Pilgrim’s Pride Corporation (PPC) — FY2016 Form 10-K
Reporting period: Fiscal year ended December 25, 2016, a 52-week year. The filing also reports fourth-quarter results for the 13 weeks ended December 25, 2016. PPC produces and sells chicken products in the U.S., Puerto Rico and Mexico; JBS beneficially owned 78.5% of its common stock. The January 2017 GNP acquisition is subsequent to year-end and is not included in FY2016 operating results.
Financial results and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $7.931 billion | $8.180 billion | Down 3.0% |
| Gross profit / margin | $914.4 million / 11.5% | $1.254 billion / 15.3% | Profit down 27.1% |
| Operating income / margin | $713.5 million / 9.0% | $1.045 billion / 12.8% | Down 31.7% |
| Net income attributable to PPC | $440.5 million | $645.9 million | Down 31.8% |
| Diluted earnings per share | $1.73 | $2.50 | Down 30.8% |
| Cash from operating activities | $755.5 million | $976.8 million | Down $221.3 million |
| Capital expenditures | $272.5 million | $175.8 million | Up $96.7 million |
FY2016 net income was $439.7 million; net income attributable to PPC was $440.5 million. Adjusted EBITDA was $899.3 million versus $1.213 billion in FY2015. These are non-GAAP measures and should be considered alongside GAAP results.
Fourth quarter: Net sales were $1.908 billion versus $1.961 billion in Q4 2015; gross profit was $180.5 million versus $160.7 million; net income attributable to PPC was $70.6 million versus $63.1 million; diluted EPS was $0.28 versus $0.25.
Balance sheet at year-end: Cash and cash equivalents were $120.3 million, total debt at face value was approximately $1.024 billion, and stockholders’ equity was $896.7 million. Working capital was $454.1 million, down from $899.3 million; the current ratio declined to 1.52 from 2.06. The company reported $633.1 million available under its U.S. revolving facility and $49.5 million available under its Mexico facility. PPC said operating cash flow and credit availability should cover obligations, working capital, debt maturities and capital spending for at least 12 months.
Changes and drivers
- U.S. sales fell 6.6%, primarily from lower volume and lower sales per pound. Production improvements at a prepared-foods facility and lower commercial-customer demand reduced volume; lower market prices also weighed on sales.
- Mexico sales increased 21.5%, mainly from higher volume and sales per pound, partly offset by unfavorable currency translation. Mexico operating income rose 48.0%, while U.S. operating income fell 39.7%.
- Gross margin contracted as cost of sales increased as a share of revenue. U.S. feed-ingredient costs declined, but this benefit was offset in part by higher labor costs and less favorable derivative results. Mexico cost of sales rose with volume, feed costs, wages and freight.
- Interest expense, net, rose to $44.2 million from $33.9 million; the filing attributes the increase principally to higher average borrowings and interest rates.
- Operating cash flow declined, reflecting lower earnings and working-capital movements. Cash declined to $120.3 million from $439.6 million.
Outlook, capital allocation and notable items
- Management expected FY2017 capital expenditures of $250 million to $280 million, primarily for efficiency and cost-reduction projects, funded by operating cash flow and credit facilities. It expected a future effective tax rate comparable to FY2016’s 34.6%.
- Management noted feed prices remain volatile and chicken prices could weaken due to competition or consumer substitution. PPC uses commodity derivatives, but does not designate them as cash-flow hedges; fair-value changes therefore affect earnings immediately. FY2016 derivative fair-value changes produced a net loss of $4.3 million.
- PPC paid a $700 million special dividend ($2.75 per share) in May 2016, financed with cash and U.S. facility borrowings, and repurchased 5.8 million shares for $117.9 million during the year. The company stated it had no current intention to pay further dividends.
- In April and May 2016, PPC recalled approximately 5.6 million pounds of cooked chicken products after foreign-material contamination was identified. The company said no confirmed adverse reactions had been reported and the recall’s direct effects had not materially affected results; it had not included recall expenses in FY2016 results and was still assessing the full impact.
- On January 6, 2017, PPC acquired GNP for a stated cash purchase price of $350 million, subject to working-capital adjustments. The filing reports a preliminary purchase price of $359.7 million after a $9.7 million adjustment. Integration, assumed liabilities and realization of expected benefits remain risks.
- Material contingencies include consolidated broiler-chicken antitrust class actions alleging an industry conspiracy to reduce output and raise prices, a related shareholder action, and a January 2017 chicken-farmer action. PPC disputed the allegations and intended to defend the cases; outcomes and potential damages could not be predicted and could be material.
Key investor verification points
- Assess whether the FY2016 margin and earnings declines are cyclical or reflect lasting pricing, product-mix or operating issues; verify progress at the prepared-foods facility.
- Monitor corn and soybean-meal costs, chicken pricing, derivative exposure, and the sensitivity of earnings to commodity changes.
- Review cash generation, working-capital needs, debt service and covenant capacity after the special dividend, repurchases and GNP acquisition.
- Track the GNP purchase-price finalization, integration costs, synergies and any acquired liabilities.
- Follow the antitrust and shareholder litigation, as well as the chicken recall’s final costs and any related claims.
- Consider foreign-exchange exposure, export restrictions, disease outbreaks, labor negotiations and JBS’s controlling ownership when evaluating risk.
The audited financial statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting as of December 25, 2016.