Pilgrim’s Pride Corporation — Q1 2015 Form 10-Q
Reporting period: Thirteen weeks ended March 29, 2015; comparative period ended March 30, 2014. Amounts below are in U.S. dollars. The company produces and sells chicken products in the U.S., Puerto Rico and Mexico and operates as one reportable segment. JBS USA owned 75.3% of its common stock at quarter-end.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $2,052.9 million | $2,018.1 million | Up 1.7% |
| Gross profit / margin | $377.1 million / 18.4% | $215.1 million / 10.7% | Up $162.0 million |
| Operating income / margin | $327.6 million / 16.0% | $168.2 million / 8.3% | Up $159.4 million |
| Net income attributable to Pilgrim’s Pride | $204.2 million | $98.1 million | Up 108% |
| Diluted earnings per share | $0.79 | $0.38 | Up $0.41 |
| Cash from operating activities | $296.1 million | $195.7 million | Up $100.4 million |
Gross profit improvement reflected lower U.S. feed ingredient costs and derivative results: a $23.4 million net gain in Q1 2015 versus an $8.0 million net loss in Q1 2014. U.S. gross profit increased 96%; Mexico gross profit declined 9.1%. U.S. sales rose 2.7% on higher sales per pound and volume. Mexico sales fell 5.9%, mainly because currency translation reduced reported sales.
Liquidity, debt and capital
- Cash and cash equivalents were $478.0 million at March 29, down from $576.1 million at December 28, 2014. Working capital was $997.4 million and the current ratio was 2.32, compared with $1.1 billion and 2.53 at year-end.
- Operating cash flow was $296.1 million; capital expenditures were $32.6 million; cash used in investing activities was $31.7 million.
- Long-term debt was $1.150 billion, compared with $4.0 million at year-end. The company issued $500 million of 5.75% senior notes due 2025 and had $650 million of term loans outstanding at quarter-end. The notes proceeds funded term-loan repayment; a further $150 million repayment occurred on April 22, after quarter-end.
- The U.S. revolving facility had $679.9 million available, with no revolving borrowings and $20.1 million of letters of credit outstanding. The company said it was in compliance with facility covenants.
- The company paid a special dividend of $5.77 per share, totaling approximately $1.5 billion. This drove retained earnings to a $702.8 million accumulated deficit and reduced total stockholders’ equity to $909.1 million from $2.197 billion at year-end.
Material changes, outlook and risks
- Profitability rose sharply despite modest revenue growth, primarily reflecting lower feed costs, favorable derivative gains and lower net interest expense. Net interest expense fell 82% to $3.4 million; the weighted-average interest rate declined to 4.90% from 8.20%.
- No full-year earnings 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. Commodity exposure, disease outbreaks, product contamination and recalls, customer concentration, labor issues, currency movements and litigation are among the stated risks.
- The planned acquisition of Tyson Mexico for approximately $400 million remained subject to regulatory approvals and customary closing conditions. On April 29, 2015, the closing deadline was extended to June 30; management expected a regulatory decision in Q2 2015 and planned to use cash and bank credit if completed.
- Management reported that disclosure controls were not effective at March 29 because a previously disclosed material weakness in IT general controls had not been fully remedied. The weakness concerned restricting access to applications and data and monitoring users able to change programs or data. Management stated that the financial statements were fairly presented and described a remediation plan.
- Contingencies include an IRS claim related to Gold Kist’s 2004 tax year: the Fifth Circuit ruled in the company’s favor on February 25, 2015, but the IRS could seek Supreme Court review by May 26. ERISA claims exceeding $35 million were also disclosed; the company said the possible loss could not be determined. Remaining grower claims continued, although prior major rulings favored the company.
Important facts for investors to verify
- Whether strong margins persist as feed costs, chicken prices and derivative mark-to-market results change.
- The post-quarter debt balance and interest burden after the April 22 term-loan repayment, and the impact of the $1.5 billion dividend on future flexibility.
- The status, financing and regulatory outcome of the Tyson Mexico acquisition.
- Progress in remediating the IT-control material weakness and any subsequent assessment of disclosure controls.
- The final outcome of the IRS appeal period, ERISA and grower litigation, and other disclosed contingencies.