Pilgrim’s Pride Corporation — Q1 2019 Form 10-Q
Business context and period. The filing covers the 13 weeks ended March 31, 2019, compared with the 13 weeks ended April 1, 2018. Pilgrim’s Pride is a vertically integrated poultry producer operating in the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 78.4% of the company’s common stock.
Financial performance
| Metric | Q1 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $2.725 billion | $2.747 billion | Down 0.8% |
| Gross profit / margin | $218.9 million / 8.0% | $287.7 million / 10.5% | Profit down 23.9% |
| Operating income / margin | $137.0 million / 5.0% | $201.6 million / 7.3% | Down 32.0% |
| Net income attributable to Pilgrim’s Pride | $84.0 million | $119.4 million | Down 29.6% |
| Diluted earnings per share | $0.34 | $0.48 | Down $0.14 |
| Cash provided by operating activities | $120.4 million | $0.6 million | Up $119.7 million |
Capital expenditures were $87.9 million, versus $76.7 million. Operating cash flow less capital expenditures was approximately $32.5 million. Cash, cash equivalents and restricted cash totaled $398.9 million at quarter-end, including $378.5 million of unrestricted cash. Current assets were $2.286 billion and current liabilities were $1.358 billion.
Total debt, including current maturities, was approximately $2.331 billion; operating lease liabilities were $331.2 million following adoption of the new lease standard. The company had $708.4 million available under its U.S. revolving facility, $77.2 million under its Mexico facility and $127.0 million across U.K. and Europe facilities. It reported compliance with U.S. Credit Facility covenants. Net interest expense declined to $30.2 million from $48.7 million, while the weighted average interest rate rose to 5.4% from 5.0%.
Material changes and segment results
- U.S. sales increased 2.3% to $1.884 billion, with higher sales per pound and volume. U.S. operating income fell 9.8% to $114.8 million, primarily as higher payroll, derivative, lease, insurance and contract-service costs pressured results.
- U.K. and Europe sales decreased 5.4% to $515.0 million, reflecting unfavorable currency translation and lower volume, partly offset by higher sales per pound. Operating income declined 40.6% to $12.7 million.
- Mexico sales decreased 9.7% to $326.1 million, mainly due to lower sales per pound and unfavorable currency remeasurement. Operating income fell 82.1% to $9.5 million.
- Mexico and U.K. and Europe segment profit weakness drove much of the consolidated decline. Consolidated cost of sales rose 1.9% despite lower sales.
- Operating lease assets of $330.0 million and related liabilities were recognized upon adoption of the lease accounting standard at the start of fiscal 2019; the company said the adoption materially increased balance-sheet assets and liabilities but did not materially affect income.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said current chicken prices were sufficient to offset feed ingredient costs, but cautioned that prices could weaken due to competition, protein substitution or economic uncertainty. It expects operating cash flow and facility availability to fund obligations, working capital, debt maturities and capital spending for at least the next 12 months.
- Feed-cost exposure remains significant: a hypothetical 10% increase in primary feed ingredient costs would have increased quarterly cost of sales by approximately $73.1 million before derivative effects. The company uses futures and options to manage some commodity risk; derivative fair-value changes produced a net loss of $8.0 million, compared with a $6.4 million gain a year earlier.
- Currency movements affected results: Mexico recorded $8.0 million of foreign currency remeasurement losses. U.K. and Europe had approximately $2.1 billion in net assets exposed to currency changes; management estimated a 10% adverse exchange-rate move would reduce those net assets by $212.4 million.
- Brexit remained uncertain, with the U.K. scheduled to leave the E.U. on October 31, 2019. Management described contingency planning, including customer coordination and increased inventories where possible, while warning of potential trade, tariff, labor, currency and demand impacts.
- Material legal and regulatory exposures include broiler-chicken price-fixing and grower antitrust litigation, related shareholder actions, and Mexican tax adjustments totaling $40.4 million under appeal for 2009 and 2010; no loss was recorded for the tax claims. The company also described ongoing J&F/JBS investigations in Brazil and related potential reputational, legal and financial risks.
- The board’s $200 million share repurchase authorization remained largely unused: no shares were repurchased in the quarter, and approximately $199.8 million remained available. A $27,000 restructuring credit was recorded in the quarter.
Important facts for investors to verify
- Confirm the drivers and sustainability of lower gross margins, especially U.S. cost inflation and the sharp decline in Mexico operating income.
- Review debt maturities, interest-rate exposure, available borrowing capacity and the additional fixed obligations from operating leases.
- Track feed prices, derivative coverage and the lag between feed purchases and their recognition in cost of sales.
- Monitor Brexit developments, foreign-exchange exposure, and the progression and potential financial impact of antitrust, shareholder, tax and J&F/JBS-related matters.
- Check the filing’s inconsistent MD&A wording: one passage reverses the direction of the year-over-year operating-income comparison, while the financial statements report $137.0 million for 2019 versus $201.6 million for 2018. The legal discussion also differs on the status of the Delaware derivative case; verify the latest court record.