PILGRIMS PRIDE CORP - Quarter Report: 2006 July (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended July
1, 2006
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
|
(I.R.S.
Employer
|
|
|
incorporation
or organization)
|
Identification
No.)
|
|
|
4845
US Hwy 271 N, Pittsburg, TX
|
75686-0093
|
|
|
(Address
of principal executive offices)
|
(Zip
code)
|
|
|
Registrant’s
telephone number, including area code: (903)
434-1000
|
||
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report.)
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No
x
Number
of
shares outstanding of the issuer’s common stock, as of July 31, 2006, was
66,555,733.
1
|
PILGRIM’S
PRIDE CORPORATION AND SUBSIDIARIES
|
||
|
PART
I. FINANCIAL INFORMATION
|
||
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
July
1, 2006 and October 1, 2005
|
||
|
Three
months and nine months ended July 1, 2006 and July 2,
2005
|
||
|
Nine
months ended July 1, 2006 and July 2, 2005
|
||
|
Item
2.
|
||
|
Item
3.
|
||
|
Item
4.
|
||
|
PART
II. OTHER INFORMATION
|
||
|
Item
1.
|
||
|
Item
1A.
|
||
|
Item
6.
|
||
|
PART
I. FINANCIAL INFORMATION
|
|||||||
|
Item
1. Financial Statements
|
|||||||
|
Pilgrim’s
Pride Corporation
|
|||||||
|
(Unaudited)
|
|||||||
|
|
July 1, 2006 |
October
1, 2005
|
|||||
|
|
(In thousands, except share and per share data) | ||||||
|
Assets
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
44,069
|
$
|
132,567
|
|||
|
Investments
in available for sale securities
|
54,322
|
--
|
|||||
|
Trade
accounts and other receivables, less allowance for doubtful
accounts
|
197,028
|
288,528
|
|||||
|
Income
taxes receivable
|
42,764
|
--
|
|||||
|
Inventories
|
602,120
|
527,329
|
|||||
|
Current
deferred income taxes
|
17,153
|
25,107
|
|||||
|
Other
current assets
|
35,166
|
25,884
|
|||||
|
Total
Current Assets
|
992,622
|
999,415
|
|||||
|
Investment
in Available for Sale Securities
|
148,123
|
304,593
|
|||||
|
Other
Assets
|
47,139
|
53,798
|
|||||
|
Property,
Plant and Equipment:
|
|||||||
|
Land
|
52,750
|
51,887
|
|||||
|
Buildings,
machinery and equipment
|
1,655,935
|
1,612,739
|
|||||
|
Autos
and trucks
|
56,694
|
55,202
|
|||||
|
Construction-in-progress
|
77,157
|
58,942
|
|||||
|
1,842,536
|
1,778,770
|
||||||
|
Less
accumulated depreciation
|
(694,849
|
)
|
(624,673
|
)
|
|||
|
1,147,687
|
1,154,097
|
||||||
|
$
|
2,335,571
|
$
|
2,511,903
|
||||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable
|
$
|
275,892
|
$
|
281,909
|
|||
|
Accrued
expenses
|
270,106
|
288,106
|
|||||
|
Income
taxes payable
|
--
|
16,196
|
|||||
|
Current
maturities of long-term debt
|
7,768
|
8,603
|
|||||
|
Total
Current Liabilities
|
553,766
|
594,814
|
|||||
|
Long-Term
Debt, Less Current Maturities
|
484,970
|
518,863
|
|||||
|
Deferred
Income Taxes
|
169,970
|
173,232
|
|||||
|
Minority
Interest in Subsidiary
|
2,004
|
1,396
|
|||||
|
Commitments
and Contingencies
|
|||||||
|
Stockholders’
Equity:
|
|||||||
|
Preferred
stock, $.01 par value, 5,000,000 authorized shares; none
issued
|
--
|
--
|
|||||
|
Common
stock, $.01 par value, 160,000,000 authorized shares; 66,826,833
issued
|
668
|
668
|
|||||
|
Additional
paid-in capital
|
471,344
|
471,344
|
|||||
|
Retained
earnings
|
655,729
|
753,527
|
|||||
|
Accumulated
other comprehensive loss
|
(1,312
|
)
|
(373
|
)
|
|||
|
Less
treasury stock, 271,100 shares
|
(1,568
|
)
|
(1,568
|
)
|
|||
|
Total
Stockholders’ Equity
|
1,124,861
|
1,223,598
|
|||||
|
$
|
2,335,571
|
$
|
2,511,903
|
||||
|
See
notes to consolidated financial
statements.
|
|
Pilgrim’s
Pride Corporation and Subsidiaries
(Unaudited)
|
|||||||||||||
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
|
|
July
1, 2006
|
July
2, 2005
|
July
1, 2006
|
July
2, 2005
|
|||||||||
|
(in
thousands, except share and per share data)
|
|||||||||||||
|
Net
Sales
|
$
|
1,287,646
|
$
|
1,440,039
|
$
|
3,897,167
|
$
|
4,183,607
|
|||||
|
Cost
of sales
|
1,244,950
|
1,220,818
|
3,698,870
|
3,639,213
|
|||||||||
|
Gross
profit
|
42,696
|
219,221
|
198,297
|
544,394
|
|||||||||
|
Selling,
general and administrative
|
69,433
|
83,228
|
216,772
|
228,431
|
|||||||||
|
Operating
income (loss)
|
(26,737
|
)
|
135,993
|
(18,475
|
)
|
315,963
|
|||||||
|
Other
Expense (Income):
|
|||||||||||||
|
Interest
expense
|
12,736
|
13,602
|
38,402
|
37,436
|
|||||||||
|
Interest
income
|
(1,268
|
)
|
(1,280
|
)
|
(8,429
|
)
|
(3,572
|
)
|
|||||
|
Foreign
exchange loss (gain)
|
1,822
|
(94
|
)
|
1,012
|
(420
|
)
|
|||||||
|
Miscellaneous,
net
|
(2,053
|
)
|
88
|
(1,025
|
)
|
(11,659
|
)
|
||||||
|
Total
other expenses, net
|
11,237
|
12,316
|
29,960
|
21,785
|
|||||||||
|
Income
(loss) before income taxes
|
(37,974
|
)
|
123,677
|
(48,435
|
)
|
294,178
|
|||||||
|
Income
tax (benefit) expense
|
(17,501
|
)
|
38,324
|
(21,686
|
)
|
103,928
|
|||||||
|
Net
income (loss)
|
$
|
(20,473
|
)
|
$
|
85,353
|
$
|
(26,749
|
)
|
$
|
190,250
|
|||
|
Net
income (loss) per common share
-
basic and diluted
|
$
|
(0.31
|
)
|
$
|
1.28
|
$
|
(0.40
|
)
|
$
|
2.86
|
|||
|
Dividends
declared per common share
|
$
|
0.0225
|
$
|
0.0150
|
$
|
1.0675
|
$
|
0.0450
|
|||||
|
Weighted
average shares outstanding
|
66,555,733
|
66,555,733
|
66,555,733
|
66,555,733
|
|||||||||
|
See
notes to consolidated financial
statements.
|
|||||||||||||
|
Pilgrim’s
Pride Corporation and Subsidiaries
(Unaudited)
|
|||||||
|
|
Nine
Months Ended
|
||||||
|
|
July
1, 2006
|
July
2, 2005
|
|||||
|
(in
thousands)
|
|||||||
|
Cash
Flows From Operating Activities:
|
|||||||
|
Net
income (loss)
|
$
|
(26,749
|
)
|
$
|
190,250
|
||
|
Adjustments
to reconcile net income (loss) to cash provided by operating
activities
|
|||||||
|
Depreciation
and amortization
|
100,052
|
94,263
|
|||||
|
Impairment
of assets
|
3,767
|
--
|
|||||
|
Loss
on property disposals
|
988
|
2,952
|
|||||
|
Deferred
income taxes
|
(8,065
|
)
|
830
|
||||
|
Changes
in operating assets and liabilities
|
|||||||
|
Accounts
and other receivables
|
97,242
|
57,909
|
|||||
|
Income
taxes receivable
|
(30,007
|
)
|
--
|
||||
|
Inventories
|
(74,792
|
)
|
36,737
|
||||
|
Other
current assets
|
(9,280
|
)
|
(3,220
|
)
|
|||
|
Accounts
payable and accrued expenses
|
(40,214
|
)
|
(17,115
|
)
|
|||
|
Other
|
(2,421
|
)
|
299
|
||||
|
Cash
provided by operating activities
|
10,521
|
362,905
|
|||||
|
Investing
Activities:
|
|||||||
|
Acquisitions
of property, plant and equipment
|
(101,314
|
)
|
(90,148
|
)
|
|||
|
Purchases
of investment securities
|
(238,763
|
)
|
--
|
||||
|
Proceeds
from sale/maturity of investment securities
|
343,120
|
--
|
|||||
|
Proceeds
from property disposals
|
3,709
|
4,278
|
|||||
|
Other,
net
|
295
|
196
|
|||||
|
Cash
provided by (used for) investing activities
|
7,047
|
(85,674
|
)
|
||||
|
Financing
Activities:
|
|||||||
|
Proceeds
from notes payable to banks
|
226,000
|
--
|
|||||
|
Repayments
on notes payable to banks
|
(226,000
|
)
|
--
|
||||
|
Payments
on long-term debt
|
(34,728
|
)
|
(14,655
|
)
|
|||
|
Cash
dividends paid
|
(71,048
|
)
|
(2,995
|
)
|
|||
|
Cash
used for financing activities
|
(105,776
|
)
|
(17,650
|
)
|
|||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(290
|
)
|
75
|
||||
|
Increase
(decrease) in cash and cash equivalents
|
(88,498
|
)
|
259,656
|
||||
|
Cash
and cash equivalents at beginning of year
|
132,567
|
38,165
|
|||||
|
Cash
and Cash Equivalents at End of Period
|
$
|
44,069
|
$
|
297,821
|
|||
|
|
|||||||
|
See
notes to consolidated financial
statements.
|
|||||||
NOTE
A—BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements of Pilgrim’s Pride
Corporation (referred to herein as “Pilgrim’s,” “the Company,” “we,” “us,” “our”
or similar terms) have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S.”) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X of the U.S. Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal and recurring adjustments
unless otherwise disclosed) considered necessary for a fair presentation have
been included. Operating results for the period ended July 1, 2006 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2006. For further information, refer to the consolidated financial
statements and footnotes thereto included in Pilgrim’s Annual Report on Form
10-K for the fiscal year ended October 1, 2005.
