PILGRIMS PRIDE CORP - Quarter Report: 2007 March (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 March
31, 2007
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
![](https://www.sec.gov/Archives/edgar/data/0000802481/000080248107000035/seclogo.jpg)
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 April 30, 2007, was
66,555,733.
1
PILGRIM’S
PRIDE CORPORATION AND SUBSIDIARIES
|
||
PART
I. FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements (Unaudited)
|
|
March
31, 2007 and September 30, 2006
|
||
Three
months and six months ended March 31, 2007 and April 1,
2006
|
||
Six
months ended March 31, 2007 and April 1, 2006
|
||
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
||
Quantitative
and Qualitative Disclosures about Market Risk
|
||
Controls
and Procedures
|
||
PART
II. OTHER INFORMATION
|
||
Legal
Proceedings
|
||
Risk
Factors
|
||
Submission
of Matters to a Vote of Security Holders
|
||
Exhibits
|
||
PART
I. FINANCIAL INFORMATION
|
|||||||
Item
1. Financial Statements
|
|||||||
Pilgrim's
Pride Corporation
|
|||||||
(Unaudited)
|
|||||||
March
31, 2007
|
September
30, 2006
|
||||||
(In
thousands, except share and per share data)
|
|||||||
Assets
|
|||||||
Current
Assets:
|
|||||||
Cash
and cash equivalents
|
$
|
69,170
|
$
|
156,404
|
|||
Investment
in available for sale securities
|
24,000
|
21,246
|
|||||
Trade
accounts and other receivables, less allowance for doubtful
accounts
|
391,569
|
263,149
|
|||||
Inventories
|
896,331
|
585,940
|
|||||
Income
taxes receivable
|
76,683
|
39,167
|
|||||
Current
deferred income taxes
|
81,493
|
7,288
|
|||||
Other
current assets
|
48,489
|
32,480
|
|||||
Total
Current Assets
|
1,587,735
|
1,105,674
|
|||||
Investment
in Available for Sale Securities
|
31,042
|
115,375
|
|||||
Other
Assets
|
101,283
|
50,825
|
|||||
Goodwill
|
515,387
|
--
|
|||||
Property,
Plant and Equipment:
|
|||||||
Land
|
92,984
|
52,493
|
|||||
Buildings,
machinery and equipment
|
2,435,408
|
1,702,949
|
|||||
Autos
and trucks
|
54,249
|
57,177
|
|||||
Construction-in-progress
|
122,886
|
63,853
|
|||||
2,705,527
|
1,876,472
|
||||||
Less
accumulated depreciation
|
(793,977
|
)
|
(721,478
|
)
|
|||
1,911,550
|
1,154,994
|
||||||
$
|
4,146,997
|
$
|
2,426,868
|
||||
Liabilities
and Stockholders’ Equity
|
|||||||
Current
Liabilities:
|
|||||||
Accounts
payable
|
$
|
392,137
|
$
|
293,685
|
|||
Accrued
expenses
|
462,373
|
272,830
|
|||||
Current
maturities of long-term debt
|
8,253
|
10,322
|
|||||
Total
Current Liabilities
|
862,763
|
576,837
|
|||||
Long-Term
Debt, Less Current Maturities
|
1,789,519
|
554,876
|
|||||
Deferred
Income Taxes
|
338,788
|
175,869
|
|||||
Other
long-term liabilities
|
85,048
|
--
|
|||||
Minority
Interest in Subsidiary
|
2,033
|
1,958
|
|||||
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; 66,555,733
issued
|
665
|
665
|
|||||
Additional
paid-in capital
|
469,779
|
469,779
|
|||||
Retained
earnings
|
594,942
|
646,750
|
|||||
Accumulated
other comprehensive loss
|
3,460
|
134
|
|||||
Total
Stockholders’ Equity
|
1,068,846
|
1,117,328
|
|||||
$
|
4,146,997
|
$
|
2,426,868
|
See
notes to consolidated financial
statements.
|
Pilgrim’s
Pride Corporation and Subsidiaries
(Unaudited)
|
|||||||||||||
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
March
31, 2007
|
April
1, 2006
|
March
31, 2007
|
April
1, 2006
|
||||||||||
(in
thousands, except share and per share data)
|
|||||||||||||
Net
Sales
|
$
|
1,993,965
|
$
|
1,265,709
|
$
|
3,331,097
|
$
|
2,609,521
|
|||||
Cost
of sales
|
1,910,023
|
1,228,508
|
3,181,628
|
2,453,920
|
|||||||||
Gross
profit
|
83,942
|
37,201
|
149,469
|
155,601
|
|||||||||
Selling,
general and administrative
|
95,641
|
75,137
|
164,073
|
147,339
|
|||||||||
Operating
income (loss)
|
(11,699
|
)
|
(37,936
|
)
|
(14,604
|
)
|
8,262
|
||||||
Other
Expense (Income):
|
|||||||||||||
Interest
expense
|
39,295
|
13,271
|
53,209
|
25,666
|
|||||||||
Interest
income
|
(1,684
|
)
|
(3,214
|
)
|
(2,992
|
)
|
(7,161
|
)
|
|||||
Loss
on early extinguishment of debt
|
14,475
|
--
|
14,475
|
--
|
|||||||||
Foreign
exchange (gain)/loss
|
10
|
(190
|
)
|
1,514
|
(810
|
)
|
|||||||
Miscellaneous,
net
|
(3,678
|
)
|
(702
|
)
|
(6,194
|
)
|
1,028
|
||||||
Total
other expenses, net
|
48,418
|
9,165
|
60,012
|
18,723
|
|||||||||
Loss
before income taxes
|
(60,117
|
)
|
(47,101
|
)
|
(74,616
|
)
|
(10,461
|
)
|
|||||
Income
tax (benefit) expense
|
(20,040
|
)
|
(15,147
|
)
|
(25,804
|
)
|
(4,185
|
)
|
|||||
Net
loss
|
$
|
(40,077
|
)
|
$
|
(31,954
|
)
|
$
|
(48,812
|
)
|
$
|
(6,276
|
)
|
|
Net
loss per common share- basic and diluted
|
$
|
(0.60
|
)
|
$
|
(0.48
|
)
|
$
|
(0.73
|
)
|
$
|
(0.09
|
)
|
|
Dividends
declared per common share
|
$
|
0.0225
|
$
|
0.0225
|
$
|
0.0450
|
$
|
1.0450
|
|||||
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)
|
|||||||
Six
Months Ended
|
|||||||
March
31, 2007
|
April
1, 2006
|
||||||
(in
thousands)
|
|||||||
Cash
Flows From Operating Activities:
|
|||||||
Net
loss
|
$
|
(48,812
|
)
|
$
|
(6,276
|
)
|
|
Adjustments
to reconcile net loss to cash provided by operating
activities
|
|||||||
Depreciation
and amortization
|
87,673
|
65,092
|
|||||
Loss
on early extinguishment of debt
|
7,099
|
--
|
|||||
Impairment
of assets
|
--
|
3,767
|
|||||
Loss
on property disposals
|
(306
|
)
|
1,215
|
||||
Deferred
income taxes
|
6,194
|
|
(605
|
)
|
|||
Changes
in operating assets and liabilities
|
|||||||
Accounts
and other receivables
|
(13,383
|
)
|
59,192
|
||||
Income
taxes receivable
|
(11,738
|
)
|
(14,822
|
)
|
|||
Inventories
|
(64,090
|
)
|
(81,353
|
)
|
|||
Other
current assets
|
(3,511
|
)
|
(11,471
|
)
|
|||
Accounts
payable and accrued expenses
|
(23,528
|
)
|
(10,642
|
)
|
|||
Other
|
8,664
|
(2,134
|
)
|
||||
Cash
provided by (used for) operating activities
|
(55,738
|
)
|
1,963
|
||||
Investing
Activities:
|
|||||||
Acquisitions
of property, plant and equipment
|
(94,449
|
)
|
(74,519
|
)
|
|||
Business
acquisitions
|
(1,108,817
|
)
|
--
|
||||
Purchases
of investment securities
|
(357,248
|
)
|
(212,403
|
)
|
|||
Proceeds
from sale/maturity of investment securities
|
436,536
|
319,260
|
|||||
Proceeds
from property disposals
|
4,959
|
2,717
|
|||||
Other,
net
|
7,940
|
|
(3
|
)
|
|||
Cash
provided by (used for) investing activities
|
(1,111,079
|
)
|
35,052
|
||||
Financing
Activities:
|
|||||||
Borrowing
for acquisition
|
1,230,000
|
--
|
|||||
Proceeds
from notes payable to banks
|
--
|
83,000
|
|||||
Repayments
on notes payable to banks
|
--
|
(83,000
|
)
|
||||
Proceeds
from long-term debt
|
774,791
|
--
|
|||||
Payments
on long-term debt
|
(906,673
|
)
|
(32,350
|
)
|
|||
Debt issue costs | (15,565 | ) |
--
|
||||
Cash
dividends paid
|
(2,995
|
)
|
(69,551
|
)
|
|||
Cash
provided by (used for) financing activities
|
1,079,558
|
(101,901
|
)
|
||||
Effect
of exchange rate changes on cash and cash equivalents
|
25
|
(1
|
)
|
||||
Decrease
in cash and cash equivalents
|
(87,234
|
)
|
(64,887
|
)
|
|||
Cash
and cash equivalents at beginning of year
|
156,404
|
132,567
|
|||||
Cash
and Cash Equivalents at End of Period
|
$
|
69,170
|
$
|
67,680
|
|||
|
|||||||
See
notes to consolidated financial
statements.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 March 31, 2007 are
not
necessarily indicative of the results that may be expected for the year ending
September 29, 2007. 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 September 30, 2006.
