Pilgrim’s Pride Corporation — Q3 2016 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 25, 2016; comparisons are to periods ended September 27, 2015. Amounts below are in U.S. dollars.
Business context and results
Pilgrim’s Pride produces and sells chicken products in the U.S., Mexico and Puerto Rico, and reported one operating segment. JBS beneficially owned 77.0% of outstanding common stock. The company acquired Tyson Mexico in June 2015, affecting year-over-year comparability, particularly in Mexico.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $2,031.7m | $2,112.5m | $6,023.0m | $6,219.3m |
| Gross profit | $210.2m | $284.5m | $733.9m | $1,093.7m |
| Gross margin | 10.3% | 13.5% | 12.2% | 17.6% |
| Operating income | $163.8m | $231.1m | $589.2m | $937.1m |
| Net income attributable to Pilgrim’s Pride | $98.7m | $137.1m | $369.9m | $582.8m |
| Diluted EPS | $0.39 | $0.53 | $1.45 | $2.24 |
| Cash provided by operating activities | $242.1m | Not stated here | $531.1m | $856.3m |
Q3 sales fell 3.8% and operating income fell 29.1%. For the 39 weeks, sales declined 3.2% and operating income declined 37.1%. U.S. sales weakness reflected lower volume, lower demand and prepared-foods facility improvements; Mexico’s year-to-date sales benefited from the Tyson Mexico acquisition, partly offset by currency translation. Management attributed lower margins primarily to higher costs relative to sales, including feed costs and, in Q3, derivative losses.
Cash, debt and liquidity
At September 25, 2016, cash was $86.0m, down from $439.6m at December 27, 2015. Current assets were $1,369.9m and current liabilities $844.3m. Long-term debt, net of current maturities and financing costs, was $1,004.8m; total debt at face value was approximately $1,017.6m, including $500m of 5.75% senior notes due 2025 and $500m of U.S. term loans due 2020. The U.S. revolver had no borrowings and $657.3m available after letters of credit; the Mexico facility had $58.6m available at quarter-end.
Year-to-date investing cash outflow was $163.1m, including $173.4m of capital expenditures. Financing cash outflow was $721.6m, principally including the $699.9m special dividend. Management said operating cash flow and U.S. facility availability should fund obligations, working capital, debt maturities and capital spending for at least the next 12 months. The company reported compliance with credit-facility covenants.
Material developments, outlook and risks
- The company paid a special dividend of $2.75 per share, approximately $700m, in May 2016, funded with cash and U.S. facility proceeds. It also repurchased approximately 925,000 shares year to date for $20.3m.
- Q3 commodity derivatives generated a net loss of $17.0m, compared with a net gain of $2.7m in Q3 2015; year-to-date results were a net loss of $11.1m versus a net gain of $31.7m. These instruments are not designated as cash-flow hedges, so fair-value changes affect earnings immediately.
- During April and May, the company recalled approximately 5.6m pounds of cooked chicken products after foreign-material contamination. It was still assessing the full impact and had not included recall expenses in 2016 results; it said the recall had not yet materially affected financial results or condition. Facility improvements also reduced prepared-foods production.
- On September 27, 2016, after quarter-end, Mexican subsidiaries replaced their credit facility with a new three-year facility of 1.5bn Mexican pesos, bearing interest at the Mexican interbank rate plus 0.95%.
- Ten putative class actions filed in 2016 allege a broiler-chicken output and pricing conspiracy and seek treble damages. The company disputes the allegations; it says outcomes and potential exposure cannot be predicted and damages could be material. A separate ERISA complaint was dismissed with prejudice in October 2016. The IRS tax dispute described in the filing was resolved in the company’s favor.
- Key business risks include volatile feed and chicken prices, disease outbreaks, product contamination and recalls, labor and regulatory issues, foreign-exchange movements, competition, and litigation. The filing gives no quantified earnings or revenue guidance.
Investor facts to verify
- Whether margin and earnings pressure persists, especially in U.S. operations and prepared foods, and how much reflects temporary facility work versus ongoing costs.
- The eventual financial and operational impact of the 5.6m-pound recall, since related expenses were not included in reported 2016 results.
- Developments in the broiler-chicken antitrust litigation, including any estimates of probable loss or changes to contingency accruals.
- Cash use and leverage following the special dividend, and continued covenant compliance and revolver availability.
- Feed-cost exposure and derivative positions: the filing estimates a 10% change in weighted-average primary feed costs would affect quarterly cost of sales by about $65.1m before derivative effects.