UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K | ||||
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 25, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File number 1-9273
PILGRIM’S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 75-1285071 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1770 Promontory Circle, Greeley, Colorado | 80634-9038 |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (970) 506-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, Par Value $0.01 | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x | Accelerated Filer ¨ | |
Non-accelerated Filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the Registrant’s Common Stock, $0.01 par value, held by non-affiliates of the Registrant as of June 26, 2016, was $1,473,125,099. For purposes of the foregoing calculation only, all directors, executive officers and greater than 10% beneficial owners have been deemed affiliates. Number of shares of the Registrant’s Common Stock outstanding as of February 8, 2017 was 248,370,044.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this annual report.
PILGRIM’S PRIDE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I | Page | |
Item 1. | Business | |
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
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PART I
Forward Looking Statements and Explanatory Note
Certain written and oral statements made by our Company and subsidiaries of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made herein, in our other filings with the SEC, in press releases, and in certain other oral and written presentations.
Statements of our intentions, beliefs, expectations or predictions for the future, denoted by the words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “project,” “imply,” “intend,” “should,” “foresee” and similar expressions, are forward-looking statements that reflect our current views about future events and are subject to risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include those described under “Risk Factors” below and elsewhere in this annual report.
Actual results could differ materially from those projected in these forward-looking statements as a result of these factors, among others, many of which are beyond our control.
In making these statements, we are not undertaking, and specifically decline to undertake, any obligation to address or update each or any factor in future filings or communications regarding our business or results, and we are not undertaking to address how any of these factors may have caused changes in information contained in previous filings or communications. The risks described below are not the only risks we face, and additional risks and uncertainties may also impair our business operations. The occurrence of any one or more of the following or other currently unknown factors could materially adversely affect our business and operating results.
On January 6, 2017, we acquired 100% of the membership interests of JFC LLC and its subsidiaries (together, “GNP”). Unless specifically indicated, data included in this annual report does not include data related to GNP. See “Note 2. Business Acquisitions” of our Consolidated Financial Statements included in the annual report for more information.
Item 1. Business
Company Overview
Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “PPC,” “the Company,” “we,” “us,” “our,” or similar terms), which was incorporated in Texas in 1968 and reincorporated in Delaware in 1986, is the successor to a partnership founded in 1946 as a retail feed store. JBS S.A., through its indirect wholly-owned subsidiaries (together, “JBS”), beneficially owns 78.5% of our outstanding common stock. We are one of the largest chicken producers in the world with operations in the United States (“U.S.”), Mexico and Puerto Rico. We are primarily engaged in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products to retailers, distributors and foodservice operators. We offer a wide range of products to our customers through strong national and international distribution channels. Pilgrim's fresh chicken products consist of refrigerated (non-frozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. The Company's prepared chicken products include fully cooked, ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated.
We market our balanced portfolio of fresh, prepared and value-added chicken products to a diverse set of over 5,000 customers across the U.S., Mexico and in approximately 80 other countries, with no single customer accounting for more than 10% of total sales. We have become a valuable partner to our customers and a recognized industry leader by consistently providing high-quality products and services designed to meet their needs and enhance their business. Our sales efforts are largely targeted towards the foodservice industry, principally chain restaurants and food processors, such as Chick-fil-A®, distributors such as US Foods and Sysco® and retail customers, including grocery store chains and wholesale clubs, such as Kroger®, Costco®, Publix®, and H-E-B®.
As a vertically integrated company, we control every phase of the production process, which helps us better manage food safety and quality, as well as more effectively control margins and improve customer service. As of December 25, 2016, we operate feed mills, hatcheries, processing plants and distribution centers in 12 U.S. states, Puerto Rico and Mexico. Our plants are strategically located to ensure that customers timely receive fresh products. With our global network of approximately 4,045 growers, 32 feed mills, 39 hatcheries, 30 processing plants, six prepared foods cook plants, 20 distribution centers, eight rendering facilities and three pet food plants, we believe we are well positioned to supply the growing demand for our products.
We are one of the largest, and we believe one of the most efficient, producers and sellers of chicken in Mexico. Our presence in Mexico provides access to a market with growing demand and has enabled us to leverage our operational strengths within the region. The market for chicken products in Mexico is still developing, with most sales attributed to fresh, commodity-
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oriented, market price-based business. We believe our Mexico business is well positioned to continue benefiting from these trends in the Mexican consumer market. Additionally, we are an important player in the live market, which accounted for approximately 35% of the industry’s chicken sales in Mexico in 2016.
As of December 25, 2016, we have approximately 39,600 employees and have the capacity to process more than 36.7 million birds per week for a total of more than 10.7 billion pounds of live chicken annually. In 2016, we produced 8.1 billion pounds of chicken products, generating approximately $7.9 billion in net sales and approximately $440.5 million in net income attributable to Pilgrim’s.
On June 29, 2015, we acquired 100% of the equity of Provemex Holdings, LLC and its subsidiaries (together, “Tyson Mexico”) from Tyson Foods, Inc. and certain of its subsidiaries. Tyson Mexico is a vertically integrated poultry business based in Gómez Palacio, Durango, Mexico. The acquired business has a production capacity of 2.9 million birds per week in its three plants and currently employs approximately 4,400 people. The acquisition further strengthened our strategic position in the Mexico chicken market.
On January 6, 2017, we acquired 100% of the membership interests of GNP from Maschhoff Family Foods, LLC for a cash purchase price of $350 million, subject to customary working capital adjustments. GNP is a vertically integrated poultry business based in St. Cloud, Minnesota. The acquired business has a production capacity of 2.1 million birds per five-day work week in its three plants and currently employs approximately 1,775 people. The plants are located in geographic areas where Pilgrim’s is not currently present, providing Pilgrim’s the opportunity to expand its production and customer bases. We plan to leverage GNP’s operations to enhance its production efficiencies. Also, the addition of GNP’s Just Bare® product lines join our existing no-antibiotics-ever and organic production capabilities, strengthening our footprint in fast-growing and higher-margin chicken segments. This acquisition further strengthens the Company’s strategic position in the U.S. chicken market.
We operate on the basis of a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. Any reference we make to a particular year (for example, 2016) applies to our fiscal year and not the calendar year. Fiscal 2016 was a 52-week fiscal year.
Our Industry
Industry Overview
The U.S. consumes more chicken than any other protein (approximately 34.4 billion pounds projected in calendar year 2017 according to the U.S. Department of Agriculture (“USDA”)), and chicken is the second most consumed protein globally after pork. The U.S. is the world’s largest producer of chicken and is projected to produce approximately 41.1 billion pounds of ready-to-cook broiler meat in calendar year 2017, representing 20.7% of the total world production. Broilers are tender, young chickens suitable for broiling or roasting. Brazil and China produce the second and third most broiler meat, with 15.6% and 12.7% of the world market, respectively, according to the USDA.
According to the USDA, the export of U.S. chicken products increased at an average annual growth rate of 1.8% from 2005 through 2015. The U.S. is the second-largest exporter of broiler meat behind Brazil. The U.S. is projected to export 6.9 billion pounds in calendar year 2017, which would account for 27.5% of the total world exports and 16.7% of the total U.S. production, according to the USDA. The top five exporters are projected to control over 86.6% of the market in 2017.
According to the USDA, chicken production in the U.S. increased from 2005 through 2015 at a compounded annual growth rate of 1.1%. The growth in chicken demand is attributable to (i) relative affordability compared to other proteins such as beef and pork, (ii) the increasingly health conscious nature of U.S. consumers, (iii) chicken’s consistent quality and versatility and (iv) its introduction on many foodservice menus. In addition, global protein demand continues to be strong, consistent with rising standards of living and a growing middle class in developing countries around the world. USDA estimates from 2015 through 2025 show an anticipated increase of global chicken production at a compounded annual growth rate of 1.2%. We believe our relationship with JBS positions us to capture a portion of those emerging markets.
Key Industry Dynamics
Pricing. Items that influence chicken pricing in the U.S. include international demand, changes in production by other broiler producing countries, input costs and the demand associated with substitute products such as beef and pork. We believe our focus on sales mix enables us to adapt to changing supply demand dynamics by adjusting our production to maximize value. We also benefit from a shorter production lifecycle of broilers compared to other proteins. While production for cattle takes approximately 28 to 39 months from breeding to slaughter and the production for pork takes 11 to 12 months, the production lifecycle for the broiler is only ten weeks.
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Feed. Broilers are fed corn and soybean meal as well as certain vitamins and minerals. Corn and soybean meal accounted for approximately 45.7% and 36.3% of our feed costs, respectively, in 2016. Broiler production is significantly more efficient from a feed perspective than cattle or hog production. Approximately two pounds of feed are required for each pound of chicken, as compared to approximately seven and 3.5 pounds for cattle and hogs, respectively. We have sought to mitigate the impact of feed price volatility on our profitability by decreasing the amount of our products that are sold under longer term fixed price contracts, broadening our product portfolio and expanding the variety of contracts within our book of business.
Competitive Strengths
We believe that our competitive strengths will enable us to maintain and grow our position as a leading chicken company and to capitalize on future favorable growth opportunities:
Leading market position in the growing chicken industry. We are one of the largest chicken producers globally and a leading chicken producer in the U.S. with an approximate 16.6% market share, based on ready-to-cook production in 2016, according to WATTPoultryUSA magazine. We believe we can maintain this prominent market position as we are one of the few producers in the chicken industry that can fully satisfy the requirements of large retailers and foodservice companies due to our broad product range, national distribution, vertically integrated operations and technical capabilities. Further, our scale of operations, balanced product portfolio and a wide range of production capabilities enable us to meet both the capacity and quality requirements of our customer base. Finally, we believe we are well positioned with our global footprint to benefit from the growth in the U.S. chicken export market.
Broad product portfolio. We have a diversified product portfolio ranging from large to small birds and from fresh to cooked to processed chicken. In addition, our prepared foods business is focused on our most profitable product lines. We believe we are well positioned to be the primary chicken supplier for large customers due to our ability to provide consistent supply, innovate and develop new products to address consumer desires and provide competitive pricing across a diverse product portfolio. Our balanced portfolio of fresh, prepared and value-added chicken products yields a diversified sales mix, mitigating supply and market volatility and creating more consistent gross margins.
Blue chip and diverse customer base across all industry segments. We benefit from strong relationships with leading companies in every customer segment, including Chick-fil-A®, Sysco®, US Foods, Kroger®, Costco®, Publix®, and H-E-B®, most of whom have been doing business with us for more than five years. We sell our products to a large and diverse customer base, with over 5,000 customers, with no single one accounting for more than 10% of total sales.
Lean and focused enterprise. We are an efficient and lean organization supported by our market-driven business strategy. We have closed, idled or sold plants and distribution centers, reduced or consolidated production at other facilities, streamlined our workforce and reduced administrative and corporate expenses. In addition, we continue to seek to make significant production improvements driven by improved yields, labor, cost savings and product mix. We utilize zero-based budgeting and plant-level profit and loss analysis, driving engagement and ownership over the results at each plant. These strategic initiatives have reduced our cost base, resulting in higher and more sustainable profits. We share corporate headquarters with JBS in Greeley, Colorado, and have integrated certain corporate functions with JBS to save costs.
Robust cash flow generation with disciplined capital allocation. Our leading market position, strong customer relationships and highly efficient operations help drive attractive and we believe sustainable margins. We also have a proven track record of disciplined capital allocation. We have spent approximately $826 million since 2011 in capital spending towards identified projects with rapid payback, further driving our profitability. Since the end of 2011, we have also reduced our net debt from over $1.4 billion to $892 million at the end of 2016.
Experienced management team and results-oriented corporate culture. We have a proven senior management team whose tenure in the chicken industry has spanned numerous market cycles and is among the most experienced in the industry. Our senior management team is led by William W. Lovette, our Chief Executive Officer, who has over 30 years of experience in the chicken industry. Our management team has successfully improved and realigned our business and instilled a corporate culture focused on performance and accountability. We also benefit from management ideas, best practices, and talent shared with the seasoned management team of JBS, which has over 50 years of combined experience operating protein processing facilities in South America, North America and Australia.
Relationship with JBS. We work closely with JBS management to identify areas where Pilgrim’s and JBS can achieve synergies. We share corporate headquarters with JBS in Greeley, Colorado, and have integrated certain corporate functions with JBS to save costs. In addition to cost savings through the integration of certain corporate functions and the rationalization of facilities, our relationship with JBS allows us to enjoy several advantages given its diversified international operations and strong record in commodity risk management. In addition, the expertise of JBS in managing the risk associated with volatile commodity inputs will help us to further improve our operations and manage our margins.
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Business Strategy
We intend to continue growing our business and enhancing profitability by pursuing the following strategies:
Be a valued partner with our key customers. We have developed and acquired complementary markets, distributor relationships and geographic locations that have enabled us to expand our customer base and provide global distribution capabilities for all of our product lines. As a result, we believe we are one of only two U.S. chicken producers that can supply the growing demand for a broad range of price competitive standard and specialized products with well-known brand names on a nationwide basis from a single-source supplier. Additionally, we intend to leverage our innovation capabilities to develop new products along with our customers to accelerate sales and enhance the profitability of chicken products at their businesses. We plan to further enhance our industry position by optimizing our sales mix and accelerating innovation.
Relentless pursuit of operational excellence. As production and sales grow, we continue to focus on improving operating efficiencies by focusing on cost reductions, more effective processes, training and our total quality management program. Specific initiatives include:
• | Benchmarking live and plant costs against the industry; |
• | Striving to be in the top 25% of the industry for yields and costs; |
• | Fostering a culture of accountability and ownership deeper in the organization; |
• | Conducting monthly performance reviews with senior management; and |
• | Improving sales mix and price. |
Between 2011 and 2016, these initiatives have resulted in approximately $1.0 billion of cumulative operational improvements, including from reduction of plant-related costs and improved sales mix and product yield.
Accountability and ownership culture. We have a results-oriented culture with our business strategy centered on reducing fixed costs and increasing profitability, consistent with JBS values. Our employee accountability has further increased as we have de-layered the organization through our recent restructuring and cost improvement initiatives. In addition, we continue to invest in developing our talent internally. As a result, we have a strong accountability and ownership culture. We strive to be the best managed and most respected company in our industry.
Reportable Business Segment
We operate in one reportable business segment, as a producer and seller of chicken products we either produce or purchase for resale in the U.S., Puerto Rico and Mexico. We conduct separate operations in the U.S., Puerto Rico and Mexico; however, for geographic reporting purposes, we include Puerto Rico with our U.S. operations. See “Note 19. Business Segment and Geographic Reporting” of our Consolidated Financial Statements included in this annual report for additional information.
Products and Markets
Our primary product types are fresh chicken products, prepared chicken products and value-added export chicken products. We sell our fresh chicken products to the foodservice and retail markets. Our fresh chicken products consist of refrigerated (nonfrozen) whole or cut-up chicken, either pre-marinated or non-marinated and prepackaged case-ready chicken. Our case-ready chicken includes various combinations of freshly refrigerated, whole chickens and chicken parts in trays, bags or other consumer packs labeled and priced ready for the retail grocer’s fresh meat counter. Our fresh chicken sales accounted for 75.4% of our total U.S. chicken sales in 2016.
