Pilgrim’s Pride Corporation — Q2 2012 Form 10-Q
Reporting period: Thirteen weeks ended June 24, 2012; year-to-date figures cover the twenty-six weeks ended that date. Comparatives are the corresponding 2011 periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Pilgrim’s Pride is a vertically integrated chicken producer operating in the U.S., Puerto Rico and Mexico, with exports to about 105 countries. It reported one business segment. JBS USA Holdings beneficially owned 75.3% of the company at June 24, 2012.
Financial performance
| Metric | Q2 2012 | Q2 2011 | 26 weeks 2012 | 26 weeks 2011 |
|---|---|---|---|---|
| Net sales | $1,974.5 | $1,922.7 | $3,863.2 | $3,815.2 |
| Gross profit (loss) | $144.1 | $(46.2) | $254.2 | $(99.3) |
| Gross margin | 7.3% | (2.4)% | 6.6% | (2.6)% |
| Operating income (loss) | $99.3 | $(98.7) | $161.2 | $(205.5) |
| Operating margin | 5.0% | (5.1)% | 4.2% | (5.4)% |
| Net income (loss) attributable to Pilgrim’s Pride | $69.4 | $(128.1) | $108.5 | $(248.9) |
| Diluted EPS | $0.27 | $(0.57) | $0.45 | $(1.11) |
Cash flow: Year-to-date operating cash flow was $80.3 million, versus $140.2 million used in 2011. Investing activities used $25.2 million, including $37.6 million of capital expenditures; financing activities used $45.3 million. Cash and cash equivalents increased to $49.2 million from $41.6 million at fiscal year-end.
Liquidity and debt: Working capital was $843.4 million, with a 2.16 current ratio, compared with $747.0 million and 2.04 at December 25, 2011. Carrying debt was approximately $1.23 billion, down from $1.47 billion, and the $50 million JBS USA subordinated loan was repaid. The company had $476.2 million available under its U.S. revolving facility, subject to borrowing-base limits, and $40.2 million available under its Mexico facility. The U.S. facility matures in 2014; $500 million of senior notes mature in 2018.
Material changes and drivers
- Q2 sales rose 2.7%; year-to-date sales rose 1.3%. Higher selling prices drove U.S. revenue gains, while lower pounds sold partly offset them. Mexico year-to-date sales increased 5.7%, primarily on higher volume.
- Profitability rebounded sharply from 2011 losses. Management attributed lower U.S. costs partly to the prior-year inventory reduction, disposal of the distribution and pork businesses, closure of the Dallas facility and lower depreciation. Higher feed and packaging costs partly offset these factors year to date.
- SG&A declined year over year. Net interest expense also declined, mainly because average borrowings were lower, although average interest rates increased.
- Cash flow improved substantially, but inventory rose $108.9 million from year-end to $988.0 million, principally reflecting higher live chicken, finished product and feed ingredient costs.
- The February rights offering issued 44.4 million shares for $200 million gross proceeds ($198.3 million net). Proceeds supported working capital and debt repayment; outstanding shares increased to about 258.9 million.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said its forecasts indicated sufficient liquidity for the foreseeable future, but warned that weaker chicken prices or higher feed costs could materially jeopardize liquidity.
- Management cited drought-related uncertainty and sharp post-quarter grain price increases: by July 23, 2012, corn and soybean meal had reached highs of $8.64 per bushel and $565 per ton, respectively. Chicken prices then appeared sufficient to offset higher feed costs, but that could change. A 10% increase in primary feed ingredient costs, based on Q2 consumption and excluding derivatives, would have increased cost of sales by $83.8 million.
- Commodity derivatives are not designated as cash-flow hedges, so fair-value changes are recognized immediately in cost of sales. They produced a $2.4 million net gain in Q2 2012, but a $2.2 million net loss year to date, compared with a $26.3 million year-to-date gain in 2011.
- U.S. Credit Facility fixed-charge coverage and senior secured leverage covenant testing was suspended through the quarter ending December 30, 2012. The company reported compliance with its modified tangible-net-worth covenant and expected to meet the other covenants when testing resumes. Debt restrictions include limits on dividends and certain transactions.
- Ongoing restructuring and disposal efforts are expected to incur an additional $12.3 million of costs. A sale agreement for commercial egg operations was reached on July 17, 2012, with closing expected in August.
- Material legal and tax uncertainties include a $25.6 million grower judgment under appeal, additional grower claims with losses not estimable, and an IRS amended bankruptcy claim of $74.7 million under dispute. The filing says an adverse outcome in the tax cases could materially affect results and financial position.
- Other exposures include feed commodity and foreign-exchange volatility, disease outbreaks, product contamination and recalls, competition, and an investigation in Mexico into alleged below-cost U.S. chicken-leg and thigh sales.
Key facts for investors to verify
- Whether improved chicken pricing can continue to cover drought-driven feed cost increases, and how much of future input needs are hedged.
- Progress against credit-facility covenants ahead of their resumption, available borrowing-base capacity and debt maturities.
- Outcome and potential financial exposure from the grower litigation and IRS tax disputes, including the amount accrued for the appealed judgment.
- Completion and terms of the commercial egg operations sale, and any further restructuring or asset-sale costs.
- Effects of the rights offering on per-share results and JBS USA’s control, which stood at 75.3% at quarter-end.