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 28, 2002
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No _____
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 December 2, 2002, was $85,088,774 and $28,502,342,
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 December 2, 2002.
13,523,429 shares of the Registrant's Class A Common Stock, $.01 par value,
were outstanding as of December 2, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the annual meeting of
stockholders to be held January 29, 2003 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.......................................................24
Item 3. Legal Proceedings................................................29
Item 4. Submission of Matters to a Vote of Security Holders..............31
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters......................................32
Item 6. Selected Financial Data..........................................33
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition..............................................35
Item 7a.Quantitative and Qualitative Disclosures About Market Risk.......45
Forward Looking Statements and Risk Factors......................47
Item 8. Financial Statements and Supplementary Data (see Index to Financial
Statements and Schedules below)..................................55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................55
PART III
Item 10.Directors and Executive Officers of Registrant...................56
Item 11.Executive Compensation...........................................56
Item 12.Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters......................................56
Item 13.Certain Relationships and Related Transactions...................56
Item 14.Controls and Procedures..........................................56
PART IV
Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K..57
Signatures...............................................................63
Certifications...........................................................65
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Ernst & Young LLP, Independent Auditors........................71
Consolidated Balance Sheets as of September 28, 2002 and
September 29,2001....................................................72
Consolidated Statements of Income for the years ended September 28, 2002,
September 29, 2001 and September 30, 2000............................73
Consolidated Statements of Stockholders' Equity for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000........74
Consolidated Statements of Cash Flows for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000........75
Notes to Consolidated Financial Statements...............................76
Schedule II - Valuation and Qualifying Accounts for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000........92
PART I
ITEM 1. BUSINESS
GENERAL
Overview and Recent Developments.
The Company, which was incorporated in Texas in 1968 and reincorporated in
Delaware in 1986, is the successor to a partnership founded in 1946 as a retail
feed store. Over the years, the Company grew through both internal growth and
various acquisitions of farming operations and chicken processors. 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 exclusively produce 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. 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
2002, we sold 2.7 billion pounds of dressed chicken and 374.3 million pounds of
dressed turkey and generated net sales of $2.5 billion and Earnings Before
Interest, Taxes, Depreciation and Amortization, ("EBITDA") of $103.5 million.
In fiscal 2002, our U.S. operations accounted for 86.5% of our net sales, with
the remaining 13.5% arising from our Mexico operations.
On January 27, 2001, we acquired WLR Foods, Inc. (formerly Nasdaq: WLRF),
(which is referred to herein as, our Eastern Division) for approximately $239.5
million and the assumption of approximately $45.5 million of indebtedness. The
acquisition was accounted for under the purchase method of accounting and the
purchase price was allocated based on the estimated fair value of assets and
liabilities. WLR Foods' operations have been included in our financial results
since the acquisition on January 27, 2001. WLR Foods was the seventh largest
poultry company in the United States with $836.9 million of revenue in calendar
year 2000. The WLR Foods acquisition provided us with (1) chicken processing
facilities in the eastern United States, where we previously had no facilities,
enabling us to 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.
Currently, our Eastern Division's chicken sales mix consists mostly of lower
margin fresh chicken products. However, we intend to convert more of our
Eastern Division chicken sales into higher margin, fresh and prepared chicken
products in the years to come. By consistent and continued application of our
long-term business strategy to both our recently acquired Eastern Division 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 in subsequent
years.
Since the acquisition of WLR Foods, our Eastern Division, which consists of
the former WLR Foods' operations, has been affected by two significant
unexpected challenges. First, on March 12, 2002 an outbreak of low-pathogenic
avian influenza, a disease contagious to turkey, chicken and other birds, was
discovered in Virginia. During fiscal 2002, we estimate that our operating
income was negatively impacted by approximately $26.0 million due to the
negative impact of the avian influenza. As of September 28, 2002, poultry
growers and producers have destroyed approximately 4.7 million head of poultry
affected as a result of the virus. Turkeys represent approximately 70.0% of
the destroyed poultry, with chickens representing approximately 30.0%.
Approximately one-half of the turkeys and approximately three-quarters of the
chickens destroyed by the poultry industry in Virginia belonged to the Company.
No new flocks have tested positive for the presence of avian influenza in
Virginia since July 2, 2002. We currently estimate that production in our
turkey operation will be significantly reduced over the next six months due to
the effects of this viral outbreak. As a result of this lower production
output in our turkey operation, we anticipate that operating income from our
turkey operation will decrease for the first six months of fiscal 2003 by
approximately $8.0 to $14.0 million, when compared to the first six months of
fiscal 2002, assuming the outbreak of avian influenza has been contained. On
June 19, 2002, U.S. Secretary of Agriculture Ann Veneman proposed to the Office
of Management and Budget that the U.S. Department of Agriculture (USDA) cover
one-half of the total estimated economic loss suffered by the poultry industry
and independent growers in Virginia due to the avian influenza outbreak.
Secretary Veneman also recommended that the government of Virginia cover the
remaining portion. It is our understanding that, as part of her proposal,
Secretary Veneman is suggesting that independent chicken and turkey growers are
to be fully compensated for their losses first and that the remainder is to be
allocated to other poultry producers (including us) whose flocks were destroyed
by the virus. On November 4, 2002 the Department of Agriculture made public
their estimate of total federal compensation at $51 million, with growers being
compensated $13.9 million and owners being compensated $37.1 million. No
assurance can be given as to the amount of federal compensation that we may
receive or that any state agencies will in fact provide further economic
assistance to the poultry growers and producers affected by the avian influenza
outbreak in Virginia. No anticipated recoveries have been recorded by us as
our portion of the compensation has not yet been determined. In the event that
state agencies do decide to grant economic assistance to the affected poultry
growers and producers, it is impossible at this time to estimate how the state
agencies would allocate any such assistance between affected poultry growers
and producers whose flocks were destroyed by the virus.
The second challenge faced by our Eastern Division was the voluntary
nationwide recall of certain cooked deli products produced at our Franconia,
Pennsylvania facility. A turkey pastrami product sample - one sample from one
lot from one day's production, taken on August 14, 2002-- tested positive for
Listeria, prompting us to voluntarily recall 295,000 pounds of product on
October 9, 2002. According to the Food Safety and Inspection Service, (FSIS),
testing indicated that the particular strain of Listeria found in this single
product sample was not the same as that involved in a Northeastern outbreak of
illnesses and deaths resulting from listeriosis. However, we later received
information from the USDA suggesting that environmental samples (not product
samples) taken at the facility on October 3 and 4, 2002 had tested positive for
both the strain of Listeria which prompted the August 14, 2002 recall and a
strain having characteristics similar to those of the strain identified in a
Northeastern outbreak. We immediately, and voluntarily, expanded the recall to
extend to cooked deli products produced from May 1, 2002 through October 11,
2002. As an additional precautionary measure, we immediately suspended
operations at our Franconia facility to redouble our food safety and sanitation
efforts. No illnesses associated with the Listeria strain in a Northeastern
outbreak have been linked to any of our products, and our Franconia facility
has been reviewed and inspected by the USDA and was reopened on November 13,
2002. The amount of product covered by the recall was approximately 7% of our
annual turkey production and less than 1% of our total poultry production. We
carry insurance designed to cover the direct recall related expenses and
certain aspects of the related business interruption caused by the recall, and
subject to the insurer's reservation of rights, we have received a $4 million
advance payment from our insurer with respect to the product recall claim. The
Company believes that the recall and its direct effects will not have a
material impact on our financial position and results of operations after
considering available insurance coverage. However, there will be differences
between the accounting periods in which certain recall effects are realized and
when insurance recoveries are received and there can be no assurances as to the
Company's ability to re-establish the products and sales affected by the
recall.