The
consolidated financial statements include the accounts of Pilgrim’s and its
wholly and majority owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
The
assets and liabilities of the foreign subsidiaries are translated at
end-of-period exchange rates, except for any non-monetary assets, which are
translated at equivalent dollar costs at dates of acquisition using historical
rates. Operations of foreign subsidiaries are translated at average exchange
rates in effect during the period.
Total
comprehensive income (loss) was $(21.0) million and $85.5 million for the three
months and $(27.7) million and $190.7 million for the nine months ended July
1,
2006 and July 2, 2005, respectively.
On
November 30, 2005, the Company declared a special dividend of $1.00 per share
totaling $66.6 million with a record date of December 30, 2005, which was paid
on January 13, 2006.
NOTE
B - ACCOUNTS RECEIVABLE
In
connection with the Asset Sale Agreement dated July 18, 2003, the Company sells,
on a revolving basis, certain of its trade receivables (the “Pooled
Receivables”) to a special purpose corporation wholly owned by the Company,
which in turn sells a percentage ownership interest to third parties. At July
1,
2006, an interest in these Pooled Receivables of $50.0 million had been sold
to
third parties and is reflected as a reduction to accounts receivable. These
transactions have been recorded as sales in accordance with Financial Accounting
Standards Board Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
The
gross proceeds resulting from the sale are included in cash flows from operating
activities in the Consolidated Statements of Cash Flows. Losses on these sales
were immaterial. As of July 1, 2006, $75.0 million of additional Pooled
Receivables could have been sold pursuant to the Asset Sale Agreement.
Also
included in accounts receivable at July 1, 2006, is $3.5 million in preliminary
net insurance claims for losses of inventory and fixed assets destroyed in,
and
costs incurred by the Company directly associated with, a fire on June 23,
2006
at its Farmerville, Louisiana prepared foods facility. This amount was collected
subsequent to the end of the quarter.
The
Company will be filing additional claims in the future for further costs
incurred in clean-up along with the actual cost of rebuilding and re-equipping
the facility. The Company will likely record an immaterial gain on the
involuntary conversion of non-monetary assets to monetary assets once all
contingencies are resolved and the final claim realized.
NOTE
C—INVENTORIES
|
July
1,
|
October
1,
|
||||||
|
(In
thousands)
|
2006
|
2005
|
|||||
|
Chicken:
|
|||||||
|
Live
chicken and hens
|
$
|
198,286
|
$
|
196,406
|
|||
|
Feed
and eggs
|
134,796
|
114,091
|
|||||
|
Finished
chicken products
|
208,531
|
164,412
|
|||||
|
541,613
|
474,909
|
||||||
|
Turkey:
|
|||||||
|
Live
turkey and hens
|
$
|
6,645
|
$
|
7,209
|
|||
|
Feed
and eggs
|
3,664
|
4,924
|
|||||
|
Finished
turkey products
|
32,737
|
23,072
|
|||||
|
43,046
|
35,205
|
||||||
|
Other
Products:
|
|||||||
|
Commercial
feed, table eggs, and retail farm store
|
$
|
7,515
|
$
|
4,866
|
|||
|
Distribution
inventories (other than chicken & turkey products)
|
9,946
|
12,349
|
|||||
|
17,461
|
17,215
|
||||||
|
Total
Inventories
|
$
|
602,120
|
$
|
527,329
|
NOTE
D—NOTES PAYABLE AND LONG-TERM DEBT
In
the
first nine months of fiscal 2006, the Company retired $34.7 million of debt
($6.8 million representing scheduled payments) including the purchase of $17.4
million of its 9 1/4% senior subordinated unsecured notes and $2.5 million
of
its 9 5/8% senior unsecured notes, which were recorded as treasury bonds,
resulting in an immaterial loss on the retirement.
NOTE
E—INCOME TAXES
As
of
December 31, 2005, certain Mexican subsidiaries of the Company did not meet
the
Simplified Regime requirements of Mexico tax law. The Company’s Mexico
subsidiaries file and pay income taxes based on the calendar year. These
companies which paid tax at a reduced rate in previous years under the
Simplified Regime filed and paid income taxes for the calendar year ending
December 31, 2005, under the General Regime of the Mexico tax law at the full
statutory
rate. The Company has evaluated the effect of certain Mexico subsidiaries no
longer qualifying for the Simplified Regime on its effective tax rate being
applied to current operations and deferred taxes and recorded the impact of
this
change during the first quarter ended December 31, 2005. This amount was not
material.
NOTE
F—RELATED PARTY TRANSACTIONS
Lonnie
“Bo” Pilgrim, the Chairman and, through certain related entities, the major
stockholder of the Company (collectively, the “major stockholder”), owns an egg
laying and a chicken growing operation. In addition, at certain times during
the
year, the major stockholder has purchased from the Company live chickens and
hens and certain feed inventories during the grow-out process and then
contracted with the Company to resell the birds at maturity using a market-based
formula, with price subject to a ceiling price calculated at his cost plus
two
percent. Purchases made by the Company under this agreement resulted in an
operating margin to the major stockholder of $0 and $8,454 during the quarters,
and $4,539 and $1,011,791 during the nine months ended July 1, 2006 and July
2,
2005, respectively, on gross amounts paid by the Company to the major
stockholder as described below in “Live chicken purchases and other payments to
major stockholder.”
Transactions
with related parties are summarized as follows:
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
|
July
1, 2006
|
July
2, 2005
|
July
1, 2006
|
July
2, 2005
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
Lease
payments on commercial egg property
|
$
|
188
|
$
|
188
|
$
|
563
|
$
|
563
|
|||||
|
Chick,
feed and other sales to major stockholder, including
advances
|
$
|
223
|
$
|
368
|
$
|
596
|
$
|
50,854
|
|||||
|
Live
chicken purchases and other payments to major stockholder
|
$
|
276
|
$
|
602
|
$
|
979
|
$
|
53,664
|
|||||
|
Loan
guaranty fees
|
$
|
468
|
$
|
452
|
$
|
1,245
|
$
|
1,350
|
|||||
|
Lease
payments and operating expenses on airplane
|
$
|
129
|
$
|
133
|
$
|
380
|
$
|
409
|
|||||
NOTE
G—COMMITMENTS and CONTINGENCIES
At
July
1, 2006, the Company had $28.7 million in letters of credit outstanding relating
to normal business transactions.
In
October 2002, a limited number of USDA environmental samples from our Franconia,
Pennsylvania plant tested positive for Listeria. As a result, we voluntarily
recalled all cooked deli products produced at the plant from May 1, 2002 through
October 11, 2002. No illnesses associated with the Listeria strain in a
Northeastern outbreak have been linked to any of our products and none of our
products have tested positive for the outbreak strain. However, in connection
with this recall, we have been named as a defendant in a number of lawsuits
brought by individuals generally alleging injuries resulting from contracting
Listeria monocytogenes. We believe that we have meritorious defenses to these
claims and intend to assert vigorous defenses to the litigation. After
considering our available insurance coverage, we do not expect these cases
to
have a material impact on our financial position, operations or
liquidity.
We
are
subject to various other legal proceedings and claims which arise in the
ordinary course of our business. In the opinion of management, the amount
of
ultimate liability with respect to these actions will not materially affect
the
financial position or results of operations of the Company.
NOTE
H—BUSINESS SEGMENTS
We
operate in three reportable business segments as (1) a producer and seller
of
chicken products, (2) a producer and seller of turkey products and (3)
other
products. In previous years, our presented segments included chicken and
other
and turkey. After fully integrating a major business acquisition into our
operations during fiscal 2004 and early fiscal 2005, we changed our segment
presentation to separate our non-chicken and non-turkey operations into
a
separate category consistent with management’s evaluation of operating results
and decisions with respect to the allocation of resources. See Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Annual Report on Form 10-K for the fiscal year ended October
1, 2005.
