Pilgrim’s Pride Corporation — Q1 2018 Form 10-Q
Reporting period: Thirteen weeks ended April 1, 2018; comparison is with the thirteen weeks ended March 26, 2017. Amounts below are in U.S. dollars unless noted.
Business context
Pilgrim’s Pride is a vertically integrated poultry producer operating in the U.S., U.K. and Europe, and Mexico. It reported approximately 51,400 employees and capacity to process about 45.2 million birds per work week. JBS beneficially owned 78.5% of its common stock. Moy Park, acquired from JBS in 2017, is included in the U.K. and Europe segment. The company says the prior-year comparative statements also include Moy Park under common-control accounting.
Key financial results
| Metric | Q1 2018 | Prior comparable period |
|---|---|---|
| Net sales | $2,746.7 million | $2,479.3 million |
| Gross profit / margin | $287.7 million / 10.5% | $256.5 million / 10.3% |
| Operating income / margin | $201.6 million / 7.3% | $166.7 million / 6.7% |
| Net income | $119.2 million | $100.7 million |
| Net income attributable to Pilgrim’s Pride | $119.4 million | $93.9 million |
| Diluted EPS | $0.48 | $0.38 |
| Cash provided by operating activities | $0.6 million | $66.3 million |
Sales increased 10.8%, gross profit 12.1%, and operating income 20.9%. Segment sales were $1,841.1 million in the U.S. (+6.0%), $544.3 million in U.K. and Europe (+18.6%), and $361.3 million in Mexico (+27.2%). Operating income rose in U.K. and Europe to $21.4 million from $14.4 million and in Mexico to $52.9 million from $18.8 million, but fell in the U.S. to $127.3 million from $133.6 million.
Net interest expense rose to $48.7 million from $18.7 million. Management attributed the increase mainly to costs from the Moy Park note redemption and higher average borrowings ($2.7 billion versus $1.8 billion); the weighted-average interest rate increased to 5.0% from 4.2%. The effective tax rate declined to 23.7% from 32.9%, primarily reflecting the U.S. corporate tax-rate reduction.
Cash, debt and liquidity
Cash and cash equivalents were $580.8 million at April 1, 2018. Operating cash flow was nearly flat, as earnings and noncash expenses were largely offset by cash tax payments, receivables growth, and movements in payables and accrued liabilities. Investing activities used $75.7 million, including $76.7 million of capital expenditures, primarily for efficiency and cost-reduction projects. Financing activities provided $70.3 million.
Balance-sheet debt was approximately $2.775 billion, including current maturities and long-term debt net of financing costs; contractual obligations present debt at $2.795 billion face value. The company had $705.2 million available under its U.S. revolver, $12.7 million under its Mexico facility, and $87.2 million under U.K. and Europe facilities. It reported compliance with U.S. Credit Facility covenants. Current assets were $2.593 billion and current liabilities $1.441 billion.
In March, the company issued $250 million of 5.75% notes due 2025 and $250 million of 5.875% notes due 2027. Proceeds were used for the Moy Park note tender, repayment of some secured debt, and general corporate purposes. At quarter-end, £65.7 million of Moy Park notes remained outstanding; the company subsequently gave notice to redeem them on May 29, 2018 at 101.56% of principal plus accrued interest.
Management commentary, outlook and notable items
- Management said chicken prices were then sufficient to offset feed costs, but cautioned that prices could fall due to competition from other proteins and consumer substitution. Feed prices, weather, supply and demand, and foreign exchange are key exposures. A hypothetical 10% increase in primary feed costs would have increased quarterly cost of sales by about $75.4 million before derivatives.
- Management expects operating cash flow and available credit to fund obligations, working capital, debt maturities and capital spending for at least the next twelve months. No specific earnings or revenue guidance was provided.
- Puerto Rico operations remained affected by Hurricane Maria: 2.1 million birds were lost, facilities and grower poultry houses were damaged, and full operating functionality was not expected until Q3 2018. The company recorded a $9.7 million insurance receivable against reported property damage and business-interruption losses.
- The quarter included $0.8 million of administrative restructuring charges, including impairment and severance costs. The company reported $53.2 million in carrying value for idled facilities that it was not actively marketing for sale.
- Major contingencies include broiler-chicken price-fixing and grower litigation, shareholder suits, and a Mexican tax appeal involving $40.4 million in proposed adjustments for 2009–2010; no loss was recorded for that tax appeal. The company also described ongoing investigations related to J&F/JBS and warned that outcomes or related proceedings could materially affect its business, reputation, or financial results.
- The Tax Act accounting remained incomplete; management estimated no transition-tax or GILTI liability at quarter-end and a $1.2 million FDII benefit, while noting estimates could change. The company adopted the new revenue-recognition standard in 2018 with no opening retained-earnings adjustment and expected minimal ongoing financial-statement impact.
Important facts for investors to verify
- Whether the very low Q1 operating cash flow was principally timing-related, and whether working-capital and tax-payment trends reverse.
- The effect of higher debt and interest costs after the Moy Park refinancing and redemption, including subsequent debt balances and maturities.
- Feed-cost and chicken-price trends, derivative coverage, and the sensitivity of margins to commodity and currency movements.
- Progress toward restoring Puerto Rico operations and collection of the recorded insurance receivable.
- Developments, potential exposure, and any accrual changes relating to antitrust, grower, shareholder, tax, and JBS-related matters.
- Segment performance, especially the U.S. operating-income decline and the durability of Mexico’s improvement; also note that Moy Park’s inclusion in prior comparative statements reflects common-control accounting.