Strategy.
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:
- 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 grew
from $466.8 million in fiscal 1998 to $848.7 million in fiscal 2002, a
compounded annual growth rate of 16.1%. However, as a result of the
acquisition of WLR Foods, whose operations were focused primarily on
fresh chicken products, these sales decreased as a percentage of our
total U.S. chicken revenues to 51.4% in fiscal 2002 from 61.1% in fiscal
2000. By consistent and continued application of our long-term business
strategy, we believe that our overall product mix will return to the
levels existing prior to the WLR Foods acquisition in subsequent years.
- 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. We estimate that approximately $300 million, or
27%, of our chicken sales to foodservice customers in fiscal 2002
consisted of new products, which were not sold by us in fiscal 1998.
- ENHANCE U.S. FRESH CHICKEN PROFITABILITY THROUGH VALUE-ADDED, BRANDED
PRODUCTS. Our U.S. fresh chicken sales accounted for $706.8 million, or
42.9%, of our U.S. chicken sales for fiscal 2002. 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 and to continually shift
portions of this product mix into the higher value and margin prepared
chicken products, particularly in our Eastern Division. Much of our fresh
chicken products are sold under the Pilgrim's Pride{reg-trade-mark} 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.
- 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, if Mexican tariffs on imported chicken are eliminated
as scheduled under NAFTA in January 2003, a significant portion of the
chicken imported from the U.S. will be distributed through our
existing and planned distribution facilities. We believe 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{reg-trade-mark} 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 26.7% for chicken and decreased
19.5% for turkey from 1997 through 2001. We believe that U.S. poultry
exports will grow as worldwide demand increases for high-grade, low-cost
protein sources. According to USDA data, the export market is expected to
grow at 11.1% and 8.9% for chicken and turkey, respectively, from 2001 to
2006. 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.
We utilize both a direct international sales force and export brokers.
Our key international markets include Canada, Mexico, Eastern Europe
including Russia, and the Far East. We believe that we have substantial
opportunities to expand our sales to these markets by capitalizing on
direct international distribution channels supplemented by our existing
export broker relationships. Exports and other chicken and turkey
products accounted for approximately 5.5% of our net sales in fiscal
2002.
Products and Markets.
Our chicken products consist primarily of:
(1) Prepared chicken products, which are products such as portion-
controlled breast fillets, tenderloins and strips, delicatessen products,
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. Effective November 13, 2002, we are
no longer producing frankfurters although we continue to distribute
frankfurters processed by others.
(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 chicken products, which are primarily parts and whole
chicken, either refrigerated or frozen for U.S. export or domestic use, and
chicken prepared foods products for U.S. exports.
(4) Mexico products, which consist primarily of lower 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, salads
and flavored turkey burgers. We also have an array of cooked, further
processed deli products. Effective November 13, 2002, we are no longer
producing frankfurters although we continue to distribute frankfurters
processed by others.
(2) Fresh turkey, which includes fresh traypack products, turkey burgers,
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, for U.S. export or domestic use, and turkey
prepared foods products 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 1998, 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. 28, Sept. 29, Sept. 30, Oct. 2, Sept. 26,
2002 2001(a) 2000 1999 1998
(52 weeks) (52 weeks) (52 weeks)(53 weeks)(52 weeks)
U.S. CHICKEN SALES: (in thousands)
Prepared Foods:
Foodservice $659,856 $632,075 $589,395 $527,732 $418,160
Retail 158,299 103,202 47,655 28,079 46,335
Total
Prepared Foods(b) 818,155 735,277 637,050 555,811 464,495
Fresh Chicken:
Foodservice 448,376 387,624 202,192 205,968 220,804
Retail 258,424 224,693 148,977 163,387 162,283
Total
Fresh Chicken(b) 706,800 612,317 351,169 369,355 383,087
Export and Other:
Prepared Foods(b) 30,528 18,912 4,595 1,030 2,301
Other Chicken 93,575 105,834 57,573 37,300 64,469
Total Export
and Other 124,103 124,746 62,168 38,330 66,770
Total
U.S. Chicken(b) 1,649,058 1,472,340 1,050,387 963,496 914,352
MEXICO CHICKEN SALES(c): 323,769 303,433 285,605 233,074 249,104
Total Chicken Sales 1,972,827 1,775,773 1,335,992 1,196,570 1,163,456
U.S. TURKEY SALES:
Prepared Foods(d):
Foodservice 134,651 88,012 -- -- --
Retail 54,638 48,681 -- -- --
Total Prepared Foods 189,289 136,693 -- -- --
Fresh Turkey(d):
Foodservice 36,119 18,618 -- -- --
Retail 107,582 71,647 -- -- --
Total Fresh Turkey 143,701 90,265 -- -- --
Export and Other(d):
Prepared Foods 2,858 2,434 -- -- --
Other Turkey 12,270 9,443 -- -- --
Total Export
and Other 15,128 11,877 -- -- --
Total U.S.
Turkey Sales 348,118 238,835 -- -- --
SALES OF OTHER PRODUCTS:
United States 193,691 179,859 141,690 139,407 139,106
Mexico(c) 19,082 20,245 21,757 21,426 28,983
Total Sales of
Other Products 212,773 200,104 163,447 160,833 168,089
Total Net Sales $2,533,718 $2,214,712 $1,499,439$1,357,403$1,331,545
Total Chicken
Prepared Foods 848,683 754,189 641,645 556,841 466,796
Total Turkey
Prepared Foods 192,147 139,127 -- -- --
(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.
(b)In 2002 the Company identified certain products that were more properly
classified in other categories and as a result, certain items previously
classified under U.S. prepared foods and U.S. fresh chicken were reclassified
into U.S. chicken export and other categories. Amounts by year were:
$18.6 million, $19.1 million, $4.7 million, $1.1 million, and $2.3 million for
the fiscal years 2002 to 1998, respectively.
(c)In order to present additional classifications, items previously classified
as Mexico chicken sales and were reclassified to exportand other products,
Amounts reclassified were: $19.1 million, $20.2 million, $21.8 million,
$21.4 million and $29.0 million for the years 2002 to 1998, respectively.
(d)In 2002 the Company identified certain products that were more properly
classified in other categories and as a result, certain items previously
classified under U.S. turkey prepared foods and U.S. fresh turkey were
reclassified into the U.S. export and other categories. Net amounts
reclassified to U.S. export and other were: $2.1 million in 2002 and $0.4
million in 2001.
