Pilgrim’s Pride Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 27, 2020 (52 weeks). This is an annual filing; the fourth-quarter figures below are unaudited quarterly data. The company produces and distributes chicken and pork products across the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 80.26% of its common stock.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $12.092 billion | $11.409 billion |
| Gross profit / margin | $838.2 million / 6.9% | $1.070 billion / 9.4% |
| Operating income / margin | $245.5 million / 2.0% | $690.6 million / 6.1% |
| Net income attributable to PPC | $94.8 million | $455.9 million |
| Diluted EPS | $0.39 | $1.83 |
| Cash provided by operations | $724.2 million | $666.5 million |
| Capital expenditures | $354.8 million | $348.1 million |
Revenue rose 6.0%, but gross profit fell 21.7% and operating income fell 64.5%. Management reported adjusted net income of $250.4 million, or $1.02 per diluted share, versus $405.1 million, or $1.62, in 2019. Adjusted EBITDA was $788.1 million versus $973.8 million. These are non-GAAP measures; the filing cautions they should be considered alongside, not instead of, GAAP results.
Fourth-quarter net sales were $3.118 billion and gross profit was $227.4 million. Net income attributable to PPC was $79,000, with diluted EPS shown as zero rounded to cents.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $547.6 million (cash plus restricted cash was $548.4 million). Working capital was $965.1 million. Total debt was approximately $2.30 billion at face value, including $450 million outstanding on the U.S. term loan; the balance sheet reported $2.281 billion of debt, net of financing costs and current maturities. The company reported $933.6 million of available borrowing capacity across its U.S., Mexico, and U.K./Europe facilities, after applicable letters of credit. It said operating cash flow and available credit should cover obligations and planned spending for at least 12 months.
Operating cash flow increased 8.7% year over year. Accounts payable and accrued expenses contributed $295.3 million of operating cash, including accruals for the DOJ fine and legal settlement; thus, working-capital timing was a significant cash-flow factor. Financing activities used $136.7 million, including $110.2 million for share repurchases. No dividend is currently planned. Management anticipates $375 million to $400 million of capital expenditures in 2021, primarily for efficiency and cost-reduction projects.
Material changes and management commentary
- U.K. and Europe sales increased 37.4%, principally due to the acquisition of Pilgrim’s Pride Ltd. (formerly Tulip), which contributed about $1.1 billion of sales growth. U.S. sales declined 1.8%; Mexico sales declined 4.8%, including adverse currency effects.
- U.S. operating income fell to $69.4 million from $487.3 million. U.K. and Europe operating income rose to $102.7 million from $79.2 million; Mexico operating income fell to $72.9 million from $124.0 million.
- COVID-19 shifted demand from foodservice toward retail, disrupted supply chains, and increased employee health, benefits, and operating costs. Some facilities ran at reduced output, though all 60 production facilities were operating as of February 10, 2021. Management expected pandemic-related disruption to continue into 2021.
- Management reported chicken-market prices recovered during the second half of 2020. The 2021 outlook depends on foodservice recovery, the pandemic, regulation, the broader economy, and protein supply. The filing provides no specific earnings or revenue guidance.
- Feed costs, disease outbreaks, foreign exchange, trade policy and tariffs, Brexit-related uncertainty, labor availability and costs, food safety, environmental regulation, and customer concentration are among the risks identified. The two largest customers represented 13.1% of sales combined; no single customer exceeded 10%.
Unusual items, contingencies and governance
FY2020 results included a $110.5 million DOJ antitrust fine, a $75.0 million direct-purchaser class settlement, and $15.0 million of incremental Hometown Strong donations expense. The company agreed to plead guilty to one Sherman Act count; the agreement was subject to court approval and the company continued cooperating with the DOJ investigation. Other broiler-chicken antitrust, grower, securities, and related cases remained pending. The company stated outcomes are uncertain and could result in further material costs or other relief.
A separate shareholder derivative settlement generated $34.6 million of income, net of legal fees. The company committed $20 million to Hometown Strong donations for 2020 and recorded $15 million of expense during the year. The effective tax rate rose to 41.2% from 26.1%, with the DOJ fine a material factor. KPMG gave unqualified opinions on the financial statements and internal controls; the audit identified inventory costing as a critical audit matter, not a qualification.
Important facts for investors to verify
- Legal status, court approval, payment timing, and any remaining exposure related to the DOJ plea agreement and antitrust settlements and litigation.
- Whether FY2020 operating cash flow is sustainable given the large contribution from payables and accrued expenses, including legal accruals.
- Feed-ingredient costs, chicken and pork pricing, and the pace of foodservice recovery, particularly in the U.S. and Mexico.
- Execution of the $375–$400 million 2021 capital plan, borrowing availability, debt maturities, and compliance with credit-facility covenants.
- Contribution and profitability of the acquired U.K. pork business, and the effects of currency movements, Brexit, and changing trade policies.