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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 27, 2003
Commission File Number 2-62681
GOLD KIST INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-0255560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
244 Perimeter Center Parkway, N.E., Atlanta, Georgia 30346
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(770) 393-5000
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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
GOLD KIST INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets -
June 28, 2003 and December 27, 2003 1
Consolidated Statements of Operations -
Three Months and Six Months Ended
December 28, 2002 and December 27, 2003 2
Consolidated Statements of Cash Flows -
Six Months Ended December 28, 2002
and December 27, 2003 3
Notes to Consolidated Financial
Statements 4 - 7
Item 2. Management's Discussion and Analysis of
Consolidated Results of Operations and
Financial Condition 8 - 16
Item 3. Quantitative and Qualitative Disclosure About
Market Risks 17
Item 4. Controls and Procedures 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Page 1
Item 1. Financial GOLD KIST INC.
Statements CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
(Unaudited)
June 28, December 27,
2003 2003
ASSETS
Current assets:
Cash and cash equivalents $ 11,026 15,971
Receivables, principally trade,
less allowance for doubtful
accounts of $2,002 at
June 28, 2003 and $1,997
at December 27, 2003 104,699 109,037
Inventories 196,728 210,633
Deferred income taxes 43,270 23,041
Other current assets 20,100 21,516
Total current assets 375,823 380,198
Investments 66,805 50,540
Property, plant and equipment, net 226,905 213,073
Deferred income taxes 26,822 25,669
Other assets 65,692 65,876
$762,047 735,356
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt $ 22,162 43,509
Accounts payable 63,281 63,843
Accrued compensation and related expenses 31,875 36,405
Interest left on deposit 8,495 7,789
Other current liabilities 39,783 46,784
Total current liabilities 165,596 198,330
Long-term debt, less current maturities 324,011 232,000
Accrued pension costs 44,487 45,025
Accrued postretirement benefit costs 10,119 9,279
Other liabilities 33,937 40,717
Total liabilities 578,150 525,351
Patrons' and other equity:
Common stock, $1.00 par value - Authorized
500 shares; issued and outstanding 2 at
June 28, 2003 and December 27, 2003 2 2
Patronage reserves 185,620 183,716
Accumulated other comprehensive loss (43,448) (41,514)
Retained earnings 41,723 67,801
Total patrons' and other equity 183,897 210,005
$762,047 735,356
See Accompanying Notes to Consolidated Financial Statements.
Page 2
GOLD KIST INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
Dec. 28, Dec. 27, Dec. 28, Dec. 27,
2002 2003 2002 2003
Net sales volume $437,488 536,927 898,112 1,053,615
Cost of sales 461,230 468,717 898,987 922,715
Gross margins (loss) (23,742) 68,210 (875) 130,900
Distribution, administrative
and general expenses 20,105 29,023 40,645 53,294
Postretirement benefit plan
Curtailment gain 10,311 - 10,311 -
Net operating margins (loss) (33,536) 39,187 (31,209) 77,606
Other income (deductions):
Interest and dividend income 1,059 144 1,389 317
Interest expense (5,570) (6,782) (11,661) (14,385)
Unrealized loss on investment - (18,486) (24,064) (18,486)
Miscellaneous, net (4,029) 291 (3,722) 4,533
Total other deductions (8,540) (24,833) (38,058) (28,021)
Margins (loss) from operations
before income taxes (42,076) 14,354 (69,267) 49,585
Income tax expense (benefit) (14,028) 10,949 (15,071) 22,695
Net margins (loss) $(28,048) 3,405 (54,196) 26,890
See Accompanying Notes to Consolidated Financial Statements.
Page 3
GOLD KIST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
Dec. 28, Dec. 27,
2002 2003
Cash flows from operating activities:
Net margins (loss) $ (54,196) 26,890
Non-cash items included in net margins (loss)
from operations:
Depreciation and amortization 19,604 19,503
Unrealized loss on investment 24,064 18,486
Postretirement benefit plan curtailment gain (10,311) -
Deferred income tax expense (benefit) (11,442) 19,797
Other 2,021 3,782
Changes in operating assets and liabilities:
Receivables 11,606 (4,338)
Inventories 2,871 (13,905)
Other current assets (493) 269
Accounts payable, accrued and other expenses (11,031) 15,279
Net cash provided by (used in) operating activities (27,307) 85,763
Cash flows from investing activities:
Dispositions of investments 105 42
Acquisitions of property, plant and equipment (20,478) (9,761)
Other (565) 2,281
Net cash used in investing activities (20,938) (7,438)
Cash flows from financing activities:
Short-term debt repayments, net (10,000) -
Proceeds from long-term debt 165,620 -
Principal repayments of long-term debt and
capitalized loan fees (102,353) (70,664)
Patrons' equity redemptions paid in cash (2,452) (2,716)
Net cash provided by (used in) financing
activities 50,815 (73,380)
Net change in cash and cash equivalents 2,570 4,945
Cash and cash equivalents at beginning of period 8,997 11,026
Cash and cash equivalents at end of period $ 11,567 15,971
Supplemental disclosure of cash flow data:
Cash paid (received) during the periods for:
Interest (net of amounts capitalized) $ 11,576 15,280
Income taxes, net $ (4,131) (3,422)
See Accompanying Notes to Consolidated Financial Statements.
