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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2001
Commission File number 1-9273
PILGRIM'S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1285071
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 SOUTH TEXAS, PITTSBURG, TX 75686-0093
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (903) 855-1000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
TITLE OF EACH CLASS WHICH REGISTERED
Class A Common Stock, Par Value $0.01 New York Stock Exchange
Class B Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Class B Common Stock, $0.01
par value, and Class A Common Stock, $0.01 par value, held by non-
affiliates of the Registrant as of November 15, 2001, was $133,152,552 and
$41,760,798, respectively. For purposes of the foregoing calculation only,
all directors, executive officers and 5% beneficial owners have been deemed
affiliates.
27,589,250 shares of the Registrant's Class B Common Stock, $.01 par value,
were outstanding as of November 15, 2001.
13,523,429 shares of the Registrant's Class A Common Stock, $.01 par value,
were outstanding as of November 15, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the annual meeting of
stockholders to be held January 30, 2002 are incorporated by reference into
Part III.
PILGRIM'S PRIDE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business........................................................ 4
Item 2. Properties......................................................22
Item 3. Legal Proceedings...............................................26
Item 4. Submission of Matters to a Vote of Security Holders.............27
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters......................................................28
Item 6. Selected Financial Data.........................................29
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.............................................31
Item 7a. Quantitative and Qualitative Disclosures About Market Risk......38
Item 8. Financial Statements and Supplementary Data
(see Index to Financial Statements and Schedules below)......40
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................40
PART III
Item 10. Directors and Executive Officers of Registrant..................41
Item 11. Executive Compensation..........................................41
Item 12. Security Ownership of Certain Beneficial Owners and Management..41
Item 13. Certain Relationships and Related Transactions..................41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.41
Signatures...............................................................48
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Ernst & Young LLP, Independent Auditors........................49
Consolidated Balance Sheets as of September 29, 2001 and
September 30, 2000....................................................50
Consolidated Statements of Income for the years ended
September 29, 2001, September 30, 2000 and October 2, 1999............51
Consolidated Statements of Stockholders' Equity for the years ended
September 29, 2001, September 30, 2000 and October 2, 1999............52
Consolidated Statements of Cash Flows for the years ended
September 29, 2001, September 30, 2000 and October 2, 1999............53
Notes to Consolidated Financial Statements...............................54
Schedule II - Valuation and Qualifying Accounts for the years ended
September 29, 2001, September 30, 2000 and October 2, 1999............67
PART I
ITEM 1. BUSINESS
GENERAL
We are the second largest producer of poultry in both the United States
and Mexico and have one of the best known brand names in the poultry
industry. In the United States, WE PRODUCE BOTH PREPARED AND FRESH CHICKEN
AND TURKEY, WHILE IN MEXICO, WE PRODUCE EXCLUSIVELY FRESH CHICKEN. THROUGH
VERTICAL INTEGRATION, WE CONTROL THE BREEDING, HATCHING AND GROWING OF
CHICKENS AND TURKEYS AND THE PROCESSING, PREPARATION, PACKAGING AND SALE OF
OUR PRODUCT LINES, WHICH WE BELIEVE HAS MADE US ONE OF THE HIGHEST QUALITY,
LOWEST-COST PRODUCERS OF POULTRY IN NORTH AMERICA. WE HAVE CONSISTENTLY
APPLIED A LONG-TERM BUSINESS STRATEGY OF FOCUSING OUR GROWTH EFFORTS ON THE
HIGHER-VALUE, HIGHER-MARGIN PREPARED FOODS PRODUCTS AND HAVE BECOME A
RECOGNIZED INDUSTRY LEADER IN THIS MARKET SEGMENT. ACCORDINGLY, OUR SALES
EFFORTS HAVE TRADITIONALLY BEEN TARGETED TO THE FOODSERVICE INDUSTRY,
PRINCIPALLY CHAIN RESTAURANTS AND FOOD PROCESSORS. SOME OF OUR LARGEST
CUSTOMERS INCLUDE WENDY'S(TM), STOUFFERS(TM), ARBY'S(TM), KFC(TM) AND WAL-
MART(TM). WE HAVE CONTINUALLY MADE INVESTMENTS TO ENSURE THAT OUR PREPARED
FOODS CAPABILITIES REMAIN STATE-OF-THE-ART AND HAVE COMPLEMENTED THESE
INVESTMENTS WITH A SUBSTANTIAL AND SUCCESSFUL RESEARCH AND DEVELOPMENT
EFFORT. IN FISCAL 2001, WE SOLD 2.6 BILLION POUNDS OF DRESSED CHICKEN AND
296.1 MILLION POUNDS OF DRESSED TURKEY AND GENERATED NET SALES OF $2.2
BILLION AND EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION,
("EBITDA") OF $147.7 MILLION. IN FISCAL 2001, OUR U.S. OPERATIONS
ACCOUNTED FOR 85.4% OF OUR NET SALES, WITH THE REMAINING 14.6% ARISING FROM
OUR MEXICO OPERATIONS.
On January 27, 2001, we acquired WLR Foods, Inc. (formerly Nasdaq: WLRF)
for $239.5 million and the assumption of $45.5 million of indebtedness. WLR
FOODS WAS THE SEVENTH LARGEST POULTRY COMPANY IN THE UNITED STATES WITH
$836.9 MILLION OF REVENUE IN CALENDAR YEAR 2000. THE ACQUISITION WAS
ACCOUNTED FOR AS A PURCHASE. THE WLR FOODS ACQUISITION PROVIDED US WITH (1)
CHICKEN PROCESSING FACILITIES IN THE EASTERN UNITED STATES, WHERE WE
PREVIOUSLY HAD NO FACILITIES, WHICH CAN DELIVER POULTRY PRODUCTS WITHIN ONE
DAY TO MARKETS ACCOUNTING FOR APPROXIMATELY 40% OF THE U.S. POPULATION; (2)
SIGNIFICANT OPPORTUNITIES TO REALIZE SYNERGIES BETWEEN WLR FOODS AND OUR
PRE-EXISTING CHICKEN OPERATIONS; AND (3) DIVERSIFICATION OF OUR REVENUE
STREAM INTO THE $8 BILLION TURKEY INDUSTRY, WHERE WE CAN CAPITALIZE ON OUR
PREPARED FOODS PROCESSING EXPERTISE. TO DATE, WE ARE ACTIVELY INTEGRATING
THE WLR FOODS OPERATIONS AND HAVE REALIZED SIGNIFICANT ANNUALIZED COST
SAVINGS AND BELIEVE OPPORTUNITIES FOR SIGNIFICANT ADDITIONAL COST SAVINGS
EXIST AS OUR INTEGRATION EFFORTS CONTINUE. CURRENTLY, WLR FOODS' CHICKEN
SALES MIX CONSISTS MOSTLY OF LOWER MARGIN FRESH CHICKEN PRODUCTS. HOWEVER,
WE INTEND TO CONVERT WLR FOODS' CHICKEN SALES INTO HIGHER MARGIN, FRESH AND
PREPARED CHICKEN PRODUCTS. BY CONSISTENT AND CONTINUED APPLICATION OF OUR
LONG-TERM BUSINESS STRATEGY TO BOTH OUR RECENTLY ACQUIRED AND OUR EXISTING
FRESH CHICKEN MIX, WE BELIEVE THAT OUR OVERALL PRODUCT MIX WILL RETURN TO
THE LEVELS EXISTING PRIOR TO THE WLR FOODS ACQUISITION WITHIN THREE YEARS.
OUR OBJECTIVES ARE (1) TO INCREASE SALES, PROFIT MARGINS AND EARNINGS
AND (2) OUTPACE THE GROWTH OF, AND MAINTAIN OUR LEADERSHIP POSITION IN, THE
POULTRY INDUSTRY. TO ACHIEVE THESE GOALS, WE PLAN TO CONTINUE TO PURSUE THE
FOLLOWING STRATEGIES AND APPLY THESE STRATEGIES TO THE RECENTLY ACQUIRED
WLR FOODS OPERATIONS:
- CAPITALIZE ON ATTRACTIVE U.S. PREPARED FOODS MARKET. We focus our
U.S. growth initiatives on sales of prepared foods to the foodservice
market because it continues to be one of the fastest growing and most
profitable segments in the poultry industry. Products sold to this
market segment require further processing, which enables us to charge
a premium for our products, reduces the impact of feed ingredient
costs on our profitability and improves and stabilizes our profit
margins. Feed ingredient costs typically decrease from approximately
30-50% of total production cost for fresh chicken products to
approximately 16-25% for prepared chicken products. Our sales of
prepared chicken products to the foodservice market grew from $349.0
million in fiscal 1997 to $642.2 million in fiscal 2001, a compounded
annual growth rate of 16.5%. In addition, these sales increased as a
percentage of our total U.S. chicken revenues from 40.5% to 43.6%
during the same five-year period. As a result of the acquisition of
WLR Foods, whose operations were focused primarily on fresh chicken
products, this percentage has decreased to 43.6% from 56.5% in fiscal
2000. Over the last 24 months, we have invested approximately $79
million to expand our prepared foods operations, which increased our
prepared foods production capacity by approximately 50%. We believe
that we will realize the benefits from this additional production
capacity over the next 18 to 24 months and that these investments will
be the primary investments necessary to enable us to return the
percentage of our overall product mix derived from prepared foods
products to the levels existing before the acquisition of WLR Foods.
- EMPHASIZE CUSTOMER-DRIVEN RESEARCH AND TECHNOLOGY. We have a long-
standing reputation for customer-driven research and development in
designing new products and implementing advanced processing
technology. This enables us to better meet our customers' changing
needs for product innovation, consistent quality and cost efficiency.
In particular, customer-driven research and development is integral to
our growth strategy for the prepared foods market in which customers
continue to place greater importance on value-added services. Our
research and development personnel often work directly with
institutional customers in developing products for these customers,
which we believe helps promote long-term relationships. Approximately
$248.0 million, or 24.1%, of our chicken sales to foodservice
customers in fiscal 2001 consisted of products that we did not sell in
fiscal 1997.
- ENHANCE U.S. FRESH CHICKEN PROFITABILITY THROUGH VALUE-ADDED,
BRANDED PRODUCTS. Our U.S. fresh chicken sales accounted for $612.5
million, or 41.6%, of our U.S. chicken sales for fiscal 2001. In
addition to maintaining the sales of mature, traditional fresh chicken
products, our strategy is to shift the mix of our U.S. fresh chicken
products by continuing to increase sales of higher margin, faster
growing products, such as marinated chicken and chicken parts. Most of
our fresh chicken products are sold under the Pilgrim's
Pride brand name, which is one of the best known
brands in the chicken industry.
- IMPROVE OPERATING EFFICIENCIES AND INCREASE CAPACITY ON A COST-
EFFECTIVE BASIS. As production and sales grow, we continue to focus
on improving operating efficiencies by investing in state-of-the-art
technology, processes and training and our total quality management
program. Specific initiatives include:
- standardizing lowest-cost production processes across our various
facilities;
- centralizing purchasing and other shared services; and
- upgrading technology where appropriate.
In addition, we have a proven history of increasing capacity while
improving operating efficiencies at acquired properties both in the
U.S. and Mexico. As a result, according to industry data, since 1993
we have consistently been one of the lowest cost producers of chicken
in the U.S., and we also believe we are one of the lowest cost
producers of chicken in Mexico. With respect to our WLR Foods
acquisition, we have already begun realizing significant operating
efficiencies by reducing administrative expenses and focusing on live
production and plant operations, sales, marketing, freight and
procurement. To date, we have realized significant annualized cost
savings with WLR Foods and believe additional opportunities for
significant cost savings exist.
- CONTINUE TO PENETRATE THE GROWING MEXICAN MARKET. We seek to leverage
our leading market position and reputation for freshness and quality
in Mexico by focusing on the following four objectives:
- to be one of the most cost-efficient producers and processors of
chicken in Mexico by applying technology and expertise utilized in
the U.S.;
- to continually increase our distribution of higher margin, more
value-added products to national retail stores and restaurants;
- to continue to build and emphasize brand awareness and capitalize
on Mexican consumers' preference for branded products and their
insistence on freshness and quality; and
- to ensure that, as Mexican tariffs on imported chicken are
eliminated by 2003, a significant portion of the chicken imported
from the U.S. will be distributed through our existing and
planned distribution facilities. The location of our U.S.
operations in the Southwest gives us a strategic advantage to
capitalize on exports of U.S. chicken to Mexico.
- LEVERAGE OUR RECENTLY ACQUIRED TURKEY OPERATIONS. We seek to take
advantage of our leading market position and reputation as a high
quality, high service provider of chicken products to purchasers of
turkey products by focusing on the following four objectives:
- to cross-sell prepared turkey products to existing chicken
customers;
- to develop new and innovative prepared turkey products by
capitalizing on our research and development expertise;
- to improve operating efficiencies in our turkey operations by
applying proven management methodologies and techniques employed
historically in our chicken operations; and
- to capitalize on the unique opportunity to establish, develop and
market turkey products under the Pilgrim's Pride
brand name.
- CAPITALIZE ON EXPORT OPPORTUNITIES. We intend to continue to focus
on international opportunities to complement our U.S. poultry
operations and capitalize on attractive export markets. According to
the USDA, the export of U.S. poultry products has grown 25.5% and 4.6%
for chicken and turkey, respectively, from 1996 through 2000. We
believe that U.S. poultry exports will continue to grow as worldwide
demand increases for high-grade, low-cost protein sources. According
to USDA data, the export market is expected to grow at 57.7% and 8.1%
for chicken and turkey, respectively, from 2000 to 2005. Historically,
we have targeted international markets to generate additional demand
for our chicken and turkey dark meat, which is a natural by-product of
our U.S. operations given our concentration on prepared foods products
and the U.S. customers' general preference for white meat. As part of
this initiative, we have created a significant international
distribution network into several markets, including Mexico, which we
now utilize not only for dark meat distribution, but also for various
higher margin prepared foods and other poultry products. Historically,
WLR Foods has utilized a direct international sales force compared to
our primary use of export brokers. Our key international markets
include Canada, Mexico, Eastern Europe and the Far East. We believe
that we have substantial opportunities to expand our sales to these
markets by capitalizing on WLR Foods' direct international
distribution channels supplemented by our existing export broker
relationships. Exports accounted for approximately 5.1% of our net
sales in fiscal 2001.
Our chicken products consist primarily of:
(1) Prepared chicken products, which are products such as portion-
controlled breast fillets, tenderloins and strips, delicatessen
products, frankfurters, salads, formed nuggets and patties and bone-in
chicken parts. These products are sold either refrigerated or frozen and
may be fully cooked, partially cooked or raw. In addition, these
products are breaded or non-breaded and either pre-marinated or non-
marinated.
(2) Fresh chicken, which is refrigerated (non-frozen) whole or cut-up
chicken sold to the foodservice industry either pre-marinated or non-
marinated. Fresh chicken also includes prepackaged chicken, which
includes various combinations of freshly refrigerated, whole chickens
and chicken parts in trays, bags or other consumer packs labeled and
priced ready for the retail grocer's fresh meat counter.
(3) Export and other products, which are primarily parts and whole
chicken, either refrigerated or frozen for U.S. export or domestic use.
(4) Our Mexico products consist primarily of value-added products such
as eviscerated chicken and chicken parts and basic products such as New
York dressed (whole chicken with only feathers and blood removed) and
live birds.
Our turkey products consist primarily of:
(1) Prepared turkey products, which are products such as turkey
sausages, ground turkey, turkey hams and roasts, ground turkey breast
products, frankfurters, salads and flavored turkey burgers. We also have
an array of cooked, further processed deli products.
(2) Fresh turkey, which includes fresh traypack products, turkey
burgers, frankfurters and fresh and frozen whole birds, as well as semi-
boneless whole turkey, which has all bones except the drumsticks
removed.
(3) Export and other products, which are parts and whole turkey
products, either refrigerated or frozen, and frankfurters for U.S.
export or domestic use.
Our chicken and turkey products are sold primarily to:
(1) Foodservice customers, which are customers such as chain
restaurants, food processors, foodservice distributors and certain other
institutions. We sell to our foodservice customers products ranging from
portion-controlled refrigerated poultry parts to fully-cooked and
frozen, breaded or non-breaded poultry parts or formed products.
(2) Retail customers, which are customers such as grocery store chains,
wholesale clubs and other retail distributors. We sell to our retail
customers branded, pre-packaged cut-up and whole poultry, and fresh
refrigerated or frozen whole poultry and poultry parts in trays, bags or
other consumer packs.
The following table sets forth, for the periods since fiscal 1997, net
sales attributable to each of our primary product lines and markets served
with those products. Consistent with our long-term strategy, we have
emphasized our U.S. growth initiatives on sales of prepared foods products,
primarily to the foodservice market, because this product and market
segment has experienced, and we believe will continue to experience,
greater growth than fresh chicken products. We based the table on our
internal sales reports and their classification of product types and
customers.
FISCAL YEAR ENDED
Sept. 29 Sept. 30, Oct. 2, Sept. 26 Sept. 27,
2001(a) 2000 1999 1998 1997
(52 WEEKS) (52 WEEKS) (53 WEEKS) (52WEEKS) (52WEEKS)
U.S. Chicken Sales: (IN THOUSANDS)
Prepared Foods:
Foodservice $642,220 $593,586 $528,566 $420,396 $348,961
Retail 111,969 48,059 28,275 46,400 42,289
Total Prepared
Foods 754,189 641,645 556,841 466,796 391,250
Fresh Chicken:
Foodservice 387,836 202,297 205,997 220,804 259,349
Retail 224,693 148,977 163,387 162,283 153,554
Total Fresh
Chicken 612,529 351,274 369,384 383,087 412,903
Export and Other 105,622 57,468 37,271 64,469 56,784
Total
U.S.Chicken 1,472,340 1,050,387 963,496 914,352 860,937
MEXICO CHICKEN SALES 323,678 307,362 254,500 278,087 274,997
Total Chicken
Sales 1,796,018 1,357,749 1,217,996 1,192,439 1,135,934
U.S. TURKEY SALES:
Prepared Foods:
Foodservice 90,777 -- -- -- --
Retail 48,407 -- -- -- --
Total 139,184 -- -- -- --
Prepared Foods
Fresh Turkey:
Foodservice 18,614 -- -- -- --
Retail 69,557 -- -- -- --
Total Fresh
Turkey 88,171 -- -- -- --
Export and Other 11,480 -- -- -- --
Total U.S.
Turkey Sales 238,835 -- -- -- --
SALES OF OTHER
U.S. PRODUCTS 179,859 141,690 139,407 139,106 141,715
Total Net Sales $2,214,712 $1,499,439 $1,357,403 $1,331,545 $1,277,649
(a) The acquisition of WLR Foods on January 27, 2001 has been accounted
for as a purchase, and the results of operations for this acquisition
have been included in our consolidated results of operations since the acquisition date.
The following table sets forth, since fiscal 1997, the percentage of net
U.S. chicken and turkey sales attributable to each of our primary product
lines and the markets serviced with those products. We based the table and
related discussion on our internal sales reports and their classification
of product types and customers.