The following table sets forth, since fiscal 1998, 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
Sept. 28, Sept. 29, Sept. 30, Oct. 2, Sept. 26,
2002 2001 2000 1999 1998
U.S. CHICKEN SALES:
Prepared Foods:
Foodservice 39.9% 42.9% 56.2% 54.7% 45.7%
Retail 9.6 7.0 4.5 2.9 5.1
Total Prepared Foods 49.5 49.9 60.7 57.6 50.8
Fresh Chicken:
Foodservice 27.2 26.3 19.2 21.4 24.1
Retail 15.7 15.3 14.2 17.0 17.7
Total Fresh Chicken 42.9 41.6 33.4 38.4 41.8
Export and Other:
Prepared Foods 1.9 1.3 0.4 0.1 0.3
Other Chicken 5.7 7.2 5.5 3.9 7.1
Total Export and Other 7.6 8.5 5.9 4.0 7.4
Total U.S. Chicken 100.0% 100.0% 100.0% 100.0% 100.0%
Total Chicken Prepared Foods as
a percentage of US Chicken 51.4% 51.2% 61.1% 57.7% 51.1%
U.S. TURKEY SALES:
Prepared Foods:
Foodservice 38.7% 36.8% -- -- --
Retail 15.7 20.4 -- -- --
Total Prepared Foods 54.4 57.2 -- -- --
Fresh Turkey:
Foodservice 10.4 7.8 -- -- --
Retail 30.9 30.0 -- -- --
Total Fresh Turkey 41.3 37.8 -- -- --
Export and Other:
Prepared Foods 0.8 1.0 -- -- --
Other Turkey 3.5 4.0 -- -- --
Total Export and Other 4.3 5.0 -- -- --
Total U.S. Turkey 100.0% 100.0% -- -- --
Total Turkey Prepared Foods as
a percentage of US Turkey 55.2% 58.2% -- -- --
UNITED STATES
PRODUCT TYPES
Chicken Products
PREPARED FOODS OVERVIEW. During fiscal 2002, $848.7 million, or 51.4%, of
our U.S. chicken net sales were in prepared foods products to foodservice
customers and retail distributors, as compared to $466.8 million in fiscal
1998. 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 30% of our U.S. cost of
goods sold for the year ended September 28, 2002. 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 $706.8 million, or 42.9%, of our total
U.S. chicken net sales for fiscal 2002. 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
and to continually shift portions of this product mix into the higher value and
margin prepared chicken products, particularly in our Eastern Division.
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 and branded and non-branded prepared foods products for
distribution to export markets. In fiscal 2002, approximately $124.1 million,
or 7.6% of our U.S. chicken net sales were attributable to U.S. chicken export
and other. These exports and other products, other than the prepared foods
products, have historically been characterized by lower prices and greater
price volatility than our more value-added product lines.
Turkey Products
Since March 2002, our sales of turkey products have been negatively impacted
by an outbreak of low-pathogenic avian influenza in Virginia in March 2002,
that resulted in the destruction of a significant number of our turkey flocks.
See further discussion in Item 7 Management's Discussion and Analysis of
Results of Operations and Financial Condition.
PREPARED FOODS OVERVIEW. During fiscal 2002, $192.1 million, or 55.2%, of
our U.S. turkey net 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 30.0% of our
turkey cost of goods sold in fiscal 2002. 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 $143.7 million, or 41.3%, of our U.S.
turkey net sales in fiscal 2002. 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
prepared turkey products, such as deli meats, ground turkey, turkey burgers and
sausage, roasted turkey and salads.
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 turkey
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 2002, approximately $15.1
million, or 4.3%, of our total U.S. 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. Effective November 13, 2002, we are no longer producing
frankfurters, although we continue to distribute frankfurters produced by
others.
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 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 1997 through 2001 period, sales of chicken
products to the foodservice market grew at a compounded annual growth rate of
approximately 2.3%, versus 1.2% 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 5.0% during the 1997 through
2001 period and are projected to grow at a 4.4% compounded annual growth rate
from 2001 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 2001. Our sales to the
foodservice market from fiscal 1998 through fiscal 2002 grew at a compounded
annual growth rate of 14.8% and represented 67.2% of the net sales of our U.S.
chicken operations in fiscal 2002.
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 $659.9 million in fiscal 2002
compared to $418.2 million in fiscal 1998, a compounded annual growth rate of
approximately 12.1%. 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 our 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 $300 million, or 27%, of our chicken sales to
foodservice customers in fiscal 2002 consisted of new products which were not
sold by us in fiscal 1998.
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 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{reg-trade-mark} 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{reg-trade-mark} 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, eastern regions of the U.S. Our prepared chicken
products sales to the retail market were $158.3 million in fiscal 2002 compared
to $46.3 million in fiscal 1998, a compounded annual growth rate of
approximately 36.0%. We believe that our growth in this market segment will
continue as retailers concentrate on offering more products which are quick,
easy and convenient to prepare at home.
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,
other than the prepared foods 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--including Russia, the Far East and other world markets.
On March 10, 2002 Russia announced it was imposing a ban on the importing of
U.S. poultry products. Russia accounted for approximately 35% of all U.S.
poultry exports in 2001, or approximately 7% of the total U.S. poultry
production. On April 10, 2002 Russia announced the lifting of the import ban.
However, U.S. markets continue to be affected as Russia continues to restrict
the import of U.S. poultry products. On September 15, 2002 new sanitary
guidelines were established by Russia that requires veterinary specialists from
the Agriculture Ministry of Russia to inspect and certify plants of U.S.
poultry producers interested in exporting to Russia. We expect this
certification process to be completed in calendar 2002 and expect that the
industry will resume exporting these products into Russia shortly thereafter;
however, once exports resume, there is no assurance that they will regain the
levels existing prior to the March 10, 2002 ban. 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 several years. Accordingly, we believe we are well
positioned to capitalize on such growth. Also included in these categories are
chicken 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 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 $134.7 million of our sales in fiscal
2002. We believe that future growth in this segment will be attributable to the
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 is 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{reg-trade-mark} and
Wampler{reg-trade-mark} 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 turkey products,
other than the prepared foods products, consist of whole turkeys and turkey
parts sold in bulk form, either non-branded or under the
Wampler{reg-trade-mark} and Rockingham{reg-trade-mark} 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---including
Russia, 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 several years.
Accordingly, we believe we are well positioned to capitalize on such growth,
especially in Mexico where we have established distribution channels. Also
included in these categories are turkey by-products, which are converted into
protein products sold primarily to manufacturers of pet foods.
MARKETS FOR OTHER U.S. PRODUCTS
We market fresh eggs under the Pilgrim's Pride{reg-trade-mark} brand name,
as well as under 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 2.2 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 58.6% of the total number of egg
laying hens in service during 2001. 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{trademark}.
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{trademark} 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 mill in Mt.
Pleasant, Texas and at our farm supply store in Pittsburg, Texas to dairy
farmers and livestock producers in northeastern Texas. We engage in similar
sales activities at our other U.S. feed mills.
MEXICO
BACKGROUND
The Mexican market represented approximately 13.5% of our net sales in
fiscal 2002. Recognizing favorable long-term demographic trends and improving
economic conditions in Mexico, in the 1980's 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. Since this original acquisition, we have made subsequent
acquisitions and capital expenditures in Mexico 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 that 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 lower
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. Other products sold by us in Mexico include commercial
feed, vaccines and other agricultural products.
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 22
million, to Saltillo, the capital of the State of Coahuila, about 500 miles
north of Mexico City, and from Tampico and Veracruz 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, and Cancun on the
Caribbean.
In Mexico, where product differentiation has traditionally been limited,
product quality, service 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. On November
21,2002 the Mexican Secretariat of the Economy announced that it would initiate
an investigation to determine whether a temporary safeguard action is warranted
to protect the domestic poultry industry when import tariffs on poultry are
eliminated in January 2003. The action stems from concerns of the Union
Nacional Avicultores (UNA) that duty-free imports of leg quarters would injure
the Mexico poultry industry. A suggested safeguard by the UNA is to establish a
tariff rate for chicken leg quarters at the 2001 tariff level of 98.8% of the
sales price for a period of three to five years.
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 26 of the 32 Mexican states, encompassing approximately
85% of the total population of Mexico. Our distribution network is comprised of
eighteen 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, service 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. On November 21, 2002 the Mexican Secretariat
of the Economy announced that it would initiate an investigation to determine
whether a temporary safeguard action is warranted to protect the domestic
poultry industry when import tariffs on poultry are eliminated in January 2003.
The action stems from concerns of the Union Nacional Avicultores (UNA) that
duty-free imports of leg quarters would injure the Mexico poultry industry. A
suggested safeguard by the UNA is to establish a tariff rate for chicken leg
quarters at the 2001 tariff level of 98.8% of the sales price for a period of
three to five years.
