Pilgrim’s Pride Corporation — Q3 2011 Form 10-Q
Business context and period. The filing covers the 13 and 39 weeks ended September 25, 2011; comparisons are to the corresponding 2010 periods. Pilgrim’s Pride is a vertically integrated chicken producer operating in the U.S., Puerto Rico and Mexico, with exports to about 95 countries. JBS USA owned 67.3% of the company.
Financial performance
| Metric | 13 weeks ended Sep. 25, 2011 | 13 weeks ended Sep. 26, 2010 | 39 weeks ended Sep. 25, 2011 | 39 weeks ended Sep. 26, 2010 |
|---|---|---|---|---|
| Net sales | $1,891.2 million | $1,719.9 million | $5,706.4 million | $5,070.3 million |
| Gross profit (loss) / margin | $(62.4) million / (3.3)% | $157.3 million / 9.1% | $(161.7) million / (2.8)% | $341.8 million / 6.7% |
| Operating income (loss) / margin | $(125.1) million / (6.6)% | $113.2 million / 6.6% | $(330.5) million / (5.8)% | $132.7 million / 2.6% |
| Net income (loss) attributable to Pilgrim’s Pride | $(162.5) million | $57.9 million | $(411.4) million | $45.3 million |
| Diluted earnings (loss) per share | $(0.76) | $0.27 | $(1.92) | $0.21 |
- Revenue grew 10.0% in the quarter and 12.5% year to date, largely on higher sales volume in the U.S. and Mexico. U.S. volume rose with domestic and export demand and inventory-reduction efforts; less favorable product mix reduced revenue per pound.
- Higher feed ingredient costs outpaced chicken prices. U.S. live-production costs and feed costs were major contributors to increased cost of sales; Mexico results also faced higher feed costs. The company reported that chicken prices remained insufficient to offset feed costs.
- Commodity derivative gains recognized in cost of sales were $34.4 million for the quarter and $60.8 million year to date. These instruments were not designated as cash-flow hedges, so fair-value changes were recognized immediately in earnings.
- Interest expense was $27.9 million for the quarter and $82.9 million year to date. Average borrowings and weighted-average interest rates were higher than in the comparable periods.
Cash, liquidity and debt
- Operating cash flow was $(129.5) million for the 39 weeks, versus $22.3 million provided in 2010. Investing activities used $104.3 million, including $121.9 million of capital expenditures; financing activities provided $177.9 million. Cash declined to $46.9 million from $106.1 million at fiscal year-end 2010.
- At September 25, current assets were $1.537 billion and current liabilities $710.7 million: working capital of $826.7 million and a 2.16 current ratio, down from $971.8 million and 2.32 at December 26, 2010. Restricted cash was $57.3 million and is not generally available for operations.
- Debt and borrowing arrangements totaled about $1.524 billion, including $1.474 billion of long-term debt and current maturities and a $50 million JBS USA subordinated loan. The principal components included $500 million of 7.875% senior notes due 2018 and borrowings under the Exit Credit Facility.
- Exit Credit Facility revolving borrowings were $394.4 million, with $40.1 million of letters of credit and $243.9 million available under the borrowing-base limits. The company said it was complying with the amended tangible-net-worth covenant; fixed-charge coverage and senior-secured leverage covenants were suspended until September 23, 2012. Management expected sufficient liquidity for the foreseeable future but warned that continued weak chicken prices and high feed costs could jeopardize liquidity and covenant compliance.
Material changes, outlook and risks
- Year-to-date results swung from profit to substantial loss despite sales growth. Feed ingredient volatility, chicken oversupply and pricing, foreign exchange, and demand were key risks. A hypothetical 10% change in feed ingredient costs would have changed quarterly cost of sales by $76.5 million, before derivatives.
- Restructuring continued. On September 30, 2011, the company idled its Dallas facility rather than selling it; it expected about $15.6 million of future closing costs and a $0.4 million inventory write-off, plus about $0.5 million of later impairment. Douglas, Georgia operations had reopened, but full-capacity timing was deferred pending a 2012 review.
- For the quarter, the company recorded $11.5 million of administrative restructuring charges, including $8.8 million of asset impairment, $1.6 million of egg-sale and flock-depletion losses, and $1.0 million of severance. It also recorded $11.6 million of asset impairment year to date. Product recall costs of $7.9 million and a $6.0 million live-inventory lower-of-cost-or-market adjustment were included in year-to-date cost of sales.
- A U.S. court awarded approximately $25.8 million to 91 growers in a Packers and Stockyards Act case; the company recorded an estimated liability and planned post-judgment proceedings and an appeal. The IRS asserted a $74.7 million bankruptcy claim over disputed tax years; an adverse outcome could materially affect results and financial position. Unrecognized tax benefits totaled $63.0 million, with payment timing not estimable.
- An ammonia leak and explosion damaged the Marshville, North Carolina facility; $5.5 million of costs incurred through quarter-end was offset by an insurance receivable, with recovery expected in later quarters. Severe weather damage at other facilities also generated insurance proceeds.
- After quarter-end, the company agreed to sell distribution and transportation assets to JBS affiliates for $23 million and pork-business assets to a JBS subsidiary for $13 million, subject to adjustments and closing. These related-party sales were expected to close in November and December 2011, respectively. The company also reported a verbal settlement agreement in securities litigation, subject to documentation, class notice and court approval.
- No quantitative earnings or revenue guidance was provided. Management’s outlook was conditional: liquidity was expected to be adequate if operating conditions did not worsen, while continued unfavorable chicken/feed economics could materially impair liquidity and covenant capacity.
Investor verification priorities
- Track feed costs, chicken pricing, sales mix and whether volume gains translate into improved gross margins.
- Review operating cash burn, unrestricted liquidity, borrowing-base availability, debt balances and compliance with the amended tangible-net-worth covenant.
- Verify the timing and final costs of the Dallas idling, other restructuring actions, and asset-sale proceeds and use of proceeds.
- Monitor the $25.8 million grower judgment, the $74.7 million IRS claim and related tax proceedings, and any securities-litigation settlement approval.
- Confirm insurance recoveries for facility damage and assess the impact of product recall and impairment charges.