We also sell prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties and bone-in chicken parts. These products are sold either refrigerated or frozen and may be fully cooked, partially cooked or raw. In addition, these products are breaded or non-breaded and either pre-marinated or non-marinated. Our prepared chicken products sales accounted for 20.7% of our total U.S. chicken sales in 2016.
Export and other chicken products primarily consist of whole chickens and chicken parts sold either refrigerated for distributors in the U.S. or frozen for distribution to export markets. We sell U.S.-produced chicken products for export to Mexico, the Middle East, Asia, countries within the Commonwealth of Independent States (the “CIS”) and other world markets. In the U.S., prices of these products are negotiated daily or weekly and are generally related to market prices quoted by the USDA or other public price reporting services. Prices for export sales are determined by supply and demand and local market conditions.
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In certain newly accessed international markets, we have established premium brands, which allow us to market our products at a premium to commodity price levels within those regions. Our export and other chicken products sales accounted for 3.9% of our total U.S. chicken sales in 2016.
Our primary customer markets consist of the foodservice and retail channels, as well as selected export and other markets.
Our foodservice market principally consists of chain restaurants, food processors, broad-line distributors and certain other institutions located throughout the continental U.S. Within this market, we service frozen, fresh and corporate accounts. Fresh and frozen chicken products are usually pre-cut to customer specifications and are often marinated to enhance value and product differentiation. Corporate accounts include further-processed and value-added products supplied to select foodservice customers, improving their ability to manage product consistency and quality in a cost efficient manner. We believe we are positioned to be the primary or secondary supplier to national and international chain restaurants who require multiple suppliers of chicken products. Additionally, we believe we are well suited to be the sole supplier for many regional chain restaurants. Regional chain restaurants often offer better margin opportunities and a growing base of business. We believe that our full-line product capabilities, high-volume production capacities, research and development expertise and extensive distribution and marketing experience are competitive strengths compared to smaller and non-vertically integrated producers.
Our retail market consists primarily of grocery store chains, wholesale clubs and other retail distributors. Our retail market products consist primarily of branded, prepackaged cut-up and whole chicken and chicken parts. We concentrate our efforts in this market on creating value for our customers through category management and supporting key customers in expanding their private label sales programs. Additionally, for many years, we have invested in both trade and retail marketing designed to establish high levels of brand name awareness and consumer preference. We utilize numerous advertising and marketing techniques to develop and strengthen trade and consumer awareness and increase brand loyalty for consumer products marketed under the Gold Kist®, County Post®, Pierce Chicken®, Pilgrim’s Pride® and Pilgrim’s® brands. We believe our efforts to achieve and maintain brand awareness and loyalty help to achieve greater price premiums than would otherwise be the case in certain markets and support and expand our product distribution. We actively seek to identify and address consumer preferences by using sophisticated qualitative and quantitative consumer research techniques in key geographic markets to discover and validate new product ideas, packaging designs and methods.
Our export and other chicken market consists primarily of customers who purchase for distribution in the U.S. or for export to Mexico, the Middle East, Asia, countries within the CIS and other world markets. Our value-added export and other chicken products, with the exception of our exported prepared chicken products, consist of whole chickens and chicken parts sold in bulk, or value-added form, either refrigerated or frozen. We believe that U.S. chicken exports will continue to grow as worldwide demand increases for high-quality, low-cost meat protein sources. We expect that worldwide demand for higher-margin prepared food products will increase over the next several years and believe our strategy of value-added export growth positions us to take advantage of this expected demand.
Historically, we have targeted international markets to generate additional demand for our dark chicken meat, for which there has been less demand in the U.S. than for white chicken meat. We have expanded our portfolio to provide prepared chicken products tailored for export to the international divisions of our U.S. chain restaurant customers, as well as newly identified customers in regions not previously accessed. Through our relationship with JBS, we have developed an international distribution channel focused on growing our tailored export program and expanding value-added products, such as all-vegetable-fed whole griller birds, chicken franks and further processed thigh meat. Utilizing the extensive sales network of JBS, we believe that we can accelerate the sales of value-added chicken products into these international channels.
The following table sets forth, for the periods beginning with 2012, net sales attributable to each of our primary product lines and markets served with those products. We based the table on our internal sales reports and their classification of product types.
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2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(In thousands) | |||||||||||||||||||
U.S. chicken: | |||||||||||||||||||
Fresh chicken | $ | 4,627,137 | $ | 4,701,943 | $ | 4,703,993 | $ | 4,123,089 | $ | 3,583,854 | |||||||||
Prepared chicken | 1,269,010 | 1,672,693 | 1,787,389 | 2,046,746 | 2,239,289 | ||||||||||||||
Export and other chicken | 313,827 | 358,878 | 620,082 | 715,969 | 817,723 | ||||||||||||||
Total U.S. chicken | 6,209,974 | 6,733,514 | 7,111,464 | 6,885,804 | 6,640,866 | ||||||||||||||
Mexico chicken | 1,245,644 | 1,016,200 | 900,360 | 864,454 | 758,023 | ||||||||||||||
Total chicken | 7,455,618 | 7,749,714 | 8,011,824 | 7,750,258 | 7,398,889 | ||||||||||||||
Other products: | |||||||||||||||||||
U.S. | 461,429 | 409,840 | 535,572 | 614,409 | 608,619 | ||||||||||||||
Mexico | 14,076 | 20,550 | 35,969 | 46,481 | 113,874 | ||||||||||||||
Total other products | 475,505 | 430,390 | 571,541 | 660,890 | 722,493 | ||||||||||||||
Total net sales | $ | 7,931,123 | $ | 8,180,104 | $ | 8,583,365 | $ | 8,411,148 | $ | 8,121,382 | |||||||||
The following table sets forth, beginning with 2012, the percentage of net U.S. chicken sales attributable to each of our primary product lines and the markets serviced with those products. We based the table and related discussion on our internal sales reports and their classification of product types and customers.
2016 | 2015 | 2014 | 2013 | 2012 | |||||
Fresh chicken | 75.4 | 69.8 | 66.2 | 59.9 | 54.0 | ||||
Prepared chicken | 20.7 | 24.9 | 25.1 | 29.7 | 33.7 | ||||
Export and other chicken | 3.9 | 5.3 | 8.7 | 10.4 | 12.3 | ||||
Total U.S. chicken | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | ||||
United States Operations
Product Types
Fresh Chicken Overview. Fresh chicken is an important component of our sales and accounted for $4,627.1 million, or 75.4%, of our total U.S. chicken sales in 2016 and $3,583.9 million, or 54.0%, in 2012. Most fresh chicken products are sold to established customers, based upon certain weekly or monthly market prices reported by the USDA and other public price reporting services, plus a markup, which is dependent upon the customer’s location, volume, product specifications and other factors. We believe our practices with respect to sales of fresh chicken are generally consistent with those of our competitors. The majority of these products are sold pursuant to agreements with varying terms that set a price according to formulas based on underlying chicken price markets, subject in many cases to minimum and maximum prices.
Prepared Chicken Overview. In 2016, $1,269.0 million, or 20.7%, of our U.S. chicken sales were in prepared chicken products to foodservice customers and retail distributors, as compared to $2,239.3 million, or 33.7%, in 2012. The production and sale in the U.S. of prepared chicken products reduce the impact of the costs of feed ingredients on our profitability. Feed ingredient costs are the single largest component of our U.S. cost of sales, representing approximately 29.6% of our U.S. cost of sales in 2016. The production of feed ingredients is positively or negatively affected primarily by the global level of supply inventories, demand for feed ingredients, the agricultural policies of the U.S. and foreign governments and weather patterns throughout the world. As further processing is performed, feed ingredient costs become a decreasing percentage of a product’s total production cost, thereby reducing their impact on our profitability. Products sold in this form enable us to charge a premium, reduce the impact of feed ingredient costs on our profitability and improve and stabilize our profit margins.
We establish prices for our prepared chicken products based primarily upon perceived value to the customer, production costs and prices of competing products. The majority of these products are sold pursuant to agreements with varying terms that either set a fixed price for short-term periods or set a price according to formulas based on an underlying commodity market such as corn and chicken price forecasts, subject in many cases to minimum and maximum prices. Many times, these prices are dependent upon the customer’s location, volume, product specifications and other factors.
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Export and Other Chicken Overview. Our export and other chicken products consist of whole chickens and chicken parts sold primarily in bulk, nonbranded form, either refrigerated to distributors in the U.S. or frozen for distribution to export markets, and branded and nonbranded prepared chicken products for distribution to export markets. In 2016, approximately $313.8 million, or 3.9%, of our total U.S. chicken sales were attributable to U.S. chicken export and other chicken products, as compared to $817.7 million, or 12.3%, in 2012.
Markets for Other Products
Presently, this category includes chicken by-products, which we convert into protein products and sell primarily to manufacturers of pet foods. In addition, many of our U.S. feed mills produce and sell some livestock feeds to local dairy farmers and livestock producers. We marketed fresh eggs through private labels until August 2012. In August 2012, we sold our commercial egg operation to Cal-Maine Foods, Inc.
Mexico Operations
Background
Our Mexico operations generated approximately 15.9% of our net sales in 2016. We are one of the largest producers and sellers of chicken in Mexico. We believe that we operate one of the more efficient business models for chicken production in Mexico.
On June 29, 2015, we acquired, indirectly through certain of our Mexican subsidiaries, 100% of the equity of Tyson Mexico from Tyson Foods, Inc. and certain of its subsidiaries for cash. Tyson Mexico is a vertically integrated poultry business based in Gómez Palacio, Durango, Mexico. The acquired business has a production capacity of 2.9 million birds per week in its three plants. The acquisition further strengthened our strategic position in the Mexico chicken market.
During 2014 and 2015, we invested approximately $12.5 million in the first phase of a new poultry processing complex in Veracruz, Mexico. We initiated live production operations at this facility in September 2015.
Product Types
While the market for chicken products in Mexico is less developed than in the U.S., with sales attributed to fewer, simpler products, we believe we have been successful in differentiating our products through high-quality client service and product improvements. Additionally, we are an important player in the live market, which accounts for approximately 35% of the chicken sales in Mexico.
Markets
We sell our chicken products primarily to wholesalers, large restaurant chains, fast food accounts and supermarket chains, and also engage in direct retail distribution in selected markets. Our largest presence is by far in the central states of the country where we have been able to gain market share. Our presence in Mexico reaches 75.4% of the population.
Foreign Operations Risks
Our foreign operations pose special risks to our business and operations. A discussion of foreign operations risks is included in “Item 1A. Risk Factors.”
Key Customers
Our two largest customers accounted for approximately 14.4% and 14.9% of our net sales in 2016 and 2015, respectively. No customer accounted for ten percent or more of our net sales in either 2016 or 2015.
Competition
The chicken industry is highly competitive. We are one of the largest chicken producers in the world and we believe our relationship with JBS enhances our competitive position. In the U.S. and Mexico, we compete principally with other vertically integrated poultry companies. However, there is some competition with non-vertically integrated further processors in the U.S. prepared chicken business. We believe vertical integration generally provides significant, long-term cost and quality advantages over non-vertically integrated further processors.
In general, the competitive factors in the U.S. chicken industry include price, product quality, product development, brand identification, breadth of product line and customer service. Competitive factors vary by major market. In the U.S. retail market,
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we believe that product quality, brand awareness, customer service and price are the primary bases of competition. In the foodservice market, competition is based on consistent quality, product development, service and price. The export market is competitive on a global level based on price, product quality, product tailoring, brand identification and customer service. Competitive factors vary by market and may be impacted further by trade restrictions, sanitary and phyto-sanitary issues, brand awareness and the relative strength or weakness of the U.S. dollar against local currencies. We believe that product customization, service and price are the most critical competitive factors for export sales.
In Mexico, where product differentiation has traditionally been limited, we believe product quality and price have been the most critical competitive factors.
Regulation and Environmental Matters
The chicken industry is subject to government regulation, particularly in the health, workplace safety and environmental areas, including provisions relating to the discharge of materials into the environment, by the Centers for Disease Control (“CDC”), the USDA, the Food and Drug Administration (“FDA”), the Environmental Protection Agency (“EPA”), the Occupational Safety and Health Administration (“OSHA”) and state and local regulatory authorities in the U.S. and by similar governmental agencies in Mexico. Our chicken processing facilities in the U.S. are subject to on-site examination, inspection and regulation by the USDA. The FDA inspects the production of our feed mills in the U.S. Our Mexican food processing facilities and feed mills are subject to on-site examination, inspection and regulation by a Mexican governmental agency that performs functions similar to those performed by the USDA and FDA.
Our operations are subject to extensive regulation by the EPA and other state and local authorities relating to handling and discharge of waste water, storm water, air emissions, treatment, storage and disposal of wastes, handling of hazardous substances and remediation of contaminated soil, surface water and groundwater. Our Mexican operations also are subject to extensive regulation by Mexican environmental authorities. The EPA, Mexican environmental authorities and/or other U.S. or Mexican state and local authorities may, from time to time, adopt revisions to environmental rules and regulations, and/or changes in the terms and conditions of our environmental permits, with which we must comply. Compliance with existing or new environmental requirements, including more stringent limitations imposed or expected in recently-renewed or soon-to be renewed environmental permits, may require capital expenditures and operating expenses which may be significant. Our operations are also subject to regulation by the EPA, OSHA and other state and local regulatory authorities regarding the treatment and disposal of agricultural and food processing wastes, the use and maintenance of refrigeration systems, including ammonia-based chillers, noise, odor and dust management, the operation of mechanized processing equipment, and other operations.
Some of our facilities have been operating for many years, and were built before current environmental, health and safety standards were imposed and/or in areas that recently have become subject to residential and commercial development pressures. We are upgrading wastewater treatment facilities at a number of our facilities, either pursuant to consent agreements with regulatory authorities or on a voluntary basis in anticipation of future permit requirements. We do not anticipate that the capital expenditures associated with these upgrades, which will be spread over a number of years, will be material.
We have from time to time had incidents at our plants involving worker health and safety. These have included ammonia releases due to mechanical failures in chiller systems and worker injuries and fatalities involving processing equipment and vehicle accidents. We have taken preventive measures in response.
Some of our properties have been impacted by contamination from spills or other releases, and we have incurred costs to remediate such contamination. In addition, in the past we acquired businesses with operations such as pesticide and fertilizer production that involved greater use of hazardous materials and generation of more hazardous wastes than our current operations. While many of those operations have been sold or closed, some environmental laws impose strict and, in certain circumstances, joint and several liability for costs of investigation and remediation of contaminated sites on current and former owners and operators of the sites, and on persons who arranged for disposal of wastes at such sites. In addition, current owners or operators of such contaminated sites may seek to recover cleanup costs from us based on past operations or contractual indemnifications. See “Item 1A. Risk Factors” for risks associated with compliance with existing or changing environmental requirement.
