Pilgrim’s Pride Corporation — Q2 2014 Form 10-Q
Business context and period: Poultry producer operating in the U.S., Mexico and Puerto Rico, with one reportable segment. This unaudited filing covers the 13 and 26 weeks ended June 29, 2014; comparisons are with the periods ended June 30, 2013. JBS USA owned 75.5% of the company.
Financial performance
Amounts are in millions of dollars except per-share data. Margins are calculated from reported figures.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2,186.8 | $2,184.1 | $4,204.9 | $4,221.0 |
| Gross profit / margin | $349.5 / 16.0% | $282.5 / 12.9% | $564.6 / 13.4% | $400.9 / 9.5% |
| Operating income / margin | $300.4 / 13.7% | $237.9 / 10.9% | $468.6 / 11.1% | $311.9 / 7.4% |
| Net income attributable to Pilgrim’s Pride | $190.4 | $190.7 | $288.5 | $245.3 |
| Diluted EPS | $0.73 | $0.74 | $1.11 | $0.95 |
- Cash flow: Six-month cash from operations was $416.2 million, up from $310.9 million. Capital expenditures were $90.8 million versus $49.0 million. Ending cash and cash equivalents were $527.4 million.
- Debt and liquidity: Balance-sheet debt was $502.3 million, compared with $912.2 million at year-end 2013; the company repaid $410.2 million of borrowings during the half-year, including the remaining Term B loans. Working capital was $1,044.0 million and the current ratio was 2.27. The $700 million U.S. revolving facility had no borrowings and $679.9 million available after letters of credit.
- Taxes and other items: The six-month effective tax rate was 34.4%, versus 7.1% a year earlier; management attributed the increase primarily to the prior-year valuation-allowance reduction and said it expected a higher rate going forward. Six-month derivative fair-value changes were a net loss of $14.1 million, versus a net gain of $13.8 million in 2013.
Material changes versus the prior period
- Q2 sales were nearly unchanged, while six-month sales declined 0.4%. Higher volume was largely offset by lower sales per pound from product mix and, in Mexico, currency translation.
- Gross profit and operating income rose substantially in both periods, principally reflecting lower feed-ingredient costs in the U.S. Six-month U.S. gross profit rose $173.9 million; Mexico gross profit fell $10.3 million.
- Six-month net income attributable to the company increased 17.6%, although Q2 net income was essentially flat year over year. Lower interest expense from reduced average borrowings supported earnings, partly offset by a higher average interest rate.
- Six-month operating cash flow improved, while investing cash flow was positive $10.5 million, including proceeds from sales or maturities of investment securities. Financing used $409.8 million, mainly for debt repayment.
Outlook, risks and contingencies
- Management reported strong chicken demand and constrained supplies across beef, pork and chicken, which it expected to persist until mid-2015. It said market prices then covered feed costs, but gave no formal earnings or revenue guidance.
- Feed prices remain volatile. Management cautioned that higher corn, soybean meal and other input costs, or lower chicken prices, could adversely affect results. Derivatives are not designated as cash-flow hedges, so fair-value changes affect earnings immediately.
- China imposed combined antidumping and countervailing duties of 77.9% on the company’s covered U.S. chicken products, which management said could deter imports and reduce sales to China.
- After quarter-end, the company agreed to acquire Tyson Mexico for approximately $400 million in cash, subject to adjustments, customary closing conditions and regulatory approvals, with completion expected in the second half of 2014. Management expected to use available cash. Integration, assumed liabilities and financing or execution risks were identified.
- After quarter-end, Mexican subsidiaries replaced the ING facility with an unsecured 560 million-peso BBVA Bancomer facility, maturing in 2017; no borrowings were outstanding at the time disclosed.
- Legal and tax matters: A remaining IRS claim of approximately $45.4 million relating to Gold Kist’s 2004 tax year was under appeal; an adverse result could materially affect results and financial position. ERISA claims seek unspecified damages, with plaintiffs asserting claims exceeding $35 million; outcome and potential loss were not estimable. Remaining grower claims were scheduled for trial, though management said a financial loss was no longer considered reasonably possible. The company stated it intended to defend the claims.
- Other risks include disease outbreaks, product contamination and recalls, labor and regulatory issues, competition, foreign-exchange movements, weather, customer concentration, and the ability to maintain liquidity and realize acquisition benefits.
Important facts for investors to verify
- Whether the Tyson Mexico acquisition closed as planned, its final purchase price and funding, and any assumed liabilities or integration costs.
- Whether supply and demand conditions, chicken pricing and feed costs developed as management expected, including the effect of commodity hedges and their earnings volatility.
- The progress and potential financial exposure of the Gold Kist tax appeal, ERISA litigation and remaining grower proceedings.
- Post-acquisition liquidity, debt levels, covenant compliance and capital spending, particularly given the planned cash purchase and $350 million annual capex covenant.
- The impact of China’s 77.9% duties and any subsequent changes to export volumes or duty rates.