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.
During
July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation
Number 48, Accounting
for Uncertainty in Income Taxes
(FIN
48). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum
requirements a tax position must meet before being recognized in the financial
statements. In addition, FIN 48 prohibits the use of Statement of Financial
Accounting Standards (SFAS) Number 5, Accounting
for Contingencies,
in
evaluating the recognition and measurement of uncertain tax positions. The
Company will be required to adopt FIN 48 on September 30, 2007, and has not
yet
assessed the impact of the adoption of this standard on the Company’s financial
statements.
During
September 2006, the FASB issued SFAS Number 157, Fair
Value Measurements.
SFAS
Number 157 establishes a framework for measuring fair value within generally
accepted accounting principles, clarifies the definition of fair value within
that framework, and expands disclosures about the use of fair value
measurements. SFAS Number 157 does not require any new fair value measurements
in generally accepted accounting principles. However, the definition of fair
value in SFAS Number 157 may affect assumptions used by companies in determining
fair value. The Company will be required to adopt SFAS Number 157 on September
28, 2008. The Company has not completed its evaluation of the impact of adoption
SFAS Number 157 on the Company’s financial statements, but currently believes
the impact of the adoption of SFAS Number 157 will not require material
modification of the Company’s fair value measurement and will be substantially
limited to expanded disclosures in the notes to the Company’s consolidated
financial statements.
Total
comprehensive income (loss) was $(40.0) million and $(31.7) million for the
three months and $(45.5) million and $(6.1) million for the six months ended
March 31, 2007 and April 1, 2006, respectively.
NOTE
B—BUSINESS ACQUISITION
On
December 27, 2006, through a tender offer we acquired 45,343,812 shares of
Gold
Kist Inc. (“Gold Kist”) common stock representing 88.87% of all outstanding
shares. Subsequently we completed the purchase of all remaining shares and
on
January 9, 2007, Gold Kist became a wholly owned subsidiary of the Company.
The
acquired assets and assumed liabilities are included in our March 31, 2007
balance sheet using a preliminary allocation of the purchase price. However,
we
have not completed certain appraisals and other purchase price adjustments.
During the quarter ended March 31, 2007, the Company recognized a liability
of
$20.0 million for certain of Gold Kist’s unfavorable sales contracts. However,
the Company has not yet completed its analysis of all its purchase and sales
contracts assumed in the acquisition.
The
purchase price for Gold Kist was $21.00 per share for all outstanding common
shares plus the assumption of approximately $143.5 million of Gold Kist’s debt.
In the second quarter of fiscal 2007, we retired the Gold Kist 10 1/4% Senior
Notes due 2014 with a book value of $128.5 million at a cost of $149.8 million
plus accrued interest and the Gold Kist Subordinated Capital Certificates
of
Interest at par plus accrued interest and a premium of one year’s interest. The
Company also paid transaction costs. This acquisition was initially funded
by
(1) $780 million borrowed under our revolving-term secured credit facility,
and
(2) $450 million borrowed under our $450 million Senior Unsecured Term Loan
Agreement (“Bridge Loan”) (see Note D below).
In
connection with the acquisition, the Company determined that certain of the
Gold
Kist benefit plans will be frozen immediately with the intent to ultimately
terminate. As a result, the Company recorded an additional purchase price
adjustment of $82.5 million representing the current estimated incremental
cost
of termination. We do not anticipate any material net periodic benefit costs
(income) related to these plans in fiscal 2007. Additionally, we conformed
Gold
Kist’s accounting policies to the Company’s accounting policies and provided for
deferred income taxes on all related purchase adjustments.
The
following summarizes our purchase price at March 31, 2007, (in
thousands):
Purchase
50,146,368 shares at $21.00 per share
|
$
|
1,053,074
|
||
Premium
paid on retirement of debt
|
22,208
|
|||
Retirement
of various share-based compensation awards
|
25,677
|
|||
Various
costs and fees
|
45,639
|
|||
Total
purchase price at March 31, 2007
|
$
|
1,146,598
|
The
following table summarizes our current estimates of the fair value of the
assets
acquired and liabilities assumed at the date of acquisition of Gold Kist.
The
purchase price allocation is preliminary and will be finalized after completion
of the independent appraisal of certain of the assets acquired and additional
analysis of the liabilities assumed, which is currently underway. Upon
completion of our analysis, significant adjustments may be
required.
Purchase
price allocation:
(In
thousands):
Current
Assets
|
$
|
421,468
|
||
Plant,
Property & Equipment
|
755,434
|
|||
Goodwill
|
515,387
|
|||
Other
assets
|
64,332
|
|||
Total
assets acquired
|
1,756,621
|
|||
Current
liabilities
|
279,527
|
|||
Long-term
debt, less current maturities
|
140,674
|
|||
Deferred
income taxes
|
111,206
|
|||
Other
long-term liabilities
|
78,616
|
|||
Total
liabilities assumed
|
610,023
|
|||
Total
purchase price
|
$
|
1,146,598
|
||
|
Goodwill
represents the purchase price in excess of the value assigned to identifiable
tangible and intangible assets. The value assigned to goodwill is supported
by
expected benefits gained by consolidating the two companies.
The
following unaudited pro forma financial information has been presented as
if the
acquisition had occurred at the beginning of each period presented.
In
thousands, except share and per share data
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
March
31, 2007
(Actual)
|
April
1, 2006
(Pro
forma)
|
March
31, 2007
(Pro
forma)
|
April
1, 2006
(Pro
forma)
|
||||||||||
Net
sales
|
$
|
1,993,965
|
$
|
1,795,249
|
$
|
3,858,907
|
$
|
3,680,202
|
|||||
Depreciation
and amortization
|
$
|
54,976
|
$
|
57,347
|
$
|
112,775
|
$
|
111,088
|
|||||
Operating
income (loss)
|
$
|
(11,699
|
)
|
$
|
(74,376
|
)
|
$
|
(45,036
|
)
|
$
|
(31,490
|
)
|
|
Interest
expense, net
|
$
|
37,611
|
$
|
31,291
|
$
|
76,038
|
$
|
61,293
|
|||||
Income
(loss) before taxes
|
$
|
(60,117
|
)
|
$
|
(103,329
|
)
|
$
|
(129,431
|
)
|
$
|
(90,400
|
)
|
|
Net
income (loss)
|
$
|
(40,077
|
)
|
$
|
(65,738
|
)
|
$
|
(82,920
|
)
|
$
|
(55,073
|
)
|
|
Net
income (loss) per common share
|
$
|
(0.60
|
)
|
$
|
(0.99
|
)
|
$
|
(1.25
|
)
|
$
|
(0.83
|
)
|
|
Weighted
average shares outstanding
|
66,555,733
|
66,555,733
|
66,555,733
|
66,555,733
|
NOTE
C—INVENTORIES
March
31,
|
September
30,
|
||||||
(In
thousands)
|
2007
|
2006
|
|||||
Chicken:
|
|||||||
Live
chicken and hens
|
$
|
343,076
|
$
|
196,284
|
|||
Feed
and eggs
|
224,867
|
132,309
|
|||||
Finished
chicken products
|
271,574
|
201,516
|
|||||
839,517
|
530,109
|
||||||
Turkey:
|
|||||||
Live
turkey and hens
|
$
|
8,471
|
$
|
7,138
|
|||
Feed
and eggs
|
3,673
|
4,740
|
|||||
Finished
turkey products
|
22,512
|
26,685
|
|||||
34,656
|
38,563
|
||||||
Other
Products:
|
|||||||
Commercial
feed, table eggs, retail farm store and other
|
$
|
11,740
|
$
|
7,080
|
|||
Distribution
inventories (other than chicken & turkey products)
|
10,418
|
10,188
|
|||||
22,158
|
17,268
|
||||||
Total
Inventories
|
$
|
896,331
|
$
|
585,940
|
NOTE
D—NOTES PAYABLE AND LONG-TERM DEBT
Final
Maturity
|
March
31, 2007
|
September
30, 2006
|
||||||||
Senior
unsecured notes, at 9 5/8%
|
2011
|
$
|
299,391
|
$
|
299,601
|
|||||
Senior
subordinated unsecured notes, at 9 1/4%
|
2013
|
5,135
|
82,640
|
|||||||
Senior
unsecured notes, at 7 5/8%
|
2015
|
400,000
|
--
|
|||||||
Senior
unsecured notes, at 8 3/8%
|
2017
|
250,000
|
--
|
|||||||
Secured
revolving credit facility with notes payable at LIBOR plus 1.25%
to LIBOR
plus 2.75%
|
2011
|
50,472
|
74,682
|
|||||||
Note
payable to an insurance company at 6.68%
|
2012
|
--
|
50,115
|
|||||||
Notes
payable to an insurance company at LIBOR plus 2.2075%
|
2013
|
--
|
41,333
|
|||||||
Revolving-term
secured credit facility with notes payable at US Treasuries, plus
a
spread
|
2016
|
25,000
|
--
|
|||||||
Term
credit facility, with notes payable at LIBOR plus 1.75%
|
2016
|
540,000
|
--
|
|||||||
Term
loan payable at 7.06%
|
2016
|
110,000
|
||||||||
Term
loan payable at 6.84%
|
2016
|
99,750
|
--
|
|||||||
Other
|
Various
|
18,024
|
16,827
|
|||||||
1,797,772
|
565,198
|
|||||||||
Less
current maturities
|
(8,253
|
)
|
(10,322
|
)
|
||||||
Total
|
$
|
1,789,519
|
$
|
554,876
|
||||||
On
December 15, 2006, the Company borrowed $100 million at 6.84% under our term
credit facility using the majority of the funds to retire the notes payable
to
an insurance company maturing in 2012 and 2013.
