Pilgrim’s Pride Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 28, 2020; comparisons are with the quarter ended June 30, 2019. The six-month period runs from December 30, 2019 through June 28, 2020. Dollar amounts below are in millions unless stated otherwise.
Business context
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 79.6% of the company’s outstanding common stock. The U.K. and Europe results include Tulip, acquired in October 2019.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $2,824.0 | $2,843.1 | $5,899.0 | $5,567.8 |
| Gross profit | $119.9 | $367.9 | $297.0 | $586.8 |
| Operating income | $27.3 | $279.6 | $111.7 | $416.6 |
| Net income (loss) attributable to Pilgrim’s | $(6.0) | $170.1 | $61.2 | $254.1 |
| Diluted EPS | $(0.02) | $0.68 | $0.25 | $1.02 |
| Gross margin | 4.2% | 12.9% | 5.0% | 10.5% |
| Operating margin | 1.0% | 9.8% | 1.9% | 7.5% |
Cash flow: Operating cash flow was $140.7 million for the first half, versus $403.4 million a year earlier. Capital expenditures were $148.2 million, producing negative free cash flow of approximately $7.5 million before acquisitions and other investing items. Investing activities used $142.5 million. Financing activities provided $258.6 million, including precautionary credit-facility borrowings; cash, cash equivalents and restricted cash ended at $534.5 million. Management separately reported $119.6 million of operating cash generated in Q2.
Liquidity and debt: At June 28, cash and cash equivalents were $507.4 million. Long-term debt, including current maturities and before financing costs, was approximately $2,661.4 million; net debt on that basis was approximately $2,154.0 million. The company had $359.6 million available under its U.S. revolving facility after outstanding letters of credit, plus reported availability of $68.4 million under Mexico facilities and $134.6 million under U.K. and Europe facilities. Management said cash from operations and available facilities should cover obligations, working capital, maturities and capital spending for at least twelve months. The company reported compliance with U.S. Credit Facility covenants.
Changes and drivers versus comparable periods
- Q2 sales decreased 0.7%, while first-half sales rose 5.9%, primarily reflecting the inclusion of Tulip. Tulip contributed $336.2 million of Q2 sales and $657.3 million of first-half sales.
- Profitability fell sharply: Q2 gross profit declined 67.4% and operating income declined 90.2%; first-half gross profit declined 49.4% and operating income declined 73.2%.
- Management attributed pressure to COVID-19-related foodservice weakness and the shift toward retail, lower pricing, supply-chain disruption, higher broiler and chick costs, and higher payroll and benefits costs. Q2 cost of sales increased 9.2% despite slightly lower sales.
- Segment results diverged. Q2 operating income was $39.4 million in the U.S. and $23.2 million in U.K. and Europe, while Mexico recorded a $35.5 million operating loss. For the first half, Mexico recorded a $59.4 million operating loss. U.K. and Europe sales growth reflected Tulip, while existing operations faced COVID-related foodservice weakness and adverse currency translation.
- First-half results included $34.6 million of net income from a court-approved settlement paid to Pilgrim’s by non-PPC defendants in a derivative action relating to the Moy Park acquisition. This unusual item is included in miscellaneous, net.
- Debt increased from year-end: the company drew $350 million under its U.S. revolving facility in March as a precaution amid COVID-19 uncertainty. It also repurchased 4.1 million shares for $77.9 million in the first half.
Outlook, risks and contingencies
- No quantified earnings, sales or margin guidance was provided. Management expected COVID-19 disruptions to continue in the second half of 2020 and cited uncertainty around foodservice recovery, consumer demand, labor availability, commodity prices, foreign exchange and trade policy.
- All 60 production facilities were operating as of the filing’s stated date, although some had reduced output. The company described employee health measures and efforts to shift product mix and production toward retail demand.
- Significant legal exposure remains. The company faces broiler-chicken antitrust class and direct actions, a DOJ investigation, grower litigation and plant-worker compensation litigation. The filing says outcomes cannot be predicted and damages could be material.
- In June, CEO and President Jayson Penn was indicted alongside others on alleged broiler-chicken bid-rigging and price-fixing charges; he pleaded not guilty and took paid leave. CFO Fabio Sandri was appointed interim CEO and president.
- Mexican tax authorities are challenging tax treatment for 2009 and 2010, with $24.3 million and $16.1 million under appeal; no loss was recorded. The filing also describes continuing investigations and proceedings involving JBS and its controlling shareholder, with potential reputational, financial and operational consequences.
- Other financial exposures include $111.5 million of unfunded pension obligations and the risk of further COVID-related customer payment delays, operating disruption, asset impairment or financing pressure. The company estimated that the CARES Act would defer approximately $51 million of employer payroll taxes otherwise payable in 2020.
Investor verification priorities
- Track recovery in foodservice demand, chicken pricing and costs, particularly whether Mexico’s operating losses improve.
- Separate Tulip’s contribution and performance from underlying U.K. and Europe operations; verify integration progress and profitability.
- Monitor operating cash generation, working-capital movements, capital spending, revolving borrowings and remaining facility availability.
- Follow developments in the DOJ investigation, antitrust and other litigation, and the consequences of the executive indictment; assess potential financial exposure and governance changes.
- Reconcile first-half earnings with the $34.6 million settlement income and other currency, derivative and pension-related impacts.