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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 March 27, 2004
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 March 27, 2004 1
Consolidated Statements of Operations -
Three Months and Nine Months Ended
March 29, 2003 and March 27, 2004 2
Consolidated Statements of Cash Flows -
Nine Months Ended March 29, 2003
and March 27, 2004 3
Notes to Consolidated Financial
Statements 4 - 14
Item 2. Management's Discussion and Analysis of
Consolidated Results of Operations and
Financial Condition 15 - 24
Item 3. Quantitative and Qualitative Disclosure About
Market Risks 25
Item 4. Controls and Procedures 25
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 26
Page 1
Item 1. Financial GOLD KIST INC.
Statements CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
(Unaudited)
June 28, March 27,
2003 2004
ASSETS
Current assets:
Cash and cash equivalents $ 11,026 93,526
Receivables, principally trade,
less allowance for doubtful
accounts of $2,002 at
June 28, 2003 and $1,821
at March 27, 2004 104,699 117,156
Inventories 196,728 221,283
Deferred income taxes 43,270 22,043
Other current assets 20,100 27,633
Total current assets 375,823 481,641
Investments 66,805 50,914
Property, plant and equipment, net 226,905 218,684
Deferred income taxes 26,822 30,799
Other assets 65,692 67,230
$762,047 849,268
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt $ 22,162 13,436
Accounts payable 63,281 67,012
Accrued compensation and related expenses 31,875 42,978
Interest left on deposit 8,495 7,570
Income taxes payable - 22,348
Other current liabilities 39,783 59,018
Total current liabilities 165,596 212,362
Long-term debt, less current maturities 324,011 296,042
Accrued pension costs 44,487 59,722
Accrued postretirement benefit costs 10,119 7,485
Other liabilities 33,937 42,474
Total liabilities 578,150 618,085
Patrons' and other equity:
Common stock, $1.00 par value - Authorized
500 shares; issued and outstanding 2 at
June 28, 2003 and March 27, 2004 2 2
Patronage reserves 185,620 212,992
Accumulated other comprehensive loss (43,448) (43,448)
Retained earnings 41,723 61,637
Total patrons' and other equity 183,897 231,183
$762,047 849,268
See Accompanying Notes to Consolidated Financial Statements.
Page 2
GOLD KIST INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
Mar. 29, Mar. 27, Mar. 29, Mar. 27,
2003 2004 2003 2004
Net sales volume $466,389 575,589 1,364,501 1,629,204
Cost of sales 461,589 480,128 1,360,576 1,402,843
Gross margins 4,800 95,461 3,925 226,361
Distribution, administrative
and general expenses 19,196 27,200 59,841 80,494
Postretirement benefit
curtailment gain and pension
settlement (expense) 554 (9,908) 10,865 (9,908)
Net operating margins (loss) (13,842) 58,353 (45,051) 135,959
Other income (deductions):
Interest and dividend income 662 744 2,051 1,061
Interest expense (6,762) (13,316) (18,423) (27,701)
Unrealized loss on investment - - (24,064) (18,486)
Miscellaneous, net 2,134 886 (1,588) 5,419
Total other deductions (3,966) (11,686) (42,024) (39,707)
Margins (loss) from operations
before income taxes (17,808) 46,667 (87,075) 96,252
Income tax expense (benefit) (5,937) 16,805 (21,008) 39,500
Net margins (loss) $(11,871) 29,862 (66,067) 56,752
See Accompanying Notes to Consolidated Financial Statements.
Page 3
GOLD KIST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
Mar. 29, Mar. 27,
2003 2004
Cash flows from operating activities:
Net margins (loss) from continuing operations $(66,067) 56,752
Non-cash items included in net margins (loss)
from operations:
Depreciation and amortization 29,361 29,538
Unrealized loss on investment 24,064 18,486
Postretirement benefit curtailment gain (10,865) -
Pension and other benefit plans expense 2,406 16,639
Deferred income tax expense (benefit) (17,379) 16,190
Other (184) (1,241)
Changes in operating assets and liabilities:
Receivables 3,648 (12,474)
Inventories (324) (24,555)
Other current assets 1,871 (656)
Accounts payable, accrued and other expenses (7,338) 48,512
Net cash provided by (used in) operating activities
of continuing operations (40,807) 147,191
Net cash used in operating activities of
discontinued operations (18,381) -
Net cash provided by (used in) operating activities (59,188) 147,191
Cash flows from investing activities:
Dispositions of investments 469 43
Acquisitions of property, plant and equipment (27,871) (19,810)
Other 4,426 2,882
Net cash used in investing activities (22,976) (16,885)
Cash flows from financing activities:
Short-term debt repayments, net (2,500) -
Proceeds from long-term debt 202,920 196,940
Principal repayments of long-term debt (105,823) (235,052)
Payments of capitalized financing costs (3,007) (5,925)
Patrons' equity redemptions paid in cash (5,614) (3,769)
Net cash provided by (used in) financing
activities 85,976 (47,806)
Net change in cash and cash equivalents 3,812 82,500
Cash and cash equivalents at beginning of period 8,997 11,026
Cash and cash equivalents at end of period $ 12,809 93,526
Supplemental disclosure of cash flow data:
Cash paid (received) during the periods for:
Interest (net of amounts capitalized) $ 18,940 33,236
Income taxes, net $ (5,849) (1,548)
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 March 27, 2004 and for the three
and nine months ended March 27, 2004. 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 in the Company's previously
filed Annual Report on 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 $(11,871) and $29,862 for the three
months ended March 29, 2003 and March 27, 2004, respectively, and
$(66,067) and $56,752 for the nine months ended March 29, 2003 and
March 27, 2004, 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 arrangement.
