The nation's largest chicken producer, Pilgrim's Pride Corp., said Thursday that high animal feed costs will force it to post a "significant loss" in its fiscal fourth quarter and that it was trying to negotiate new terms with its lenders.
Its shares, which had already dropped 38 percent a day earlier before being halted, slid nearly 40 percent more to levels not seen since 2002.
The company, which holds about a quarter of the U.S. chicken market, said it is so sagged by debt that it may not meet the terms of its loan agreements, which means it could be forced to repay its debts faster than expected and possibly penalties. Analysts say arranging other financing may be difficult because of the credit turmoil on Wall Street.
Pilgrim's Pride did not offer any details about the size of the loss and spokesmen did not return messages left seeking comment. Analysts polled by Thomson Reuters expect a loss of 89 cents per share for the fiscal fourth quarter.
The announcement sent the company's battered shares down even more in a week that has seen its stock nearly erode on the credit worries. Trading was halted Wednesday afternoon, freezing the stock at a 38 percent drop. On Thursday, its shares set a 52-week low when they hit $3.26 for the first time since 2002. They closed at $3.84, a drop of 39.6 percent, in heavy volume.
Pilgrim's Pride said in a statement the big loss for its fourth quarter, which ends Saturday, is in part attributed to high costs for animal feed, which is made with corn and soybeans.
Price for both grains have jumped to record levels in the past year, and though the company tried to save money by locking in prices with hedges, even that didn't work as the prices have moderated slightly. Pilgrim's Pride said it suffered "significant negative impact" of its hedged grain positions during the quarter.
Also to blame are soft demand for breast meat and weak pricing, which is being caused by an oversupply of meat on the market. Meat companies are trying to boost prices by cutting production and those cuts are just now starting to take effect in the market.
The entire meat industry is suffering but Pittsburg, Texas-based Pilgrim's Pride is hurting the most because it has a lot of debt and has been unprofitable for several quarters, said Morningstar equity analyst Ann Gilpin. The company has already said it may be the summer of 2009 before it turns a profit again.
"If we liken this to a sickness, they're all sick. Pilgrim's Pride is sicker than the other two," she said, referring to Tyson Foods Inc., which makes chicken, beef and pork, and pork producer Smithfield Foods Inc. "It's the least healthy of all the meat companies."
According to the company's most recent annual report, it carried $1.3 billion in long-term debt at the end of 2007, more than doubling from the previous year.
The debt was largely due to its $1.1 billion buyout of rival Gold Kist Inc. in early 2007, which made it the nation's largest chicken producer. Gilpin said the company paid too much for Gold Kist.
"They overpaid for a bad business right before corn prices went out of control so it's a very toxic mix," she said.
And now the credit issue comes into play, analysts say.
"There is concern that given the adverse conditions in the chicken industry, Pilgrim's Pride may be facing a liquidity crisis," Stephens Inc. analyst Farha Aslam wrote in a research note Thursday.
Companies are typically required to have a certain amount of profits relative to their debts whenever they get a loan, so banks are guaranteed they will get money back, Gilpin said. These ratios are typically negotiated for a year term, to give companies room to meet those obligations, she said.
But Pilgrim's Pride now says it won't meet those obligations in its current fiscal year. The company's announcement that it won't meet its so-called debt covenant means the banks can now ask that the debts be repaid and potentially charge a penalty.
Pilgrim's Pride has said, however, that it is being given a waiver until Oct. 28 to get its business back in order and meet the requirements. In the meantime, it said, the understanding it believes it has reached with lenders means they will continue offering the company financing until then.
The company said it still needs to hammer out a written agreement with its lenders. If it is unable to secure a deal, Pilgrim's Pride said it may not be able to draw funds under the facilities and the lenders may be able to say the company defaulted on the loans.
Deutsche Bank-North America analyst Eric Katzman wrote that while it remains unclear whether Pilgrim's Pride's lenders will continue to give it money, he felt there was a good chance the company would be able to renegotiate with its lenders. He said they understand the volatile nature of the business, and he was also heartened by recent promising trends of production cuts that indicate they will be higher than the 4 percent to 5 percent cut that was previously predicted.
But Gilpin said it was unlikely the company would be able to turn around its business by the end of October, saying that was too fast for this type of business.
What options does Pilgrim's Pride have? Filing for bankruptcy protection would be one way out, she said, adding it would most likely be in a manner that allowed them to continue operating. She said the protein industry was too important to Americans' diets and regulators would most likely let the company keep operating while it was reorganizing for a few years.
"If 25 percent of your chicken is gone, that's a problem because it has to do with our basic needs," she said. "I doubt they'd completely go away."