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 26 of the 32 Mexican states, encompassing approximately
85% 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, and Phoenix, Arizona 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 USDA, the Food and Drug Administration (FDA) 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. 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. See Item
1. Business-General-Overview and Recent Developments.
EMPLOYEES AND LABOR RELATIONS
As of September 28, 2002, we employed approximately 20,200 persons in the
U.S. and 4,600 persons in Mexico. Approximately 2,850 employees at our Lufkin
and Nacogdoches, Texas facilities are members of collective bargaining units
represented by the United Food and Commercial Workers Union. 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 expire in October 2004 with respect to our Nacogdoches employees.
Our Lufkin employees voted in July 2002 to retain union representation.
However, the election results have not yet been certified; objections are still
pending and are being reviewed by the National Labor Relations Board. 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.
EXECUTIVE OFFICERS
Set forth below is certain information relating to our current executive
officers:
NAME AGE POSITIONS
Lonnie "Bo" Pilgrim..........74 Chairman of the Board
Clifford E. Butler...........60 Vice Chairman of the Board
David Van Hoose(1)...........61 Chief Executive Officer and Director
O.B. Goolsby, Jr.............55 President and Chief Operating Officer
Richard A. Cogdill...........42 Executive Vice President,
Chief Financial Officer,
Secretary, Treasurer and Director
________________________________________________________________________
(1) On November 11, 2002, the Company announced the retirement of David Van
Hoose as Chief Executive Officer of the Company, effective March 29,
2003. During the transition and until a replacement Chief Executive
Officer is appointed, certain of Mr. Van Hoose's duties have been assumed
by Lonnie "Bo" Pilgrim, who served as the Company's Chief Executive
Officer until Mr. Van Hoose was promoted to the position in June 1998.
Lonnie "Bo" Pilgrim has served as Chairman of the Board since the
organization of Pilgrim's Pride in July 1968. He was previously Chief Executive
Officer from July 1968 to June 1998. Prior to the incorporation of Pilgrim's
Pride, Mr. Pilgrim was a partner in its predecessor partnership business
founded in 1946.
Clifford E. Butler serves as Vice Chairman of the Board. He joined us as
Controller and Director in 1969, was named Senior Vice President of Finance in
1973, became Chief Financial Officer and Vice Chairman of the Board in July
1983, became Executive President in January 1997 and served in such capacity
through July 1998 and continues to serve as Vice Chairman of the Board.
David Van Hoose serves as Chief Executive Officer of Pilgrim's Pride. He
became a Director in July 1998. He was named Chief Executive Officer and Chief
Operating Officer in June 1998 and President in July 1998. He was previously
President of Mexico Operations from April 1993 to June 1998 and Senior Vice
President, Director General, Mexico Operations from August 1990 to April 1993.
Mr. Van Hoose was employed by us in September 1988 as Senior Vice President,
Texas Processing. Prior to that, Mr. Van Hoose was employed by Cargill, Inc.,
as General Manager of one of its chicken operations. Mr. Van Hoose retired as
President and Chief Operating Officer in November 2002, and he will retire as
Chief Executive Officer of the Company in March 2003.
O.B. Goolsby, Jr. serves as President and Chief Operating Officer of
Pilgrim's Pride. Prior to being named as President and Chief Operating Officer
in November 2002, Mr. Goolsby served as Executive Vice President, Prepared
Foods Complexes from June 1998 to November 2002. He was previously Senior Vice
President, Prepared Foods Operations from August 1992 to June 1998 and Vice
President, Prepared Foods Operations from April 1986 to August 1992 and was
previously employed by us from November 1969 to January 1981.
Richard A. Cogdill has served as Executive Vice President, Chief Financial
Officer, Secretary and Treasurer since January 1997. He became a Director in
September 1998. Previously he served as Senior Vice President, Corporate
Controller, from August 1992 through December 1996 and as Vice President,
Corporate Controller from October 1991 through August 1992. Prior to October
1991 he was a Senior Manager with Ernst & Young LLP. He is a Certified Public
Accountant.
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 13.1% of them are maintained on 42 company-owned breeder farms.
In the U.S., we currently own or contract for approximately 15.0 million square
feet of breeder housing on approximately 429 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 1,560 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 5,818 chicken houses with approximately 81.0
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 5.2% 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 produced under an incentive
arrangement. In Mexico, we place our grown chicks on contract grow-out farms
containing approximately 756 chicken houses with approximately 9.7 million
square feet of growing facilities. Additionally, we own and operate grow-out
farms containing approximately 648 chicken houses with approximately 10.4
million square feet of growing facilities in Mexico, which account for
approximately 52.0% 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, Broadway, 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 2002, 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 by truck
to our processing plants. These plants utilize modern, highly automated
equipment to process and package the chickens. We periodically review the
possible application of new processing technologies in order to enhance
productivity and reduce costs. We have nine 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,
Virginia, Marshville, North Carolina and Moorefield, West Virginia. These
processing plants have the capacity, under present USDA inspection procedures,
to slaughter approximately 12.5 million head of chicken per week, assuming a
five-day work week. The Company's plant in Alma, Virginia, which had been
acquired in the acquisition of WLR Foods, was closed during fiscal 2002, with
the production from the Alma plant being consolidated with the Company's other
processing plants in the area. 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 semen requirements and 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 produced
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 the
majority of 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 by truck to
our processing plants. These plants utilize modern, highly automated equipment
to process and package the turkeys. We periodically review the possible
application of new processing technologies in order to enhance productivity and
reduce costs. Our two turkey processing plants, located in 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. The Company closed its Harrisonburg Plant, which had been
acquired in the acquisition of WLR Foods, at the end of fiscal 2002 and
consolidated all production from this plant to the Company's Hinton facility.
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.
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
based on current production mix and is currently operating at 80% of capacity.
We measure our operating capacity of our prepared foods plants on the basis of
running two shifts per day, six days per week.
Our Waco, Texas prepared foods plant was purchased in 1999 and expanded in
fiscal 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
based on current production mix and is currently operating at approximately 60%
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 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 the
line-production system used in our other plants. This plant has approximately
95 million annual pounds of oven capacity and 17 million annual pounds of salad
capacity for a total capacity of approximately 112 million pounds of further
processed product annually based on current product mix and is currently
operating at approximately 80% of capacity. See Item 1. Business-General-
Overview and Recent Developments for a discussion of the recent events at this
facility.
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 based on current product mix and is
currently operating at approximately 70% of 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 based on current product mix and
is currently operating at approximately 90% 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 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
2.2 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. In April 2002, we completed a partially automated
distribution freezer located outside of Pittsburg, Texas, which includes
125,000 square feet of storage area. 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, and an office building outside of Pittsburg, Texas, which houses our
Logistics and Customer Service 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 Eastern Division support activities.
Substantially all of our U.S. property, plant and equipment, except those
in our turkey segment, are pledged as collateral on our secured debt.
ITEM 3. LEGAL PROCEEDINGS
On November 4, 2002, an individual who allegedly consumed our meat products
filed a putative class action lawsuit in the Philadelphia County Court of
Common Pleas in the Commonwealth of Pennsylvania. Plaintiff allegedly
contracted Listeriosis. The case is styled "Frank Niemtzow, individually and
on behalf of all others similarly situated, v. Pilgrim's Pride Corporation and
Wampler Foods, Inc" The complaint seeks recovery on behalf of a putative class
of all persons that purchased and/or consumed meat products manufactured by us
between May 1, 2002, and October 11, 2002, bearing establishment code P-1351
and who have suffered an injury. This class represents all individuals who
have suffered Listeriosis and symptoms of Listeriosis and other medical
injuries. Plaintiff also seeks to represent a putative class of all persons
that purchased and/or consumed meat products manufactured by us between May 1,
2002 and October 11, 2002 bearing establishment code P-1351 and who have not
suffered any personal injury. The complaint seeks compensatory and punitive
damages under theories of negligence, alleged violation of the Pennsylvania
Unfair Trade Practices Act and Consumer Protection Law, strict liability in
tort, and unjust enrichment. The time for responding to the complaint has not
yet arrived. We intend to defend vigorously both certification of the case as
a class action and questions concerning ultimate liability and damages, if any.
