Pilgrim’s Pride Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020 (December 30, 2019–March 29, 2020). Amounts below are U.S. dollars; financial statement amounts are in millions unless noted. Pilgrim’s is a vertically integrated poultry and prepared-food producer operating in the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 78.8% of its common stock.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $3,074.9 | $2,724.7 | +12.9% |
| Gross profit / margin | $177.1 / 5.8% | $218.9 / 8.0% | Profit down 19.1% |
| Operating income / margin | $84.4 / 2.7% | $137.0 / 5.0% | Down 38.4% |
| Net income attributable to Pilgrim’s | $67.3 | $84.0 | Down 19.9% |
| Diluted earnings per share | $0.27 | $0.34 | Down $0.07 |
| Cash provided by operations | $21.1 | $120.4 | Down $99.3 |
Income before tax was $106.0 million versus $104.5 million. The effective tax rate rose to 36.3% from 19.5%, which the company attributed primarily to foreign-currency effects. Net interest expense was $31.0 million, compared with $30.2 million; the weighted-average interest rate declined to 5.1% from 5.4%.
Revenue growth was concentrated in U.K. and Europe, where sales rose 59.7% to $822.3 million, primarily reflecting the acquired Tulip business. Tulip contributed $321.1 million of sales and incurred a $3.9 million net loss in the quarter. U.S. sales rose 2.3% to $1,926.9 million; Mexico sales were essentially flat at $325.8 million. Segment operating income was $85.1 million in the U.S., $23.2 million in U.K. and Europe, and a $23.9 million loss in Mexico.
Cash, debt and liquidity
- Cash and cash equivalents were $511.2 million at March 29, up from $260.6 million at year-end; restricted cash was an additional $25.2 million.
- Total debt was approximately $2.668 billion, including $350 million drawn on the U.S. revolving facility; long-term debt, net of financing costs and current maturities, was $2.621 billion. Cash less total debt implies net debt of about $2.157 billion, excluding restricted cash.
- Available borrowing capacity was $359.6 million under the U.S. facility, $64.3 million in Mexico and $135.7 million in U.K. and Europe. Management said operating cash flows and facility availability should cover obligations, working capital, debt maturities and capital spending for at least 12 months. The company reported compliance with U.S. facility covenants.
- Operating cash flow fell to $21.1 million, with significant working-capital cash uses, particularly $108.0 million from accounts payable, accrued expenses and other current liabilities. Capital expenditures were $77.2 million; cash used in investing was $78.3 million.
- Financing provided $315.2 million, including $350 million borrowed under the U.S. revolver in March as a precautionary liquidity measure amid market uncertainty. The company repurchased $27.9 million of stock during the quarter.
Changes, outlook and risks
- Sales increased, but gross and operating margins contracted as cost of sales grew faster than revenue. U.S. operating income fell 25.9%; Mexico moved to an operating loss from a profit in the prior-year quarter. Management cited higher U.S. live-input and labor costs and higher Mexico cost per pound; the acquired Tulip operations drove much of the U.K. and Europe growth.
- The $42.5 million settlement payment from non-Pilgrim’s defendants in a derivative lawsuit was received March 2. The income statement also reported a $34.2 million net miscellaneous gain; the filing does not clearly reconcile the settlement receipt to that line, so the relationship and earnings impact warrant verification.
- Management said COVID-19 had not materially affected Q1 results, but adverse impacts began as the outbreak accelerated late in the quarter. It expected business disruptions through Q2, potentially extending into the second half of 2020. Shifts from restaurant and foodservice demand toward retail, employee absenteeism, safety measures, volatile chicken prices and possible production constraints were key uncertainties. As of April 10, all but three European facilities were operating; those three were temporarily closed for commercial reasons.
- The company described liquidity as strong and estimated that the CARES Act would defer about $51 million of employer payroll taxes otherwise due in 2020, with payments due in 2021 and 2022. No formal earnings or revenue guidance was provided.
- Material risks include COVID-19 effects on staffing, production, demand, customer collections and financing; feed and product-price volatility; currency movements and tariffs; and ongoing antitrust, grower, wage and other litigation. The company said it intends to defend the cases and cannot predict their outcomes. Separate Mexican tax assessments of $24.3 million and $16.1 million are under appeal, with no loss recorded. JBS-related Brazilian investigations and potential sanctions also remain a disclosed risk.
Important facts for investors to verify
- Whether the $42.5 million settlement receipt is included in, or otherwise explains, the $34.2 million miscellaneous gain, and how much of quarterly earnings depended on unusual items.
- Subsequent COVID-19 effects on facility operations, worker availability, foodservice versus retail demand, pricing and customer payment delays.
- Whether operating cash flow and working capital recover after the substantial Q1 cash uses, and whether the precautionary revolver borrowing remains outstanding.
- Mexico segment profitability, U.K. and Europe performance excluding Tulip, and the trajectory of margins as input costs and product prices change.
- Developments in the poultry antitrust, grower and wage litigation, Mexican tax appeals, and JBS-related investigations; potential outcomes are uncertain and could be material.