Pilgrim’s Pride Corporation — Q3 2018 Form 10-Q
Reporting period: Thirteen weeks ended September 30, 2018; year-to-date results cover thirty-nine weeks. Comparatives are the thirteen and thirty-nine weeks ended September 24, 2017. The 2017 statements include Moy Park on a combined basis because it was under common control before its September 2017 transfer to Pilgrim’s.
Financial results
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $2,697.6m | $2,793.9m | $8,281.0m | $8,025.5m |
| Gross profit / margin | $169.7m / 6.3% | $478.6m / 17.1% | $731.6m / 8.8% | $1,209.8m / 15.1% |
| Operating income / margin | $85.3m / 3.2% | $372.2m / 13.3% | $472.1m / 5.7% | $917.3m / 11.5% |
| Net income attributable to Pilgrim’s | $29.3m | $232.7m | $255.3m | $560.2m |
| Diluted EPS | $0.12 | $0.93 | $1.03 | $2.25 |
| Cash provided by operations | $121.3m | Not stated here | $425.3m | $618.5m |
Q3 sales fell 3.4%, while gross profit declined 64.5%. Year-to-date sales rose 3.2%, but gross profit fell 39.5%. Higher feed and raw-material costs, freight and storage, grower payments, payroll and derivative costs weighed on margins. Management also cited driver shortages and, in the U.S., increased grain prices and production volume. The filing attributes much of the year-to-date U.S. cost increase to feed and freight.
Q3 operating income by segment was $74.2m in the U.S., $23.5m in U.K. and Europe, and a $12.4m loss in Mexico. For the year to date, segment operating income was $301.0m, $68.5m and $102.5m, respectively. Q3 U.S. sales per pound declined, partly offset by higher volume; Mexico sales were down amid lower sales per pound and adverse currency remeasurement. U.K. and Europe Q3 sales increased modestly, while operating income improved.
Cash, debt and liquidity
At September 30, cash and cash equivalents were $401.3m, down from $581.5m at December 31, 2017. Current assets were $2,282.7m and current liabilities $1,323.1m. Balance-sheet debt, including current maturities, was approximately $2,326.2m; long-term debt, net of current maturities and financing costs, was $2,302.2m.
For the thirty-nine weeks, operating cash flow was $425.3m, investing cash outflow $229.2m (including $231.9m of capital expenditures), and financing cash outflow $373.9m. Cash, cash equivalents and restricted cash decreased $173.7m to $415.8m. Operating cash flow was lower than the prior-year $618.5m, including due to a $175.6m cash use for income taxes; the prior-year period also included the GNP acquisition.
Available borrowing capacity at quarter-end included $705.1m under the U.S. facility, $40.1m in Mexico and $140.4m in U.K. and Europe facilities. The U.S. revolver had no borrowings and $44.9m of letters of credit outstanding. Management said operating cash flows and available facilities should be sufficient for obligations, working capital, debt maturities and capital spending for at least the next twelve months.
Material changes, outlook and notable items
- Net interest expense rose year over year: to $31.1m in Q3 from $22.5m, and to $115.2m year to date from $62.8m. The company reported higher average borrowings and higher weighted-average interest rates.
- The company estimated a $26.4m one-time transition-tax liability under the U.S. Tax Act, increasing the year-to-date effective tax rate by about 7 percentage points. Tax Act accounting remained incomplete; management said estimates could change materially. It also estimated $5.9m of GILTI tax liability.
- In July 2018, the company amended and restated its U.S. credit facility, including a $750m revolving commitment and $500m term loan. It completed repayment or refinancing of Moy Park’s senior notes; none remained outstanding at quarter-end. A $6.0m noncash loss on early debt extinguishment was recorded year to date.
- Puerto Rico operations were still recovering from Hurricane Maria. The company expected operations to be fully functional in Q4 2018 and had recorded an $11.5m insurance receivable against estimated storm-related losses and business interruption.
- Restructuring continued at GNP operations in Minnesota and at 40 North Foods in Colorado. Year-to-date restructuring charges were $2.2m. The company also recorded a $0.8m impairment on a Minnesota processing complex held for sale.
- On October 31, 2018, after quarter-end, the board approved a new $200m share repurchase authorization over twelve months. Timing and amount depend on market and corporate conditions.
- No specific earnings or sales guidance was provided. Key stated uncertainties include feed and chicken prices, foreign exchange, disease outbreaks, customer demand, labor and logistics costs, leverage, and litigation.
Risks, contingencies and items to monitor
- Broiler-chicken purchaser antitrust class and individual actions, and a grower antitrust action, remain pending. The company says it intends to defend the cases; outcomes and any potential exposure are uncertain and could be material.
- A shareholder securities action was dismissed without prejudice, but a motion for reconsideration remained pending. A separate derivative action concerning the Moy Park acquisition was scheduled for a motion-to-dismiss hearing in November 2018.
- A Mexican tax assessment appeal concerns $40.4m in total asserted amounts for tax years 2009 and 2010; no loss was recorded. The company also disclosed ongoing investigations involving J&F/JBS-related parties and said resulting proceedings or reputational harm could adversely affect the business.
- Commodity hedging did not eliminate exposure: derivative fair-value changes were net losses of $7.4m in Q3 and $25.0m year to date, versus gains in the comparable 2017 periods. The filing’s sensitivity analysis estimates a 10% feed-cost change would alter Q3 cost of sales by about $76.6m, excluding hedges.
- The company expected the new lease-accounting standard to materially increase balance-sheet assets and liabilities upon adoption, but not materially affect the income statement.
Important facts for investors to verify
- Whether weaker poultry margins persist and whether feed, freight and labor costs ease or can be offset by selling prices and operating efficiencies.
- Cash generation, debt levels, interest expense and covenant compliance, including the effect of the new credit facility and the proposed share repurchases.
- Updates on the antitrust, grower, shareholder and Mexican tax matters, including any change in estimated exposure or accruals.
- Actual insurance recoveries and the timing and completeness of Puerto Rico’s operational recovery.
- Finalization of the Tax Act transition-tax estimate and effects of GILTI and other tax provisions.