Page 4
GOLD KIST INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands)
(Unaudited)
1. The accompanying unaudited consolidated financial statements reflect
the accounts of Gold Kist Inc. and its subsidiaries ("Gold Kist", the
"Company" or the "Association") as of December 27, 2003 and for the
three and six months ended December 27, 2003. These consolidated
financial statements should be read in conjunction with Management's
Discussion and Analysis of Results of Operations and Financial
Condition and the Notes to Consolidated Financial Statements of Gold
Kist's Annual Report in the previously filed Form 10-K for the fiscal
year ended June 28, 2003.
The Association employs a 52/53 week fiscal year. Fiscal 2004 will be
a 52-week year and fiscal 2003 was also a 52-week year with each
quarter in both periods consisting of 13 weeks.
2. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position,
the results of operations, and the cash flows of the Company. All
significant intercompany balances and transactions have been eliminated
in consolidation. Results of operations for interim periods are not
necessarily indicative of results for the entire fiscal year.
3. Comprehensive income (loss) was $(28,048) and $4,371 for the three
months ended December 28, 2002 and December 27, 2003, respectively, and
$(54,196) and $28,824 for the six months ended December 28, 2002 and
December 27, 2003, respectively.
4. Revenue is recognized upon shipment and transfer of ownership of the
product to the customer. Revenue is recorded net of any discounts,
allowances or promotions. Estimates for any special pricing
arrangements, promotions or other volume-based incentives are recorded
upon shipment of the product in accordance with the terms of the
promotion, allowance or pricing arrangements.
5. Inventories consist of the following:
June 28, 2003 Dec. 27, 2003
Live poultry and hogs $ 97,691 96,924
Marketable products 53,587 64,955
Raw materials and supplies 45,450 48,754
$196,728 210,633
The Company has historically accounted for marketable products
inventory principally at selling prices less estimated brokerage,
freight and certain other selling costs where applicable (estimated net
realizable value). The Company has begun to focus its growth efforts
and production on further-processed or value-added poultry products and
anticipates that an increasing amount of its poultry sales will be from
further-processed products. As such, the Company began accounting for
its marketable products inventory at the lower of cost or market during
the second quarter of fiscal 2004.
Page 5
6. Depreciation and amortization included in cost of goods sold in the
accompanying consolidated statements of operations were $8.7 million
and $17.7 million for the three and six months ended December 28, 2002,
respectively, and $8.6 million and $17.2 million for the three and six
months ended December 27, 2003, respectively.
7. At June 28, 2003, the Association had a minimum pension liability of
$43.4 million, net of the deferred tax benefit of $25.9 million. The
minimum pension liability, net of deferred taxes, has been included as
a component of patrons' and other equity in accumulated other
comprehensive loss. At December 27, 2003, the cumulative minimum
pension liability included in accumulated other comprehensive loss was
$41.5 million, net of the deferred tax benefit of $24.7 million.
8. In October 1998, the Association completed the sale of assets of its
Agri-Services business to Southern States Cooperative, Inc. (SSC). In
order to complete the transaction, the Association committed to
purchase from SSC, subject to certain terms and conditions, up to $60
million in principal amount of capital trust securities and $40 million
in principal amount of cumulative preferred securities if SSC was
unable to market the securities to other purchasers. In October 1999,
the Company purchased for $98.6 million the $100 million principal
amount of the securities under this commitment. No dividends from the
cumulative preferred securities have been received since the quarterly
payment received in January 2002.
The SSC capital trust securities have a fixed maturity and therefore
are considered to be subject to the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). The SSC
preferred stock securities are considered outside the scope of SFAS 115
and are accounted for at cost as they do not have a fixed maturity, are
not redeemable by Gold Kist, and do not have a readily determinable
fair value.
In October 2002, SSC notified the Association that, pursuant to the
provisions of the indenture under which the Association purchased the
capital trust securities, SSC would defer the quarterly interest
payment due on October 5, 2002. All subsequent quarterly interest
payments have also been deferred. The terms of the capital trust
securities allow for the deferral of quarterly interest payments for up
to 20 quarters, with any deferred payments bearing interest at 10.75%.
As a result of the deferral of the interest payments, the Association
followed the guidance of paragraph 16 of SFAS 115 and reduced the
carrying value of the capital trust securities by $24.1 million with a
corresponding charge against margins from operations before income
taxes for the six months ended December 28, 2002.