FISCAL YEAR ENDED
U.S. Chicken Sales:
Prepared Foods:
Foodservice 43.6% 56.5% 54.9% 46.0% 40.5%
Retail 7.6 4.6 2.9 5.1 4.9
Total Prepared
Foods 51.2 61.1 57.8 51.1 45.4
Fresh Chicken:
Foodservice 26.3 19.2 21.3 24.2 30.1
Retail 15.3 14.2 17.0 17.7 17.9
Total Fresh
Chicken 41.6 33.4 38.3 41.9 48.0
Export and Other 7.2 5.5 3.9 7.0 6.6
Total U.S. Chicken
Sales Mix 100.0% 100.0% 100.0% 100.0% 100.0%
FISCAL YEAR ENDED
Sept. 29 Sept. 30, Oct. 2, Sept. 26 Sept. 27,
2001(a) 2000 1999 1998 1997
U.S. Turkey Sales:
Prepared Foods:
Foodservice 38.0% -- -- -- --
Retail 20.3 -- -- -- --
Total Prepared
Foods 58.3 -- -- -- --
Fresh Turkey:
Foodservice 7.8 -- -- -- --
Retail 29.1 -- -- -- --
Total Fresh
Turkey 36.9 -- -- -- --
Export and Other 4.8 -- -- -- --
Total U.S. Turkey
Sales Mix 100.0% -- -- -- --
(a) The acquisition of WLR Foods on January 27, 2001 has been accounted
for as a purchase, and the results of operations for this acquisition
have been included in our consolidated results of operations since the acquisition date.
UNITED STATES
PRODUCT TYPES
CHICKEN PRODUCTS
PREPARED FOODS OVERVIEW. During fiscal 2001, $754.2 million of our
net U.S. chicken sales were in prepared foods products to foodservice
customers and retail distributors, as compared to $391.3 million in fiscal
1997. These numbers reflect the strategic focus for our growth. The market
for prepared chicken products has experienced, and we believe will continue
to experience, greater growth, higher average sales prices and higher
margins than fresh chicken products. Also, the production and sale in the
U.S. of prepared foods products reduce the impact of the costs of feed
ingredients on our profitability. Feed ingredient costs are the single
largest component of our chicken cost of goods sold, representing
approximately 29.9% of our U.S. cost of goods sold for the year ended
September 29, 2001. The production of feed ingredients is positively or
negatively affected primarily by weather patterns throughout the world, the
global level of supply inventories and demand for feed ingredients, and the
agricultural policies of the United States and foreign governments. As
further processing is performed, feed ingredient costs become a decreasing
percentage of a product's total production cost, thereby reducing their
impact on our profitability. Products sold in this form enable us to charge
a premium, reduce the impact of feed ingredient costs on our profitability
and improve and stabilize our profit margins.
We establish prices for our prepared chicken products based primarily
upon perceived value to the customer, production costs and prices of
competing products. The majority of these products are sold pursuant to
agreements with varying terms that either set a fixed price for the
products or set a price according to formulas based on an underlying
commodity market, subject in many cases to minimum and maximum prices.
FRESH CHICKEN OVERVIEW. Our fresh chicken business is an important
component of our sales and accounted for $612.5 million, or 41.6%, of our
total U.S. chicken sales for fiscal 2001. In addition to maintaining sales
of mature, traditional fresh chicken products, our strategy is to shift the
mix of our U.S. fresh chicken products by continuing to increase sales of
higher margin, faster growing products, such as marinated chicken and
chicken parts.
Most fresh chicken products are sold to established customers based
upon certain weekly or monthly market prices reported by the USDA and other
public price reporting services, plus a markup, which is dependent upon the
customer's location, volume, product specifications and other factors. We
believe our practices with respect to sales of fresh chicken are generally
consistent with those of our competitors. Prices of these products are
negotiated daily or weekly and are generally related to market prices
quoted by the USDA or other public reporting services.
EXPORT AND OTHER CHICKEN PRODUCTS OVERVIEW. Our export and other
products consist of whole chickens and chicken parts sold primarily in
bulk, non-branded form either refrigerated to distributors in the U.S. or
frozen for distribution to export markets. In fiscal 2001, approximately
$105.6 million of our sales were attributable to U.S. chicken export and
other. These exports and other products have historically been
characterized by lower prices and greater price volatility than our more
value-added product lines.
TURKEY PRODUCTS
PREPARED FOODS OVERVIEW. During fiscal 2001, $139.2 million, or
58.3%, of our total turkey sales were prepared turkey products sold to
foodservice customers and retail distributors. Like the U.S. chicken
markets, the market for prepared turkey products has experienced greater
growth and higher margins than fresh turkey products and the production and
sale of prepared turkey products reduce the impact of the costs of feed
ingredients on our profitability. Feed ingredient costs are the single
largest component of our turkey division cost of goods sold, representing
approximately 29.5% of our turkey cost of goods sold in fiscal 2001.
Similarly with the chicken business, as further processing is performed,
feed ingredient costs become a decreasing percentage of a product's total
production cost, thereby reducing their impact on our profitability.
We establish prices for our prepared turkey products based primarily
upon perceived value to the customer, production costs and prices of
competing products. The majority of these products are sold pursuant to
agreements with varying terms that either set a fixed price or are subject
to a market driven formula.
FRESH TURKEY OVERVIEW. Our fresh turkey business is an important
component of our sales and accounted for $88.2 million, or 36.9%, of our
total turkey sales in fiscal 2001. As is typical for the industry, a
significant portion of the sales of fresh and frozen whole turkeys is
seasonal in nature, with the height of sales occurring during the
Thanksgiving and Christmas holidays. In addition to maintaining sales of
mature, traditional fresh turkey products, our strategy is to shift the mix
of our fresh turkey products by continuing to increase sales of higher
margin, faster growing value-added turkey products, such as deli meats,
ground turkey, turkey burgers and sausage, roasted turkey, frankfurters and
salads and a new line of flavored turkey burgers.
Most fresh turkey products are sold to established customers pursuant
to agreements with varying terms that either set a fixed price or are
subject to a market driven formula with some agreements based upon market
prices reported by the USDA and other public price reporting services, plus
a markup, which is dependent upon the customer's location, volume, product
specifications and other factors. We believe our practices with respect to
sales of fresh turkey are
generally consistent with those of our competitors with similar programs.
Prices of these products are generally negotiated daily or weekly.
EXPORT AND OTHER TURKEY PRODUCTS OVERVIEW. Our export and other
products consist primarily of turkey parts sold primarily in bulk, non-
branded form frozen for distribution to export markets and refrigerated and
frozen frankfurters sold in a branded form. In fiscal 2001, approximately
$11.5 million, or 5.1%, of our total turkey sales were attributable to
export and other sales. These exports and other products have historically
been characterized by lower prices and greater price volatility than our
more value-added product lines.
MARKETS FOR CHICKEN PRODUCTS
FOODSERVICE. The majority of our U.S. chicken sales are derived from
products sold to the foodservice market. This market principally consists
of chain restaurants, food processors and certain other institutions
located throughout the continental United States. We are the largest
supplier of chicken to Wendy's and
Stouffers, and we are a major supplier of chicken to Burger
King, Arby's, and KFC. We
supply chicken products ranging from portion-controlled refrigerated
chicken parts to fully cooked and frozen, breaded or non-breaded chicken
parts or formed products.
We believe Pilgrim s Pride is well-positioned to be the primary or
secondary supplier to many national and international chain restaurants who
require multiple suppliers of chicken products. Additionally, we are well
suited to be the sole supplier for many regional chain restaurants.
Regional chain restaurants often offer better margin opportunities and a
growing base of business.
We believe we have significant competitive strengths in terms of full-
line product capabilities, high-volume production capacities, research and
development expertise and extensive distribution and marketing experience
relative to smaller and to non-vertically integrated producers. While the
overall chicken market has grown consistently, we believe the majority of
this growth in recent years has been in the foodservice market. According
to the National Chicken Council, during the 1996 through 2000 period, sales
of chicken products to the foodservice market grew at a compounded annual
growth rate of approximately 7.8%, versus 3.3% growth for the chicken
industry overall. Foodservice growth is anticipated to continue as food-
away-from-home expenditures continue to outpace overall industry rates.
According to the National Restaurant Association, food-away-from-home
expenditures grew at a compounded annual growth rate of approximately 5.3%
during the 1996 through 2000 period and are projected to grow at a 4.3%
compounded annual growth rate from 2000 through 2010. As a result, the
food-away-from-home category is projected by the National Restaurant
Association to account for 53% of total food expenditures by 2010, as
compared with 46% in 2000. Our sales to the foodservice market from fiscal
1997 through fiscal 2001 grew at a compounded annual growth rate of 14.1%
and represented 70.0% of the net sales of our U.S. chicken operations in
fiscal 2001.
FOODSERVICE - PREPARED FOODS. THE majority of our sales to the
foodservice market consist of prepared foods products. Our prepared chicken
products sales to the foodservice market were $642.2 million in fiscal 2001
compared to $349.0 million in fiscal 1997, a compounded annual growth rate
of approximately 16.5%. We attribute this growth in sales of prepared
chicken products to the foodservice market to a number of factors:
FIRST, there has been significant growth in the number of foodservice
operators offering chicken on their menus and the number of chicken items
offered.
SECOND, foodservice operators are increasingly purchasing prepared
chicken products, which allow them to reduce labor costs while providing
greater product consistency, quality and variety across all restaurant
locations.
THIRD, there is a strong need among larger foodservice companies for
an alternative or additional supplier to our principal competitor in the
prepared chicken products market. A viable alternative supplier must be
able to ensure supply, demonstrate innovation and new product development
and provide competitive pricing. We have been successful in our objective
of becoming the alternative supplier of choice by being the primary or
secondary prepared chicken products supplier to many large foodservice
companies because:
- We are vertically integrated, giving us control over supply of
chicken and chicken parts;
- Our further processing facilities are particularly well suited to
the high-volume production runs necessary to meet the capacity and
quality requirements of the foodservice market; and
- We have established a reputation for dependable quality, highly
responsive service and excellent technical support.
FOURTH, as a result of the experience and reputation developed with
larger customers, we have increasingly become the principal supplier to
mid-sized foodservice organizations.
FIFTH, our in-house product development group follows a customer-
driven research and development focus designed to develop new products to
meet customers' changing needs. Our research and development personnel
often work directly with institutional customers in developing products for
these customers. Approximately $248.0 million, or 24.1%, of our sales to
foodservice customers in fiscal 2001 consisted of new products which were
not sold by us in fiscal 1997.
SIXTH, we are a leader in utilizing advanced processing technology,
which enables us to better meet our customers' needs for product
innovation, consistent quality and cost efficiency.
FOODSERVICE - FRESH CHICKEN. We produce and market fresh,
refrigerated chicken for sale to U.S. quick-service restaurant chains,
delicatessens and other customers. These chickens have the giblets removed,
are usually of specific weight ranges, and are usually pre-cut to customer
specifications. They are often marinated to enhance value and product
differentiation. By growing and processing to customers' specifications, we
are able to assist quick-service restaurant chains in controlling costs and
maintaining quality and size consistency of chicken pieces sold to the
consumer.
RETAIL. The retail market consists primarily of grocery store chains,
wholesale clubs and other retail distributors. We concentrate our efforts
in this market on sales of branded, prepackaged cut-up and whole chicken to
grocery store chains and retail distributors in the midwestern,
southwestern, western and, since the acquisition of WLR Foods, eastern
regions of the United States. This regional marketing focus enables us to
develop consumer brand franchises and capitalize on proximity to the trade
customer in terms of lower transportation costs, more timely, responsive
service, and enhanced product freshness. For a number of years, we have
invested in both trade and retail marketing designed to establish high
levels of brand name awareness and consumer preferences.
We utilize numerous marketing techniques, including advertising, to
develop and strengthen trade and consumer awareness and increase brand
loyalty for consumer products marketed under the Pilgrim's
Pride brand. Our founder, Lonnie "Bo" Pilgrim, is the
featured spokesman in our television, radio and print advertising, and a
trademark cameo of a person wearing a Pilgrim's hat serves as the logo on
all of our primary branded products. As a result of this marketing
strategy, Pilgrim's Pride is a well-known brand name in several
southwestern markets, including Dallas/Fort Worth, Houston and San Antonio,
Texas, Oklahoma City, Oklahoma, Denver, Colorado, Phoenix, Arizona and Los
Angeles and San Diego, California. We believe our efforts to achieve and
maintain brand awareness and loyalty help to provide more secure
distribution for our products. We also believe our efforts at brand
awareness generate greater price premiums than would otherwise be the case
in certain southwestern markets. We also maintain an active program to
identify consumer preferences. The program primarily consists of testing
new product ideas, packaging designs and methods through taste panels and
focus groups located in key geographic markets.
RETAIL - PREPARED FOODS. We sell retail-oriented prepared chicken
products primarily to grocery store chains located in the midwestern,
southwestern, western and, since the acquisition of WLR Foods, eastern
regions of the U.S. We believe that our growth in this market segment will
remain relatively modest, however, as we concentrate our efforts primarily
on the faster-growing, higher-margin foodservice market segment.
RETAIL - FRESH CHICKEN. Our prepackaged retail products include
various combinations of freshly refrigerated, whole chickens and chicken
parts in trays, bags or other consumer packs labeled and priced ready for
the retail grocer's fresh meat counter. We believe the retail, prepackaged
fresh chicken business will continue to be a large and relatively stable
market, providing opportunities for product differentiation and regional
brand loyalty.
EXPORT AND OTHER CHICKEN PRODUCTS. Our export and other chicken
products consist of whole chickens and chicken parts sold primarily in
bulk, non-branded form either refrigerated to distributors in the U.S. or
frozen for distribution to export markets. In the U.S., prices of these
products are negotiated daily or weekly and are generally related to market
prices quoted by the USDA or other public price reporting services. We also
sell U.S.-produced chicken products for export to Canada, Mexico, Eastern
Europe, the Far East and other world markets. Historically, we have
targeted international markets to generate additional demand for our
chicken dark meat which is a natural by-product of our U.S. operations
given our concentration on prepared foods products and the U.S. customers'
general preference for white meat. We have also begun selling prepared
chicken products for export to the international divisions of our U.S.
chain restaurant customers. We believe that U.S. chicken exports will
continue to grow as worldwide demand increases for high-grade, low-cost
protein sources. We also believe that worldwide demand for higher margin
prepared foods products will increase over the next five years.
Accordingly, we believe we are well positioned to capitalize on such
growth. Also included in this categories are chicken and turkey by-
products, which are converted into protein products sold primarily to
manufacturers of pet foods.
MARKETS FOR TURKEY PRODUCTS
FOODSERVICE. A portion of our turkey sales are derived from products
sold to the foodservice market. This market principally consists of chain
restaurants, food processors, foodservice distributors and certain other
institutions located throughout the continental United States. We supply
turkey products ranging from portion-controlled refrigerated turkey parts
to ready-to-cook turkey, fully cooked formed products, delicatessen
products such as deli meats and sausage, salads, ground turkey and turkey
burgers, frankfurters and other foodservice products.
We believe Pilgrim's Pride is well-positioned to be the primary or
secondary supplier to many national and international chain restaurants
that require multiple suppliers of turkey products. Additionally, we are
well suited to be the sole supplier for many regional chain restaurants.
We believe we have significant competitive strengths in terms of full-
line product capabilities, high-volume production capacities, research and
development expertise and extensive distribution and marketing experience
relative to smaller and to non-vertically integrated producers.
FOODSERVICE - PREPARED FOODS. The majority of our turkey sales to the
foodservice market consist of prepared turkey products. Our prepared turkey
sales to the foodservice market were $90.8 million of our sales in fiscal
2001. We believe that future growth in this segment will be attributable to
the same six factors described above relating to the growth of prepared
chicken sales to the foodservice market.
FOODSERVICE - FRESH TURKEY. We produce and market fresh, refrigerated
and frozen turkey for sale to foodservice distributors, restaurant chains
and other customers. These turkeys are usually of specific weight ranges,
and are usually whole birds to customer specifications. They are often
marinated to enhance value and product differentiation. Our semi-boneless
turkey, unique to Pilgrim's Pride, is becoming very popular with
cruiselines and other customers where visual presentation of the whole
turkey is critical.
RETAIL. A significant portion of our turkey sales are derived from
products sold to the retail market. This market consists primarily of
grocery store chains, wholesale clubs and other retail distributors. We
concentrate our efforts in this market on sales of branded, prepackaged
cut-up and whole turkey to grocery store chains and retail distributors in
the eastern region of the United States. This regional marketing focus
enables us to develop consumer brand franchises and capitalize on proximity
to the trade customer in terms of lower transportation costs, more timely
and responsive service and enhanced product freshness.
We utilize numerous marketing techniques, including advertising, to
develop and strengthen trade and consumer awareness and increase brand
loyalty for consumer products marketed under the Pilgrim's
Pride and Wampler brands. We believe our
efforts to achieve and maintain brand awareness and loyalty help to provide
more secure distribution for our products. We also believe our efforts at
brand awareness generate greater price premiums than would otherwise be the
case in certain eastern markets. We also maintain an active program to
identify consumer preferences. The program primarily consists of testing
new product ideas, packaging designs and methods through taste panels and
focus groups located in key geographic markets.
RETAIL - PREPARED FOODS. We sell retail-oriented prepared turkey
products primarily to grocery store chains located in the eastern U.S. We
also sell these products to the wholesale club industry.
RETAIL - FRESH TURKEY. Our prepackaged retail products include
various combinations of freshly refrigerated and frozen, whole turkey and
turkey parts in trays, bags or other consumer packs labeled and priced
ready for the retail grocer's fresh meat counter, ground turkey or sausage
and turkey burgers. We believe the retail prepackaged fresh turkey business
will continue to be a large and relatively stable market, providing
opportunities for product differentiation and regional brand loyalty with
large seasonal spikes in the holiday seasons.
EXPORT AND OTHER TURKEY PRODUCTS. Our export and other products
consist of whole turkeys, turkey franks and turkey parts sold in bulk form,
either non-branded or under the Wampler and
Rockingham brands. These products are primarily sold frozen
either to distributors in the U.S. or for distribution to export markets.
In the U.S., prices of these products are negotiated daily or weekly and
are generally related to market prices quoted by the USDA or other public
price reporting services. We also sell U.S.-produced turkey products for
export to Canada, Mexico, Eastern Europe, the Far East and other world
markets. Historically, we have targeted international markets to generate
additional demand for our turkey dark meat, and frankfurters made from
turkey dark meat, which is a natural by-product of our U.S. operations
given our concentration of prepared foods products and the U.S. customers'
general preference for white meat. We believe that U.S. turkey exports will
continue to grow as worldwide demand increases for high-grade, low-cost
protein sources. We also believe that worldwide demand for higher margin
prepared turkey products will increase over the next five years.
Accordingly, we believe we are well positioned to capitalize on such
growth, especially in Mexico where we have established distribution
channels.
MARKETS FOR OTHER U.S. PRODUCTS
We market fresh eggs under the Pilgrim's Pride brand
name as well as private labels in various sizes of cartons and flats to
U.S. retail grocery and institutional foodservice customers located
primarily in Texas. We have a housing capacity for approximately 2.3
million commercial egg laying hens which can produce approximately 42
million dozen eggs annually. U.S. egg prices are determined weekly based
upon reported market prices. The U.S. egg industry has been consolidating
over the last few years, with the 25 largest producers accounting for more
than 54% of the total number of egg laying hens in service during 2000. We
compete with other U.S. egg producers primarily on the basis of product
quality, reliability, price and customer service.
In 1997, we introduced a high-nutrient egg called EggsPlus . This egg
contains high levels of Omega-3 and Omega-6 fatty acids along with Vitamin
E, making the egg a heart-friendly product. Our marketing of EggsPlus has
received national recognition for our progress in being an innovator in the
functional foods category.