We anticipate increased regulation by the USDA concerning food safety, by the FDA concerning the use of medications in feed and by the EPA and various other state agencies concerning discharges to the environment. Although we do not currently anticipate that such increased regulation will have a material adverse effect upon us, new environmental, health and safety requirements that are more stringent than we anticipate, stricter interpretations of existing environmental requirements, or obligations related to the investigation or clean-up of contaminated sites may materially affect our business or operations in the future.
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Employees
As of December 25, 2016, we employed approximately 29,850 persons in the U.S. and approximately 9,750 persons in Mexico. Approximately 42.9% of the Company’s employees were covered under collective bargaining agreements. Substantially all employees covered under collective bargaining agreements are covered under agreements that expire in 2017 or later, with the exception of three processing operations locations, where the collective bargaining agreements expired in 2016. Collective bargaining agreements have been reached for two of these three processing operations locations and we expect to ratify these agreements in 2017. Negotiations are ongoing on the collective borrowing agreement for the remaining processing operations location. We have not experienced any labor-related work stoppage at any location in over ten years. We believe our relationship with our employees and union leadership is satisfactory. At any given time, we will likely be in some stage of contract negotiations with various collective bargaining units. In the absence of agreements, we may become subject to labor disruption at one or more of these locations, which could have an adverse effect on our financial results.
Trademarks
We own registered trademarks which are used in connection with our activity in our business. The trademarks are important to the overall marketing and branding of our products. All major trademarks in our business are registered. In part, our success can be attributed to the existence and continued protection of these trademarks.
Seasonality
The demand for our chicken products generally is greatest during the spring and summer months and lowest during the winter months.
Financial Information about Foreign Operations
Our foreign operations are in Mexico. Geographic financial information is set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For additional information, see “Note 19. Business Segment and Geographic Reporting” of our Consolidated Financial Statements included in this annual report.
Available Information
The Company’s Internet website is www.pilgrims.com. The Company makes available, free of charge, through its Internet website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, directors and officers Forms 3, 4 and 5, and amendments to those reports, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the Securities and Exchange Commission. The public may read and copy any materials that the Company files with the Securities and Exchange Commission at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 and may obtain information about the operation of the Public Information Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.
In addition, the Company makes available, through its Internet website, the Company’s Business Code of Conduct and Ethics, Corporate Governance Guidelines and the written charter of the Audit Committee, each of which is available in print to any stockholder who requests it by contacting the Secretary of the Company at 1770 Promontory Circle, Greeley, Colorado 80634-9038. Information contained on the Company’s website is not included as part of, or incorporated by reference into, this annual report.
Executive Officers
Set forth below is certain information relating to our current executive officers:
Name | Age | Positions | |||
William W. Lovette | 57 | President and Chief Executive Officer | |||
Fabio Sandri | 45 | Chief Financial Officer | |||
William W. Lovette joined Pilgrim’s as President and Chief Executive Officer on January 3, 2011. He brings more than 30 years of industry leadership experience to Pilgrim’s. He previously served two years as President and Chief Operating Officer of Case Foods, Inc. Before joining Case Foods, Inc., Mr. Lovette spent 25 years with Tyson Foods in various roles in senior management, including President of its International Business Unit, President of its Foodservice Business Unit and Senior Group Vice President of Poultry and Prepared Foods. Mr. Lovette earned a B.S. degree from Texas A&M University. In addition, he is a graduate of Harvard Business School’s Advanced Management Program.
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Fabio Sandri has served as the Chief Financial Officer for Pilgrim’s since June 2011. From April 2010 to June 2011, Mr. Sandri served as the Chief Financial Officer of Estacio Participações, the private post-secondary educational institution in Brazil. From November 2008 until April 2010, he was the Chief Financial Officer of Imbra SA, a provider of dental services based in Sao Paolo, Brazil. Commencing in 2005 through October 2008, he was employed by Braskem S.A., a New York Stock Exchange-listed petrochemical company headquartered in Camaçari, Brazil, first from 2005 to 2007 as its strategy director, then from 2007 until his departure as its corporate controller. He earned his Masters in Business Administration in 2001 from the Wharton School at the University of Pennsylvania and a degree in electrical engineering in 1993 from Escola Politécnica da Universidade de São Paulo.
Item 1A. Risk Factors
The following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this annual report on Form 10-K. Any of the following risks could materially adversely affect our business, operations, industry or financial position or our future financial performance. While we believe we have identified and discussed below all risk factors affecting our business that we believe are material, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial position and financial performance in the future.
Industry cyclicality can affect our earnings, especially due to fluctuations in commodity prices of feed ingredients and chicken.
Profitability in the chicken industry is materially affected by the commodity prices of feed ingredients and market prices of chicken, which are determined by supply and demand factors. As a result, the chicken industry is subject to cyclical earnings fluctuations.
The price of feed ingredients is positively or negatively affected primarily by the global level of supply inventories and demand for feed ingredients, the agricultural policies of the U.S. and foreign governments and weather patterns throughout the world. In particular, weather patterns often change agricultural conditions in an unpredictable manner. A significant change in weather patterns could affect supplies of feed ingredients, as well as both the industry’s and our ability to obtain feed ingredients, grow chickens or deliver products. More recently, feed prices have been impacted by increased demand both domestically for ethanol and globally for protein production, as well as grain production levels outside the U.S.
We have recently benefited from low market prices for feed ingredients, but market prices for feed ingredients remain volatile. Consequently, there can be no assurance that the price of corn or soybean meal will not continue to rise as a result of, among other things, increasing demand for these products around the world and alternative uses of these products, such as ethanol and biodiesel production.
Volatility in feed ingredient prices has had, and may continue to have, a materially adverse effect on our operating results, which has resulted in, and may continue to result in, additional noncash expenses due to impairment of the carrying amounts of certain of our assets. We periodically seek, to the extent available, to enter into advance purchase commitments or financial derivative contracts for the purchase of feed ingredients in an effort to manage our feed ingredient costs. The use of these instruments may not be successful. In addition, we have not designated the derivative financial instruments that we have purchased to mitigate commodity purchase exposures as cash flow hedges. Therefore, we recognize changes in the fair value of these derivative financial instruments immediately in earnings. Unexpected changes in the fair value of these instruments could adversely affect the results of our operations. Although we have sought to mitigate the impact of feed price volatility on our profitability by decreasing the amount of our products that are sold under longer term fixed price contracts, these changes will not eliminate the impact of changes in feed ingredient prices on our profitability and would prevent us from profiting on such contracts during times of declining market prices of chicken.
Outbreaks of livestock diseases in general and poultry diseases in particular, including avian influenza, can significantly affect our ability to conduct our operations and demand for our products.
We take precautions designed to ensure that our flocks are healthy and that our processing plants and other facilities operate in a sanitary and environmentally-sound manner. However, events beyond our control, such as the outbreaks of disease, either in our own flocks or elsewhere, could significantly affect demand for our products or our ability to conduct our operations. Furthermore, an outbreak of disease could result in governmental restrictions on the import and export of our fresh chicken or other products to or from our suppliers, facilities or customers, or require us to destroy one or more of our flocks. This could also result in the cancellation of orders by our customers and create adverse publicity that may have a material adverse effect on our ability to market our products successfully and on our business, reputation and prospects.
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For example, there was substantial publicity in 2015 regarding highly pathogenic avian influenza (“HPAI”) H5 in the Pacific, Central, and Mississippi flyways (or migratory bird paths) of North America. The disease was found in wild birds, as well as in a few backyard and commercial poultry flocks. The CDC considers the risk to people from these HPAI H5 infections to be low. No human cases of these HPAI H5 viruses have been detected. In its response effort, the USDA coordinated closely with state officials in affected and bordering states and other federal departments on avian influenza surveillance, reporting and control efforts. The USDA also coordinated with Canada on the HPAI H5 findings that were close to the northern U.S. border. Furthermore, there was substantial publicity in 2012 and 2013 regarding a highly pathogenic strain of avian influenza, known as H7N3, which affected several states in central Mexico. There was also substantial publicity in 2013 regarding a low pathogenic strain of avian influenza, known as H7N9, which affected eastern and northern China in and around the cities of Shanghai and Beijing.
There have been outbreaks of other low pathogenic strains of avian influenza in the U.S. In Mexico, outbreaks of both high and low-pathogenic strains of avian influenza are a fairly common occurrence. Historically, the outbreaks of low pathogenic strains of avian influenza have not generated the same level of concern, or received the same level of publicity or been accompanied by the same reduction in demand for poultry products in certain countries as that associated with highly pathogenic strains such as HPAI H5 and H7N3 or highly infectious strains such as H7N9. Even if no further highly pathogenic or highly contagious strains of avian influenza are confirmed in the U.S. or Mexico, there can be no assurance that outbreaks of these strains in other countries will not materially adversely affect demand for U.S.-produced poultry internationally and/or U.S.-produced or Mexico-produced poultry domestically, and, if any of these strains were to spread to either the U.S. or Mexico, there can be no assurance that it would not significantly affect our ability to conduct our operations and/or demand for our products, in each case, in a manner having a material adverse effect on our business, reputation and/or prospects.
If our poultry products become contaminated, we may be subject to product liability claims and product recalls.
Poultry products may be subject to contamination by disease-producing organisms, or pathogens, such as Listeria monocytogenes, Salmonella and generic E.coli. These pathogens are generally found in the environment, and, as a result, there is a risk that, as a result of food processing, they could be present in our processed poultry products. These pathogens can also be introduced as a result of improper handling at the further processing, foodservice or consumer level. These risks may be controlled, although not eliminated, by adherence to good manufacturing practices and finished product testing. We have little, if any, control over proper handling once the product has been shipped. Illness and death may result if the pathogens are not eliminated at the further processing, foodservice or consumer level. Even an inadvertent shipment of contaminated products is a violation of law and may lead to increased risk of exposure to product liability claims, product recalls and increased scrutiny by federal and state regulatory agencies and may have a material adverse effect on our business, reputation and prospects.
Product liability claims or product recalls can adversely affect our business reputation, expose us to increased scrutiny by federal and state regulators and may not be fully covered by insurance.
The packaging, marketing and distribution of food products entail an inherent risk of product liability and product recall and the resultant adverse publicity. We may be subject to significant liability if the consumption of any of our products causes injury, illness or death. We could be required to recall certain products in the event of contamination or damage to the products. In addition to the risks of product liability or product recall due to deficiencies caused by our production or processing operations, we may encounter the same risks if any third party tampers with our products. We cannot assure you that we will not be required to perform product recalls, or that product liability claims will not be asserted against us, in the future. Any claims that may be made may create adverse publicity that would have a material adverse effect on our ability to market our products successfully or on our business, reputation, prospects, financial condition and results of operations.
If our poultry products become contaminated, we may be subject to product liability claims and product recalls. There can be no assurance that any litigation or reputational injury associated with product recalls will not have a material adverse effect on our ability to market our products successfully or on our business, reputation, prospects, financial condition and results of operations.
We currently maintain insurance with respect to certain of these risks, including product liability insurance, business interruption insurance and general liability insurance, but in many cases such insurance is expensive, difficult to obtain and no assurance can be given that such insurance can be maintained in the future on acceptable terms, or in sufficient amounts to protect us against losses due to any such events, or at all. Moreover, even though our insurance coverage may be designed to protect us from losses attributable to certain events, it may not adequately protect us from liability and expenses we incur in connection with such events.
Competition in the chicken industry with other vertically integrated poultry companies may make us unable to compete successfully in this industry, which could adversely affect our business.
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The chicken industry is highly competitive. In both the U.S. and Mexico, we primarily compete with other vertically integrated chicken companies.
In general, the competitive factors in the U.S. chicken industry include price, product quality, product development, brand identification, breadth of product line and customer service. Competitive factors vary by major market. In the foodservice market, competition is based on consistent quality, product development, service and price. In the U.S. retail market, we believe that competition is based on product quality, brand awareness, customer service and price. Further, there is some competition with non-vertically integrated further processors in the prepared chicken business. In Mexico, where product differentiation has traditionally been limited, we believe product quality and price have been the most critical competitive factors.
The loss of one or more of our largest customers could adversely affect our business.
Our two largest customers accounted for approximately 14.4% of our net sales in 2016. Our business could suffer significant setbacks in revenues and operating income if we lost one or more of our largest customers, or if our customers’ plans and/or markets should change significantly.
Our foreign operations pose special risks to our business and operations.
We have significant operations and assets located in Mexico and may participate in or acquire operations and assets in other foreign countries in the future. Foreign operations are subject to a number of special risks such as currency exchange rate fluctuations, trade barriers, exchange controls, expropriation and changes in laws and policies, including tax laws and laws governing foreign-owned operations.
Currency exchange rate fluctuations have adversely affected us in the past. Exchange rate fluctuations or one or more other risks may have a material adverse effect on our business or operations in the future.
Our operations in Mexico are conducted through subsidiaries organized under the laws of Mexico. Claims of creditors of our subsidiaries, including trade creditors, will generally have priority as to the assets of our subsidiaries over our claims. Additionally, the ability of our Mexican subsidiaries to make payments and distributions to us may be limited by the terms of our Mexico credit facility and will be subject to, among other things, Mexican law. In the past, these laws have not had a material adverse effect on the ability of our Mexican subsidiaries to make these payments and distributions. However, laws such as these may have a material adverse effect on the ability of our Mexican subsidiaries to make these payments and distributions in the future.
Disruptions in international markets and distribution channels could adversely affect our business.
Historically, we have targeted international markets to generate additional demand for our products. In particular, given U.S. customers’ general preference for white meat, we have targeted international markets for the sale of dark chicken meat, specifically leg quarters, which are a natural by-product of our U.S. operations’ concentration on prepared chicken products. As part of this initiative, we have created a significant international distribution network into several markets in Mexico, the Middle East, Asia and countries within the CIS. Our success in these markets may be, and our success in recent periods has been, adversely affected by disruptions in chicken export markets. For example, dozens of countries, including Mexico, Canada, China, Angola and South Korea, imposed either partial or full bans on the importation of poultry produced in the U.S. after an outbreak of HPAI H5 avian influenza was confirmed in 2015. Additionally, China imposed anti-dumping and countervailing duties on the U.S. chicken producers in 2010, which have deterred Chinese importers from purchases of U.S.-origin chicken products. Russia also banned the importation of chicken and other agricultural products from the U.S. and certain other western countries in August 2014 in retaliation for sanctions imposed by the U.S. and Europe on Russia over its actions in Ukraine.
A significant risk is disruption due to import restrictions and tariffs, other trade protection measures, and import or export licensing requirements. In addition, disruptions may be caused by outbreaks of disease such as avian influenza, either in our flocks or elsewhere in the world, and resulting changes in consumer preferences.
One or more of these or other disruptions in the international markets and distribution channels could adversely affect our business.