Page 6
As of December 31, 2003, SSC's total stockholders' and patrons' equity
fell below the Association's carrying value of the preferred stock
investment, which the Company believes is a triggering event indicating
impairment. The Association valued the preferred securities based on a
discounted cash flow approach and recorded an "other-than-temporary"
impairment charge of $18.5 million for the three and six months ended
December 27, 2003.
The carrying value of the SSC securities was $57.3 million at June
28, 2003 and $38.8 million on December 27, 2003. As interest rates and
market conditions change, the carrying value of the securities could be
further reduced. Also, the proceeds from any future sale of the SSC
securities could differ from these estimates. If these events were to
occur, they could have a material impact on results of operations and
financial position of the Association.
Gold Kist is permitted to sell the SSC securities pursuant to applicable
securities regulations and the terms of the securities. The SSC
securities are classified as noncurrent assets - investments in the
accompanying consolidated balance sheets at June 28 and December 27,
2003.
9. On September 27, 2002, the Company refinanced and extended its
Senior Secured Credit Facility to include a $110 million Revolving
Credit Facility maturing November 2004 and a $95 million Term Loan
maturing November 2005. The interest rates on the facility range from
1.50% to 2.25% over the London Interbank Offered Rate (LIBOR), adjusted
quarterly based on the Association's financial condition. Other terms
and conditions were essentially unchanged. The terms and conditions
on the $45 million five-year Term Loan due November 2005 were also
unchanged.
In February 2003, the Company amended its Senior Secured Credit
Facility and entered into a Temporary Revolving Credit Facility to
provide up to $35 million of incremental liquidity. The Temporary
Revolving Credit Facility matured on September 30, 2003 with no
outstanding balance.
At December 27, 2003, the Association was in compliance or had
obtained waivers for all applicable loan covenants under its credit
facilities.
10. The Company announced the closing of a poultry processing facility on
September 3, 2003 and wrote down the carrying value of the related
assets by $2.5 million to the expected sales price less costs of
disposal. Additional charges of $1 million were also taken in the
first quarter of fiscal 2004, primarily related to employee severance
amounts, which were paid during the quarter ended December 27, 2003.
No significant additional charges were taken in the second quarter of
fiscal 2004.
11. Pension expense included in the statement of operations was $1.9
million and $3.8 million for the three and six months ended December
27, 2003, respectively. Pension expense included in the statement of
operations was $55 thousand and $109 thousand for the three and six
months ended December 28, 2002, respectively.
Page 7
Effective January 1, 2004, the Association's qualified pension plan was
prospectively amended. For benefits earned in calendar 2004 and future
years, the basic pension formula was changed from 50% to 45% of final
average earnings, early retirement benefits were reduced, and the lump
sum distribution option is no longer available. The pension benefits
earned by employees through 2003 were unchanged.
The Association anticipates an estimated $10.0 million of pension
settlement accounting expense in the six months ended June 26, 2004 as
a result of expected lump sum distribution payments to electing
retiring employees exceeding service and interest cost components of
pension expense in the plan year. There was no pension settlement
accounting expense in the statements of operations for any of the
periods ended December 2003 and 2002.
12. Gold Kist is a party to various other legal, environmental and
administrative proceedings, all of which management believes constitute
ordinary routine litigation incidental to the business conducted by the
Company and are not material in amount.
Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
General
After two decades of rapid growth, the broiler industry is maturing and will
be dependent on new and value-added product development, as well as expanded
export opportunities for continued revenue growth. Production and operating
efficiencies will also be necessary for increased profitability. In
addition, the industry is undergoing consolidation as a number of
acquisitions and mergers have occurred in the last five years. The market
share of the top five U.S. firms in terms of ready-to-cook broiler meat
production has increased from 49% to 59.8% during that period, and we expect
this trend to continue.
The industry has experienced volatility in results of operations over the
last five years and expects the volatility to continue in the foreseeable
future. Volatility in results of operations is generally attributable to
fluctuations, which can be substantial, in broiler sales prices and cost of
feed grains. Broiler sales prices tend to fluctuate due to supply of
chicken, viability of export markets, supply and prices of competing meats
and proteins, animal health factors in the global meat complex and general
economic conditions.
According to the USDA World Agricultural Outlook Board, the forecast for
calendar 2003 U.S. broiler meat production is 32.288 billion pounds, ready-to-
cook weight, which is a 0.91% increase from the 31.895 billion pounds
produced in calendar 2002. This is the smallest increase in broiler
production for the industry in recent history, and has led to improved
broiler market prices in the six-month period ended December 27, 2003.
Heavier bird weights slightly offset lower egg sets and chick placements.