In
January 2007, the Company borrowed (1) $780 million under our revolving-term
secured credit agreement and (2) $450 million under our Bridge Loan agreement.
On January 24, 2007, the Company closed on the sale of $400 million of 7
5/8%
Senior Notes due 2015 (the “Senior Notes”) and $250 million of 8 3/8% Senior
Subordinated Notes due 2017 (the “Subordinated Notes”), sold at par. Interest is
payable on May 1 and November 1 of each year, beginning November 1, 2007.
We may
redeem all or part of the Senior Notes on or after May 1, 2011. We may redeem
all or part of the Subordinated Notes on or after May 1, 2012. Before May
1,
2010, we also may redeem up to 35% of the aggregate principal amount of each
of
the Senior Notes and the Subordinated Notes with the proceeds of certain
equity
offerings. Each of these optional redemptions is at a premium as described
in
the indentures under which the notes were issued. The proceeds from the sale
of
the notes, after underwriting discounts, were used to (1) retire the Bridge
Loan, (2) repurchase $75.7 million of the Company’s 9 1/4% Senior Subordinated
Notes due 2013 at a premium of $7.4 million plus accrued interest of $1.3
million and (3) reduce the balance owed under our revolving-term secured
agreement. Early extinguishment of debt of $14.5 million includes the $7.4
million premium along with unamortized loan costs of $7.1
million.
NOTE
E—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 may purchase from the Company live chickens and
hens
and certain feed inventories during the grow-out process and then contract
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.
No
purchases have been made by the Company under this agreement since the first
quarter of fiscal 2006 when the major stockholder recognized an operating
margin
of $4,539 on gross amounts paid by the Company to the major stockholder as
described below in “Live chicken purchases from major stockholder.”
Much
of
the Company’s debt obligations have been guaranteed by and entity controlled by
the Company’s major stockholders. In consideration of such guarantees, the
Company has paid to Pilgrim Interests, Ltd., an affiliate of Lonnie “Bo”
Pilgrim, the amounts described below in “Loan Guaranty Fees”.
Transactions
with related parties are summarized as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
March
31, 2007
|
April
1, 2006
|
March
31, 2007
|
April
1,2006
|
||||||||||
(in
thousands)
|
|||||||||||||
Lease
payments on commercial egg property
|
$
|
188
|
$
|
188
|
$
|
375
|
$
|
375
|
|||||
Contract
grower pay
|
$
|
202
|
$
|
238
|
$
|
401
|
$
|
473
|
|||||
Other
sales to major stockholder
|
$
|
165
|
$
|
152
|
$
|
312
|
$
|
372
|
|||||
Live
chicken purchases from major stockholder
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
231
|
|||||
Loan
guaranty fees
|
$
|
1,165
|
$
|
367
|
$
|
1,501
|
$
|
777
|
|||||
Lease
payments and operating expenses on airplane
|
$
|
131
|
$
|
120
|
$
|
250
|
$
|
251
|
NOTE
F—COMMITMENTS and CONTINGENCIES
At
March
31, 2007, the Company had $86.1 million in letters of credit outstanding
relating to normal business transactions.
Among
the
claims presently pending against the Company are claims brought by current
and
former employees seeking compensation for the time spent donning and doffing
work equipment. We are aware of an industry-wide investigation by the Wage
and
Hour Division of the U.S. Department of Labor to ascertain compliance with
various wage and hour issues, including the compensation of employees for
the
time spent on activities such as donning and doffing work equipment. Due,
in
part, to the government investigation and the recent U.S. Supreme Court decision
in IBP,
Inc. v. Alvarez,
it is
possible that we may be subject to additional employee claims. We intend
to
assert vigorous defenses to the litigation. Nonetheless, there can be no
assurances that other similar claims may not be brought against the Company.
Currently we do not expect these cases to have a material impact on our
financial position or results of operations.
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 we intend to vigorously oppose class certification
and
defend these claims. After considering our available resources, we do not
expect
these cases to have a material impact on our financial position or results
of
operations.
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
G—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) and
seller of other products.
The
following table presents certain information regarding our
segments:
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
March
31, 2007(a)
|
April
1, 2006
|
March
31, 2007(a)
|
April
1, 2006
|
||||||||||
(In
thousands)
|
|||||||||||||
Net
Sales to Customers:
|
|||||||||||||
Chicken:
|
|||||||||||||
United
States
|
$
|
1,683,463
|
$
|
985,208
|
$
|
2,714,412
|
$
|
2,019,374
|
|||||
Mexico
|
111,046
|
104,031
|
233,955
|
196,434
|
|||||||||
Sub-total
|
1,794,509
|
1,089,239
|
2,948,367
|
2,215,808
|
|||||||||
Turkey
|
12,256
|
17,115
|
64,106
|
79,019
|
|||||||||
Other
Products:
|
|||||||||||||
United
States
|
183,194
|
154,083
|
312,169
|
307,613
|
|||||||||
Mexico
|
4,006
|
5,272
|
6,455
|
7,081
|
|||||||||
Sub-total
|
187,200
|
159,355
|
318,624
|
314,694
|
|||||||||
Total
|
$
|
1,993,965
|
$
|
1,265,709
|
$
|
3,331,097
|
$
|
2,609,521
|
|||||
Operating
Income (Loss):
|
|||||||||||||
Chicken:
|
|||||||||||||
United
States
|
$
|
(4,148
|
)
|
$
|
(37,716
|
)
|
$
|
(15,594
|
)
|
$
|
16,146
|
||
Mexico
|
(12,605
|
)
|
1,844
|
(11,276
|
)
|
(5,226
|
)
|
||||||
Sub-total
|
(16,753
|
)
|
(35,872
|
)
|
(26,870
|
)
|
10,920
|
||||||
Turkey(b)
|
261
|
(6,716
|
)
|
2,767
|
(12,358
|
)
|
|||||||
Other
Products:
|
|||||||||||||
United
States
|
4,273
|
4,314
|
8,412
|
8,904
|
|||||||||
Mexico
|
520
|
338
|
1,087
|
796
|
|||||||||
Sub-total
|
4,793
|
4,652
|
9,499
|
9,700
|
|||||||||
Total
|
$
|
(11,699
|
)
|
$
|
(37,936
|
)
|
$
|
(14,604
|
)
|
$
|
8,262
|
||
Depreciation
and Amortization(c)
|
|||||||||||||
Chicken:
|
|||||||||||||
United
States
|
$
|
49,046
|
$
|
28,717
|
$
|
76,491
|
$
|
54,278
|
|||||
Mexico
|
2,746
|
3,125
|
5,552
|
5,718
|
|||||||||
Sub-total
|
51,792
|
31,842
|
82,043
|
59,996
|
|||||||||
Turkey
|
401
|
772
|
775
|
1,553
|
|||||||||
Other
Products:
|
|||||||||||||
United
States
|
2,729
|
2,090
|
4,757
|
3,467
|
|||||||||
Mexico
|
54
|
40
|
98
|
76
|
|||||||||
Sub-total
|
2,783
|
2,130
|
4,855
|
3,543
|
|||||||||
Total
|
$
|
54,976
|
$
|
34,744
|
$
|
87,673
|
$
|
65,092
|
(a)
|
The
Company acquired Gold Kist Inc. on December 27, 2006 for $1,146.6
million
plus assumed liabilities. The acquisition has been accounted for
as a
purchase and the results of operations have been included in our
consolidated results of operations since the acquisition
date.
|
(b)
|
Included
in the operating losses for the turkey segment for the three months
ended
April 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 three
month
period are accrued severance expenses totaling $0.2 million. In
addition
to the previous items, the operating losses for the turkey segment
for the
six months ended April 1, 2006 include charges of $2.5 million
to reduce
the carrying value of certain packaging and supplies, bringing
the total
of such charges for the six months ended April 1, 2006 to $6.5
million.
|
(c)
|
Includes
amortization of capitalized financing costs of approximately $1.1
million
and $0.9 million for the three month periods and $1.8 million and
$1.6
million for the six month periods ending March 31, 2007 and April
1, 2006,
respectively.
|
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Description
of the Company
The
Company is the largest chicken producer in the United States, the second
largest
producer and seller of chicken in Mexico, the largest producer and seller
of
chicken 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 fresh
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.
Business
Acquisition
On
December 27, 2006, we acquired 88.87% of all outstanding shares of common
stock
of Gold Kist Inc. which was the third largest chicken company in the U.S.,
accounting for approximately 8.8% of chicken produced in the U.S. in 2005.
On
January 9, 2007, we acquired all remaining shares of Gold Kist common stock,
making Gold Kist a wholly owned subsidiary of the Company. The assets and
liabilities of Gold Kist have been included in the accompanying balance sheet
using an allocation based on preliminary valuations and purchase price
adjustments. See Note B - “Business Acquisition” of the notes to our
consolidated financial statements included elsewhere in this Quarterly
Report.
We
are in
the process of fully integrating the operations of Gold Kist into the Company.
We intend to do this as rapidly as possible without interrupting the business.
We expect the acquisition and its integration will result in significant
cost
saving opportunities and enhanced growth. We are currently preparing an
optimization plan for all production and distribution facilities and determining
and implementing a “best practice” approach across all operations.
