Pilgrim’s Pride Corporation — Q1 2013 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2013; comparison period ended March 25, 2012. Amounts are in U.S. dollars. Pilgrim’s is a vertically integrated chicken producer operating in the U.S., Puerto Rico and Mexico. JBS USA owned 75.5% of the company at quarter-end.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $2.037 billion | $1.889 billion | +7.8% |
| Gross profit / margin | $118.4 million / 5.8% | $110.1 million / 5.8% | +7.6% profit |
| Operating income / margin | $74.0 million / 3.6% | $61.9 million / 3.2% | +19.4% |
| Net income attributable to Pilgrim’s | $54.6 million | $39.2 million | +39.3% |
| Diluted EPS | $0.21 | $0.18 | +16.7% |
| Cash provided by operations | $20.6 million | $29.4 million | Down $8.7 million |
| Capital expenditures | $25.8 million | $16.7 million | Up $9.1 million |
Net income was $54.2 million, compared with $39.6 million. The effective tax rate was 4.8%, versus 1.6%; management cited current-period tax expense partly offset by a valuation-allowance decrease. Foreign-currency transaction gains were $7.6 million, compared with $5.9 million. The company recorded $0.5 million of restructuring charges, down from $2.9 million.
Balance sheet, debt and liquidity
- Cash was $43.6 million at March 31, down from $68.2 million at December 30, 2012. Current assets were $1.560 billion and current liabilities $702.6 million; working capital was $857.1 million and the reported current ratio was 2.22.
- Debt carrying value was $1.142 billion, including $1.127 billion long-term and $15.9 million current. The company had $500 million principal of 7.875% notes due 2018 and $555.2 million outstanding under Term B loans. Debt fair value was estimated at $1.197 billion.
- The $700 million U.S. revolving facility had $85 million borrowed, $24.6 million of letters of credit and $577.7 million available at quarter-end, subject to the borrowing base. The $45.2 million Mexico facility had no borrowings.
- Management reported compliance with financial covenants. The U.S. facility matures December 28, 2014, restricts dividends and caps capital expenditures at $350 million in 2013 and 2014.
- After quarter-end, on April 29, 2013, the company paid approximately $141.2 million toward Term B loans from 2012 excess cash flow. The filing says that, after this and other prepayments, quarterly Term B installments would no longer be required; the loans remain due at maturity.
Material changes and management commentary
- Sales rose mainly from higher revenue per pound, reflecting higher market prices: U.S. sales increased 7.4% and Mexico sales 11.9%. Lower sales volumes partially offset price gains in both markets.
- U.S. gross profit declined 6.7% to $78.7 million as higher live-production costs, primarily feed, outweighed pricing gains. Mexico gross profit rose 54.6% to $39.8 million. Consolidated gross margin remained 5.8%.
- Average borrowings fell from $1.41 billion to $1.15 billion, reducing interest expense; the weighted-average interest rate increased from 6.72% to 7.13%.
- Operating cash flow was lower principally because of working-capital changes. Inventory rose to $972.4 million, while cash declined. Investing outflows exceeded operating cash flow, with capital spending higher than the prior-year quarter.
- Management said chicken prices were then sufficient to offset high feed costs, but warned that feed prices remain volatile and chicken prices could weaken. A hypothetical 10% change in primary feed costs would have changed quarterly cost of sales by $91.3 million before derivative effects.
- The company expected approximately $2.5 million of additional costs for ongoing exit or disposal efforts. No formal earnings or revenue guidance was provided. The filing notes potential additional restructuring costs and possible lender pre-approval requirements.
Risks, contingencies and unusual items
- Commodity and currency exposure: Feed-cost movements, chicken pricing and Mexican peso fluctuations can affect results. Commodity derivatives are not designated as cash-flow hedges, so fair-value changes flow through earnings; Q1 derivative changes generated a $4.9 million gain versus a $4.6 million loss in Q1 2012.
- Legal matters: A grower case carries a $25.6 million judgment on appeal; the company recorded a probable loss below the judgment amount. Other grower claims remain unresolved and potential loss cannot be estimated. ERISA class-certification proceedings were awaiting a decision.
- Tax contingency: The IRS’s amended bankruptcy claim totaled $74.7 million. Stipulations resolved approximately $29.3 million with no additional tax expected; a Gold Kist tax matter involving approximately $45.4 million remained unresolved and could materially affect results if adversely determined.
- Animal disease and trade: Mexico’s H7N3 outbreak had affected a Pilgrim’s breeder farm. Mexican duties of approximately 25% on specified U.S. chicken exports had been postponed pending normalization of the domestic market; the company challenged the duties through NAFTA review. The filing also highlights avian-influenza risks to operations and demand.
- Other exposures: About 36.3% of employees were covered by collective bargaining agreements, with negotiations underway at 11 locations. The filing cites risks from labor disruption, customer concentration, product recalls, leverage, and access to operating liquidity.
- Other notable items include $10.4 million of pension-related other comprehensive income and $26.8 million of assets held for sale. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether feed costs and chicken selling prices preserve margins, particularly given the divergent U.S. and Mexico gross-profit trends.
- Cash generation, working-capital needs, capital spending and liquidity after the $141.2 million post-quarter debt payment.
- Debt maturity and covenant position, including the December 2014 U.S. Credit Facility and Term B maturity.
- Developments in the grower judgment, remaining grower litigation, ERISA case and unresolved Gold Kist tax claim.
- Effects of avian influenza, Mexican trade duties, labor negotiations and currency movements on sales and operations.