5. Inventories consist of the following:
June 28, 2003 Mar. 27, 2004
Live poultry and hogs $ 97,691 103,418
Marketable products 53,587 64,520
Raw materials and supplies 45,450 53,345
$196,728 221,283
Live poultry and hogs consist of broilers, market hogs and breeding
stock. Broilers are stated at the lower of cost or market and breeders
are stated at cost less accumulated amortization. Costs include live
production costs (principally feed, chick cost, medications and other
raw materials), labor and production overhead. Breeder costs include
acquisition of chicks from parent stock breeders, feed, medication,
labor and production costs that are accumulated up to the production
stage and then amortized over their estimated useful life of thirty six
weeks. Market hogs include costs
Page 5
of feed, medication, feeder pigs, labor and production overhead. Pork
breeder herds include cost of breeder gilts acquired from parent stock
breeders, feed, medications and production costs that are accumulated
up to production stage and then amortized over twenty-four months. The
pork breeders are included in other assets - noncurrent in the
consolidated financial statements and are not significant. If market
prices for inventories move below carrying value, the Company records
adjustments to write down the carrying values of these inventories.
Marketable products consist primarily of dressed and further processed
poultry. 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.
Raw materials and supplies consist of feed ingredients, hatching eggs,
packaging materials and operating supplies. These inventories are
stated, generally, on the basis of the lower of cost (first-in, first-
out or average) or market. Gold Kist engages in forward purchase
contracts and commodity futures and options transactions to manage the
risk of adverse price fluctuations with regard to its feed ingredient
purchases.
6. Depreciation and amortization included in cost of goods sold in the
accompanying consolidated statements of operations were $8.1 million
and $24.9 million for the three and nine months ended March 29, 2003,
respectively, and $8.5 million and $25.9 million for the three and nine
months ended March 27, 2004, respectively.
7. At June 28, 2003 and March 27, 2004, 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.
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. The Company initially
recorded the securities at an estimated fair value of $81.4 million.
Page 6
The SSC capital trust securities have a fixed maturity and are 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%.
No dividends from the cumulative preferred securities have been
received since the quarterly payment received in January 2002.
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.
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 in the quarter ended December 27,
2003.
The carrying value of the SSC securities was $57.3 million at June 28,
2003 and $38.8 million on March 27, 2004. As interest rates and
market conditions change, or if SSC incurs additional significant
losses, 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 toapplicable
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, 2003 and March 27,
2004.
Page 7
9. Long-term debt is summarized as follows:
June 28, March 27,
2003 2004
(Amounts in Thousands)
Senior notes, due 2014 $ - 196,940
Series B senior exchange notes, due in annual
installments of $2,727 24,546 21,818
Series C senior exchange notes, due in annual
installments of $2,273 20,454 20,454
Senior secured note payable with an insurance
company 45,000 -
Term loan agreements with financial
institutions 95,000 -
Revolving credit facility 83,000 -
Term loan agreement with agricultural credit
bank, due in semi-annual installments of
$1,785 35,720 32,150
Term loan agreement with agricultural credit
bank, due in quarterly installments of $600 10,000 9,600
Subordinated capital certificates of interest
with original fixed maturities ranging from
seven to fifteen years, unsecured 23,006 18,204
Tax exempt industrial revenue bond due July
2015 7,500 7,500
Mortgage loan, due in monthly installments to
January 2010, secured by an office building 1,947 2,812
346,173 309,478
Less current maturities 22,162 13,436
$324,011 296,042
In March 2004, the Company issued the senior notes in a private offering
pursuant to Rule 144A and Regulation S of the Securities Act of 1933.