The
following table presents certain information regarding our
segments:
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
|
|
July
1, 2006
|
July
2, 2005(a)
|
|
July
1, 2006
|
July
2, 2005(a)
|
|
|||||||
|
(In
thousands)
|
|||||||||||||
|
Net
Sales to Customers:
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$
|
1,019,918
|
$
|
1,123,096
|
$
|
3,039,292
|
$
|
3,248,716
|
|||||
|
Mexico
|
106,996
|
114,377
|
303,430
|
302,202
|
|||||||||
|
Sub-total
|
1,126,914
|
1,237,473
|
3,342,722
|
3,550,918
|
|||||||||
|
Turkey
|
15,753
|
37,538
|
94,772
|
154,640
|
|||||||||
|
Other
Products:
|
|||||||||||||
|
United
States
|
137,997
|
159,285
|
445,610
|
462,471
|
|||||||||
|
Mexico
|
6,982
|
5,743
|
14,063
|
15,578
|
|||||||||
|
Sub-total
|
144,979
|
165,028
|
459,673
|
478,049
|
|||||||||
|
Total
|
$
|
1,287,646
|
$
|
1,440,039
|
$
|
3,897,167
|
$
|
4,183,607
|
|||||
|
Operating
Income (Loss):
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$
|
(20,158
|
)
|
$
|
121,214
|
$
|
(4,012
|
)
|
$
|
291,897
|
|||
|
Mexico
|
(4,951
|
)
|
17,823
|
(10,177
|
)
|
31,897
|
|||||||
|
Sub-total
|
(25,109
|
)
|
139,037
|
(14,189
|
)
|
323,794
|
|||||||
|
Turkey(b)
|
(3,598
|
)
|
(6,354
|
)
|
(15,956
|
)
|
(16,603
|
)
|
|||||
|
Other
Products:
|
|||||||||||||
|
United
States
|
1,597
|
2,215
|
10,501
|
5,284
|
|||||||||
|
Mexico
|
373
|
1,095
|
1,169
|
3,488
|
|||||||||
|
Sub-total
|
1,970
|
3,310
|
11,670
|
8,772
|
|||||||||
|
Total
|
$
|
(26,737
|
)
|
$
|
135,993
|
$
|
(18,475
|
)
|
$
|
315,963
|
|||
|
Depreciation
and Amortization(c)
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$
|
29,400
|
$
|
25,174
|
$
|
79,911
|
$
|
78,607
|
|||||
|
Mexico
|
2,752
|
2,996
|
8,470
|
9,100
|
|||||||||
|
Sub-total
|
32,152
|
28,170
|
88,381
|
87,707
|
|||||||||
|
Turkey
|
705
|
846
|
6,025
|
2,389
|
|||||||||
|
Other
Products:
|
|||||||||||||
|
United
States
|
2,060
|
1,352
|
5,527
|
4,023
|
|||||||||
|
Mexico
|
43
|
53
|
119
|
144
|
|||||||||
|
Sub-total
|
2,103
|
1,405
|
5,646
|
4,167
|
|||||||||
|
Total
|
$
|
34,960
|
$
|
30,421
|
$
|
100,052
|
$
|
94,263
|
|||||
|
(a)
|
Certain
historical amounts have been reclassified to conform to current
year
presentation.
|
|
(b)
|
Included
in the operating losses for the turkey segment for the nine months
ended
July 1, 2006 are charges of $3.8 million to write certain assets
down to
estimated realizable value. These assets are held for sale and
are related
to the Franconia, Pennsylvania turkey cooking facility at which
the
Company ceased production of certain products in March 2006. Also
included
in the operating losses for the turkey segment for the same nine
month
period are accrued severance expenses totaling $0.2 million and
charges of
$2.5 million to reduce certain packaging and supplies, bringing
the total
charges for the nine months ended July 1, 2006 to $6.5 million.
Included
in the three months ended July 2, 2005 is $0.8 million and in the
nine
months ended July 2, 2005 is $5.2 million in proceeds from the
final
resolution of our 2004 turkey restructuring activities.
|
|
(c)
|
Includes
amortization of capitalized financing costs of approximately $0.5
million
and $0.6 million for the three month periods and $2.0 million and
$1.7
million for the nine month periods ending July 1, 2006 and July
2, 2005,
respectively.
|
Description
of the Company
The
Company is the second largest chicken producer in the United States and Mexico,
the largest in Puerto Rico and has one of the best known brand names in the
poultry industry. In the U.S., we produce both prepared and fresh chicken and
turkey while in Mexico and Puerto Rico, we exclusively produce fresh chicken.
Through vertical integration we control the breeding, hatching and growing
of
chickens. We operate in three business segments and two geographical
areas.
Executive
Summary
Overview.
Focus
and concern abroad over avian influenza significantly reduced international
demand for chicken products during the first nine months of fiscal 2006 when
compared to the same period in the prior year, leading at times to higher
inventory levels and contributing to lower overall market pricing. At the same
time, industry production levels continued to increase, creating an oversupply
situation and further weakening prices. Industry-wide inventories of leg
quarters reached extremely high levels during the first nine months of fiscal
2006 due to reduced purchasing in foreign markets. Leg quarter inventory levels
began falling at the beginning of our third fiscal quarter and by the end of
such quarter had reached levels comparable to the end of the third quarter
of
fiscal 2005. Additionally, the oversupply of leg quarters put significant
pressure on the U.S. white meat markets which contributed to historically low
breast meat prices. While leg quarter pricing had improved substantially by
the
end of our third fiscal quarter, breast meat pricing, while higher, remained
low
when compared to the prior year period. During the third quarter of fiscal
2006,
even though the average market pricing for both chicken leg quarters and breast
meat increased 118.8% and 36.2%, respectively, when compared to the second
quarter of fiscal 2006, the average market pricing we received for both chicken
leg quarters and breast meat declined approximately 34.2% and 16.6%,
respectively, from the same period in the prior year. Additionally, even though
sales volume for the third quarter of fiscal 2006 was 2.4% greater than the
same
period last year, during the first nine months of fiscal 2006 our U.S. chicken
sales volumes were approximately 1.3% lower versus the same period in the prior
year due primarily to the effects of avian influenza concerns in the
international markets. This change in pricing and demand adversely affected
our
results for the third quarter of fiscal 2006. Additionally, some U.S.
customers have renegotiated our contracts with them to reflect the current
pricing environment for chicken.
In
response to this challenging operating environment, we have executed a
multi-point plan designed to improve our competitive position:
|
·
|
First,
we have delayed one-half of our planned expansion in the Fresh
Food
Service Division of our Mayfield, Kentucky plant from early July
until
mid-September of this year, and the other half of this expansion
from
early July 2006 until April 2007.
|
· Second,
beginning on July 1, 2006, we reduced our weekly slaughter rate by approximately
3%, which is equivalent to approximately 830,000 head per week.
|
·
|
Third,
we reduced our planned capital investments for the year by $30-$50
million. Our original capital investment projection for the year had
been in the range of $180-$200 million. Our
new estimated range for the year is $140-$150 million. We are
focusing only on those projects we deem critically necessary to our
business or those in which our immediate investment is judged by
us to be in our best long-term interests.
|
|
·
|
Fourth,
we have sharpened our focus on reducing costs and operating more
efficiently. For example, in order to eliminate holiday and overtime
premiums, we cut egg placements for Memorial Day and the Fourth
of July as
well as other previously planned Saturday productions.
|
We
intend
to continue to monitor market conditions for purposes of determining when
we
believe further changes in our business are prudent.
Results.
Net income for the third quarter of fiscal 2006 is down $105.8 million from
the
third quarter of fiscal 2005, resulting in a net loss of $20.5 million for
the
quarter ended July 1, 2006. This decrease is primarily due to:
| · |
Reduced
selling prices for chicken created by market disruptions caused by
the
avian influenza scares in other parts of the world. Reduced selling
prices
for our Mexico produced chicken partially offset by an increase in
pounds
sold in Mexico.
|
| · |
Increased
cost of sales due to higher freight delivery costs, as well as the
cost of
fuel in other areas.
|
Net
income for the first nine months of fiscal 2006 is down $217.0 million from
the
first nine months of fiscal 2005, resulting in a net loss of $26.7 million
for
the nine months ended July 1, 2006. This decrease is primarily due to the
same
factors discussed above plus higher feed ingredient costs..
Business
Environment
Profitability
in the poultry industry is materially affected by the commodity prices of
feed
ingredients, chicken and turkey, which are determined by supply and demand
factors. As a result, the chicken and turkey industries are subject to cyclical
earnings fluctuations. Cyclical earnings fluctuations can be mitigated somewhat
by:
-
Business strategy;
-
Product
mix;
-
Sales
and marketing plans; and
-
Operating efficiencies.
In
an
effort to reduce price volatility and to generate higher, more consistent
profit
margins, we have concentrated on the production and marketing of prepared
foods
products. Prepared foods products generally have higher profit margins than
our
other products. Also, the production and sale in the U.S. of prepared foods
products reduces the impact of the costs of feed ingredients on our
profitability. Feed ingredient purchases are the single largest component
of our
cost of sales, representing approximately 27.0% of our consolidated cost
of
sales in the first nine months of fiscal
2006. The
production of feed ingredients is positively or negatively affected primarily
by
weather patterns throughout the world, the global level of supply inventories
and demand for feed ingredients, and the agricultural policies of the U.S.
and
foreign governments. 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.