Executive
Summary
During
the first six months of fiscal 2007, amid growing demand for corn-based ethanol,
feed ingredient prices were at very high levels when compared to the prior
year
period, which adversely affected our business. The average price of corn
during
our second quarter of fiscal 2007 was 82.6% higher than during the second
quarter of fiscal 2006 and 17.2% higher than during the first quarter of
fiscal
2007. While we have succeeded in passing on some of these higher costs to
our
customers, most of the benefit from these price increases was not fully realized
in the second quarter of fiscal 2007. However, our U.S. operations returned
to
profitability late in the second quarter of fiscal 2007 and we continue to
address pricing opportunities in customer contracts as they arise.
The
net
loss of $40.1 million for the second quarter of fiscal 2007 is $8.1 million
greater than the net loss of $32.0 million for the second quarter of fiscal
2006. This increased loss is primarily driven by:
§ |
Increased
cost of sales due to increased feed costs between the two periods,
as feed
ingredient costs rose 38.2% in the U.S. and 39.0% in Mexico, due
primarily
to corn and soybean meal prices.
|
§ |
Although
our average chicken selling prices in the U.S. were up 10.9% over
the same
period last year, the increase was not sufficient to completely offset
the
increased feed cost.
|
§ |
Net
interest expense increased $27.6 million due primarily to the financing
of
the acquisition of Gold Kist.
|
§ |
A
$14.5 million loss on the early extinguishment of debt incurred during
the
financing of the Gold Kist acquisition during the second quarter
of fiscal
2007.
|
The
net
loss of $48.8 million for the first six months of fiscal 2007 is $42.5 million
higher than the net loss of $6.3 million for the first six months of fiscal
2006. This increase is primarily driven by the following items offset by
improved market prices for our chicken products:
§ |
Increased
cost of sales due to increased feed costs between the two periods.
Feed
ingredient costs rose 35.7% in the U.S. and 33.3% in Mexico chicken
divisions, respectively, due primarily to corn and soybean meal
prices.
|
§ |
Net
interest expense increased $31.7 million in the first six months
of fiscal
2007, when compared to the same period in fiscal 2006, due primarily
to
the financing of the acquisition of Gold
Kist.
|
§ |
A
$14.5 million loss on the early extinguishment of debt during the
second
quarter of fiscal 2007.
|
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 32.6% of our consolidated cost
of
sales in the first six months of fiscal 2007. 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. chicken production is exported, the commodity
prices of chicken and turkey can be, and in the first and second quarters
of
fiscal 2006 were, adversely affected by disruptions in export markets.
Disruptions in the first and second quarters of fiscal 2006 included the
effects
focus and concern over avian influenza had on international demand for poultry
products and the need to reroute products in transit to locations other than
those intended as these concerns materialized. Disruptions at times may also
be
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. For
example, Russia and Japan have restricted the importation of U.S.-produced
poultry for both of these reasons in recent periods. 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, 2007 to 19.8% and is scheduled to be eliminated
on January 1, 2008. 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 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. Because these
disruptions in chicken export markets are often political, 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) seller
of
other products.
The
following table presents certain information regarding our
segments:
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
March
31, 2007(a)
|
April
1, 2006
|
March
31, 2007(a)
|
April
1, 2006
|
||||||||||
(In
thousands)
|
|||||||||||||
Net
Sales to Customers:
|
|||||||||||||
Chicken:
|
|||||||||||||
United
States
|
$
|
1,683,463
|
$
|
985,208
|
$
|
2,714,412
|
$
|
2,019,374
|
|||||
Mexico
|
111,046
|
104,031
|
233,955
|
196,434
|
|||||||||
Sub-total
|
1,794,509
|
1,089,239
|
2,948,367
|
2,215,808
|
|||||||||
Turkey
|
12,256
|
17,115
|
64,106
|
79,019
|
|||||||||
Other
Products:
|
|||||||||||||
United
States
|
183,194
|
154,083
|
312,169
|
307,613
|
|||||||||
Mexico
|
4,006
|
5,272
|
6,455
|
7,081
|
|||||||||
Sub-total
|
187,200
|
159,355
|
318,624
|
314,694
|
|||||||||
Total
|
$
|
1,993,965
|
$
|
1,265,709
|
$
|
3,331,097
|
$
|
2,609,521
|
|||||
Operating
Income (Loss):
|
|||||||||||||
Chicken:
|
|||||||||||||
United
States
|
$
|
(4,148
|
)
|
$
|
(37,716
|
)
|
$
|
(15,594
|
)
|
$
|
16,146
|
||
Mexico
|
(12,605
|
)
|
1,844
|
(11,276
|
)
|
(5,226
|
)
|
||||||
Sub-total
|
(16,753
|
)
|
(35,872
|
)
|
(26,870
|
)
|
10,920
|
||||||
Turkey(b)
|
261
|
(6,716
|
)
|
2,767
|
(12,358
|
)
|
|||||||
Other
Products:
|
|||||||||||||
United
States
|
4,273
|
4,314
|
8,412
|
8,904
|
|||||||||
Mexico
|
520
|
338
|
1,087
|
796
|
|||||||||
Sub-total
|
4,793
|
4,652
|
9,499
|
9,700
|
|||||||||
Total
|
$
|
(11,699
|
)
|
$
|
(37,936
|
)
|
$
|
(14,604
|
)
|
$
|
8,262
|
||
Depreciation
and Amortization(c)
|
|||||||||||||
Chicken:
|
|||||||||||||
United
States
|
$
|
49,046
|
$
|
28,717
|
$
|
76,491
|
$
|
54,278
|
|||||
Mexico
|
2,746
|
3,125
|
5,552
|
5,718
|
|||||||||
Sub-total
|
51,792
|
31,842
|
82,043
|
59,996
|
|||||||||
Turkey
|
401
|
772
|
775
|
1,553
|
|||||||||
Other
Products:
|
|||||||||||||
United
States
|
2,729
|
2,090
|
4,757
|
3,467
|
|||||||||
Mexico
|
54
|
40
|
98
|
76
|
|||||||||
Sub-total
|
2,783
|
2,130
|
4,855
|
3,543
|
|||||||||
Total
|
$
|
54,976
|
$
|
34,744
|
$
|
87,673
|
$
|
65,092
|
(a)
|
The
Company acquired Gold Kist Inc. on December 27, 2006 for $1,146.6
million
plus assumed liabilities. The acquisition has been accounted for
as a
purchase and the results of operations have been included in our
consolidated results of operations since the acquisition
date.
|
(b)
|
Included
in the operating losses for the turkey segment for the three months
ended
April 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 three
month
period are accrued severance expenses totaling $0.2 million. In
addition
to the previous items, the operating losses for the turkey segment
for the
six months ended April 1, 2006 include charges of $2.5 million
to reduce
the carrying value of certain packaging and supplies, bringing
the total
of such charges for the six months ended April 1, 2006 to $6.5
million.
|
(c)
|
Includes
amortization of capitalized financing costs of approximately $1.1
million
and $0.9 million for the three month periods and $1.8 million and
$1.6
million for the six month periods ending March 31, 2007 and April
1, 2006,
respectively.
|
The
following table presents certain items as a percentage of net sales for the
periods indicated:
Percentage
of Net Sales
|
|||||||||||||
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
March
31, 2007
|
April
1, 2006
|
March
31, 2007
|
April
1, 2006
|
||||||||||
Net
Sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||
Costs
and Expenses
|
|||||||||||||
Cost
of sales
|
95.8
|
%
|
97.1
|
%
|
95.5
|
%
|
94.0
|
%
|
|||||
Gross
profit
|
4.2
|
%
|
2.9
|
%
|
4.5
|
%
|
6.0
|
%
|
|||||
Selling,
general and administrative
|
4.8
|
%
|
5.9
|
%
|
4.9
|
%
|
5.6
|
%
|
|||||
Operating
Income (Loss)
|
(0.6
|
)%
|
(3.0
|
)%
|
(0.4
|
)%
|
0.3
|
%
|
|||||
Interest
expense
|
2.0
|
%
|
1.0
|
%
|
1.6
|
%
|
1.0
|
%
|
|||||
Interest
income
|
(0.1
|
)%
|
(0.3
|
)%
|
(0.1
|
)%
|
(0.3
|
)%
|
|||||
Income
(loss) before income taxes
|
(3.0
|
)%
|
(3.7
|
)%
|
(2.2
|
)%
|
(0.4
|
)%
|
|||||
Net
income (loss)
|
(2.0
|
)%
|
(2.5
|
)%
|
(1.5
|
)%
|
(0.2
|
)%
|
Results
of Operations
The
changes in our results of operations for the three-month and six-month periods
ending March 31, 2007, as compared to the same periods in fiscal 2006 are
impacted greatly as a result of the acquisition of Gold Kist on December
27,
2006 as discussed in Note B to the financial statements included elsewhere
in
this quarterly report. The acquisition resulted in significant increases
in net
sales and related costs, including interest expense.