The estimate for calendar 2004 broiler meat production is 33.25 billion
pounds, which is a 2.98% increase from the calendar 2003 forecast. Subject
to the supplies of competing meats, the status of export markets and other
factors, we believe this increase in supply, which is below historical
averages for years prior to 2003, should continue to contribute to improved
broiler sales prices in fiscal 2004 compared to average prices for the year
ended June 28, 2003. However, current broiler sales prices are approaching
their highest levels since 1999 and are not expected to continue at these
levels.
Gold Kist's poultry export sales historically have been less than 10% of
total net sales. The poultry industry historically has exported 15% to 20%
of domestic production, principally dark meat products. Any disruption in
the export markets can significantly impact domestic broiler sales prices
due to excess domestic supply. The Russian ban on the import of U.S. poultry
in March 2002 depressed broiler sales prices through fiscal 2003 and coupled
with higher feed costs resulted in the Company's net operating losses in
fiscal 2003. The lifting of the Russian ban on U.S. chicken imports and
implementation of an import quota system has brought stability to the export
market for U.S. chicken and has contributed to an improved supply and demand
balance and higher broiler sales prices in the first six months of fiscal
2004.
Page 9
The cost of feed grains, primarily corn and soybean meal, represents
approximately fifty percent of total broiler production costs. Prices of
feed grains fluctuate in response to worldwide supply and demand. Corn and
soybean meal prices increased in fiscal 2003 by 25% and 18%, respectively,
due to stronger worldwide demand and a reduced U.S. crop due to weather
problems in grain producing areas. Higher feed grain prices, particularly
soybean meal, are expected to continue at least through fiscal 2004.
The Company believes that increasing its value-added product lines,
continuing to improve its cost structure and continuing its commitment to an
unbranded strategy to grow private label sales will help to reduce its
exposure to the industry volatility of the past five years and generate
higher gross margins on a consistent basis. The Association also plans to
increase its base of longer-term capital and improve its financial leverage;
however, due to its cooperative structure, it does not have access to equity
capital markets and has exposure to increases in interest rates. General
issues such as increased domestic and global competition in the meat
industry, heightened concerns over the safety of the U.S. food supply,
volatility in feed grain commodity prices and export markets, increasing
government regulation over animal production and animal welfare activism
continue as significant risks and challenges to the profitability and growth
of the Company and the broiler industry.
RESULTS OF OPERATIONS
Net Sales Volume
Gold Kist's net sales volume for the quarter ended December 27, 2003
increased 22.7% compared to the quarter ended December 28, 2002. For the six-
month period ended December 27, 2003, net sales volume increased 17.3% from
$898 million in the comparable period last year to $1.1 billion in the
current year. The increase in net sales volume was due primarily to an
approximate 14% increase in average chicken sales prices and to a 1.2%
increase in pounds of chicken sold. An overall strengthening economy,
favorable production levels, improved export demand and higher prices in the
beef and pork meat sectors contributed to stronger demand and higher chicken
sales prices in the 2003 periods. Current diet trends emphasizing low fat
proteins such as chicken or fish have also favorably impacted product demand.
The Association's export sales of $30.3 million and $48.7 million for the
three and six months ended December 27, 2003, respectively, were 112% and
90.8% higher than the 2002 periods, due to substantially increased prices,
the resumption of shipments to Russia and increased demand from other
countries. An import quota system was negotiated and announced by Russian
officials in December 2003. The U.S. share of the total quota was 771,900
tons or 73.5%. This is below the U.S. levels of imports prior to the
embargo; however, increased demand from other countries has partially offset
this reduction. The Company's export sales to Russia increased 20.4% in
pounds shipped and 89% in dollar value from $9.7 million in the December 2002
year-to-date period to $18.3 million in the December 2003 year-to-date
period.
Page 10
Net Operating Margins (Loss)
The Association had net operating margins of $39.2 million and $77.6 million
for the three and six months ended December 27, 2003, respectively, compared
to net operating losses of $(33.5) million and $(31.2) million in the
comparable periods last year. The increase in operating margins in the
December 2003 periods was due primarily to higher chicken selling prices and
additional pounds sold partially offset by higher feed ingredient costs,
principally soybean meal. Soybean meal prices were 19.9% higher per ton
during the six-month period ended December 27, 2003 than the same period a
year ago. The increased feed grain costs were due to adverse weather
conditions experienced late in the growing season. The Company expects that
higher soybean meal prices will continue through at least the remainder of
the fiscal year due to tighter supplies. Cost of sales also included a $3.5
million charge to write down the assets and recognize other expenses,
primarily employee severance amounts, related to the closing of a poultry
processing facility announced in September 2003.
The Association's pork production operations were breakeven for the six
months ended December 27, 2003 as compared to a net operating loss of $1.9
million for the six months ended December 28, 2002. The improvement was
attributable to improved hog market prices.