Regulation, present and future, is a constant factor affecting our business.
Our operations will continue to be subject to federal, state and local governmental regulation, including in the health, safety and environmental areas. Changes in laws or regulations or the application thereof regarding areas such as wage and hour and environmental compliance may lead to government enforcement actions and resulting litigation by private litigants.
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In addition, unknown matters, new laws and regulations, or stricter interpretations of existing laws or regulations may also materially affect our business or operations in the future.
New immigration legislation or increased enforcement efforts in connection with existing immigration legislation could cause the costs of doing business to increase, cause us to change the way we conduct our business or otherwise disrupt our operations.
Immigration reform continues to attract significant attention in the public arena and the U.S. Congress. If new federal immigration legislation is enacted or if states in which we do business enact immigration laws, such laws may contain provisions that could make it more difficult or costly for us to hire U.S. citizens and/or legal immigrant workers. Additionally, there may be uncertainty as to the position the U.S. will take with respect to immigration following the 2016 U.S. presidential election and related change in the U.S. political agenda, coupled with the transition of administrations. In such case, we may incur additional costs to run our business or may have to change the way we conduct our operations, either of which could have a material adverse effect on our business, operating results and financial condition. Also, despite our past and continuing efforts to hire only U.S. citizens and/or persons legally authorized to work in the U.S., we may be unable to ensure that all of our employees are U.S. citizens and/or persons legally authorized to work in the U.S. No assurances can be given that enforcement efforts by governmental authorities will not disrupt a portion of our workforce or operations at one or more facilities, thereby negatively impacting our business. Also, no assurance can be given that further enforcement efforts by governmental authorities will not result in the assessment of fines that could adversely affect our financial position, operating results or cash flows.
Loss of essential employees could have a significant negative impact on our business.
Our success is largely dependent on the skills, experience, and efforts of our management and other employees. The loss of the services of one or more members of our senior management or of numerous employees with essential skills could have a negative effect on our business, financial condition and results of operations. If we are not able to retain or attract talented, committed individuals to fill vacant positions when needs arise, it may adversely affect our ability to achieve our business objectives.
Our performance depends on favorable labor relations with our employees and our compliance with labor laws. Any deterioration of those relations or increase in labor costs due to our compliance with labor laws could adversely affect our business.
As of December 25, 2016, we employed approximately 29,850 persons in the U.S. and approximately 9,750 persons in Mexico. Approximately 42.9% of the Company’s employees were covered under collective bargaining agreements. Substantially all employees covered under collective bargaining agreements are covered under agreements that expire in 2017 or later, with the exception of three processing operations locations, where the collective bargaining agreements expired in 2016. Collective bargaining agreements have been reached for two of these three processing operations locations and we expect to ratify these agreements in 2017. Negotiations are ongoing on the collective borrowing agreement for the remaining processing operations location. We have not experienced any labor-related work stoppage at any location in over ten years. We believe our relationship with our employees and union leadership is satisfactory. At any given time, we will likely be in some stage of contract negotiations with various collective bargaining units. In the absence of agreements, we may become subject to labor disruption at one or more of these locations, which could have an adverse effect on our financial results.
Extreme weather, natural disasters or other events beyond our control could negatively impact our business.
Bioterrorism, fire, pandemic, extreme weather or natural disasters, including droughts, floods, excessive cold or heat, hurricanes or other storms, could impair the health or growth of our flocks, production or availability of feed ingredients, or interfere with our operations due to power outages, fuel shortages, damage to our production and processing facilities or disruption of transportation channels, among other things. Any of these factors could have an adverse effect on our financial results.
We may face significant costs for compliance with existing or changing environmental, health and safety requirements and for potential environmental obligations relating to current or discontinued operations.
Our operations are subject to extensive and increasingly stringent federal, state, local and foreign laws and regulations pertaining to the protection of the environment, including those relating to the discharge of materials into the environment, the handling, treatment and disposal of wastes and remediation of soil and groundwater contamination. Failure to comply with these requirements could have serious consequences for us, including criminal as well as civil and administrative penalties, claims for property damage, personal injury and damage to natural resources and negative publicity. Compliance with existing or changing environmental requirements, including more stringent limitations imposed or expected to be imposed in recently-renewed or soon-to be renewed environmental permits, will require capital expenditures for installation of new or upgraded pollution control equipment at some of our facilities.
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Operations at many of our facilities require the treatment and disposal of wastewater, stormwater and agricultural and food processing wastes, the use and maintenance of refrigeration systems, including ammonia-based chillers, noise, odor and dust management, the operation of mechanized processing equipment, and other operations that potentially could affect the environment, health and safety. Some of our facilities have been operating for many years, and were built before current environmental standards were imposed, and/or in areas that recently have become subject to residential and commercial development pressures. Failure to comply with current and future environmental, health and safety standards could result in the imposition of fines and penalties, and we have been subject to such sanctions from time to time. We are upgrading wastewater treatment facilities at a number of these locations, either pursuant to consent agreements with regulatory authorities or on a voluntary basis in anticipation of future permit requirements.
In the past, we have acquired businesses with operations such as pesticide and fertilizer production that involved greater use of hazardous materials and generation of more hazardous wastes than our current operations. While many of those operations have been sold or closed, some environmental laws impose strict and, in certain circumstances, joint and several liability for costs of investigation and remediation of contaminated sites on current and former owners and operators of the sites, and on persons who arranged for disposal of wastes at such sites. In addition, current owners or operators of such contaminated sites may seek to recover cleanup costs from us based on past operations or contractual indemnifications.
New environmental, health and safety requirements, stricter interpretations of existing requirements, or obligations related to the investigation or clean-up of contaminated sites, may materially affect our business or operations in the future.
JBS beneficially owns a majority of our common stock and has the ability to control the vote on most matters brought before the holders of our common stock.
JBS beneficially owns a majority of the shares and voting power of our common stock and is entitled to appoint a majority of the members of our board of directors. As a result, JBS will, subject to restrictions on its voting power and actions in a stockholders agreement between JBS and us and our organization documents, have the ability to control our management, policies and financing decisions, elect a majority of the members of our board of directors at the annual meeting and control the vote on most matters coming before the holders of our common stock.
Under the stockholders agreement between JBS and us, JBS has the ability to elect up to six members of our board of directors and the other holders of our common stock have the ability to elect up to three members of our board of directors. If the percentage of our outstanding common stock owned by JBS exceeds 80%, then JBS would have the ability to elect one additional member of our board of directors while the other holders of our common stock would have the ability to elect one less member of our board of directors.
Our operations are subject to general risks of litigation.
We are involved on an ongoing basis in litigation relating to alleged antitrust violations or arising in the ordinary course of business or otherwise. For example, between September 2, 2016 and October 13, 2016, ten purported class action lawsuits were brought against Pilgrim’s and 13 other producers by and on behalf of direct and indirect purchasers of broiler chickens. The complaints, which were filed with the U.S. District Court for the Northern District of Illinois, seek, among other relief, treble damages for an alleged conspiracy among defendants to reduce output and increase prices of broiler chickens from the period of January 2008 to the present. See “Item 3. Legal Proceedings.” Trends in litigation may include class actions involving consumers, shareholders, employees or injured persons, and claims relating to commercial, labor, employment, antitrust, securities or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty, and adverse litigation trends and outcomes could result material damages, which could adversely affect our financial condition and results of operations.
We depend on contract growers and independent producers to supply us with livestock.
We contract primarily with independent contract growers to raise the live chickens processed in our poultry operations. If we do not attract and maintain contracts with growers or maintain marketing and purchasing relationships with independent producers, our production operations could be negatively affected.
Changes in consumer preference could negatively impact our business.
The food industry in general is subject to changing consumer trends, demands and preferences. Trends within the food industry change often, and failure to identify and react to changes in these trends could lead to, among other things, reduced demand and price reductions for our products, and could have an adverse effect on our financial results.
The consolidation of customers could negatively impact our business.
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Our customers, such as supermarkets, warehouse clubs and food distributors, have consolidated in recent years, and consolidation is expected to continue throughout the U.S. and in other major markets. These consolidations have produced large, sophisticated customers with increased buying power who are more capable of operating with reduced inventories, opposing price increases, and demanding lower pricing, increased promotional programs and specifically tailored products. These customers also may use shelf space currently used for our products for their own private label products. Because of these trends, our volume growth could slow or we may need to lower prices or increase promotional spending for our products, any of which could adversely affect our financial results.
Interruptions in the proper functioning of information systems could disrupt operations and cause unanticipated increases in costs and/or decreases in revenues.
The proper functioning of our information systems is critical to the successful operation of our business. Although our information systems are protected with robust backup systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to natural disasters, power losses, unauthorized access, telecommunication failures, and other problems. In addition, certain software used by us is licensed from, and certain services related to our information systems are provided by, third parties who could choose to discontinue their relationship with us. If critical information systems fail or these systems or related software or services are otherwise unavailable, our ability to process orders, maintain proper levels of inventories, collect accounts receivable, pay expenses, and maintain the security of Company and customer data could be adversely affected. Disruptions or failures of, or security breaches with respect to, our information technology infrastructure could have a negative impact on our operations.
Our future financial and operating flexibility may be adversely affected by significant leverage.
On a consolidated basis, as of December 25, 2016, we had approximately $500.4 million in secured indebtedness, $523.3 million of unsecured indebtedness and had the ability to borrow approximately $682.6 million under our credit agreements. Significant amounts of cash flow will be necessary to make payments of interest and repay the principal amount of such indebtedness.
The degree to which we are leveraged could have important consequences because:
• | It could affect our ability to satisfy our obligations under our credit agreements; |
• | A substantial portion of our cash flow from operations is required to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes; |
• | Our ability to obtain additional financing and to fund working capital, capital expenditures and other general corporate requirements in the future may be impaired; |
• | We may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; |
• | Our flexibility in planning for, or reacting to, changes in our business may be limited; |
• | It may limit our ability to pursue acquisitions and sell assets; and |
• | It may make us more vulnerable in the event of a continued or new downturn in our business or the economy in general. |
Our ability to make payments on and to refinance our debt, including our credit facilities, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to various business factors (including, among others, the commodity prices of feed ingredients and chicken) and general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control.
There can be no assurance that we will be able to generate sufficient cash flow from operations or that future borrowings will be available under our credit facilities in an amount sufficient to enable us to pay our debt obligations, including obligations under our credit facilities, or to fund our other liquidity needs. We may need to refinance all or a portion of their debt on or before maturity. There can be no assurance that we will be able to refinance any of their debt on commercially reasonable terms or at all.
Impairment in the carrying value of goodwill could negatively affect our operating results.
We have a significant amount of goodwill on our Consolidated Balance Sheet. Under generally accepted accounting principles, goodwill must be evaluated for impairment annually or more frequently if events indicate it is warranted. If the carrying
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value of our reporting units exceeds their current fair value as determined based on the discounted future cash flows of the related business, the goodwill is considered impaired and is reduced to fair value by a non-cash charge to earnings. Events and conditions that could result in impairment in the value of our goodwill include changes in the industry in which we operate, particularly the impact of a downturn in the global economy or the economies of geographic regions or countries in which we operate, as well as competition, adverse changes in the regulatory environment, or other factors leading to reduction in expected long-term sales or profitability.
Media campaigns related to food production present risks.
Individuals or organizations can use social media platforms to publicize inappropriate or inaccurate stories or perceptions about the food production industry or our company. Such practices could cause damage to the reputations of our company and/or the food production industry in general. This damage could adversely affect our financial results.
There can be no assurance that GNP can be combined successfully with our business.
In evaluating the terms of our acquisition of GNP, we analyzed the respective businesses of Pilgrim’s Pride and GNP and made certain assumptions concerning their respective future operations. A principal assumption was that the acquisition will produce operating results better than those historically experienced or presently expected to be experienced in the future by us in the absence of the acquisition. There can be no assurance, however, that this assumption is correct or that the businesses of Pilgrim’s Pride and GNP will be successfully integrated in a timely manner.
Assumption of unknown liabilities in acquisitions may harm our financial condition and operating results.
Acquisitions may be structured in such a manner that would result in the assumption of unknown liabilities not disclosed by the seller or uncovered during pre-acquisition due diligence. For example, our acquisition of GNP was structured as an equity purchase in which we effectively assumed all of the liabilities of GNP including liabilities that may be unknown. Such unknown obligations and liabilities could harm our financial condition and operating results.
We may pursue additional opportunities to acquire complementary businesses, which could further increase leverage and debt service requirements and could adversely affect our financial situation if we fail to successfully integrate the acquired business.
We intend to continue to pursue selective acquisitions of complementary businesses in the future. Inherent in any future acquisitions are certain risks such as increasing leverage and debt service requirements and combining company cultures and facilities, which could have a material adverse effect on our operating results, particularly during the period immediately following such acquisitions. Additional debt or equity capital may be required to complete future acquisitions, and there can be no assurance that we will be able to raise the required capital. Furthermore, acquisitions involve a number of risks and challenges, including:
•Diversion of management’s attention;
•The need to integrate acquired operations;
•Potential loss of key employees and customers of the acquired companies;
•Lack of experience in operating in the geographical market of the acquired business; and
•An increase in our expenses and working capital requirements.
Any of these and other factors could adversely affect our ability to achieve anticipated cash flows at acquired operations or realize other anticipated benefits of acquisitions.
Item 1B. Unresolved Staff Comments
None.
