Pilgrim’s Pride Corporation — FY2017 Form 10-K
Business context and reporting period. Pilgrim’s Pride produces and distributes fresh, prepared and value-added chicken products across the U.S., U.K. and Europe, and Mexico. Fiscal 2017 comprised 53 weeks ended December 31, 2017; the comparable 2016 year comprised 52 weeks. JBS S.A. indirectly owned 78.6% of the company’s outstanding common stock.
The year included the January 2017 acquisition of GNP and the September 2017 transfer of Moy Park from JBS in a common-control transaction. Moy Park’s results were combined with Pilgrim’s for periods beginning in September 2015, so reported comparisons include accounting and scope effects as well as operating changes.
Financial results and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $10.768 billion | $9.879 billion | +9.0% |
| Gross profit | $1.472 billion | $1.104 billion | +33.3% |
| Operating income | $1.072 billion | $792.1 million | +35.4% |
| Net income attributable to Pilgrim’s | $694.6 million | $440.5 million | +57.7% |
| Diluted EPS attributable to Pilgrim’s | $2.79 | $1.73 | Up from prior year |
| Cash provided by operating activities | $801.3 million | $795.4 million | +$6.0 million |
| Capital expenditures | $339.9 million | $341.0 million | Down slightly |
- Gross margin rose to 13.7% from 11.2%; operating margin was approximately 10.0%, versus approximately 8.0% in 2016.
- Net income was $718.2 million before deductions for pre-acquisition Moy Park income and noncontrolling interest. The effective tax rate was 26.9%, down from 34.6%.
- Cash used in investing activities was $992.1 million, including $658.5 million for acquired businesses and $339.9 million in capital expenditures. Cash provided by financing activities was $466.4 million.
- Year-end cash and cash equivalents were $581.5 million; working capital was $1.064 billion. The company reported approximately $2.71 billion of debt at face value. U.S. and U.K./Europe facilities had approximately $744 million of stated borrowing availability combined; Mexico availability was less than $0.1 million.
- Management said operating cash flow and available facilities should cover obligations, working capital, debt maturities and planned capital spending for at least the next 12 months.
Fourth-quarter results
Unaudited fiscal Q4 2017 included 98 days, compared with 91 days in Q4 2016. Sales were $2.742 billion versus $2.371 billion; gross profit was $261.8 million versus $228.9 million; and net income attributable to Pilgrim’s was $134.3 million versus $70.6 million. Diluted EPS was $0.54 versus $0.28. The differing quarter lengths should be considered when comparing results.
Material changes and management commentary
- U.S. sales increased 11.6%, primarily from GNP and higher net sales per pound, partly offset by lower volume. U.S. operating income rose to $841.5 million from $572.6 million.
- U.K. and Europe sales increased 2.5% as volume and sales per pound gains were substantially offset by adverse currency translation. Segment operating income declined slightly to $77.1 million from $78.6 million.
- Mexico sales increased 5.4%; segment operating income rose to $153.6 million from $140.9 million.
- Management attributed improved overall profitability to higher market prices and lower feed ingredient costs in U.S. operations, among other factors. U.S. feed costs fell by $79.6 million, while labor and other costs increased. Companywide net gains on derivative fair-value changes were $6.7 million.
- Sales mix continued to shift toward fresh chicken: fresh products were 83.0% of U.S. chicken sales, compared with 74.5% in 2016; prepared chicken’s share declined to 13.9% from 20.4%.
Outlook, risks and unusual items
- No full-year revenue or earnings guidance was provided. Planned 2018 capital expenditures were $315–$325 million, principally for efficiency and cost-reduction projects. Management indicated an expected future effective tax rate of approximately 24%, subject to tax-law effects and other factors.
- The 2017 U.S. Tax Act generated a provisional $41.5 million tax benefit from remeasuring deferred tax balances. The company recorded no transition tax on foreign earnings based on its current estimate, but said further analysis could produce a material adjustment. GILTI and BEAT effects were still being assessed.
- Hurricane Maria damaged Puerto Rico operations, caused the loss of 2.1 million birds and disrupted facilities. The company did not expect operations to be fully functional until the third quarter of 2018. It recorded a $5.5 million insurance receivable; estimated damages included $5.2 million of property and casualty losses and an $8.4 million business-interruption claim.
- Material risks include volatile chicken and feed prices, disease outbreaks, food safety and recalls, foreign exchange and trade restrictions, acquisition integration, labor and environmental requirements, Brexit uncertainty, and significant debt. A 10% feed-cost change was estimated to affect cost of sales by approximately $279.7 million, before derivative effects.
- Broiler-chicken antitrust class actions, grower litigation, securities and derivative suits, and other claims remain unresolved; plaintiffs seek damages that could be material. A Mexican tax assessment of $40.4 million was under appeal and considered reasonably possible, with no loss recorded. The company also disclosed an ongoing J&F investigation in Brazil; any connection to Pilgrim’s or resulting company liability had not been determined.
- GNP and Moy Park acquisition costs included approximately $19.6 million of Moy Park transaction costs. GNP-related restructuring charges were estimated at $6.8 million in total, with approximately $5.4 million expected to be cash outlays. The filing reported no goodwill impairment indicators.
- The financial statement audit opinion was unqualified. Management and the auditor concluded internal control over financial reporting was effective, but the assessment excluded Moy Park’s controls, covering $2.2 billion of assets and $2.0 billion of 2017 revenue included in the statements.
Most important facts for investors to verify
- Whether the improvement in margins and earnings is sustainable after separating acquisition effects, the extra fiscal week, market pricing, feed costs and currency movements.
- Debt levels, refinancing and interest costs following the acquisitions, and the extent to which subsidiary financing restrictions limit cash transfers to the parent.
- Developments and potential financial exposure in the antitrust, grower, securities, derivative and Mexican tax matters, as well as the J&F investigation.
- Progress integrating GNP and Moy Park, restoring Puerto Rico operations, and achieving the planned 2018 capital spending and cost improvements.
- Final effects of the Tax Act, including the foreign-earnings calculation and GILTI/BEAT provisions.