Pilgrim’s Pride Corporation — FY2013 Form 10-K
Business context and reporting period. Pilgrim’s Pride produces, processes and sells fresh, prepared and export chicken products in the U.S., Puerto Rico and Mexico. It reported one business segment. Fiscal 2013 was 52 weeks ended December 29, 2013; the comparable 2012 year was 53 weeks ended December 30, 2012. The filing also reports fourth-quarter results.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $8.411 billion | $8.121 billion |
| Gross profit / margin | $845.4 million / 10.1% | $435.8 million / 5.4% |
| Operating income / margin | $658.9 million / 7.8% | $250.3 million / 3.1% |
| Net income attributable to Pilgrim’s Pride | $549.6 million | $174.2 million |
| Diluted EPS | $2.12 | $0.70 |
| Adjusted EBITDA | $805.9 million | $402.6 million |
| Cash provided by operating activities | $878.5 million | $199.6 million |
Fourth-quarter 2013 sales were $2.047 billion, gross profit was $207.9 million, attributable net income was $143.4 million and diluted EPS was $0.55.
Sales increased 3.6% year over year despite one fewer fiscal week. Higher revenue per pound, driven by healthy chicken demand and constrained supply, more than offset lower sales volume. Gross profit improvement reflected lower U.S. feed and other costs, higher chicken prices and operational improvements. Mexico sales benefited from favorable currency translation and higher market prices, while volume was affected by the H7N3 outbreak. Management reported $25.1 million of net derivative gains in 2013; derivative fair-value changes are recognized immediately in earnings.
Financial position, cash flow and debt
- At year-end, cash and cash equivalents were $508.2 million and available-for-sale securities were $96.9 million. Working capital was $845.6 million; the current ratio was 1.78, down from 2.11 in 2012.
- Cash used in investing activities was $181.8 million, including $116.2 million of capital expenditures and $96.9 million of security purchases. Cash used in financing activities was $250.2 million, including $758.6 million of long-term debt repayments.
- Reported debt carrying value was $912.2 million: $410.2 million current and $502.0 million long-term. The company also had $500 million principal amount of 7.875% senior notes due 2018. No revolving U.S. facility borrowings were outstanding; $665.8 million was available, after letters of credit. The Mexico facility had $42.7 million of availability and no borrowings.
- The Term B loans matured in 2014. The company reported paying $204.9 million on December 30, 2013, after year-end, and expected to pay approximately $205.2 million on April 28, 2014; it expected no Term B balance after that payment. Debt covenants, collateral pledges and borrowing-base limitations remain relevant.
Outlook, commentary and material risks
- No specific revenue or earnings guidance was provided. Management expected 2014 capital spending of $110 million–$150 million, mainly for efficiency and cost-reduction projects, and estimated approximately $3 million of additional exit or disposal costs in 2014.
- Feed costs and chicken prices remain volatile. A hypothetical 10% increase in primary feed ingredient costs, based on 2013 consumption and excluding derivatives, would have increased cost of sales by approximately $336.5 million. Management cautioned that market prices for chicken could fall and feed costs could rise.
- The 2012–2013 H7N3 avian influenza outbreak in Mexico affected a Pilgrim’s breeder farm and contributed to reduced broiler-egg availability and sales volume. Disease outbreaks can also trigger trade restrictions, culling, lower demand and reputational harm.
- Mexico had imposed, but postponed, duties of approximately 25% on certain U.S. chicken legs and thighs pending normalization of domestic market conditions; Pilgrim’s and other producers sought NAFTA review. Management did not expect material financial impact when duties are imposed.
- Legal and tax contingencies include remaining contract-grower claims, for which loss was considered reasonably possible but not estimable, and an IRS dispute related to Gold Kist’s 2004 tax year. The Tax Court ruled the relevant loss was capital in nature; Pilgrim’s sought reconsideration and further review. An adverse outcome could materially affect results and financial position. The Fifth Circuit reversed a prior $25.6 million grower judgment in Pilgrim’s favor, but plaintiffs petitioned the U.S. Supreme Court for review.
- Other risks include customer concentration (Wal-Mart represented 9.7% of sales), foreign currency and trade exposure, environmental and food-safety regulation, labor negotiations at one location, and JBS USA’s control of approximately 75.5% of the common stock. The company paid no dividends in 2013 and had no current plan to pay cash dividends.
Most important facts for investors to verify
- Whether the strong 2013 profitability and margin recovery are sustainable if chicken prices, supply, or feed costs change.
- Completion and funding of the scheduled 2014 Term B repayments, and the resulting debt, liquidity and borrowing availability.
- Developments in the Gold Kist IRS dispute and remaining grower litigation, including any potential loss estimates or accrual changes.
- Effects of Mexico’s postponed import duties, avian-influenza recovery and currency movements on Mexican operations.
- Cash conversion and capital allocation: operating cash flow was $878.5 million, while working capital and the current ratio declined year over year.