No discovery has been conducted to date. 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 to
have a material impact on our financial position, operation or liquidity after
considering our available insurance coverage.
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 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 was submitted on December 5, 2001. The Fifth Circuit
Court of Appeals heard oral arguments in this matter on June 4, 2002. On June
6, 2002 the Fifth Circuit Court of Appeals entered a per curiam opinion
affirming the opinion of the trial court. Appellants did not file any motion
for a rehearing and the deadline for filing of such a motion has passed.
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.
On August 20, 1999, the former WLR Foods brought legal action as a
plaintiff in an antitrust lawsuit filed in the U.S. District Court in
Washington D.C. alleging a world-wide conspiracy by approximately 34 named
defendants to control production capacity and raise prices of common vitamins
such as A, B-4, C, and E. The Company, as successor to WLR Foods in this suit,
received $9.5 million in fiscal 2002 in partial settlement of its claims, $4.3
million of which was recorded by the Company as a component of "Other Expense
(Income): Miscellaneous, Net" in fiscal 2002 as the recovery amount received
during the period exceeded the $5.2 million recovery amount recorded at the
time of the acquisition of WLR Foods. The initial estimate of the amount that
would be recovered under the WLR Foods claims was based on the ratio of
recoveries to vitamin purchases that was inherent in similar claims settled by
the Company in fiscal 2001 on substantially similar claims. To date, claims
related to approximately one-third of the WLR Foods affected vitamin purchases
have been settled by or on behalf of the former WLR Foods, which settlements
have resulted in payments to the Company and the former WLR Foods of $11.0
million. No assurances can be made regarding the likelihood or timing of
future settlements or whether or not future recoveries, if any, will be
proportionally less than, equal to or greater than these previous recovery
amounts.
On June 7, 2001, the Company brought legal action as a plaintiff in an
antitrust lawsuit filed in the U.S. District Court in San Francisco alleging a
world-wide conspiracy by defendant suppliers and producers of methionine to
control production capacity and raise prices of methionine. The Company
estimates that it was overcharged by approximately $50 million in connection
with the alleged conspiracy and expects the litigation of this matter to be
resolved during calendar year 2003. No assurances can be made regarding the
likelihood or timing of future awards or settlements.
On July 1, 2002, three individuals, on behalf of themselves and a putative
class of chicken growers, filed their original class action complaint against
us in the United States District Court for the Eastern District of Texas,
Texarkana Division. The case is styled "Wheeler vs. Pilgrim's Pride
Corporation". The complaint alleges that we violated the Packers and
Stockyards Act (7 U.S.C. Section 192) and breached fiduciary duties allegedly
owed to the plaintiff growers. The plaintiffs also brought individual actions
under the Packers and Stockyards Act alleging common law fraud, negligence,
breach of fiduciary duties and breach of contract. On July 29, 2002, we filed
our Motion to Dismiss under Rules 12(b) (1), 12(b) (6) and 9(b). We also filed
a Motion to Transfer Venue on August 19, 2002, and the plaintiffs have filed a
Motion for Preliminary Injunction to prohibit any alleged retaliation against
the growers. Discovery has not yet been conducted in this case. In addition,
the Court has not ruled upon any of the above-referenced motions. We intend to
defend vigorously both certification of the case as a class action and
questions concerning ultimate liability and damages, if any. 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, 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 EQUITY AND RELATED STOCKHOLDER
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
2002 2001 Dividends
Quarter High Low High Low 2002 2001
Class B Common Stock
First $14.48 $12.24 $ 8.15 $ 6.03 $.015 $.01
Second 14.45 12.05 12.33 7.67 .015 .01
Third 14.80 12.90 12.55 9.43 .015 .01
Fourth 13.92 8.49 15.35 11.90 .015 .01
Class A Common Stock
First 9.94 8.35 5.72 4.46 .015 .01
Second 10.90 8.66 8.42 5.47 .015 .01
Third 11.14 9.79 8.74 6.63 .015 .01
Fourth $10.53 $6.59 $10.98 $7.50 $.015 $.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 13,676 and 26,022 holders (including
individual participants in security position listings) of the Company's Class A
and Class B common stock, respectively, as of November 5, 2002. See Note
F-common stock of the Notes to Consolidated Financial Statements for additional
discussion of the Company's common stock.
With the exception of two quarters in 1993, the Company's Board of Directors
has declared cash dividends of $0.015 per share of common stock (on a split
adjusted basis) every fiscal quarter since the Company's initial public
offering in 1986. Payment of future dividends will depend upon the Company's
financial condition, results of operations and other factors deemed relevant by
the Company's Board of Directors, as well as any limitations imposed by lenders
under the Company's credit facilities. The Company's revolving credit facility
and revolving/term borrowing facility currently limit dividends to a maximum of
$3.4 million per year. See Note C - Notes Payable and Long-Term Debt of the
Notes to Consolidated Financial Statements for additional discussions of the
Company's credit facilities.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)Ten Years Ended September 28, 2002
2002 2001(a) 2000 1999(b) 1998
INCOME STATEMENT DATA:
Net sales $2,533,718 $2,214,712 $1,499,439 $1,357,403 $1,331,545
Gross margin 165,165 213,950 165,828 185,708 136,103
Operating income (loss) 29,904 94,542 80,488 109,504 77,256
Income (loss) before
income taxes and
extraordinary charge 1,910 63,294 62,786 90,904 56,522
Interest expense, net 32,003 30,775 17,779 17,666 20,148
Income tax expense
(benefit) (c) (12,425) 21,263 10,442 25,651 6,512
Income (loss) before
extraordinary charge 14,335 42,031 52,344 65,253 50,010
Extraordinary charge -
net of tax -- (894) -- -- --
Net income (loss) 14,335 41,137 52,344 65,253 50,010
Ratio of earnings to
fixed charges (d) (d) 2.16x 3.04x 4.33x 2.96x
PER COMMON SHARE DATA(e)
Income (loss) before
extraordinary charge $0.35 $1.02 $1.27 $1.58 $1.21
Extraordinary charge -
early repayment of debt -- (0.02) -- -- --
Net income (loss) 0.35 1.00 1.27 1.58 1.21
Cash dividends 0.06 0.06 0.06 0.045 0.04
Book value 9.59 9.27 8.33 7.11 5.58
BALANCE SHEET SUMMARY:
Working capital $179,038 $203,450 $124,531 $154,242 $147,040
Total assets 1,227,890 1,215,695 705,420 655,762 601,439
Notes payable and
current maturities of
