Business context and reporting period
Pilgrim’s Pride Corporation (PPC) filed this Form 10-K for its 53-week fiscal year ended December 30, 2012. The company produces, processes and sells chicken products in the U.S., Puerto Rico and Mexico, operating as a vertically integrated business in one reportable segment. JBS USA owned 75.5% of PPC at year-end.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $8.121 billion | $7.536 billion |
| Gross profit (margin) | $435.8 million (5.4%) | $(141.5) million ((1.9)%) |
| Operating income (margin) | $250.3 million (3.1%) | $(373.6) million ((5.0)%) |
| Net income attributable to PPC | $174.2 million; $0.70 diluted EPS | $(496.8) million; $(2.21) diluted EPS |
| Cash from operating activities | $199.6 million | $(129.0) million |
| Cash and cash equivalents at year-end | $68.2 million | $41.6 million |
Revenue rose 7.8%, supported by higher U.S. selling prices and increased Mexico volume and pricing. U.S. sales grew 6.9%; Mexico sales grew 15.2%. Cost of sales was nearly flat overall, but U.S. feed ingredient costs increased by $365.0 million year over year. SG&A declined to $177.0 million from $205.1 million. Net interest expense was $103.5 million, down from $110.1 million; the effective tax benefit was $21.0 million.
Operating cash flow improved from the prior-year outflow. Investing activities used $60.4 million, including $90.3 million of capital expenditures, partly offset by asset-sale proceeds. Financing activities used $111.0 million. Working capital was a surplus of $812.6 million and the current ratio was 2.11, versus $747.0 million and 2.04 at the prior year-end.
Debt totaled approximately $1.165 billion at December 30, 2012, down from $1.474 billion of long-term debt plus a $50 million JBS loan in 2011. Cash was supplemented by $529.9 million of available U.S. revolving capacity and $42.8 million available under the Mexico facility. The company reported compliance with U.S. facility financial covenants. It expected to make a required $141 million Term B repayment in April 2013; the U.S. facility matures in December 2014 and $500 million of senior notes mature in 2018. Dividends were not paid and are restricted by the U.S. credit facility.
Fourth-quarter 2012 sales were $2.190 billion, gross profit was $75.5 million, and net income attributable to PPC was $22.8 million, or $0.09 per share. Fourth-quarter 2011 sales were $1.829 billion, gross profit was $20.2 million, and net loss attributable to PPC was $85.4 million, or $0.38 per share. The 2012 fourth quarter had 98 days versus 91 days in 2011.
Material changes versus prior period
- Results rebounded sharply from the 2011 loss, with gross profit improving by $577.4 million and operating income by $623.9 million.
- Management attributed the improvement to higher chicken prices, lower production levels following industry supply reductions, cost and efficiency actions, and improved results in Mexico. Feed costs remained a significant offset.
- A $200 million rights offering in early 2012 produced $198.3 million net proceeds; PPC issued 44.4 million shares, increasing year-end shares outstanding to 259.0 million from 214.3 million. Proceeds supported working capital and debt repayment, including repayment of the $50 million JBS subordinated loan.
- PPC sold its commercial egg operation in August 2012 and continued disposing of noncore assets. It recorded $8.7 million of exit and disposal costs in 2012, compared with $29.2 million in 2011.
Outlook, management commentary, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management planned approximately $107 million of 2013 capital expenditures, primarily for efficiency and cost-reduction projects, and estimated about $3 million of additional costs for ongoing exit or disposal actions. Management said chicken prices at the time were sufficient to offset higher feed costs, but did not assure that this would continue.
- Commodity exposure: Corn and soybean meal prices were historically high and volatile after drought-related supply constraints. A hypothetical 10% increase in weighted-average feed costs, based on 2012 consumption, would have increased cost of sales by approximately $324.7 million before derivative effects. Derivative fair-value changes are recorded immediately in earnings; 2012 net derivative gains were $8.3 million, versus $63.8 million in 2011.
- Export and disease risks: Mexico announced duties of about 25% on PPC’s U.S. chicken legs and thighs, but postponed implementation pending normalization of its domestic market after an H7N3 avian influenza outbreak. PPC and other producers sought NAFTA panel review. Export restrictions, disease outbreaks, changing demand and currency movements could affect results.
- Legal and tax matters: A grower case resulted in a $25.6 million judgment; PPC appealed, and recorded a probable loss below the judgment amount. Potential losses on remaining grower claims were described as reasonably possible but not estimable. The IRS’s $74.7 million amended claim was partly resolved by stipulations covering approximately $29.3 million, expected to require no additional tax; a separate approximately $45.4 million Gold Kist tax matter remained unresolved and could materially affect results if adversely determined. An ERISA case had a class-certification hearing scheduled for February 2013.
- Other risks: Major customers represented 15.7% of sales, including Wal-Mart at 9.7%; union agreements covering about 36.3% of employees were in negotiation or approaching expiration. Other material exposures include food safety and recalls, environmental obligations, customer consolidation, foreign operations, and JBS USA’s control over PPC.
The company reported audited financial statements with an unqualified opinion and effective internal control over financial reporting. It noted that the timing of a return to historical margins is uncertain and that delayed recovery could lead to future asset impairment charges.
Most important facts for investors to verify
- Whether the 2012 earnings recovery and positive operating cash flow persist as feed costs and chicken prices change.
- The amount and timing of the required $141 million debt repayment, remaining borrowing availability, covenant compliance and 2014 facility maturity plans.
- Developments in the grower judgment and remaining claims, the unresolved IRS matter, and any resulting changes to reserves or cash obligations.
- Whether Mexico’s chicken duties take effect and how export-market access, avian influenza and foreign exchange affect sales and margins.
- The impact of the share issuance on per-share results and the implications of JBS USA’s 75.5% ownership and related-party transactions.