Pilgrim’s Pride Corporation — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the 13 and 26 weeks ended June 25, 2017. Pilgrim’s Pride produces and sells chicken products in the U.S., Mexico and Puerto Rico; it operates as one reportable segment. JBS beneficially owned 78.6% of the company’s outstanding shares.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $2,251.6 million | $2,028.3 million | $4,272.1 million | $3,991.3 million |
| Gross profit | $425.4 million | $286.1 million | $640.6 million | $523.7 million |
| Gross margin | 18.9% | 14.1% | 15.0% | 13.1% |
| Operating income | $359.4 million | $236.6 million | $511.8 million | $425.4 million |
| Operating margin | 16.0% | 11.7% | 12.0% | 10.7% |
| Net income attributable to Pilgrim’s Pride | $233.6 million | $152.9 million | $327.6 million | $271.3 million |
| Diluted earnings per share | $0.94 | $0.60 | $1.32 | $1.06 |
- Revenue and profit: Q2 sales increased 11.0%, and first-half sales increased 7.0%. Q2 gross profit rose 48.7%; first-half gross profit rose 22.3%. Higher sales per pound and the GNP acquisition contributed to growth; lower volume in existing U.S. operations partly offset it.
- Cash flow: First-half cash from operations was $316.1 million, versus $289.0 million a year earlier. Investing used $532.4 million, including $359.7 million for GNP, net of acquired cash, and $174.2 million in capital expenditures. Financing provided $415.2 million. Q2 operating cash flow was reported in MD&A as $254.7 million; the statements provide cash flow for the 26-week period.
- Liquidity: At June 25, cash and cash equivalents were $303.9 million, with an additional $20.3 million of restricted cash. Current assets were $1.788 billion and current liabilities $982.2 million (current ratio approximately 1.82).
- Debt: Total debt at face value was approximately $1.457 billion, up from $1.024 billion at December 25, 2016; cash less face-value debt was approximately negative $1.153 billion. The company had $800 million of term loans and $73.3 million of U.S. revolver borrowings; $631.9 million remained available under the revolver after letters of credit. The Mexico facility had $83.3 million outstanding.
Material changes versus the prior comparable period
- Q2 net income attributable to the company rose to $233.6 million from $152.9 million; first-half net income rose to $327.6 million from $271.3 million.
- Improved margins reflected stronger results in U.S. and Mexico operations. Existing U.S. operations benefited from lower feed costs, while increased labor and benefit costs were a partial offset. Mexico sales growth was reduced by unfavorable currency translation.
- On January 6, 2017, the company acquired GNP, a Minnesota poultry business, for a preliminary purchase price of $357.3 million. GNP contributed $213.7 million in first-half sales and $14.8 million in first-half net income. Purchase accounting remains preliminary.
- Borrowings and interest expense increased, principally to fund the acquisition. The weighted-average borrowing rate was 3.9% for the first half versus 3.7% in 2016.
- Capital expenditures rose to $174.2 million from $94.0 million. The company repurchased $14.6 million of shares in the first half; no repurchases occurred during Q2.
Outlook, management commentary and risks
- No specific earnings or revenue guidance is provided. Management said chicken prices were then sufficient to offset feed ingredient costs and expected operating cash flows plus U.S. facility availability to fund obligations and planned capital spending for at least 12 months.
- Management warned that feed prices remain volatile and that increases could adversely affect financial results and cash flow. A hypothetical 10% increase in weighted-average feed costs would have raised quarterly cost of sales by approximately $59.3 million, before derivative effects. Commodity hedges are not designated as cash-flow hedges, so fair-value changes flow through earnings.
- The company recorded $4.3 million in Q2 administrative restructuring charges, including a $3.5 million impairment of an Alabama processing complex held for sale, $0.7 million for obsolete GNP software costs and $0.1 million in severance. It expects approximately $1.8 million of additional GNP-related severance costs in 2017.
- Material legal matters include purchaser antitrust class actions alleging a broiler chicken price/output conspiracy, a grower class action, securities and derivative suits, and unresolved IRS tax calculations. The company says it intends to defend the cases; outcomes and potential losses cannot be predicted and could be material.
- J&F Investimentos, an indirect controlling shareholder, is investigating improper payments in Brazil, including whether any conduct had a connection to Pilgrim’s or violated U.S. law. Pilgrim’s is cooperating; the investigation is ongoing and its outcome is uncertain.
- Other identified risks include disease outbreaks, product contamination and recalls, customer and pricing pressures, labor matters, foreign exchange movements, weather, and acquisition integration. The company reported compliance with U.S. Credit Facility covenants. Disclosure controls were deemed effective, but the internal-control evaluation excluded GNP.
Important facts for investors to verify
- Whether stronger margins and earnings persist after accounting for GNP’s contribution, lower existing U.S. sales volumes and changing feed costs.
- Final GNP purchase-price allocation, integration progress, and realization of anticipated synergies; current valuations are preliminary.
- Debt repayment, interest-rate exposure, revolver availability and compliance with credit-facility covenants as capital spending continues.
- Developments and potential financial exposure from antitrust, securities, grower, tax and J&F-related matters.
- Whether working-capital growth, including receivables and inventories, affects cash conversion; first-half cash generation occurred alongside increased operating-asset investment.