Pilgrim’s Pride Corporation — FY2015 Form 10-K
Reporting period: 52 weeks ended December 27, 2015; this is an annual filing, not a standalone fourth-quarter filing. The company produces and sells chicken products in the U.S., Puerto Rico and Mexico. JBS beneficially owned 76.7% of its common stock.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $8.180 billion | $8.583 billion |
| Gross profit / margin | $1.254 billion / 15.3% | $1.394 billion / 16.2% |
| Operating income / margin | $1.045 billion / 12.8% | $1.203 billion / 14.0% |
| Net income attributable to Pilgrim’s / diluted EPS | $645.9 million / $2.50 | $711.6 million / $2.74 |
| Cash from operating activities | $976.8 million | $1.067 billion |
| Capital expenditures | $175.8 million | $171.4 million |
FY2015 sales fell 4.7% and operating income declined 13.2%. U.S. sales decreased 6.6%, primarily due to lower sales per pound and a mix shift toward lower-priced fresh chicken, partly offset by higher volume. Mexico sales rose 10.7%, mainly reflecting the Tyson Mexico acquisition and existing-business volume growth, but were affected by peso translation. U.S. feed ingredient costs declined $358.2 million year over year; Mexico operations faced higher feed costs in existing operations.
Fourth-quarter 2015 sales were $1.961 billion, gross profit $160.7 million, net income attributable to Pilgrim’s $63.1 million and diluted EPS $0.25. In Q4 2014, these were $2.110 billion, $379.1 million, $167.2 million and $0.64, respectively.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $439.6 million; working capital was approximately $899 million and the current ratio was 2.06, down from 2.58 a year earlier.
- Debt included $500 million of term loans, $500 million of 5.75% senior notes due 2025 and $28.7 million outstanding under the Mexico facility. The U.S. revolver had no borrowings and $670.7 million available; Mexico facility availability was $58.6 million. The company reported compliance with U.S. facility covenants.
- The company issued $500 million of 2025 notes and used the proceeds to repay $500 million of U.S. term loans. It paid a $1.5 billion special dividend ($5.77 per share) in February 2015, funded with U.S. facility borrowings and cash, and repurchased 4.9 million shares for $99.2 million during the year.
- Cash used in investing activities was $534.7 million, including $373.5 million net cash paid for Tyson Mexico. Cash used in financing activities was $578.6 million. Management said operating cash flow and available credit should cover obligations, working capital, debt maturities and capital spending for at least 12 months.
Material changes, outlook and risks
- Tyson Mexico acquisition: Acquired June 29, 2015 for a final purchase price of $379.1 million. From acquisition through year-end it contributed $250.6 million of sales and incurred a $13.7 million net loss. Purchase accounting was preliminary; certain asset, tax, legal and goodwill valuations remained subject to measurement-period adjustments.
- Outlook: Management expected 2016 capital expenditures of $180–$200 million, principally for efficiency and cost-reduction projects, and expected a future effective tax rate comparable to FY2015’s 34.9%. It cautioned that feed prices and chicken market prices remain volatile. The filing does not provide earnings or revenue guidance.
- Operating and market risks: Earnings are sensitive to feed costs, chicken prices and industry cycles. Other material risks include avian influenza and export restrictions, product contamination or recalls, competition, customer consolidation, peso movements, labor negotiations at four locations, environmental and regulatory obligations, and integration or unknown liabilities from acquisitions.
- Legal and other items: The Fifth Circuit’s 2015 decision in the Gold Kist tax dispute became final in the company’s favor; no additional tax was expected on that matter. Grower litigation remained in process, and ERISA claims sought unspecified damages; the likelihood and amount of any loss on the ERISA matter could not be determined. Management considered other ordinary-course claims not likely to materially affect results. The company recorded $5.6 million of administrative restructuring charges, including asset impairment and a rendering-plant sale loss.
- Controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s controls assessment excluded the acquired Pilgrim’s México Norte business, which represented $436.2 million of assets and $250.6 million of FY2015 revenue. A material weakness in IT general controls identified at the prior year-end was reported as remediated.
Investor verification priorities
- Assess the sustained earnings impact of lower sales per pound, weaker quarterly gross profit and the shift in U.S. product mix.
- Track Tyson Mexico’s integration, profitability, synergy realization and final purchase-accounting adjustments.
- Reconcile total debt, cash and facility availability, and evaluate the effect of the special dividend and share repurchases on leverage and financial flexibility.
- Review feed-cost and chicken-price exposure, derivative accounting (fair-value changes were recognized immediately in earnings), export restrictions and peso-related losses.
- Monitor the four unresolved labor negotiations, ERISA and grower proceedings, and the acquired business’s internal-control coverage.