The 31.1% year-to-date increase in distribution, administrative and general
expenses was principally due to incentive compensation accruals associated
with the net margins for the year-to-date December 2003 periods compared to
the net losses in the December 2002 periods. The Company also experienced
higher benefit costs, principally pension expense and employee medical claims
during the first six months of fiscal 2004, which contributed to the increase
in these expenses.
Other Deductions
Other deductions totaled $24.8 million and $28.0 million for the three and
six months ended December 27, 2003, respectively, compared to $8.5 million
and $38.1 million for the comparable periods last year.
In October 2002, Southern States Cooperative, Inc. (SSC) notified the
Association that, pursuant to the provisions of the indenture under which the
Association purchased the capital trust securities, SSC would defer the
quarterly interest payment due on October 5, 2002. Interest payments for
subsequent quarters have also been deferred. The terms of the capital trust
securities allow for the deferral of quarterly interest payments for up to 20
quarters, with the deferred payments bearing interest at 10.75%. As a result
of the deferral of the interest payments, the Association reduced the
carrying value of the capital trust securities by $24.1 million with a
corresponding charge included in other deductions for the six months ended
December 28, 2002.
As of December 31, 2003, SSC's total stockholders' and patrons' equity fell
below the Association's carrying value of the preferred stock investment,
which the Company believes is a triggering event indicating impairment. The
Association valued the preferred securities based on a discounted cash flow
approach and recorded an "other-than-temporary" impairment charge of $18.5
million included in other deductions for the three and six months ended
December 27, 2003.
Page 11
As interest rates and market conditions change, the carrying value of the
securities could be further reduced. Also, the proceeds from any future sale
of the securities could differ from these estimates. If these events were to
occur, they could have a material impact on the Association's results of
operations and financial position.
Interest expense was $6.8 million and $14.4 million for the three and six-
month periods ended December 27, 2003, respectively, compared to $5.6 million
and $11.7 million for the comparable periods last year. The increase in the
quarter and year-to-date interest expense was due to higher interest rate
spreads over the London Interbank Offered Rate (LIBOR) and higher fees
resulting from the February 2003 amendment to the Senior Credit Facility and
the arrangement of the Temporary Revolving Credit Facility that matured on
September 30, 2003.
Miscellaneous, net was income of $291 thousand and $4.5 million for the three
and six months ended December 27, 2003, respectively, compared to expense of
$4.0 million and $3.7 million for the comparable periods last year. Gains
from the sale of assets and from the settlement in August 2003 of notes
receivable that exceeded their carrying value were the primary items
accounting for the December 2003 year-to-date income amounts. The notes
receivable were acquired from the parent corporation of the other general
partner of a pecan processing and marketing partnership dissolved in January
2003. A payment in December 2002 representing the Company's share of a legal
settlement as a former partner of Golden Peanut Company accounted for the
expense in the three and six months ended December 28, 2002.
Income from a hog grow-out joint venture with another regional cooperative
was $.4 million for the six months ended December 27, 2003 as compared to a
loss of $.6 million for the six months ended December 28, 2002 due to
improved hog market prices.
Income Tax Expense (Benefit)
For the three and six months ended December 27, 2003, the Association's
combined federal and state effective income tax rates used to calculate the
tax expense of the margins before income taxes were 76.3% and 45.8%,
respectively. The increased effective tax rate over the federal and state
statutory rates for the three and six months ended December 27, 2003 was due
to the deferred income tax valuation allowance established for the unrealized
capital loss resulting from the write down of the SSC preferred stock
investment.
The combined effective rates for the three and six months ended December 28,
2002 were 33.3% and 21.8%, respectively. The lower tax benefit on the net
loss for the six months ended December 28, 2002 was due to the deferred
income tax valuation allowance established for the unrealized capital loss
resulting from the write down of the SSC capital trust securities. Income
tax expense (benefit) for the periods presented reflects income taxes at
statutory rates adjusted for available tax credits and deductible
nonqualified equity redemptions.
Page 12
LIQUIDITY AND CAPITAL RESOURCES
The Association's liquidity is dependent upon funds from operations and
external sources of financing. On September 27, 2002, the Company refinanced
and extended its Senior Secured Credit Facility to include a $110 million
Revolving Credit Facility maturing November 2004 and a $95 million Term Loan
maturing November 2005. The interest rates on the facility ranged from 1.50%
to 2.25% over the London Interbank Offered Rate (LIBOR), adjusted quarterly
based on the Association's financial condition. Other terms and conditions
were essentially unchanged. The terms and conditions on the $45 million five-
year Term Loan due November 2005 were also unchanged.
In February 2003, the Company amended its Senior Secured Credit Facility and
arranged a Temporary Revolving Credit Facility to provide up to $35 million
of incremental liquidity. The Temporary Revolving Credit Facility matured on
September 30, 2003. There was no outstanding balance under the Temporary
Facility at June 28 or September 30, 2003.