The stated interest rate on the senior notes is 10 1/4%, with interest
payable semi-annually on March 15 and September 15. The Senior Notes
were issued at a price of 98.47% and are reflected net of the discount
of $3.06 million in the accompanying consolidated balance sheet at March
27, 2004. The discount amount will be amortized to interest expense
over the ten-year term of the senior notes under the interest method
yielding an effective interest rate of approximately 10 1/2%.
Net proceeds from the sale of the senior notes after underwriting and
other expenses were $191.2 million. From the proceeds, $145.5 million
was used to repay the $95 million term loan under the senior credit
facility, the $45 million term loan due to an insurance company and a
prepayment penalty of $5.5 million on the term loan due to the insurance
company. The prepayment penalty and the write off of unamortized loan
fees of $.9 million are included in interest expense in the accompanying
consolidated statement of operations for the quarter and nine months
ended March 27, 2004. The remaining proceeds after other expenses were
approximately $44.7 million and will be used to fund capital
expenditures, operations, working capital needs and future debt
service obligations. The fees and expenses of the
Page 8
offering of approximately $5.4 million will be amortized over the ten-
year term of the senior notes under the interest method and included in
interest expense.
Concurrent with the issuance of the senior notes, the Company amended
its senior credit facility to provide for a revolving line of credit in
an aggregate principal amount of $125 million, including a sub-facility
of up to $60 million for letters of credit, for a term of three years.
Borrowings under the facility will be limited to the lesser of $125
million and a borrowing base determined by reference to a percentage of
the collateral value of the accounts receivable and inventories securing
the facility.
At March 27, 2004, the Association was in compliance with all
applicable loan covenants under its senior notes and 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 three months ended December 27,
2003. No significant additional charges were taken in the third
quarter of fiscal 2004.
11. 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 other
changes were made. The pension benefits earned by employees through
2003 were unchanged.
The Association recognized $9.9 million of pension settlement expense
in the quarter ended March 27, 2004. The settlement expense resulted
from lump sum distribution payments from the plan to electing retiring
employees exceeding service and interest cost components of pension
expense in the plan year.
In October 2002, the Association substantially curtailed its
postretirement supplemental life insurance plan. Gains from the
curtailment of approximately $.6 million and $10.9 million are
reflected in the accompanying consolidated statements of operations for
the three and nine-month periods ended March 29, 2003.
Page 9
Components of net periodic benefit cost for the three months ended
March 29, 2003 and March 27, 2004 are as follows:
Postretirement
Pension Benefits Insurance Benefits
2003 2004 2003 2004
Service cost $ 1,380 1,674 16 -
Interest cost 2,548 2,672 687 78
Estimated return on plan assets (3,823) (3,398) - -
Amortization of:
Unrecognized transition asset (224) (60) - -
Unrecognized prior service cost 440 456 (403) (2,586)
Unrecognized (gain)/loss 92 569 358 2,088
Net periodic benefit expense
(income) 413 1,913 658 (420)
Settlements and curtailment - 9,908 (554) -
Net periodic benefit expense/
(income) after settlements
and curtailment $ 413 11,821 104 (420)
Components of net periodic benefit cost for the nine months ended March
29, 2003 and March 27, 2004 are as follows:
Postretirement
Pension Benefits Insurance Benefits
2003 2004 2003 2004
Service cost $ 4,141 5,022 48 -
Interest cost 7,645 8,017 2,060 234
Estimated return on plan assets (11,468) (10,193) - -
Amortization of:
Unrecognized transition asset (672) (180) - -
Unrecognized prior service cost 1,318 1,366 (1,207) (7,760)
Unrecognized (gain)/loss 275 1,708 1,074 6,265
Net periodic benefit expense
(income) 1,239 5,740 1,975 (1,261)
Settlements and curtailment - 9,908 (10,865) -
Net periodic benefit expense/
(income) after settlements
and curtailment $ 1,239 15,648 (8,890) (1,261)
12. The Company has been named as a defendant in a purported class action
lawsuit filed in the U.S. District Court for the Northern District of
Alabama alleging that the Company's production contracts with its
member-growers constitute unfair practices or arrangements that have
permitted the Company to manipulate the prices of live poultry and have
damaged independent live poultry producers in violation of the Federal
Packers and Stockyards Act of 1921. The Company believes that the
substantive and class claims alleged in this lawsuit are without merit.
The plaintiff's claims are premised on the existence of a significant
market for live poultry that does not exist within the vertically
integrated structure of the U.S. poultry industry. Further, the
Company is a farmers' cooperative, and the Company
Page 10
believes that the plaintiff, who is a member of the cooperative, is
obligated to arbitrate any disputes with the Company on an individual
basis and also otherwise lacks standing to bring the claims in
question. For these and other reasons, the Company intends to defend
the suit vigorously and believes that this lawsuit will not have a
material adverse effect on the Company.