long-term debt 3,483 5,099 4,657 4,353 5,889
Long-term debt, less
current maturities 450,161 467,242 165,037 183,753 199,784
Total stockholders'
equity 394,324 380,932 342,559 294,259 230,871
CASH FLOW SUMMARY:
Operating cash flow $98,113 $87,833 $130,803 $81,452 $85,016
Depreciation &
amortization(f) 70,973 55,390 36,027 34,536 32,591
Capital expenditures 80,388 112,632 92,128 69,649 53,518
Business acquisitions -- 239,539 -- -- --
Financing activities, net (21,163) 254,382 (22,619) (19,634) (32,498)
CASHFLOW RATIOS:
EBITDA(g) 103,469 147,666 115,356 142,043 108,268
EBITDA/interest expense, net 3.23x 4.80x 6.49x 8.04x 5.37x
Senior secured debt/EBITDA 2.45x 1.84x .69x .67x 1.02x
Total debt/EBITDA 4.38x 3.20x 1.47x 1.32x 1.90x
KEY INDICATORS (AS A PERCENTAGE OF NET SALES):
Gross margin 6.5% 9.7% 11.1% 13.7% 10.2%
Selling, general and
administrative expenses 5.3% 5.4% 5.7% 5.6% 4.4%
Operating income (loss) 1.2% 4.3% 5.4% 8.1% 5.8%
Interest expense, net 1.3% 1.4% 1.2% 1.3% 1.5%
Net income (loss) 0.6% 1.9% 3.5% 4.8% 3.8%
(In thousands, except per share data)Ten Years Ended September 28, 2002
1997 1996 1995 1994 1993(b)
INCOME STATEMENT DATA:
Net sales $1,277,649 $1,139,310 $931,806 $922,609 $887,843
Gross margin 114,467 70,640 74,144 110,827 106,036
Operating income (loss) 63,894 21,504 24,930 59,698 56,345
Income (loss) before
income taxes and
extraordinary charge 43,824 47 2,091 42,448 32,838
Interest expense, net 22,075 21,539 17,483 19,175 25,719
Income tax expense
(benefit) (c) 2,788 4,551 10,058 11,390 10,543
Income (loss) before
extraordinary charge 41,036 (4,504) (7,967) 31,058 22,295
Extraordinary charge -
net of tax -- (2,780) -- -- (1,286)
Net income (loss) 41,036 (7,284) (7,967) 31,058 21,009
Ratio of earnings to fixed
charges 2.57x (d) 1.07x 2.79x 2.10x
PER COMMON SHARE DATA:(E)
Income (loss) before
extraordinary charge $ 0.99 $ (0.11) $ (0.19) $ 0.75 $ 0.54
Extraordinary charge -
early repayment of debt -- (0.07) -- -- (0.03)
Net income (loss) 0.99 (0.18) (0.19) 0.75 0.51
Cash dividends 0.04 0.04 0.04 0.04 0.02
Book value 4.41 3.46 3.67 3.91 3.20
BALANCE SHEET SUMMARY:
Working capital $ 133,542 $ 88,455 $ 88,395 $ 99,724 $72,688
Total assets 579,124 536,722 497,604 438,683 422,846
Notes payable and
current maturities of
long-term debt 11,596 35,850 18,187 4,493 25,643
Long-term debt, less
current maturities 224,743 198,334 182,988 152,631 159,554
Total stockholders'
equity 182,516 143,135 152,074 161,696 132,293
CASH FLOW SUMMARY:
Operating cash flow $49,615 $11,391 $32,712 $60,664 $44,970
Depreciation &
amortization(f) 29,796 28,024 26,127 25,177 26,034
Capital expenditures 50,231 34,314 35,194 25,547 15,201
Business acquisitions -- -- 36,178 -- --
Financing activities, net 348 27,313 40,173 (30,291) (40,339)
CASHFLOW RATIOS:
EBITDA(g) 94,782 47,849 49,811 83,658 79,222
EBITDA/interest expense, net 4.29x 2.22x 2.85x 4.36x 3.08x
Senior secured debt/EBITDA 1.45x 2.26x 1.79x .70x .94x
Total debt/EBITDA 2.49x 4.89x 4.04x 1.88x 2.34x
KEY INDICATORS (AS A PERCENTAGE OF NET SALES):
Gross margin 9.0% 6.2% 8.0% 12.0% 11.9%
Selling, general and
administrative expenses 4.0% 4.3% 5.3% 5.5% 5.6%
Operating income (loss) 5.0% 1.9% 2.7% 6.5% 6.3%
Interest expense, net 1.7% 1.9% 1.9% 2.1% 2.9%
Net income (loss) 3.2% (0.6%) (0.9%) 3.4% 2.4%
(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.
(c) Fiscal 2002 includes an $11.9 million of tax benefit from changes in
Mexican tax laws. See Note D-Income Taxes of the Notes to the Consolidated
Financial Statements of the Company.)
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary items plus fixed
charges (excluding capitalized interest). Fixed charges consist of interest
(including capitalized interest) on all indebtedness, amortization of
capitalized financing costs and that portion of rental expense that we
believe to be representative of interest. Earnings were inadequate to
cover fixed charges by $4.1 million and $1.2 million in fiscal 2002 and
1996, respectively.
(e) Historical per share amounts represent both basic and diluted and have been
restated to give effect to a stock dividend issued on July 30, 1999.
(f) Includes amortization of capitalized financing costs of approximately $1.4
million, $0.9 million, $1.2 million, $1.1 million, $1.0 million, $0.9
million, $1.8 million, $1.1 million, $1.3 million and $1.6 million in
fiscal years 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994 and 1993,
respectively.
(g) "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
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% of
our consolidated cost of goods sold in fiscal 2002. 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
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, feed and other items. 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,
which operate 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 28,SEPTEMBER 29,SEPTEMBER 30,
2002 2001(A) 2000
(IN THOUSANDS)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $1,842,749 $1,652,199 $1,192,077
Mexico 342,851 323,678 307,362
Sub-total 2,185,600 1,975,877 1,499,439
Turkey 348,118 238,835 --
Total $2,533,718 $2,214,712 $1,499,439
OPERATING INCOME:
Chicken and Other Products:
United States $ 32,663 $ 78,096 $ 45,928
Mexico 17,064 12,157 34,560
Sub-total 49,727 90,253 80,488
Turkey (19,823) 4,289 --
Total $ 29,904 $ 94,542 $ 80,488
DEPRECIATION AND AMORTIZATION:(B)
Chicken and Other Products:
United States $ 47,528 $ 38,155 $ 24,444
Mexico 13,526 11,962 11,583
Sub-total 61,054 50,117 36,027
Turkey 9,919 5,273 --
Total $ 70,973 $ 55,390 $ 36,027
(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 operations since January 27, 2001 the
acquisition date.
(b) Includes amortization of capitalized financing costs of approximately
$1.4 million, $0.9 million and $1.2 million in fiscal years 2002,
2001, and 2000, respectively.
The following table presents certain items as a percentage of net sales for the
periods indicated:
2002 2001 2000
Net sales 100.0% 100.0% 100.0%
Cost of sales 93.5 90.3 88.9
Gross profit 6.5 9.7 11.1
Selling, general and
administrative expense 5.3 5.4 5.7
Operating income 1.2 4.3 5.4
Interest expense, net 1.3 1.4 1.2
Income before income taxes 0.1 2.9 4.2
Net income 0.6 1.9 3.5
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
On January 27, 2001, we completed the acquisition of WLR Foods (now the
Company's Eastern Division), a vertically integrated producer of chicken and
turkey products located in the eastern United States, for approximately $239.5
million and the assumption of approximately $45.5 million of indebtedness. The
acquisition was accounted for under the purchase method of accounting and the
purchase price was allocated based on the estimated fair value of assets and
liabilities. WLR Foods' operations have been included in our financial results
since the acquisition on January 27, 2001. Accordingly, only 35 weeks of
operations of the former WLR Foods are included in our results for fiscal 2001.