The Association also has $42.2 million in term loans outstanding with an
agricultural credit bank and $45.0 million in senior notes outstanding with
an insurance company. The Association's senior notes, senior secured credit
facilities and term loans are secured by substantially all of the
Association's inventories, receivables, and property, plant and equipment.
Covenants under the terms of the debt agreements with lenders include
conditions that could limit short-term and long-term financing available from
various external sources. The terms of debt agreements specify minimum
consolidated tangible net worth, current ratio and coverage ratio
requirements, as well as a limitation on the total debt to total capital
ratio. The debt agreements place a limitation on capital expenditures,
equity distributions, cash patronage refunds, commodity hedging contracts and
additional loans, advances or investments and other items. At December 27,
2003, the Association was in compliance with or had obtained waivers for all
applicable loan covenants under its credit facilities.
For the first six months of fiscal 2004, cash provided by operating
activities was $85.8 million compared to cash used in operating activities of
$27.3 million for the first six months of 2003. The increased cash flow was
due to the strong operating results for the period as adjusted for non-cash
items, principally depreciation and amortization, the unrealized loss on
investment and deferred income taxes. Cash used in financing activities for
the six months ended December 2003 was $73.4 million compared to cash
provided by financing activities for the six months ended December 2002 of
$50.8 million. During the period, the Company repaid outstanding debt of
$70.7 million, including scheduled long-term debt amounts and payments
on the revolving credit facility. At February 6, 2004, the Association
had unused loan commitments of $84.9 million.
Working capital and patrons' and other equity were $181.9 million and $210.0
million, respectively, at December 27, 2003 compared to $210.2 million and
$183.9 million, respectively, at June 28, 2003. The reclassification of the
Revolving Credit Facility from long-term debt to a current liability
effective November 2003 resulted in the reduction in working capital at
December 27, 2003 from June 28, 2003. At December 27, 2003, the amount
outstanding under the Revolving Credit Facility was $20 million. The
increase in patrons' and other equity reflects the net margins for the first
half of 2004 partially offset by $2.7 million of equity redemptions.
Page 13
In August 2003, the Board of Directors of the Association suspended the early
cashing of notified equity at the request of the holder, but will continue to
pay the full face value of notified equity to the estates of deceased equity
holders, subject to a board imposed $4.0 million limitation on total equity
cashings in 2004. The redemption of patrons' equity is subject to the
discretion of the Board of Directors.
The Association has spent approximately $9.8 million in capital expenditures
in the six month period ended December 27, 2004 and expects to spend an
additional $35 million in the last six months of fiscal 2004 that include
expenditures for expansion of further processing capacity and technological
advances in poultry production and processing. In addition, planned capital
expenditures include other asset improvements and necessary replacements.
Management intends to finance planned 2004 capital expenditures and related
working capital needs with existing cash balances, cash expected to be
provided from operations and additional borrowings, as needed.
In response to adverse operating conditions in fiscal 2003, the Company
instituted a cost reduction plan freezing pay levels, reducing staff and
overtime, implementing employee benefit plan reductions/eliminations and
selling certain non-operating assets. The Company continues to analyze all
aspects of its business and may consider additional cost reductions or
operational changes necessary to maintain its cost competitiveness.
Effective January 1, 2004, the Association's qualified pension plan was
prospectively amended. For benefits earned in calendar 2004 and future
years, the basic pension formula was changed from 50% to 45% of final average
earnings, early retirement benefits were reduced, and the lump sum
distribution option is no longer available. The pension benefits earned by
employees through 2003 were unchanged. As a result of these amendments, the
projected pension plan contribution commencing in calendar 2005 was reduced
from $7 million estimated at July 2003 to $4 million.
The Association expects to have an estimated $10.0 million of pension
settlement accounting expense in the six months ending June 26, 2004 as a
result of expected lump sum distribution payments to electing retiring
employees exceeding service and interest cost components of pension expense
in the plan year. There was no pension settlement accounting expense in the
statements of operations for any of the periods ended December 2003 and 2002.
In connection with the sale of assets of its Agri-Services business to SSC
during 1999, Gold Kist discontinued the sale of Subordinated Capital
Certificates. The Association believes cash on hand and cash equivalents at
December 27, 2003 and cash expected to be provided from operations, in
addition to borrowings available under committed credit arrangements, will be
sufficient to maintain cash flows adequate for the Association's operational
objectives over the next twelve months and to fund the repayment of
outstanding Subordinated Certificates as they mature.
Due in part to the $45 million term loan and $80 million of the $95 million
term loan maturing in November 2005, the Company is considering long-term
debt financing alternatives. The Company is also in process of negotiating a
new three-year revolving credit agreement with its bank group to replace its
current credit facility maturing November 2004.
