Pilgrim’s Pride Corporation — Q3 2013 Form 10-Q
Reporting period: 13 weeks ended September 29, 2013; year-to-date figures cover the 39 weeks ended September 29, 2013. Comparatives are the corresponding 2012 periods. Financial statements are unaudited. Amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Business context
Pilgrim’s Pride is a vertically integrated chicken producer operating in the United States, Mexico and Puerto Rico, with exports to about 100 countries. It reported one business segment. JBS USA beneficially owned 75.5% of the company at quarter-end.
Key financial results
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $2,142.8m | $2,068.5m | $6,363.9m | $5,931.7m |
| Gross profit | $236.6m | $106.1m | $637.5m | $360.3m |
| Gross margin | 11.0% | 5.1% | 10.0% | 6.1% |
| Operating income | $189.1m | $61.7m | $501.0m | $222.9m |
| Operating margin | 8.8% | 3.0% | 7.9% | 3.8% |
| Net income attributable to Pilgrim’s Pride | $160.9m | $42.9m | $406.2m | $151.5m |
| Diluted EPS | $0.62 | $0.17 | $1.57 | $0.61 |
Cash flow and liquidity: Year-to-date cash from operations was $596.7m, versus $156.0m in 2012; investing activities used $73.0m, including $76.3m of capital expenditures, and financing activities used $257.7m. Cash rose to $330.3m from $68.2m at December 30, 2012. Working capital was $1,058.4m and the current ratio was 2.39, compared with $812.6m and 2.11 at year-end 2012.
Debt: Debt and other borrowing arrangements totaled $912.4m at September 29, 2013, down from $1,164.8m at year-end 2012. Cash exceeded revolving-credit borrowings, which were zero; the U.S. facility had $670.4m available after letters of credit, and the Mexico facility had $42.4m available with no borrowings. The $410.1m Term B balance matures December 28, 2014. The 7.875% senior notes have $500m principal outstanding and mature in 2018.
Material changes and drivers
- Q3 sales increased 3.6%; 39-week sales increased 7.3%. U.S. growth was chiefly driven by higher revenue per pound and market prices, partly offset by lower sales volume. Mexico sales fell 3.4% in Q3 as prices declined, but rose 13.1% year to date, primarily due to higher prices and exchange-rate effects.
- Profitability improved substantially. Management attributed the U.S. performance to pricing and lower Q3 cost of sales; year-to-date U.S. live-production costs were higher, primarily reflecting feed costs. Mexico gross profit and operating income improved year to date, but Mexico’s Q3 gross profit fell sharply from the prior-year quarter.
- Net interest expense declined year to date, mainly because average borrowings fell to $1.02bn from $1.28bn; the weighted-average interest rate increased to 7.16% from 6.95%.
- Year-to-date derivative gains recognized in cost of sales were $21.9m, compared with $3.7m in 2012. These instruments are not designated as cash-flow hedges, so fair-value changes affect earnings immediately.
- Year-to-date income tax expense was $24.2m, versus a $0.7m benefit in 2012. The reported 2013 effective tax rate was 5.6%; management cited current-period earnings and a reduction in valuation allowance.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said chicken prices were then sufficient to offset high feed costs, while cautioning that feed prices remain volatile and chicken prices could weaken due to competition or changes in consumer demand.
- Feed-price exposure is significant: a hypothetical 10% change in weighted-average primary feed-ingredient costs would have changed quarterly cost of sales by $87.5m, excluding derivative effects. Outstanding hedges covered only small portions of anticipated corn and soybean-meal needs.
- The company expected approximately $1.5m of additional costs from ongoing exit and disposal efforts. It recorded $4.6m of restructuring charges year to date, including $3.1m of asset impairments. Separately, it sold its Batesville, Arkansas processing complex on October 25, 2013, after quarter-end.
- Following the Fifth Circuit’s reversal of the El Dorado grower judgment, the company reversed the related loss accrual on September 1, 2013; the filing text does not provide a clear value for the accrual reversed. Remaining grower claims could result in losses, but the company could not estimate a potential loss. An ERISA case seeks damages in excess of $35m, with outcome and potential company exposure undetermined.
- An unresolved IRS matter relating to Gold Kist’s 2004 tax year accounts for approximately $45.4m of an IRS amended bankruptcy claim. The company said an adverse outcome could materially affect results and financial position. Other portions of the claim were resolved by stipulations expected to result in no additional tax due.
- Mexico had imposed a final duty decision of approximately 25% on certain U.S. chicken legs and thighs, but postponed implementation pending normalization of domestic-market conditions. The company said it did not expect the duties, when imposed, to have a material impact.
- The U.S. credit facility was amended and restated in August 2013. It requires a minimum tangible-net-worth covenant, with which the company reported compliance; other financial covenants were eliminated. The Term B debt maturity and expected significant future excess-cash-flow repayment remain important liquidity considerations.
Important facts for investors to verify
- Whether strong chicken pricing and margins persist as feed costs, product prices and sales volumes change.
- The timing and funding plan for the $410.1m Term B maturity in December 2014, including required excess-cash-flow repayments and refinancing options.
- The full earnings impact of derivative gains and the amount of the El Dorado grower-claim accrual reversal, which is not clearly stated in the filing text.
- Developments in unresolved grower and ERISA litigation, the Gold Kist tax dispute, and the postponed Mexican duties.
- Progress on asset sales and restructuring, including the Batesville sale and the expected remaining exit costs.