As
a
significant portion of the U.S. poultry production is exported, the commodity
prices of chicken and turkey can be, and in recent periods have been, adversely
affected by disruptions in chicken export markets. As described above, recent
disruptions include the effects, focus and concern over avian influenza has
had
on international demand for chicken products and effects the resulting
oversupply has had on U.S. chicken prices. Disruptions are also often caused
by
restrictions on imports of U.S. produced poultry products imposed by foreign
governments for a variety of reasons, including the protection of their domestic
poultry producers and allegations of consumer health issues, including with
respect to avian influenza. For example, on April 27, 2006, Russia’s agriculture
ministry, citing cases where products were offloaded without import permission,
the discovery of fake products and other factors, announced that it had
temporarily cancelled all poultry import permits, which it subsequently began
to
reissue, however, it remains uncertain whether or not such permits will be
reissued in the same quantities as previously existed. As Russia represents
approximately 30% of exports from the U.S. chicken industry, cancellations
of
its poultry import permits may further pressure pricing. Also, in July 2003,
the
U.S. and Mexico entered into a safeguard agreement with regard to imports
into
Mexico of chicken leg quarters from the U.S. Under this agreement, a tariff
rate
for chicken leg quarters of 98.8% of the sales price was established. This
tariff rate was reduced on January 1, 2006 to 39.5% and is scheduled to be
reduced in each of the following two years in equal increments so that the
final
tariff rate at January 1, 2008 will be zero. The tariff was imposed due to
concerns that the duty-free importation of such products as provided by the
North American Free Trade Agreement would injure Mexico’s chicken industry. As
such tariffs are reduced, we expect greater amounts of chicken to be imported
into Mexico from the U.S., which could negatively affect the profitability
of
Mexican chicken producers and positively affect the profitability of U.S.
exporters of chicken to Mexico. Although this could have a negative impact
on
our Mexican chicken operations, we believe that this will be mitigated by
the
close proximity of our U.S. operations to the Mexico border. We have some
of the
largest U.S. production and distribution capacities near the Mexican border,
which gives us a strategic advantage to capitalize on exports of U.S. chicken
to
Mexico. No assurances can be given as to when the existing disruptions will
be
alleviated or that new ones will not arise.
Business
Segments
We
operate in three reportable business segments as (1) a producer and seller
of
chicken products, (2) a producer and seller of turkey products and (3) other
products. In previous years, our presented segments included chicken and
other
and turkey. After fully integrating a major business acquisition into our
operations during fiscal 2004 and early fiscal 2005, we changed our segment
presentation to separate our non-chicken and non-turkey operations into a
separate category consistent with management’s evaluation of operating results
and decisions with respect to the allocation of resources. See Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Form 10-K for the fiscal year ended October 1,
2005.
The
following table presents certain information regarding our
segments:
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
|
|
July
1, 2006
|
July
2, 2005(a)
|
|
July
1, 2006
|
July
2, 2005(a)
|
|
|||||||
|
(In
thousands)
|
|||||||||||||
|
Net
Sales to Customers:
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$
|
1,019,918
|
$
|
1,123,096
|
$
|
3,039,292
|
$
|
3,248,716
|
|||||
|
Mexico
|
106,996
|
114,377
|
303,430
|
302,202
|
|||||||||
|
Sub-total
|
1,126,914
|
1,237,473
|
3,342,722
|
3,550,918
|
|||||||||
|
Turkey
|
15,753
|
37,538
|
94,772
|
154,640
|
|||||||||
|
Other
Products:
|
|||||||||||||
|
United
States
|
137,997
|
159,285
|
445,610
|
462,471
|
|||||||||
|
Mexico
|
6,982
|
5,743
|
14,063
|
15,578
|
|||||||||
|
Sub-total
|
144,979
|
165,028
|
459,673
|
478,049
|
|||||||||
|
Total
|
$
|
1,287,646
|
$
|
1,440,039
|
$
|
3,897,167
|
$
|
4,183,607
|
|||||
|
Operating
Income (Loss):
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$
|
(20,158
|
)
|
$
|
121,214
|
$
|
(4,012
|
)
|
$
|
291,897
|
|||
|
Mexico
|
(4,951
|
)
|
17,823
|
(10,177
|
)
|
31,897
|
|||||||
|
Sub-total
|
(25,109
|
)
|
139,037
|
(14,189
|
)
|
323,794
|
|||||||
|
Turkey(b)
|
(3,598
|
)
|
(6,354
|
)
|
(15,956
|
)
|
(16,603
|
)
|
|||||
|
Other
Products:
|
|||||||||||||
|
United
States
|
1,597
|
2,215
|
10,501
|
5,284
|
|||||||||
|
Mexico
|
373
|
1,095
|
1,169
|
3,488
|
|||||||||
|
Sub-total
|
1,970
|
3,310
|
11,670
|
8,772
|
|||||||||
|
Total
|
$
|
(26,737
|
)
|
$
|
135,993
|
$
|
(18,475
|
)
|
$
|
315,963
|
|||
|
Depreciation
and Amortization(c)
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$
|
29,400
|
$
|
25,174
|
$
|
79,911
|
$
|
78,607
|
|||||
|
Mexico
|
2,752
|
2,996
|
8,470
|
9,100
|
|||||||||
|
Sub-total
|
32,152
|
28,170
|
88,381
|
87,707
|
|||||||||
|
Turkey
|
705
|
846
|
6,025
|
2,389
|
|||||||||
|
Other
Products:
|
|||||||||||||
|
United
States
|
2,060
|
1,352
|
5,527
|
4,023
|
|||||||||
|
Mexico
|
43
|
53
|
119
|
144
|
|||||||||
|
Sub-total
|
2,103
|
1,405
|
5,646
|
4,167
|
|||||||||
|
Total
|
$
|
34,960
|
$
|
30,421
|
$
|
100,052
|
$
|
94,263
|
|||||
|
(a)
|
Certain
historical amounts have been reclassified to conform to current
year
presentation.
|
|
(b)
|
Included
in the operating losses for the turkey segment for the nine months
ended
July 1, 2006 are charges of $3.8 million to write certain assets
down to
estimated realizable value. These assets are held for sale and
are related
to the Franconia, Pennsylvania turkey cooking facility at which
the
Company ceased production of certain products in March 2006. Also
included
in the operating losses for the turkey segment for the same nine
month
period are accrued severance expenses totaling $0.2 million and
charges of
$2.5 million to reduce certain packaging and supplies, bringing
the total
charges for the nine months ended July 1, 2006 to $6.5 million.
Included
in the three months ended July 2, 2005 is $0.8 million and in the
nine
months ended July 2, 2005 is $5.2 million in proceeds from the
final
resolution of our 2004 turkey restructuring activities.
|
|
(c)
|
Includes
amortization of capitalized financing costs of approximately $0.5
million
and $0.6 million for the three month periods and $2.0 million and
$1.7
million for the nine month periods ending July 1, 2006 and July
2, 2005,
respectively.
|
The
following table presents certain items as a percentage of net sales for the
periods indicated:
|
|
Percentage
of Net Sales
|
||||||||||||
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
|
July
1, 2006
|
July
2, 2005
|
July
1, 2006
|
July
2, 2005
|
||||||||||
|
Net
Sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||
|
Costs
and Expenses:
|
|||||||||||||
|
Cost
of sales
|
96.7
|
%
|
84.8
|
%
|
94.9
|
%
|
87.0
|
%
|
|||||
|
Gross
profit
|
3.3
|
%
|
15.2
|
%
|
5.1
|
%
|
13.0
|
%
|
|||||
|
Selling,
general and administrative
|
5.4
|
%
|
5.8
|
%
|
5.6
|
%
|
5.5
|
%
|
|||||
|
Operating
Income (Loss)
|
(2.1
|
)%
|
9.4
|
%
|
(0.5
|
)%
|
7.5
|
%
|
|||||
|
Interest
expense
|
1.0
|
%
|
0.9
|
%
|
1.0
|
%
|
0.9
|
%
|
|||||
|
Interest
income
|
(0.1
|
)%
|
(0.1
|
)%
|
(0.2
|
)%
|
(0.1
|
)%
|
|||||
|
Income
(loss) before income taxes
|
(2.9
|
)%
|
8.6
|
%
|
(1.2
|
)%
|
7.0
|
%
|
|||||
|
Net
income (loss)
|
(1.6
|
)%
|
5.9
|
%
|
(0.7
|
)%
|
4.5
|
%
|
|||||
Results
of Operations
Fiscal
Third Quarter 2006 Compared to Fiscal Third Quarter 2005
Net
Sales. Net
Sales
for the third quarter of fiscal 2006 decreased $152.4 million, or 10.6%, over
the third quarter of fiscal 2005. The following table provides additional
information regarding net sales (in millions):
|
Fiscal
Quarter Ended
|
Change
from
Fiscal
Quarter Ended
|
||||||||||||
|
July
1,
|
July
2,
|
Percentage
|
|||||||||||
|
Source
|
2006
|
2005
|
Change
|
||||||||||
|
Chicken-
|
|||||||||||||
|
United
States
|
$
|
1,019.9
|
$
|
(103.2
|
)
|
(9.2
|
)%
|
(a
|
)
|
||||
|
Mexico
|
107.0
|
(7.4
|
)
|
(6.5
|
)%
|
(b
|
)
|
||||||
|
$
|
1,126.9
|
$
|
(110.6
|
)
|
(8.9
|
)%
|
|||||||
|
Turkey
|
$
|
15.8
|
$
|
(21.7
|
)
|
(58.0
|
)%
|
(c
|
)
|
||||
|
Other
Products-
|
|||||||||||||
|
United
States
|
$
|
137.9
|
$
|
(21.4
|
)
|
(13.4
|
)%
|
(d
|
)
|
||||
|
Mexico
|
7.0
|
1.3
|
21.6
|
%
|
|||||||||
|
$
|
144.9
|
$
|
(20.1
|
)
|
(12.1
|
)%
|
|||||||
|
$
|
1,287.6
|
$
|
(152.4
|
)
|
(10.6
|
)%
|
|||||||
|
(a)
|
U.S.
chicken sales for the quarter declined compared to the same quarter
last
fiscal year due to an 11.3% decrease in net revenue per pound sold
partially offset by a 2.4% increase in the number of pounds sold.