In addition, we produce and sell livestock feeds at our feed mills in
Pittsburg and Mt. Pleasant, Texas and at our farm supply store in
Pittsburg, Texas to dairy farmers and livestock producers in northeastern
Texas, as well as engage in similar sales activities at our other U.S. feed
mills.
MEXICO
BACKGROUND
The Mexican market represented approximately 14.6% of our net sales in
fiscal 2001. Recognizing favorable long-term demographic trends and
improving economic conditions in Mexico, we began exploring opportunities
to produce and market chicken in Mexico. In fiscal 1988, we acquired four
vertically integrated chicken production operations in Mexico for
approximately $15.1 million. From fiscal 1988 through fiscal 2001, we made
acquisitions and capital expenditures in Mexico totaling $240.5 million to
modernize our production technology, improve our distribution network and
expand our operations. In addition, we have transferred experienced
management personnel from the U.S. and developed a strong local management
team. As a result of these expenditures, we have increased weekly
production in our Mexican operations by over 400% since our original
investment in fiscal 1988. We are now the second largest producer of
chicken in Mexico. We believe our facilities are among the most
technologically advanced in Mexico and that we are one of the lowest cost
producers of chicken in Mexico.
PRODUCT TYPES
While the market for chicken products in Mexico is less developed than
in the United States, with sales attributed to fewer, more basic products,
the market for value-added products is increasing. Our strategy is to lead
this trend. The products currently sold by us in Mexico consist primarily
of value-added products such as eviscerated chicken and chicken parts and
basic products such as New York dressed (whole chickens with only feathers
and blood removed) and live birds. We have increased our sales of value-
added products, primarily through national retail chains and restaurants,
and it is our business strategy to continue to do so. In addition, we
remain opportunistic, utilizing our low cost production to enter markets
where profitable opportunities exist.
MARKETS
We sell our Mexico chicken products primarily to large wholesalers and
retailers. Our customer base in Mexico covers a broad geographic area from
Mexico City, the capital of Mexico with a population estimated to be over
20 million, to Saltillo, the capital of the State of Coahuila, about 500
miles north of Mexico City, and from Tampico on the Gulf of Mexico to
Acapulco on the Pacific, which region includes the cities of San Luis
Potosi and Queretaro, capitals of the states of the same name.
In Mexico, where product differentiation has traditionally been
limited, product quality and price have been the most critical competitive
factors. The North American Free Trade Agreement, which went into effect on
January 1, 1994, requires annual reductions in tariffs for chicken and
chicken products in order to eliminate those tariffs by January 1, 2003.
While the extent of the impact of the elimination of tariffs is
uncertain, we believe we are uniquely positioned to benefit from this
elimination. We have an extensive distribution network in Mexico which
distributes products to 19 of the 32 Mexican states, encompassing
approximately 74% of the total population of Mexico. Our distribution
network is comprised of eight distribution centers utilizing approximately
126 company-owned vehicles. We believe this distribution network will be an
important asset in distributing our own, as well as other companies', U.S.-
produced chicken into Mexico.
COMPETITION
The chicken and turkey industries are highly competitive and some of
our competitors have greater financial and marketing resources than we do.
In the United States and Mexico, we compete principally with other
vertically integrated chicken and turkey companies.
In general, the competitive factors in the U.S. chicken and turkey
industries include price, product quality, product development, brand
identification, breadth of product line and customer service. Competitive
factors vary by major market. In the foodservice market, competition is
based on consistent quality, product development, service and price. In the
U.S. retail market, we believe that product quality, brand awareness and
customer service are the primary bases of competition. There is some
competition with non-vertically integrated further processors in the U.S.
prepared food business. We believe we have significant, long-term cost and
quality advantages over non-vertically integrated further processors.
In Mexico, where product differentiation has traditionally been
limited, product quality and price have been the most critical competitive
factors. The North American Free Trade Agreement, which went into effect on
January 1, 1994, requires annual reductions in tariffs for chicken and
chicken products in order to eliminate those tariffs by January 1, 2003. As
such tariffs are reduced, we expect greater amounts of chicken to be
imported into Mexico from the U.S., which could negatively affect the
profitability of Mexican chicken producers and positively affect the
profitability of U.S. exporters of chicken to Mexico.
While the extent of the impact of the elimination of tariffs is
uncertain, we believe we are uniquely positioned to benefit from this
elimination for two reasons. First, we have an extensive distribution
network in Mexico which distributes products to 19 of the 32 Mexican
states, encompassing approximately 74% of the total population of Mexico.
We believe this distribution network will be an important asset in
distributing our own, as well as other companies', U.S.-produced chicken
into Mexico. Second, we have the largest U.S. production and distribution
capacities near the Mexican border, which will provide us with cost
advantages in exporting U.S. chicken into Mexico. These facilities include
our processing facilities in Mt. Pleasant, Pittsburg, Lufkin, Nacogdoches,
Dallas and Waco, Texas, and distribution facilities in San Antonio and El
Paso, Texas and Phoenix, Arizona.
OTHER ACTIVITIES
We have regional distribution centers located in Arlington, El Paso,
Mt. Pleasant and San Antonio, Texas, Phoenix, Arizona, and Oklahoma City,
Oklahoma that distribute our own poultry products along with certain
poultry and non-poultry products purchased from third parties to
independent grocers and quick service restaurants. Our non-poultry
distribution business is conducted as an accommodation to our customers and
to achieve greater economies of scale in distribution logistics. The store-
door delivery capabilities for our own poultry products provide a strategic
service advantage in selling to quick service, national chain restaurants.
REGULATION AND ENVIRONMENTAL MATTERS
The chicken and turkey industries are subject to government
regulation, particularly in the health and environmental areas, including
provisions relating to the discharge of materials into the environment, by
the Centers for Disease Control, the United States Department of
Agriculture, the Food and Drug Administration and the Environmental
Protection Agency in the United States and by similar governmental agencies
in Mexico. Our chicken processing facilities in the U.S. are subject to on-
site examination, inspection and regulation by the USDA. The FDA inspects
the production of our feed mills in the U.S. Our Mexican food processing
facilities and feed mills are subject to on-site examination, inspection
and regulation by a Mexican governmental agency, which performs functions
similar to those performed by the USDA and FDA. Since commencement of
operations by our predecessor in 1946, compliance with applicable
regulations has not had a material adverse effect upon our earnings or
competitive position and such compliance is not anticipated to have a
materially adverse effect in the future. We believe that we are in
substantial compliance with all applicable laws and regulations relating to
the operations of our facilities.
We anticipate increased regulation by the USDA concerning food safety,
by the FDA concerning the use of medications in feed and by the EPA and
various other state agencies concerning the disposal of chicken by-products
and wastewater discharges. Although we do not anticipate any regulations
having a material adverse effect upon us, a material adverse effect may
occur.
EMPLOYEES AND LABOR RELATIONS
As of September 29, 2001, we employed approximately 19,900 persons in
the U.S. and 4,600 persons in Mexico. Approximately 2,500 employees at our
Lufkin and Nacogdoches, Texas facilities are members of collective
bargaining units represented by the United Food and Commercial Workers
Union. However, our Lufkin employees have recently filed a de-certification
petition, which is presently being reviewed by the National Labor Relations
Board. None of our other U.S. employees have union representation.
Collective bargaining agreements with the United Food and Commercial
Workers Union expired on August 10, 2001 with respect to our Lufkin
employees, where we are currently operating without a contract, and
expires in October 2004 with respect to our Nacogdoches employees. We
believe that the terms of the Nacogdoches agreement are no more favorable
than those provided to our non-union U.S. employees. In Mexico, most of our
hourly employees are covered by collective bargaining agreements, as are
most employees in Mexico. We have not experienced any work stoppage since a
two-day work stoppage, with no significant operation disruption, at our
Lufkin facility in May 1993. We believe our relations with our employees
are satisfactory.
FORWARD-LOOKING STATEMENTS
Statements of our intentions, beliefs, expectations or predictions for
the future, denoted by the words "anticipate," "believe," "estimate,"
"expect," "project," "imply," "intend," "foresee" and similar expressions,
are forward-looking statements that reflect our current views about future
events and are subject to risks, uncertainties and assumptions. Such risks,
uncertainties and assumptions include the following:
- Matters affecting the poultry industry generally, including
fluctuations in the commodity prices of feed ingredients, chicken
and turkey;
- Management of our cash resources, particularly in light of our
substantial leverage;
- Restrictions imposed by, and as a result of, our substantial
leverage;
- Currency exchange rate fluctuations, trade barriers, exchange
controls, expropriation and other risks associated with foreign
operations;
- Changes in laws or regulations affecting our operations, as well as
competitive factors and pricing pressures;
- Inability to effectively integrate WLR Foods or realize the
associated cost savings and operating synergies currently
anticipated; and
- The impact of uncertainties of litigation as well as other risks
described in our filings with the Securities and Exchange Commission.
Actual results could differ materially from those projected in these
forward-looking statements as a result of these factors, among others, many
of which are beyond our control.
ITEM 2. PROPERTIES
Chicken Operations
BREEDING AND HATCHING
We supply all of our chicks in the U.S. by producing our own hatching
eggs from domestic breeder flocks in the U.S. These flocks are owned by us,
and approximately 13.9% of them are maintained on 43 company-owned breeder
farms. In the U.S., we currently own or contract for approximately 14.2
million square feet of breeder housing on approximately 417 breeder farms.
In Mexico, all of our breeder flocks are maintained on company-owned farms
totaling approximately 4.1 million square feet.
We own eleven chicken hatcheries in the United States. These
hatcheries are located in Nacogdoches, Center and Pittsburg, Texas, DeQueen
and Nashville, Arkansas, Broadway, Virginia, Concord, North Carolina and
Moorefield, West Virginia, where eggs are incubated and hatched in a
process requiring 21 days. Once hatched, the day-old chicks are inspected
and vaccinated against common poultry diseases and transported by our
vehicles to grow-out farms. Our eleven hatcheries in the U.S. have an
aggregate production capacity of approximately 15.5 million chicks per
week. In Mexico, we own seven hatcheries, which have an aggregate
production capacity of approximately 3.5 million chicks per week.
GROW-OUT
We place our U.S. grown chicks on approximately 1,500 contract grow-
out farms located in Texas, Arkansas, Virginia, West Virginia, North
Carolina and Oklahoma, some of which are owned by our affiliates. These
contract grow-out farms contain approximately 5,360 chicken houses with
approximately 78.4 million square feet of growing facilities. Additionally,
we own and operate grow-out farms containing approximately 390 chicken
houses with approximately 4.4 million square feet of growing facilities in
the U.S., which account for approximately 5% of our total annual U.S.
chicken capacity. On the contracted grow-out farms, the farmers provide the
facilities, utilities and labor. We supply the chicks, the feed and all
veterinary and technical services. Contract grow-out farmers are paid based
on live weight under an incentive arrangement. In Mexico, we place our
grown chicks on contract grow-out farms containing approximately 732
chicken houses with approximately 10.2 million square feet of growing
facilities. Additionally, we own and operate grow-out farms containing
approximately 632 chicken houses with approximately 9.2 million square feet
of growing facilities in Mexico, which account for approximately 56.5% of
our total annual Mexican chicken capacity. Arrangements with independent
farmers in Mexico are similar to our arrangements with contractors in the
United States. The average grow-out cycle of our chickens is six to seven
weeks.
FEED MILLS
An important factor in the production of chicken is the rate at which
feed is converted into body weight. The quality and composition of the feed
is critical to the conversion rate. Accordingly, we formulate and produce
our own feed. We purchase feed ingredients on the open market. The primary
feed ingredients include corn, milo and soybean meal, which historically
have been the largest component of our total production costs. In the U.S.,
we operate nine feed mills located in Nacogdoches, Tenaha and Pittsburg,
Texas, Nashville and Hope, Arkansas, Harrisonburg, Virginia, Wingate, North
Carolina and Moorefield, West Virginia. In the U.S., we currently have
annual feed requirements of approximately 3.4 million tons and the capacity
to produce approximately 6.1 million tons. We own four feed mills in
Mexico, which produce all of the requirements of our Mexico operations.
Mexico's annual feed requirements are approximately 0.7 million tons with a
capacity to produce approximately 1.0 million tons. In fiscal 2001,
approximately 67% of the feed ingredients used by us in Mexico were
imported from the United States, but this percentage fluctuates based on
the availability and cost of local feed ingredient supplies.
PROCESSING
Once the chickens reach processing weight, they are transported in our
trucks to our processing plants. These plants utilize modern, highly
automated equipment to process and package the chickens. We periodically
review possible application of new processing technologies in order to
enhance productivity and reduce costs. We have ten U.S. processing plants,
two of which are located in Mt. Pleasant, Texas, and the remainder of which
are located in Dallas, Nacogdoches and Lufkin, Texas, DeQueen, Arkansas,
Broadway and Alma, Virginia, Marshville, North Carolina and Moorefield,
West Virginia. These processing plants have the capacity, under present
USDA inspection procedures, to slaughter approximately 11.9 million head of
chicken per week, assuming a five-day work week. Our three processing
plants located in Mexico have the capacity to slaughter approximately 3.3
million head of chicken per week, assuming a six-day work week, which is
typical in Mexico.
TURKEY OPERATIONS
BREEDING AND HATCHING
We purchase breeder poults, which we place with growers who supply
labor and housing to produce breeder flocks. These breeder flocks are owned
by us, and approximately 16.2% of them are maintained on three company-
owned breeder farms. We currently own or contract for approximately 2.0
million square feet of turkey breeder housing on approximately 40 breeder
farms which produce eggs that are taken to the company-owned turkey
hatchery. Our breeder flocks provide approximately 69% of our poult supply
for grow-out. We own and operate one turkey stud farm with approximately
50,000 square feet, which houses 3,600 breeder males and supplies semen for
52% of our breeder production. The balance of our poults for grow-out are
purchased from third parties.
We own and operate one turkey hatchery, which is located in
Harrisonburg, Virginia, where eggs are incubated and hatched in a process
requiring 28 days. Once hatched, the day-old poults are inspected and
vaccinated against common poultry diseases and transported by our vehicles
to grow-out farms. Our turkey hatchery has an aggregate production
capacity of approximately 450,000 poults per week.
GROW-OUT
We place our turkey poults on approximately 350 contract grow-out
farms located in Virginia, West Virginia, Pennsylvania, Maryland and North
and South Carolina. These contract grow-out farms contain approximately
1,260 turkey houses with approximately 23.6 million square feet of growing
facilities. In addition, we own and operate a grow-out farm containing 20
turkey houses with approximately 251,000 square feet of growing facilities
in the U.S., which accounts for approximately 1.1% of our total annual
turkey capacity. On the contracted grow-out farms, the farmers provide the
facilities, utilities and labor. We supply the poults, the feed and all
veterinary and technical services. Contract grow-out farmers are paid
based on live weight under an incentive arrangement. The average grow-out
cycle of our turkeys is 20 to 26 weeks.
FEED MILLS
An important factor in the production of turkey is the rate at which
feed is converted into body weight. The quality and composition of the feed
is critical to the conversion rate. Accordingly, we formulate and produce
our own feed. We purchase feed ingredients on the open market. The primary
feed ingredients include corn, milo and soybean meal, which historically
have been the largest component of our total production costs. We own and
operate a turkey feed mill located in Harrisonburg, Virginia. We currently
have the capacity to annually produce approximately 520,000 tons of turkey
feed at this mill. We also produce turkey feed when required at our other
three eastern division mills or purchase it on the open market.
PROCESSING
Once the poults reach processing weight, they are transported in our
trucks to our processing plants. These plants utilize modern, highly
automated equipment to process and package the turkeys. We periodically
review possible application of new processing technologies in order to
enhance productivity and reduce costs. Our three turkey processing plants,
located in Harrisonburg and Hinton, Virginia and New Oxford, Pennsylvania,
have the capacity, under present USDA inspection procedures, to process
approximately 450,000 turkeys per week, assuming a five-day work week.
PREPARED FOODS OPERATIONS
We operate five prepared foods plants. Four of these plants process
primarily chicken prepared foods products and are located in Mt. Pleasant,
Waco, Dallas and Nacogdoches, Texas. Substantially all of our turkey
prepared foods products are processed in our plant located in Franconia,
Pennsylvania. In line with our stated business strategy to capitalize on
the attractive U.S. prepared foods market, we have increased our prepared
foods production capacity through expansion and acquisitions. The U.S.
prepared foods market continues to be one of the fastest growing and most
profitable segments in the poultry industry. Further processed prepared
foods products include items such as portion-controlled breast fillets,
tenderloins and strips, formed nuggets and patties, turkey hams and roasts,
salads and bone-in chicken parts. Prepared foods are sold frozen and may be
either fully cooked, partially cooked or raw, breaded or non-breaded, pre-
marinated or non-marinated or smoked. We measure our operating capacity of
our prepared foods plants on the basis of running two shifts per day, six
days per week.
Our largest prepared foods plant is located in Mt. Pleasant, Texas and
was constructed in 1986 and has been expanded significantly since that
time. This facility includes 281,000 square feet and employs approximately
2,300 people. This facility has de-boning lines, marinating systems,
batter/breading systems, fryers, ovens, both mechanical and cryogenic
freezers, a variety of packaging systems and cold storage including four
fully-cooked lines and three ready-to-cook/par-frying/Individually Quick
Frozen ("IQF") lines and one batter-breaded/IQF line and eight spiral
freezers. This facility has capacity to produce approximately 350 million
pounds of further processed product annually and is currently operating at
full capacity.
Our Waco, Texas prepared foods plant was purchased in 1999 and
expanded in fiscal year 2000 and again in fiscal 2001. It is functionally
equivalent to the Mt. Pleasant plant and includes 150,146 square feet and
employs approximately 700 people. This state of the art facility has
marinating systems, batter/breading systems, fryers, ovens, both mechanical
and cryogenic freezers, a variety of packaging systems and cold storage
including two fully-cooked lines and two ready-to-cook lines and four
spiral freezers. This facility has capacity to produce approximately 270
million pounds of further processed product annually and is currently
operating at approximately 80% of capacity.
Our Franconia, Pennsylvania prepared foods plant was acquired in
January 2001 and further processes chicken and turkey products, including
grinding, marinating, spicing and cooking, producing premium delicatessen,
foodservice and retail products, including roast turkey, frankfurters and
salads. This facility includes approximately 170,000 square feet and
employs approximately 775 people. Our Franconia facility employs the
batching system of production as opposed to line-production used in our
other plants. This plant has approximately 95 million annual pounds of oven
capacity, 26 million annual pounds of frankfurter capacity and 17 million
annual pounds of salad capacity for a total capacity of approximately 138
million pounds of further processed product annually and is currently
operating at approximately 80% of capacity.
Our Dallas, Texas prepared foods plant was constructed in 1999 and
includes 84,000 square feet and employs approximately 900 people. This
facility has de-boning and portioning capability, marinating systems,
batter/breading and frying systems and IQF capabilities. This plant is
currently running one par-frying line and one IQF production line, each
with a spiral freezer. This facility has the capacity to produce
approximately 105 million pounds of further processed product annually and
is currently operating at full capacity.
Our Nacogdoches, Texas prepared foods plant was constructed in fiscal
2001. It is functionally equivalent to our Dallas, Texas prepared foods
plant and includes 115,465 square feet and employs approximately 1,850
people. This facility has de-boning and portioning capability, marinating
systems, batter/breading and frying systems and IQF capabilities. This
plant is currently running one par-frying line with a spiral freezer and
two IQF lines each with a spiral freezer with capability of making them
par-fry lines as sales dictate. This facility has capacity to produce
approximately 80 million pounds of further processed product annually and
is currently operating at approximately 80% of capacity.
