Pilgrim’s Pride Corporation — FY2011 Form 10-K
Business context and reporting period. The company produces, processes, markets and distributes chicken products in the U.S., Puerto Rico and Mexico, operating as a vertically integrated business. This annual report covers the fiscal year ended December 25, 2011 (52 weeks); the comparable fiscal year ended December 26, 2010. The fourth quarter was 13 weeks. Comparisons below use fiscal years, not calendar years.
Key financial metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $7.536 billion | $6.882 billion |
| Gross profit (loss) / margin | $(141.5) million / (1.9)% | $461.0 million / 6.7% |
| Operating income (loss) / margin | $(373.6) million / (5.0)% | $185.4 million / 2.7% |
| Net income (loss) attributable to Pilgrim’s / diluted EPS | $(496.8) million / $(2.32) | $87.1 million / $0.41 |
| Adjusted EBITDA | $(149.8) million | $481.9 million |
| Cash from (used in) operating activities | $(129.0) million | $14.6 million |
| Capital expenditures | $136.0 million | $179.3 million |
| Interest expense | $111.5 million | $105.6 million |
Fourth-quarter FY2011: Sales were $1.829 billion; gross profit was $20.2 million; net loss attributable to common stockholders was $85.4 million, or $0.40 per share.
Balance sheet and liquidity at December 25, 2011: Cash and cash equivalents were $41.6 million; working capital was $747.0 million, down from $971.8 million, and the current ratio was 2.04 versus 2.32. Total debt, including the $50.0 million JBS subordinated loan, was approximately $1.474 billion. The company reported $248.0 million available under its Exit Credit Facility, subject to borrowing-base limits, and a separate $40.3 million Mexican credit commitment with no borrowings outstanding. Stockholders’ equity was $558.4 million.
Material changes versus FY2010
- Sales rose 9.5%, mainly from higher sales volume and demand; lower revenue per pound from less favorable product mix partly offset the volume increase. U.S. sales increased 8.7% and Mexico sales increased 17.4%.
- Profitability deteriorated sharply: cost of sales increased 19.7%, exceeding sales growth. Management attributed the pressure primarily to higher feed costs; feed ingredients represented about 40.7% of U.S. cost of sales.
- Operating cash flow swung from a $14.6 million source to a $129.0 million use, and cash declined to $41.6 million from $106.1 million. The company also reported a $496.8 million net loss compared with $87.1 million net income.
- Debt and interest costs increased. Average borrowings rose to $1.483 billion from $1.216 billion, and the weighted average interest rate increased to 6.7% from 6.4%.
Outlook, commentary, risks and unusual items
- Management said feed prices remained volatile, despite easing in the fourth quarter, and chicken prices remained insufficient to offset generally higher feed costs. The company reported significant losses in 2011 amid high corn and soybean meal prices and low chicken prices. No formal earnings or revenue guidance is provided.
- The company reopened its Douglas, Georgia processing plant in January 2011 and planned to assess bringing it to full capacity during 2012. Management estimated restructuring and operating initiatives could yield a $400 million annualized improvement in plant-related costs and product mix by early 2012; this is an estimate, not a reported result.
- A rights offering was underway after year-end: up to approximately 44.4 million shares at $4.50 per share, with expected gross proceeds of about $200 million. JBS USA committed to exercise its basic and over-subscription rights. Proceeds were intended for working capital and general corporate purposes, with possible repayment of JBS debt or Exit Credit Facility borrowings. The offering was scheduled to expire February 29, 2012.
- Exit Credit Facility amendments temporarily suspended fixed-charge coverage and senior secured leverage covenant testing until September 2012 and modified tangible-net-worth requirements. The amendments and certain more favorable future covenant terms depended in part on the rights offering. Failure to restore earnings, maintain liquidity or meet covenants remains a material risk.
- Unusual costs included $22.9 million of asset impairments, $26.1 million of administrative restructuring charges, $18.5 million of egg-sale and flock-depletion losses in cost of sales, $7.9 million of product recall expenses, and a $1.9 million uninsured loss related to the Marshville facility. Commodity derivatives generated net gains in 2011, but are not designated as cash-flow hedges, so fair-value changes affect earnings immediately.
- Material contingencies include a $25.6 million grower judgment under appeal, with the company recording a probable loss below the judgment; remaining grower claims whose potential loss could not be estimated; and IRS claims of $74.7 million under tax litigation. A securities class action settlement of $1.5 million was subject to final court approval. The filing also identifies labor negotiations, disease and food-safety events, export restrictions, environmental regulation, customer concentration and JBS control as risks.
Important facts for investors to verify
- Whether the rights offering closed, its final proceeds and share dilution, and how proceeds were used.
- Subsequent feed and chicken prices, margins, operating cash flow and progress toward the stated cost and mix improvements.
- Current borrowing availability, covenant compliance after testing resumes, and repayment or refinancing plans for debt maturing in 2014.
- Outcomes and updated accruals for the grower judgment and remaining claims, IRS tax disputes, and securities settlement.
- Whether the company’s liquidity and inventory position can support operations through commodity-price and demand volatility.