Fiscal
Second Quarter 2007 Compared to Fiscal Second Quarter 2006
Net
Sales. Net
Sales
for the second quarter of fiscal 2007 increased $728.3 million, or 57.5%,
over
the second quarter of fiscal 2006. The following table provides additional
information regarding net sales (dollars in millions):
Fiscal
Quarter Ended
|
Change
from
Fiscal
Quarter Ended
|
||||||||||||
March
31,
|
April
1,
|
Percentage
|
|||||||||||
Source
|
2007
|
2006
|
Change
|
||||||||||
Chicken-
|
|||||||||||||
United
States
|
$
|
1,683.5
|
$
|
698.3
|
70.9
|
%
|
(a
|
)
|
|||||
Mexico
|
111.0
|
7.0
|
6.7
|
%
|
(b
|
)
|
|||||||
$
|
1,794.5
|
$
|
705.3
|
64.7
|
%
|
||||||||
Turkey
|
$
|
12.3
|
$
|
(4.8
|
)
|
(28.4
|
)%
|
(c
|
)
|
||||
Other
Products-
|
|||||||||||||
United
States
|
$
|
183.2
|
$
|
29.1
|
18.9
|
%
|
|||||||
Mexico
|
4.0
|
(1.3
|
)
|
(24.0
|
)%
|
||||||||
$
|
187.2
|
$
|
27.8
|
17.5
|
%
|
(d
|
)
|
||||||
$
|
1,994.0
|
$
|
728.3
|
57.5
|
%
|
(a)
|
U.S.
chicken sales for the quarter increased compared to the same quarter
last
fiscal year due primarily to the acquisition of Gold Kist Inc.,
whose
results are included for the full quarter, offset in part by a
reduction
in sales resulting from our previously announced 5% year-over-year
production cuts . Also, sales rose due to a 10.9% increase in net
revenue
per pound sold.
|
(b)
|
Mexico
chicken sales increased compared to the second quarter of last
fiscal year
because of a 5.0% increase in revenue per pound sold and a 1.7%
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 although the plant continued to process into
March
2006.
|
(d)
|
Other
product sales increased due to the addition of the distribution
centers
added through the Gold Kist acquisition offset somewhat by reduced
sales
in Mexico.
|
Gross
Profit.
Gross
profit increased $46.7 million, or 125.5%, in the second quarter of fiscal
2007
compared to the second quarter of fiscal 2006.
The
following table provides gross profit information (dollars in
millions):
Quarter
|
Change
From
|
Percentage
of
|
Percentage
|
||||||||||||||||
Ended
|
Quarter
Ended
|
Net
Sales
|
of
Net Sales
|
||||||||||||||||
March
31,
|
April
1,
|
Percentage
|
Second
Quarter
|
Second
Quarter
|
|||||||||||||||
Components
|
2007
|
2006
|
Change
|
Fiscal
2007
|
Fiscal
2006
|
||||||||||||||
Net
sales
|
$
|
1,994.0
|
$
|
728.3
|
57.5
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||||
Cost
of sales
|
1,910.1
|
681.6
|
55.5
|
%
|
95.8
|
%
|
97.1
|
%
|
(a
|
)
|
|||||||||
Gross
profit
|
$
|
83.9
|
$
|
46.7
|
125.5
|
%
|
4.2
|
%
|
2.9
|
%
|
(b
|
)
|
|||||||
(a)
|
Cost
of sales increased compared to the same quarter last fiscal year
due to
the acquisition of Gold Kist and a 38.2% increase in the cost of
feed.
These increases were offset by a $7.7 million decrease in the cost
of
sales in the turkey division due to the decision to cease production
on
March 3, 2006, of certain products at our Franconia, Pennsylvania
turkey
cooking facility. Included in cost of sales for the second quarter
of
fiscal 2006 was a charge of $3.8 million to impair the carrying
value of
certain equipment formerly used in our turkey division and currently
held
for sale and $0.2 million for severance costs.
|
(b)
|
Gross
profit increased $46.7 million due to increased selling prices and
the acquisition of Gold Kist offset somewhat by increased cost of
feed.
|
Operating
Income (Loss).
Operating loss for the second quarter of fiscal 2007 decreased $26.2 million,
or
69.2%, when compared to the second quarter of fiscal 2006.
The
following tables provide operating income (loss) information (dollars in
millions):
Change
from
|
||||||||||
Quarter
Ended
|
Quarter
Ended
|
|||||||||
March
31,
|
April
1,
|
Percentage
|
||||||||
Source
|
2007
|
2006
|
Change
|
|||||||
Chicken
|
||||||||||
United
States
|
$
|
(4.2
|
)
|
$
|
33.5
|
89.0
|
%
|
|||
Mexico
|
(12.6
|
)
|
(14.4
|
)
|
(783.6
|
)%
|
||||
$
|
(16.8
|
)
|
$
|
19.1
|
53.2
|
%
|
||||
Turkey
|
$
|
0.3
|
$
|
7.0
|
103.9
|
%
|
||||
Other
Products
|
||||||||||
United
States
|
$
|
4.3
|
$
|
(0.1
|
)
|
(1.0
|
)%
|
|||
Mexico
|
0.5
|
0.2
|
53.8
|
%
|
||||||
$
|
4.8
|
$
|
0.1
|
3.0
|
%
|
|||||
Operating
Income (Loss)
|
$
|
(11.7
|
)
|
$
|
26.2
|
69.2
|
%
|
Change
from
|
Percentage
|
Percentage
|
|||||||||||||||||
Quarter
Ended
|
Quarter
Ended
|
of
Net Sales
|
of
Net Sales
|
||||||||||||||||
March
31,
|
April
1,
|
Percentage
|
Second
Quarter
|
Second
Quarter
|
|||||||||||||||
Components
|
2007
|
2006
|
Change
|
Fiscal
2007
|
Fiscal
2006
|
||||||||||||||
Gross
profit
|
$
|
83.9
|
$
|
46.7
|
125.5
|
%
|
4.2
|
%
|
2.9
|
%
|
|||||||||
Selling,
general and administrative expense
|
95.6
|
20.5
|
27.3
|
%
|
4.8
|
%
|
5.9
|
%
|
(a
|
)
|
|||||||||
Operating
income (loss)
|
$
|
(11.7
|
)
|
$
|
26.2
|
69.2
|
%
|
(0.6
|
)%
|
(3.0
|
)%
|
(b
|
)
|
(a)
|
Selling,
general and administrative expense increased due to the Gold Kist
acquisition.
|
(b)
|
Increased
operating income is primarily due to the items discussed above
under gross
profit offset by increased selling, general and administrative
expense.
|
Interest
Expense. Interest
expense increased $26.0 million to $39.3 million in the second quarter of
fiscal
2007, when compared to $13.3 million for the second quarter of fiscal 2006,
due
primarily to the funds borrowed to complete the Gold Kist acquisition. As
a
percentage of sales, interest expense in the second quarter of fiscal 2007
increased to 2.0% from 1.0% in the second quarter of fiscal 2006.
Interest
Income.
Interest
income decreased from $3.2 million in the second quarter of fiscal 2006 to
$1.7
million in the second quarter of fiscal 2007 due to reduced investments.
As a
percentage of sales, interest income in the second quarter of fiscal 2007
decreased to 0.1% from 0.3% in the second quarter of fiscal 2006.
Early
Extinguishment of Debt.
Early
extinguishment of debt of $14.5 million in the second quarter of fiscal
2007 represents the premium paid of $7.4 million and the write off of $7.1
million of unamortized loan costs.
Miscellaneous,
Net.
Consolidated miscellaneous, net expense (income) of $(3.7) million for the
second quarter of fiscal 2007 consisted mainly of investment and dividend
income. Miscellaneous, net was $(0.7) for the second quarter of fiscal
2006.
Income
Tax (Benefit) Expense.
Consolidated income tax benefit in the second quarter of fiscal 2007 was
$(20.0)
million, compared to $(15.1) million in the second quarter of fiscal 2006.
This
income tax benefit was primarily due to the loss before income taxes in the
U.S.
First
Six Months of Fiscal 2007 Compared to First Six Months of Fiscal
2006
Net
Sales. Net
Sales
for the first six months of fiscal 2007 increased $721.6 million, or 27.7%,
versus the first six months of fiscal 2006. The following table provides
additional information regarding net sales (dollars in millions):
First
Six Months Ended
|
Change
from
First
Six Months Ended
|
||||||||||||
March
31,
|
April
1,
|
Percentage
|
|||||||||||
Source
|
2007
|
2006
|
Change
|
||||||||||
Chicken-
|
|||||||||||||
United
States
|
$
|
2,714.4
|
$
|
695.0
|
34.4
|
%
|
(a
|
)
|
|||||
Mexico
|
234.0
|
37.6
|
19.1
|
%
|
(b
|
)
|
|||||||
$
|
2,948.4
|
$
|
732.6
|
33.1
|
%
|
||||||||
Turkey
|
$
|
64.1
|
$
|
(14.9
|
)
|
(18.9
|
)%
|
(c
|
)
|
||||
Other
Products-
|
|||||||||||||
United
States
|
$
|
312.1
|
$
|
4.5
|
1.5
|
%
|
|||||||
Mexico
|
6.5
|
(0.6
|
)
|
(8.5
|
)%
|
||||||||
$
|
318.6
|
$
|
3.9
|
1.2
|
%
|
||||||||
$
|
3,331.1
|
$
|
721.6
|
27.7
|
%
|
(a)
|
U.S.
chicken sales for the first six months of fiscal 2007 were 27.7%
more than
the first six months of fiscal 2006 primarily because of the Gold
Kist
acquisition, offset in part by a reduction in sales resulting from
our
previously announced 5% year-over-year production cuts which became
fully
effective in January 2007.
|
(b)
|
Mexico
chicken sales increased due to a 15.1% increase in net revenue
per pound
sold during the first six months of fiscal 2007 versus the first
six
months of fiscal 2006 and a 3.5% increase in pounds
sold.
|
(c)
|
Turkey
sales declined because of the March 2006 discontinuation of certain
products discussed above.
|
Gross
Profit.
Gross
profit decreased $6.1 million, or 3.9%, in the first six months of fiscal
2007
compared to the first six months of fiscal 2006.