Excess
inventories created by the lack of demand for export products in
prior
quarters created downward pressure on pricing.
|
|
(b)
|
Mexico
chicken sales decreased compared to the third quarter last fiscal
year
because of a 13.0% decrease in revenue per pound sold partially
offset by
a 7.6% increase in pounds sold.
|
|
(c)
|
Turkey
sales declined due to our decision in the first quarter of fiscal
2006 to
cease production of certain products at our Franconia, Pennsylvania
turkey
cooking operation.
|
|
(d)
|
U.S.
other product sales decreased primarily due to the divestiture
of
non-poultry related distribution
facilities.
|
Gross
Profit.
Gross
profit decreased $176.5 million, or 80.5%, in the third quarter of fiscal 2006
compared to the third quarter of fiscal 2005.
The
following table provides gross profit information (in millions):
|
Quarter
|
Change
From
|
Percentage
of
|
Percentage
|
||||||||||||||||
|
Ended
|
Quarter
Ended
|
Net
Sales
|
of
Net Sales
|
||||||||||||||||
|
July
1,
|
July
2,
|
Percentage
|
Third
Quarter
|
Third
Quarter
|
|||||||||||||||
|
Components
|
2006
|
2005
|
Change
|
Fiscal
2006
|
Fiscal
2005
|
||||||||||||||
|
Net
sales
|
$
|
1,287.6
|
$
|
(152.4
|
)
|
(10.6
|
)%
|
100.0
|
%
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
1,244.9
|
24.1
|
2.0
|
%
|
96.7
|
%
|
84.8
|
%
|
(a
|
)
|
|||||||||
|
Gross
profit
|
$
|
42.7
|
$
|
(176.5
|
)
|
(80.5
|
)%
|
3.3
|
%
|
15.2
|
%
|
(b
|
)
|
||||||
|
(a)
|
Cost
of sales increased $24.1 million due primarily to higher energy costs
and
transportation costs created by fuel cost increases.
|
|
(b)
|
Gross
profit decreased $176.5 million due primarily to the combination
of
depressed selling prices in the U.S. due primarily to a decrease
in export
demand for U.S. chicken products caused by changes in buying patterns
in
foreign markets as a result of avian influenza outbreaks in those
countries and increased freight and fuel
costs.
|
Operating
Income (Loss).
Operating income (loss) for the third quarter of fiscal 2006 decreased $162.7
million when compared to the third quarter of fiscal
2005.
The
following tables provide operating income (loss) information
(millions):
|
Change
from
|
||||||||||
|
Quarter
Ended
|
Quarter
Ended
|
|||||||||
|
July
1,
|
July
2,
|
Percentage
|
||||||||
|
Source
|
2006
|
2005
|
Change
|
|||||||
|
Chicken
|
||||||||||
|
United
States
|
$
|
(20.1
|
)
|
$
|
(141.4
|
)
|
(116.6
|
)%
|
||
|
Mexico
|
(5.0
|
)
|
(22.8
|
)
|
(127.8
|
)%
|
||||
|
$
|
(25.1
|
)
|
$
|
(164.2
|
)
|
(118.1
|
)%
|
|||
|
Turkey
|
$
|
(3.6
|
)
|
$
|
2.8
|
43.4
|
%
|
|||
|
Other
Products
|
||||||||||
|
United
States
|
$
|
1.6
|
$
|
(0.6
|
)
|
(27.9
|
)%
|
|||
|
Mexico
|
0.4
|
(0.7
|
)
|
(65.9
|
)%
|
|||||
|
$
|
2.0
|
$
|
(1.3
|
)
|
(40.5
|
)%
|
||||
|
Operating
Income (Loss)
|
$
|
(26.7
|
)
|
$
|
(162.7
|
)
|
(119.7
|
)%
|
||
|
Change
from
|
Percentage
|
Percentage
|
|||||||||||||||||
|
Quarter
Ended
|
Quarter
Ended
|
of
Net Sales
|
of
Net Sales
|
||||||||||||||||
|
July
1,
|
July
2,
|
Percentage
|
Third
Quarter
|
Third
Quarter
|
|||||||||||||||
|
Components
|
2006
|
2005
|
Change
|
Fiscal
2006
|
Fiscal
2005
|
||||||||||||||
|
Gross
profit
|
$
|
42.7
|
$
|
(176.5
|
)
|
(80.5
|
)%
|
3.3
|
%
|
15.2
|
%
|
||||||||
|
Selling,
general and administrative expense
|
69.4
|
(13.8
|
)
|
(16.6
|
)%
|
5.4
|
%
|
5.8
|
%
|
(a
|
)
|
||||||||
|
Operating
income (loss)
|
$
|
(26.7
|
)
|
$
|
(162.7
|
)
|
(119.7
|
)%
|
(2.1
|
)%
|
9.4
|
%
|
(b
|
)
|
|||||
|
(a)
|
Selling,
general and administrative expense decreased due to the impact of
profit
based retirement and compensation plans.
|
|
(b)
|
Decreased
operating income is primarily due to the items discussed above under
gross
profit partially offset by the reduction in selling, general and
administrative expense discussed
above.
|
Interest
Expense. Interest
expense decreased 6.6% to $12.7 million in the third quarter of fiscal 2006,
when compared to $13.6 million for the third quarter of fiscal 2005, due
primarily to the repurchase of approximately $19.9 million of the Company’s
unsecured notes.
Interest
Income.
Interest
income for the third quarters of fiscal 2006 and fiscal 2005 remained flat
at
$1.3 million.
Miscellaneous,
Net.
Consolidated miscellaneous, net expense (income) of $(2.1) million, for the
third quarter of fiscal 2006 consisted mainly of a $1.3 million gain on sale
of
assets and $0.5 million of dividend income.
Income
Tax (Benefit) Expense.
Consolidated income tax benefit in the third quarter of fiscal 2006 was $(17.5)
million, compared to an income tax expense of $38.3 million in the third quarter
of fiscal 2005. This income tax benefit was primarily due to the loss before
income taxes in the U.S.
The
American Jobs Creation Act of 2004 includes a temporary incentive to U.S.
multinationals to repatriate foreign earnings at an approximate effective 5.25%
U.S. federal tax rate. In addition to the federal taxes, repatriation would
also
result in state income taxes, which we estimate in our case to be approximately
an additional 2.4% of the amount repatriated. We continue to evaluate our
reinvestment and repatriation opportunities and are considering whether to
repatriate earnings from our Mexico operation beyond the $43.6 million amount
anticipated and provided for in fiscal 2005. Total cumulative undistributed
earnings of our Mexico subsidiaries approximate $245 million, or approximately
$200 million in excess of the amount which was provided for in fiscal 2005.
The
tax consequences on additional repatriation, if any, will be recorded in the
fourth quarter of fiscal 2006 upon completion of detailed repatriation
plans.
First
Nine Months of Fiscal 2006 Compared to First Nine Months of Fiscal 2005
Net
Sales. Net
Sales
for the first nine months of fiscal 2006 decreased $286.4 million, or 6.8%,
versus the first nine months of fiscal 2005. The following table provides
additional information regarding net sales (in millions):
|
First
Nine Months Ended
|
Change
from
First
Nine Months Ended
|
||||||||||||
|
July
1,
|
July
2,
|
Percentage
|
|||||||||||
|
Source
|
2006
|
2005
|
Change
|
||||||||||
|
Chicken-
|
|||||||||||||
|
United
States
|
$
|
3,039.3
|
$
|
(209.4
|
)
|
(6.4
|
)%
|
(a
|
)
|
||||
|
Mexico
|
303.4
|
1.2
|
0.4
|
%
|
(b
|
)
|
|||||||
|
$
|
3,342.7
|
$
|
(208.2
|
)
|
(5.9
|
)%
|
|||||||
|
Turkey
|
$
|
94.8
|
$
|
(59.8
|
)
|
(38.7
|
)%
|
(c
|
)
|
||||
|
Other
Products-
|
|||||||||||||
|
United
States
|
$
|
445.6
|
$
|
(16.9
|
)
|
(3.6
|
)%
|
(d
|
)
|
||||
|
Mexico
|
14.1
|
(1.5
|
)
|
(9.7
|
)%
|
||||||||
|
$
|
459.7
|
$
|
(18.4
|
)
|
(3.8
|
)%
|
|||||||
|
$
|
3,897.2
|
$
|
(286.4
|
)
|
(6.8
|
)%
|
|||||||
|
(a)
|
U.S.
chicken sales for the first nine months of fiscal 2006 were 6.4%
less than
the first nine months of fiscal 2005 because of a 1.3% decline in
pounds
sold and a 5.3% decline in net revenue per pound sold created by
market
disruptions caused by the avian influenza scare in other parts of
the
world.
|
|
(b)
|
Mexico
chicken sales increased due to a 9.1% increase in pounds sold during
the
first nine months of fiscal 2006 versus the first nine months of
fiscal
2005 substantially offset by an 8.0% decline in net revenue per pound
sold.
|
|
(c)
|
Turkey
sales declined because of the March 2006 discontinuation of certain
products discussed above.
|
|
(d)
|
U.S.
other product sales decreased primarily due to the divestiture of
non-poultry related distribution
facilities.
|
Gross
Profit.