EGG PRODUCTION
We produce table eggs at three farms near Pittsburg, Texas. One farm
is owned by us, while two farms are leased from an entity owned by our
major stockholder. The eggs are cleaned, sized, graded and packaged for
shipment at processing facilities located on the egg farms. The farms have
a housing capacity for approximately 2.3 million producing hens and are
currently housing approximately 1.9 million hens.
OTHER FACILITIES AND INFORMATION
We operate three rendering plants that convert by-products into
protein products, located in Mt. Pleasant, Texas, Broadway, Virginia and
Moorefield, West Virginia. These rendering plants currently process by-
products from approximately 13.1 million chickens and 0.6 million turkeys
weekly into protein products. These products are used in the manufacture of
poultry and livestock feed and pet foods. We operate a commercial feed mill
in Mt. Pleasant, Texas, which produces various bulk and sacked livestock
feed sold to area dairies, ranches and farms. We also operate a feed supply
store in Pittsburg, Texas, from which we sell various bulk and sacked
livestock feed products, a majority of which is produced in our Mt.
Pleasant commercial feed mill. We own an office building in Pittsburg,
Texas, which houses our executive offices, an office building in Mexico
City, which houses our Mexican marketing offices, and an office building in
Broadway, Virginia, which houses our Eastern Division sales and marketing,
research and development, and corporate activities.
Substantially all of our U.S. property, plant and equipment is pledged
as collateral on our secured debt.
ITEM 3. LEGAL PROCEEDINGS
SINCE MARCH 23, 1999, THE COMPANY HAS BEEN A PLAINTIFF IN TWO ANTITRUST
LAWSUITS IN U.S. DISTRICT COURT IN WASHINGTON, D.C. ALLEGING A WORLD-WIDE
CONSPIRACY TO CONTROL PRODUCTION CAPACITY AND RAISE PRICES OF COMMON
VITAMINS SUCH AS A, B-4, C AND E. ON NOVEMBER 3, 1999, A SETTLEMENT, WHICH
WAS ENTERED INTO AS PART OF A CLASS ACTION LAWSUIT TO WHICH THE COMPANY WAS
A MEMBER, WAS AGREED TO AMONG THE DEFENDANTS AND THE CLASS, WHICH WOULD
PROVIDE FOR A RECOVERY OF BETWEEN 18-20% OF VITAMINS PURCHASED FROM THE
DEFENDANTS FROM 1990 THROUGH 1998. ON MARCH 28, 2000, THE JUDGE PRESIDING
OVER THE CASE ACCEPTED THE NEGOTIATED SETTLEMENT BETWEEN THE PARTIES;
HOWEVER, APPEALS FROM VARIOUS SOURCES ARE IN PROCESS. THE COMPANY HAS
FILED DOCUMENTATION SHOWING THAT VITAMIN PURCHASES MADE DURING THE RECOVERY
PERIOD TOTALED APPROXIMATELY $14.9 MILLION. DURING FISCAL 2001, THE
COMPANY RECEIVED $3.3 MILLION IN FINAL SETTLEMENT OF ITS CLAIM.
IN JANUARY OF 1998, SEVENTEEN OF OUR CURRENT AND/OR FORMER EMPLOYEES
FILED THE CASE OF "OCTAVIUS ANDERSON, ET AL. V. PILGRIM'S PRIDE
CORPORATION" IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT
OF TEXAS, LUFKIN DIVISION CLAIMING PILGRIM'S PRIDE VIOLATED REQUIREMENTS OF
THE FAIR LABOR STANDARDS ACT. THE SUIT ALLEGED PILGRIM'S PRIDE FAILED TO
PAY EMPLOYEES FOR ALL HOURS WORKED. THE SUIT GENERALLY ALLEGED THAT (1)
EMPLOYEES SHOULD BE PAID FOR TIME SPENT TO PUT ON, TAKE OFF, AND CLEAN
CERTAIN PERSONAL GEAR AT THE BEGINNING AND END OF THEIR SHIFTS AND BREAKS
AND (2) THE USE OF A MASTER TIME CARD OR PRODUCTION "LINE" TIME FAILS TO
PAY EMPLOYEES FOR ALL TIME ACTUALLY WORKED. PLAINTIFFS SOUGHT TO RECOVER
UNPAID WAGES PLUS LIQUIDATED DAMAGES AND LEGAL FEES. APPROXIMATELY 1,700
CONSENTS TO JOIN AS PLAINTIFFS WERE FILED WITH THE COURT BY CURRENT AND/OR
FORMER EMPLOYEES. DURING MARCH 2001, THE CASE WAS TRIED IN THE FEDERAL
COURT OF THE EASTERN DISTRICT OF TEXAS, LUFKIN, TEXAS. THE COMPANY
PREVAILED AT THE TRIAL WITH A JUDGMENT ISSUED BY THE JUDGE, WHICH FOUND NO
EVIDENCE PRESENTED TO SUPPORT THE PLAINTIFFS' ALLEGATIONS. THE PLAINTIFFS
HAVE FILED AN APPEAL IN THE FIFTH CIRCUIT COURT OF APPEALS TO REVERSE THE
JUDGE'S DECISION. THE PLAINTIFF'S BRIEF WAS SUBMITTED TO THE COURT ON
NOVEMBER 5, 2001. PILGRIM'S PRIDE'S RESPONSE TO THE PLAINTIFF'S BRIEF TO
THE FIFTH CIRCUIT COURT OF APPEALS IS DUE ON DECEMBER 5, 2001. NEITHER THE
LIKELIHOOD OF AN UNFAVORABLE OUTCOME NOR THE AMOUNT OF ULTIMATE LIABILITY,
IF ANY, WITH RESPECT TO THIS CASE CAN BE DETERMINED AT THIS TIME. THE
COMPANY DOES NOT EXPECT THIS MATTER, INDIVIDUALLY OR COLLECTIVELY, TO HAVE
A MATERIAL IMPACT ON OUR FINANCIAL POSITION, OPERATIONS OR LIQUIDITY.
SUBSTANTIALLY SIMILAR SUITS HAVE BEEN FILED AGAINST FOUR OTHER INTEGRATED
POULTRY COMPANIES, INCLUDING WLR FOODS, ONE OF WHICH RESULTED IN A FEDERAL
JUDGE DISMISSING MOST OF THE PLAINTIFFS' CLAIMS IN THAT ACTION WITH FACTS
SIMILAR TO OUR CASE.
IN AUGUST OF 2000, FOUR OF OUR CURRENT AND/OR FORMER EMPLOYEES FILED THE
CASE OF "BETTY KENNELL, ET AL. V. WAMPLER FOODS, INC." IN THE UNITED STATES
DISTRICT COURT FOR THE NORTHERN DISTRICT OF WEST VIRGINIA, CLAIMING WE
VIOLATED REQUIREMENTS OF THE FAIR LABOR STANDARDS ACT. THE SUIT GENERALLY
MAKES THE SAME ALLEGATIONS AS ANDERSON V. PILGRIM'S PRIDE DISCUSSED ABOVE.
PLAINTIFFS SEEK TO RECOVER UNPAID WAGES PLUS LIQUIDATED DAMAGES AND LEGAL
FEES. APPROXIMATELY 150 CONSENTS TO JOIN AS PLAINTIFFS WERE FILED WITH THE
COURT BY CURRENT AND/OR FORMER EMPLOYEES. NO TRIAL DATE HAS BEEN SET. TO
DATE, ONLY LIMITED DISCOVERY HAS BEEN PERFORMED. NEITHER THE LIKELIHOOD OF
AN UNFAVORABLE OUTCOME NOR THE AMOUNT OF ULTIMATE LIABILITY, IF ANY, WITH
RESPECT TO THIS CASE CAN BE DETERMINED AT THIS TIME. WE DO NOT EXPECT THIS
MATTER, INDIVIDUALLY OR COLLECTIVELY, TO HAVE A MATERIAL IMPACT ON OUR
FINANCIAL POSITION, OPERATIONS OR LIQUIDITY.
THE COMPANY IS SUBJECT TO VARIOUS OTHER LEGAL PROCEEDINGS AND CLAIMS,
WHICH ARISE IN THE ORDINARY COURSE OF ITS BUSINESS. IN THE OPINION OF
MANAGEMENT, THE AMOUNT OF ULTIMATE LIABILITY WITH RESPECT TO THESE ACTIONS
WILL NOT MATERIALLY AFFECT THE FINANCIAL POSITION OR RESULTS OF OPERATIONS
OF THE COMPANY.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
QUARTERLY STOCK PRICES AND DIVIDENDS
High and low sales prices of and dividends on the Company's Class B
and Class A common stock for the periods indicated were:
Prices Prices
2001 2000 DIVIDENDS
QUARTER HIGH LOW HIGH LOW 2001 2000
Class B Common Stock
First $8.15 $6.03 $9.00 $6.25 $.01 $.01
Second 12.33 7.67 8.56 6.25 .01 .01
Third 12.55 9.43 8.31 6.75 .01 .01
Fourth 15.35 11.90 7.81 6.63 .01 .01
Class A Common Stock
First 5.72 4.46 7.00 4.63 .01 .01
Second 8.42 5.47 6.63 4.50 .01 .01
Third 8.74 6.63 6.13 4.06 .01 .01
Fourth $10.98 $7.50 $5.69 $4.81 $.01 $.01
The Company's Class B common stock (ticker symbol "CHX") and Class A
common stock (ticker symbol "CHX.A") are traded on the New York Stock
Exchange. The Company estimates there were approximately 21,800 and 23,925
holders (including individual participants in security position listings)
of the Company's Class A and Class B common stock, respectively, as of
November 8, 2001. See Note F-Common Stock, of the Notes to Consolidated
Financial Statements for additional discussion of the Company's common
stock.
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) TEN YEARS ENDED SEPTEMBER 29, 2001
2001(a) 2000 1999(b) 1998 1997
INCOME STATEMENT DATA: early
Net Sales $2,214,712 $1,499,439 $1,357,403 $1,331,545 $1,277,649
Gross margin 213,950 165,828 185,708 136,103 114,467
Operating income
(loss) 94,542 80,488 109,504 77,256 63,894
Income (loss) before
income taxes and
extraordinary
charge 63,294 62,786 90,904 56,522 43,824
Interest expense,
net 30,775 17,779 17,666 20,148 22,075
Income tax expense
(benefit) 21,263 10,442 25,651 6,512 2,788
Income (loss)before
extraordinary
charge 42,031 52,344 65,253 50,010 41,036
Extraordinary charge--
early repayment of
debt, net
of tax (894) -- -- -- --
Net income (loss) 41,137 52,344 65,253 50,010 41,036
PER COMMON SHARE DATA(C)
Income (loss)before
extraordinary
charge $ 1.02 $ 1.27 $ 1.58 $ 1.21 $ 0.99
Extraordinary
charge -
early repayment
of debt (0.02) -- -- -- --
Net income (loss) 1.00 1.27 1.58 1.21 0.99
Cash dividends 0.06 0.06 0.045 0.04 0.04
Book Value 9.27 8.33 7.11 5.58 4.41
BALANCE SHEET SUMMARY:
Working capital $ 203,450 $124,531 $154,242 $147,040 $133,542
Total assets 1,215,695 705,420 655,762 601,439 579,124
Notes payable and
current maturities of
long-term debt 5,099 4,657 4,353 5,889 11,596
Long-term debt, less
current
maturities 467,242 165,037 183,753 199,784 224,743
Total stockholders'
equity 380,932 342,559 294,259 230,871 182,516
CASH FLOW SUMMARY:
Operating cash
flow $87,833 $130,803 $81,452 $85,016 $49,615
Depreciation &
amortization(d) 55,390 36,027 34,536 32,591 29,796
Capital
expenditures 112,632 92,128 69,649 53,518 50,231
Business
acquisitions 239,539 -- -- -- --
Financing
activities, net 254,382 (22,619) (19,634) (32,498) 348
CASHFLOW RATIOS:
EBITDA(e) 147,666 115,356 142,043 108,268 94,782
EBITDA/interest
expense, net 4.80x 6.49x 8.04x 5.37x 4.29x
Senior secured
debt/EBITDA 1.84x .69x .67x 1.02x 1.45x
Total debt/EBITDA 3.20x 1.47x 1.32x 1.90x 2.49x
KEY INDICATORS (AS A PERCENTAGE OF NET SALES):
Gross margin 9.7% 11.1% 13.7% 10.2% 9.0%
Selling,
general and
administrative
expenses 5.4% 5.7% 5.6% 4.4% 4.0%
Operating
income (loss) 4.3% 5.4% 8.1% 5.8% 5.0%
Interest
expense, net 1.4% 1.2% 1.3% 1.5% 1.7%
Net income (loss) 1.9% 3.5% 4.8% 3.8% 3.2%
(See page 30 for footnotes.)
(IN THOUSANDS, EXCEPT PER SHARE DATA) TEN YEARS ENDED SEPTEMBER 29, 2001
1996 1995 1994 1993(b) 1992
Income Statement Data:
Net sales $1,139,310 $931,806 $922,609 $887,843 $817,361
Gross margin 70,640 74,144 110,827 106,036 32,802
Operating income
(loss) 21,504 24,930 59,698 56,345 (12,475)
Income (loss) before
income taxes and
extraordinary
charge 47 2,091 42,448 32,838 (33,712)
Interest expense,
net 21,539 17,483 19,175 25,719 22,502
Income tax expense
(benefit) 4,551 10,058 11,390 10,543 (4,048)
Income (loss) before
extraordinary
charge (4,504) (7,967) 31,058 22,295 (29,664)
Extraordinary charge--
early repayment
of debt, net
of tax (2,780) -- -- (1,286) --
Net income (loss) (7,284) (7,967) 31,058 21,009 (29,664)
Per Common Share Data(c)
Income (loss) before
extraordinary
charge $ (0.11) $ (0.19) $ 0.75 $ 0.54 $(0.83)
Extraordinary charge--
early repayment
of debt (0.07) -- -- (0.03) --
Net income (loss) (0.18) (0.19) 0.75 0.51 (0.83)
Cash dividends 0.04 0.04 0.04 0.02 0.04
Book value 3.46 3.67 3.91 3.20 2.71
Balance Sheet Summary:
Working capital 88,455 88,395 99,724 72,688 11,227
Total assets $536,722 $497,604 $438,683 $422,846 $434,566
Notes payable and
current maturities
of long-term
debt 35,850 18,187 4,493 25,643 86,424
Long-term debt, less
current
maturities 198,334 182,988 152,631 159,554 131,534
Total stockholders'
equity 143,135 152,074 161,696 132,293 112,112
Cash Flow Summary:
Operating cash
flow $11,391 $32,712 $60,664 $44,970 $(1,573)
Depreciation &
ammortization(d) 28,024 26,127 25,177 26,034 24,090
Capital
expenditures 34,314 35,194 25,547 15,201 18,043
Business
acquisitions -- 36,178 -- -- --
Financing
activities, net 27,313 40,173 (30,291) (40,339) 25,110
Cashflow Ratios:
EBITDA(e) 47,849 49,811 83,658 79,222 10,955
EBITDA/interest
expense, net 2.22x 2.85x 4.36x 3.08x .48x
Senior secured debt/
EBITDA 2.26x 1.79x .70x .94x 9.40x
Total debt/EBITDA 4.89x 4.04x 1.88x 2.34x 20.17x
Key Indicators (as a percentage of net sales):
Gross margin 6.2% 8.0% 12.0% 11.9% 4.0%
Selling, general and
administrative
expenses 4.3% 5.3% 5.5% 5.6% 5.7%
Operating income
(loss) 1.9% 2.7% 6.5% 6.3% (1.6%)
Interest expense, net 1.9% 1.9% 2.1% 2.9% 2.8%
Net income (loss) (0.6%) (0.9%) 3.4% 2.4% (3.6%)
(A) THE COMPANY ACQUIRED WLR FOODS ON JANUARY 27, 2001 FOR $239.5 MILLION
AND THE ASSUMPTION OF $45.5 MILLION OF INDEBTEDNESS. THE ACQUISITION
HAS BEEN ACCOUNTED FOR AS A PURCHASE, AND THE RESULTS OF OPERATIONS
FOR THIS ACQUISITION HAVE BEEN INCLUDED IN OUR CONSOLIDATED RESULTS
OF OPERATIONS SINCE THE ACQUISITION DATE.
(B) FISCAL 1999 AND 1993 HAD 53 WEEKS
HISTORICAL PER SHARE AMOUNTS REPRESENT BOTH BASIC AND DILUTED AND HAVE
(C) BEEN RESTATED TO GIVE EFFECT TO A STOCK DIVIDEND ISSUED ON JULY 30,
1999. SEE NOTE F OF THE CONSOLIDATED FINANCIAL STATEMENTS OF THE
COMPANY.
(D) INCLUDES AMORTIZATION OF CAPITALIZED FINANCING COSTS OF APPROXIMATELY
$0.9 MILLION, $1.2 MILLION, $1.1 MILLION, $1.0 MILLION, $0.9 MILLION,
$1.8 MILLION, $1.1 MILLION, $1.3 MILLION, $1.6 MILLION AND $0.5
MILLION IN FISCAL YEARS 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994,
1993 AND 1992, RESPECTIVELY.
(E) "EBITDA" IS DEFINED AS THE SUM OF NET INCOME (LOSS) BEFORE EXTRAORDINARY
CHARGES, INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA IS
PRESENTED BECAUSE WE BELIEVE IT IS FREQUENTLY USED BY SECURITIES
ANALYSTS, INVESTORS AND OTHER INTERESTED PARTIES IN THE EVALUATION OF
COMPANIES. EBITDA IS NOT A MEASUREMENT OF FINANCIAL PERFORMANCE UNDER
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND SHOULD NOT BE CONSIDERED AS
AN ALTERNATIVE TO CASH FLOW FROM OPERATING ACTIVITIES OR AS A MEASURE OF
LIQUIDITY OR AN ALTERNATIVE TO NET INCOME AS INDICATORS OF OUR OPERATING
PERFORMANCE OR ANY OTHER MEASURES OF PERFORMANCE DERIVED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
Statements of our intentions, beliefs, expectations or predictions for
the future, denoted by the words "anticipate," "believe," "estimate,"
"expect," "project," "imply," "intend," "foresee" and similar expressions,
are forward-looking statements that reflect our current views about future
events and are subject to risks, uncertainties and assumptions. Such risks,
uncertainties and assumptions include the following:
- Matters affecting the poultry industry generally, including
fluctuations in the commodity prices of feed ingredients, chicken
and turkey;
- Management of our cash resources, particularly in light of our
substantial leverage;
- Restrictions imposed by, and as a result of, our substantial
leverage;
- Currency exchange rate fluctuations, trade barriers, exchange
controls, expropriation and other risks associated with foreign
operations;
- Changes in laws or regulations affecting our operations, as well as
competitive factors and pricing pressures;
- Inability to effectively integrate WLR Foods or realize the
associated cost savings and operating synergies currently
anticipated; and
- The impact of uncertainties of litigation as well as other risks
described in our filings with the Securities and Exchange
Commission.
Actual results could differ materially from those projected in these
forward-looking statements as a result of these factors, among others, many
of which are beyond our control.
GENERAL
Profitability in the poultry industry is materially affected by the
commodity prices of feed ingredients, chicken and turkey, which are
determined by supply and demand factors. As a result, the chicken and
turkey industries are subject to cyclical earnings fluctuations. Cyclical
earnings fluctuations can be mitigated somewhat by:
- Business strategy;
- Product mix;
- Sales and marketing plans; and
- Operating efficiencies.
