Pilgrim's Pride -- Embarrassing Case of Hubris and Greed

Last Updated Jan 28, 2009 11:05 AM EST

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On December 1, 2008, Pilgrim's Pride voluntarily filed for financial relief under Chapter 11 of the U.S. Bankruptcy Code after losing $820 million in 2008 and failing to renegotiate its debt agreements with lenders. The largest U.S. chicken processor allegedly struggled with low meat prices caused by an oversupply of chicken and weak consumer demand, and record high costs for the corn and soybeans used in its animal feed. A read of the company's amended 2008 regulatory 10-K, filed with the SEC on January 26, 2009, suggests that (a) senior executives more interested in self-enrichment and (b) a self-serving board of directors failed to safeguard shareholders' interests and minimize opportunistic behavior on the part of management. Ergo, neglect of fiduciary responsibilities played a significant role as year-on-year financial results and the capital structure deteriorated beyond the tipping point.

In fact, several lawsuits have been filed on behalf of shareholders, alleging among other complaints: (a) the company's hedges to protect it from adverse changes in costs were not working and in fact were harming the Company's results more than helping; (b) the company's financial results were continuing to deteriorate rather than improve, such that the company's capital structure was threatened; (c) the company was in a much worse position than its competitors due to its inability to raise prices for customers sufficient to offset cost increases, whereas its competitors were able to raise prices to offset higher costs affecting the industry; and (d) the Company had not made sufficient changes to its business model to succeed in the more difficult industry conditions.

Ovem lupo commitere is Latin for 'To set a wolf to guard sheep.' The proverbial foxes guarding the chickens at Pilgrims Pride were none other than founder Lonnie "Bo" Pilgrim, 80, and family members:

· The company paid cash compensation to Bo totaling $2.1 million and $3.2 million in 2008 and 2007 to serve as 'Senior Chairman' of the Board. Self-enrichment on a scale befitting Roman Emperors or French Nobility is a common occurrence among company founders--especially in the case of Bo Pilgrim, who beneficially controls 62.3% of the voting stock of the company. As an aside, Bo was instrumental in the December 2007 acquisition of poultry producer Gold Kist for $1.1 billion--which aggravated an already strained debt load. In spite of the challenges facing Pilgrim's Pride today, the empirical evidence suggests that Bo seems more focused on related-party (personal) transactions:

1. Pilgrim paid $1.01 million to Bo under a chicken grower's contract in 2008;

2. Bo is the owner of Pilgrim and Pilgrim Poultry G.P (PPGP), which rents facilities to the company for the production of eggs. During fiscal 2008, PPGP earned fees of $775,000 on the rented facilities; and,

3. Since 1985, the company had leased an airplane from Bo Pilgrim under a lease agreement, which provided for monthly lease payments of $33,000 plus operating expenses. During fiscal 2008, lease expenses and operating expenses totaled $396,000 and $59,970 associated with the use of this airplane. (Albeit the company's financial health caught a summer cold, it took the board until November 18 to cancel this aircraft lease.)

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  • Bo Pilgrim's son, Ken Pilgrim, 50, serves as Co-Chairman of the Board, earning cash compensation of $544,077 and $588,887 in 2008 and 2007.
  • Additionally, his other son, Pat Pilgrim; and his daughter, Greta Pilgrim-Owens, were employed by the company and received total compensation for fiscal 2008 of $220,281 and $227,669, respectively.
  • The company purchases grain from Pat Pilgrim, too, who earned $392, 398 for purchases in 2008. Pat also provided hauling services to the company in fiscal 2008, for which he was paid $47,962.
  • Conflicts of interest involving certain members of the Board call into question the ethics of Pilgrim's corporate governance system, too. For example, Director Blake Lovette's son-in-law, Ted Lankford, is employed as a Complex Manager at Athens, AL, and was paid total compensation of $132,350 in 2008. Blake Lovette serves on the Compensation Committee.
  • In addition, Pilgrim also employs former Vice-Chairman of the Board Clifford E. Butler's son, Shane Butler, as Senior Vice President Prepared Foods Regional Operations, who was paid total compensation of $240,967 in 2008.

On January 27, the United States Bankruptcy Court approved the company's hiring of Don Jackson as president and chief executive officer. "As Pilgrim's Pride begins the reorganization process, we believe the company and its stakeholders would be best served by a fresh perspective on the opportunities available to us through restructuring," said Lonnie "Bo" Pilgrim. "Don Jackson is a proven leader with the essential skills and industry insight to position Pilgrim's Pride to emerge from Chapter 11 as a stronger, more efficient, and more focused company." Might this fresh perspective also include the firing of named executive officers and board members instrumental in the company's current situation?--the only senior executive to have left the company is former chief executive O.B. Goolsby, who died from a stroke while still in the employment of the company in December 2007.

In conjunction with the Chapter 11 filing, the company sought--and received approval--to enter into a $450 million debtor-in-possession financing facility arranged by Bank of Montreal as lead agent (the "DIP Financing").


It is worth noting, too, that the $450 million debtor-in-possession financing facility involves financial performance guarantees. Pilgrim must meet minimum monthly levels of EBITDA. For the three-month period ended April 25, 2009, the company must show EBITDA of $57,200,000, according to the amended 10-K filing. With the same management and board in power at Pilgrim, however, it is difficult to imagine how the poultry producer will emerge from the down cycle as a much stronger and more efficient competitor.
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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