Page 14
Important Considerations Related to Forward-Looking Statements
The statements contained in this report regarding our future financial and
operating performance and results, business strategy, market prices, future
commodity price risk management activities, plans and forecasts and other
statements that are not historical facts are forward-looking statements, as
defined in Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended. We have based these forward-
looking statements on our current assumptions, expectations and projections
about future events.
We use the words "may," "will," "expect," "anticipate," "estimate,"
"believe," "continue," "intend," "should," "would," "could", "plan," "budget"
and other similar words to identify forward-looking statements. You should
read statements that contain these words carefully because they discuss
future expectations, contain projections of results of operations or of our
financial condition and/or state other "forward-looking" information. These
statements may also involve risks and uncertainties that could cause our
actual results of operations or financial condition to materially differ from
our expectations in this offering circular, including, but not limited to:
- fluctuations in the cost and availability of raw materials, such as feed
ingredients;
- changes in the availability and relative costs of labor and contract
growers;
- market conditions for finished products, including competitive factors
and the supply and pricing of alternative meat proteins;
- effectiveness of our sales and marketing programs;
- disease outbreaks affecting broiler production and/or marketability of
our products;
- contamination of products, which can lead to product liability and
product recalls;
- access to foreign markets together with foreign economic conditions;
- acquisition activities and the effect of completed acquisitions;
- pending or future litigation;
- the ability to obtain additional financing or make payments on our debt;
- regulatory developments, industry conditions and market conditions; and
general economic conditions.
Any forward-looking statements in this report are based on certain
assumptions and analysis made by us in light of our experience and perception
of historical trends, current conditions, expected future developments and
other factors that we believe are appropriate under the current
circumstances. However, events may occur in the future that we are unable to
accurately predict, or over which we have no control. Forward-looking
statements are not a guarantee of future performance and actual results or
developments may differ materially from expectations. You are therefore
cautioned not to place undue reliance on such forward-looking statements. We
do not intend to update any forward-looking statements contained in this
document. When considering our forward-looking statements, also keep in mind
the risk factors and other cautionary statements in reports that we file with
the SEC.
Page 15
Effects of Inflation
The major factors affecting the Association's net sales volume and cost of
sales are the commodity market prices for broilers, hogs and feed grains.
The prices of these commodities are affected by world market conditions and
are volatile in response to supply and demand, as well as political and
economic events. The price fluctuations of these commodities do not
necessarily correlate with the general inflation rate. Inflation has,
however, affected operating costs such as labor, energy and material costs.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Liabilities and
Equity," which is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for the
classification of financial instruments in financial statements that have
characteristics of both liabilities and equity. Any redemption of the
Company's patrons' equity is subject to the discretion of the Board of
Directors and is not mandatorily redeemable.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" (FIN 46), as amended in December 2003. This interpretation addresses
the consolidation by business enterprises of variable interest entities as
defined in the interpretation. Generally, the provisions of the
Interpretation are effective in the first interim period ending after March
15, 2004. The Company is in process of evaluating the impact of this
interpretation and does not expect a significant impact on the Company's
consolidated financial statements.
In May 2003, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue 01-08, "Determining Whether an Arrangement Contains a
Lease." If an arrangement contains a lease in accordance with the EITF
guidance, the timing of the expense and recognition in the balance sheet (if
a capital lease) and disclosures could be affected. The EITF is applicable
to all arrangements agreed to or modified in fiscal periods after May 28,
2003. The effect of this EITF is not material to the Company for those
arrangements entered into or modified in the first six months ended December
27, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement does not have
a material impact on the Company's consolidated financial statements.
Critical Accounting Policies
The preparation of the Company's Consolidated Financial Statements requires
the use of estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
fiscal years presented. The following is a summary of certain accounting
policies considered to be critical by the Company.
Page 16
Valuation of Investments - The Company has an investment in the preferred and
capital trust securities of Southern States Cooperative, Inc. (SSC). The
Company has accounted for the capital trust securities as "available for
sale" securities under the provisions of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Debt and Equity Securities" (SFAS
115). The capital trust securities are reflected at an approximate fair
value based on discounted cash flows using interest rates for similar
securities. As a result, changes in interest rates or credit worthiness of
SSC would impact the approximate fair value. The preferred stock is an
equity security that does not have a readily determinable market value and is
carried at cost and periodically assessed for "other-than-temporary"
impairments.
As interest rates and market conditions change, the carrying values of the
securities could be reduced. Also, the proceeds from any future sale of
these securities could differ from these estimates. These events could have
a material impact on results of operations and financial position of the
Company.
