Pilgrim’s Pride Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 27, 2020; comparisons are with periods ended September 29, 2019. Pilgrim’s Pride is a vertically integrated poultry and prepared-foods producer operating in the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 80.2% of its common stock.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $3.075 billion | $2.778 billion | $8.974 billion | $8.346 billion |
| Gross profit / margin | $313.8 million / 10.2% | $282.2 million / 10.2% | $610.8 million / 6.8% | $869.0 million / 10.4% |
| Operating income / margin | $94.3 million / 3.1% | $188.2 million / 6.8% | $206.0 million / 2.3% | $604.8 million / 7.2% |
| Net income attributable to Pilgrim’s | $33.4 million | $109.8 million | $94.7 million | $363.8 million |
| Diluted earnings per share | $0.14 | $0.44 | $0.38 | $1.46 |
| Operating cash flow | $367.6 million, per MD&A | Not stated here | $508.3 million | $535.5 million |
Q3 adjusted net income attributable to Pilgrim’s was $161.7 million, versus $112.1 million a year earlier. Nine-month adjusted net income was $206.9 million, versus $369.8 million. These non-GAAP figures exclude specified items, including the DOJ fine, Hometown Strong donations and foreign-currency effects.
Balance sheet and liquidity
- At September 27, 2020, cash and cash equivalents were $768.0 million, versus $260.6 million at December 29, 2019. Total current assets were $3.058 billion and current liabilities $1.695 billion.
- Long-term debt, net of financing costs, was $2.611 billion, plus $25.5 million of current maturities. Debt at face value was approximately $2.656 billion. The company had drawn $350 million on its U.S. revolver; $359.6 million remained available after letters of credit. Other available facilities totaled $206.3 million. Management said cash and facilities should cover obligations and planned spending for at least 12 months.
- Nine-month operating cash flow was $508.3 million; capital expenditures were $242.6 million; cash used in investing was $225.1 million. Financing provided $222.1 million, including $386.7 million in borrowings and $107.8 million of share repurchases.
Material changes and drivers
- Q3 sales rose 10.7%, but operating income fell 49.9%. The $110.5 million DOJ antitrust fine and $14.5 million of Hometown Strong donations substantially increased SG&A. Without these and other specified items, adjusted Q3 earnings were higher year over year.
- Nine-month sales increased 7.5%, while gross profit fell 29.7% and operating income fell 65.9%. Lower U.S. and Mexico profitability, pandemic-related market disruption and higher costs weighed on results.
- U.K. and Europe sales benefited from the October 2019 acquisition of Tulip, renamed Pilgrim’s Pride Ltd. (PPL): acquired operations contributed $341.8 million of Q3 sales and $999.1 million for the nine months. PPL reported a nine-month net loss of $0.3 million.
- Q3 segment operating income was $2.5 million in the U.S., $29.9 million in U.K. and Europe, and $61.7 million in Mexico. For the nine months, U.S. operating income was $127.0 million, U.K. and Europe $76.3 million, and Mexico $2.2 million.
- Net debt increased alongside pandemic-related precautionary revolver borrowing. The company repurchased 6.1 million shares for $107.8 million during the nine months; $89.1 million remained under the authorization.
Outlook, risks and unusual items
- The filing provides no specific earnings or sales guidance. Management expected COVID-19-related disruption to continue through the remainder of 2020 and into 2021, while noting Q3 improvement in foodservice demand and more stable chicken prices. Future pricing depends on foodservice recovery, restrictions, economic conditions, protein supply and consumer demand.
- COVID-19 affected supply chains, staffing, production costs and the mix of foodservice versus retail demand. All 60 production facilities were operating as of October 28, 2020, though some operated at reduced levels. Management cited continuing risks from facility disruption, employee health, commodity and foreign-exchange volatility, and demand shifts.
- On October 13, 2020, after quarter-end, the company announced a DOJ plea agreement to plead guilty to one Sherman Act conspiracy count and pay a $110.5 million fine. The fine was accrued in Q3 and is non-deductible for tax purposes; the agreement remained subject to court approval. The company said the DOJ agreed not to bring further charges against it for covered U.S. broiler sales conduct before the agreement, but its cooperation with the broader investigation continued.
- Related private antitrust, securities, grower and other litigation remained pending. The company said outcomes were uncertain and adverse judgments or settlements could materially affect results. It also disclosed Mexican tax assessments totaling $40.4 million under appeal, with no loss recorded.
- CEO Jayson Penn went on leave in June and was no longer with the company by September 22. CFO Fabio Sandri became CEO while retaining the CFO role; a CFO search was underway. Management reported disclosure controls effective, while excluding PPL from the evaluation.
- The company recorded $34.6 million of net income from a settlement paid by non-company parties in a shareholder derivative case. It also recorded a $10.6 million deferred tax expense related to the U.K. corporate tax rate remaining at 19%.
Investor verification points
- Track court approval and payment timing of the DOJ plea agreement, the continuing federal investigation, and the potential exposure from related private litigation.
- Reconcile reported earnings with adjusted earnings, especially the fine, Hometown Strong expense, currency effects and settlement income.
- Monitor U.S. and Mexico segment recovery, foodservice demand, feed and labor costs, and the contribution and integration of PPL.
- Review debt, revolver use, covenant compliance, available liquidity and the scale of share repurchases against cash generation and capital spending.
- Assess COVID-19 operating impacts, foreign-exchange exposure, pension funding, and the unresolved Mexican tax appeals.