The
following table provides gross profit information (dollars in
millions):
Change
From
|
Percentage
of
|
Percentage
of
|
|||||||||||||||||
First
Six
|
First
Six
|
Net
Sales
|
Net
Sales
|
||||||||||||||||
Months
Ended
|
Months
Ended
|
First
Six
|
First
Six
|
||||||||||||||||
March
31,
|
April
1,
|
Percentage
|
Months
|
Months
|
|||||||||||||||
Components
|
2007
|
2006
|
Change
|
Fiscal
2007
|
Fiscal
2006
|
||||||||||||||
Net
sales
|
$
|
3,331.1
|
$
|
721.6
|
27.7
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||||
Cost
of sales
|
3,181.6
|
727.7
|
29.7
|
%
|
95.5
|
%
|
94.0
|
%
|
(a
|
)
|
|||||||||
Gross
profit
|
$
|
149.5
|
$
|
(6.1
|
)
|
(3.9
|
)%
|
4.5
|
%
|
6.0
|
%
|
(b
|
)
|
||||||
(a)
|
Cost
of sales increased primarily due to the Gold Kist acquisition.
Cost of
sales also, increased due to a 34.3% increase in feed cost per
pound.
These increases were offset by a $24.1 million decrease in the
cost of
sales in the turkey division due to the decision to cease production
on
March 3, 2006, of certain products at our Franconia, Pennsylvania
turkey
cooking facility. Included in cost of sales for the first six 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 carrying value
of certain
packaging and supplies associated with those products and $0.2
million for
severance costs.
|
(b)
|
Gross
profit decreased primarily due to feed costs increasing faster
than
selling prices.
|
Operating
Income.
Operating income for the first six months of fiscal 2007 decreased $22.9
million
when compared to the first six months of fiscal 2006.
The
following tables provide operating income information (dollars in
millions):
Change
from
|
||||||||||
First
Six
|
First
Six
|
|||||||||
Months
Ended
|
Months
Ended
|
|||||||||
March
31,
|
April
1,
|
Percentage
|
||||||||
Source
|
2007
|
2006
|
Change
|
|||||||
Chicken
|
||||||||||
United
States
|
$
|
(15.6
|
)
|
$
|
(31.7
|
)
|
(196.6
|
)%
|
||
Mexico
|
(11.3
|
)
|
(6.1
|
)
|
(115.8
|
)%
|
||||
$
|
(26.9
|
)
|
$
|
(37.8
|
)
|
(346.1
|
)%
|
|||
Turkey
|
$
|
2.8
|
$
|
15.2
|
122.4
|
%
|
||||
Other
Products
|
||||||||||
United
States
|
$
|
8.4
|
$
|
(0.6
|
)
|
(5.5
|
)%
|
|||
Mexico
|
1.1
|
0.3
|
36.6
|
%
|
||||||
$
|
9.5
|
$
|
(0.3
|
)
|
(2.1
|
)%
|
||||
Operating
Income
|
$
|
(14.6
|
)
|
$
|
(22.9
|
)
|
(276.8
|
)%
|
Change
from
|
Percentage
|
Percentage
|
|||||||||||||||||
First
Six
|
First
Six
|
of
Net Sales
|
of
Net Sales
|
||||||||||||||||
Months
Ended
|
Months
Ended
|
First
Six
|
First
Six
|
||||||||||||||||
March
31,
|
April
1,
|
Percentage
|
Months
|
Months
|
|||||||||||||||
Components
|
2007
|
2006
|
Change
|
Fiscal
2007
|
Fiscal
2006
|
||||||||||||||
Gross
profit
|
$
|
149.5
|
$
|
(6.1
|
)
|
(3.9
|
)%
|
4.5
|
%
|
6.0
|
%
|
||||||||
Selling,
general and administrative expense
|
164.1
|
16.8
|
11.4
|
%
|
4.9
|
%
|
5.6
|
%
|
(a
|
)
|
|||||||||
Operating
income
|
$
|
(14.6
|
)
|
$
|
(22.9
|
)
|
(276.8
|
)%
|
(0.4
|
)%
|
0.3
|
%
|
(b
|
)
|
(a)
|
Selling,
general and administrative expense decreased as a percentage of
net sales
due primarily to added revenue from the Gold Kist acquisition.
However,
overall selling, general and administrative expense increased $16.8
million, primarily due to the Gold Kist acquisition.
|
(b)
|
Decreased
operating income is primarily due to the items discussed above
under gross
profit and the increase in selling, general and administrative
expense.
|
Interest
Expense. Interest
expense increased to $53.2 million in the first six months of fiscal 2007,
compared to $25.7 million for the first six months of fiscal 2006, due primarily
to financing the Gold Kist acquisition. As a percentage of sales, interest
expense in the first six months of fiscal 2007 increased to 1.6% from 1.0%
in
the first six months of fiscal 2006.
Interest
Income.
Interest
income decreased from $7.2 million in the first six months of fiscal 2006
to
$3.0 million in the first six months of fiscal 2007 due to decreased
investments. As a percentage of sales, interest income in the first six months
of fiscal 2007 decreased to 0.1% from 0.3% in the first six months of fiscal
2006.
Early
Extinguishment of Debt.
Early
extinguishment of debt of $14.5 million in the second quarter of fiscal 2007
represents the premium paid of $7.4 million and the write off of $7.1 million
of
unamortized loan costs.
Miscellaneous,
Net.
Consolidated miscellaneous, net expense (income) of $(6.2) million for the
first
six months of fiscal 2007 consisted mainly of investment and dividend income.
Consolidated miscellaneous, net expense (income) for the first six months
of
fiscal 2006 was negligible.
Income
Tax (Benefit) Expense.
Consolidated income tax benefit in the first six months of fiscal 2007 was
$(25.8) million, compared to an income tax benefit of $(4.2) million in the
first six months of fiscal 2006. This income tax benefit was primarily due
to
the loss before income taxes in the U.S.
Liquidity
and Capital Resources
The
following table presents our available sources of liquidity as of March 31,
2007. See our Annual Report on Form 10-K for the fiscal year ended September
30,
2006 for a description of each facility discussed below.
Facility
|
Amount
|
|||||||||
Source
of Liquidity
|
Amount
|
Outstanding
|
Available
|
|||||||
(in
millions)
|
||||||||||
Cash
and cash equivalents
|
$
|
--
|
$
|
--
|
$
|
69.2
|
||||
Investments
in available for sale securities - short-term
|
--
|
--
|
24.0
|
|||||||
Debt
Facilities:
|
||||||||||
Revolving
credit facilities
|
300.0
|
--
|
211.6
|
|||||||
Revolving/term
facility
|
550.0
|
25.0
|
525.0
|
|||||||
Receivables
purchase agreement
|
125.0
|
--
|
125.0
|
|||||||
Total
available
|
$
|
954.8
|
At
March
31, 2007, our working capital increased $196.2 million to $725.0 million
and our
current ratio decreased to 1.84 to 1, compared with working capital of $528.8
million and a current ratio of 1.92 to 1 at September 30, 2006, primarily
due to
the working capital changes discussed below resulting from the acquisition
of
Gold Kist. See Note B - “Business Acquisition” to our notes to the consolidated
financial statements included elsewhere in this Quarterly Report.
Trade
accounts and other receivables were $391.6 million at March 31, 2007, compared
to $263.1 million at September 30, 2006, an increase of $128.5 million or
48.8%,
primarily as a result of the acquisition. In addition to the acquisition,
this
increase was due to increased revenue per pound sold in the current period.
Inventories
increased $310.4 million or 53.0% to $896.3 million at March 31, 2007, compared
to $585.9 million at September 30, 2006. In addition to the acquisition,
this
increase was due to higher product costs in finished chicken products, live
inventories and feed inventories as a result of higher feed ingredient
costs.
Accounts
payable increased $98.4 million, or 33.5%, to $392.1 million at March 31,
2007,
compared to $293.7 million at September 30, 2006, primarily as a result of
the
acquisition.
Accrued
liabilities increased $189.5 million or 69.5% to $462.4 million at March
31,
2007, compared to $272.8 million at September 30, 2006, primarily as a result
of
the acquisition.
Cash
flows (used for) provided by operating activities were $(55.7) million and
$2.0
million for the six months ended March 31, 2007 and April 1, 2006, respectively.
The decrease in cash flows provided by operating activities for the first
six
months of fiscal 2007, when compared to the first six months of fiscal 2006,
was
primarily due to decreased profitability and changes in working capital items.
Cash
flows (used for) provided by investing activities were $(1,111.1) million
and
$35.1 million for the six months ended March 31, 2007 and April 1, 2006,
respectively. Cash flows used by investing activities for the six months
ended
March 31, 2007 were primarily for the acquisition of Gold Kist and capital
expenditures discussed below.
Capital
expenditures of $94.5 million for the six months ended March 31, 2007 were
primarily incurred to improve efficiencies, expand capacity, reduce costs
and
for the routine replacement of equipment. Capital expenditures of $74.5 million
for the six months ended April 1, 2006 were primarily incurred to improve
efficiencies, reduce costs and for the routine replacement of equipment.
We
anticipate spending approximately $150 million to $175 million in fiscal
2007 to
improve efficiencies, expand capacities and for the routine replacement of
equipment. We expect to finance such expenditures with cash on hand, available
operating cash flows and existing revolving/term and revolving credit
facilities.
Cash
flows provided by (used for) financing activities were $1,079.6 million and
$(101.9) million for the six months ended March 31, 2007 and April 1, 2006,
respectively.