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.
13. SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS
The Company's senior notes, due 2014 are jointly and severally
guaranteed by the Company's domestic subsidiaries, which are 100% owned
by Gold Kist Inc. (the "Parent"), except for GK Insurance Inc., a
wholly owned captive insurance company domiciled in the State of
Vermont.
The following is the unaudited supplemental combining condensed balance
sheets as of June 28, 2003 and March 27, 2004, the supplemental
combining condensed statements of operations for the three and nine
months ended March 29, 2003 and March 27, 2004, respectively, and the
supplemental combining condensed statements of cash flows for the nine
months ended March 29, 2003 and March 27, 2004. The only intercompany
eliminations are the normal intercompany revenues, borrowings and
investments in wholly owned subsidiaries. Separate complete financial
statements of the guarantor subsidiaries, which are 100% owned by the
Parent, are not presented because the guarantors are jointly and
severally, fully and unconditionally liable under the guarantees.
Page 11
As of June 28, 2003
Balance Sheet: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
ASSETS
Current assets:
Cash and cash
equivalents $ 8,353 164 2,509 11,026
Receivables, net 102,203 16,725 15,162 (29,391) 104,699
Inventories 196,630 98 - 196,728
Deferred income
taxes and other
current assets 45,137 1,668 16,565 63,370
Total current
assets 352,323 18,655 34,236 (29,391) 375,823
Investments 86,237 - - (19,432) 66,805
Property, plant
and equipment,
net 226,571 334 - 226,905
Deferred income
taxes and other
assets 70,155 14,511 7,848 - 92,514
Total Assets $735,286 33,500 42,084 (48,823) 762,047
LIABILITIES AND
PATRONS' EQUITY
Current liabilities:
Current maturities
of long-term debt $ 22,162 - - 22,162
Accounts payable 75,837 16,835 - (29,391) 63,281
Accrued compensation
and related expenses 31,871 4 - 31,875
Interest left on
deposit 8,495 - - 8,495
Other current
liabilities 24,045 28 15,710 39,783
Total current
liabilities 162,410 16,867 15,710 (29,391) 165,596
Long-term debt, less
Current maturities 324,011 - - 324,011
Accrued pension costs 44,487 - - 44,487
Accrued postretirement
benefit costs 10,119 - - 10,119
Other liabilities 10,362 326 23,249 33,937
Total liabilities 551,389 17,193 38,959 (29,391) 578,150
Patrons' and other
equity 183,897 16,307 3,125 (19,432) 183,897
Total liabilities
and patrons'
equity $735,286 33,500 42,084 (48,823) 762,047
Page 12
As of March 27, 2004
Balance Sheet: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
ASSETS
Current assets:
Cash and cash
equivalents $ 90,784 219 2,523 93,526
Receivables, net 115,279 13,059 26,232 (37,414) 117,156
Inventories 221,128 155 - 221,283
Deferred income
taxes and other
current assets 26,463 (702) 23,915 49,676
Total current
assets 453,654 12,731 52,670 (37,414) 481,641
Investments 71,822 - - (20,908) 50,914
Property, plant
and equipment,
net 218,409 275 - 218,684
Deferred income
taxes and other
assets 78,184 10,467 9,378 98,029
Total Assets $822,069 23,473 62,048 (58,322) 849,268
LIABILITIES AND
PATRONS' EQUITY
Current liabilities:
Current maturities
of long-term debt $ 13,436 - - 13,436
Accounts payable 99,051 5,375 - (37,414) 67,012
Accrued compensation
and related expenses 42,958 20 - 42,978
Interest left on
deposit 7,570 - - 7,570
Income taxes payable 22,364 (16) - 22,348
Other current
liabilities 29,360 3 29,655 59,018
Total current
liabilities 214,739 5,382 29,655 (37,414) 212,362
Long-term debt, less
Current maturities 296,042 - - 296,042
Accrued pension costs 59,722 - - 59,722
Accrued postretirement
benefit costs 7,485 - - 7,485
Other liabilities 12,898 326 29,250 42,474
Total liabilities 590,886 5,708 58,905 (37,414) 618,085
Patrons' and other
equity 231,183 17,765 3,143 (20,908) 231,183
Total liabilities
and patrons'
equity $822,069 23,473 62,048 (58,322) 849,268
Page 13
Three Months Ended March 29, 2003
Statement of
Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales volume $465,525 633 2,895 (2,664) 466,389
Gross margins
(loss) 4,803 96 (99) 4,800
Net operating
loss (13,454) (270) (118) (13,842)
Interest, income
taxes and other,
net 1,397 388 186 1,971
Net margins (loss) (12,057) 118 68 (11,871)
Three Months Ended March 27, 2004
Statement of
Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales volume $574,060 810 3,598 (2,879) 575,589
Gross margins
(loss) 94,304 (2) 1,159 95,461
Net operating
margins (loss) 57,411 (198) 1,140 58,353
Interest, income
taxes and other,
