Pilgrim’s Pride Corporation (NASDAQ: PPC) — Q2 2019 Form 10-Q
Reporting period: 13 and 26 weeks ended June 30, 2019; comparisons are to periods ended July 1, 2018. Figures are in U.S. dollars.
Business context
Pilgrim’s Pride is a vertically integrated chicken producer operating in the U.S., U.K. and Europe, and Mexico. It sells fresh and prepared chicken products to retail, foodservice and other customers. JBS beneficially owned 78.4% of the company at quarter-end.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $2,843.1m | $2,836.7m | $5,567.8m | $5,583.4m |
| Gross profit | $367.9m | $274.2m | $586.8m | $561.9m |
| Operating income | $279.6m | $185.1m | $416.6m | $386.7m |
| Net income attributable to PPC | $170.1m | $106.5m | $254.1m | $226.0m |
| Diluted EPS | $0.68 | $0.43 | $1.02 | $0.91 |
| Operating cash flow | $283.0m | Not stated here | $403.4m | $304.0m |
Q2 sales rose 0.2%, while gross profit increased 34.1% and operating income 51.0%. Gross margin improved to 12.9% from 9.7%; operating margin rose to 9.8% from 6.5%. For the first half, sales declined 0.3%, gross profit grew 4.4%, and operating income grew 7.7%; gross margin was 10.5% versus 10.1%, and operating margin 7.5% versus 6.9%.
Q2 improvement was led by the U.S., where operating income increased $87.5m to $187.0m, reflecting lower cost per pound, including reduced feed and commodity-derivative costs. Mexico operating income rose to $68.4m, while U.K. and Europe operating income was $24.2m. For the first half, U.S. operating income rose 33.1%, but U.K. and Europe fell 18.1% and Mexico fell 32.2%.
First-half net interest expense declined to $60.4m from $84.1m, primarily as average borrowings fell to $2.3bn from $2.7bn; the weighted-average rate increased to 5.4% from 5.1%. First-half income tax expense was $96.0m, with a 27.4% effective rate, versus $75.5m and 25.1% a year earlier.
Cash, debt and liquidity
- At June 30, 2019, cash and cash equivalents were $538.2m, restricted cash was $33.4m, and current assets were $2.48bn against current liabilities of $1.39bn.
- Long-term debt, including current maturities, had a reported carrying amount of approximately $2.31bn. The company also reported $318.6m of operating lease liabilities following adoption of the lease accounting standard.
- Cash provided by operations of $403.4m in the first half funded $177.6m of capital expenditures. Investing cash use was $175.9m; financing cash use was $17.5m. Cash, cash equivalents and restricted cash increased $210.0m.
- Available liquidity included $708.4m under the U.S. revolving facility, $78.0m under the Mexico facility and $135.0m under U.K. and Europe facilities, in addition to cash. The U.S. facility had no revolver borrowings, but $41.6m of letters of credit reduced availability. Management stated it expected operating cash flow and facility availability to cover obligations and planned spending for at least 12 months; the company reported compliance with U.S. facility covenants.
Material developments, outlook and risks
- Tax item: The company recorded a $16.5m loss in the first half related to a Mexican tax assessment concerning a 2011 transaction. Separate Mexican tax assessments of $24.3m and $16.1m for 2009 and 2010 remained under appeal, with no loss recorded for those matters.
- Litigation: PPC faces broiler-chicken antitrust class and direct-purchaser litigation alleging output restriction and price increases, as well as grower-related litigation. The DOJ intervened in the antitrust matter and subpoenaed PPC; discovery was stayed through September 27, 2019. The company said outcomes and potential losses cannot be predicted and could be material.
- Other contingencies: The filing describes ongoing investigations and proceedings involving J&F/JBS and warns that resulting penalties, litigation or reputational harm could adversely affect the company. PPC states it is cooperating with investigations and strengthening compliance measures.
- Operating risks: Feed and chicken prices, disease outbreaks, product contamination, labor costs and availability, foreign exchange, trade disruption, litigation and customer competition can affect results. Management said current chicken prices were sufficient to offset feed costs, but gave no specific earnings or revenue guidance.
- Brexit: The company identified potential disruption to trade, tariffs, costs, demand and currency values, and described contingency planning, including increased inventories where possible.
- Unusual accounting change: Lease-standard adoption materially increased reported assets and liabilities, but management said it did not materially affect the income statement. First-half pension costs also increased to $9.6m from $6.2m, including a $1.9m settlement loss.
Most important facts for investors to verify
- Whether Q2 U.S. margin gains and lower feed/derivative costs persist, and whether weaker first-half performance in Mexico and U.K./Europe continues.
- Developments, potential exposure and any accruals related to antitrust, grower, tax and J&F/JBS matters.
- Debt repayment needs, interest-rate exposure, facility availability and compliance with financing covenants.
- Actual effects of Brexit, commodity-price movements, foreign exchange, labor costs and disease or food-safety events.
- Whether operating cash flow can support planned capital spending and liquidity needs; management’s stated outlook is not a specific earnings forecast.