16
Item 2. Properties
Operating Facilities
Our main operating facilities are as follows:
Operating | Idled | Capacity(a) | Unit of measure | Average Capacity Utilization(b) | |||||||||
Legacy Pilgrim’s Facilities: | |||||||||||||
U.S. Facilities | |||||||||||||
Fresh processing plants | 23 | 6 | 6.2 million | Birds per day | 91.0 | % | |||||||
Prepared foods cook plants | 4 | 3 | 463.2 million | Pounds per year | 65.3 | % | |||||||
Feed mills | 23 | 3 | 11.2 million | Tons per year | 82.0 | % | |||||||
Hatcheries | 29 | 3 | 2.1 billion | Eggs per year | 85.9 | % | |||||||
Rendering | 4 | 2 | 374,211 | Tons per year | 72.2 | % | |||||||
Pet food processing | 3 | — | 77,651 | Tons per year | 62.7 | % | |||||||
Freezers | 1 | 1 | 125,000 | Square feet | N/A | ||||||||
Puerto Rico Facilities | |||||||||||||
Fresh processing plant | 1 | — | 0.1 million | Birds per day | 102.3 | % | |||||||
Feed mill | 1 | — | 0.1 million | Tons per year | 97.1 | % | |||||||
Hatchery | 1 | — | 27.0 million | Eggs per year | 78.4 | % | |||||||
Rendering | 1 | — | 8,050 | Tons per year | 57.5 | % | |||||||
Distribution center | 1 | — | N/A | N/A | |||||||||
Mexico Facilities | |||||||||||||
Fresh processing plants | 6 | — | 1.1 million | Birds per day | 87.1 | % | |||||||
Prepared foods cook plants | 2 | — | 54.4 million | Kilograms per year | 66.7 | % | |||||||
Feed mills | 8 | — | 2.3 million | Tons per year | 79.5 | % | |||||||
Hatcheries | 9 | — | 500.8 million | Eggs per year | 94.6 | % | |||||||
Rendering | 3 | — | 54,240 | Tons per year | 70.7 | % | |||||||
Distribution centers | 19 | — | N/A | N/A | |||||||||
GNP Facilities: | |||||||||||||
Fresh processing plants | 2 | — | 0.4 million | Birds per day | 100.0% | ||||||||
Further processing plant | 1 | — | 47.0 million | Pounds per year | N/A | ||||||||
Feed mills | 2 | — | 0.7 million | Tons per year | 78.9% | ||||||||
Hatcheries | 2 | — | 160.5 million | Eggs per year | 79.5% | ||||||||
Grain elevator | 1 | — | 4.0 million | Bushels put through per year | 100.0% | ||||||||
(a) | Capacity and utilization numbers do not include idled facilities. |
Other Facilities and Information
In the U.S, our corporate offices share a building with JBS in Greeley, Colorado. We own a building in Richardson, Texas, which houses our computer data center. We also own office buildings in Broadway, Virginia, and Pittsburg, Texas, which house additional administrative, sales and marketing, research and development, and other support activities. We lease building space in St. Cloud, Minnesota, which houses GNP administrative, sales and marketing, and other support activities. We also lease office buildings in Bentonville, Arkansas and Cincinnati, Ohio for members of our sales team and building space in Carrollton, Texas, which houses a second computer data center.
In Mexico, we own an office building in Gómez Palacio, Durango and lease an office building in Santiago de Querétaro, Querétaro, both of which house our Mexican administrative functions. We also lease office space in Mexico City that houses our Mexican marketing office.
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Most of our property, plant and equipment are pledged as collateral on our credit facilities. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
18
Item 3. Legal Proceedings
Tax Claims and Proceedings
In 2009, the IRS asserted claims against the Company in the Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”) totaling $74.7 million. Following a series of objections, motions and opposition filed by both parties with the Bankruptcy Court, the Company worked with the IRS through the normal processes and procedures that are available to resolve the IRS’ claims. On December 12, 2012, the Company entered into two Stipulation of Settled Issues agreements with the IRS (the “Stipulations”). The first Stipulation related to the Company’s 2003, 2005, and 2007 tax years and resolved all of the material issues in the case. The second Stipulation related to the Company as the successor in interest to Gold Kist Inc. (“Gold Kist”) for the tax years ended June 30, 2005 and September 30, 2005, and resolved all substantive issues in the case. These Stipulations accounted for approximately $29.3 million of the claims and should result in no additional tax due. The Company is currently working with the IRS to finalize the complete tax calculations associated with the Stipulations.
Other Claims and Proceedings
Between September 2, 2016 and October 13, 2016, ten purported class action lawsuits were filed with the U.S. District Court for the Northern District of Illinois against Pilgrim’s and 13 other producers by and on behalf of direct and indirect purchasers of broiler chickens. On October 5, 2016, the Court consolidated the complaints, for pretrial purposes, into actions on behalf of three different putative classes: direct purchasers, indirect purchasers/consumers and commercial/institutional indirect purchasers. These actions are now styled In re Broiler Chicken Antitrust Litigation. The current operative complaints filed on behalf of each putative class allege, among other things, a conspiracy among defendants to reduce output and fix, increase, maintain, and stabilize the prices of broiler chickens in violation of the U.S. antitrust laws from the period of January 2008 to the present. The complaints on behalf of putative classes of indirect purchasers also include causes of action under various state consumer protection laws, unfair competition laws and unjust enrichment common laws. The complaints seek treble damages, injunctive relief, pre- and post-judgment interest, costs, and attorneys’ fees on behalf of the putative class. Pilgrim’s has filed motions to dismiss these actions.
On October 10, 2016, Patrick Hogan, acting on behalf of himself and a putative class of persons who purchased shares of Pilgrim’s stock between February 21, 2014 and October 6, 2016, filed a class action complaint in the U.S. District Court for the District of Colorado against Pilgrim’s and its named executive officers. The complaint alleges, among other things, that Pilgrim’s SEC filings contained statements that were rendered materially false and misleading by Pilgrim’s failure to disclose that (i) the company colluded with several of its industry peers to fix prices in the broiler-chicken market as alleged in the In re Broiler Chicken Antitrust Litigation, (ii) its conduct constituted a violation of federal antitrust laws, (iii) Pilgrim’s revenues during the class period were the result of illegal conduct and (iv) that Pilgrim’s lacked effective internal control over financial reporting, as well as stating that Pilgrim’s industry was anticompetitive. The Court has not yet appointed a lead plaintiff and no consolidated class action complaint has been filed.
On January 27, 2017, a purported class action on behalf of broiler chicken farmers was brought against Pilgrim’s and 10 other producers in the Eastern District of Oklahoma, alleging, among other things, a conspiracy among the defendants to reduce competition in the domestic market for broiler chickens. Plaintiffs’ allegations are similar to those raised in the In re Broiler Chicken Antitrust Litigation, and seek, among other relief, treble damages.
We believe we have strong defenses in response to the plaintiffs’ allegations and intend to contest these actions vigorously. We cannot predict the outcome of these actions nor when they will be resolved. If the plaintiffs were to prevail in any of these actions, we could be liable for damages, which could be material and could adversely affect our financial condition or results of operations.
The Company is subject to various other legal proceedings and claims, which arise in the ordinary course of its business. In the opinion of management, the aggregate amount of ultimate liability with respect to these actions will not materially affect the Company’s financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “PPC.” High and low closing prices of the Company’s common stock for 2016 and 2015 are as follows:
2016 Prices | 2015 Prices | |||||||||||||||
Quarter | High | Low | High | Low | ||||||||||||
First | $ | 25.15 | $ | 21.00 | $ | 37.02 | $ | 23.55 | ||||||||
Second | 27.50 | 23.48 | 27.00 | 22.59 | ||||||||||||
Third | 25.82 | 20.80 | 23.39 | 19.41 | ||||||||||||
Fourth | 21.84 | 17.38 | 22.68 | 18.14 | ||||||||||||
Holders
The Company estimates there were approximately 21,600 holders (including individual participants in security position listings) of the Company’s common stock as of February 8, 2017.
Dividends
On May 18, 2016, the Company paid a special cash dividend from retained earnings of approximately $700 million, or $2.75 per share, to stockholders of record as of May 10, 2016. On February 17, 2015, the Company paid a special cash dividend from retained earnings of approximately $1.5 billion, or $5.77 per share, to stockholders of record as of January 30, 2015. The Company used proceeds from the U.S. Credit Facility, along with cash on hand, to fund both special cash dividends.
Notwithstanding the special cash dividends paid on May 18, 2016 and February 17, 2015, the Company has no current intention to pay any further dividends to its stockholders. Any change in dividend policy will depend upon future conditions, including earnings and financial condition, general business conditions, any applicable contractual limitations and other factors deemed relevant by our board of directors in its discretion.
Both the U.S. Credit Facility and the Indenture governing the Senior Notes restrict, but do not prohibit, the Company from declaring dividends.
Issuer Purchases of Equity Securities in 2016
On July 28, 2015, the Company’s Board of Directors approved a $150.0 million share repurchase authorization. The Company plans to repurchase shares through various means, which may include but are not limited to open market purchases, privately negotiated transactions, the use of derivative instruments and/or accelerated share repurchase programs. The share repurchase program was originally scheduled to expire on July 27, 2016. On February 10, 2016, the Company’s Board of Directors approved an increase of the share repurchase authorization to $300.0 million and an extension of the expiration date to February 9, 2017. The extent to which the Company repurchases its shares and the timing of such repurchases will vary and depend upon market conditions and other corporate considerations, as determined by the Company’s management team. The Company reserves the right to limit or terminate the repurchase program at any time without notice. For the fifty-two weeks ended December 25, 2016, the Company repurchased 5.8 million shares of its common stock under the program for an aggregate cost of $117.9 million and an average price of $20.42 per share. Since the inception of the program, the Company has repurchased 10.6 million shares of its common stock under the program for an aggregate cost of $217.1 million and an average price of $20.41 per share. Set forth below is information regarding our stock repurchases for the thirteen weeks ended December 25, 2016.
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Issuer Purchases of Equity Securities | ||||||||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of the Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||
September 26, 2016 through October 23, 2016 | 2,061,986 | $ | 20.80 | 2,061,986 | $ | 142,211,182 | ||||||||
October 24, 2016 through November 27, 2016 | 2,100,172 | 20.08 | 2,100,172 | 100,032,966 | ||||||||||
November 28, 2016 through December 25, 2016 | 686,700 | 18.17 | 686,700 | 87,554,118 | ||||||||||
Total | 4,848,858 | $ | 20.12 | 4,848,858 | $ | 87,554,118 | ||||||||
Total Return on Registrant’s Common Equity
The graph below matches the cumulative 5-Year total return of holders of Pilgrim’s Pride Corporation’s common stock with the cumulative total returns of the Russell 2000 index and a customized peer group of three companies that includes: Hormel Foods Corp, Sanderson Farms Inc. and Tyson Foods Inc. The graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on 12/25/2011 and tracks it through 12/25/2016.
The graph covers the period from December 25, 2011 to December 25, 2016, and reflects the performance of the Company’s single class of common stock. The stock price performance represented by this graph is not necessarily indicative of future stock performance.
21
12/25/11 | 06/30/12 | 12/30/12 | 06/30/13 | 12/29/13 | 06/30/14 | 12/28/14 | 06/30/15 | 12/27/15 | 06/30/16 | 12/25/16 | |||||||||||||||||||||||||||||||||
PPC | $ | 100.00 | $ | 119.37 | $ | 120.03 | $ | 249.42 | $ | 274.96 | $ | 456.76 | $ | 568.78 | $ | 462.35 | $ | 452.69 | $ | 569.84 | $ | 425.37 | |||||||||||||||||||||
Russell 2000 | 100.00 | 108.53 | 116.35 | 134.80 | 161.52 | 166.67 | 169.43 | 177.48 | 161.95 | 165.53 | 196.45 | ||||||||||||||||||||||||||||||||
Peer Group | 100.00 | 97.99 | 100.34 | 131.23 | 159.64 | 180.84 | 196.51 | 207.23 | 277.76 | 294.97 | 284.30 | ||||||||||||||||||||||||||||||||
Item 6. Selected Financial Data
(In thousands, except ratios and per share data) | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Operating Results Data: | |||||||||||||||||||
Net sales | $ | 7,931,123 | $ | 8,180,104 | $ | 8,583,365 | $ | 8,411,148 | $ | 8,121,382 | |||||||||
Gross profit(a) | 914,360 | 1,254,377 | 1,393,995 | 845,439 | 435,832 | ||||||||||||||
Operating income(a) | 713,510 | 1,044,891 | 1,203,115 | 658,863 | 250,342 | ||||||||||||||
Interest expense, net | 44,197 | 33,875 | 77,271 | 84,881 | 103,529 | ||||||||||||||
Loss on early extinguishment of debt | — | — | — | — | — | ||||||||||||||
Income (loss) before income taxes(a) | 672,635 | 992,758 | 1,102,391 | 573,940 | 153,062 | ||||||||||||||
Income tax expense (benefit)(b) | 232,906 | 346,796 | 390,953 | 24,227 | (20,980 | ) | |||||||||||||
Net income(a) | 439,729 | 645,962 | 711,438 | 549,713 | 174,042 | ||||||||||||||
Net income (loss) attributable to noncontrolling interest | (803 | ) | 48 | (210 | ) | 158 | (192 | ) | |||||||||||
Net income attributable to Pilgrim’s Pride Corporation(a) | 440,532 | 645,914 | 711,648 | 549,555 | 174,234 | ||||||||||||||
Ratio of earnings to fixed charges(c) | 12.25x | 20.63x | 12.96x | 7.47x | 2.34x | ||||||||||||||
Per Common Diluted Share Data: | |||||||||||||||||||
Net income attributable to Pilgrim’s Pride Corporation | $ | 1.73 | $ | 2.50 | $ | 2.74 | $ | 2.12 | $ | 0.70 | |||||||||
Adjusted net income attributable to Pilgrim’s Pride Corporation(d) | 1.75 | 2.60 | 2.96 | 2.14 | 0.68 | ||||||||||||||
Book value | 3.53 | 4.88 | 8.46 | 5.75 | 3.50 | ||||||||||||||
Balance Sheet Summary: | |||||||||||||||||||
Working capital | 454,067 | 899,264 | 1,138,177 | 845,584 | 812,551 | ||||||||||||||
Total assets | 3,008,218 | 3,318,443 | 3,091,718 | 3,172,402 | 2,913,869 | ||||||||||||||
Notes payable and current maturities of long-term debt | 94 | 28,812 | 262 | 410,234 | 15,886 | ||||||||||||||
Long-term debt, less current maturities | 1,011,858 | 985,509 | 3,980 | 501,999 | 1,148,870 | ||||||||||||||
Total stockholders’ equity | 896,747 | 1,261,810 | 2,196,801 | 1,492,602 | 908,997 | ||||||||||||||
Cash Flow Summary: | |||||||||||||||||||
Cash flows from operating activities | 755,483 | 976,828 | 1,066,692 | 878,533 | 199,624 | ||||||||||||||
Depreciation and amortization(e) | 180,515 | 158,975 | 155,824 | 150,523 | 147,414 | ||||||||||||||
Impairment of goodwill and other assets | 790 | 4,813 | — | 4,004 | 2,770 | ||||||||||||||
Purchases of investment securities | — | — | (55,100 | ) | (96,902 | ) | (162 | ) | |||||||||||
Proceeds from sale or maturity of investment securities | — | — | 152,050 | — | 688 | ||||||||||||||
Acquisitions of property, plant and equipment | (272,467 | ) | (175,764 | ) | (171,443 | ) | (116,223 | ) | (90,327 | ) | |||||||||
Purchase of acquired business, net of cash acquired | — | (373,532 | ) | — | — | — | |||||||||||||
Cash flows from financing activities | (813,131 | ) | (578,647 | ) | (905,595 | ) | (250,214 | ) | (111,029 | ) | |||||||||
Other Data: | |||||||||||||||||||
EBITDA(f)(g) | 893,515 | 1,181,970 | 1,321,774 | 800,398 | 393,942 | ||||||||||||||
Adjusted EBITDA(f)(g) | 899,284 | 1,213,467 | 1,352,249 | 810,316 | 397,773 | ||||||||||||||
Key Indicators (as a percent of net sales): | |||||||||||||||||||
Gross profit(a) | 11.5 | % | 15.3 | % | 16.2 | % | 10.1 | % | 5.4 | % | |||||||||
Selling, general and administrative expenses | 2.5 | % | 2.5 | % | 2.2 | % | 2.2 | % | 2.2 | % | |||||||||
Operating income(a) | 9.0 | % | 12.8 | % | 14.0 | % | 7.8 | % | 3.1 | % | |||||||||
Interest expense, net | 0.6 | % | 0.4 | % | 0.9 | % | 1.0 | % | 1.3 | % | |||||||||
Net income(a) | 5.6 | % | 7.9 | % | 8.3 | % | 6.5 | % | 2.1 | % | |||||||||
(a) | Operating income and net income include the following restructuring charges for each of the years presented: |
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||
(In millions) | ||||||||||||||