WLR Foods was the seventh largest poultry company in the United States with
$836.9 million of revenue in calendar year 2000. The WLR Foods acquisition
provided us with (1) chicken processing facilities in the eastern United
States, where we previously had no facilities, enabling us to 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. Currently, our Eastern Division's
chicken sales mix consists mostly of lower margin fresh chicken products.
However, we intend to convert more of our Eastern Division chicken sales mix
into higher margin, fresh and prepared chicken products in the years to come.
By consistent and continued application of our long-term business strategy to
both our recently acquired Eastern Division 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 in subsequent years.
Since the acquisition of WLR Foods, our Eastern Division, which consists of
the former WLR Foods' operations, has been affected by two significant
unexpected challenges. First, on March 12, 2002 an outbreak of low-pathogenic
avian influenza, a disease contagious to turkey, chicken and other birds, was
discovered in Virginia. During fiscal 2002, we estimate that our operating
income was negatively impacted by approximately $26.0 million due to the
negative impact of the avian influenza. As of September 28, 2002, poultry
growers and producers have destroyed approximately 4.7 million head of poultry
affected as a result of the virus. Turkeys represent approximately 70.0% of
the destroyed poultry, with chickens representing approximately 30.0%.
Approximately one-half of the turkeys and approximately three-quarters of the
chickens destroyed by the poultry industry in Virginia belonged to the Company.
No new flocks have tested positive for the presence of avian influenza in
Virginia since July 2, 2002. We currently estimate that production in our
turkey operation will be significantly reduced over the first six months of
fiscal 2003 due to the effects of this viral outbreak. As a result of this
lower production output in our turkey operation, we anticipate that operating
income from our turkey operation will decrease for the first six months of
fiscal 2003 by approximately $8.0 to $14.0 million, when compared to the first
six months of fiscal 2002, assuming the outbreak of avian influenza has been
contained. On June 19, 2002, U.S. Secretary of Agriculture Ann Veneman
proposed to the Office of Management and Budget that the U.S. Department of
Agriculture (USDA) cover one-half of the total estimated economic loss suffered
by the poultry industry and independent growers in Virginia due to the avian
influenza outbreak. Secretary Veneman also recommended that the government of
Virginia cover the remaining portion. It is our understanding that, as part of
her proposal, Secretary Veneman is suggesting that independent chicken and
turkey growers are to be fully compensated for their losses first and that the
remainder is to be allocated to other poultry producers (including us) whose
flocks were destroyed by the virus. On November 4, 2002 the Department of
Agriculture made public their estimate of total federal compensation at $51
million, with growers being compensated $13.9 million and owners being
compensated $37.1 million. No assurance can be given as to the amount of
federal compensation that we may receive or that any state agencies will in
fact provide further economic assistance to the poultry growers and producers
affected by the avian influenza outbreak in Virginia. No anticipated
recoveries have been recorded by us as our portion of the compensation has not
yet been determined. In the event that state agencies do decide to grant
economic assistance to the affected poultry growers and producers, it is
impossible at this time to estimate how the state agencies would allocate any
such assistance between affected poultry growers and producers whose flocks
were destroyed by the virus.
The second challenge faced by our Eastern Division was that in October
2002 a limited number of USDA samples from the Company's Franconia,
Pennsylvania plant tested positive for Listeria. As a result the Company
voluntarily recalled all cooked deli products produced at the plant from May 1,
2002 through October 11, 2002. Additionally as a precautionary measure, we
immediately suspended operations at our Franconia facility to redouble our food
safety and sanitation efforts. No illnesses associated with the Listeria
strain in a Northeastern outbreak have been linked to any of our products, and
our Franconia facility has been reviewed and inspected by the USDA and reopened
on November 13, 2002. As the recall occurred in early fiscal 2003, it did not
have any significant impact on our consolidated financial statements as of
September 28, 2002. In addition, we carry insurance designed to cover the
direct recall related expenses and certain aspects of the related business
interruption caused by the recall. As a result, we believe that the recall and
its direct effects will not have a material impact on our financial position,
results of operations, or liquidity after considering available insurance
coverage. However, there will likely be differences between the accounting
periods in which certain recall effects are realized and when insurance
recoveries are received, and there can be no assurances as to the Company's
ability to re-establish the products and sales affected by the recall.
Consolidated Net Income Before Tax. Consolidated net income before tax is
affected by foreign exchange rate fluctuations between the U.S. dollar and the
Mexican peso. Assuming the peso exchange rate does not change from the rate at
the end of fiscal 2002, approximately $1.7 million of future devaluation will
result as remaining inventory is sold. On September 29, 2001, the Mexican peso
closed at 9.54 to 1 U.S. dollar, compared to 10.02 to 1 U.S. dollar on
September 28, 2002, and at 10.19 to 1 U.S. dollar on December 2, 2002. No
assurances can be given as to how future movements in the peso could affect our
future earnings.
Consolidated Net Sales. Consolidated net sales were $2.5 billion for
fiscal 2002, an increase of $319.0 million, or 14.4%, from fiscal 2001. The
increase in consolidated net sales resulted from a $176.7 million increase in
U.S. chicken sales to $1.6 billion, a $109.3 million increase in turkey sales
to $348.1 million, a $20.3 million increase in Mexico chicken sales to $323.8
million and a $13.8 million increase in sales of other products to $193.7
million. The increase in U.S. chicken sales was primarily due to a 17.2%
increase in dressed pounds produced, which resulted primarily from the
acquisition of WLR Foods on January 27, 2001 offset partially by a 4.4%
decrease in total revenue per dressed pound produced, caused in part by import
restrictions on poultry products typically sold to Russia and Japan by the
industry, resulting in production being liquidated at less favorable pricing
levels. The increase in turkey sales was due to the acquisition of WLR Foods,
partially offset by the impact of the avian influenza discussed above. The
$20.3 million increase in Mexico chicken sales was primarily due to an 8.0%
increase in average revenue per dressed pound produced, partially offset by a
1.9% decrease in pounds produced. The $13.8 million increase in sales of other
U.S. products was primarily due to poultry by-products sales price increases,
an increase in sales by the Company's wholesale feed division and the
acquisition of WLR Foods.
Cost of Sales. Consolidated cost of sales was $2.4 billion in fiscal
2002, an increase of $367.8 million, or 18.4%, when compared to fiscal 2001.
The U.S. operations accounted for $356.9 million of the increase in the cost of
sales and our Mexico operations accounted for $10.9 million of the increase.
The cost of sales increase in our U.S. operations of $356.9 million was due
primarily to the acquisition of WLR Foods, $121.6 million of which is related
to the turkey operations and was impacted by the avian influenza discussed
above. The increase in cost of sales of chicken products also resulted from
increased sales of higher cost prepared foods products.
The $10.9 million cost of sales increase in our Mexico operations was
primarily due to production of a higher cost, more value added product mix
compared to the prior year.
Gross Profit. Gross profit was $165.2 million for fiscal 2002, a decrease
of $48.8 million, or 22.8%, from the same period last year, due primarily to
the negative effects of the avian influenza outbreak in our Eastern Division
and to lower dark meat sales prices in the U.S. caused in part by import
restrictions on poultry products typically sold to Russia and Japan by the
industry.
Gross profit as a percentage of sales decreased to 6.5% in fiscal 2002,
from 9.7% in fiscal 2001, primarily due to increased operating expenses
incurred in connection with the avian influenza outbreak in our Eastern
Division and lower dark meat sales prices in the U.S. caused in part by import
restrictions on poultry products typically sold to Russia and Japan by the
industry.
Consolidated Selling, General and Administrative. Consolidated selling,
general and administrative expenses were $135.3 million in fiscal 2002 and
$119.4 million in fiscal 2001. The $15.9 million increase was due primarily to
the acquisition of WLR Foods, which was completed on January 27, 2001.