net (28,519) 117 (89) (28,491)
Net margins (loss) 28,892 (81) 1,051 29,862
Nine Months Ended March 29, 2003
Statement of
Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales volume $1,359,569 1,805 8,686 (5,559) 1,364,501
Gross margins 3,681 178 66 3,925
Net operating
margins (loss) (43,648) (1,410) 7 (45,051)
Interest, income
taxes and other,
net (22,534) 1,151 367 (21,016)
Net margins (loss) (66,182) (259) 374 (66,067)
Nine Months Ended March 27, 2004
Statement of
Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales volume $1,624,835 2,056 11,564 (9,251) 1,629,204
Gross margins
(loss) 227,614 (15) (1,238) 226,361
Net operating
margins (loss) 137,910 (652) (1,299) 135,959
Interest, income
taxes and other,
net (82,634) 2,110 1,317 (79,207)
Net margins 55,276 1,458 18 56,752
Page 14
Nine Months Ended March 29, 2003
Statement of
Cash Flows: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net cash provided
by (used in)
operating
activities,
including cash
used in operating
activities of
discontinued
operations (58,814) (381) 7 (59,188)
Net cash provided
by (used in)
investing
activities (23,224) 248 - (22,976)
Net cash provided
by financing
activities 85,976 - - 85,976
Net increase
(decrease) in
cash and cash
equivalents 3,938 (133) 7 3,812
Cash and cash
equivalents,
beginning of
period 8,213 533 251 8,997
Cash and cash
equivalents,
end of period 12,151 400 258 12,809
Nine Months Ended March 27, 2004
Statement of
Cash Flows: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net cash provided
by (used in)
operating
activities $151,438 (4,261) 14 147,191
Net cash provided
by (used in)
investing
activities (21,201) 4,316 - (16,885)
Net cash used in
financing
activities (47,806) - - (47,806)
Net increase in
cash and cash
equivalents 82,431 55 14 82,500
Cash and cash
equivalents,
beginning of
period 8,353 164 2,509 11,026
Cash and cash
equivalents,
end of period 90,784 219 2,523 93,526
Page 15
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 approximately 49% to 60% during that period,
and this trend is expected 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 sector and general
economic conditions.
Broiler market prices were favorable during the first half of fiscal 1999 as
a result of industry-wide live production problems that restricted broiler
supplies. Broiler prices weakened in the second half of fiscal 1999 as these
problems were resolved and supplies increased. Market prices for poultry dark
meat were weak during fiscal 1999 as a result of the Russian and Asian
economic crises that began during the summer of 1998. Depressed broiler
prices continued through fiscal 2000 and most of fiscal 2001 due to increased
production levels and the large supply of competing meats, primarily pork and
beef. Broiler prices strengthened during the first half of fiscal 2002 due to
an improved supply/demand balance. Strong export demand, principally from
Russia, favorably impacted both foreign and domestic markets and fueled
higher broiler prices through the first eight months of fiscal 2002. However,
on March 10, 2002, Russia banned the import of U.S. poultry. This led to
downward pressure on broiler sales prices due to excess domestic supply.
Export sales industry-wide declined by approximately 20% during the fourth
quarter of fiscal 2002. Although the Russian ban on U.S. imports was lifted
in April 2002 and product specifications and other issues were resolved in
August 2002, fiscal 2003 sales to Russia were 60% below levels prior to the
embargo. Increased domestic supplies and higher supplies of competing meats
continued the downward pressure on broiler sales prices through the majority
of fiscal 2003. Resumption of export sales to Russia and improved domestic
demand for chicken products have contributed to improved broiler prices in
the first nine months of fiscal 2004.
According to the USDA World Agricultural Outlook Board (WAOB), calendar 2003
U.S. broiler meat production approximated 32.399 billion pounds, ready-to-
cook weight, 1.6% above 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 contributed to improved broiler market prices in the
nine-month period ended March 27, 2004. Heavier bird weights slightly
Page 16
offset lower egg sets and chick placements. The WAOB April estimate for
calendar 2004 broiler meat production is 33.676 billion pounds, which is a
3.9% 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 fiscal 2003. However, current
broiler sales prices are approaching their highest levels since 1999 and are
not expected to continue at these levels.