Additional effect on operating income: | ||||||||||||||
Administrative restructuring charges | (1.1 | ) | (5.6 | ) | (2.3 | ) | (5.7 | ) | (8.4 | ) | ||||
22
(b) | Income tax expense in 2016, 2015 and 2014 resulted primarily from expense recorded on our year-to-date income. Income tax expense in 2013 resulted primarily from expense recorded on our year-to-date income offset by a decrease in valuation allowance as a result of year-to-date earnings. Income tax benefit in 2012 resulted primarily from a decrease in valuation allowance and a decrease in reserves for unrecognized tax benefits. |
(c) | For purposes of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest (including capitalized interest) on all indebtedness, amortization of capitalized financing costs and that portion of rental expense that we believe to be representative of interest. |
(d) | Adjusted net income attributable to Pilgrim’s Pride Corporation per common diluted share is presented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of results prepared in conformity with GAAP, to compare the performance of companies. Adjusted net income attributable to Pilgrim’s Pride Corporation per common diluted share is not a measurement of financial performance under GAAP, has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP. It does not reflect the impact of earnings or charges resulting from matters we consider to not be indicative of our ongoing operations. |
A reconciliation of net income attributable to Pilgrim’s Pride Corporation per common diluted share to adjusted net income attributable to Pilgrim’s Pride Corporation per common diluted share is as follows:
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(In thousands except per share data) | |||||||||||||||||||
Net income attributable to Pilgrim’s Pride Corporation | $ | 440,532 | $ | 645,914 | $ | 711,648 | $ | 549,555 | $ | 174,234 | |||||||||
Loss on early extinguishment of debt | — | 1,470 | 29,475 | — | — | ||||||||||||||
Foreign currency transaction losses (gains) | 3,897 | 25,940 | 27,979 | 4,415 | (4,810 | ) | |||||||||||||
Adjusted net income attributable to Pilgrim’s Pride Corporation | 444,429 | 673,324 | 769,102 | 553,970 | 169,424 | ||||||||||||||
Weighted average diluted shares of common stock outstanding | 254,126 | 258,676 | 259,471 | 259,241 | 250,216 | ||||||||||||||
Adjusted net income attributable to Pilgrim’s Pride Corporation per common diluted share | $ | 1.75 | $ | 2.60 | $ | 2.96 | $ | 2.14 | $ | 0.68 | |||||||||
(e) | Includes amortization of capitalized financing costs of approximately $3.8 million, $3.6 million, $13.7 million, $9.3 million and $10.1 million in 2016, 2015, 2014, 2013, and 2012, respectively. |
(f) | “EBITDA” is defined as the sum of net income (loss) plus interest, taxes, depreciation and amortization. “Adjusted EBITDA” is calculated by adding to EBITDA certain items of expense and deducting from EBITDA certain items of income that we believe are not indicative of our ongoing operating performance consisting of: (i) net income (loss) attributable to noncontrolling interests in the period from 2012 through 2016, (ii) restructuring charges in the period from 2012 through 2016 and (iii) foreign currency transaction losses (gains) in the period from 2012 through 2016. EBITDA is presented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of results prepared in conformity with GAAP, to compare the performance of companies. We believe investors would be interested in our Adjusted EBITDA because this is how our management analyzes EBITDA applicable to continuing operations. We also believe that Adjusted EBITDA, in combination with our financial results calculated in accordance with GAAP, provides investors with additional perspective regarding the impact of certain significant items on EBITDA and facilitates a more direct comparison of its performance with its competitors. EBITDA and Adjusted EBITDA are not measurements of financial performance under GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under GAAP. Some of the limitations of these measures are: |
• | They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments; |
• | They do not reflect changes in, or cash requirements for, our working capital needs; |
• | They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; |
• | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; |
• | They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; |
• | EBITDA does not reflect the impact of earnings or charges attributable to noncontrolling interests; |
• | They do not reflect the impact of earnings or charges resulting from matters we consider to not be indicative of our ongoing operations; and |
• | They do not reflect limitations on or costs related to transferring earnings from our subsidiaries to us. |
(g) | In addition, other companies in our industry may calculate these measures differently than we do, limiting their usefulness as a comparative measure. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with GAAP. You should compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only on a supplemental basis. |
23
A reconciliation of net income to EBITDA and Adjusted EBITDA is as follows:
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Net income | $ | 439,729 | $ | 645,962 | $ | 711,438 | $ | 549,713 | $ | 174,042 | |||||||||
Add: | |||||||||||||||||||
Interest expense, net (a) | 44,197 | 33,875 | 77,271 | 84,881 | 103,529 | ||||||||||||||
Income tax expense (benefit) | 232,906 | 346,796 | 390,953 | 24,227 | (20,980 | ) | |||||||||||||
Depreciation and amortization (b) | 180,515 | 158,975 | 155,824 | 150,884 | 147,414 | ||||||||||||||
Minus: | |||||||||||||||||||
Amortization of capitalized financing costs(c) | 3,832 | 3,638 | 13,712 | 9,307 | 10,063 | ||||||||||||||
EBITDA | 893,515 | 1,181,970 | 1,321,774 | 800,398 | 393,942 | ||||||||||||||
Add: | |||||||||||||||||||
Foreign currency transaction losses (gains)(d) | 3,897 | 25,940 | 27,979 | 4,415 | (4,810 | ) | |||||||||||||
Restructuring charges(e) | 1,069 | 5,605 | 2,286 | 5,661 | 8,449 | ||||||||||||||
Minus: | |||||||||||||||||||
Net income (loss) attributable to noncontrolling interest | (803 | ) | 48 | (210 | ) | 158 | (192 | ) | |||||||||||
Adjusted EBITDA | $ | 899,284 | $ | 1,213,467 | $ | 1,352,249 | $ | 810,316 | $ | 397,773 | |||||||||
(a) | Interest expense, net, consists of interest expense less interest income. |
(b) | 2013 includes $0.4 million of asset impairments not included in restructuring charges. |
(c) | Amortization of capitalized financing costs is included in both interest expense, net and depreciation and amortization above. |
(d) | The Company measures the financial statements of its Mexico subsidiaries as if the U.S. dollar were the functional currency. Accordingly, we remeasure assets and liabilities, other than nonmonetary assets, of the Mexico subsidiaries at current exchange rates. We remeasure nonmonetary assets using the historical exchange rate in effect on the date of each asset’s acquisition. Currency exchange gains or losses resulting from these remeasurements are included in the line item Foreign currency transaction losses (gains) in the Consolidated Statements of Income. |
(e) | Restructuring charges includes tangible asset impairment, severance and change-in-control compensation costs, and losses incurred on both the sale of unneeded broiler eggs and flock depletion. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Company
We are one of the largest chicken producers in the world, with operations in the U.S., Mexico and Puerto Rico. We are primarily engaged in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products to retailers, distributors and foodservice operators. We offer a wide range of products to our customers through strong national and international distribution channels. Pilgrim’s fresh chicken products consist of refrigerated (non-frozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. The Company’s prepared chicken products include fully cooked, ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated.
We market our balanced portfolio of fresh, prepared and value-added chicken products to a diverse set of over 5,000 customers across the U.S., Mexico and in approximately 80 other countries, with no single one accounting for more than 10% of total sales. We have become a valuable partner to our customers and a recognized industry leader by consistently providing high-quality products and services designed to meet their needs and enhance their business. Our sales efforts are largely targeted towards the foodservice industry, principally chain restaurants and food processors such as Chick-fil-A®, distributors such as US Foods and Sysco® and retail customers, including grocery store chains and wholesale clubs such as Kroger®, Costco®, Publix®, and H‑E-B®.
As a vertically integrated company, we control every phase of the production process, which helps us better manage food safety and quality, as well as more effectively control margins and improve customer service. We operate feed mills, hatcheries, processing plants and distribution centers in 12 U.S. states, Puerto Rico and Mexico. Our plants are strategically located to ensure that customers timely receive fresh products. With our global network of approximately 4,045 growers, 32 feed mills, 39 hatcheries, 30 processing plants, six prepared foods cook plants, 20 distribution centers, eight rendering facilities and three pet food plants, we believe we are well positioned to supply the growing demand for our products.
We are one of the largest, and we believe one of the most efficient, producers and sellers of chicken in Mexico. Our presence in Mexico provides access to a market with growing demand and has enabled us to leverage our operational strengths within the region. The market for chicken products in Mexico is still developing with most sales attributed to fresh, commodity-oriented, market price-based business. We believe our Mexico business is well positioned to continue benefiting from these trends in the Mexican consumer market. Additionally, we are an important player in the live market, which accounted for approximately 35% of the industry’s chicken sales in Mexico in 2016.
As of December 25, 2016, we had approximately 39,600 employees and the capacity to process more than 36.7 million birds per week for a total of more than 10.7 billion pounds of live chicken annually. In 2016, we produced 8.1 billion pounds of chicken products, generating approximately $7.9 billion in net revenues and approximately $440.5 million in net income attributable to Pilgrim’s.
We operate on a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. Any reference we make to a particular year (for example, 2016) in this report applies to our fiscal year and not the calendar year.
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Executive Summary
We reported net income attributable to Pilgrim’s Pride Corporation of $440.5 million, or $1.73 per diluted common share, for 2016. These operating results included gross profit of $914.4 million. During 2016, we generated $755.5 million of cash from operations.
Market prices for feed ingredients remain volatile. Consequently, there can be no assurance that our feed ingredients prices will not increase materially and that such increases would not negatively impact our financial position, results of operations and cash flow. The following table compares the highest and lowest prices reached on nearby futures for one bushel of corn and one ton of soybean meal during the current year and previous two years:
Corn | Soybean Meal | ||||||||||||||
Highest Price | Lowest Price | Highest Price | Lowest Price | ||||||||||||
2016: | |||||||||||||||
Fourth Quarter | $ | 3.67 | $ | 3.39 | $ | 330.80 | $ | 299.60 | |||||||
Third Quarter | 3.94 | 3.16 | 401.00 | 302.80 | |||||||||||
Second Quarter | 4.38 | 3.52 | 418.30 | 266.80 | |||||||||||
First Quarter | 3.73 | 3.52 | 275.30 | 257.20 | |||||||||||
2015: | |||||||||||||||
Fourth Quarter | 3.98 | 3.58 | 320.70 | 269.00 | |||||||||||
Third Quarter | 4.34 | 3.48 | 374.80 | 302.40 | |||||||||||
Second Quarter | 4.10 | 3.53 | 326.40 | 286.50 | |||||||||||
First Quarter | 4.13 | 3.70 | 377.40 | 317.50 | |||||||||||
2014: | |||||||||||||||
Fourth Quarter | 4.14 | 3.21 | 411.60 | 304.60 | |||||||||||
Third Quarter | 4.24 | 3.23 | 464.20 | 307.20 | |||||||||||
Second Quarter | 5.16 | 4.39 | 506.00 | 448.40 | |||||||||||
First Quarter | 4.92 | 4.12 | 470.50 | 416.50 | |||||||||||
We purchase derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our anticipated consumption of commodity inputs such as corn, soybean meal, sorghum, wheat, soybean oil and natural gas. We will sometimes take a short position on a derivative instrument to minimize the impact of a commodity's price volatility on our operating results. We will also occasionally purchase derivative financial instruments in an attempt to mitigate currency exchange rate exposure related to the financial statements of our Mexico operations that are denominated in Mexican pesos. We do not designate derivative financial instruments that we purchase to mitigate commodity purchase or currency exchange rate exposures as cash flow hedges; therefore, we recognize changes in the fair value of these derivative financial instruments immediately in earnings. We recognized $4.3 million in net losses related to changes in the fair value of its derivative financial instruments during 2016. We recognized $21.8 million and $16.1 million in net gains related to changes in the fair value of its derivative financial instruments during 2015 and 2014, respectively.
Although changes in the market price paid for feed ingredients impact cash outlays at the time we purchase the ingredients, such changes do not immediately impact cost of sales. The cost of feed ingredients is recognized in cost of sales, on a first-in-first-out basis, at the same time that the sales of the chickens that consume the feed grains are recognized. Thus, there is a lag between the time cash is paid for feed ingredients and the time the cost of such feed ingredients is reported in cost of goods sold. For example, corn delivered to a feed mill and paid for one week might be used to manufacture feed the following week. However, the chickens that eat that feed might not be processed and sold for another 42 to 63 days, and only at that time will the costs of the feed consumed by the chicken become included in cost of goods sold.
Commodities such as corn, soybean meal, sorghum, wheat and soybean oil are actively traded through various exchanges with future market prices quoted on a daily basis. These quoted market prices, although a good indicator of the commodity's base price, do not represent the final price for which we can purchase these commodities. There are several components in addition to the quoted market price, such as freight, storage and seller premiums, that are included in the final price that we pay for grain. Although changes in quoted market prices may be a good indicator of the commodity’s base price, the components mentioned above may have a significant impact on the total change in grain costs recognized from period to period.
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Market prices for chicken products are currently at levels sufficient to offset the costs of feed ingredients. However, there can be no assurance that chicken prices will not decrease due to such factors as competition from other proteins and substitutions by consumers of non-protein foods because of uncertainty surrounding the general economy and unemployment.
Recent Developments
Special Cash Dividend. On May 18, 2016, the Company paid a special cash dividend from retained earnings of approximately $700.0 million, or $2.75 per share, to stockholders of record on May 10, 2016. The Company used proceeds from the U.S. Credit Facility, along with cash on hand, to fund the special cash dividend. For additional information, see “Note 14. Stockholders’ Equity - Special Cash Dividends” of our Consolidated Financial Statements included in this annual report.
Prepared Foods Recall and Production. During April and May 2016, we ordered recalls of approximately 5.6 million pounds of cooked chicken products after consumers and federal meat inspectors found contamination by certain foreign materials, including wood, plastic, rubber and metal, at one of our prepared foods facilities. At this time, there have been no confirmed reports of adverse reactions from the consumption of the recalled products. We are still assessing the full impact of this recall, and we have not included any of these expenses in our 2016 results. To date, the recall and its direct effects have not had a material impact on our financial position or results of operations. Unrelated to the recall, we also made operational improvements in one of our prepared foods facilities that negatively impacted production during 2016, but positioned that facility for future long-term growth.
