Pilgrim’s Pride Corporation — Q2 2015 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 28, 2015; comparisons are with the periods ended June 29, 2014. Unaudited results. Pilgrim’s is a vertically integrated chicken producer operating in the U.S., Mexico and Puerto Rico. JBS USA owned 75.3% of the company at quarter-end.
Key financial results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $2.054B | $2.187B | $4.107B | $4.205B |
| Gross profit / margin | $432.0M / 21.0% | $349.5M / 16.0% | $809.1M / 19.7% | $564.6M / 13.4% |
| Operating income / margin | $378.4M / 18.4% | $300.4M / 13.7% | $706.0M / 17.2% | $468.6M / 11.1% |
| Net income attributable to Pilgrim’s | $241.5M | $190.4M | $445.7M | $288.5M |
| Diluted EPS | $0.93 | $0.73 | $1.71 | $1.11 |
| Cash from operations | $292.0M | Not stated for quarter | $588.1M | $416.2M |
Balance sheet, liquidity and capital
- At June 28, cash was $574.2M; current assets were $1.904B and current liabilities $818.6M. Working capital was approximately $1.09B and the current ratio was 2.33, versus $1.14B and 2.53 at December 28, 2014.
- Long-term debt, including current maturities, was approximately $1.001B, versus $4.2M at year-end. Debt comprised $500M of 5.75% senior notes due 2025 and $500M of term loans due 2020. No revolving credit borrowings were outstanding; $679.9M was available under the U.S. facility and $36M under the Mexico facility.
- First-half capital expenditures were $87.7M. Investing activities used $85.6M; financing activities used $504.5M, including the $1.498B special dividend, partly offset by borrowings and repayments.
- The company paid a special dividend of $5.77 per share, approximately $1.5B, in February. This drove retained earnings into a $461.3M accumulated deficit and reduced total equity to $1.160B from $2.197B at year-end.
Changes versus prior year and management commentary
- Q2 sales declined 6.1%; first-half sales declined 2.3%. Lower U.S. net sales per pound, reflecting a shift toward lower-priced fresh chicken products, reduced sales, partly offset by higher volume. Mexico sales were also reduced by peso translation.
- Despite lower revenue, gross profit increased 23.6% in Q2 and 43.3% for the first half. Management attributed the improvement principally to lower U.S. feed costs and more favorable derivative results; first-half U.S. operations also benefited from lower utility costs. Mexico’s results faced currency translation headwinds and higher feed costs.
- Net interest expense fell year over year as the weighted average interest rate declined, although average borrowings increased. The company reported first-half foreign currency transaction losses of $11.0M, compared with gains of $1.5M in the prior-year period.
- Management said cash from operations and available credit were expected to fund obligations, working capital, debt maturities and capital spending for at least the next 12 months. No earnings or revenue guidance was provided.
Material events, risks and contingencies
- Tyson Mexico acquisition: Closed June 29, 2015, one day after quarter-end, for approximately $400M using available cash, subject to working-capital adjustment. The acquired business has capacity of three million birds per week and over 5,400 employees. Purchase-price allocation was incomplete, and the quarter’s financial statements exclude the acquisition.
- Restructuring and assets: The company recorded $4.8M of impairment charges on properties held for sale in Texas and Louisiana. It reported $6.6M of assets held for sale and $51.2M of idled assets still held and depreciated.
- Commodity exposure: Feed ingredient prices remain volatile. The company uses futures and options, but does not designate them as cash-flow hedges, so fair-value changes affect earnings immediately. Management warned that higher feed costs or lower chicken prices could harm results.
- Controls: Management concluded disclosure controls were not effective because a previously reported material weakness in IT access and program-change controls had not been fully remediated. Management nevertheless stated the filed financial statements fairly presented results in all material respects and described a remediation plan.
- Legal matters: The Fifth Circuit ruling on the Gold Kist tax claim became final in the company’s favor, with no additional tax expected. Grower claims remained unresolved; a court had indicated it would rule for the company on remaining federal claims, but had not issued a written decision. ERISA claims seek damages exceeding $35M; the company said the likelihood and amount of any loss could not be determined.
- Other subsequent event: On July 28, 2015, the board authorized a $150M share-repurchase program, expiring July 27, 2016. No shares were repurchased during the reported quarter.
Important facts for investors to verify
- Whether improved margins persist as feed prices, chicken pricing and product mix change; assess the impact of derivative gains on reported cost of sales.
- Post-acquisition cash, debt and liquidity after the approximately $400M Tyson Mexico purchase, and the acquisition’s integration costs, earnings contribution and final purchase-price allocation.
- Debt and covenant headroom following the special dividend, including compliance with the tangible-net-worth covenant and restrictions on dividends and capital spending.
- Progress in remediating the IT-controls material weakness and whether disclosure controls are later assessed as effective.
- Developments in grower and ERISA litigation, and any resulting accruals or financial exposure.