Pilgrim’s Pride Corporation — Q2 2016 Form 10-Q
Business context and period. The filing covers the 13 and 26 weeks ended June 26, 2016. Pilgrim’s Pride produces and sells chicken products in the U.S., Mexico and Puerto Rico, and reports one operating segment. JBS beneficially owned 76.8% of its common stock.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $2,028.3m | $2,053.9m | $3,991.3m | $4,106.8m |
| Gross profit / margin | $286.1m / 14.1% | $432.0m / 21.0% | $523.7m / 13.1% | $809.1m / 19.7% |
| Operating income / margin | $236.6m / 11.7% | $378.4m / 18.4% | $425.4m / 10.6% | $706.0m / 17.2% |
| Net income attributable to Pilgrim’s Pride | $152.9m | $241.5m | $271.3m | $445.7m |
| Diluted EPS | $0.60 | $0.93 | $1.06 | $1.71 |
| Cash provided by operations | $111.1m | Not stated for quarter | $289.0m | $588.1m |
Cash flow, debt and liquidity. First-half investing cash outflow was $85.9m, including $94.0m of capital expenditures; financing cash outflow was $601.7m, principally reflecting the $699.9m special dividend. Cash fell to $41.0m from $439.6m at fiscal year-end. At June 26, total debt was about $1.132bn at face value (including $500m of 5.75% senior notes due 2025, a $500m U.S. term loan, $52.1m drawn on the U.S. revolver and $79.2m of Mexico borrowings). U.S. revolver availability was $571.0m; Mexico facility availability was zero. The company reported compliance with credit covenants and expected operating cash flows plus U.S. facility availability to cover obligations and planned spending for at least 12 months.
Changes versus comparable periods
- Q2 sales declined 1.2%, while first-half sales declined 2.8%. U.S. sales fell 8.8% in Q2 and 9.1% year to date, reflecting lower volume and lower sales per pound; prepared-foods facility improvements constrained production, and product mix shifted somewhat toward lower-priced fresh chicken.
- Mexico sales rose 63.2% in Q2 and 51.4% year to date, driven chiefly by higher volume, partly offset by adverse currency translation. The acquired Tyson Mexico business generated $15.2m of Q2 sales and a $0.2m net loss; management attributed its lower reported sales to activity shifting to the legacy Mexico business.
- Gross profit fell 33.8% in Q2 and 35.3% in the first half; operating income fell 37.5% and 39.7%, respectively. U.S. gross profit was the principal source of the decline. Lower feed costs were offset by higher labor and other operating costs and by lower derivative gains than in 2015.
- First-half operating cash flow was down $299.1m year over year, mainly due to lower net income and less favorable changes in operating assets and liabilities. First-half net income declined about 39%.
Outlook, risks and unusual items
- Outlook: No specific earnings or sales guidance is provided. Management said chicken prices were then sufficient to offset feed costs, but warned that feed prices could rise and chicken prices could fall due to competition, protein substitution or economic conditions.
- Recall and operations: The company ordered a recall of approximately 5.6m pounds of cooked chicken after foreign materials were found at a prepared-foods facility. No confirmed adverse reactions were reported. The company was still assessing the impact, had not included recall expenses in 2016 results, and did not expect the recall and direct effects to materially affect financial position or results. Separately, operational improvements at a prepared-foods facility reduced Q2 production but were intended to support future growth.
- Capital returns: Pilgrim’s paid a $2.75-per-share special dividend, approximately $700m, on May 18, funded with cash and U.S. Credit Facility proceeds. It had repurchased approximately 5.2m shares for $106.6m under its program by quarter-end; the authorization was increased to $300m and extended to February 2017.
- Market and financial risks: Commodity price volatility, foreign exchange movements, disease outbreaks, product contamination and recalls, competition, labor and litigation are identified risks. A hypothetical 10% increase in primary feed costs was estimated to raise quarterly cost of sales by about $61.7m before derivative effects. Variable-rate debt was 55.7% of total debt; a 25-basis-point rate increase would have added about $0.4m to quarterly interest expense.
- Legal matters: The Fifth Circuit’s final ruling favored the company in the IRS tax dispute, with no additional tax expected. ERISA claims seek unspecified damages; the filing says plaintiffs assert claims exceeding $35m, and the likelihood and amount of any company loss cannot be determined. The company says it has recorded appropriate accruals where necessary.
- Other items: Foreign currency transaction gains were $4.7m in Q2 and $5.0m for the first half, compared with losses in the prior-year periods. A $4.8m administrative restructuring charge recorded in first-half 2015 did not recur.
Key facts for investors to verify
- Whether weaker U.S. sales, lower margins and reduced operating cash flow persist, and how much is attributable to temporary production work versus underlying demand and pricing.
- The eventual costs and any further operational consequences of the 5.6m-pound recall; no recall expense was included in reported 2016 results.
- Feed and chicken price trends, derivative positions and the timing lag between feed purchases and recognition in cost of sales.
- Liquidity and leverage after the special dividend, including revolver availability, borrowing-base constraints, covenant compliance and the Mexico facility maturity in 2017.
- Progress integrating Tyson Mexico, the shift in sales activity between Mexico businesses, and the effect of peso movements on reported results.
- Developments in the ERISA litigation and any resulting exposure or change in accruals.