Pilgrim’s Pride Corporation — Q1 2021 Form 10-Q
Business context and period. The unaudited quarter ended March 28, 2021 (December 28, 2020–March 28, 2021), compared with the three months ended March 29, 2020. Pilgrim’s Pride is a vertically integrated chicken and pork producer operating in the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 80.2% of the Company’s common stock.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Net sales | $3,273.4 million | $3,074.9 million | Up 6.5% |
| Gross profit / margin | $261.2 million / 8.0% | $177.1 million / 5.8% | Gross profit up 47.5% |
| Operating income / margin | $158.5 million / 4.8% | $84.4 million / 2.7% | Operating income up 87.8% |
| Net income attributable to Pilgrim’s | $100.2 million | $67.3 million | Up approximately 49% |
| Diluted EPS | $0.41 | $0.27 | Up $0.14 |
| Operating cash flow | $(143.6) million | $21.1 million | Cash used in Q1 2021 |
| Capital expenditures | $102.2 million | $77.2 million | Primarily efficiency and cost-reduction projects |
| Cash and cash equivalents | $367.0 million | $547.6 million at Dec. 27, 2020 | Restricted cash was an additional $43.2 million |
| Total debt | $2,392.3 million | $2,298.5 million at Dec. 27, 2020 | Includes current debt and finance leases; note carrying values differ due to financing costs |
Liquidity. Current assets were $2.876 billion and current liabilities were $1.712 billion at quarter-end. The Company reported $610.3 million available under its U.S. revolving facility, $72.9 million under its Mexico facility and $137.9 million under its U.K. and Europe facility. Management expected operating cash flow and facility availability to cover obligations, working capital, debt maturities and capital spending for at least the next 12 months. The Company was in compliance with U.S. Credit Facility covenants.
Material changes and operating performance
- Sales growth reflected higher chicken commodity pricing, especially in Mexico, and favorable currency translation in U.K. and Europe. Mexico sales increased 28.7%; U.S. and U.K./Europe sales increased 3.8% and 3.9%, respectively.
- Mexico operating income rose to $79.8 million from a $23.9 million loss, primarily on higher selling prices. U.S. operating income fell 19.9% to $68.1 million and U.K./Europe operating income fell 54.7% to $10.5 million. Higher feed costs and other cost pressures weighed on results; U.S. feed costs increased $80.7 million year over year.
- Operating cash flow deteriorated as receivables and inventories increased and accounts payable and accrued liabilities were paid down. Payments included the previously accrued $110.5 million DOJ fine and $75.0 million direct-purchaser settlement; incentive compensation payments also affected working capital.
- Net income benefited from improved operating results and lower foreign-currency-related non-operating gains and losses year over year. The effective tax rate declined to 26.0% from 36.3%, primarily due to foreign-currency effects.
Outlook, commentary and risks
- No numerical earnings or sales guidance was provided. Management said COVID-19-related disruptions could continue through the remainder of 2021, and that foreign exchange rates and commodity prices were expected to remain volatile.
- Management cited stronger chicken prices in Q1 amid reduced industry broiler production, robust retail demand and a recovering foodservice market. Future pricing depends on foodservice recovery, retail demand, COVID-19 developments, regulation, the economy and protein supply.
- COVID-19-related labor shortages and absenteeism reduced production. The Company also identified supply-chain disruption, feed and chick cost increases, changing foodservice-versus-retail demand, and suspended China export licenses for two PPL plants as business impacts.
- Commodity, currency and interest-rate exposures are partly managed with derivatives. A hypothetical 10% rise in primary feed-ingredient prices would have increased Q1 feed-purchase costs by approximately $96.7 million before considering mitigating hedges.
- After quarter-end, the Company issued $1.0 billion of 4.25% sustainability-linked notes due 2031 and used proceeds plus cash to redeem its 5.75% notes due 2025. The 2031 coupon can increase to 4.50% from October 2026 if the stated emissions-intensity target and verification conditions are not met. The Company expects $21.3 million of tender and call premium, along with specified financing-cost and discount adjustments, to be recognized in Q2 2021.
- Legal matters remain significant. The Company paid the DOJ fine and the $75 million settlement with the putative direct-purchaser class. Other antitrust, grower, worker and securities-related matters remain pending; outcomes and potential losses are uncertain. The Company said it intends to defend claims and cannot predict their outcome.
Important facts for investors to verify
- Whether higher chicken prices and Mexico’s turnaround are sustainable, and whether U.S. and U.K./Europe profitability recovers amid elevated feed and other costs.
- Whether working-capital needs normalize and operating cash flow returns to positive levels after Q1’s substantial outflow.
- The effect of the 2031 refinancing on future interest expense, liquidity and the cost of failing to meet the sustainability-linked target.
- Developments, possible costs and financial-statement effects of unresolved antitrust and other litigation, including any additional settlements or penalties.
- The persistence of COVID-19 impacts on staffing, production, customer demand and exports, as well as commodity and foreign-exchange volatility.