a component of interest expense — 24,654 Negative adjustment to the gain recognized on the bargain purchase of PPL (19,580) — Gain recognized on deconsolidation of subsidiary — (1,131) Net tax expense (benefit) of adjustments (a) (19,115) (174,619) Adjusted net income attributable to Pilgrim's $ 803,552 $ 557,381 Weighted average diluted shares of common stock outstanding 240,394 244,129 Adjusted net income attributable to Pilgrim's per common diluted share $ 3.34 $ 2.28 (a) Net tax impact of adjustments represents the tax impact of all adjustments shown above with the exclusion of the DOJ agreement as this item is non-deductible for tax purposes.