Pilgrim’s Pride Corporation — Form 10-Q Summary
Reporting period: 13 and 26 weeks ended June 26, 2011, compared with periods ended June 27, 2010. Unaudited interim results; amounts below are in millions of dollars unless stated otherwise. Pilgrim’s Pride produces and sells chicken products in the U.S., Puerto Rico and Mexico and exports to international markets. JBS USA owned 67.3% of the company.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $1,922.7 | $1,707.6 | $3,815.2 | $3,350.5 |
| Gross profit (loss) | $(46.2) | $132.5 | $(99.3) | $184.5 |
| Gross margin | (2.4)% | 7.8% | (2.6)% | 5.5% |
| Operating income (loss) | $(98.7) | $51.9 | $(205.5) | $19.5 |
| Net income (loss) attributable to Pilgrim’s Pride | $(128.1) | $32.9 | $(248.9) | $(12.6) |
| Diluted loss per share | $(0.60) | $0.15 | $(1.16) | $(0.06) |
- Revenue and margins: Sales increased 12.6% in Q2 and 13.9% in the first half. Higher volume and favorable product mix supported U.S. Q2 sales; Mexico sales also benefited from volume and peso exchange-rate movements. However, cost of sales rose 25.0% in Q2 and 23.6% year to date, exceeding sales growth and driving gross losses.
- Drivers: Management attributed much of the cost increase to higher feed-ingredient costs. U.S. live production costs rose $263.0 million in Q2 and $462.4 million in the first half versus comparable periods. Inventory-reduction efforts also increased reported cost of sales. U.S. operations generated a gross loss; Mexico remained gross-profitable.
- Cash flow: Cash used in operations was $140.2 million in the first half, versus $14.9 million used in 2010. Investing activities used $99.0 million, including $103.2 million of capital expenditures. Financing activities provided $167.4 million. Cash fell by $71.5 million to $34.6 million.
- Liquidity: Working capital was $928.7 million and the current ratio was 2.29 at June 26, versus $971.8 million and 2.32 at year-end 2010. Restricted cash was $61.5 million, limiting its availability for general purposes. Revolver availability was reported at $279.8 million, after $40.2 million of letters of credit; the borrowing base was $700.0 million. The company also reported $46.8 million available under a Mexican facility maturing September 2011 and a further conditional $50 million JBS loan.
- Debt: Total debt and borrowing arrangements were approximately $1.514 billion, including $50 million owed to JBS USA, compared with approximately $1.339 billion at December 26, 2010. The revolving facility had $380.0 million drawn and the Term B loan had $582.3 million outstanding. The company issued $500 million of 7.875% senior notes due 2018 in December 2010 and borrowed $50 million from JBS USA in June 2011 at 9.845%.
Changes, outlook and material items
- The deterioration from prior-year profitability principally reflects feed-cost inflation and chicken prices that management said were insufficient to offset feed costs. Corn futures reached $7.99 per bushel in June 2011. Management described feed prices as volatile and chicken markets as affected by oversupply and competition.
- On June 23, 2011, lenders amended the Exit Credit Facility, temporarily suspending fixed-charge coverage and senior secured leverage covenant tests until September 23, 2012 and revising the tangible-net-worth covenant. The company said it was compliant at quarter-end, but warned that continued weak chicken prices and high feed costs could jeopardize compliance. Capital expenditures are limited to $175 million through 2012.
- Management forecast sufficient liquidity for the foreseeable future, but cautioned that adverse chicken and feed prices could materially jeopardize liquidity. The filing provides no quantified earnings or sales guidance; management said interim results are not necessarily indicative of full-year results.
- After quarter-end, the company announced the planned closure of its Dallas processing facility. It expected approximately $9.1 million of impairments, $16.6 million of closing costs and a $3.0 million breeder-hen inventory write-off in the third quarter. The Douglas, Georgia plant, reopened in January, was expected to reach full capacity by Q2 2012.
- Severe weather and flooding damaged facilities in Alabama, South Carolina and Arkansas. The company expected insurance proceeds in Q3; amounts were not clearly stated. It recorded $2.8 million of impairment expense on assets held for sale during the first half.
- Commodity derivatives are not designated as cash-flow hedges, so fair-value changes flow through cost of sales. These generated a $5.7 million net loss in Q2 but a $26.3 million net gain in the first half. At period-end, derivatives covered 15.6% of anticipated corn needs and 2.7% of soybean-meal needs.
- International-market risks include China’s 58.5% duties on the company’s U.S. chicken exports, Russia’s 2011 poultry import quota, and Mexico’s investigation of U.S. chicken producers over dumping allegations. The outcome of the Mexican investigation was uncertain.
- Material contingencies include an IRS amended bankruptcy claim of $74.7 million, contested in Tax Court proceedings; the company stated the possible loss and outcome could not be determined. Grower litigation and ERISA claims also remain unresolved, with potential losses not clearly determinable. A securities class action had a verbal settlement agreement, subject to written settlement documents.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the first half.
Important facts for investors to verify
- Whether feed costs and chicken pricing improve enough to restore positive gross margins and operating cash flow.
- Current revolver availability, borrowing-base capacity, covenant compliance and the terms and availability of the conditional JBS financing.
- Progress resolving the IRS claim, grower and ERISA litigation, and completion and terms of the securities-case settlement.
- Actual insurance recoveries and realized costs and timing of the Dallas closure and other restructuring actions.
- Effects of trade duties, import restrictions and the Mexico dumping investigation on export volumes and revenue.