Pilgrim’s Pride Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (52 weeks); comparison is with the 53-week fiscal year ended December 31, 2017. Pilgrim’s produces and distributes chicken and related products across the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 78.5% of the Company’s common stock.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $10.938 billion | $10.768 billion |
| Gross profit / margin | $843.5 million / 7.7% | $1.472 billion / 13.7% |
| Operating income / margin | $495.7 million / 4.5% | $1.072 billion / 10.0% |
| Net income attributable to Pilgrim’s / diluted EPS | $247.9 million / $1.00 | $694.6 million / $2.79 |
| Adjusted EBITDA (non-GAAP) | $798.2 million | $1.388 billion |
| Cash from operating activities | $491.7 million | $801.3 million |
| Capital expenditures | $348.7 million | $339.9 million |
Net sales increased 1.6%, while gross profit fell 42.7% and operating income fell 53.8%. The U.S. generated $291.4 million of operating income, down 65.4%; U.K. and Europe generated $84.5 million, up 9.6%; and Mexico generated $119.6 million, down 22.1%.
Fourth-quarter sales were $2.657 billion, gross profit was $111.8 million, and the Company reported a $7.3 million net loss attributable to Pilgrim’s, or a $0.03 diluted loss per share. Quarterly gross profit declined through the year, from $287.7 million in Q1 to $111.8 million in Q4.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $338.4 million, working capital was $938.4 million, and total assets were $5.931 billion. Current assets were $2.235 billion and current liabilities $1.296 billion. Long-term debt, net of current maturities and financing costs, was $2.295 billion; current maturities were $30.4 million. The filing separately describes approximately $505.6 million of secured and $1.8 billion of unsecured indebtedness.
Available borrowing capacity under the U.S., Mexico, and U.K./Europe facilities totaled approximately $920.9 million, in addition to cash. Management expected operating cash flow and facility availability to fund obligations, working capital, debt maturities, and capital spending for at least the next 12 months. The Company was in compliance with U.S. Credit Facility covenants.
Operating cash flow declined 38.7% year over year. Cash used in investing was $338.9 million, principally capital expenditures; cash used in financing was $384.2 million. The Company forecast 2019 capital spending of $260–$280 million, primarily for efficiency and cost-reduction projects. It stated no current intention to pay dividends. A $200 million repurchase authorization was approved in October 2018; only 15,578 shares, costing approximately $0.2 million, had been repurchased by year-end.
Drivers, outlook and notable items
- U.S. sales were nearly flat: lower prices reduced sales by $120.5 million, partly offset by higher volume. U.S. cost of sales increased $561.4 million, including higher costs per pound, feed, freight and storage, and grower compensation.
- U.K. and Europe sales rose 7.6%, supported by currency translation, higher sales prices and volume. Costs increased, including feed/raw material, payroll and freight costs. Mexico sales rose 2.6%, but foreign currency translation offset part of the increase.
- The Company recorded $27.1 million of net derivative losses in 2018, compared with $6.7 million of net gains in 2017. Feed ingredient prices, chicken prices and foreign exchange remain important earnings exposures; management estimated a 10% change in weighted-average feed costs could change cost of sales by about $304 million, before derivative effects.
- Other unusual items included a $26.4 million U.S. Tax Act transition-tax liability, which increased the effective tax rate by about 7.9 percentage points; $15.8 million of loss on early debt extinguishment; and $11.9 million of Hurricane Maria-related charges after an expected insurance recovery was denied. Hurricane Michael caused a two-day closure and approximately $3.0 million of charges. Fiscal 2018 effective tax rate was 25.7%, versus 26.9% in 2017.
- The 2017 acquisition of Moy Park from JBS and acquisition of GNP affect comparability. FY2018 includes full-year results for both, while FY2017 included only partial-year results for Moy Park and GNP. Moy Park was a common-control transaction and its historical results were combined for accounting purposes.
- Management cited continuing uncertainty from tariffs and trade policy. Risks also include feed and chicken price cycles, avian influenza and food safety events, customer and labor issues, foreign exchange, Brexit, environmental requirements, and cyber incidents.
Contingencies and governance
Material pending matters include broiler-chicken purchaser antitrust litigation alleging output restriction and price increases, grower antitrust litigation, and derivative litigation related to alleged antitrust conduct and the Moy Park acquisition. The Company says it has defenses and intends to contest the cases; outcomes and potential losses are uncertain. A Mexican subsidiary is appealing tax adjustments of $24.3 million and $16.1 million for 2009 and 2010; no loss was recorded. The filing also describes continuing investigations involving J&F/JBS and alleged improper payments in Brazil, with potential reputational, regulatory and financial consequences for the Company.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether lower margins and sharply reduced U.S. operating income persist, and how chicken pricing, feed costs, freight and grower costs evolve.
- Actual cash generation, debt service and covenant headroom; confirm facility availability and the effect of financing costs.
- Developments and potential exposure in antitrust, grower, tax and J&F/JBS-related proceedings; the filing does not provide a clear estimate of potential losses.
- Effects of tariffs, Brexit, currency movements, disease or food-safety events on operations, exports and earnings.
- Whether the planned 2019 capital expenditure range is met and produces the expected efficiency benefits.