Pilgrim’s Pride Corporation — Q3 2015 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 27, 2015; comparisons are to the corresponding periods ended September 28, 2014. Amounts below are in U.S. dollars unless noted. Pilgrim’s Pride produces and sells chicken products in the U.S., Mexico and Puerto Rico. JBS USA owned 75.8% of its common stock.
Financial performance
- Q3 revenue and earnings: Net sales were $2.113 billion, down 6.9%. Gross profit fell 36.8% to $284.5 million; operating income fell 43.0% to $231.1 million. Net income attributable to Pilgrim’s Pride was $137.1 million, or $0.53 per diluted share, versus $256.0 million, or $0.99, a year earlier.
- Q3 margins: Gross margin was 13.5%, versus 19.9%; operating margin was 10.9%, versus 17.9%. U.S. sales declined 11.2%, principally from lower sales per pound and a shift toward lower-priced fresh chicken. Mexico sales rose 29.9%, mainly reflecting the Tyson Mexico acquisition, but Mexico gross profit declined 34.7%.
- Nine-month results: Net sales were $6.219 billion, down 3.9%; gross profit increased 7.8% to $1.094 billion and operating income rose 7.2% to $937.1 million. Net income attributable to Pilgrim’s Pride was $582.8 million, or $2.24 per diluted share, compared with $544.5 million, or $2.10. Gross and operating margins improved to 17.6% and 15.1%, respectively, from 15.7% and 13.5%.
- Cash flow: Cash provided by operations for the 39 weeks was $856.3 million, up from $802.4 million. Investing used $489.8 million, including $373.5 million for Tyson Mexico and $129.8 million of capital expenditures. Financing used $545.9 million, including the $1.5 billion special dividend and $45.1 million of share repurchases, partly offset by borrowing proceeds. Cash declined to $396.7 million from $576.1 million at fiscal year-end.
- Liquidity and debt: Working capital was $850.1 million and the current ratio 1.94, versus $1.1 billion and 2.53 at December 28, 2014. Total debt was approximately $1.006 billion, compared with approximately $4.2 million at year-end 2014. The company reported $679.9 million available under its U.S. revolving facility and $27.1 million under its Mexico facility. Management said operating cash flows and U.S. facility availability should cover obligations and planned spending for at least the next 12 months.
Material changes and significant transactions
- Tyson Mexico acquisition: Acquired on June 29, 2015 for a final purchase price of $379.1 million. The business contributed $128.9 million in sales and a $2.9 million net loss from acquisition through September 27. Purchase accounting remained preliminary, including estimates for contingencies, taxes and goodwill; recorded goodwill was $174.4 million.
- Capital return and financing: The company paid a $5.77-per-share special dividend totaling approximately $1.5 billion in February, funded with cash and borrowings. It issued $500 million of 5.75% senior notes due 2025 and had $500 million outstanding under its term loan at quarter-end. A $150 million repurchase authorization was approved in July; $45.1 million had been used by quarter-end.
- Operating cost and currency factors: Nine-month U.S. feed ingredient costs declined, supporting gross profit, while Q3 profitability was pressured by lower sales per pound and lower derivative gains than in the prior-year quarter. Nine-month foreign currency transaction losses increased to $23.8 million from $4.9 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said chicken prices at the time were sufficient to offset feed costs, but warned that chicken prices could fall and feed prices could rise. Commodity price volatility, foreign exchange movements, disease outbreaks, product contamination and recalls, labor matters, competition, customer concentration, and acquisition integration were among the identified risks.
- Commodity hedges are not designated as cash flow hedges, so fair-value changes flow immediately through earnings. A hypothetical 10% change in primary feed ingredient costs, before derivatives, would have changed quarterly cost of sales by $61.6 million. The company also disclosed sensitivity to interest rates and the Mexican peso.
- Management reported that disclosure controls were not effective as of September 27, 2015 because a previously disclosed material weakness in IT general controls had not been fully remediated. The weakness concerned access to applications and data, program-change access, and monitoring. Management said it had found no evidence of unauthorized entries and was implementing remediation.
- ERISA litigation seeks unspecified damages; plaintiffs assert claims exceeding $35 million, and the company said the likelihood and range of loss could not be determined. The IRS tax matter involving a claimed $45.4 million was resolved in the company’s favor, with no additional tax expected. Other ordinary-course proceedings remain subject to uncertainty.
- The company recorded $4.8 million of impairment costs related to assets held for sale and a $0.8 million loss on sale of a rendering plant during the 39 weeks. It also reported a $3.6 million pension settlement loss in nine-month benefit costs.
Important facts for investors to verify
- Whether the acquired Tyson Mexico operations improve profitability after the reported $2.9 million post-acquisition loss, and how final purchase accounting or assumed contingencies change.
- Whether Q3 sales-per-pound and margin pressure persists, and how feed costs, chicken prices and derivative results affect subsequent quarters.
- Debt, interest costs, covenant compliance and liquidity after the special dividend, acquisition and share repurchases; the company reported covenant compliance at quarter-end.
- Progress in remediating the IT control material weakness and any subsequent changes in the effectiveness of disclosure controls.
- Developments in the ERISA claims and other legal contingencies, as well as execution and proceeds from planned asset sales.