Pilgrim’s Pride Corporation — Form 10-Q Summary
Reporting period: Thirteen weeks ended September 24, 2017 (third quarter) and thirty-nine weeks ended September 24, 2017. Comparative periods ended September 25, 2016. Amounts below are in U.S. dollars.
Business context and reporting period
Pilgrim’s Pride produces fresh and prepared chicken products across the U.S., U.K. and Europe, and Mexico. JBS S.A. beneficially owned 78.6% of the company’s common stock at September 24, 2017. The statements include GNP, acquired in January 2017, and Moy Park, transferred from JBS on September 8, 2017. Moy Park is presented on a common-control basis, with its results combined from September 30, 2015; this affects interpretation of year-over-year comparisons.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $2.794 billion | $2.495 billion | $8.026 billion | $7.508 billion |
| Gross profit / margin | $478.6 million / 17.1% | $253.1 million / 10.1% | $1.210 billion / 15.1% | $875.1 million / 11.7% |
| Operating income / margin | $372.2 million / 13.3% | $176.8 million / 7.1% | $917.3 million / 11.4% | $645.0 million / 8.6% |
| Net income attributable to Pilgrim’s Pride | $232.7 million | $98.7 million | $560.2 million | $369.9 million |
| Diluted earnings per share | $0.93 | $0.39 | $2.25 | $1.45 |
Cash flow: For the first 39 weeks, operating cash flow was $618.5 million, versus $552.0 million a year earlier. Investing used $914.3 million, including $658.5 million for acquisitions and $258.4 million in capital expenditures. Financing provided $389.8 million. Cash, cash equivalents and restricted cash ended at $406.6 million.
Debt and liquidity: Debt was approximately $2.63 billion at quarter-end, before unamortized financing costs, compared with approximately $1.43 billion at December 25, 2016. Cash and cash equivalents were $401.8 million. The company reported $631.9 million available under its U.S. revolver and $108.9 million available across U.K. and Europe facilities; its Mexico facility was fully drawn. The U.S. facility’s covenant and capital-spending limits apply, and the company reported compliance at quarter-end. Management said operating cash flow and facility availability were expected to cover obligations and planned spending for at least twelve months.
Material changes versus prior comparable periods
- Q3 sales rose 12.0%; 39-week sales rose 6.9%. The company attributed much of U.S. growth to GNP and higher sales per pound. In the U.S., lower existing-business volumes partly offset those gains; export shipments were disrupted by hurricane-related port delays.
- Profitability improved substantially: Q3 gross profit increased 89.1% and operating income 110.5%; for 39 weeks, gross profit increased 38.2% and operating income 42.2%. Management cited lower U.S. feed costs and improved derivative results among the factors supporting margins.
- U.K. and Europe 39-week sales declined 0.7%, primarily due to adverse currency translation, while segment operating income declined 7.1%. Mexico operating income increased 34.3% for the 39-week period.
- Interest expense rose as average borrowings increased, largely to fund acquisitions. The 39-week effective tax rate was 32.2%, versus 34.0% in 2016.
- After quarter-end, the company issued $250 million of additional 5.75% notes due 2025 and $600 million of 5.875% notes due 2027; proceeds repaid the $753.7 million JBS seller note used for Moy Park. Moy Park’s outstanding notes validly tendered were purchased on November 3, 2017.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management cautioned that feed prices remain volatile and that chicken prices could fall because of competition, consumer substitution or economic conditions.
- Q3 included $4.1 million of administrative restructuring charges; 39-week charges were $8.5 million, including GNP severance and obsolete software costs, and impairments of facilities in Alabama and Dublin. The company expected about $1.7 million of additional GNP restructuring costs in the remainder of 2017 and 2018.
- Hurricane-related items included $1.9 million of damage to Puerto Rico assets and export-shipping delays at Southeastern U.S. ports. On October 24, the company announced the Luverne, Minnesota facility would close effective December 29, 2017.
- Material unresolved legal exposures include federal and state broiler-chicken purchaser antitrust suits, a grower antitrust suit, securities litigation and related derivative claims. The company said it intends to defend these matters; outcomes and potential damages cannot be predicted and could be material.
- JBS-related Brazilian bribery investigations and the status of associated plea-bargain and leniency arrangements create reputational and potential business risks for the controlling shareholder and its group, including Pilgrim’s. The company said it was cooperating with the ongoing investigation.
- Other key risks include feed and poultry price volatility, foreign-exchange movements, acquisition integration and assumed liabilities, leverage, disease outbreaks, food safety, Brexit-related uncertainty, and weather or other operational disruptions.
Important facts for investors to verify
- How much of the reported growth and margin improvement is sustainable versus attributable to acquisitions, favorable feed costs, pricing, currency effects or derivative gains.
- The post-quarter debt refinancing’s final impact on interest expense, maturity profile, covenants and liquidity.
- Progress and financial effects of integrating GNP and Moy Park, including remaining restructuring costs and realization of expected synergies.
- Developments, potential exposure and disclosure updates in the antitrust, securities and grower litigation, and the JBS-related investigations.
- Effects of commodity prices, foreign exchange, hurricane disruption, Brexit developments and the announced Luverne closure on subsequent results.