Our poultry export sales historically have been less than 10% of total net
sales. Our poultry export sales, which we define as sales other than to
customers in the United States or Canada, for fiscal 2001, 2002, 2003 and the
first nine months of fiscal 2004 were $68.8 million, $74.2 million, $56.4
million and $70.7 million, respectively. The U.S. 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. Starting in
fiscal 2000, poultry export markets strengthened as demand from Russia
increased due to changes in import tariffs and improved economic conditions
due to the rise in world oil prices, which led to increased consumption.
Increased demand continued through fiscal 2001 due in part to the ban on red
meat imports from the European Union. Strong export sales continued through
the first half of fiscal 2002, increasing 49% over the same period in fiscal
2001. However, due to the Russian ban mentioned above, export sales for the
last quarter of fiscal 2002 decreased 32.6% from export sales in the same
period in fiscal 2001. The drop in export sales continued in fiscal 2003,
decreasing 24% from fiscal 2002. Due to the resumption of sales to Russia,
export sales for the first nine months of fiscal 2004 were significantly
higher than for the same period in fiscal 2003. In December 2003, Russia
implemented a quota system that has reduced U.S. poultry imports by an
estimated 30% from levels prior to the embargo. This quota could negatively
affect our exports in future periods. In addition, China, Japan and several
smaller chicken importing countries have banned all imports of certain
broiler products from the United States due to chickens in several states
testing positive for avian influenza. Also, as a result of this event, Russia
has banned the import of broiler products from the affected states. Although
our broiler production operations are not located in the affected states, the
continuation or expansion of these bans could negatively affect our results
of operations.
The cost of feed grains, primarily corn and soybean meal, represents
approximately fifty percent of total live 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. According to the USDA World Agricultural Outlook Board, projected
lower South American soybean production and reduced global stocks are
expected to push the season-average farm price to the highest level in 20
years.
Page 17
The Company believes that it can reduce the impact of industry volatility on
its results by 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. In March 2004, the Association
improved its capital position and financial leverage through the issuance of
the senior notes.
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 March 27, 2004 increased
23.4% compared to the quarter ended March 29, 2003. For the nine-months
ended March 27, 2004, net sales volume increased 19.4% from $1.4 billion in
the comparable period last year to $1.6 billion in the current year. The
increase in net sales volume was due primarily to an approximate 26.4% and
18.2% increase in average chicken sales prices for the quarter and nine
months ended March 27, 2004, respectively. 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 fiscal 2004 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 $22.0 million and $70.7 million for the
three and nine months ended March 27, 2004, respectively, were 51.8% and 77%
higher than the fiscal 2003 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 29.9% in
pounds shipped and 110.2% in dollar value from $13.1 million in the March
2003 year-to-date period to $27.5 million in the March 2004 year-to-date
period.
Net Operating Margins (Loss)
The Association had net operating margins of $58.4 million and $136.0 million
for the three and nine months ended March 27, 2004, respectively, compared to
net operating losses of $(13.8) million and $(45.1) million in the comparable
periods last year. The increase in operating margins in the March 2004
periods was due primarily to higher chicken selling prices
Page 18
partially offset by higher feed ingredient costs, principally soybean meal.
Soybean meal prices were 24.9% higher per ton during the nine-month period
ended March 27, 2004 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 until the U.S. fall harvest 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 nine
months ended March 27, 2004 as compared to a net operating loss of $3.0
million for the comparable period in 2003. The improvement was attributable
to improved hog market prices brought about by lower beef supplies.
The 34.5% 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 March 2004 periods compared to the
net losses in the March 2003 periods. The Company also experienced higher
benefit costs, principally pension expense and employee medical claims during
the first nine months of fiscal 2004, which contributed to the increase.
The Association recognized $9.9 million of pension settlement expense in the
quarter ended March 27, 2004. The settlement expense resulted from lump sum
distribution payments from the plan to electing retiring employees exceeding
service and interest cost components of pension expense in the plan year. In
October 2002, the Association substantially curtailed its postretirement
supplemental life insurance plan. A gain from the curtailment of
approximately $10.9 million is reflected in the accompanying consolidated
statements of operations for the nine-month period ended March 29, 2003.
Other Deductions
Other deductions totaled $11.7 million and $39.7 million for the three and
nine months ended March 27, 2004, respectively, compared to $4.0 million and
$42.0 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 nine months ended
March 29, 2003.
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 nine months ended March 27,
2004.
Page 19
As interest rates and market conditions change, or if SSC incurs additional
significant losses, 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 $13.3 million and $27.7 million for the three and nine-
month periods ended March 27, 2004, respectively, compared to $6.8 million
and $18.4 million for the comparable periods last year. The increase in the
quarter and year-to-date interest expense was due in large part to the
prepayment penalty of $5.5 million associated with the payoff of the $45
million term loan due to an insurance company. In addition, higher interest
rate spreads over the London Interbank Offered Rate (LIBOR) and amortization
of fees related to the February 2003 amendment to the Senior Credit Facility
and the arrangement of the Temporary Revolving Credit Facility that matured
on September 30, 2003 contributed to the increase.
