Pilgrim’s Pride Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 29, 2019 (52 weeks); comparative FY 2018 also comprised 52 weeks. The filing was signed February 20, 2020. The company produces, processes and distributes chicken and pork in the U.S., U.K. and Europe, and Mexico. JBS beneficially owned 78.31% of PPC’s common stock.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $11.409B | $10.938B | +4.3% |
| Gross profit | $1.070B | $843.5M | +26.9% |
| Gross margin | 9.4% | 7.7% | +1.7 percentage points |
| Operating income | $690.6M | $495.7M | +39.3% |
| Operating margin | 6.1% | 4.5% | +1.6 percentage points |
| Net income attributable to PPC | $455.9M | $247.9M | +83.9% |
| Diluted EPS attributable to PPC | $1.83 | $1.00 | +$0.83 |
| Cash from operating activities | $666.5M | $491.7M | +$174.9M |
| Capital expenditures | $348.1M | $348.7M | Nearly flat |
| Adjusted EBITDA | $973.8M | $798.2M | +22.0% |
FY 2019 reported net income also included a $56.9M bargain-purchase gain from the Tulip acquisition. Net income was $456.5M before noncontrolling interests. Segment operating margins were 6.4% in the U.S., 3.3% in U.K. and Europe, and 8.9% in Mexico.
Quarterly context: fourth-quarter sales were $3.063B, gross profit was $201.4M, and net income attributable to PPC was $92.1M ($0.37 per diluted share). Fourth-quarter 2018 recorded sales of $2.657B, gross profit of $111.8M and a net loss attributable to PPC of $7.3M.
Balance sheet and liquidity
- At December 29, 2019, cash and cash equivalents were $260.6M; restricted cash was an additional $20.0M. Working capital was $950.1M, versus $938.4M a year earlier.
- Total assets were $7.102B and stockholders’ equity was $2.536B. Current liabilities were $1.648B.
- Current maturities of debt were $26.4M and long-term debt, net of current maturities, was $2.276B. Debt carrying value rose modestly overall from 2018; face-value debt was approximately $2.326B.
- Available borrowing capacity was $708.4M under the U.S. facility, $79.6M in Mexico and $141.9M in U.K. and Europe facilities. Management said operating cash flow and available facilities should fund obligations, working capital, debt maturities and capital spending for at least 12 months.
- Cash used in investing activities was $717.1M, including $384.7M for Tulip and $348.1M for property and equipment. Cash used in financing activities was $34.5M.
Material changes and management commentary
- Sales increased $471.4M. U.S. sales rose 2.8%, principally from higher volume and sales per pound; Mexico sales rose 1.9%, mainly from higher sales per pound. U.K. and Europe sales rose 10.9%, driven by Tulip, partly offset by unfavorable currency translation and softer existing-business sales.
- The largest improvement came from the U.S. segment: operating income increased $195.9M to $487.3M. Management cited lower cost per pound, lower feed costs and reduced freight costs, partly offset by higher labor costs. U.K. and Europe operating income decreased $5.3M to $79.2M; Mexico operating income rose $4.4M to $124.0M.
- On October 15, 2019, PPC acquired U.K. prepared-pork supplier Tulip for £310.0M (approximately $391.5M), funded with cash on hand. Tulip contributed $306.7M of sales and incurred a $2.7M net loss during the included post-acquisition period. Purchase accounting was preliminary.
- Interest expense, net, declined to $118.4M from $149.0M, principally due to lower average borrowings. Income tax expense increased to $161.0M from $85.4M as pretax income increased.
- Management forecast $340M–$360M of 2020 capital expenditures, primarily for efficiency and cost reduction, funded from operating cash flow and revolving facilities. No earnings or revenue guidance was provided. PPC had no current intention to pay dividends.
Risks, contingencies and unusual items
- Commodity and operating exposure: Earnings are cyclical and sensitive to chicken and pork prices, feed costs, weather, animal disease, labor availability, food safety and customer pricing power. A hypothetical 10% change in feed-ingredient costs would have changed cost of sales by approximately $301.1M based on 2019 consumption, before derivatives.
- Trade and foreign exchange: Management reported that uncertainty in trade policy and increased tariffs were affecting domestic and export chicken prices. Brexit, currency movements and disruptions to export markets could also affect results.
- Legal matters: PPC faces broiler-chicken antitrust claims by purchasers and growers, a worker wage-fixing class action, and related shareholder litigation. The DOJ subpoenaed PPC in the purchaser antitrust matter; a trial was set for April 2022. PPC said it intends to defend the cases, but outcomes and potential losses could not be predicted. Mexican tax assessments under appeal total $40.4M, with no loss recorded.
- Controlling-stockholder and compliance exposure: JBS’s control may diverge from other shareholders’ interests. Ongoing Brazilian investigations and proceedings involving J&F/JBS could result in additional penalties, reputational harm or financing constraints for the group; the filing says the outcome and effect on PPC cannot be predicted.
- Leverage and financing: Debt service, refinancing and covenant constraints may limit financial flexibility. Approximately $450M of debt was tied to LIBOR at year-end 2019, and the benchmark’s planned phaseout created uncertainty about replacement terms.
- Unusual acquisition accounting: The Tulip purchase generated the $56.9M bargain-purchase gain; acquired-asset valuations and working-capital adjustments remained subject to finalization. PPC excluded Tulip’s internal controls from its year-end control assessment while integration work continued; management and the auditor otherwise reported effective controls and the auditor issued an unqualified financial-statement opinion.
Important facts for investors to verify
- Reconcile the filing’s adjusted EPS disclosures: the selected-data table states $1.85 for 2019, while the adjusted-net-income reconciliation reports $405.1M and adjusted diluted EPS of $1.62. The filing text does not explain this difference.
- Track Tulip integration, final purchase accounting, and the acquired business’s ongoing profitability following its reported $2.7M post-acquisition net loss.
- Monitor the status, potential exposure and insurance or reserve coverage for antitrust, wage-fixing and tax matters; the filing does not quantify probable losses for the principal litigations.
- Assess whether forecast 2020 capital spending and operating cash flow are consistent with debt service, liquidity needs and management’s 12-month funding outlook.
- Review the effect of feed prices, tariffs and export-market changes on margins, and the implications of JBS control and related compliance investigations.