In
December 2006, we borrowed $100 million at 6.84% under our term credit facility
and primarily used the proceeds to retire our notes payable to an insurance
company maturing in 2012 and 2013. In January 2007, we borrowed $1,230.0
million
to finance the acquisition of Gold Kist. See Note D - “Notes Payable and Long
Term Debt” to our notes to the consolidated financial statements included
elsewhere in this Quarterly Report.
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.
Accounting
Pronouncements
During
July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation
Number 48, Accounting
for Uncertainty in Income Taxes
(FIN
48). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum
requirements a tax position must meet before being recognized in the financial
statements. In addition, FIN 48 prohibits the use of Statement of Financial
Accounting Standards (SFAS) Number 5, Accounting
for Contingencies,
in
evaluating the recognition and measurement of uncertain tax positions. The
Company will be required to adopt FIN 48 on September 30, 2007, and has not
yet
assessed the impact of the adoption of this standard on the Company’s financial
statements.
During
September 2006, the FASB issued SFAS Number 157, Fair
Value Measurements.
SFAS
Number 157 establishes a framework for measuring fair value within generally
accepted accounting principles, clarifies the definition of fair value within
that framework and expands disclosures about the use of fair value measurements.
SFAS Number 157 does not require any new fair value measurements in generally
accepted accounting principles. However, the definition of fair value in
SFAS
Number 157 may affect assumptions used by companies in determining fair value.
The Company will be required to adopt SFAS Number 157 on September 28, 2008.
The
Company has not completed its evaluation of the impact of adoption SFAS Number
157 on the Company’s financial statements, but currently believes the impact of
the adoption of SFAS Number 157 will not require material modification of
the
Company’s fair value measurement and will be substantially limited to expanded
disclosures in the notes to the Company’s consolidated financial
statements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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. As market conditions dictate, we will from time to time 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% increase
in the weighted-average cost of our primary feed ingredients as of March
31,
2007. Based on our feed consumption during the six months ended March 31,
2007,
such an increase would have resulted in an increase to cost of sales of
approximately $82.9 million, excluding the impact of any hedging in that
period.
A 10% increase in the aggregate primary feed ingredients purchased by the
Company and Gold Kist during the six months ended March 31, 2007, would have
increased cost of sales by $121.2 million.
Interest
Rates
Our
earnings are also affected by changes in interest rates due to the impact
those
changes have on our variable-rate interest expense and the fair value of
our
fixed-rate debt instruments. During the quarter ended March 31, 2007 we
refinanced the notes payable to insurance companies through our term facility
and entered into a U.S. Treasury Note Rate Lock derivative with a notional
amount of $300 million in anticipation of the offering of Senior Notes issued
in
January 2007. In January 2007, we settled a U.S. Treasury Note Rate Lock
for a
gain of $5.7 million which will be reflected as a reduction to interest expense
over the remaining term of such debt obligations. However, at March 31, 2007
we
do not believe our interest rate risk has materially changed since September
30,
2006.
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, 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 gain of $1.5 million
in the first six months of fiscal 2007 compared to a gain of $0.8 million
for
the first six months of fiscal 2006. On March 31, 2007, the Mexico peso closed
at 11.02 to 1 U.S. dollar, compared to 11.01 at September 30, 2006. 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 September 30, 2006,
other
than as described above.
Forward
Looking Statements
Statements
of our intentions, 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 previously 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;
|
· |
Management
of our cash resources, particularly in light of our substantial
leverage;
|
· |
Restrictions
imposed by, and as a result of, our substantial
leverage;
|
· |
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;
|
· |
Inability
to consummate, or effectively integrate, any acquisition, including
integrating our recent acquisition of Gold Kist, or realize the associated
cost savings and operating synergies;
|
· |
Currency
exchange rate fluctuations, trade barriers, exchange controls,
expropriation and other risks associated with foreign
operations;
|
· |
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 and
subsequent reports 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.
Item
4. Controls and Procedures
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 defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) 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 to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that information we are required to disclose in our reports
filed with the Securities and Exchange Commission is accumulated and
communicated to our management, including our Chairman, Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
On
December 27, 2006, we acquired 88.87% of the outstanding common stock of
Gold
Kist and on January 9, 2007, we acquired all remaining shares of Gold Kist.
We
believe that the internal controls and procedures of Gold Kist have a material
effect on our internal control over financial reporting. See Note B - “Business
Acquisition” to our notes to consolidated financial statements contained in this
Quarterly Report for further details of the transaction. We are currently
in the
process of assessing and integrating Gold Kist’s internal controls over
financial reporting into our financial reporting systems.
In
connection with the evaluation described above, the Company’s management,
including the Chairman, Chief Executive Officer and Chief Financial Officer,
identified no other change in the Company's internal control over financial
reporting that occurred during the Company’s fiscal quarter ended March 31,
2007, and that has materially affected, or is reasonably likely to materially
affect, the Company’s internal controls over financial reporting.
.PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
On
July
1, 2002, three individuals, on behalf of themselves and a putative class
of
chicken growers, filed their original class action complaint against the
Company
in the United States District Court for the Eastern District of Texas, Texarkana
Division, styled “Cody Wheeler, et al. vs. Pilgrim’s Pride Corporation.” In
their lawsuit, plaintiffs initially alleged that the Company 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, virtually re-wrote most of the allegations. Now the plaintiffs contend
that the Company and Tyson are involved in a conspiracy to violate federal
antitrust laws. The plaintiffs’ initial allegations, although still contained in
the amended lawsuit, are no longer the sole focus of the case. On January
3,
2006, the Court entered an Order severing the plaintiffs’ Packers and Stockyards
Act and antitrust claims. The Court ordered that the plaintiffs may proceed
with
their Packers and Stockyards Act claims as set forth in Plaintiffs’ Third
Amended Complaint. The Court also ordered that the plaintiffs may proceed
with
their respective antitrust claims asserted against the Company and Tyson
in a
separate cause of action styled “Cody Wheeler, et al. vs. Pilgrim’s Pride
Corporation, et al.” On March 6, 2006, the plaintiffs filed their motion for
class certification in the original lawsuit. Pilgrim’s Pride attacked the
plaintiffs’ class certification brief on several grounds, and ultimately the
plaintiffs voluntarily withdrew their Motion for Class Certification on May
26,
2006. As a result, the Court canceled the class certification hearing and
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 Pilgrim’s Pride in this lawsuit. Additionally, the
two former growers who joined the lawsuit on September 30, 2005 withdrew
from
the case. The lawsuit is currently proceeding with individual claims by the
three original individual plaintiffs against Pilgrim’s Pride. The Company
intends to defend vigorously against the plaintiffs’ individual claims. The
Company does not expect this matter to have a material impact on its financial
position, operations or liquidity.
On
January 3, 2006, an action styled "Cody Wheeler, et al. vs. Pilgrim's Pride
Corporation, et al.," arising out of the original Wheeler litigation described
above, was filed in the United States District Court for the Eastern District
of
Texas, Texarkana Division. The lawsuit was filed by the three original
plaintiffs and a former grower, both in their individual capacities and on
behalf of a putative class of chicken growers. In the lawsuit, the four
plaintiffs allege that the Company and Tyson are involved in a conspiracy
to
violate federal antitrust laws. The proceedings are currently in the early
stages of discovery. The Company intends to defend vigorously both the
certification of the case as a class action and the merits of the four
plaintiffs’ individual claims. The Company does not expect this matter to have a
material impact on its 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.
On
October 12, 2006, a complaint styled “Gold Kist Inc. v. Pilgrim’s Pride
Corporation, Protein Acquisition Corporation, et al.” was filed in the United
States District Court for the Northern District of Georgia, Atlanta Division,
alleging that the election of our President’s and Chief Executive Officer’s
nominees to the Gold Kist Board of Directors would violate Section 8 of the
Clayton Act and seeking to enjoin our solicitation of the Gold Kist stockholders
to elect such persons to the Gold Kist Board. The complaint also alleges
that we
violated the proxy and tender offer rules by failing to disclose such alleged
violation of the Clayton Act.
Pursuant
to the Agreement and Plan of Merger by and among Gold Kist, the Company and
a
wholly-owned subsidiary of the Company dated as of December 3, 2006, Gold
Kist
agreed that it would dismiss with prejudice the pending litigation upon the
occurrence of the “payment date” referenced therein. On January 3, 2007, the
“payment date” occurred and accordingly, Gold Kist filed a stipulation of
dismissal with prejudice under Rule 41 of the Federal Rules of Civil Procedure.
On January 8, 2007, the Court clerk notified the parties that the case had
been
formally dismissed with prejudice pursuant to the stipulation filed by Gold
Kist.
The
Wage
and Hour Division of the U.S. Department of Labor conducted an industry wide
investigation to ascertain compliance with various wage and hour issues,
including the compensation of employees for the time spent on such activities
such as donning and doffing work equipment. Due, in part, to the government
investigation and the recent U.S. Supreme Court decision in IBP,
Inc. b. Alvarez,
employees have brought claims against the Company. The claims filed against
us
as of the date of this report include: “Juan Garcia, et al. v. Pilgrim’s Pride
Corporation, a/k/a Wampler Foods, Inc.”, filed in Pennsylvania state court on
January 27, 2006 and subsequently removed to the U.S. District Court for
the
Eastern District of Pennsylvania; “Esperanza Moya, et al. v. Pilgrim’s Pride
Corporation and Maxi Staff, LLC”, filed March 23, 2006 in the Eastern District
of Pennsylvania; “Barry Antee, et al. v. Pilgrim’s Pride Corporation” filed
April 20, 2006 in the Eastern District of Texas; “Stephania Aaron, et al. v.