Miscellaneous, net was income of $886 thousand and $5.4 million for the three
and nine months ended March 27, 2004, respectively, compared to income of
$2.1 million and expense of $1.6 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
resulting in the March 2004 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 a peanut processing and marketing company
resulted in expense in the nine months ended March 29, 2003. Income from a
hog grow-out joint venture with another regional cooperative was $.5 million
for the nine months ended March 27, 2004 as compared to a loss of $.9 million
for the nine months ended March 29, 2003 due to improved hog market prices.
Income Tax Expense (Benefit)
The combined effective rates for determining the tax benefit on the loss
before income taxes for the three and nine months ended March 29, 2003 were
33.3% and 24.1%, respectively. The lower tax benefit on the net loss for the
nine months ended March 29, 2003 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 in October 2002.
For the three and nine months ended March 27, 2004, the Association's
combined federal and state effective income tax rates used to calculate the
tax expense on the margins before income taxes were 36.0% and 41.0%,
respectively. The increased effective tax rate over the federal and state
statutory rates for the nine months ended March 27, 2004 was primarily 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 in December 2003.
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 20
LIQUIDITY AND CAPITAL RESOURCES
The Association's liquidity is dependent upon funds from operations and
external sources of financing. In September 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. On February 11, 2003,
certain terms and conditions were amended, and interest rates on the facility
were adjusted to range from 2.00% to 4.00% over LIBOR, adjusted quarterly
based on financial conditions.
In March 2004, the Company issued the $200 million in principal amount of
senior notes in a private offering pursuant to Rule 144A and Regulation S of
the Securities Act of 1933. The stated interest rate on the senior notes is
10 1/4%, with interest payable semi-annually on March 15 and September 15.
The senior notes were issued at a price of 98.47% and are reflected net of
the discount of $3.06 million in the accompanying consolidated balance sheet
at March 27, 2004. The discount amount will be amortized to interest expense
over the ten-year term of the senior notes under the interest method yielding
an effective interest rate of approximately 10 1/2%.
Net proceeds from the sale of the senior notes after underwriting and other
expenses were approximately $191.2 million. From the proceeds, $145.5
million were used to repay the $95 million term loan under the senior credit
facility, the $45 million term loan due to an insurance company and a
prepayment penalty of $5.5 million on the term loan due to the insurance
company. The prepayment penalty and the write off of unamortized loan fees
of $.9 million are included in interest expense in the accompanying
consolidated statement of operations for the quarter and nine months ended
March 27, 2004. The remaining proceeds after other expenses were
approximately $44.7 million will be used to fund capital expenditures,
operations, working capital needs and future debt service obligations. The
fees and expenses of the offering of approximately $5.4 million will be
amortized over the ten-year term of the senior notes under the interest
method and included in interest expense.
Concurrent with the issuance of the senior notes, the Company amended its
senior credit facility to provide for a revolving line of credit in an
aggregate principal amount of $125 million, including a sub-facility of up to
$60 million for letters of credit, for a term of three years. The Company
had letters of credit outstanding in the normal course of business under the
facility of $25.1 million at March 27, 2004. Borrowings under the facility
will be limited to the lesser of $125 million and a borrowing base determined
by reference to a percentage of the collateral value of the accounts
receivable and inventories securing the facility. Borrowings under the
facility bear interest from 2.25% to 3.25% over LIBOR adjusted quarterly
based on financial conditions.
The Association's senior secured credit facility, senior exchange notes and
term loans are secured by substantially all of the Association's inventories,
receivables, and property, plant and equipment. Covenants under the terms of
these debt agreements with lenders include conditions that could limit
short-term and long-term financing available from various
Page 21
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 contracts and additional loans, advances or
investments and other items. Covenants under the senior notes include, among
others, limitations on indebtedness, restricted payments, sales of assets and
subsidiary stock, capital expenditures and other items. Terms of
the notes also include an excess cash flow provision, which under certain
conditions could require the Company to deposit funds in a restricted cash
account to be used for future scheduled or mandatory principal payments of
senior debt.
At March 27, 2004, the Association was in compliance with all applicable loan
covenants under its senior notes and other credit facilities.