Allowance for Doubtful Accounts - The Company's management estimates the
allowance for doubtful accounts based on an analysis of the status of
individual accounts. Factors such as current overall economic and industry
conditions, historical customer performance and current financial condition,
collateral position and delinquency trends are used in evaluating the
adequacy of the allowance for doubtful accounts. Changes in the economy,
industry and specific customer conditions may require adjustment to the
allowance amount recorded by the Company.
Accrued Self-Insurance Costs - The Company is self-insured for certain losses
related to property, fleet, product and general liability, worker's
compensation and employee medical benefits. Stop loss coverage is maintained
with third party insurers to limit the total exposure to the Company.
Estimates of the ultimate cost of claims incurred as of the balance sheet
date are accrued based on historical data and estimated future costs. While
the Company believes these estimates are reasonable based on the information
available, actual costs could differ and materially impact the results of
operations and financial position.
Employee Benefits - The Company incurs various employment-related benefit
costs with respect to qualified and nonqualified pensions and deferred
compensation plans. Assumptions are made related to discount rates used to
value certain liabilities, assumed rates of return on assets in the plans,
compensation increases, employee turnover and mortality rates. The Company
utilizes third party actuarial firms to assist management in determining
these assumptions. Different assumptions could result in the recognition of
differing amounts of expense over different periods of time.
Income Taxes - The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes," which requires that deferred tax
assets and liabilities be recognized for the tax effect of temporary
differences between the financial statement and tax basis of recorded assets
and liabilities at current tax rates. SFAS No. 109 also requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. The recoverability of the tax assets recorded on the balance sheet
is based on both historical and anticipated earnings levels of the
Association and is reviewed to determine if any additional valuation
allowance is necessary when it is more likely than not that amounts will not
be recovered.
Page 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Market Risk
The principal market risks affecting the Association are exposure to changes
in broiler and commodity prices and interest rates on borrowings. Although
the Company has international sales and related accounts receivable from
foreign customers, there is no foreign currency exchange risk as all sales
are denominated in United States dollars.
Commodities Risk
The Association is a purchaser of certain agricultural commodities used for
the manufacture of poultry feeds. The Association uses commodity futures and
options for economic hedging purposes to reduce the effect of changing
commodity prices on operations and to ensure supply of a portion of its
commodity inventories and related purchase and sales contracts. Feed
ingredients futures and option contracts, primarily corn and soybean meal,
are accounted for at fair value. Changes in fair value on these commodity
futures and options are recorded as a component of product cost in the
consolidated statements of operations. Terms of the Association's secured
credit facility limit the use of forward purchase contracts and commodities
futures and options transactions. At December 27, 2003, the notional amounts
and fair value of the Association's outstanding commodity futures and options
positions were not material.
Feed ingredient purchase commitments for corn and soybean meal in the
ordinary course of business were $270.8 million at December 27, 2003. These
commitments include both priced and unpriced contracts. Unpriced feed
ingredient commitments are valued at market for the month of delivery as of
December 27, 2003. Based on estimated annual feed usage, a 10% increase in
the weighted average cost of feed ingredients would increase annualized cost
of sales by an estimated $60 million.
Interest Rate Risk
The Association has exposure to changes in interest rates on certain debt
obligations. The interest rates on the Senior Secured Credit facilities
fluctuate based on the London Interbank Offered Rate (LIBOR), as well as the
Association's financial condition. A 1% change in LIBOR would increase
annual interest expense by an estimated $2.0 million.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation
of the Company's management, including the President and Chief Executive
Officer ("CEO"), and the Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and the CFO, concluded that the Company's disclosure
controls and procedures as of the end of the period covered by this report,
were effective in timely bringing to their attention material information
related to the Company required to be included in the Company's periodic
Securities and Exchange Commission filings. There has not been any change in
the Company's internal control over financial reporting that occurred during
the Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
Page 18
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Designation of Exhibit in this Report Description of Exhibit
B-31 Section 302, Sarbanes-
Oxley Act, Certifications
B-32 Section 906, Sarbanes-
Oxley Act, Certifications
(b) Reports on Form 8-K. Gold Kist has not filed any reports on Form
8-K during the three months ended December 27, 2003.
SIGNATURES
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.
GOLD KIST INC.
(Registrant)
Date February 10, 2004
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date February 10, 2004
Stephen O. West
Treasurer and Chief Financial Officer
(Principal Financial Officer)
Page 18
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Designation of Exhibit in this Report Description of Exhibit
B-31 Section 302, Sarbanes-
Oxley Act, Certifications
B-32 Section 906, Sarbanes-
Oxley Act, Certifications
(b) Reports on Form 8-K. Gold Kist has not filed any reports on Form
8-K during the three months ended December 27, 2003.
SIGNATURES
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.
GOLD KIST INC.
(Registrant)
Date February 10, 2004 /s/ John Bekkers
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date February 10, 2004 /s/ Stephen O. West
Stephen O. West
Treasurer and Chief Financial Officer
(Principal Financial Officer)