Gross
profit decreased $346.1 million, or 63.6%, in the first nine months of fiscal
2006 compared to the first nine months of fiscal 2005.
The
following table provides gross profit information (in millions):
|
Change
From
|
Percentage
of
|
Percentage
of
|
|||||||||||||||||
|
First
Nine
|
First
Nine
|
Net
Sales
|
Net
Sales
|
||||||||||||||||
|
Months
Ended
|
Months
Ended
|
First
Nine
|
First
Nine
|
||||||||||||||||
|
July
1,
|
July
2,
|
Percentage
|
Months
|
Months
|
|||||||||||||||
|
Components
|
2006
|
2005
|
Change
|
Fiscal
2006
|
Fiscal
2005
|
||||||||||||||
|
Net
sales
|
$
|
3,897.2
|
$
|
(286.4
|
)
|
(6.8
|
)%
|
100.0
|
%
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
3,698.9
|
59.7
|
1.6
|
%
|
94.9
|
%
|
87.0
|
%
|
(a
|
)
|
|||||||||
|
Gross
profit
|
$
|
198.3
|
$
|
(346.1
|
)
|
(63.6
|
)%
|
5.1
|
%
|
13.0
|
%
|
(b
|
)
|
||||||
|
(a)
|
Cost
of sales increased $59.7 million due primarily to increased feed
ingredient costs and higher energy costs and transportation costs
created
by fuel cost increases. Supplemental fuel payments to growers in
the first
nine months of fiscal 2006 were $11.7 million higher than in the
first
nine months of fiscal 2005. Included in cost of sales for the first
nine
months of fiscal 2006 was a charge of $3.8 million to impair the
carrying
value of certain equipment currently held for sale and formerly used
in
our turkey division, a charge of $2.5 million to reduce the value
of
certain packaging and supplies associated with those products and
$0.2
million for severance costs. Included in the cost of sales for the
first
nine months of fiscal 2005 were proceeds of $5.2 million from the
final
resolution of the 2004 turkey restructuring activities.
|
|
(b)
|
Gross
profit decreased $346.1 million due to the combination of depressed
selling prices, due primarily to a decrease in export demand for
U.S.
chicken products caused by changes in buying patterns in foreign
markets
as a result of avian influenza outbreaks in those countries, increased
feed ingredient costs and freight and fuel
costs.
|
Operating
Income (Loss).
Operating income (loss) for the first nine months of fiscal 2006 decreased
$334.5 million, or 105.8%, when compared to the first nine months of fiscal
2005.
The
following tables provide operating income (loss) information
(millions):
|
Change
from
|
||||||||||
|
First
Nine
|
First
Nine
|
|||||||||
|
Months
Ended
|
Months
Ended
|
|||||||||
|
July
1,
|
July
2,
|
Percentage
|
||||||||
|
Source
|
2006
|
2005
|
Change
|
|||||||
|
Chicken
|
||||||||||
|
United
States
|
$
|
(4.0
|
)
|
$
|
(295.9
|
)
|
(101.4
|
)%
|
||
|
Mexico
|
(10.2
|
)
|
(42.1
|
)
|
(131.9
|
)%
|
||||
|
$
|
(14.2
|
)
|
$
|
(338.0
|
)
|
(104.4
|
)%
|
|||
|
Turkey
|
$
|
(16.0
|
)
|
$
|
0.6
|
3.9
|
%
|
|||
|
Other
Products
|
||||||||||
|
United
States
|
$
|
10.5
|
$
|
5.2
|
98.7
|
%
|
||||
|
Mexico
|
1.2
|
(2.3
|
)
|
(66.5
|
)%
|
|||||
|
$
|
11.7
|
$
|
2.9
|
33.0
|
%
|
|||||
|
Operating
Income
|
$
|
(18.5
|
)
|
$
|
(334.5
|
)
|
(105.8
|
)%
|
||
|
Change
from
|
Percentage
|
Percentage
|
|||||||||||||||||
|
First
Nine
|
First
Nine
|
of
Net Sales
|
of
Net Sales
|
||||||||||||||||
|
Months
Ended
|
Months
Ended
|
First
Nine
|
First
Nine
|
||||||||||||||||
|
July
1,
|
July
2,
|
Percentage
|
Months
|
Months
|
|||||||||||||||
|
Components
|
2006
|
2005
|
Change
|
Fiscal
2006
|
Fiscal
2005
|
||||||||||||||
|
Gross
profit
|
$
|
198.3
|
$
|
(346.1
|
)
|
(63.6
|
)%
|
5.1
|
%
|
13.0
|
%
|
||||||||
|
Selling,
general and administrative expense
|
216.8
|
(11.6
|
)
|
(5.1
|
)%
|
5.6
|
%
|
5.5
|
%
|
(a
|
)
|
||||||||
|
Operating
income
|
$
|
(18.5
|
)
|
$
|
(334.5
|
)
|
(105.8
|
)%
|
(0.5
|
)%
|
7.5
|
%
|
(b
|
)
|
|||||
|
(a)
|
Selling,
general and administrative expense decreased due to the impact of
profit
based retirement and compensation plans.
|
|
(b)
|
Decreased
operating income is primarily due to the items discussed above under
gross
profit partially offset by the decrease in selling, general and
administrative expense.
|
Interest
Expense. Interest
expense increased 2.6% to $38.4 million in the first nine months of fiscal
2006,
when compared to $37.4 million for the first nine months of fiscal 2005, due
primarily to short-term borrowings.
Interest
Income.
Interest
income increased from $3.6 million in the first nine months of fiscal 2005
to
$8.4 million in the first nine months of fiscal 2006 due to investments
purchased with excess cash flow from fiscal 2005 operations and generally
higher
interest rates.
Miscellaneous,
Net.
Consolidated miscellaneous, net expense (income) for the first nine months
of
fiscal 2006 was $(1.0) million primarily due to dividend income. Miscellaneous,
net expense (income) of $(11.7) for the first nine months of fiscal 2005
consisted primarily of a non-recurring gain of $11.7 million associated with
a
litigation settlement.
Income
Tax (Benefit) Expense.
Consolidated income tax benefit in the first nine months of fiscal 2006 was
$(21.7) million, compared to an income tax expense of $103.9 million in the
first nine months of fiscal 2005. This decrease in consolidated income tax
expense was primarily due to a loss before income taxes in the U.S.
Liquidity
and Capital Resources
The
following table presents our available sources of liquidity as of July
1, 2006.
See our Annual Report on Form 10-K for the fiscal year ended October 1,
2005 for
a detailed description of each facility discussed below.
|
Facility
|
Available
|
Amount
|
Net
|
||||||||||
|
Source
of Liquidity
|
Amount
|
Borrowing
|
Outstanding
|
Available
|
|||||||||
|
(in
millions)
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
44,069
|
|||||
|
Investments
in available for sale securities
|
--
|
--
|
--
|
170,657
|
|||||||||
|
Debt
Facilities:
|
|||||||||||||
|
Revolving
credit facilities
|
168,000
|
139,317
|
--
|
139,317
|
|||||||||
|
Revolving/term
facility
|
500,000
|
500,000
|
--
|
500,000
|
|||||||||
|
Receivables
purchase
|
|||||||||||||
|
agreement
|
125,000
|
125,000
|
50,000
|
75,000
|
|||||||||
|
Total
available
|
793,000
|
764,317
|
50,000
|
$
|
929,043
|
||||||||
At
July
1, 2006, our working capital increased $34.3 million to $438.9 million
and our
current ratio increased to 1.79 to 1, compared with working capital of
$404.6
million and a current ratio of 1.68 to 1 at October 1, 2005, primarily
due to
the working capital changes discussed below.
Trade
accounts and other receivables were $197.0 million at July 1, 2006, compared
to
$288.5 million at October 1, 2005, a decrease of $91.5 million or 31.7%.
This
decrease is partially due to the sale of $50.0 million of trade receivables
under an Asset Sales Agreement as discussed in Note B-Accounts Receivable
to the
consolidated financial statements and decreased revenue in fiscal 2006
versus
the prior year.
Income
taxes receivable of $42.8 million relates to the year to date loss before
income
taxes. This compares to an income tax payable of $16.2 million at October
1,
2005.