For the first nine months of fiscal 2004, cash provided by operating
activities was $147.2 million compared to cash used in operating activities
of continuing operations of $40.8 million for the first nine 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, accrued benefit costs and
deferred income taxes. Cash used in financing activities for the nine months
ended March 27, 2004 was $47.8 million compared to cash provided by financing
activities for the nine months ended March 29, 2003 of $86.0 million. During
the period, the Company repaid outstanding debt of $241 million, including
scheduled long-term debt amounts and payments on the revolver and senior
credit facility. At March 27, 2004, the Association had unused loan
commitments of $99.8 million and cash of $80.5 million invested in short term
interest bearing instruments.
Working capital and patrons' and other equity were $269.3 million and $231.2
million, respectively, at March 27, 2004 compared to $210.2 million and
$183.9 million, respectively, at June 28, 2003. The improvement in working
capital reflected the strong operating results and improved liquidity
provided by the financing transactions consummated during the third fiscal
quarter. The increase in patrons' and other equity reflects the net margins
for the first nine months of fiscal 2004 partially offset by $3.8 million of
equity redemptions and the $5.7 million estimated cash portion of the fiscal
2004 patronage refund reclassified to a current liability.
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 $19.8 million in capital expenditures
in the nine month period ended March 27, 2004 and expects to spend an
additional $12-$15 million in the last quarter 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 and cash expected to be
provided from operations.
Page 22
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 minimum contribution commencing in calendar 2005 was
reduced from $7 million estimated at July 2003 to $4 million.
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
March 27, 2004 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.
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, 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;
Page 23
- 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 other reports that we
file with the Securities and Exchange Commission.
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. Therefore implementation of
SFAS No. 150 did not have a significant impact on the Company's consolidated
financial statements.
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. Implementation of FIN 46 did not have a material impact on the
Company's consolidated financial statements.
Page 24
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 nine months ended March
27, 2004.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement did not have
a material impact on the Company's consolidated financial statements.
In December 2003, the FASB issued a revision of SFAS No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which is
effective for the Company's fiscal year ending June 26, 2004. Interim period
disclosures required by SFAS No. 132 are incorporated herein.
Contractual Obligations
Obligations under long-term debt, non-cancelable operating leases and feed
ingredient purchase commitments at March 27, 2004 are as follows (in
millions):
Payments Due by Period
Less than After
Total 1 year 1-3 years 4-5 years 5 years
Long-term debt (a) $309.5 13.4 25.4 28.8 241.9
Operating leases (b) 53.7 15.5 21.7 14.3 2.2
Feed ingredient purchase
commitments (c) 307.3 307.3 - - -
Total $670.5 336.2 47.1 43.1 244.1
(a) Excludes $33.8 million in total letters of credit outstanding related to
normal business transactions.
(b) Operating lease commitments as of June 28, 2003. There have not been
any significant changes in the nine months ended March 27, 2004.
(c) Feed ingredient purchase commitments include both priced and unpriced
contracts in the ordinary course of business. Unpriced feed ingredient
commitments are priced at market as of March 27, 2004 for the month of
delivery. If necessary, these commitments could be settled at a gain or
a loss dependent on grain market conditions.
Critical Accounting Policies
There were no material changes in the Company's critical accounting policies
during the quarter ended March 27, 2004.
Page 25
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. 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 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 March 27,
2004, the notional amounts and fair value of the Association's outstanding
commodity futures and options positions were not significant.
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. If the entire commitment under the
facility was outstanding, a 1% change in LIBOR would increase annual interest
expense by an estimated $1.4 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 26
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 filed the following reports on
Form 8-K during the three months ended March 27, 2004:
March 12, 2004 - Reports the completion and filing of material
agreements entered into in connection with the Company's private
placement of senior notes.
March 8, 2004 - Reports the issuance of a press release announcing
the pricing of the Company's private placement of $200 million of
senior notes.
February 26, 2004 - Reports the issuance of a press release
announcing the commencement of litigation against the Company.
February 19, 2004 - Reports the issuance of a press release
announcing the Company's intent to complete an institutional private
placement of senior notes in the amount of $200 million.
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 May 11, 2004
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date May 11, 2004
Stephen O. West
Chief Financial Officer, Vice President
(Principal Financial Officer)
Page 26
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 filed the following reports on
Form 8-K during the three months ended March 27, 2004:
March 12, 2004 - Reports the completion and filing of material
agreements entered into in connection with the Company's private
placement of senior notes.
March 8, 2004 - Reports the issuance of a press release announcing
the pricing of the Company's private placement of $200 million of
senior notes.
February 26, 2004 - Reports the issuance of a press release
announcing the commencement of litigation against the Company.
February 19, 2004 - Reports the issuance of a press release
announcing the Company's intent to complete an institutional private
placement of senior notes in the amount of $200 million.
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 May 11, 2004 /s/ John Bekkers
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date May 11, 2004 /s/ Stephen O. West
Stephen O. West
Chief Financial Officer, Vice President
(Principal Financial Officer)