GNP Acquisition. On January 6, 2017, we acquired 100% of the membership interests of GNP from Maschhoff Family Foods, LLC for a cash purchase price of $350 million, subject to customary working capital adjustments. GNP is a vertically integrated poultry business based in St. Cloud, Minnesota. The acquired business has a production capacity of 2.1 million birds per five-day work week in its three plants and currently employs approximately 1,775 people. This acquisition further strengthens our strategic position in the U.S. chicken market.
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Business Segment and Geographic Reporting
We operate in one reportable business segment, as a producer and seller of chicken products we either produce or purchase for resale in the U.S., Puerto Rico and Mexico. We conduct separate operations in the U.S., Puerto Rico and Mexico; however, for geographic reporting purposes, we include Puerto Rico within our U.S. operations. Corporate expenses are allocated to Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. For additional information, see “Note 19. Business Segment and Geographic Reporting” of our Consolidated Financial Statements included in this annual report.
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Results of Operations
2016 Compared to 2015
Net sales. Net sales for 2016 decreased $249.0 million, or 3.0%, from 2015. The following table provides additional information regarding net sales:
Change from 2015 | ||||||||||||
Source of net sales | 2016 | Amount | Percent | |||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 6,671,403 | $ | (471,951 | ) | (6.6 | )% | (a) | ||||
Mexico | 1,259,720 | 222,970 | 21.5 | % | (b) | |||||||
Total net sales | $ | 7,931,123 | $ | (248,981 | ) | (3.0 | )% | |||||
(a) | U.S. net sales generated in 2016 decreased $472.0 million, or 6.6%, from U.S. net sales generated in 2015 primarily because of decreases in both sales volume and net sales per pound. The decrease in sales volume, which resulted from the unfavorable impact that ongoing operational improvements in one of our prepared foods facilities had on production during the period and lower product demand from our commercial customers, contributed $300.5 million, or 4.2 percentage points, to the net sales decrease. Lower net sales per pound, which resulted primarily from lower market prices, contributed $171.4 million, or 2.3 percentage points, to the net sales decrease. Included in U.S. sales generated during 2016 and 2015 were sales to JBS USA Food Company totaling $16.5 million and $21.7 million, respectively. |
(b) | Mexico sales generated in 2016 increased $223.0 million, or 21.5%, from Mexico sales generated in 2015, primarily because of an increase in sales volume and an increase in net sales per pound partially offset by the impact of foreign currency translation. The increase in sales volume contributed $310.6 million, or 30.0 percentage points, to the increase in Mexico net sales. The increase in net sales per pound contributed $133.7 million, or 12.9 percentage points, to the increase in Mexico net sales. The increases to net sales was partially offset by the impact of foreign currency translation, which contributed $221.3 million, or 21.3 percentage points, to the decrease in Mexico net sales. Other factors affecting the increase in Mexico net sales were individually immaterial. |
Gross profit. Gross profit decreased by $340.0 million, or 27.1%, from $1.3 billion generated in 2015 to $914.4 million generated in 2016. The following tables provide gross profit information:
Change from 2015 | Percent of Net Sales | |||||||||||||||||
Components of gross profit | 2016 | Amount | Percent | 2016 | 2015 | |||||||||||||
(In thousands, except percent data) | ||||||||||||||||||
Net sales | $ | 7,931,123 | $ | (248,981 | ) | (3.0 | )% | 100.0 | % | 100.0 | % | |||||||
Cost of sales | 7,016,763 | 91,036 | 1.3 | % | 88.5 | % | 84.7 | % | (a)(b) | |||||||||
Gross profit | $ | 914,360 | $ | (340,017 | ) | (27.1 | )% | 11.5 | % | 15.3 | % | |||||||
Sources of gross profit | 2016 | Change from 2015 | ||||||||||
Amount | Percent | |||||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 742,085 | $ | (384,776 | ) | (34.1 | )% | |||||
Mexico | 172,180 | 44,759 | 35.1 | % | ||||||||
Elimination | 95 | — | — | % | (c) | |||||||
Total gross profit | $ | 914,360 | $ | (340,017 | ) | (27.1 | )% | |||||
Sources of cost of sales | 2016 | Change from 2015 | ||||||||||
Amount | Percent | |||||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 5,929,318 | $ | (87,175 | ) | (1.4 | )% | (a) | ||||
Mexico | 1,087,540 | 178,211 | 19.6 | % | (b) | |||||||
Elimination | (95 | ) | — | — | % | (c) | ||||||
Total cost of sales | $ | 7,016,763 | $ | 91,036 | 1.3 | % | ||||||
(a) | Cost of sales incurred by our U.S. operations in 2016 decreased $87.2 million, or 1.4%, from cost of sales incurred by our U.S. operations in 2015. Cost of sales primarily decreased because of lower sales volume, an $81.5 million decrease in feed ingredients costs and a $17.9 million decrease in freight and storage costs. These costs were partially offset by a $27.0 million increase in contract labor costs, derivative losses of $5.0 million in 2016 compared to derivative gains of $21.3 million in 2015, a $21.3 million increase in wages and benefits, and an $18.1 million increase in co-pack labor costs. Other factors affecting U.S. cost of sales were individually immaterial. |
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(b) | Cost of sales incurred by the Mexico operations during 2016 increased $178.2 million, or 19.6%, from cost of sales incurred by the Mexico operations during 2015 primarily because of increased sales volume and a $33.3 million increase in feed ingredient costs. Mexico cost of sales also increased because of a $22.9 million increase in wages and benefits, a $11.9 million increase in freight and storage costs, and a $11.2 increase in in depreciation and amortization costs. These costs were partially offset by the impact of foreign currency translation which contributed $191.9 million, or 21.1 percentage points, to the decrease in cost of sales incurred by our Mexico operations. Other factors affecting cost of sales were individually immaterial. |
(c) | Our Consolidated Financial Statements include the accounts of our company and its majority owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation. |
Operating income. Operating income decreased $331.4 million, or 31.7%, from $949.6 billion generated for 2015 to $572.5 million generated for 2016. The following tables provide operating income information:
Change from 2015 | Percent of Net Sales | |||||||||||||||||
Components of operating income | 2016 | Amount | Percent | 2016 | 2015 | |||||||||||||
(In thousands, except percent data) | ||||||||||||||||||
Gross profit | $ | 914,360 | $ | (340,017 | ) | (27.1 | )% | 11.5 | % | 15.3 | % | |||||||
SG&A expenses | 199,781 | (4,100 | ) | (2.0 | )% | 2.5 | % | 2.5 | % | (a)(b) | ||||||||
Administrative restructuring charges | 1,069 | (4,536 | ) | (80.9 | )% | — | % | 0.1 | % | (c) | ||||||||
Operating income | $ | 713,510 | $ | (331,381 | ) | (31.7 | )% | 9.0 | % | 12.8 | % | |||||||
Change from 2015 | ||||||||||||
Source of operating income | 2016 | Amount | Percent | |||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 572,558 | $ | (377,052 | ) | (39.7 | )% | |||||
Mexico | 140,857 | 45,671 | 48.0 | % | ||||||||
Elimination | 95 | — | — | % | (d) | |||||||
Total operating income | $ | 713,510 | $ | (331,381 | ) | (31.7 | )% | |||||
Sources of SG&A expenses | 2016 | Change from 2015 | ||||||||||
Amount | Percent | |||||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 168,457 | $ | (3,189 | ) | (1.9 | )% | (a) | ||||
Mexico | 31,324 | (911 | ) | (2.8 | )% | (b) | ||||||
Total SG&A expense | $ | 199,781 | $ | (4,100 | ) | (2.0 | )% | |||||
Sources of administrative restructuring charges | 2016 | Change from 2015 | ||||||||||
Amount | Percent | |||||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 1,069 | $ | (4,536 | ) | (80.9 | )% | (c) | ||||
Total administrative restructuring charges | $ | 1,069 | $ | (4,536 | ) | (80.9 | )% | |||||
(a) | SG&A expense incurred by the U.S. operations during 2016 decreased $3.2 million, or 1.9%, from SG&A expense incurred by the U.S. operations during 2015 primarily because of a $5.2 million decrease in brokerage expenses, a $2.6 million decrease in management fees charged for administrative functions shared with JBS USA Food Company Holdings, and a $2.0 million decrease in employee wages and benefits that were partially offset by a a $3.1 million increase in contract labor expenses, and a $2.6 million increase in professional fees expenses. Other factors affecting SG&A expense were individually immaterial. |
(b) | SG&A expense incurred by the Mexico operations during 2016 decreased $0.9 million, or 2.8%, from SG&A expense incurred by the Mexico operations during 2015 primarily because of a $15.0 million decrease in management fees charged for administrative functions shared with JBS USA Food Company Holdings, and a $2.6 million decrease in professional fees expenses. These decreases to SG&A expense were partially offset by a $15.9 increase in employee wages and benefits. Other factors affecting SG&A expense were individually immaterial. |
(c) | Administrative restructuring charges incurred by the U.S. operations during 2016 decreased $4.5 million, or 80.9%, from administrative restructuring charges incurred during 2015. During 2016, administrative restructuring charges represented impairment costs of $0.8 million related to assets held for sale in Texas and impairment costs of $0.3 million related to the sale of an asset in Louisiana. During 2015, administrative restructuring charges represented impairment costs of $4.8 million related to assets held for sale in Louisiana and Texas and a loss of $0.8 million related to the sale of a rendering plant in Arkansas. |
(d) | Our Consolidated Financial Statements include the accounts of both our company and its majority owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation. |
Interest expense. Consolidated interest expense increased 22.3% to $45.9 million in 2016 from $37.5 million in 2015, primarily because of an increase in the weighted average interest rate to 4.97% in 2016 from 4.02% in 2015 and an increase in
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average borrowings of $1.4 billion in 2016 from $933.6 million in 2015. As a percent of net sales, interest expense in 2016 and 2015 was 0.58% and 0.46%, respectively.
Income taxes. Our consolidated income tax expense in 2016 was $232.9 million, compared to income tax expense of $346.8 million in 2015. The decrease in income tax expense in 2016 resulted primarily from a decrease in income. We expect a future effective tax rate that is comparative to 2016.
2015 Compared to 2014
Net sales. Net sales for 2015 decreased $403.3 million, or 4.7%, from 2014. The following table provides additional information regarding net sales:
Change from 2014 | ||||||||||||
Source of net sales | 2015 | Amount | Percent | |||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 7,143,354 | $ | (503,682 | ) | (6.6 | )% | (a) | ||||
Mexico | 1,036,750 | 100,421 | 10.7 | % | (b) | |||||||
Total net sales | $ | 8,180,104 | $ | (403,261 | ) | (4.7 | )% | |||||
(a) | U.S. net sales generated in 2015 decreased $503.7 million, or 6.6%, from U.S. net sales generated in 2014 primarily because of a decrease in net sales per pound. Lower net sales per pound, which reflects a slight shift in product mix toward lower-priced fresh chicken products when compared to the same period in the prior year, contributed $681.8 million, or 8.9 percentage points, to the sales decrease. An increase in sales volume partially offset the net decrease by $178.2 million, or 2.3 percentage points. Included in U.S. sales generated during 2015 and 2014 were sales to JBS USA Food Company totaling $21.7 million and $39.7 million, respectively. |
(b) | Mexico sales generated in 2015 increased $100.4 million, or 10.7%, from Mexico sales generated in 2014, primarily because of net sales generated by the acquired Tyson Mexico operations and an increase in sales volume experienced by our existing operations. The impact of the acquired business contributed $250.6 million, or 26.8 percentage points, to the increase in net sales. The sales volume increase experienced by our existing operations contributed $24.7 million, or 2.6 percentage points, to the increase in net sales. The impact of of the acquired business and the sales volume increase experienced by our existing operations were partially offset by a decrease in net sales per pound experienced by our existing operations and the impact of foreign currency translation on our existing operations. The decrease in net sales per pound experienced by our existing operations offset the impact of the acquired business and the sales volume increase experienced by our existing operations by $24.1 million, or 2.6 percentage points. The impact of foreign currency translation on our existing operation offset the impact of the acquired business and the sales volume increase experienced by our existing operations by $150.7 million, or 16.1 percentage points. |
Gross profit. Gross profit decreased by $139.6 million, or 10.0%, from $1.4 billion generated in 2014 to $1.3 billion generated in 2015. The following tables provide gross profit information:
Change from 2014 | Percent of Net Sales | |||||||||||||||||
Components of gross profit | 2015 | Amount | Percent | 2015 | 2014 | |||||||||||||
(In thousands, except percent data) | ||||||||||||||||||
Net sales | $ | 8,180,104 | $ | (403,261 | ) | (4.7 | )% | 100.0 | % | 100.0 | % | |||||||
Cost of sales | 6,925,727 | (263,643 | ) | (3.7 | )% | 84.7 | % | 83.8 | % | (a)(b) | ||||||||
Gross profit | $ | 1,254,377 | $ | (139,618 | ) | (10.0 | )% | 15.3 | % | 16.2 | % | |||||||
Sources of gross profit | 2015 | Change from 2014 | ||||||||||
Amount | Percent | |||||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 1,126,861 | $ | (75,941 | ) | (6.3 | )% | |||||
Mexico | 127,421 | (63,772 | ) | (33.4 | )% | |||||||
Elimination | 95 | 95 | — | % | (c) | |||||||
Total gross profit | $ | 1,254,377 | $ | (139,618 | ) | (10.0 | )% | |||||
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Sources of cost of sales | 2015 | Change from 2014 | ||||||||||
Amount | Percent | |||||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 6,016,493 | $ | (427,741 | ) | (6.6 | )% | (a) | ||||
Mexico | 909,329 | 164,193 | 22.0 | % | (b) | |||||||
Elimination | (95 | ) | (95 | ) | — | % | (c) | |||||
Total cost of sales | $ | 6,925,727 | $ | (263,643 | ) | (3.7 | )% | |||||
(a) | Cost of sales incurred by our U.S. operations in 2015 decreased $427.7 million, or 6.6%, from cost of sales incurred by our U.S. operations in 2014. Cost of sales decreased primarily because of a $358.2 million decrease in feed ingredients costs, a $33.2 million decrease in wages and benefits, a $17.0 million decrease in utilities costs and a $13.3 million decrease in vehicle costs partially offset by a $24.4 million increase in co-pack labor costs, a $20.9 million increase in contract labor costs, a $20.6 million increase in contract grower costs and a $19.7 million increase in supplies and equipment costs. Other factors affecting U.S. cost of sales were individually immaterial. |
(b) | Cost of sales incurred by the Mexico operations during 2015 increased $164.2 million, or 22.0%, from cost of sales incurred by the Mexico operations during 2014 primarily because of costs incurred by the acquired Tyson Mexico operations, partially offset by a decrease in cost of sales incurred by our existing operations. Cost of sales incurred by the acquired Tyson Mexico operations contributed $249.1 million, or 33.4 percentage points, to the overall increase in cost of sales incurred by the Mexican operations. The decrease in cost of sales incurred by our existing operations partially offset the impact of the cost of sales incurred by the acquired business by $85.0 million, or 11.4 percentage points. The impact of foreign currency translation contributed $126.5 million, or 17.0 percentage points, to the decrease in cost of sales incurred by our existing operations. Decreases in both wage and benefits costs and utilities costs along with a gain related to the sale of property, plant and equipment also contributed $18.0 million, or 2.4 percentage points, to the decrease in cost of sales incurred by our existing operations. The favorable impact that the items listed above had on cost of sales incurred by our existing operations was partially offset by $59.6 million, or 8.0 percentage points, because of higher feed ingredients costs. Other factors affecting cost of sales were individually immaterial. |
