Pilgrim’s Pride Corporation — Q3 2014 Form 10-Q
Reporting period: Thirteen weeks ended September 28, 2014; year-to-date (YTD) covers thirty-nine weeks. Comparisons are with the periods ended September 29, 2013, except balance-sheet comparisons, which are with December 29, 2013. Amounts below are in millions unless noted.
Business context
Pilgrim’s Pride produces and sells chicken products in the U.S., Mexico and Puerto Rico, operating as a vertically integrated poultry business. JBS USA beneficially owned 75.5% of the company’s common stock at quarter-end.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | YTD 2014 | YTD 2013 |
|---|---|---|---|---|
| Net sales | $2,268.0 | $2,142.8 | $6,472.9 | $6,363.9 |
| Gross profit | $450.3 | $236.6 | $1,014.8 | $637.5 |
| Gross margin | 19.9% | 11.0% | 15.7% | 10.0% |
| Operating income | $405.5 | $189.1 | $874.1 | $501.0 |
| Operating margin | 17.9% | 8.8% | 13.5% | 7.9% |
| Net income attributable to Pilgrim’s Pride | $256.0 | $160.9 | $544.5 | $406.2 |
| Diluted earnings per share | $0.99 | $0.62 | $2.10 | $1.57 |
- Q3 sales increased 5.8%; YTD sales increased 1.7%. Q3 sales benefited from higher sales per pound and volume. YTD volume growth was partly offset by lower sales per pound and adverse Mexican peso translation.
- YTD operating cash flow was $802.4, versus $596.7 in 2013. Capital expenditures were $131.3, compared with $76.3. Cash used in financing was $409.9, including $410.2 of debt and lease repayments. Cash rose to $868.6 from $508.2 at fiscal year-end.
- At September 28, current assets were $2,181.2 and current liabilities $884.4; working capital was $1,296.8 and the current ratio 2.47. Total assets were $3,505.8 and stockholders’ equity $2,030.8.
- Debt was approximately $502.4: $502.1 long-term and $0.3 current. The company had no U.S. revolving-credit borrowings and $679.9 available under that facility; a further $41.7 was available under the Mexico facility. Cash exceeded reported debt by approximately $366.2.
- YTD net interest expense declined to $42.4 from $66.7, mainly because average borrowings fell. Income tax expense rose to $284.9, a 34.4% effective rate, from $24.2 and 5.6% in 2013.
Material changes and management commentary
- Profitability improved sharply as feed ingredient costs declined, chicken demand and selling prices remained strong, and supply was constrained. Q3 U.S. gross profit rose $161.6; Mexico gross profit rose $52.1, with constrained Mexican supply associated with Marek’s disease contributing to higher selling prices.
- Management attributed lower U.S. YTD cost of sales principally to a $362.1 decrease in feed ingredient costs. Derivative gains also contributed: $28.0 in Q3 2014 versus $8.0 in Q3 2013, and $14.0 YTD versus $21.9 YTD in 2013. These instruments are not designated as cash-flow hedges, so fair-value changes are recognized immediately in earnings.
- Management said strong chicken demand and constrained supplies of beef, pork and chicken were expected to continue until mid-2015; it also said the industry could not rapidly increase production. Feed prices remain volatile, and the filing gives no specific earnings or revenue guidance. Management expected a higher full-year 2014 effective tax rate than in 2013.
- Capital investment focused on U.S. efficiency and cost reduction and Mexican capacity expansion. Fiscal 2014 capital expenditures are capped at $350 under the U.S. credit agreement.
Outlook, risks, contingencies and unusual items
- The company agreed to acquire Tyson Mexico for approximately $400, subject to working-capital adjustment and regulatory and other closing conditions. Closing was expected in Q4 2014 or Q1 2015; funding was expected from cash and bank credit. The filing cautions that completion, integration and anticipated benefits are uncertain, and the stock purchase could expose the company to unknown liabilities.
- China imposed combined antidumping and countervailing duties of 77.9% on the company’s U.S.-origin chicken products, which management said could deter imports and reduce sales to China unless modified or eliminated.
- Commodity-price exposure is significant: a hypothetical 10% change in primary feed ingredient costs would change quarterly cost of sales by an estimated $72.7, before derivative effects. Other stated risks include poultry disease, product contamination and recalls, currency movements, competition, labor and litigation.
- A remaining IRS claim of approximately $45.4 relates to Gold Kist’s 2004 tax year. The Tax Court ruled against the company on the character of the claimed loss; the company appealed, and Fifth Circuit oral argument was tentatively scheduled for January 2015. An adverse result could materially affect results and financial position. The company said the likelihood and amount of loss could not be determined.
- Grower litigation remains pending. The Fifth Circuit reversed the $25.6 El Dorado growers’ award, and the U.S. Supreme Court declined review. Other grower claims remain, with court decisions or proceedings unresolved as described in the filing. ERISA claims also remain pending; class certification was awaiting a decision. Management stated it believes it has substantial defenses.
- Other unusual items include $2.3 of YTD administrative restructuring charges and a $10.1 YTD other comprehensive loss, primarily related to pension and postretirement benefits. The company reported $73.0 of idled assets still being depreciated and $1.4 of assets held for sale.
Investor verification priorities
- Track chicken pricing, demand, supply constraints and feed costs, including the timing and earnings impact of feed-cost changes and derivative marks.
- Verify Tyson Mexico closing, final purchase price, financing, assumed liabilities and subsequent integration performance.
- Monitor the Gold Kist tax appeal and grower and ERISA proceedings for changes in exposure, accruals or outcomes.
- Assess the effects of China’s 77.9% duties and Mexican disease, currency and supply conditions on sales and margins.
- Reconcile cash generation and debt repayments with acquisition funding, capital spending, credit-facility availability and covenant compliance.