Inventories
were $602.1 million at July 1, 2006, compared to $527.3 million at October
1,
2005. The $74.8 million, or 14.2%, increase in inventories was primarily due
to
an increase in finished poultry products due to normal seasonal variations
and
increased feed ingredient costs and increased fuel and transportation costs.
Accounts
payable and accrued expenses decreased $24.0 million, or 4.2%, to $546.0 million
at July 1, 2006, compared to $570.0 million at October 1, 2005 due primarily
to
normal fluctuations with respect to the timing of payments and decreases in
the
accrual for profit based retirement and compensation plans.
Capital
expenditures of $101.3 million and $90.1 million for the nine months ended
July
1, 2006 and July 2, 2005, respectively, were primarily incurred to improve
efficiencies, expand capacity, reduce costs and for the routine replacement
of
equipment. We reduced our expectation of capital spending in our second and
third fiscal quarters by $30-$50 million and now anticipate spending of
approximately $140.0 million to $150.0 million in fiscal 2006, down from our
first quarter fiscal 2006 estimate of $180.0 million to $200.0 million, to
improve efficiencies, expand capacities and for the routine replacement of
equipment. We expect to finance such expenditures with current cash, available
operating cash flows and existing revolving/term and revolving credit
facilities.
Cash
flows provided by operating activities were $10.5 million and $362.9 million
for
the nine months ended July 1, 2006 and July 2, 2005, respectively. The decrease
in cash flows provided by operating activities for the first nine months of
fiscal 2006, when compared to the first nine months of fiscal 2005, was due
primarily to decreased profitability.
The
sale
of investment securities in excess of purchases of $104.4 million was used
to
fund dividends and the repurchase of the Company’s debt.
Cash
flows used for financing activities were $105.8 million and $17.7 million for
the nine months ended July 1, 2006 and July 2, 2005, respectively. This
increased use of cash was due to the special dividend of $1.00 per share, or
$66.6 million, paid in January 2006 and the purchase and early retirement of
certain of the Company’s long term debt as described in Note D-Notes Payable and
Long-Term Debt to the consolidated financial statements.
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. We have not
recorded a liability for any of these indemnities, as the likelihood of payment
in each case is considered remote.
Feed
Ingredients
We
purchase certain commodities, primarily corn and soybean meal. As a result,
our
earnings are affected by changes in the price and availability of such feed
ingredients. We periodically elect, in some instances, to lock-in future feed
ingredient prices using various hedging techniques, including forward purchase
agreements with suppliers and futures contracts. We do not use such financial
instruments for trading purposes and are not a party to any leveraged
derivatives. Market risk is estimated as a hypothetical 10.0% increase in the
weighted-average cost of our primary feed ingredients as of July 1, 2006. Based
on our feed consumption during the nine months ended July 1, 2006, such an
increase would have resulted in an increase to cost of sales of approximately
$99.0 million, excluding the impact of any hedging in that period.
Foreign
Currency
Our
earnings are affected by foreign exchange rate fluctuations related to the
Mexico peso net monetary position of our Mexico subsidiaries. We manage this
exposure primarily by attempting to minimize our Mexico peso net monetary
position, but from time to time, we have considered executing hedges to help
minimize this exposure. Such instruments, however, have historically not been
economically feasible. We are also exposed to the effect of potential exchange
rate fluctuations to the extent that amounts are repatriated from Mexico to
the
United States. However, except to the extent we decide to repatriate our Mexico
earnings under the American Job Creation Act of 2004, we currently anticipate
that the cash flows of our Mexico subsidiaries will continue to be reinvested
in
our Mexico operations. In addition, the Mexico peso exchange rate can directly
and indirectly impact our results of operations and financial position in
several ways, including potential economic recession in Mexico resulting from
a
devalued peso. The impact on our financial position and results of operations
resulting from a hypothetical change in the exchange rate between the U.S.
dollar and the Mexico peso cannot be reasonably estimated. Foreign currency
exchange gains and losses, representing the change in the U.S. dollar value
of
the net monetary assets of our Mexico subsidiaries denominated in Mexico pesos,
was a loss of $1.0 million in the first nine months of fiscal 2006 compared
to a
gain of $0.4 million for the first nine months of fiscal 2005. On July 1, 2006,
the Mexico peso closed at 11.31 to 1 U.S. dollar, compared to 10.77 at October
1, 2005. No assurance can be given as to how future movements in the peso could
affect our future earnings.
There
have been no material changes from the information provided in Item 7A of our
Annual Report on Form 10-K for the fiscal year ended October 1, 2005, other
than
as described above.
Forward
Looking Statements
Statements
of our intentions, plans, beliefs, expectations or predictions for the future,
denoted by the words "anticipate," "believe," "estimate," "expect," "project,"
"imply," "intend," "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 the following:
| · |
Matters
affecting the poultry industry generally, including fluctuations
in the
commodity prices of feed ingredients, chicken and
turkey;
|
| · |
Additional
outbreaks of avian influenza or other diseases, either in our own
flocks
or elsewhere, affecting our ability to conduct our operations and/or
demand for our poultry products;
|
| · |
Contamination
of our products, which has recently and can in the future lead to
product
liability claims and product
recalls;
|
| · |
Exposure
to risks related to product liability, product recalls, property
damage
and injuries to persons, for which insurance coverage is expensive,
limited and potentially inadequate;
|
| · |
Changes
in laws or regulations affecting our operations or the application
thereof;
|
| · |
Competitive
factors and pricing pressures or the loss of one or more of our largest
customers;
|
| · |
Currency
exchange rate fluctuations, trade barriers, exchange controls,
expropriation and other risks associated with foreign
operations;
|
| · |
Management
of our cash resources, particularly in light of our leverage, and
restrictions imposed by and as a result of, our leverage;
and
|
| · |
The
impact of uncertainties of litigation as well as other risks described
herein and under “Risk Factors” in our Annual Report on Form 10-K filed
with the Securities and Exchange
Commission.
|
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 any forward-looking statement or any such
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 to information contained in previous filings or communications. Although
we have attempted to list comprehensively these important cautionary risk
factors, we must caution investors and others that other factors may in the
future prove to be important and affecting our business or results of
operations.
An
evaluation was performed under the supervision and with the participation of
the
Company's management, including the Chairman, Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company's
management, including the Chairman, Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures were
effective as of the end of the period covered by this Quarterly Report on Form
10-Q to provide reasonable assurance that information required to be disclosed
by the Company in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time period specified in the SEC rules and
forms.
In
connection with the evaluation described above, the Company’s management,
including the Chairman, Chief Executive Officer and Chief Financial Officer,
identified no change in the Company's internal control over financial reporting
that occurred during the Company’s fiscal quarter ended July 1, 2006, and that
has materially affected, or is reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
PART
II. OTHER INFORMATION
On
July
1, 2002, three individuals, on behalf of themselves and a putative class of
chicken growers, filed their original class action complaint against us in
the
United States District Court for the Eastern District of Texas, Texarkana
Division, styled “Cody Wheeler, et al. vs. Pilgrim’s Pride Corporation.” The
plaintiffs alleged that we violated the Packers and Stockyards Act (7 U.S.C.
Section 192) and breached fiduciary duties allegedly owed to the plaintiff
growers. The plaintiffs also brought individual actions under the Packers and
Stockyards Act alleging, among other things, breach of fiduciary duties and
breach of contract. On September 30, 2005, plaintiffs amended their lawsuit
to
join Tyson Foods, Inc. as a co-defendant. Two additional former chicken growers
were also added as plaintiffs to the lawsuit. This amendment, which occurred
38
months after the lawsuit’s initial filing, contends that the Company and Tyson
are involved in a conspiracy to violate federal antitrust laws. On January
3,
2006, the Court entered an Order severing Plaintiffs’ Packers and Stockyards Act
and antitrust claims. The Court ordered that Plaintiffs Wheeler, Davis and
Williams may proceed with their Packers and Stockyards Act claims as set forth
in Plaintiffs’ Third Amended Complaint. The Court also ordered that Plaintiffs
Wheeler, Davis, Williams, Grounds and Ward may proceed with their respective
antitrust claims asserted against us and Tyson in a separate cause of action.
On
March 6, 2006, the plaintiffs filed their motion for class certification in
the
original lawsuit. On June 2, 2006 the Court entered an Order withdrawing
Plaintiffs’ motion for class certification and prohibiting the Plaintiffs from
filing any additional class-action claims against us in the Packers and
Stockyard Act lawsuit. Additionally, the two former growers that joined the
lawsuit on September 30, 2005 withdrew from the case. The Packers and Stockyard
Act lawsuit is currently proceeding against us with individual claims by the
three original individual plaintiffs. An action styled "Cody Wheeler, et al.
vs.
Pilgrim's Pride Corporation, et al." relating to the severed antitrust claims
was filed against us and Tyson on January 3, 2006 by the three original
plaintiffs and a former grower, both in their individual capacities and on
behalf of a putative class of chicken growers. A Docket Control Order has been
entered by the Court and a class certification hearing is currently scheduled
for January 24, 2007. The proceedings are currently in the early stages of
discovery. The Company intends to defend vigorously against the plaintiffs'
individual claims in the Packers and Stockyard Act suit and the antitrust suit.
We do not expect either matter to have a material impact on our financial
position, operations or liquidity.