In an effort to reduce price volatility and to generate higher, more
consistent profit margins, we have concentrated on the production and
marketing of prepared foods products. Prepared foods products generally
have higher profit margins than our other products. Also, the production
and sale in the U.S. of prepared foods products reduce the impact of the
costs of feed ingredients on our profitability. Feed ingredient purchases
are the single largest component of our cost of goods sold, representing
approximately 30.1% of our consolidated cost of goods sold in fiscal 2001.
The production of feed ingredients is positively or negatively affected
primarily by weather patterns throughout the world, the global level of
supply inventories and demand for feed ingredients, and the agricultural
policies of the United States and foreign governments. As further
processing is performed, feed ingredient costs become a decreasing
percentage of a product's total production cost, thereby reducing their
impact on our profitability. Products sold in this form enable us to charge
a premium, reduce the impact of feed ingredient costs on our profitability
and improve and stabilize our profit margins.
BUSINESS SEGMENTS
Since the acquisition of WLR Foods on January 27, 2001, we operate in
two reportable business segments as (1) a producer of chicken and other
products and (2) a producer of turkey products.
Our chicken and other products segment primarily includes sales of
chicken products we produce and purchase for resale in the United States
and Mexico, but also includes the sale of table eggs, and feed. Our
chicken and other products segment conducts separate operations in the
United States and Mexico and is reported as two separate geographical
areas. Our turkey segment includes sales of turkey products produced in
our turkey operation recently acquired from WLR Foods, whose operations are
exclusively in the United States.
Inter-area sales and inter-segment sales, which are not material, are
accounted for at prices comparable to normal trade customer sales.
Corporate expenses are included with chicken and other products.
The following table presents certain information regarding our segments:
FISCAL YEAR ENDED
SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2,
2001(A) 2000 1999
(52 WEEKS) (52 WEEKS) (53 WEEKS)
(IN THOUSANDS)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $1,652,199 $1,192,077 $1,102,903
Mexico 323,678 307,362 254,500
Sub-total 1,975,877 1,499,439 1,357,403
Turkey 238,835 -- --
Total $2,214,712 $1,499,439 $1,357,403
OPERATING INCOME:
Chicken and Other Products:
United States $ 78,096 $ 45,928 $ 88,177
Mexico 12,157 34,560 21,327
Sub-total 90,253 80,488 109,504
Turkey 4,289 -- --
Total $ 94,542 $ 80,488 $ 109,504
Depreciation and Amortization(b)
Chicken and Other Products:
United States $ 38,155 $ 24,444 $ 23,185
Mexico 11,962 11,583 11,351
Sub-total 50,117 36,027 34,536
Turkey 5,273 -- --
Total $ 55,390 $ 36,027 $ 34,536
(a) The acquisition of WLR Foods has been accounted for as a purchase,
and the results of operations for this acquisition have been included in
our consolidated results of operating since January 27, 2001, the
acquisition date.
(b) INCLUDES AMORTIZATION OF CAPITALIZED FINANCING COSTS OF APPROXIMATELY
$0.9 MILLION, $1.2 MILLION AND $1.1 MILLION IN FISCAL YEARS 2001, 2000
AND 1999, RESPECTIVELY.
The following table presents certain items as a percentage of net sales for
the periods indicated:
2001 (a) 2000 1999
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 90.3 88.9 86.3
Gross profit 9.7 11.1 13.7
Selling, general and
administrative expense 5.4 5.7 5.6
Operating income 4.3 5.4 8.1
Interest expense, net 1.4 1.2 1.3
Income before income taxes 2.9 4.2 6.7
Net income 1.9 3.5 4.8
(a) The acquisition of WLR Foods has been accounted for as a purchase,
and the results of operations for this acquisition have been included
in our consolidated results of operating since January 27, 2001, the
acquisition date.
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
On January 27, 2001, we completed the acquisition of WLR Foods, a
vertically integrated producer of chicken and turkey products located in
the eastern United States. Accordingly, 35 weeks of operations of the
former WLR Foods are included in our results for fiscal 2001.
CONSOLIDATED NET SALES. Consolidated net sales were $2.2 billion for
fiscal 2001, an increase of $715.3 million, or 47.7%, from fiscal 2000. The
increase in consolidated net sales resulted from a $422.0 million increase
in U.S. chicken sales to $1.5 billion, a $238.8 million increase in turkey
sales, a $38.2 million increase in sales of other U.S. products to $179.9
million and by a $16.3 million increase in Mexico chicken sales to $323.7
million. The increase in U.S. chicken sales was primarily due to a 35.6%
increase in dressed pounds produced, which resulted primarily from the
acquisition of WLR Foods, and to a 3.4% increase in total revenue per
dressed pound produced. The increase in turkey sales was due to the
acquisition of WLR Foods. The $38.2 million increase in sales of other U.S.
products to $179.9 million was primarily due to the acquisition of WLR
Foods and higher prices in our commercial egg operations. The $16.3 million
increase in Mexico chicken sales was primarily due to a 13.4% increase in
dressed pounds produced offset partially by a 7.1% decrease in average
revenue per dressed pound produced, primarily due to lower prices caused by
an over supply of chicken.
COST OF SALES. Consolidated cost of sales were $2.0 billion in
fiscal 2001, an increase of $667.2 million, or 50.0%, compared to fiscal
2000. The U.S. operations accounted for $630.8 million of the increase in
the cost of sales and our Mexico operations accounted for $36.4 million of
the increase.
The cost of sales increase in our U.S. operations of $630.8 million
was due primarily to the acquisition of WLR Foods, $222.6 million of which
related to the turkey operations, but also resulted from increased
production of higher cost prepared foods products, higher energy costs and
higher feed ingredient costs.
The $36.4 million cost of sales increase in our Mexico operations was
primarily due to a 13.4% increase in dressed pounds produced.
GROSS PROFIT. Gross profit was $214.0 million for fiscal 2001, an
increase of $48.1 million, or 29.0%, over the same period last year, due
primarily to the acquisition of WLR Foods. Gross profit as a percentage of
sales decreased to 9.7% in fiscal 2001, primarily from 11.1% in fiscal 2000
due primarily to lower sale prices in Mexico.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $119.4 million in fiscal 2001 and
$85.3 million in fiscal 2000. The $34.1 million increase was due primarily
to the acquisition of WLR Foods and certain integration costs related
thereto. Consolidated selling, general and administrative expenses as a
percentage of sales decreased in fiscal 2001 to 5.4%, compared to 5.7% in
fiscal 2000, due primarily to synergies resulting from the WLR acquisition.
OPERATING INCOME. Consolidated operating income was $94.5 million for
fiscal 2001, an increase of $14.1 million when compared to fiscal 2000,
resulting primarily from higher volumes from the acquisition of WLR Foods
and higher sales prices in U.S.
INTEREST EXPENSE. Consolidated net interest expense increased 73.1%
to $30.8 million in fiscal 2001, when compared to $17.8 million for fiscal
2000, due to higher outstanding balances incurred for the acquisition of
WLR Foods.
INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 2001
increased to $21.3 million compared to an expense of $10.4 million in
fiscal 2000. This increase resulted from higher U.S. pre-tax earnings in
fiscal 2001 than in fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999:
NET SALES. Consolidated net sales were $1.5 billion for fiscal 2000,
an increase of $142.0 million, or 10.5%, from fiscal 1999. The increase in
consolidated net sales resulted from an $86.9 million increase in U.S.
chicken sales to $1.1 billion, a $52.9 million increase in Mexico chicken
sales to $307.4 million and a $2.3 million increase of sales of other U.S.
products to $141.7 million. The increase in U.S. chicken sales was
primarily due to an 8.6% increase in dressed pounds produced . The
increase in Mexico chicken sales was primarily due to a 13.7% increase in
revenue per dressed pound and to a 6.2% increase in dressed pounds
produced. The $2.3 million increase in sales of other U.S. products was
primarily due to higher selling prices in our Poultry By-Products
division.
COST OF SALES. Consolidated cost of sales was $1.3 billion in fiscal
2000, an increase of $161.9 million, or 13.8%, compared to fiscal 1999. The
increase resulted primarily from a $125.9 million increase in the cost of
sales of our U.S. operations and from a $36.0 million increase in the cost
of sales in our Mexico operations.
The cost of sales increase in our U.S. operations of $125.9 million was
due primarily to an 8.6% increase in dressed pounds produced, a 4.0%
increase in feed ingredient costs, increased production of higher-cost
prepared food products, losses associated with the late January 2000 ice
storm and a $5.8 million write-off of accounts receivable from AmeriServe,
which filed bankruptcy on January 31, 2000. AmeriServe was a significant
distributor of products to fast food and casual dining restaurant chains,
several of which are customers of the Company. The $36.0 million cost of
sales increase in our Mexico operations was primarily due to a 6.2%
increase in dressed pounds produced and a 9.8% increase in average costs of
sales per dressed pound produced caused primarily by the continued shift of
production to a higher-valued product mix.
GROSS PROFIT. Gross profit was $165.8 million for fiscal 2000, a
decrease of $19.9 million, or 10.7%, over the same period last year. Gross
profit as a percentage of sales decreased to 11.1% in fiscal 2000 from
13.7% in fiscal 1999. The lower gross profit resulted from lower net
margins in our U.S. operations primarily due to lower selling prices
realized for fresh chicken products, higher feed ingredient costs, losses
associated with the late January 2000 ice storm and the AmeriServe write-
off, discussed above, offset in part by increased volume of prepared food
chicken sales.
Beginning in the fourth quarter of fiscal 1999, commodity chicken
margins in the U.S. have been under pressure due, in part, to increased
levels of chicken production in the U.S. To the extent that these trends
continue, subsequent periods' gross margins could be negatively affected to
the extent not offset by other factors such as those discussed under "-
General" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $85.3 million in fiscal 2000 and
$76.2 million in fiscal 1999. Consolidated selling, general and
administrative expenses as a percentage of sales remained relatively stable
in fiscal 2000 at 5.7% compared to 5.6% in fiscal 1999. The $9.1 million
increase in consolidated selling, general and administrative expenses was
due to increased costs relating to our higher sales volumes.
OPERATING INCOME. Consolidated operating income was $80.5 million for
fiscal 2000, a decrease of $29.0 million, or 26.5%, when compared to fiscal
1999, resulting primarily from lower net U.S. margins due to lower selling
prices realized for fresh chicken products, higher feed ingredient costs,
losses associated with the late January 2000 ice storm and the AmeriServe
write-off, discussed above, offset in part by increased volume of prepared
food chicken sales.
INTEREST EXPENSE. Consolidated net interest expense increased 0.6% to
$17.8 million in fiscal 2000, when compared to $17.7 million for fiscal
1999, due to higher interest rates experienced in fiscal 2000 on lower
outstanding debt levels.
INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 2000
decreased to $10.4 million compared to an expense of $25.7 million in
fiscal 1999. This decrease resulted from lower U.S. earnings in fiscal 2000
than in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
WE MAINTAIN $130.0 MILLION IN REVOLVING CREDIT FACILITIES AND $400.0
MILLION IN A SECURED REVOLVING/TERM BORROWING FACILITY. THE $400.0 MILLION
REVOLVING/TERM BORROWING FACILITY PROVIDES FOR $285.0 MILLION AND $115.0
MILLION OF 10-YEAR AND 7-YEAR COMMITMENTS, RESPECTIVELY. BORROWINGS UNDER
THESE FACILITIES ARE SPLIT PRO RATA BETWEEN THE 10-YEAR AND 7-YEAR
MATURITIES AS THEY OCCUR. THE CREDIT FACILITIES PROVIDE FOR INTEREST AT
RATES RANGING FROM LIBOR PLUS FIVE-EIGHTHS PERCENT TO LIBOR PLUS TWO AND
THREE-QUARTERS PERCENT, DEPENDING UPON OUR TOTAL DEBT TO CAPITALIZATION
RATIO. INTEREST RATES ON DEBT OUTSTANDING UNDER THESE FACILITIES AS OF
SEPTEMBER 29, 2001 RANGED FROM LIBOR PLUS ONE AND ONE-QUARTER PERCENT TO
LIBOR PLUS TWO AND ONE-QUARTER PERCENT. THESE FACILITIES ARE SECURED BY
INVENTORY AND FIXED ASSETS OR ARE UNSECURED.
AT SEPTEMBER 29, 2001, $86.0 MILLION WAS AVAILABLE UNDER THE REVOLVING
CREDIT FACILITIES AND $225.0 MILLION WAS AVAILABLE UNDER THE REVOLVING/TERM
BORROWING FACILITY.
ON SEPTEMBER 7, 2001, WE AMENDED AND RESTATED OUR REVOLVING CREDIT
AGREEMENT FOR MEXICO, INCREASING THE COMMITMENT FROM $20.0 MILLION TO $30.0
MILLION. OUTSTANDING BORROWINGS UNDER THIS FACILITY ARE PRESENTLY $30.0
MILLION, THE PROCEEDS OF WHICH WERE USED TO REDUCE CERTAIN OTHER DEBT.
ON JUNE 26, 1998, WE ENTERED INTO AN ASSET SALE AGREEMENT TO SELL UP
TO $60 MILLION OF ACCOUNTS RECEIVABLE. IN CONNECTION WITH THE ASSET SALE
AGREEMENT, WE SELL, ON A REVOLVING BASIS, CERTAIN OF OUR TRADE RECEIVABLES
(THE "POOLED RECEIVABLES") TO A SPECIAL PURPOSE CORPORATION WHOLLY OWNED BY
US, WHICH IN TURN SELLS A PERCENTAGE OWNERSHIP INTEREST TO THIRD PARTIES.
AT SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000, AN INTEREST IN THESE POOLED
RECEIVABLES OF $58.5 MILLION AND $35.4 MILLION, RESPECTIVELY, HAD BEEN SOLD
TO THIRD PARTIES AND IS REFLECTED AS A REDUCTION IN ACCOUNTS RECEIVABLE.
THESE TRANSACTIONS HAVE BEEN RECORDED AS SALES IN ACCORDANCE WITH FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 140, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. THE GROSS
PROCEEDS RESULTING FROM THE SALE ARE INCLUDED IN CASH FLOWS FROM OPERATING
ACTIVITIES IN OUR CONSOLIDATED STATEMENTS OF CASH FLOWS. LOSSES ON THESE
SALES WERE IMMATERIAL.
ON JUNE 29, 1999, THE CAMP COUNTY INDUSTRIAL DEVELOPMENT CORPORATION
ISSUED $25.0 MILLION OF VARIABLE-RATE ENVIRONMENTAL FACILITIES REVENUE
BONDS SUPPORTED BY LETTERS OF CREDIT OBTAINED BY PILGRIM'S PRIDE. WE MAY
DRAW FROM THESE PROCEEDS OVER THE CONSTRUCTION PERIOD FOR NEW SEWAGE AND
SOLID WASTE DISPOSAL FACILITIES AT A POULTRY BY-PRODUCTS PLANT TO BE BUILT
IN CAMP COUNTY, TEXAS. WE ARE NOT REQUIRED TO BORROW THE FULL AMOUNT OF THE
PROCEEDS FROM THE BONDS. ALL AMOUNTS BORROWED FROM THESE FUNDS WILL BE DUE
IN 2029. THE AMOUNTS THAT WE BORROW WILL BE REFLECTED AS DEBT WHEN RECEIVED
FROM THE CAMP COUNTY INDUSTRIAL DEVELOPMENT CORPORATION. THE INTEREST RATES
ON AMOUNTS BORROWED WILL CLOSELY FOLLOW THE TAX-EXEMPT COMMERCIAL PAPER
RATES. PRESENTLY, THERE ARE NO BORROWINGS OUTSTANDING UNDER THE BONDS.
ON AUGUST 9, 2001, PILGRIM'S PRIDE ISSUED $200.0 MILLION IN SENIOR
UNSECURED NOTES WITH AN INTEREST RATE OF 9 5/8% MATURING ON SEPTEMBER 15,
2011. THE PROCEEDS FROM THE NOTES OFFERING WERE USED TO REDEEM THE
REMAINING $90.8 MILLION OUTSTANDING OF OUR 10 7/8% SENIOR SUBORDINATED
NOTES DUE 2003. THE BALANCE OF THE PROCEEDS WAS USED TO REDUCE
INDEBTEDNESS UNDER OUR $400.0 MILLION REVOLVING/TERM BORROWING FACILITY.
AT SEPTEMBER 29, 2001, OUR WORKING CAPITAL INCREASED TO $203.5 MILLION
AND OUR CURRENT RATIO INCREASED TO 1.85 TO 1, COMPARED WITH WORKING CAPITAL
OF $124.5 MILLION AND A CURRENT RATIO OF 1.86 TO 1 AT SEPTEMBER 30, 2000
AND WAS PRIMARILY DUE TO THE ACQUISITION OF WLR FOODS.
TRADE ACCOUNTS AND OTHER RECEIVABLES WERE $95.0 MILLION AT SEPTEMBER 29,
2001, COMPARED TO $50.3 MILLION AT SEPTEMBER 30, 2000. THE 89.0% INCREASE
IN TRADE ACCOUNTS AND OTHER RECEIVABLES WAS PRIMARILY DUE TO THE
ACQUISITION OF WLR FOODS' TRADE RECEIVABLES AND OTHER ACCOUNTS PARTIALLY
OFFSET BY THE SALE OF RECEIVABLES UNDER THE ASSET SALE AGREEMENT DISCUSSED
ABOVE. EXCLUDING THE SALE OF RECEIVABLES, TRADE ACCOUNTS AND OTHER
RECEIVABLES WOULD HAVE INCREASED TO $153.5 MILLION IN FISCAL 2001 FROM
$85.7 MILLION IN FISCAL 2000.
INVENTORIES WERE $314.4 MILLION AT SEPTEMBER 29, 2001, COMPARED TO
$181.2 MILLION AT SEPTEMBER 30, 2000. THE $133.2 MILLION, OR 73.5%,
INCREASE IN INVENTORIES WAS PRIMARILY DUE TO THE ACQUISITION OF WLR FOODS.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES WERE $229.9 MILLION AT SEPTEMBER
29, 2001, COMPARED TO $139.8 MILLION AT SEPTEMBER 30, 2000. THE 64.5%
INCREASE IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES WAS PRIMARILY DUE TO THE
ACQUISITION OF WLR FOODS.
CAPITAL EXPENDITURES OF $112.6 MILLION, $92.1 MILLION AND $69.6 MILLION,
FOR FISCAL YEARS 2001, 2000 AND 1999, RESPECTIVELY, WERE PRIMARILY INCURRED
TO ACQUIRE AND EXPAND CERTAIN FACILITIES, IMPROVE EFFICIENCIES, REDUCE
COSTS AND FOR THE ROUTINE REPLACEMENT OF EQUIPMENT. WE ANTICIPATE SPENDING
APPROXIMATELY $65.0 MILLION IN FISCAL 2002 TO IMPROVE EFFICIENCIES AND FOR
THE ROUTINE REPLACEMENT OF EQUIPMENT. WE EXPECT TO FINANCE SUCH
EXPENDITURES WITH AVAILABLE OPERATING CASH FLOWS AND EXISTING CREDIT
FACILITIES.