(c) | Our Consolidated Financial Statements include the accounts of our company and its majority owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation. |
Operating income. Operating income decreased $158.2 million, or 13.2%, from $1.2 billion generated for 2014 to $1.0 billion generated for 2015. The following tables provide operating income information:
Change from 2014 | Percent of Net Sales | |||||||||||||||||
Components of operating income | 2015 | Amount | Percent | 2015 | 2014 | |||||||||||||
(In thousands, except percent data) | ||||||||||||||||||
Gross profit | $ | 1,254,377 | $ | (139,618 | ) | (10.0 | )% | 15.3 | % | 16.2 | % | |||||||
SG&A expenses | 203,881 | 15,287 | 8.1 | % | 2.5 | % | 2.2 | % | (a)(b) | |||||||||
Administrative restructuring charges | 5,605 | 3,319 | 145.2 | % | 0.1 | % | — | % | (c) | |||||||||
Operating income | $ | 1,044,891 | $ | (158,224 | ) | (13.2 | )% | 12.8 | % | 14.0 | % | |||||||
Change from 2014 | ||||||||||||
Source of operating income | 2015 | Amount | Percent | |||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 949,610 | $ | (81,510 | ) | (7.9 | )% | |||||
Mexico | 95,186 | (76,809 | ) | (42.8 | )% | |||||||
Elimination | 95 | 95 | (d) | |||||||||
Total operating income | $ | 1,044,891 | $ | (155,023 | ) | (12.9 | )% | |||||
Sources of SG&A expenses | 2015 | Change from 2014 | ||||||||||
Amount | Percent | |||||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 171,646 | $ | 2,250 | 1.3 | % | (a) | |||||
Mexico | 32,235 | 13,037 | 67.9 | % | (b) | |||||||
Total SG&A expense | $ | 203,881 | $ | 15,287 | 8.1 | % | ||||||
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Sources of administrative restructuring charges | 2015 | Change from 2014 | ||||||||||
Amount | Percent | |||||||||||
(In thousands, except percent data) | ||||||||||||
United States | $ | 5,605 | $ | 3,319 | 145.2 | % | (c) | |||||
Total administrative restructuring charges | $ | 5,605 | $ | 3,319 | 145.2 | % | ||||||
(a) | SG&A expense incurred by the U.S. operations during 2015 increased $2.3 million, or 1.3%, from SG&A expense incurred by the U.S. operations during 2014 primarily because of an $7.4 million increase in employee wages and benefits, and a $2.6 million increase in management fees charged for administrative functions shared with JBS USA Food Company Holdings that were partially offset by a $5.3 million decrease in brokerage expenses, a $2.0 million decrease in legal services expenses and a $0.5 million decrease in advertising and promotion costs. Other factors affecting SG&A expense were individually immaterial. |
(b) | SG&A expense incurred by the Mexico operations during 2015 increased $13.0 million, or 67.9%, from SG&A expense incurred by the Mexico operations during 2014 primarily because of expenses incurred by the acquired Tyson Mexico operations and an increase in SG&A expense incurred by our existing operations. Expenses incurred by the acquired Tyson Mexico business contributed $10.3 million, or 53.5 percentage points, to the overall increase in SG&A expense. An increase in expenses incurred by our existing operations contributed $3.1 million, or 16.3 percentage points, to the overall increase in SG&A expense. SG&A expense incurred by our existing operations increased primarily because of a $1.8 million increase in contract labor, a $1.2 million increase in bad debt expense and a $1.1 million increase in legal services expense . Other factors affecting SG&A expense were individually immaterial. |
(c) | Administrative restructuring charges incurred by the U.S. operations during 2015 increased $3.3 million, or 145.2%, from administrative restructuring charges incurred during 2014. During 2015 administrative restructuring charges represented impairment costs of $4.8 million related to assets held for sale in Louisiana and Texas and a loss of $0.8 million related to the sale of a rendering plant in Arkansas. |
(d) | Our Consolidated Financial Statements include the accounts of both our company and its majority owned subsidiaries. We eliminate all significant affiliate accounts and transactions upon consolidation. |
Interest expense. Consolidated interest expense decreased 54.3% to $37.5 million in 2015 from $82.1 million in 2014, primarily because of a decrease in the weighted average interest rate to 4.02% in 2015 from 6.45% in 2014, partially offset by an increase in average borrowings of $933.6 million in 2015 compared to $526.7 million in 2014. As a percent of net sales, interest expense in 2015 and 2014 was 0.46% and 0.96%, respectively.
Income taxes. Our consolidated income tax expense in 2015 was $346.8 million, compared to income tax expense of $390.9 million in 2014. The decrease in income tax expense in 2015 resulted primarily from a decrease in income.
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Liquidity and Capital Resources
The following table presents our available sources of liquidity as of December 25, 2016:
Source of Liquidity(a) | Facility Amount | Amount Outstanding | Available | ||||||||||
(In millions) | |||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | 120.3 | |||||||
Debt facilities: | |||||||||||||
U.S. Credit Facility (defined below) | 700.0 | — | 633.1 | (a) | |||||||||
Mexico Credit Facility (defined below) | 72.8 | $ | 23.3 | 49.5 | (b) | ||||||||
(a) | Actual borrowings under the revolving loan commitment of our U.S. Credit Facility are subject to a borrowing base, which is a formula based on certain eligible inventory and eligible receivables. The borrowing base in effect at December 25, 2016 was $675.8 million. Availability under the U.S. Credit Facility is also reduced by our outstanding standby letters of credit. Standby letters of credit outstanding at December 25, 2016 totaled $42.7 million. |
(b) | As of December 25, 2016, the U.S. dollar-equivalent of the amount available under the Mexico Credit Facility (as described below) was $49.5 million. The Mexico Credit Facility provides for a loan commitment of $1.5 billion Mexican pesos. |
Long-Term Debt and Other Borrowing Arrangements
Senior and Subordinated Notes
On March 11, 2015, the Company completed a sale of $500.0 million aggregate principal amount of its 5.75% senior notes due 2025 (the “Senior Notes”). The Company used the net proceeds from the sale of the Senior Notes to repay $350.0 million and $150.0 million of the term loan indebtedness under the U.S. Credit Facility (defined below) on March 12, 2015 and April 22, 2015, respectively. The Notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the U.S. to non-U.S. persons pursuant to Regulation S under the Securities Act.
The Senior Notes are governed by, and were issued pursuant to, an indenture dated as of March 11, 2015 by and among the Company, its guarantor subsidiary and Wells Fargo Bank, National Association, as trustee (the “Indenture”). The Indenture provides, among other things, that the Senior Notes bear interest at a rate of 5.75% per annum from the date of issuance until maturity, payable semi-annually in cash in arrears, beginning on September 15, 2015. The Senior Notes are guaranteed on a senior unsecured basis by the Company's guarantor subsidiary. In addition, any of the Company’s other existing or future domestic restricted subsidiaries that incur or guarantee any other indebtedness (with limited exceptions) must also guarantee the Senior Notes. The Senior Notes and related guarantees are unsecured senior obligations of the Company and its guarantor subsidiary and rank equally with all of the Company’s and its guarantor subsidiary's other unsubordinated indebtedness. The Senior Notes and the Indenture also contain customary covenants and events of default, including failure to pay principal or interest on the Senior Notes when due, among others.
U.S. Credit Facility
On February 11, 2015, the Company and its subsidiaries, To-Ricos, Ltd. and To-Ricos Distribution, Ltd., entered into a Second Amended and Restated Credit Agreement (the “U.S. Credit Facility”) with Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., Rabobank Nederland, New York Branch (“Rabobank”), as administrative agent, and the other lenders party thereto. The U.S. Credit Facility provides for a revolving loan commitment of up to $700.0 million and a term loan commitment of up to $1.0 billion (the “Term Loans”). The U.S. Credit Facility also includes an accordion feature that allows us, at any time, to increase the aggregate revolving loan and term loan commitments by up to an additional $1.0 billion, subject to the satisfaction of certain conditions, including obtaining the lenders’ agreement to participate in the increase.
The revolving loan commitment under the U.S. Credit Facility matures on February 10, 2020. All principal on the Term Loans is due at maturity on February 10, 2020. No installments of principal are required to be made prior to the maturity date of the Term Loans. Covenants in the U.S. Credit Facility also require the Company to use the proceeds it receives from certain asset sales and specified debt or equity issuances and upon the occurrence of other events to repay outstanding borrowings under the U.S. Credit Facility. The Company had Term Loans outstanding totaling $500.0 million as of December 25, 2016.
The U.S. Credit Facility includes a $75.0 million sub-limit for swingline loans and a $125.0 million sub-limit for letters of credit. Outstanding borrowings under the revolving loan commitment and the Term Loans bear interest at a per annum rate equal to (i) in the case of LIBOR loans, LIBOR plus 1.50% through December 25, 2016 and, based on the Company’s net senior secured leverage ratio, between LIBOR plus 1.25% and LIBOR plus 2.75% and (ii) in the case of alternate base rate loans, the base rate plus 0.50% through December 25, 2016 and, based on the Company’s net senior secured leverage ratio, between the base rate plus 0.25% and base rate plus 1.75% thereafter.
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Actual borrowings by the Company under the revolving loan commitment of the U.S. Credit Facility are subject to a borrowing base, which is a formula based on certain eligible inventory, eligible receivables and restricted cash under the control of Rabobank, in its capacity as administrative agent. The borrowing base formula will be reduced by the sum of (i) inventory reserves, (ii) rent and collateral access reserves, and (iii) any amount more than 15 days past due that is owed by the Company or its subsidiaries to any person on account of the purchase price of agricultural products or services (including poultry and livestock) if that person is entitled to any grower's or producer's lien or other security arrangement. As of December 25, 2016, the applicable borrowing base was $675.8 million and the amount available for borrowing under the revolving loan commitment was $633.1 million. The Company had letters of credit of $42.7 million and no outstanding borrowings under the revolving loan commitment as of December 25, 2016.
The U.S. Credit Facility contains financial covenants and various other covenants that may adversely affect the Company’s ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make certain restricted payments, consummate certain assets sales, enter into certain transactions with JBS and the Company’s other affiliates, merge, consolidate and/or sell or dispose of all or substantially all of the Company’s assets. The U.S. Credit Facility requires the Company to comply with a minimum level of tangible net worth covenant. The U.S. Credit Facility also provides that the Company may not incur capital expenditures in excess of $500.0 million in any fiscal year. The Company is currently in compliance with the covenants under the U.S. Credit Facility.
All obligations under the U.S. Credit Facility will continue to be unconditionally guaranteed by certain of the Company’s subsidiaries and continue to be secured by a first priority lien on (i) the accounts receivable and inventory of our Company and its non-Mexico subsidiaries, (ii) 100% of the equity interests in the Company’s domestic subsidiaries, To-Ricos, Ltd. and To-Ricos Distribution, Ltd., and 65% of the equity interests in the Company’s direct foreign subsidiaries and (iii) substantially all of the assets of the Company and the guarantors under the U.S. Credit Facility.
Mexico Credit Facility
On September 27, 2016, certain of our Mexican subsidiaries entered into an unsecured credit agreement (the “Mexico Credit Facility”) with BBVA Bancomer, S.A. Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, as lender. The loan commitment under the Mexico Credit Facility is $1.5 billion Mexican pesos. Outstanding borrowings under the Mexico Credit Facility will accrue interest at a rate equal to the Interbank Equilibrium Interest Rate plus 0.95%. The Mexico Credit Facility will mature on September 27, 2019. As of December 25, 2016, the U.S. dollar-equivalent of the loan commitment under the Mexico Credit Facility was $72.8 million, and there were $23.3 million outstanding borrowings under the Mexico Credit Facility that bear interest at a per annum rate of 7.05%. As of December 25, 2016, the U.S. dollar-equivalent borrowing availability was $49.5 million.
Collateral
Substantially all of our domestic inventories and domestic fixed assets are pledged as collateral to secure the obligations under the U.S. Credit Facility.
Off-Balance Sheet Arrangements
We maintain operating leases for various types of equipment, some of which contain residual value guarantees for the market value of assets at the end of the term of the lease. The terms of the lease maturities range from one to ten years. We estimate the maximum potential amount of the residual value guarantees is approximately $34.7 million; however, the actual amount would be offset by any recoverable amount based on the fair market value of the underlying leased assets. No liability has been recorded related to this contingency as the likelihood of payments under these guarantees is not considered to be probable, and the fair value of the guarantees is immaterial. We historically have not experienced significant payments under similar residual guarantees.
We are a party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks. Among other considerations, we have not recorded a liability for any of these indemnities as, based upon the likelihood of payment, the fair value of such indemnities would not have a material impact on our financial condition, results of operations and cash flows.
Capital Expenditures
We anticipate spending between $250 million and $280 million on the acquisition of property, plant and equipment in 2017. Capital expenditures will primarily be incurred to improve efficiencies and reduce costs. We expect to fund these capital expenditures with cash flow from operations and proceeds from the revolving lines of credit under our various debt facilities.
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Indefinite Reinvestment of Foreign Subsidiaries’ Undistributed Earnings
We have determined that the undistributed earnings of our Mexico and Puerto Rico subsidiaries will be indefinitely reinvested and not distributed to the U.S. The undistributed earnings of our Mexico, and Puerto Rico subsidiaries totaled $647.8 million and $24.9 million, respectively, at December 25, 2016.
Contractual Obligations
In addition to our debt commitments at December 25, 2016, we had other commitments and contractual obligations that obligate us to make specified payments in the future. The following table summarizes the total amounts due as of December 25, 2016, under all debt agreements, commitments and other contractual obligations. The table indicates the years in which payments are due under the contractual obligations.
Payments Due By Period | ||||||||||||||||||||
Contractual Obligations(a) | Total | 2017 | Years 2018-2019 | Years 2020-2021 | After 2022 | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Long-term debt(b) | $ | 1,023,304 | $ | — | $ | 23,304 | $ | 500,000 | $ | 500,000 | ||||||||||
Interest(c) | 279,019 | 40,325 | 78,583 | 59,486 | 100,625 | |||||||||||||||
Capital leases | 439 | 122 | 226 | 91 | — | |||||||||||||||
Operating leases | 107,999 | 26,819 | 43,586 | 25,945 | 11,649 | |||||||||||||||
Derivative liabilities | ||||||||||||||||||||