Pilgrim’s Pride Corporation (PPC) — FY2014 Form 10-K
Reporting period: Fiscal year ended December 28, 2014 (52 weeks). The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
PPC produces and sells fresh, prepared and value-added chicken in the U.S., Puerto Rico and Mexico, operating as one reportable segment. It reported 2014 net sales of $8.58 billion and net income attributable to PPC of $711.6 million. JBS USA owned approximately 75.5% of PPC at year-end.
Financial performance and material changes
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $8.583 billion | $8.411 billion | +2.0% |
| Gross profit / margin | $1.394 billion / 16.2% | $845.4 million / 10.1% | +64.9% gross profit |
| Operating income / margin | $1.203 billion / 14.0% | $658.9 million / 7.8% | +82.6% operating income |
| Net income attributable to PPC | $711.6 million | $549.6 million | +29.5% |
| Diluted EPS | $2.74 | $2.12 | Up |
| Operating cash flow | $1.067 billion | $878.5 million | Up |
| Capital expenditures | $171.4 million | $116.2 million | Up |
Improved results primarily reflected lower feed costs and higher chicken prices amid healthy demand and constrained supply. U.S. revenue increased 2.0%; higher revenue per pound more than offset lower pounds sold. Mexico sales rose 2.8%, with currency translation partly offsetting price and volume gains. Fresh chicken’s share of U.S. chicken sales rose to 66.2% from 59.9%, while prepared chicken declined to 25.1% from 29.7%.
Fourth-quarter 2014 net sales were $2.110 billion, gross profit was $379.1 million and net income attributable to PPC was $167.2 million, versus $2.047 billion, $207.9 million and $143.4 million, respectively, in fourth-quarter 2013.
Liquidity, debt and capital allocation
At December 28, 2014, cash and cash equivalents were $576.1 million, working capital was $1.140 billion and the current ratio was 2.53, up from 1.78 a year earlier. Debt was approximately $4.2 million after PPC redeemed its $500 million 7.875% senior notes in December. Management cited a year-end net cash position of approximately $572 million. Operating cash flow less capital expenditures was approximately $895 million.
After year-end, PPC declared a $5.77-per-share special dividend totaling approximately $1.5 billion, payable February 17, 2015. It also agreed to acquire Tyson Mexico for approximately $400 million, subject to closing conditions, with completion expected in the first quarter of 2015. PPC entered a new U.S. credit facility with a $700 million revolving commitment and up to $1.0 billion in term loans. The filing’s pro forma liquidity estimate, assuming the dividend, acquisition and related financing, showed $10 million in cash and approximately $341 million available under the U.S. facility, plus $38.1 million under the Mexico facility. These are estimates, not actual post-transaction results.
Outlook, risks and unusual items
- Management expected 2015 capital expenditures of $165–$185 million, mainly for efficiency and cost-reduction projects, and anticipated a future effective tax rate comparable to 2014. No specific earnings or revenue guidance was provided.
- Feed costs remain a major earnings risk. PPC estimated that a hypothetical 10% increase in weighted-average feed ingredient costs would have increased 2014 cost of sales by approximately $287.4 million, before derivative effects. Derivative fair-value changes are recognized immediately in earnings; 2014 net derivative gains were $16.1 million.
- China imposed combined antidumping and countervailing duties of 77.9% on PPC’s U.S. chicken products. Management said the assessment had not materially affected results to date, but expected the duties to deter Chinese purchases. Russia’s 2014 import ban and other trade restrictions also threaten exports.
- Other key exposures include chicken-price and feed-price cycles, avian disease, food safety and product recalls, Mexican peso volatility, labor negotiations at one location, environmental compliance and customer concentration. The two largest customers represented 14.6% of sales combined; no individual customer exceeded 10% of sales.
- An IRS dispute concerning Gold Kist’s 2004 tax loss included a remaining claim of approximately $45.4 million; an adverse outcome could materially affect cash flow, results and financial position. The appeal was argued in January 2015; the filing gives no clear estimate of the possible loss.
- Control weakness: Management and KPMG concluded internal control over financial reporting was ineffective because of a material weakness in IT access and program-change controls. Management reported no known unauthorized entries and described a remediation plan. KPMG issued an adverse ICFR opinion but an unqualified opinion on the financial statements.
- 2014 income tax expense was $391.0 million, compared with $24.2 million in 2013; the effective tax rate was 35.5% versus 4.2%, partly reflecting prior-year valuation allowance and tax-reserve changes. PPC also recorded $28.0 million of foreign currency transaction losses.
Most important facts for investors to verify
- Completion, purchase price and integration performance of the Tyson Mexico acquisition.
- Actual borrowing, remaining liquidity and debt-service burden after funding both the special dividend and acquisition.
- Progress remediating the IT control weakness and whether disclosure and reporting controls become effective.
- Feed-cost, chicken-pricing and export-market trends, including the impact of China’s duties and Russian restrictions.
- Outcome and financial exposure from the IRS appeal and remaining grower and ERISA litigation.
- Whether the strong 2014 margins and cash generation persist as commodity and poultry markets change.