Pilgrim’s Pride Corporation — Q2 2013 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks ended June 30, 2013, and the first 26 weeks of fiscal 2013, compared with periods ended June 24, 2012. The unaudited company produces and sells chicken products in the U.S., Mexico and Puerto Rico; JBS USA owned 75.5% of its common stock at quarter-end.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $2.184 billion | $1.974 billion | $4.221 billion | $3.863 billion |
| Gross profit | $282.5 million | $144.1 million | $400.9 million | $254.2 million |
| Gross margin | 12.9% | 7.3% | 9.5% | 6.6% |
| Operating income | $237.9 million | $99.3 million | $311.9 million | $161.2 million |
| Operating margin | 10.9% | 5.0% | 7.4% | 4.2% |
| Net income attributable to Pilgrim’s Pride | $190.7 million | $69.4 million | $245.3 million | $108.5 million |
| Diluted EPS | $0.74 | $0.27 | $0.95 | $0.45 |
- Revenue and earnings drivers: Q2 sales rose 10.6%; first-half sales rose 9.3%. Higher net revenue per pound, primarily reflecting higher market prices, drove growth in both the U.S. and Mexico. Lower sales volumes partly offset the gains. First-half gross profit increased 57.8% and operating income increased 93.5% year over year.
- Costs and margins: First-half U.S. live production costs increased $176.2 million, mainly due to higher feed ingredient costs. Management said prevailing chicken prices were sufficient at the time to offset high feed costs, but that future prices and margins were uncertain.
- Cash flow: First-half operating cash flow was $310.9 million, versus $80.3 million a year earlier. Capital expenditures were $49.0 million, compared with $37.6 million; operating cash flow less capital expenditures was approximately $262 million. Investing activities used $46.1 million. Financing activities used $252.7 million, including debt repayments.
- Liquidity: At June 30, cash was $78.2 million; working capital was $851.6 million and the current ratio was 2.16. The $700 million U.S. revolver had no borrowings and $670.4 million available after letters of credit. The $43.1 million Mexico facility was undrawn.
- Debt and equity: Long-term debt and other borrowings totaled $912.3 million, down from $1.165 billion at December 30, 2012. The balance included $500 million of 7⅞% senior notes due 2018 and approximately $410.1 million of Term B loans, scheduled to mature in December 2014. The company paid approximately $141.2 million of required excess-cash-flow amortization in April. Stockholders’ equity was $1.191 billion, up from $909.0 million at year-end.
- Taxes and unusual items: First-half income tax expense was $18.6 million, a 7.1% effective rate, versus a $1.7 million benefit in the prior-year period. First-half administrative restructuring charges were $1.0 million, down from $3.3 million. Commodity derivative fair-value changes produced gains of $13.8 million in the first half, versus losses of $2.2 million a year earlier; these instruments are not designated as cash flow hedges and changes affect earnings immediately.
Material changes, outlook and risks
- Performance versus prior year: The marked improvement in profit and margins reflected higher chicken selling prices and revenue per pound; it occurred despite higher feed costs and lower sales volumes. Mexico sales and gross profit also increased substantially, with exchange-rate movements affecting reported results.
- Credit amendment after quarter-end: As of August 1, 2013, the company said it had substantially completed negotiations and received lender commitments for an amended U.S. credit facility. Proposed terms included lower pricing on revolving and Term B-1 borrowings through year-end 2013, removal of specified financial covenants, and a potential delayed-draw term loan of up to $400 million after May 1, 2014. The filing describes the agreement as not yet closed.
- Management outlook: The filing provides no specific earnings or revenue guidance. Management noted that market chicken prices then offset high feed costs, but feed prices remained volatile and chicken prices could weaken. It expected approximately $2 million of additional costs from ongoing exit or disposal activities and continued to review operational streamlining options.
- Commodity, disease and market exposure: A hypothetical 10% change in primary feed ingredient costs would have changed quarterly cost of sales by $88.1 million, before derivatives. The filing discusses avian influenza risks, including H7N3 in Mexico and H7N9 in Asia. Mexican antidumping duties of approximately 25% on certain U.S. chicken exports had been postponed pending normalization of domestic market conditions; the company had sought NAFTA panel review.
- Debt and liquidity constraints: The U.S. credit facility was secured by substantially all assets of the company and certain subsidiaries, included restrictive covenants, and limited capital expenditures to $350 million in 2013 and 2014. The company reported compliance with its financial covenants at quarter-end. Dividends were restricted by the credit facility.
- Contingencies: A grower lawsuit had an outstanding $25.6 million judgment under appeal; the company recorded an estimated probable loss below that amount. Potential losses on other grower claims were reasonably possible but not estimable. The IRS’s $74.7 million amended bankruptcy claim included approximately $45.4 million relating to a disputed Gold Kist tax-year 2004 item still being resolved; an adverse outcome could materially affect results and financial position. An ERISA class-certification decision was pending.
- Other operational risks: The company cited labor negotiations at seven locations, environmental compliance and remediation exposure, poultry disease, product liability and recall risks, and the cyclicality of feed and chicken prices. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether improved chicken pricing and margins persisted, and how feed costs and sales volumes subsequently developed.
- Completion and final terms of the amended U.S. credit facility, including covenant relief, pricing, maturity and delayed-draw availability.
- The schedule and refinancing plan for the approximately $410 million Term B balance due in December 2014.
- Developments in the appealed grower judgment, remaining grower litigation, and the unresolved IRS claim concerning Gold Kist.
- The status and financial impact of Mexican trade duties and avian influenza developments, along with the company’s commodity-hedging results.