Pilgrim’s Pride Corporation — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 27, 2016; comparisons are with the thirteen weeks ended March 29, 2015 unless stated otherwise. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Business context
Pilgrim’s Pride produces and sells chicken products in the U.S., Mexico and Puerto Rico, operating as one reportable segment. JBS beneficially owned 76.7% of the company’s outstanding common stock. The June 2015 Tyson Mexico acquisition contributed $102.9 million of Q1 2016 sales and a $0.2 million net loss.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $1,962.9 | $2,052.9 | Down 4.4% |
| Gross profit / margin | $237.6 / 12.1% | $377.1 / 18.4% | Profit down 37.0% |
| Operating income / margin | $188.8 / 9.6% | $327.6 / 16.0% | Income down 42.4% |
| Net income attributable to Pilgrim’s Pride | $118.4 | $204.2 | Down 42.0% |
| Diluted EPS | $0.46 | $0.79 | Down $0.33 |
| Cash provided by operating activities | $177.9 | $296.1 | Down $118.2 |
| Capital expenditures | $37.1 | $32.6 | Up $4.5 |
U.S. sales fell 9.4%, mainly from lower sales per pound and lower volume. Mexico sales rose 39.3%, primarily reflecting Tyson Mexico, but Mexico gross profit declined 45.0%. Across the company, cost of sales rose 3.0% despite lower sales. Management cited a less favorable U.S. product mix and weaker year-over-year derivative gains; U.S. feed ingredient costs were lower.
Cash and cash equivalents were $574.9 million at quarter-end, versus $439.6 million at December 27, 2015. Working capital was approximately $1.02 billion and the current ratio was 2.28. Total liabilities were $2.02 billion and stockholders’ equity was $1.37 billion. Gross debt was approximately $1.02 billion, including $500 million of 5.75% senior notes due 2025, $500 million of U.S. term loans due 2020, and $21.6 million outstanding under the Mexico facility. The U.S. revolver had no borrowings and $676.0 million available; Mexico facility availability was $63.9 million. The company reported compliance with U.S. facility covenants.
Operating cash flow was lower primarily because net income declined. Investing activities used $36.5 million; financing activities used $6.1 million. Cash increased $135.3 million during the quarter.
Material changes and unusual items
- Profitability weakened substantially year over year: gross margin declined to 12.1% from 18.4%, and operating margin to 9.6% from 16.0%.
- Net interest expense rose to $11.3 million from $3.4 million, primarily because average borrowings increased to about $1.0 billion from $722.5 million; the average interest rate fell to 3.7% from 4.9%.
- Q1 2015 included $23.4 million in net derivative gains, compared with $4.1 million in Q1 2016. Derivative fair-value changes are recognized immediately in earnings rather than as cash-flow hedges.
- The company repurchased approximately 5.0 million shares for $101.9 million cumulatively under its authorization by March 27; the authorization was increased to $300 million and extended through February 9, 2017.
- After quarter-end, the company declared a $2.75-per-share special dividend, approximately $700 million, payable May 18, 2016. It intended to fund the payment with cash and U.S. Credit Facility borrowings. Pro forma disclosure showed approximately $145.1 million of additional borrowing and $20 million of cash after the assumed payment.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management said operating cash flows and U.S. Credit Facility availability were expected to fund obligations, working capital, debt maturities and capital spending for at least the next 12 months. Feed ingredient and chicken prices remain volatile; the company warned that higher feed costs or lower chicken prices could harm results. A hypothetical 10% change in primary feed ingredient costs would have changed quarterly cost of sales by approximately $56.2 million, before derivative effects.
On April 26, 2016, the company expanded a recall to approximately 4.6 million pounds of cooked chicken products due to foreign-material contamination. The company had not included recall costs in Q1 results, was still assessing the impact, and did not then expect the recall and its direct effects to be material to financial position or results. No confirmed adverse reactions were reported at the time of filing.
An ERISA class action alleges fiduciary breaches and seeks damages exceeding $35 million; the company said the likelihood and amount of any loss could not be determined. Routine litigation and claims remain outstanding. The IRS tax dispute described in the filing was resolved in the company’s favor, with no additional tax expected. Other risks include disease outbreaks, product contamination and recalls, commodity and foreign-exchange volatility, labor issues, competition, acquisition integration and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weaker U.S. pricing, product mix and volume persist, and whether margins recover as feed costs and chicken prices change.
- Tyson Mexico’s ongoing contribution to sales, earnings and cash generation, including integration and synergy progress.
- The recall’s eventual costs, customer response, regulatory developments and any related claims; these effects were not recorded in Q1.
- The final funding and balance-sheet impact of the $700 million special dividend, including borrowing levels and covenant headroom.
- The status and potential exposure of the ERISA litigation and other contingencies.