Pilgrim’s Pride Corporation — Q3 2019 Form 10-Q
Business context and reporting period. Pilgrim’s Pride is a vertically integrated poultry producer operating in the U.S., U.K. and Europe, and Mexico. This unaudited quarterly report covers the 13 and 39 weeks ended September 29, 2019; comparatives are the periods ended September 30, 2018. JBS beneficially owned 78.3% of the company.
Key financial results
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $2,778.0m | $2,697.6m | $8,345.7m | $8,281.0m |
| Gross profit | $282.2m | $169.7m | $869.0m | $731.6m |
| Gross margin | 10.2% | 6.3% | 10.4% | 8.8% |
| Operating income | $188.2m | $85.3m | $604.8m | $472.1m |
| Operating margin | 6.8% | 3.2% | 7.2% | 5.7% |
| Net income attributable to Pilgrim’s Pride | $109.8m | $29.3m | $363.8m | $255.3m |
| Diluted earnings per share | $0.44 | $0.12 | $1.46 | $1.03 |
Cash flow and liquidity. For the first 39 weeks, operating cash flow was $535.5m, versus $425.3m in 2018; capital expenditures were $258.7m, versus $231.9m. Cash and cash equivalents were $598.1m at September 29, 2019, with $26.9m of restricted cash. Total current assets were $2.61bn and current liabilities $1.44bn (current ratio approximately 1.82). Management stated operating cash flow and facility availability should fund obligations, working capital, debt maturities and capital spending for at least 12 months.
Debt. Long-term debt, including current maturities and finance leases, was approximately $2.33bn before financing costs; approximately $2.28bn was reported as noncurrent debt net of costs, plus $26.6m current maturities. Cash less reported debt implies net debt of roughly $1.73bn, excluding restricted cash and operating leases. The company had $708.4m available under its U.S. revolver after letters of credit, and $74.8m and $133.8m available under Mexico and U.K./Europe facilities, respectively. It reported compliance with U.S. Credit Facility covenants.
Material changes and operating drivers
- Q3 sales increased 3.0%, while gross profit rose 66.3% and operating income rose 120.5% year over year. For the 39-week period, sales increased 0.8%, gross profit 18.8% and operating income 28.1%.
- The U.S. drove much of the improvement: Q3 segment operating income was $125.2m, versus $74.2m; 39-week income was $427.0m, versus $301.0m. Management cited improved sales pricing/volume and lower cost per pound in the U.S.
- Mexico Q3 operating income improved to $37.7m from a $12.4m loss; management cited pricing and lower production volume costs, including a $10.0m gain on sale of two broiler farms. Mexico 39-week operating income rose to $115.5m from $102.5m.
- U.K. and Europe Q3 operating income was $25.3m, up from $23.5m, but 39-week operating income fell to $62.2m from $68.5m. Period sales were pressured by currency translation and lower volumes, partly offset by higher sales per pound.
- Net interest expense decreased to $27.3m in Q3 from $31.1m and to $87.7m for 39 weeks from $115.2m, primarily reflecting lower average borrowings. The 39-week weighted-average interest rate increased to 5.4% from 5.2%.
Outlook, risks and unusual items
- No quantified earnings or sales guidance was provided. Management said chicken prices were then sufficient to offset feed costs, but warned prices could fall due to competition from other proteins and consumer substitution.
- Commodity exposure remains material: a hypothetical 10% change in primary feed ingredient costs would have changed quarterly cost of sales by about $78.8m, before derivatives. Derivatives generated net losses of $10.0m in Q3 and $18.5m for 39 weeks.
- Brexit-related disruption, tariffs, currency movements, border delays and added costs could affect European operations. The company described contingency steps including increased stock where possible and customer planning.
- After quarter-end, on October 15, 2019, the company acquired U.K. prepared-pork supplier Tulip for £290m, subject to customary working-capital adjustments, funded from cash. Integration and expected benefits remain uncertain.
- Material legal exposures include broiler-chicken antitrust class and direct actions, a DOJ investigation and subpoena, grower litigation, and newly filed plant-worker wage-fixing cases. The company says it will defend the claims; outcomes and potential losses cannot be predicted. A separate Moy Park acquisition derivative case was stipulated for settlement under which non-company defendants would pay Pilgrim’s $42.5m less specified fees, expenses and taxes, subject to court approval.
- A Mexican tax subsidiary paid and recorded a $16.6m loss related to a 2011 transaction during the period. It is separately appealing proposed tax adjustments totaling $40.4m for 2009–2010; no loss was recorded for those disputed amounts.
- Adoption of lease accounting increased balance-sheet assets and liabilities; operating lease assets were $300.5m and reported operating lease liabilities totaled approximately $301.1m. Management said the change did not materially affect income.
Investor verification checklist
- Track whether stronger U.S. and Mexico margins persist, and whether U.K./Europe volume and operating income recover.
- Review feed and chicken price trends, derivative results, and the timing lag between feed purchases and reported cost of sales.
- Assess post-acquisition cash, debt, integration costs and performance after Tulip’s purchase.
- Monitor antitrust, DOJ, grower, wage and tax matters for developments that could change estimated liabilities or cash needs.
- Confirm liquidity and covenant headroom after capital spending, debt service and the acquisition; the filing reports $350.2m of purchase obligations and $799.7m of estimated future interest payments.