Pilgrim’s Pride Corporation — Q3 2012 Form 10-Q
Business context and period. Pilgrim’s Pride produces and sells chicken products in the U.S., Puerto Rico and Mexico, with one reportable segment. The quarter was the 13 weeks ended September 23, 2012; year-to-date (“YTD”) covers 39 weeks. JBS USA owned 75.3% of the company at quarter-end. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Net sales | $2,068.5 | $1,891.2 | $5,931.7 | $5,706.4 |
| Gross profit (loss) | $106.1 | $(62.4) | $360.3 | $(161.7) |
| Gross margin | 5.1% | (3.3)% | 6.1% | (2.9)% |
| Operating income (loss) | $61.7 | $(125.1) | $222.9 | $(330.5) |
| Operating margin | 3.0% | (6.6)% | 3.8% | (5.7)% |
| Net income (loss) attributable to Pilgrim’s Pride | $42.9 | $(162.5) | $151.5 | $(411.4) |
| Diluted earnings (loss) per share | $0.17 | $(0.72) | $0.61 | $(1.83) |
| Cash provided by (used in) operations | Not stated for quarter | Not stated for quarter | $156.0 | $(129.5) |
Cash flow and investment. YTD capital expenditures were $62.1 million, down from $121.9 million. Investing activities used $32.9 million, versus $104.3 million. Financing activities used $108.9 million; the company received $198.3 million net from its rights offering and made $853.0 million in repayments of revolving and long-term borrowings and capital lease obligations.
Margins and drivers. Q3 sales grew 9.4%; management attributed the U.S. increase primarily to higher revenue per pound, with market prices contributing $128.6 million, and higher volume contributing $24.2 million. Mexico sales rose 12.7%, reflecting both volume and pricing. For YTD, sales increased 3.9%; higher U.S. pricing more than offset lower pounds sold, including the effect of prior-year business disposals. Profitability improved sharply year over year, while higher feed costs remained a significant offset to favorable chicken pricing and other cost reductions.
Balance sheet, debt and liquidity
- At September 23, 2012, cash and cash equivalents were $55.0 million; restricted cash was $4.5 million. Working capital was $831.8 million and the current ratio was 2.14, compared with $747.0 million and 2.04 at December 25, 2011.
- Total debt and other borrowing arrangements were approximately $1.167 billion, excluding the $2.8 million unaccreted discount; current maturities were $15.6 million. Debt was down from approximately $1.474 billion at December 25, 2011. The $500 million 7.875% senior notes mature in 2018; the U.S. Credit Facility matures in 2014.
- The $700 million U.S. revolver had $101.8 million drawn and $24.6 million of letters of credit outstanding, with $573.6 million available at quarter-end. The $42.9 million Mexico facility had no borrowings.
- Total stockholders’ equity was $892.7 million, up from $558.4 million at year-end, reflecting earnings and the rights offering. The offering issued 44.4 million shares at $4.50 each and generated $198.3 million net proceeds.
Material changes, outlook and risks
- Turnaround versus prior year: Q3 and YTD moved from substantial losses to profits. The company reported lower SG&A and restructuring charges, lower depreciation, and benefits from the prior-year inventory reduction and the sale of its distribution and pork businesses. These comparisons are affected by the changed business mix.
- Feed costs and commodity exposure: Management cited drought-related grain-market uncertainty. Corn traded between $5.70 and $8.49 per bushel in Q3, and soybean meal reached $541.80 per ton. A hypothetical 10% change in weighted-average feed ingredient costs would have changed quarterly cost of sales by $92.5 million, before derivatives. Derivative fair-value changes are recognized immediately in earnings; YTD gains were $3.7 million versus $60.8 million in the prior-year period.
- Management outlook: The company said its forecasts indicated sufficient liquidity for the foreseeable future and expected to comply with financial covenants when requirements resumed for the quarter ended December 30, 2012. Management cautioned that deterioration in chicken prices or feed ingredient prices could materially jeopardize liquidity. No specific earnings or revenue guidance was provided.
- Credit terms: Fixed-charge coverage and senior secured leverage covenant testing had been suspended until the quarter ending December 30, 2012. The company reported compliance with its modified tangible-net-worth covenant and expected to meet the resumed tests. The credit agreement restricts dividends and certain other actions.
- Restructuring and disposals: YTD exit and disposal costs were $6.2 million, and management expected another $5.5 million. The company sold its commercial egg business in August 2012; assets held for sale were $28.8 million at quarter-end. Management continued to consider further restructuring, which may require lender approval and entail additional costs.
- Trade and legal contingencies: Mexico announced duties of approximately 25% on certain U.S. chicken leg and thigh exports by Pilgrim’s and other named exporters, but delayed implementation pending normalization of its domestic market following avian influenza; the company and other producers sought NAFTA panel review. The company said it did not expect the duties to materially affect results. A grower judgment of $25.6 million was under appeal, with the company having accrued a probable loss below the judgment; potential losses on other grower claims were not estimable. The IRS asserted a $74.7 million claim relating to disputed tax years; the company contested it, and an adverse outcome could materially affect results and financial position.
- Other notable risk: The company reported $58.8 million of unrecognized tax benefits, for which timing and amount of any cash outflow could not be reasonably estimated. It also cited disease outbreaks, product contamination and recalls, currency movements, competition, customer concentration, leverage and litigation as risks.
Important facts for investors to verify
- Whether stronger chicken pricing and demand can continue to cover volatile feed costs, and how the company’s realized margins compare with its feed-hedging position.
- Whether liquidity and covenant compliance remain adequate when the suspended financial covenant tests resume, and the company’s debt repayment and maturity profile.
- The outcomes and potential financial exposure from the grower litigation and the disputed $74.7 million IRS claim.
- Whether Mexico’s announced trade duties are implemented, and whether any resulting impact differs from management’s assessment.
- The effects of the rights offering’s 44.4 million new shares and the prior-year business disposals on future per-share comparisons and operating trends.