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES WERE $87.8 MILLION, $130.8
MILLION AND $81.5 MILLION FOR THE FISCAL YEARS 2001, 2000 AND 1999,
RESPECTIVELY. THE DECREASE IN CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
IN FISCAL 2001 COMPARED TO FISCAL 2000, WAS PRIMARILY DUE TO AN OVERALL
INCREASE OF ACCOUNTS RECEIVABLE, DUE PRIMARILY TO A HIGHER LEVEL OF SALES
ACTIVITY; INCREASED INVENTORIES, DUE PRIMARILY TO HIGHER LEVELS OF LIVE
POULTRY AND FROZEN TURKEY INVENTORIES RESULTING PRIMARILY FROM SEASONAL
VARIATIONS IN THE LIVE PRODUCTION CYCLE AND SALES OF TURKEY PRODUCTS, BOTH
OF WHICH WERE PRIMARILY A RESULT OF THE WLR FOODS ACQUISITION AND LOWER NET
INCOME FOR FISCAL 2001. THE $24.0 MILLION DECREASE IN CASH FLOWS PROVIDED
BY OPERATING ACTIVITIES THAT RESULTED FROM ACCOUNTS RECEIVABLE WAS
PARTIALLY OFFSET BY A $23.1 INCREASE IN SALES OF ACCOUNTS RECEIVABLE FROM
$35.4 MILLION AT FISCAL 2000 YEAR END TO $58.5 MILLION AT FISCAL 2001 YEAR
END. THE INCREASE IN CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FOR
FISCAL 2000, COMPARED TO FISCAL 1999, WAS PRIMARILY DUE TO THE SALE OF
$35.4 MILLION IN ACCOUNTS RECEIVABLE UNDER THE ASSET SALE AGREEMENT
MENTIONED ABOVE AND INCREASES IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES
OFFSET PARTIALLY BY AN INCREASE IN INVENTORIES AND A DECREASE IN OPERATING
INCOME.
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES WERE $254.2
MILLION, ($22.6) MILLION AND ($19.6) MILLION FOR THE FISCAL YEARS 2001,
2000 AND 1999, RESPECTIVELY. THE INCREASE IN CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES FOR FISCAL 2001, WHEN COMPARED TO FISCAL 2000,
REFLECTS THE NET PROCEEDS FROM BORROWINGS TO FINANCE THE ACQUISITION OF WLR
FOODS. THE INCREASE IN CASH USED IN FINANCING ACTIVITIES FOR FISCAL 2000,
WHEN COMPARED TO FISCAL 1999 PRIMARILY REFLECTS THE NET PAYMENTS ON NOTES
PAYABLE AND LONG-TERM FINANCING AND DEBT RETIREMENTS.
ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price
of feed ingredients, foreign currency exchange rates and interest rates as
discussed below. The sensitivity analyses presented do not consider the
effects that such adverse changes may have on overall economic activity,
nor do they consider additional actions our management may take to mitigate
our exposure to such changes. Actual results may differ.
FEED INGREDIENTS
We purchase certain commodities, primarily corn and soybean meal. As a
result, our earnings are affected by changes in the price and availability
of such feed ingredients. As market conditions dictate, we will from time
to time lock-in future feed ingredient prices using various hedging
techniques, including forward purchase agreements with suppliers and
futures contracts. We do not use such financial instruments for trading
purposes and are not a party to any leveraged derivatives. Market risk is
estimated as a hypothetical 10% increase in the weighted-average cost of
our primary feed ingredients as of September 29, 2001. Based on our feed
consumption during fiscal 2001, such an increase would have resulted in an
increase to cost of sales of approximately $60.2 million, excluding the
impact of any hedging in that period. As of September 29, 2001, we had
hedged 9.1% of our 2002 feed requirements.
FOREIGN CURRENCY
Our earnings are affected by foreign exchange rate fluctuations related
to the Mexican peso net monetary position of our Mexico subsidiaries
denominated in Mexican pesos. We manage this exposure primarily by
attempting to minimize our Mexican peso net monetary position, but from
time to time we have also considered executing hedges to help minimize this
exposure. Such instruments, however, have historically not been
economically feasible. We are also exposed to the effect of potential
exchange rate fluctuations to the extent that amounts are repatriated from
Mexico to the United States. However, we currently anticipate that the cash
flows of our Mexico subsidiaries will continue to be reinvested in our
Mexico operations. In addition, the Mexican peso exchange rate can directly
and indirectly impact our results of operations and financial position in
several manners, including potential economic recession in Mexico resulting
from a devalued peso. The impact on our financial position and results of
operations of a hypothetical change in the exchange rate between the U.S.
dollar and the Mexican peso cannot be reasonably estimated. Foreign
currency exchange gains and losses, representing the change in the U.S.
dollar value of the net monetary assets of our Mexico subsidiaries
denominated in Mexican pesos, was a loss of $0.1 million in fiscal 2001 and
a gain of $0.1 million and $0.2 million in fiscal 1999 and 2000,
respectively. On November 15, 2001, the Mexican peso closed at 9.20 to 1
U.S. dollar, strengthening from 9.54 at September 29, 2001. No assurance
can be given as to how future movements in the peso could affect our future
earnings.
INTEREST RATES
Our earnings are also affected by changes in interest rates due to the
impact those changes have on our variable-rate debt instruments. The
acquisition of WLR Foods substantially increased our outstanding balances
of variable rate debt. We have variable-rate debt instruments representing
approximately 39.6% of our long-term debt at September 29, 2001. Holding
other variables constant, including levels of indebtedness, a 25 basis
points increase in interest rates would have increased our interest expense
by $0.5 million for fiscal 2001. These amounts are determined by
considering the impact of the hypothetical interest rates on our variable-
rate long-term debt at September 29, 2001.
Market risk for fixed-rate long-term debt is estimated as the
potential increase in fair value resulting from a hypothetical 25 basis
points decrease in interest rates and amounts to approximately $3.3 million
as of September 29, 2001, using discounted cash flow analysis.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 "GOODWILL AND OTHER INTANGIBLE
ASSETS" ("SFAS No. 142"). SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001 and requires that goodwill and certain
intangible assets will no longer be amortized upon adoption. SFAS No. 142
also establishes new standards for evaluating impairment of goodwill and
certain intangible assets. The adoption of this statement is not expected
to have a material effect on the Company.
On October 1, 2000, we adopted Financial Accounting Standards Board
Statement ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. This statement requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through earnings. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings, or
recognized in other comprehensive income (loss) until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value is recognized in earnings. The adoption of SFAS No. 133 had no
impact on the Company as of October 1, 2000.
IMPACT OF INFLATION
Due to moderate inflation in the U.S. and our rapid inventory turnover
rate, the results of operations have not been significantly affected by
inflation during the past three-year period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements together with the report of
independent auditors, and financial statement schedule are included on
pages 49 through 68 of this document. Financial statement schedules other
than those included herein have been omitted because the required
information is contained in the consolidated financial statement or related
notes, or such information is not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Reference is made to "Election of Directors" on pages 3 through 5 of the
Company's Proxy Statement for its 2001 Annual Meeting of Stockholders,
which section is incorporated herein by reference.
Reference is made to "Compliance with Section 16(a) of the Exchange Act"
on page 9 of the Company's Proxy Statement for its 2001 Annual Meeting of
Stockholders, which section is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to Items 11, 12 and 13 is incorporated by
reference from the sections entitled "Security Ownership", "Election of
Directors", "Executive Compensation" and "Certain Transactions" of the
Company's Proxy Statement for its 2001 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) The financial statements listed in the accompanying index to
financial statements and schedules are filed as part of this report.
(2) All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not required under
the related instructions or are not applicable and therefore have
been omitted.
(3) The financial statements schedule entitled "Valuation and
Qualifying Accounts and Reserves" is filed as part of this report on
page 67.
(4) Exhibits
(b) Reports on Form 8-K
(1) Pilgrim's Pride filed a Form 8-K on July 23, 2001, to report
the proposed offering of $200,000,000 aggregate principal amount of
its senior unsecured notes due in 2011 (the "Notes") under its
registration statement on Form S-3 (No. 333-84861), (The
"Registration Statement"), and for the purpose of filing as an
exhibit the Form T-1 of The Chase Manhattan Bank in connection with
the Registration Statement and the public offering of the Notes.
(2) Pilgrim's Pride filed a Form 8-K on August 9, 2001, to report
the sale of $200,000,000 aggregate principal amount of its 9 5/8%
Notes (the "9 5/8% Notes") due September 15, 2011 under the
Registration Statement, and to file as exhibits the Underwriting
Agreement, the Indenture, the First Supplemental Indenture, the form
of Note and the opinion of Baker & McKenzie in connection with the
Registration Statement and the public offering of the 9 5/8% Notes.
(c) Exhibits
EXHIBIT NUMBER
2.1 Agreement and Plan of Reorganization dated September 15, 1986, by
and among Pilgrim's Pride Corporation, a Texas corporation;
Pilgrim's Pride Corporation, a Delaware corporation; and Doris
Pilgrim Julian, Aubrey Hal Pilgrim, Paulette Pilgrim Rolston,
Evanne Pilgrim, Lonnie "Bo" Pilgrim, Lonnie Ken Pilgrim, Greta
Pilgrim Owens and Patrick Wayne Pilgrim (incorporated by reference
from Exhibit 2.1 to the Company's Registration Statement on Form
S-1 (No. 33-8805) effective November 14, 1986).
2.2 Agreement and Plan of Merger dated September 27, 2000
(incorporated by reference from Exhibit 2 of WLR Foods, Inc.'s
Current Report on Form 8-K (No. 000-17060) dated September 28,
2000).
3.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 of the Company's Registration Statement
on Form S-1 (No. 33-8805) effective November 14, 1986).
3.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride
Corporation, a Delaware Corporation, effective May 14,1999
(incorporated by reference from Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the three months ended July 3,
1999).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 1 of the Company's
Form 8-A, filed with the SEC on July 20, 1999).
4.1 Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 of the Company's Registration Statement
on Form S-1 (No. 33-8805) effective November 14, 1986).
4.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride
Corporation, a Delaware Corporation, effective May 14, 1999,
(incorporated by reference from Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the three months ended July 3,
1999).
4.3 Form of Indenture between the Company and Ameritrust Texas
National Association relating to the Company's 10 7/8% Senior
Subordinated Notes Due 2003 (incorporated by reference from
Exhibit 4.6 of the Company's Registration Statement on Form S-1
(No. 33-59626) filed on March 16, 1993).
4.4 Form of 10 7/8% Senior Subordinated Note Due 2003 (incorporated by
reference from Exhibit 4.8 of the Company's Registration Statement
on Form S-1 (No. 33-61160) filed on June 16, 1993).
4.5 Certificated of Amendment to Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 1 of the Company's
Form 8-A, filed with the SEC on July 20, 1999).
4.6 Indenture dated as of August 9, 2001 by and between Pilgrim's
Pride Corporation and The Chase Manhattan Bank relating to
Pilgrim's Pride's 9 5/8% Senior Notes Due 2011 (incorporated by
reference from Exhibit 4.1 to Pilgrim's Pride's Current Report on
Form 8-K (No. 001-09273) dated August 9, 2001).
4.7 First Supplemental Indenture dated as of August 9, 2001 by and
between Pilgrim's Pride Corporation and The Chase Manhattan Bank
relating to Pilgrim's Pride's 9 5/8% Senior Notes Due 2011
(incorporated by reference from Exhibit 4.2 to Pilgrim's Pride's
Current Report on Form 8-K (No. 001-09273) dated August 9, 2001).
4.8 Form of 9 5/8% Senior Note Due 2011 (incorporated by reference
from Exhibit 4.3 to Pilgrim's Pride's Current Report on Form 8-K
(No. 001-09273) dated August 9, 2001).
10.1 Pilgrim's Industries, Inc. Profit Sharing Retirement Plan,
restated as of July 1, 1987 (incorporated by reference from
Exhibit 10.1 of the Company's Form 8 filed on July 1, 1992).
10.2 Bonus Plan of the Company (incorporated by reference from Exhibit
10.2 to the Company's Registration Statement on Form S-1 (No. 33-
8805) effective November 14, 1986).
10.3 Employee Stock Investment Plan of the Company (incorporated by
reference from Exhibit 10.28 of the Company's Registration
Statement on Form S-1 (No. 33-21057) effective May 2, 1988).
10.4 Second Amended and Restated Loan and Security Agreement dated July
31, 1995, by and among the Company, the banks party thereto and
Creditanstalt-Bankverein, as agent (incorporated by reference from
Exhibit 10.38 of the Company's Annual Report on Form 10-K for the
fiscal year ended September 28, 1996).
10.5 Revolving Credit Loan Agreement dated March 27, 1995 by and among
the Company and Agricultural Production Credit Association
(incorporated by reference from Exhibit 10.39 of the Company's
Annual Report on Form 10-K for the fiscal year ended September 28,
1996).
10.6 First Supplement to Revolving Credit Loan Agreement dated July 6,
1995 by and among the Company and Agricultural Production Credit
Association (incorporated by reference from Exhibit 10.40 of the
Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1996).
10.7 Second Supplement to Revolving Credit Loan Agreement dated June
28, 1996 by and among the Company and Agricultural Production
Credit Association (incorporated by reference from Exhibit 10.44
of the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1996).
10.8 Third Supplement to Revolving Credit Loan Agreement dated August
22, 1996 by and among the Company and Agricultural Production
Credit Association (incorporated by reference from Exhibit 10.45
of the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1996).
10.9 Note Purchase Agreement dated April 14, 1997 by and between John
Hancock Mutual Life Insurance Company and Signature 1A (Cayman),
Ltd. And the Company (incorporated by reference from Exhibit 10.46
of the Company's Quarterly Report on Form 10-Q for the three
months ended March 29, 1997).
10.10 Aircraft Lease Extension Agreement between B.P. Leasing Co., (L.A.
Pilgrim, Individually) and Pilgrim's Pride Corporation (formerly
Pilgrim's Industries, Inc.) effective November 15, 1992
(incorporated by reference from Exhibit 10.48 of the Company's
Quarterly Report on Form 10-Q for the three months ended March 29,
1997).
10.11 Broiler Grower Contract dated May 6, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farm 30) (incorporated by
reference from Exhibit 10.49 of the Company's Quarterly Report on
Form 10-Q for the three months ended March 29, 1997).
10.12 Commercial Egg Grower Contract dated May 7, 1997 between Pilgrim's
Pride Corporation and Pilgrim Poultry G.P. (incorporated by
reference from Exhibit 10.50 of the Company's Quarterly Report on
Form 10-Q for the three months ended March 29, 1997).
10.13 Agreement dated October 15, 1996 between Pilgrim's Pride
Corporation and Pilgrim Poultry G.P. (incorporated by reference
from Exhibit 10.23 of the Company's Quarterly Report on Form 10-Q
for the three months ended January 2, 1999).
10.14 Heavy Breeder Contract dated May 7, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farms 44, 45 & 46)
(incorporated by reference from Exhibit 10.51 of the Company's
Quarterly Report on Form 10-Q for the three months ended March 29,
1997).
10.15 Broiler Grower Contract dated January 9, 1997 by and between
Pilgrim's Pride and O.B. Goolsby, Jr. (incorporated by reference
from Exhibit 10.25 of the Company's Registration Statement on Form
S-1 (No. 333-29163) effective June 27, 1997).
10.16 Broiler Grower Contract dated January 15, 1997 by and between
Pilgrim's Pride Corporation and B.J.M. Farms. (incorporated by
reference from Exhibit 10.26 of the Company's Registration
Statement on Form S-1 (No. 333-29163) effective June 27, 1997).
10.17 Broiler Grower Agreement dated January 29, 1997 by and between
Pilgrim's Pride Corporation and Clifford E. Butler (incorporated
by reference from Exhibit 10.27 of the Company's Registration
Statement on Form S-1 (No. 333-29163) effective June 27, 1997).
10.18 Second Amendment to Second Amended and Restated Loan and Security
Agreement dated September 18, 1997 by and among the Company, the
banks party thereto and Creditanstalt-Bankverein, as agent.
10.19 Revolving Credit Agreement dated March 2, 1998 by and between
Pilgrim's Pride de Mexico, S.A. de C.V., (the borrower); Avicola
Pilgrim's Pride de Mexico, S.A. de C.V. (the Mexican Guarantor),
Pilgrim's Pride Corporation (the U.S. Guarantor), and COAMERICA
Bank (the bank), (incorporated by reference from Exhibit 10.32 of
the Company's Quarterly report on form 10-Q for the three months
ended March 28, 1998.
10.20 Receivables Purchase Agreement between Pilgrim's Pride Funding
Corporation, as Seller, Pilgrim's Pride Corporation, as Servicer,
Pooled Accounts Receivable Capital Corporation, as Purchaser, and
Nesbitt Burns Securities Inc., as Agent (incorporated by reference
from Exhibit 10.33 of the Company's Quarterly report on form 10-Q
for the three months ended June 27, 1998).
10.21 Purchase and Contribution Agreement Dated as of June 26, 1998
between Pilgrim's Pride Funding Corporation and Pilgrim's Pride
Corporation (incorporated by reference from Exhibit 10.34 of the
Company's Quarterly report on form 10-Q for the three months ended
June 27, 1998).
10.22 Second Amendment to Security Agreement Re: Accounts Receivable,
Farm Products and Inventory between Pilgrim's Pride Corporation
and Harris Trust and Savings Bank (incorporated by reference from
Exhibit 10.35 of the Company's Quarterly report on form 10-Q for
the three months ended June 27, 1998).
10.23 Second Amended and Restated Secured Credit Agreement between
Pilgrim's Pride Corporation and Harris Trust and Savings Bank,
individually and as agent and the lenders from time to time
parties hereto as lenders, dated November 5, 1999.
10.24 Guaranty Fee Agreement between Pilgrim's Pride Corporation and
Pilgrim Interests, LTD., dated June 11, 1999.
10.25 Heavy Breeder Contract dated October 27, 1999 between Pilgrim's
Pride Corporation and David Van Hoose (Timberlake Farms).
10.26 Credit Agreement dated December 14, 1999 by and between Pilgrim's
Pride Corporation and Cobank, ACB, individually and as agent, and
the lenders from time to time parties thereto as lenders.
10.27 Revolving Credit Agreement, made as of September 7, 2001 by and
between Grupo Pilgrim's Pride Funding S. de R.L. de C.V., Comerica
Bank, and Comerica Bank Mexico, S.A., Institucion de Banca
Multiple.*
10.28 Third Amendment to Second Amended and Restated Secured Credit
Agreement dated as of November 5, 1999, as amended, between
Pilgrim's Pride Corporation and Harris Trust and Savings Bank,
individually and as agent and the lenders from time to time
parties thereto as lenders, dated as of September 26, 2001.*
12 Ratio of Earnings to Fixed Charges for the years ended September
29, 2001, September 30, 2000, October 2, 1999, September 26, 1998
and September 27, 1997.*
21 Subsidiaries of Registrant.*
23 Consent of Ernst & Young LLP.*
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the
21th day of November 2001.
PILGRIM'S PRIDE CORPORATION
/s/ Richard A. Cogdill
By:
Richard A. Cogdill
Chief Financial Officer
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
________________________ Chairman of the Board 11/21/2001
Lonnie "Bo" Pilgrim
_______________________ Vice Chairman of the Board 11/21/2001
Clifford E. Butler
________________________ Chief Executive Officer 11/21/2001
David Van Hoose President
Chief Operating Officer
Director
(Principal Executive Officer)
_______________________ Executive Vice President 11/21/2001
Richard A. Cogdill Chief Financial Officer
Secretary and Treasurer
Director
(Principal Financial and Accounting
Officer)
SIGNATURE TITLE DATE
_______________________ Senior Vice President 11/21/2001
Lonnie Ken Pilgrim Director of Transportation
Director
_______________________ Director 11/21/2001
Charles L. Black
_______________________ Director 11/21/2001
S. Key Coker
______________________ Director 11/21/2001
Vance C. Miller
______________________ Director 11/21/2001
James J. Vetter, Jr.