Pilgrim’s Pride Corporation” filed August 22, 2006 in the Western District of
Arkansas; “Salvador Aguilar, et al. v. Pilgrim’s Pride Corporation” filed August
23, 2006 in the Northern District of Alabama; “Benford v. Pilgrim’s Pride
Corporation” filed November 2, 2006 in the Northern District of Alabama; “Porter
v. Pilgrim’s Pride Corporation” filed December 7, 2006 in the Eastern District
of Tennessee; “Freida Brown, et al v. Pilgrim’s Pride Corporation” filed March
14, 2007 in the Middle District of Georgia, Athens Division; “Roy Menser, et al
v. Pilgrim’s Pride Corporation” filed February 28, 2007 in the Western District
of Paducah, KY; and “Victor Manuel Hernandez v. Pilgrim’s Pride Corporation”
filed January 30, 2007 in the Northern District of Georgia, Rome Division.
The
plaintiffs generally purport to bring a collective action for unpaid wages,
unpaid overtime wages, liquidated damages, costs, attorneys' fees, and
declaratory and/or injunctive relief and generally allege that they are not
paid
for the time it takes to either clear security, walk to their respective
workstations, don and doff protective clothing, and/or sanitize clothing
and
equipment. As of the date of this Quarterly Report, the following suits
have been filed against Gold Kist, which make one or more of the allegations
referenced above:
Merrell
v. Gold Kist, Inc., in the U.S. District Court for the Northern District
of
Georgia, Gainesville Division, filed on December 21, 2006; Harris v. Gold
Kist,
Inc., in the U.S. District Court for the Northern District of Georgia, Newnan
Division, filed on December 21, 2006; Blanke v. Gold Kist, Inc., in the U.S.
District Court for the Southern District of Georgia, Waycross Division, filed
on
December 21, 2006; Clarke v. Gold Kist, Inc., in the U.S. District Court
for the
Middle District of Georgia, Athens Division, filed on December 21, 2006;
Atchison v. Gold Kist, Inc., in the U.S. District Court for the Northern
District of Alabama, Middle Division, filed on October 3, 2006; Carlisle
v. Gold Kist, Inc., in the U.S. District Court for the Northern District
of
Alabama, Middle Division, filed on October 2, 2006; Benbow v. Gold Kist,
Inc.,
in the U.S. District Court for the District of South Carolina, Columbia
Division, filed on October 2, 2006; and Bonds v. Gold Kist, Inc., in the
U.S.
District Court for the Northern District of Alabama, Northwestern Division,
filed on October 2, 2006. Neither the likelihood of an unfavorable outcome
nor
the amount of ultimate liability, if any, with respect to any of these cases
can
be determined at this time. These cases are in various stages of litigation
which we intend to vigorously defend.
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.
Item
1A. Risk Factors.
In
addition to the other information set forth in this Quarterly Report, you
should
carefully consider the risks discussed in our Annual Report on Form 10-K
for the
fiscal year ended September 30, 2006 and our Quarterly Report on Form 10-Q
for
the quarterly period ended December 30, 2006, including under the heading
"Item
1A. Risk Factors", which risks could materially affect the Company’s business,
financial condition or future results. The risk factor below updates, and
should
be read in conjunction with, the risk factors disclosed in our Annual Report
on
Form 10-K for the fiscal year ended September 30, 2006 and our Quarterly
Report
on Form 10-Q for the quarterly period ended December 30, 2006. These risks
are
not the only risks facing the Company. Additional risks and uncertainties
not
currently known to the Company or that it currently deems to be immaterial
also
may materially adversely affect the Company's business, financial condition
or
future results.
Cyclicality
and Commodity Prices. Industry
cyclicality can affect our earnings, especially due to fluctuations in commodity
prices of feed ingredients, chicken and turkey.
Profitability
in the chicken and turkey industries 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.
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. In particular, weather patterns often change agricultural
conditions in an unpredictable manner. A sudden and 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 and turkeys
or deliver products.
The
cost
of corn, our primary feed ingredient, increased significantly from August
2006
to the date of this Quarterly Report, and there can be no assurance that
the
price of corn will not continue to rise as a result of, among other things,
increasing demand for corn products around the world and alternative uses
of
corn, such as ethanol production.
High
feed
ingredient prices have had a material adverse effect on our operating results.
We periodically seek, to the extent available, to enter into advance purchase
commitments or financial hedging contracts for the purchase of feed ingredients
in an effort to manage our feed ingredient costs. The use of such instruments
may not be successful.
We
also
seek to adjust our operations in response to high feed prices and other cyclical
factors. On October 29, 2006, we announced that we would reduce weekly
chicken processing by 5.0% year-over-year, or approximately 1.3 million
head per week by January 2007, as part of our continuing effort to better
balance supply and demand amid declining chicken prices and sharply higher
costs
for corn. Although industry chicken prices have risen somewhat in recent
weeks,
there can be no assurance that corn and other feed ingredient prices will
not
continue to rise or that chicken prices will not decline.
Item
4. Submission of Matters to a Vote of Security Holders
Pilgrim’s
Pride Corporation held its Annual Meeting of Shareholders on January 31,
2007.
The meeting was held to elect thirteen Directors for the ensuing year; to
ratify
the appointment of Ernst & Young LLP as the Company’s independent registered
public accounting firm for the fiscal year ending September 29, 2007; and
to
transact such other business as was properly brought before the meeting.
There
were 489,853,972 votes received, constituting 83.59% of the 586,007,381 votes
outstanding on the record date and entitled to vote. With regard to the election
of Directors for the ensuing year, the following votes were
cast:
NOMINEE
|
FOR
|
WITHHELD
|
||
Lonnie
“Bo” Pilgrim
|
479,102,920
|
10,751,052
|
||
Clifford
E. Butler
|
481,666,061
|
8,187,911
|
||
O.B.
Goolsby
|
481,752,603
|
8,101,369
|
||
Richard
A. Cogdill
|
481,399,577
|
8,454,395
|
||
Lonnie
Ken Pilgrim
|
479,338,823
|
10,515,149
|
||
Charles
L. Black
|
488,865,708
|
988,264
|
||
Linda
Chavez
|
489,603,159
|
250,813
|
||
S.
Key Coker
|
489,604,447
|
249,525
|
||
Keith
W. Hughes
|
489,619,977
|
233,995
|
||
Blake
D. Lovette
|
489,602,970
|
251,002
|
||
Vance
C. Miller, Sr.
|
488,865,928
|
988,044
|
||
James
G. Vetter, Jr.
|
485,357,409
|
4,496,563
|
||
Donald
L. Wass, Ph.D.
|
488,865,522
|
988,450
|
All
Directors were elected by the above results.
With
regard to ratifying the appointment of Ernst & Young LLP as the Company’s
independent auditors for fiscal 2007, the following votes were
cast:
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON VOTES
|
|||
489,066,410
|
772,249
|
15,313
|
0
|
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).
|
|
10.1
|
Fourth
Amended and Restated Secured Credit Agreement, dated as of February
8,
2007, by and among the Company, To-Ricos, Ltd., To-Ricos Distribution,
Ltd., Back of Montreal, as agent, SunTrust Bank as syndication
agent, U.S.
Bank National Association and Wells Fargo Bank, National Association
as
Co-Documentation Agents, BMO Capital Market as lead arranger, and
the
other lenders signatory thereto (incorporated by reference from
Exhibit
10.01 of the Company’s Current Report on Form 8-K dated February 12,
2007).
|
|
10.2
|
Third
Amendment to Credit Agreement, dated as of February 7, 2007, by
and among
the Company as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and the sole book runner, and as administrative, documentation
and
collateral agent, Agriland, FCS, as co-syndication agent, and as
a
syndication party, and the other syndication parties signatory
thereto
(incorporated by reference from Exhibit 10.02 of the Company’s Current
Report on Form 8-K dated February 12, 2007).
|
|
10.3
|
First
Amendment to Credit Agreement, dated as of March 15, 2007, by and
among
the Borrower, the Company, the Subsidiary Guarantors, ING Capital
LLC, and
the Lenders (incorporated by reference from Exhibit 10.01 of the
Company’s
Current Report on Form 8-K dated March 20, 2007).
|
|
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:
|
May
1, 2007
|
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).
|
|
10.1
|
Fourth
Amended and Restated Secured Credit Agreement, dated as of February
8,
2007, by and among the Company, To-Ricos, Ltd., To-Ricos Distribution,
Ltd., Back of Montreal, as agent, SunTrust Bank as syndication
agent, U.S.
Bank National Association and Wells Fargo Bank, National Association
as
Co-Documentation Agents, BMO Capital Market as lead arranger, and
the
other lenders signatory thereto (incorporated by reference from
Exhibit
10.01 of the Company’s Current Report on Form 8-K dated February 12,
2007).
|
|
10.2
|
Third
Amendment to Credit Agreement, dated as of February 7, 2007, by
and among
the Company as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and the sole book runner, and as administrative, documentation
and
collateral agent, Agriland, FCS, as co-syndication agent, and as
a
syndication party, and the other syndication parties signatory
thereto
(incorporated by reference from Exhibit 10.02 of the Company’s Current
Report on Form 8-K dated February 12, 2007).
|
|
10.3
|
First
Amendment to Credit Agreement, dated as of March 15, 2007, by and
among
the Borrower, the Company, the Subsidiary Guarantors, ING Capital
LLC, and
the Lenders (incorporated by reference from Exhibit 10.01 of the
Company’s
Current Report on Form 8-K dated March 20, 2007).
|
|
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
|