In
October 2002, a limited number of USDA environmental samples from our Franconia,
Pennsylvania plant tested positive for Listeria. As a result, we voluntarily
recalled all cooked deli products produced at the plant from May 1, 2002 through
October 11, 2002. No illnesses have been linked to any of our recalled products,
and none of such products have tested positive for the strain of Listeria
associated with an outbreak in the Northeastern U.S. that occurred during the
summer of 2002. However, following this recall, a number of demands and cases
have been made and filed alleging injuries purportedly arising from the
consumption of products produced at this facility. These include: “Lawese
Drayton, Individually and as Personal Representative of the Estate of Raymond
Drayton, deceased, Plaintiff, v. Pilgrim’s Pride Corporation, Jack Lambersky
Poultry Company, Inc. d/b/a JL Foods Co, Inc., Defendants,” which was filed
against us in the United States District Court for the Eastern District of
Pennsylvania on April 15, 2003; “Laron Harvey, by his mother and natural
guardian, Shakandra Hampton, and Shakandra Hampton in her own right v. Pilgrim’s
Pride Corporation and Jack Lambersky
Poultry Company, Inc.,” which was filed in the Pennsylvania
Court
of
Common Pleas on May 5, 2003, and has since been removed to the U.S. District
Court of the Eastern District of Pennsylvania in Philadelphia; “Ryan and Dana
Patterson v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, et
al” which was filed in the Superior Court of New Jersey, Law Division, Passaic
County, on August 12, 2003; “Jamar Clarke, an infant under the age of fourteen
(14) years, by his mother and natural guardian, Wanda Multrie Clarke, and Wanda
Multrie Clarke, individually v. Pilgrim’s Pride Corporation d/b/a Wampler Foods,
Inc., H. Schrier and Co., Inc., Board of Education of the City of New York
and
Public School 251” which was filed in the Supreme Court of the State of New
York, County of Queens, on August 1, 2003; “Peter Roselle, as Administrator and
Prosequendum for the Heirs-at-Law of Louis P. Roselle, deceased; and Executor
of
the Estate of Louis P. Roselle, deceased, and individually v. Pilgrim’s Pride
Corporation, Wampler Foods, Inc., Jack Lambersky Poultry Company, Inc., d.b.a.
J.L. Foods Co. Inc.” which was filed in the Superior Court of New Jersey, Law
Division, Union County, on June 14, 2004; “Jody Levonchuk, administratrix of the
Estate of Joseph Cusato v. Pilgrim’s Pride Corporation and Jack Lambersky
Poultry Company” which was filed in the U.S. District Court for the Eastern
District of Pennsylvania, on July 28, 2004; Nancy Cirigliano and Scott Fischer
v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, et al,” which
was filed in the Superior Court of New Jersey, Union County, on August 10,
2004;
“Dennis Wysocki, as the Administrator of the Estate of Matthew Tyler Wysocki,
deceased, and Dennis Wysocki and Karen Wysocki, individually v. Pilgrim’s Pride
Corporation and Jack Lambersky Poultry Company, et al,” which was filed in the
Supreme Court of the State of New York, County of New York, on July 30, 2004;
“Randi Carden v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company,
et al,” which was filed in the Superior Court of New Jersey, Camden County, on
August 10, 2004; and “Roberta Napolitano, as Trustee of the Bankruptcy Estate of
Burke Caren Kantrow v. Pilgrim’s Pride Corporation, Wampler Foods, Inc. and Jack
Lambersky Poultry Company, d/b/a J. L. Foods, Inc.” which was filed in the
Superior Court of Connecticut, New Haven, on June 16, 2005. On August 20, 2004,
the Estate of Frank Niemtzow refiled his individual action from the previously
filed and voluntarily dismissed class action suit. We resolved the litigation
with the plaintiffs in the Harvey, Patterson, Clarke, Levonchuk and Niemtzow
cases and dismissal orders have been entered with respect to these cases. We
recently resolved the litigation with the plaintiffs in the Roselle, Cirigliano
and Carden cases and expect dismissal orders with respect to these cases to
be
entered in the near future. Neither the likelihood of an unfavorable outcome
nor
the amount of ultimate liability, if any, with respect to any of the remaining
cases can be determined at this time. The remaining cases are in various stages
of litigation, and we believe we have meritorious defenses to each of the
claims, which we intend to vigorously defend. After considering our available
insurance coverage, we do not expect any of these matters to have a material
impact on our financial position, operations or liquidity.
On
December 31, 2003, we were served with a purported class action complaint styled
“Angela Goodwin, Gloria Willis, Johnny Gill, Greg Hamilton, Nathan Robinson,
Eddie Gusby, Pat Curry, Persons Similarly Situated v. ConAgra Poultry Company
and Pilgrim’s Pride, Incorporated” in the United States District Court, Western
District of Arkansas, El Dorado Division, alleging racial and age discrimination
at one of the facilities we acquired from ConAgra. Two of the named plaintiffs,
Greg Hamilton and Gloria Willis, were voluntarily dismissed from this action.
We
believe we have meritorious defenses to the class certification as well as
the
individual claims and intend to vigorously oppose class certification and defend
these claims. The ultimate liability
with respect to these claims cannot be determined at this time; however, we
do
not expect this matter to have a material impact on our financial position,
operations or liquidity.
We
are
subject to various other legal proceedings and claims, which arise in the
ordinary course of our business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect
our
financial position or results of operations.
There
are
many factors that affect our business and the results of our operations, many
of
which are beyond our control. In this regard, "Item 1A. Risk Factors" to Part
I
of our Annual Report on Form 10-K for the year ended October 1, 2005 contained
a
description of significant factors that might cause the actual results of
operations in future periods to differ materially from those currently expected
or desired. We urge you to read the risk factors contained in our Form 10-K
as
well as the risk factor set forth below which supplements the risk factors
contained in our Form 10-K:
Avian
Influenza Outbreaks Have Had A Material Adverse Effect On The Poultry Industry
In General And Us In Particular.
In
recent
months there has been substantial publicity regarding a highly pathogenic strain
of avian influenza, known as H5N1, which has been affecting Asia since 2002
and
Europe and the Middle East since 2005. It is widely believed that H5N1 is being
spread by migratory birds, such as ducks and geese. There have also been some
cases where H5N1 is believed to have passed from birds to humans as humans
came
into contact with live and dead birds that were infected with the
disease.
Although
H5N1 has not been identified in North America, the focus and concern over avian
influenza abroad has significantly reduced international demand for chicken
products and the resulting oversupply has had a significant adverse effect
on
both U.S. and international chicken prices. In the third quarter of fiscal
2006,
the market pricing we received for chicken leg quarters and breast meat declined
approximately 16.3% and 33.5%, respectively, and for the first nine months
of
fiscal 2006 our total U.S. chicken sales volumes declined approximately 1.3%,
when compared to the comparable prior year period. This change in pricing and
demand materially adversely affected our results through the third quarter
of
fiscal 2006. Although export demand and pricing have improved somewhat between
the beginning of the third quarter of fiscal 2006 and the date of this report,
we can give no assurances that such improvements will continue or that export
demand and pricing will not worsen in the future.. Additionally, although H5N1
has not been identified in North America, because of the flight patterns of
migratory birds, it is widely speculated that this strain of avian influenza
may
reach North America as early as calendar year 2006.
Any
outbreak of avian influenza, whether H5N1 or another strain in North America
could result in governmental restrictions on the import and export of our fresh
chicken, turkey 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 some of 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.
Accordingly, no assurances can be given that demand and pricing of U.S. produced
poultry products will not continue to deteriorate or that avian influenza will
not otherwise have a material adverse effect on our business or
prospects.
|
3.1
|
Certificate
of Incorporation of the Company, as amended (incorporated by reference
from Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the
fiscal year ended October 2, 2004 filed on November 24,
2004).
|
|
|
3.2
|
Amended
and Restated Corporate Bylaws of the Company (incorporated by reference
from Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (No.
333-111929) filed on January 15, 2004).
|
|
|
12.1
|
Statement
regarding Computation of Ratios.*
|
|
|
31.1
|
Certification
of Co-Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
31.2
|
Certification
of Co-Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
31.3
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
|
|
32.1
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.2
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.3
|
Certification
of Chief Financial Officer of Pilgrim's Pride Corporation pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
*
Filed herewith
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
PILGRIM’S
PRIDE CORPORATION
|
|||
|
/s/
Richard A. Cogdill
|
|||
|
Date:
|
August
1, 2006
|
Richard
A. Cogdill
|
|
|
Chief
Financial Officer,
|
|||
|
Secretary
and Treasurer
|
|||
|
(Principal
Financial Officer,
|
|||
|
Chief
Accounting Officer and
|
|||
|
Authorized
Signatory)
|
|||
|
3.1
|
Certificate
of Incorporation of the Company, as amended (incorporated by reference
from Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the
fiscal year ended October 2, 2004 filed on November 24,
2004).
|
|
|
3.2
|
Amended
and Restated Corporate Bylaws of the Company (incorporated by reference
from Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (No.
333-111929) filed on January 15, 2004).
|
|
|
Statement
regarding Computation of Ratios.*
|
||
|
Certification
of Co-Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
||
|
Certification
of Co-Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
||
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
||
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
||
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
||
|
Certification
of Chief Financial Officer of Pilgrim's Pride Corporation pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.*
|
||
|
*
Filed herewith
|
||
31