_______________________ Director 11/21/2001
Donald L. Wass, Ph.D.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders, the Board of Directors and
Pilgrim's Pride Corporation
We have audited the accompanying consolidated balance sheets of
Pilgrim's Pride Corporation and subsidiaries as of September 29, 2001 and
September 30, 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended September 29, 2001. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pilgrim's Pride Corporation as of September 29, 2001 and September 30,
2000, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended September 29, 2001, in
conformance with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements, taken as a
whole, presents fairly in all material respects the information set forth
therein.
Dallas, Texas Ernst & Young LLP
October 29, 2001
{Consolidated Balance Sheets
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT SHARE AND PER SEPTEMBER 29, SEPTEMBER 30,
SHARE DATA) 2001 2000
Assets
Current Assets :
Cash and cash equivalents $ 20,916 $ 28,060
Trade accounts and other
receivables, less allowance
for doubtful accounts 95,022 50,286
Inventories 314,400 181,237
Other current assets 12,934 9,387
Total Current Assets 443,272 268,970
OTHER ASSETS 20,067 18,576
PROPERTY, PLANT AND EQUIPMENT:
Land 36,350 26,137
Buildings, machinery and equipment 929,922 565,034
Autos and trucks 53,264 48,187
Construction-in-progress 71,427 68,743
1,090,963 708,101
Less accumulated depreciation 338,607 290,227
752,356 417,874
$1,215,695 $705,420
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 151,265 $105,078
Accrued expenses 83,558 34,704
Current maturities of long-term debt 5,099 4,657
Total Current Liabilities 239,922 144,439
LONG-TERM DEBT, LESS CURRENT MATURITIES 467,242 165,037
DEFERRED INCOME TAXES 126,710 52,496
MINORITY INTEREST IN SUBSIDIARY 889 889
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 5,000,000 shares; none
issued -- --
Common stock - Class A, $.01 par value,
authorized 100,000,000 shares; and
13,794,529 shares issued and outstanding
in 2001 and 2000, respectively; 138 138
Common stock - Class B, $.01 par value,
authorized 60,000,000 shares; 27,589,250
issued and outstanding in 2001 and 2000 276 276
Additional paid-in capital 79,625 79,625
Retained earnings 302,758 264,088
Accumulated other comprehensive
income (loss) (297) --
Less treasury stock, 271,100 shares (1,568) (1,568)
Total Stockholders' Equity 380,932 342,559
$1,215,695 $705,420
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE YEARS ENDED SEPTEMBER 29, 2001
2001 2000 1999
NET SALES $2,214,712 $1,499,439 $1,357,403
COST AND EXPENSES:
Cost of sales 2,000,762 1,333,611 1,171,695
Selling, general and administrative 119,408 85,340 76,204
2,120,170 1,418,951 1,247,899
Operating Income 94,542 80,488 109,504
OTHER EXPENSES (INCOME):
Interest expense, net 30,775 17,779 17,666
Foreign exchange (gain) loss 122 (152) (50)
Miscellaneous, net 351 75 984
31,248 17,702 18,600
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE 63,294 62,786 90,904
INCOME TAX EXPENSE 21,263 10,442 25,651
INCOME BEFORE EXTRAORDINARY CHARGE 42,031 52,344 65,253
EXTRAORDINARY CHARGE, NET OF TAX 894 -- --
NET INCOME $41,137 $52,344 $65,253
INCOME PER COMMON SHARE BEFORE EXTRAORDINARY
CHARGE - BASIC AND DILUTED $ 1.02 $ 1.27 $ 1.58
EXTRAORDINARY CHARGE, NET OF TAX (.02) -- --
NET INCOME PER COMMON SHARE-BASIC
AND DILUTED $ 1.00 $ 1.27 $ 1.58
See Notes to Consolidated Financial Statements
{Consolidated Statements of Stockholders' Equity
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
SHARES OF TOTAL ADDITIONAL OTHER
COMMON STOCK PAR PAID-IN RETAINED COMPREHENSIVE TREASURY
CLASS A CLASS B VALUE CAPITAL EARNINGS LOSS STOCK TOTAL
Balance at September
26, 1998 -- 27,589,250 $276 $79,763 $150,832 $ -- $ -- $230,871
Dividend of Class A
Common Stock 13,794,529 -- 138 (138)
Net income for year 65,253 65,253
Cash dividends declared
($.045 per share) (1,865) (1,865)
Balance at October 2,
1999 13,794,529 27,589,250 414 79,625 214,220 294,259
Treasury stock
purchased (271,100) (1,568) (1,568)
Net income for year 52,344 52,344
Cash dividends declared
($.06 per share) (2,476) (2,476)
Balance at September 30,
2000 13,523,426 27,589,250 414 79,625 264,088 (1,568) 342,559
Net income for year 41,137 41,137
Other comprehensive income (loss):
Losses on commodity hedging (994) (994)
Hedging losses reclassified as earnings 697 697
Total comprehensive income 40,840
Cash dividends declared
($.06 per share) (2,467) (2,467)
Balance at September 29,
2001 13,523,429 27,589,250 $414 $79,625 $302,758 ($297) ($1,568)$380,932
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Pilgrim's Pride Corporation
(IN THOUSANDS) THREE YEARS ENDED SEPTEMBER 29, 2001
2001 2000 1999
Cash Flows From Operating Activities:
Net income $41,137 $52,344 $65,253
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 55,390 36,027 34,536
Loss on property disposals 301 1,093 2,668
Deferred income taxes 12,737 444 (5,595)
Extraordinary charge 1,434 -- --
Changes in operating assets and
liabilities:
Accounts and other receivables 10,445 34,082 (2,555)
Inventories (26,952) (13,202) (26,351)
Other current assets (4,494) 245 (474)
Accounts payable and accrued expenses (1,030) 19,982 14,195
Other (1,135) (212) (225)
Cash Provided by Operating Activities 87,833 130,803 81,452
INVESTING ACTIVITIES:
Acquisitions of property, plant
and equipment (112,632) (92,128) (69,649)
Business acquisition (239,539) -- --
Proceeds from property disposals 2,472 2,319 1,178
Other, net 571 (6,055) (2,822)
Cash Used in Investing Activities (349,128) (95,864) (71,293)
FINANCING ACTIVITIES:
Borrowing for acquisition 285,070 -- --
Repayment on WLR Foods debt (45,531) -- --
Proceeds from notes payable to banks 136,000 71,000 24,500
Repayments on notes payable to banks (136,000) (71,000) (24,500)
Proceeds from long-term debt 425,423 20,047 15,258
Payments on long-term debt (408,316) (38,622) (33,027)
Purchase of treasury stock -- (1,568) --
Cash dividends paid (2,467) (2,476) (1,865)
Cash Provided By (Used In)Financing
Activities 254,179 (22,619) (19,634)
Effect of exchange rate changes on
cash and cash equivalents (28) 37 53
Increase (decrease) in cash and cash
equivalents (7,144) 12,357 (9,422)
Cash and cash equivalents at beginning
of year 28,060 15,703 25,125
Cash and cash equivalents at end of
year $20,916 $28,060 $15,703
SUPPLEMENTAL DISCLOSURE INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $26,948 $17,178 $18,130
Income taxes $ 7,255 $13,258 $31,835
See Notes to Consolidated Financial Statements
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SEPTEMBER 29, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PILGRIM'S PRIDE CORPORATION (REFERRED TO HEREIN AS "THE COMPANY", "WE",
"US", "OUR", OR SIMILAR TERMS) IS THE SECOND LARGEST PRODUCER OF POULTRY IN
BOTH THE UNITED STATES AND MEXICO. IN THE UNITED STATES, WE PRODUCE BOTH
PREPARED AND FRESH CHICKEN AND TURKEY, WHILE IN MEXICO, WE PRODUCE
EXCLUSIVELY FRESH CHICKEN. THROUGH VERTICAL INTEGRATION, WE CONTROL THE
BREEDING, HATCHING AND GROWING OF CHICKENS AND TURKEYS AND THE PROCESSING
AND PREPARATION, PACKAGING AND SALE OF OUR PRODUCT LINES.
OUR PREPARED CHICKEN PRODUCTS INCLUDE PORTION-CONTROLLED BREAST FILLETS,
TENDERLOINS AND STRIPS, DELICATESSEN PRODUCTS, FRANKFURTERS, SALADS, FORMED
NUGGETS AND PATTIES AND BONE-IN CHICKEN PARTS. THESE PRODUCTS ARE SOLD
EITHER REFRIGERATED OR FROZEN AND MAY BE FULLY COOKED, PARTIALLY COOKED OR
RAW. IN ADDITION, THESE PRODUCTS ARE BREADED OR NON-BREADED AND EITHER
PRE-MARINATED OR NON-MARINATED.
THE COMPANY ALSO SELLS FRESH CHICKEN PRODUCTS TO THE FOODSERVICE AND RETAIL
MARKETS. OUR FRESH CHICKEN PRODUCTS CONSIST OF REFRIGERATED (NON-FROZEN)
WHOLE OR CUT-UP CHICKEN, EITHER PRE-MARINATED OR NON-MARINATED, AND PRE-
PACKAGED CHICKEN, WHICH INCLUDES VARIOUS COMBINATIONS OF FRESHLY
REFRIGERATED, WHOLE CHICKENS AND CHICKEN PARTS.
On January 27, 2001, we acquired WLR Foods, Inc. (formerly Nasdaq: WLRF)
for $239.5 million and the assumption of $45.5 million of indebtedness. The
purchase price and refinancing were provided by borrowings on the Company's
existing secured term borrowing facility (see Note C). WLR operations have
been included since the acquisition on January 27, 2001. The acquisition
is being accounted for under the purchase method of accounting and the
purchase price, which is still preliminary, has been allocated based on the
estimated fair value of assets and liabilities. THE WLR FOODS ACQUISITION
PROVIDED US WITH CHICKEN AND TURKEY PROCESSING FACILITIES IN THE EASTERN
UNITED STATES.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SEPTEMBER 29, 2001
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information has been presented as if the
acquisition of WLR Foods, Inc. had occurred as of the beginning of each
period presented. In addition, certain reclassifications have been made to
the WLR historical financial statements to conform to the presentation used
by the Company.
IN THOUSANDS, EXCEPT PER SHARE DATA YEAR ENDED
2001 2000
Net Sales $2,479,259 $2,311,666
Operating Income 99,128 86,017
Interest Expense, Net 39,790 44,820
Income Before Taxes 58,607 42,209
Income before Extraordinary Charge 39,171 39,792
Net Income $ 38,277 $ 39,792
Income per Common Share before
Extraoridnary Charge - Basic and Diluted $ 0.95 $ 0.97
Extraordinary Charge, Net of Tax (0.02) --
Net Income per Common Share $ 0.93 $ 0.97
Other Information:
Depreciation and Amortization $ 64,565 $ 63,892
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Pilgrim's
Pride Corporation and its wholly and majority owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
The Company reports on the basis of a 52/53-week fiscal year, which ends on
the Saturday closest to September 30. As a result, fiscal year 1999 had 53
weeks, while fiscal years 2001 and 2000 each had 52 weeks.
The financial statements of the Company's Mexico subsidiaries are
remeasured as if the U.S. dollar were the functional currency.
Accordingly, assets and liabilities of the Mexico subsidiaries are
translated at end-of-period exchange rates, except for non-monetary assets,
which are translated at equivalent dollar costs at dates of acquisition
using historical rates. Operations are translated at average exchange
rates in effect during the period. Foreign exchange losses are separately
stated as a component of "Other Expenses (Income)" in the Consolidated
Statement of Income.
REVENUE RECOGNITION
The Company generally recognizes revenue when the product is shipped to the
customer and shipping and handling expenses are included in cost of goods
sold.
CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Live poultry inventories are stated at the lower of cost or market and
breeder hens at the lower of cost, less accumulated amortization, or
market. The costs associated with breeder hens are accumulated up to the
production stage and amortized over the productive lives using the unit-of-
production method. Finished poultry products, feed, eggs and other
inventories are stated at the lower of cost (first-in, first-out method) or
market. Occasionally, the Company hedges a portion of its purchases of
major feed ingredients using futures contracts to minimize the risk of
adverse price fluctuations. The changes in market value of such agreements
have a high correlation to the price changes of the feed ingredients being
hedged. Gains and losses on the hedge transactions are deferred and
recognized as a component of cost of sales when products are sold. Gains
and losses on the futures contracts would be recognized immediately were
the changes in the market value of the agreements cease to have a high
correlation to the price changes of the feed ingredients being hedged.
Statement of Accounting Standards No. 133; ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), was adopted on October 1,
2000. No transitional impact resulted from the adoption of SFAS 133. The
Company recognizes all derivatives on the balance sheet at fair value.
Derivatives that are not hedges are adjusted to fair value through income.
If the derivative is a hedge, changes in the fair value of derivatives are
offset against the change in fair value of the hedged assets, liabilities,
or firm commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value is immediately recognized in
earnings. No significant ineffectiveness was recognized in 2001. The
Company evaluates the effectiveness of the risk reduction and correlation
criteria based on forecasted future purchases (primarily corn and soybean)
and continues to evaluate the effectiveness of the hedge until the
transaction is closed.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of these
assets. Depreciation expense was $54.4 million, $34.7 million and $33.4
million in 2001, 2000 and 1999, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME
As of September 29, 2001, accumulated other comprehensive income consists
of mark-to-market adjustments on open commodity future contracts.
Comprehensive income for the year ended September 29, 2001 was net of the
related tax benefit of $179,000.
NET INCOME PER COMMON SHARE
Net income per share is based on the weighted average number of shares of
common stock outstanding during the year. The weighted average number of
shares outstanding (basic and diluted) and per-share amounts included
herein were 41,112,679 in 2001, 41,289,142 in 2000 and 41,383,779 in 1999
after adjustment for the common stock dividend referred to in Note F.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 142 "GOODWILL AND OTHER INTANGIBLE ASSETS"
(SFAS 142). SFAS 142 is effective for fiscal years beginning after
December 15, 2001 and requires that goodwill and certain intangible assets
will no longer be amortized upon adoption. SFAS 142 also establishes new
standards for evaluating impairment of goodwill and certain intangible
assets. The adoption of this statement is not expected to have a material
effect on the Company.
NOTE B - INVENTORIES
Inventories consist of the following:
(IN THOUSANDS) 2001 2000
Chicken:
Live chicken and hens $97,073 $72,438
Feed, eggs and other 77,970 54,627
Finished chicken products 70,493 54,172
245,536 181,237
Turkey:
Live turkey and hens 30,694 --
Feed, eggs and other 3,906 --
Finished turkey products 34,264 --
68,864 --
Total Inventory $314,400 $181,237
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
At September 29, 2001, the Company maintained $130.0 million in revolving
credit facilities and $400.0 million in secured revolving/term borrowing
facilities. The $400.0 million revolving/term borrowing facilities provide
for $285.0 million and $115.0 million of 10 year and 7 year commitments,
respectively. Borrowings under these facilities are split pro rata between
the 10 year and 7 year maturities as they occur. The credit facilities
provide for interest at rates ranging from LIBOR plus five-eighths percent
to LIBOR plus two and three-quarters percent, depending upon the Company's
total debt to capitalization ratio. Interest rates on debt outstanding
under these facilities at September 29, 2001 ranged from LIBOR plus one and
one-quarter percent to LIBOR plus two and one-quarter percent. These
facilities are secured by inventory and fixed assets or are unsecured. At
September 29, 2001, $86.0 million was available under the revolving credit
facilities and $225.0 million was available under the term borrowing
facilities. Annual maturities of long-term debt for the five years
subsequent to September 29, 2001 are: 2002 -- $5.1 million; 2003 -- $7.1
million; 2004 -- $16.2 million; 2005 -- $15.6 million; and 2006 -- $55.0
million.
On June 29, 1999, the Camp County Industrial Development Corporation issued
$25.0 million of variable-rate environmental facilities revenue bonds
supported by letters of credit obtained by the Company. The Company may
borrow from these proceeds over the construction period of its new sewage
and solid waste disposal facilities at a poultry by-products plant to be
built in Camp County, Texas. The Company is not required to borrow the
full amount of the proceeds from the bonds. All amounts borrowed from
these funds will be due in 2029. The amounts the Company borrows will be
reflected as debt when received from the Camp County Industrial Development
Corporation. The interest rates on amounts borrowed will closely follow
the tax-exempt commercial paper rates. Presently, there are no borrowings
outstanding under these bonds.
On August 9, 2001, the Company issued $200.0 million in senior unsecured
notes with an interest rate of 9 5/8% maturing on September 15, 2011. The
proceeds from note offering were used to redeem the remaining $90.8 million
outstanding of our 10 7/8% senior subordinated notes due 2003. The balance
of the proceeds was used to reduce outstanding under our $400.0 million
revolving/term borrowing facility. As a result of the Company's decision
to retire all of the 10 7/8% Senior Subordinated Notes due 2003, the
Company has recorded an extraordinary loss of $894,000, net of a tax
benefit of $539,000.
On September 7, 2001, we amended and restated our revolving credit
agreement for Mexico, increasing the commitment from $20.0 million to $30.0
million. The entire amount matures in three years. The facility provides
for interest rates ranging from LIBOR plus one and one-quarter to LIBOR
plus one and one-half percent. At September 29, 2001, $30.0 million was
outstanding, the proceeds of which were used to reduce existing credit
facilities.
The Company is required, by certain provisions of its debt agreements, to
maintain levels of working capital and net worth, to limit dividends to a
maximum of $3.4 million per year, and to maintain various fixed charge,
leverage, current and debt-to-equity ratios. Substantially all of the
Company's domestic property, plant and equipment is pledged as collateral
on its long-term debt and credit facilities. The Mexico debt is secured by
accounts receivable, inventories and certain fixed assets.
Total interest was $38.9 million, $21.7 million and $20.8 million in 2001,
2000 and 1999, respectively. Interest related to new construction
capitalized in 2001, 2000 and 1999 was $7.2 million, $3.3 million and $2.0
million, respectively.
LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
(IN THOUSANDS) Maturity 2001 2000
Senior unsecured notes, interest at 9 5/8% 2011 $200,000 $ -
Revolving term/credit facility - 10 year
tranche at LIBOR plus 2 .25% 2009 124,688 5,600
Notes payable to an insurance company
at 7.07% - 7.21% 2006 65,474 70,121
Revolving term/credit facility - 7 year
tranche at LIBOR plus 2.0% 2006 50,313 2,400
Notes payable to a bank at 2004 30,000 --
LIBOR plus 1.25 to 1.50
Other notes payable Various 1,866 1,078
Senior subordinated notes,
interest at 10 7/8% 2003 -- 90,495
472,341 169,694
Less current maturities 5,099 4,657
$467,242 $165,037
The fair value of long-term debt, at September 29, 2001 and September 30,
2000 based upon quoted market prices for the same or similar issues where
available or by using discounted cash flow analysis, was approximately
$469.6 million and $166.2 million, respectively.
