Pilgrim’s Pride Corporation — Q1 2014 Form 10-Q
Reporting period: Thirteen weeks ended March 30, 2014; comparisons are with the thirteen weeks ended March 31, 2013. Pilgrim’s Pride produces and sells chicken products in the U.S., Puerto Rico and Mexico, and operates as one reportable segment. JBS USA beneficially owned 75.5% of its common stock at quarter-end.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $2.018 billion | $2.037 billion |
| Gross profit / margin | $215.1 million / 10.7% | $118.4 million / 5.8% |
| Operating income / margin | $168.2 million / 8.3% | $74.0 million / 3.6% |
| Net income attributable to Pilgrim’s Pride | $98.1 million; $0.38 diluted EPS | $54.6 million; $0.21 diluted EPS |
| Cash from operations | $195.7 million | $20.6 million |
| Capital expenditures | $47.8 million | $25.8 million |
Revenue declined 0.9%, while gross profit rose 81.6% and operating income rose 127.4%. Lower feed ingredient costs were the main contributor to lower cost of sales; stronger chicken prices amid constrained supply also supported results. Net interest expense fell to $18.7 million from $24.6 million as average borrowings declined, partly offset by a higher average interest rate. The effective tax rate increased to 34.6% from 4.8%; management attributed the higher rate partly to prior utilization of almost all domestic net operating losses and expects higher rates going forward.
At March 30, cash and cash equivalents were $515.0 million and short-term available-for-sale securities were $37.0 million. Working capital was $939.5 million and the current ratio was 2.06. Total debt was $707.4 million carrying value, including $205.4 million of current maturities; $500.0 million principal of 7.875% senior notes is due 2018. The company had $664.8 million available under its U.S. revolver and $42.6 million under its Mexico facility, with no revolving or Mexico facility borrowings outstanding. On April 28, 2014, it repaid the $205.2 million Term B balance outstanding at quarter-end.
Cash increased $6.8 million to $515.0 million. Operating cash flow was partly offset by $204.9 million of financing outflows, mainly debt repayment. Investing cash flow was $13.7 million, reflecting proceeds from investment securities that exceeded purchases, as well as capital spending.
Material changes and management commentary
- U.S. gross profit increased $94.1 million; Mexico gross profit increased $2.6 million. Net sales per pound fell, partly offset by higher sales volume; Mexico revenue was also reduced by currency translation.
- Management reported strong demand in the U.S. and Mexico, particularly for tenders, small whole chickens, boneless breast portions and leg quarters. It said industry supplies of beef, pork and chicken were constrained and expected those conditions to continue until mid-2015.
- Feed prices remained volatile. The company recorded an $8.0 million net loss from changes in derivative fair values, compared with a $4.9 million net gain a year earlier. Derivatives are not designated as cash-flow hedges, so fair-value changes are recognized immediately in earnings.
- Quarter capital spending focused on U.S. efficiency and cost reduction and capacity expansion in Mexico. The credit facility caps fiscal 2014 capital expenditures at $350 million.
- Administrative restructuring charges were $1.7 million, versus $0.5 million. The company continued facility closures and other streamlining actions; additional costs or impairment charges may arise.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said current chicken prices were sufficient to offset feed costs, but noted that demand, selling prices and input costs could change. Risks include feed and chicken price volatility, disease outbreaks, product contamination and recalls, labor and regulatory matters, foreign-exchange movements, competition, weather, customer concentration, leverage and litigation.
- Tax dispute: An IRS amended bankruptcy claim totaled $74.7 million. Stipulations resolved approximately $29.3 million with no additional tax expected on those matters. The remaining approximately $45.4 million relates to a Gold Kist tax loss; the Tax Court ruled against the company on its characterization, and the company appealed to the Fifth Circuit on April 14, 2014. An adverse result could materially affect results and financial position.
- Grower litigation: The Fifth Circuit reversed the El Dorado growers’ judgment, and the U.S. Supreme Court declined review in February 2014. Other grower claims remain, with proceedings scheduled for 2014; the company intends to defend them.
- ERISA litigation: Claims against current and former directors, officers and plan fiduciaries seek unspecified damages; the filing reports plaintiffs’ claims in excess of $35 million and says the likelihood or amount of any loss cannot be determined.
- The company reported compliance with its minimum tangible-net-worth covenant. Its credit facility and note indenture restrict, but do not prohibit, dividends.
Key facts for investors to verify
- Whether constrained poultry supplies and strong demand persist, and how selling prices and product mix develop.
- Feed ingredient costs, derivative results and the timing with which input costs flow through cost of sales.
- The outcome and potential financial exposure of the Gold Kist tax appeal and remaining grower and ERISA matters.
- Post-quarter debt repayment, ongoing liquidity, capital spending and compliance with credit-facility covenants.
- The sustainability of margins and cash generation given the quarter’s unusually large improvement in gross profit and operating cash flow.