Pilgrim’s Pride Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter (13 weeks) and first half (26 weeks) ended July 1, 2018. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. Pilgrim’s Pride produces and sells chicken and prepared foods in the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 78.5% of its common stock. Prior-period figures include Moy Park on a combined, common-control basis.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $2,836.7 | $2,752.3 | $5,583.4 | $5,231.6 |
| Gross profit | $274.2 | $474.8 | $561.9 | $731.2 |
| Gross margin | 9.7% | 17.3% | 10.1% | 14.0% |
| Operating income | $185.1 | $378.3 | $386.7 | $545.1 |
| Operating margin | 6.5% | 13.7% | 6.9% | 10.4% |
| Net income attributable to Pilgrim’s Pride | $106.5 | $233.6 | $226.0 | $327.6 |
| Diluted EPS | $0.43 | $0.94 | $0.91 | $1.32 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $304.0 | $333.5 |
Q2 sales rose 3.1%, while gross profit fell 42.2%; first-half sales rose 6.7%, while gross profit fell 23.2%. Management attributed cost pressure principally to higher feed-grain costs, freight and storage, grower payments and labor, as well as derivative losses and foreign-currency effects. The U.S. segment drove much of the first-half operating-income decline; U.K. and Europe and Mexico operating income increased.
First-half capital expenditures were $155.2 million, compared with $198.0 million a year earlier. Operating cash flow less capital expenditures was approximately $148.8 million, versus $135.6 million in the prior-year first half. Cash, cash equivalents and restricted cash totaled $674.0 million at period-end.
Balance sheet, debt and liquidity
- Total assets were $6,302.6 million and total liabilities were $4,248.2 million at July 1, 2018. Current assets of $2,590.9 million exceeded current liabilities of $1,387.1 million.
- Debt, including current maturities and net of financing costs, was approximately $2,629.1 million, down from approximately $2,683.4 million at December 31, 2017. The balance included $760.0 million of U.S. term loans and senior notes due 2025 and 2027.
- Available borrowing capacity was reported as $705.1 million under the U.S. facility, $75.4 million in Mexico, and $104.2 million in U.K. and Europe facilities. U.S. availability reflects $44.9 million of outstanding letters of credit.
- First-half interest expense, net of capitalized interest, was $90.6 million versus $41.7 million; management cited higher average borrowings and a higher weighted-average rate.
Material developments, outlook and risks
- Refinancing after quarter-end: On July 20, 2018, the company entered into a new credit agreement with a $750 million revolving commitment and $500 million term-loan commitment, extending facility maturities to July 2023. Proceeds and cash on hand repaid loans under the prior agreement.
- No specific earnings guidance: The filing provides no numerical forward earnings outlook. Management expected operating cash flows and credit-facility availability to fund obligations, working capital, debt maturities and capital spending for at least the next 12 months.
- Commodity, currency and market exposure: Feed prices, chicken pricing, foreign exchange and interest rates remain significant sensitivities. A hypothetical 10% increase in primary feed-ingredient costs would have increased quarterly cost of sales by approximately $77.5 million, before derivative impacts. Commodity derivative losses were $17.6 million for the first half.
- Legal and regulatory contingencies: The company faces broiler-chicken antitrust purchaser and grower litigation, related shareholder actions, and investigations concerning JBS/J&F. It says it intends to defend the cases, but outcomes and potential financial effects cannot be predicted. A Mexican tax assessment appeal totals $40.4 million; no loss was recorded.
- Other unusual items: Hurricane Maria damage in Puerto Rico included an $11.5 million insurance receivable; operations were not expected to be fully functional until Q3 2018. First-half restructuring charges were $1.9 million, including costs related to GNP and closure of 40 North Foods. The Tax Act accounting remained incomplete; the company estimated a $6.9 million GILTI liability and a $0.7 million FDII benefit.
- Management reported disclosure controls were effective. The internal-control evaluation excluded Moy Park, which contributed $2.0 billion of assets and $1.1 billion of first-half revenue.
Important facts for investors to verify
- Whether margins and earnings recover as feed, freight, grower and labor costs change, and whether chicken prices offset those costs.
- Current debt, interest burden, covenant compliance and the terms and borrowing levels under the post-quarter refinancing.
- Developments and possible exposure from antitrust, shareholder, JBS/J&F and Mexican tax matters.
- Timing and amount of Puerto Rico insurance recoveries and restoration of operations.
- Final tax effects of the Tax Act, including GILTI, and any material changes to estimates.