Pilgrim’s Pride Corporation — Q1 2012 Form 10-Q
Reporting period: Thirteen weeks ended March 25, 2012; comparison is the thirteen weeks ended March 27, 2011. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and results
Pilgrim’s Pride is a vertically integrated chicken producer operating in the U.S., Puerto Rico and Mexico, with one reportable segment. Net sales were essentially flat year over year despite the prior-year period including the distribution and pork businesses sold in late 2011.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $1,888.8 | $1,892.5 |
| Gross profit (loss) | $110.1 | $(53.1) |
| Gross margin | 5.8% | (2.8)% |
| Operating income (loss) | $61.9 | $(106.8) |
| Net income (loss) attributable to Pilgrim’s Pride | $39.2 | $(120.8) |
| Diluted earnings (loss) per share | $0.18 | $(0.54) |
| Cash from (used in) operating activities | $29.4 | $(102.4) |
Financial position and liquidity
- Cash and cash equivalents were $47.6 at March 25, 2012; restricted cash was $4.7. Working capital was $800.7 and the current ratio was 2.17, compared with $747.0 and 2.04 at December 25, 2011.
- Total debt was approximately $1,265.1, including current maturities, down from $1,473.6 at year-end. The company repaid its $50.0 JBS subordinated loan and made substantial repayments on other borrowings during the quarter.
- U.S. revolving-credit availability was $439.2, after $192.6 in borrowings and $39.2 in letters of credit; the Mexico facility had $43.7 available and no borrowings.
- Capital expenditures were $16.7, compared with $64.0 in the prior-year quarter. Management said 2012 capital expenditures may not exceed $175.0 under the credit facility.
Material changes and drivers
- Profitability rebounded sharply from the prior-year loss. Management attributed the improvement primarily to lower U.S. costs, including the absence of the prior-year inventory-reduction efforts, disposal of the distribution and pork businesses, and reduced processing labor, depreciation and live-production costs. Prior-year results also included $32.0 in derivative gains; Q1 2012 recorded $4.6 in derivative losses, partially offsetting the improvement.
- U.S. sales fell 1.5%, reflecting lower volumes, partly offset by higher revenue per pound. Mexico sales rose 12.1%, supported by higher volume and pricing. Overall sales declined 0.2%.
- Net interest expense was approximately $28.0, up from $26.8; average borrowings and weighted-average interest rates were slightly lower, while letter-of-credit costs and lower capitalized interest contributed to the increase.
- The company raised $200.0 gross, or $198.4 net, through a rights offering of 44.4 million shares at $4.50 per share. Proceeds funded working capital and general purposes, repaid the JBS loan and reduced U.S. Credit Facility debt. Shares outstanding increased from 214.3 million at year-end to 258.9 million at quarter-end.
- After quarter-end, JBS USA acquired shares from the former Founder Director, increasing its ownership to 75.3% from 68.0% at March 25.
Outlook, risks and contingencies
- Management said current forecasts indicated sufficient liquidity for the foreseeable future, but warned that deterioration in chicken prices or feed costs could materially jeopardize liquidity. It gave no quantified earnings or revenue guidance.
- Feed prices remain a significant exposure: Q1 nearby corn futures ranged from $5.93 to $6.79 per bushel and soybean meal from $299.00 to $374.50 per ton. A hypothetical 10% move in primary feed costs would have changed quarterly cost of sales by $77.3, before derivatives.
- Commodity derivatives are not designated as cash-flow hedges, so fair-value changes flow immediately through earnings. The company reported net derivative losses of $4.6 in Q1 2012 versus gains of $32.0 in Q1 2011.
- Fixed-charge coverage and senior secured leverage covenant testing under the U.S. Credit Facility was suspended until September 24, 2012. The company reported compliance with the modified tangible-net-worth covenant and expected to meet the other modified covenants when testing resumes. The facility is secured by substantial company assets and restricts certain actions, including dividends.
- Restructuring and disposal costs were $3.0 in Q1; management expected another $12.6 in costs from ongoing exit or disposal efforts. Assets held for sale totaled $50.2; idled assets not classified as held for sale had a carrying amount of $62.8.
- Legal and tax exposures include a $25.6 grower judgment under appeal; the company recorded a probable loss below the judgment amount. Other grower claims remain unresolved, with potential loss not estimable. A proposed $1.5 securities-litigation settlement awaited court approval. The IRS asserted a $74.7 bankruptcy claim for disputed pre-petition taxes; management could not estimate the outcome of the related tax proceedings.
- Additional risks include competition and protein substitution, avian disease and product recalls, foreign exchange and trade restrictions, and the company’s substantial leverage. Mexico authorities were investigating U.S. chicken producers over alleged dumping of legs and thighs; the outcome was uncertain.
Important facts for investors to verify
- Whether the margin recovery is sustainable and how feed costs, chicken prices and derivative mark-to-market effects evolve.
- Liquidity, debt repayments and covenant compliance as financial covenant testing resumes in September 2012.
- Cash costs and timing of restructuring, asset sales and potential proceeds from assets held for sale.
- Outcomes and potential financial exposure from the grower litigation, disputed IRS claim and other contingencies.
- Effects of the rights offering and JBS USA’s increased ownership on share count, governance and related-party dealings.