NOTE D - INCOME TAXES
Income before income taxes after allocation of certain expenses to foreign
operations for 2001, 2000 and 1999 was $57.8 million, $32.7 million and
$76.6 million, respectively, for U.S. operations and $5.5 million, $30.0
million and $14.3 million, respectively, for foreign operations. The
provisions for income taxes are based on pre-tax financial statement
income.
The components of income tax expense (benefit) are set forth below:
(IN THOUSANDS) 2001 2000 1999
Current:
Federal $6,045 $ 9,239 $28,449
Foreign 1,594 138 318
State and other 348 621 2,480
7,987 9,998 31,247
Deferred 12,737 444 (5,596)
$20,724 $10,442 $25,651
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SEPTEMBER 29, 2001
The following is a reconciliation between the statutory U.S. federal
income tax rate and the Company's effective income tax rate:
(IN THOUSANDS) 2001 2000 1999
Federal income tax rate 35.0% 35.0% 35.0%
State tax rate, net 2.4 1.4 1.3
Difference in U.S. statutory tax rate and
Mexico's effective tax rate (3.9) (19.8) (8.1)
33.5% 16.6% 28.2%
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
(IN THOUSANDS) 2001 2000
Deferred tax liabilities:
Tax over book depreciation $97,667 $24,390
Inventory valuation 27,926 --
Prior use of cash accounting 26,625 27,470
Other 2,419 2,849
Total deferred tax liabilities 154,637 54,709
Deferred tax assets:
Expenses deductible in different years 23,027 8,469
Total deferred tax asset 23,027 8,469
Net deferred tax liabilities $131,610 $46,240
The Company has not provided any U.S. deferred income taxes on the
undistributed earnings of its Mexico subsidiaries based upon its
determination that such earnings will be indefinitely reinvested. As of
September 29, 2001, the cumulative undistributed earnings of these
subsidiaries were approximately $164.4 million. If such earnings were not
considered indefinitely reinvested, deferred U.S. and foreign income taxes
would have been provided, after consideration of estimated foreign tax
credits. However, determination of the amount of deferred federal and
foreign income taxes is not practical.
NOTE E - ACCOUNTS RECEIVABLE
The Company does not believe it has significant concentrations of credit
risk in its accounts receivable, which are generally unsecured. Credit
evaluations are performed on all significant customers and updated as
circumstances dictate. Allowances for doubtful accounts were $3.9 million
and $4.1 million at September 29, 2001 and September 30, 2000,
respectively.
On June 26, 1998, the Company entered into an Asset Sale Agreement to sell
up to $60.0 million of accounts receivable. In connection with the Asset
Sale Agreement, the Company sells, on a revolving basis, certain of its
trade receivables (the "Pooled Receivables") to a special purpose
corporation wholly owned by the Company, which in turn sells a percentage
ownership interest to third parties. At September 29, 2001, an interest in
these Pooled Receivables of $58.5 million had been sold to third parties
and is reflected as a reduction to accounts receivable. These transactions
have been recorded as sales in accordance with FASB Statement No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. The gross proceeds resulting from the sale
are included in cash flows from operating activities in the Consolidated
Statements of Cash Flows. Losses on these sales were immaterial.
NOTE F - COMMON STOCK
The Company has two series of authorized common stock, Class A common stock
and Class B common stock. The shares have substantially the same rights,
powers and limitations, except that each share of Class B common stock
entitles the holder thereof to 20 votes per share, except as otherwise
provided by law, on any matter submitted for a stockholder vote, while each
share of Class A common stock entitles the holder thereof to one vote per
share on any such matter.
On July 2, 1999, the Company's Board of Directors declared a stock dividend
of the Company's Class A common stock. Stockholders of record on July 20,
1999 received one share of the Company's Class A common stock for every two
shares of the Company's Class B common stock held as of that date. The
additional shares were issued on July 30, 1999. Per share and weighted
average shares outstanding amounts for periods prior to July 30, 1999 have
been restated to give effect to the stock dividend.
During 2000, the Company repurchased 271,100 shares of Class A common stock
at a total cost of $1.6 million.
NOTE G - SAVINGS PLAN
The Company maintains a Section 401(k) Salary Deferral Plan (the
"Plan"). Under the Plan, eligible U.S. employees may voluntarily
contribute a percentage of their compensation. The Plan provides for a
contribution of up to four percent of compensation subject to an overall
Company contribution limit of five percent of the U.S. operation's income
before taxes. Under this plan, the Company's expenses were $3.7 million,
$2.3 million and $4.6 million in 2001, 2000 and 1999, respectively.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SEPTEMBER 29, 2001
NOTE H - RELATED PARTY TRANSACTIONS
The major stockholder of the Company owns an egg laying and a chicken
growing operation. Transactions with related entities are summarized as
follows:
(IN THOUSANDS) 2001 2000 1999
Contract egg grower fees to
major stockholder $ 1,537 $ 5,100 $ 4,501
Lease payment to major
stockholder 564 -- --
Chick, feed and other
sales to major stockholder 38,771 31,879 25,076
Live chicken purchases from
major stockholder 39,784 31,979 26,899
On December 29, 2000 the Company entered into an agreement to lease a
commercial egg property and assume all of the ongoing costs of the
operation from the Company's major stockholder. The Company had previously
purchased the eggs produced from this operation pursuant to a contract
grower arrangement. The lease term runs for ten years with a monthly lease
payment of $62,500. The Company has an option to extend the lease for an
additional five years, with an option at the end of the lease to purchase
the property at fair market value as determined by an independent
appraisal.
The Company leases an airplane from its major stockholder under an
operating lease agreement. The terms of the lease agreement require
monthly payments of $33,000 plus operating expenses. Lease expense was
$396,000 for each of the years 2001, 2000 and 1999. Operating expenses
were $234,066, $127,680, $135,786 in 2001, 2000 and 1999, respectively.
The Company had accounts receivable of approximately $0.1 million at
September 30, 2000, from related parties, including its major stockholder.
On February 14, 2000, the Company purchased substantially all of the assets
of a chicken litter disposal and fertilizer business operated by the
Company's major stockholder's son for approximately $8.5 million.
NOTE I - COMMITMENTS
The Consolidated Statements of Income include rental expense for operating
leases of approximately $28.7 million, $22.4 million and $17.3 million in
2001, 2000 and 1999, respectively. The Company's future minimum lease
commitments under non-cancelable operating leases are as follows: 2002 --
$22.1 million; 2003 -- $19.7 million; 2004 -- $16.8 million; 2005 -- $14.2
million; 2006 -- $11.1 million and thereafter $15.4 million.
At September 29, 2001, the Company had $14.0 million in letters of credit
outstanding relating to normal business transactions.
NOTE J - CONTINGENCIES
Since March 23, 1999, the Company has been a plaintiff in two antitrust
lawsuits in U.S. District Court in Washington, D.C. alleging a world-wide
conspiracy to control production capacity and raise prices of common
vitamins such as A, B-4, C and E. On November 3, 1999, a settlement, which
was entered into as part of a class action lawsuit to which the Company was
a member, was agreed to among the defendants and the class, which would
provide for a recovery of between 18-20% of vitamins purchased from the
defendants from 1990 through 1998. On March 28, 2000, the judge presiding
over the case accepted the negotiated settlement between the parties;
however, appeals from various sources are in process. The Company has
filed documentation showing that vitamin purchases made during the recovery
period totaled approximately $14.9 million. During fiscal 2001, the
Company received $3.3 million in final settlement of its claim.
In January of 1998, seventeen of our current and/or former employees filed
the case of "Octavius Anderson, et al. v. Pilgrim's Pride Corporation" in
the United States District Court for the Eastern District of Texas, Lufkin
Division claiming Pilgrim's Pride violated requirements of the Fair Labor
Standards Act. The suit alleged Pilgrim's Pride failed to pay employees
for all hours worked. The suit generally alleged that (1) employees should
be paid for time spent to put on, take off, and clean certain personal gear
at the beginning and end of their shifts and breaks and (2) the use of a
master time card or production "line" time fails to pay employees for all
time actually worked. Plaintiffs sought to recover unpaid wages plus
liquidated damages and legal fees. Approximately 1,700 consents to join as
plaintiffs were filed with the court by current and/or former employees.
During the week of March 5, 2001, the case was tried in the Federal Court
of the Eastern District of Texas, Lufkin, Texas. The Company prevailed at
the trial with a judgment issued by the judge, which found no evidence
presented to support the plaintiffs' allegations. The plaintiffs have
filed an appeal in the Fifth Circuit Court of Appeals to reverse the
judge's decision. The plaintiff's brief was submitted to the court on
November 5, 2001. Pilgrim's Pride's response to the plaintiff's brief to
the Fifth Circuit Court of Appeals is due on December 5, 2001. Neither the
likelihood of an unfavorable outcome nor the amount of ultimate liability,
if any, with respect to this case can be determined at this time. The
Company does not expect this matter, individually or collectively, to have
a material impact on our financial position, operations or liquidity.
Substantially similar suits have been filed against four other integrated
poultry companies, including WLR Foods, one of which resulted in a federal
judge dismissing most of the plaintiffs' claims in that action with facts
similar to our case.
In August of 2000, four of our current and/or former employees filed the
case of "Betty Kennell, et al. v. Wampler Foods, Inc." in the United States
District Court for the Northern District of West Virginia, claiming we
violated requirements of the Fair Labor Standards Act. The suit generally
makes the same allegations as Anderson v. Pilgrim's Pride discussed above.
Plaintiffs seek to recover unpaid wages plus liquidated damages and legal
fees. Approximately 150 consents to join as plaintiffs were filed with the
court by current and/or former employees. No trial date has been set. To
date, only limited discovery has been performed. Neither the likelihood of
an unfavorable outcome nor the amount of ultimate liability, if any, with
respect to this case can be determined at this time. We do not expect this
matter, individually or collectively, to have a material impact on our
financial position, operations or liquidity.
The Company is subject to various other legal proceedings and claims, which
arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions
will not materially affect the financial position or results of operations
of the Company.
NOTE K - FINANCIAL INSTRUMENTS
The Company is a purchaser of certain commodities, primarily corn and
soybeans. The Company periodically uses commodity futures and options for
hedging purposes to reduce the effect of changing commodity prices and as a
mechanism to procure the grains. The contracts that effectively meet risk
reductions and correlation criteria are recorded using hedge accounting.
Gains and losses on closed hedge transactions are recorded as a component
of the underlying inventory purchase.
At September 29, 2001, (there were no outstanding contracts at September
30, 2000), the Company held the following commodity contracts consisting of
delivery contracts settling between October 2001 and July 2002. The
following table provides information about the Company's financial
instruments that is sensitive to changes in commodity prices:
Dollars in thousands, except per unit contract/strike prices
Notional Weighted Average
Units Amount Contract/Strike Price Fair Value
Hedging Position:
Long positions
in corn Bushels 14,860 $2.22 ($476)
NOTE L - BUSINESS SEGMENTS
Since the acquisition of WLR Foods on January 27, 2001, the Company
operates in two reportable business segments as (1) a producer of chicken
and other products and (2) a producer of turkey products.
The Company's chicken and other products segment primarily includes sales
of chicken products the Company produces and purchases for resale in the
United States and Mexico, and also includes table eggs and feed. The
Company's chicken and other products segment conducts separate operations
in the United States and Mexico and is reported as two separate
geographical areas. The Company's turkey segment includes sales of turkey
products produced in our turkey operation recently acquired from WLR Foods,
whose operations are exclusively in the United States.
Inter-area sales and inter-segment sales, which are not material, are
accounted for at prices comparable to normal trade customer sales. Total
assets by segment and geographic area are those assets which are used in
the Company's operations in each segment or area. Corporate assets and
expenses are included with chicken and other products.
The following table presents certain information regarding our segments:
FISCAL YEAR ENDED
SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2,
2001(A) 2000 1999
(52 WEEKS) (52 WEEKS) (53 WEEKS)
(IN THOUSANDS)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $1,652,199 $1,192,077 $1,102,903
Mexico 323,678 307,362 254,500
Sub-total 1,975,877 1,499,439 1,357,403
Turkey 238,835 -- --
Total $2,214,712 $1,499,439 $1,357,403
OPERATING INCOME:
Chicken and Other Products:
United States $ 78,096 $ 45,928 $ 88,177
Mexico 12,157 34,560 21,327
Sub-total 90,253 80,488 109,504
Turkey 4,289 -- --
Total $ 94,542 $ 80,488 $ 109,504
Depreciation and Amortization(b)
Chicken and Other Products:
United States $ 38,155 $ 24,444 $ 23,185
Mexico 11,962 11,583 11,351
Sub-total 50,117 36,027 34,536
Turkey 5,273 -- --
Total $ 55,390 $ 36,027 $ 34,536
TOTAL ASSETS:
Chicken and Other Products:
United States $ 764,073 $ 496,173
Mexico 247,681 209,247
Sub-total 1,011,754 705,420
Turkey 203,941 --
Total $1,215,695 $ 705,420
CAPITAL EXPENDITURES: (A)
Chicken and Other Products
United States $ 80,173 $ 69,712
Mexico 29,425 22,417
Sub-total 109,598 92,129
Turkey 3,034 --
Total $ 112,632 $ 92,129
(A) EXCLUDES BUSINESS ACQUISITION COST OF $239,539, INCURRED IN CONNECTION
WITH THE ACQUISITION OF WLR FOODS ON JANUARY 27, 2001.
(B) INCLUDES AMORTIZATION OF CAPITALIZED FINANCING COSTS OF APPROXIMATELY
$0.9 MILLION, $1.2 MILLION, AND $1.1 MILLION IN FISCAL YEAR 2001, 2000
AND 1999, RESPECTIVELY.
AS OF SEPTEMBER 29, 2001, THE COMPANY HAD NET ASSETS IN MEXICO OF $199.0
MILLION. THERE WERE NO CUSTOMERS REPRESENTING 10% OR MORE OF REVENUE IN
FISCAL 2001. DURING 2000 AND 1999, REVENUE FROM ONE CUSTOMER REPRESENTED
13.5% AND 13.9%, RESPECTIVELY, OF CONSOLIDATED NET SALES.
NOTE M - QUARTERLY RESULTS
Quarterly Results (Unaudited)
(IN THOUSANDS, EXCEPT PERSHARE DATA) YEAR ENDED SEPTEMBER 29, 2001
First Second Third Fourth Fiscal
Quarter Quarter(a) Quarter Quarter Year
Net sales $386,032 $541,593 $645,836 $641,251 $2,214,712
Gross profit 47,166 29,216 75,625 61,943 213,950
Operating income
(loss) 23,211 (5,272) 45,486 31,117 94,542
Income (loss)before
extraordinary
charge 12,737 (9,802) 25,267 13,829 42,031
Extraordinary charge,
net of tax -- -- -- 894 894
Net income (loss) 12,737 (9,802) 25,267 12,934 41,137
Per Share:
Net income (loss) .31 (.24) .61 .32 1.00
Cash dividends .015 .015 .015 .015 .06
(IN THOUSANDS,EXCEPT PER SHARE DATA)YEAR ENDED SEPTEMBER 30, 2000
First Second Third Fourth Fiscal
Quarter Quarter(b) Quarter Quarter Year
Net sales $354,825 $373,260 $391,979 $379,375 $1,499,439
Gross profit 45,477 34,029 46,665 39,657 165,828
Operating income 25,222 13,282 26,349 15,635 80,488
Net income 14,858 9,023 17,144 11,319 52,344
Per Share:
Net income .36 .22 .41 .28 1.27
Cash dividends .015 .015 .015 .015 .06
(a) The Company acquired WLR Foods on January 27, 2001 for $239.5 million
and the assumption of $45.5 million of indebtedness. The acquisition
has been accounted for as a purchase, and the results of operations
for this acquisition have been included in our
consolidated results of operations since the acquisition date.
(b) The second quarter of 2000 includes a $5.8 million write-off of
accounts receivable from AmeriServe, which filed bankruptcy on
January 31, 2000.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
Additions Deductions Balance at
Balance at Charged Charged to Describe end of
Beginning to Costs Other Accounts- Period
Description and Expenses Describe
YEAR ENDED SEPTEMBER 29, 2001:
RESERVES AND ALLOWANCES DEDUCTED
FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $4,086,000 $1,132,000 $-- $1,257,000(1)$3,961,000
YEAR ENDED SEPTEMBER 30, 2000:
RESERVES AND ALLOWANCES DEDUCTED
FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $4,703,000 $(611,000) $-- $6,000(1)$4,086,000
YEAR ENDED OCTOBER 2, 1999:
RESERVES AND ALLOWANCES DEDUCTED
FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $3,694,000 $1,122,000 $-- $113,000(1)$4,703,000
(1) UNCOLLECTABLE ACCOUNTS WRITTEN OFF, NET OF RECOVERIES.
EXHIBIT 12
PILGRIM'S PRIDE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED
SEPTEMBER 29, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 26, SEPTEMBER 27,
2001 2000 1999 1998 1997
(AMOUNTS IN THOUSANDS, EXCEPT RATIO)
EARNINGS:
Income before income taxes
and extraordinary
charge $63,294 $62,786 $90,904 $56,522 $43,824
Add: Total fixed charges
(see below) 48,406 29,168 26,706 27,987 27,647
Less: Interest
Capitalized 7,153 3,313 2,032 1,675 502
Total Earnings $104,547 $88,641 $115,578 $82,834 $70,969
FIXED CHARGES:
Interest (1) $38,852 $21,712 $ 20,889 $23,239 $23,889
Portion of rental expense
representative of the
interest
factor(2) 9,554 7,456 5,817 4,748 3,758
Total fixed
charges $48,406 $29,168 $ 26,706 $27,987 $27,647
Ratio of earnings
to fixed charges 2.16 3.04 4.33 2.96 2.57
(1) Interest includes amortization of capitalized financing fees.
(2) One-third of rental expenses is assumed to be representative of the
interest factor.
EXHIBIT 22- SUBSIDIARIES OF REGISTRANT
1. AVICOLA PILGRIM'S PRIDE DE MEXICO S.A. DE C.V.
2. COMPANIA INCUBADORA HIDALGO S.A. DE C.V.
3. INMOBILIARIA AVICOLA PILGRIM'S PRIDE, S. DE R.L.
4. PILGRIM'S PRIDE S.A. DE C.V.
5. GALLINA PESADA S.A. DE C.V.
6. PILGRIM'S PRIDE FUNDING CORPORATION
7. PILGRIM'S PRIDE INTERNATIONAL INC.
8. PPC OF DELAWARE BUSINESS TRUST
9. PPC MARKETING, LTD.
10. PILGRIM'S PRIDE AFFORDABLE HOUSING CORPORATION
11. GRUPO PILGRIM'S PRIDE FUNDING HOLDINGS S. DE R.L. DE C.V.
12. GRUPO PILGRIM'S PRIDE FUNDING S. DE R.L. DE C.V.
13. ROCKINGHAM POULTRY, INC.
14. ROCKINGHAM POULTRY, INC. (FOREIGN SALES CORP.)
15. VALLEY RAIL SERVICE, INC.
16. WAMPLER SUPPLY COMPANY, INC.
17. PILGRIM'S PRIDE OF NEVADA, INC.
18. PILGRIM'S PRIDE DUTCH FUNDING B.V.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 3-12043 and Form S-3 No. 333-84861) of Pilgrim's Pride
Corporation, and in the related Prospectuses, of our report dated October
29, 2001, with respect to the consolidated financial statements and
schedule of Pilgrim's Pride Corporation included in this Annual Report
(Form 10-K) for the year ended September 29, 2001.
Dallas, Texas ERNST & YOUNG LLP
November 14, 2001