Consolidated selling, general and administrative expenses as a percentage of
sales decreased slightly in fiscal 2002 to 5.3%, compared to 5.4% in fiscal
2001.
Operating Income. Consolidated operating income was $29.9 million for
fiscal 2002, decreasing by approximately $64.6 million, when compared to fiscal
2001 due primarily to the negative effects of the avian influenza outbreak in
our Eastern Division and to lower dark meat sales prices in the U.S. caused in
part by import restrictions on poultry products typically sold to Russia and
Japan by the industry.
Interest Expense. Consolidated net interest expense increased 4.0% to
$32.0 million in fiscal 2002, when compared to $30.8 million for fiscal 2001,
due primarily to higher average outstanding debt balances experienced in the
year.
Income Tax Expense. Consolidated income tax benefit in fiscal 2002 was
$12.4 million compared to an income tax expense of $21.3 million in fiscal
2001. This decrease was primarily caused by the $11.9 million income tax
benefit resulting from changes in the Mexico tax law and lower pretax earnings
in fiscal 2002.
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 $36.7 million increase in sales of other products to $200.1 million and by a
$17.8 million increase in Mexico chicken sales to $303.4 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 $36.7 million
increase in sales of other U.S. products to $200.1 million was primarily due to
the acquisition of WLR Foods and higher prices in our commercial egg
operations. The $17.8 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 was $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, from 11.1% in fiscal 2000, due
primarily to lower sales 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 Foods 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 the 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.
LIQUIDITY AND CAPITAL RESOURCES
We maintain $130.0 million in revolving credit facilities, $30 million of
which is related to our Mexican operations, and $400.0 million in a secured
revolving/term borrowing facility, subject to certain limitations including
availability of collateral. 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 28, 2002 ranged from LIBOR plus one and three-quarters percent
to LIBOR plus two percent. These facilities are secured by inventory and fixed
assets; the $30 million facility in Mexico is further secured by Mexican
accounts receivables, inventories and certain fixed assets.
At September 28, 2002, $115.9 million was available under the revolving
credit facilities including $30.0 million in Mexico and $209.0 million was
available under the revolving/term borrowing facility. At December 2, 2002 we
had $76.1 million available under our revolving credit facilities and $180.0
million available under the revolving/term borrowing facility and cash on hand
of $81.3 million compared to $14.9 million at September 28, 2002, due primarily
to advances subsequent to year end on the various facilities, for a total
liquidity of $337.4 million at December 2, 2002 compared to $339.8 million at
September 28, 2002.
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 28, 2002 and 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 in accounts receivable during each period. This sales agreement
expires on June 30, 2003. If this facility is not replaced or extended the
Company will likely use its revolving/term borrowing facility to provide this
liquidity. 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 us. 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 28, 2002, our working capital decreased to $179.0 million and
our current ratio decreased to 1.68 to 1, compared with working capital of
$203.4 million and a current ratio of 1.85 to 1 at September 29, 2001,
primarily due to the working capital changes discussed below.
Contractual Obligations and Guarantees. Obligations under long-term debt and
non-cancelable operating leases at September 28, 2002 are as follows (in
millions):
Payments Due By Period
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
Long-term debt(a) $453.6 $3.4 $21.6 $49.1 $379.5
Guarantee Fees 13.2 2.5 4.8 4.1 1.8
Operating leases 110.3 32.4 38.2 26.8 12.9
Total $577.1 $38.3 $64.6 $80.0 $394.2
(a) Excludes $14.1 million in letters of credit outstanding related to normal
business transactions.
Trade accounts and other receivables were $85.3 million at September 28,
2002, compared to $95.0 million at September 29, 2001. The $9.7 million, or
10.2%, decrease in trade accounts and other receivables was primarily due to
improvements in collection efficiencies. Excluding the sale of receivables,
trade accounts and other receivables would have decreased $8.5 million, to
$143.8 million at the end of fiscal 2002 from $153.5 million at the end of
fiscal 2001.
Inventories were $326.8 million at September 28, 2002, compared to $314.4
million at September 29, 2001. The $12.4 million, or 3.9%, increase in
inventories was primarily due to increases in finished turkey products
inventories resulting from changes made in product mix in connection with the
outbreak of avian influenza (see General, Overview and Developments) which
inventories are expected to be liquidated during the 2002 Thanksgiving and
Christmas holiday seasons.
Accounts payable and accrued expenses increased $18.6 million to $248.5
million at September 28, 2002, compared to $229.9 million at September 29, 2001
due to an increase in higher feed, other ingredients, packaging costs, and
other expenses.
Capital expenditures of $80.4 million, $112.6 million and $92.1 million,
for fiscal years 2002, 2001 and 2000, 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 to $75.0 million in fiscal 2003 to improve efficiencies and for
the routine replacement of equipment. We expect to finance such expenditures
with available operating cash flows and existing revolving/term and revolving
credit facilities.
Cash flows provided by operating activities were $98.1 million, $87.8
million and $130.8 million for the fiscal years 2002, 2001 and 2000,
respectively. The increase in cash flows provided by operating activities for
fiscal 2002 when compared to fiscal 2001, was primarily due to a full year
impact from the former WLR Foods operations in fiscal 2002, compared to 35
weeks in fiscal 2001. 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 and increased inventories, due primarily to higher levels of
live poultry and frozen turkey inventories due primarily to 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.
Cash flows (used in) provided by financing activities were ($21.2)
million, $254.2 million and ($22.6) million for the fiscal years 2002, 2001 and
2000, respectively. The increase in cash used in financing activities for
fiscal 2002, when compared to fiscal 2001, is primarily due to borrowings to
finance the acquisition of WLR Foods in 2001. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General. Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition, customer programs
and incentives, allowance for doubtful accounts, inventories and income taxes.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.
Revenue Recognition. Revenue is recognized upon shipment or upon transfer
of ownership of the product to the customer and is recorded net of estimated
incentive offerings including special pricing agreements, promotions and other
volume-based incentives. Revisions to these estimates are charged to income in
the period in which the facts that give rise to the revision become known.
Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts reflecting estimated losses resulting from the inability of our
customers to make required payments. The allowance for doubtful accounts is
based on management's review of the overall condition of accounts receivable
balances and review of significant past due accounts. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Inventory. 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. We
record valuations and adjustments for our inventory and for estimated
obsolescence at or equal to the difference between the cost of inventory and
the estimated market value based upon known conditions affecting the
inventories obsolescence, including significantly aged products, discontinued
product lines, or damaged or obsolete products. We allocate meat costs between
our various finished poultry products based on a by-product costing technique
that reduces the cost of the whole bird by estimated yields and amounts to be
recovered for certain by-product parts, primarily including leg quarters,
wings, tenders and offal, which are carried in inventory at the estimated
recovery amounts, with the remaining amount being reflected as our breast meat
cost. As a result, our lower of cost or market evaluation is done separately
on a pool basis for all chicken and turkey products. If actual market
conditions are less favorable than those projected by management, additional
inventory adjustments may be required.
Accrued Self Insurance. Insurance expense for casualty claims and
employee-related health care benefits are estimated using historical experience
and actuarial estimates. Stop-loss coverage is maintained with third party
insurers to limit the Company's total exposure. The assumption used to arrive
at periodic expenses is reviewed regularly by management. However, actual
expenses could differ from these estimates and could result in adjustments to
be recognized.
Income Taxes. We account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires that deferred tax assets and
liabilities be recognized for the effect of temporary differences between the
book and tax bases of recorded assets and liabilities. Taxes are provided for
international subsidiaries based on the assumption that these earnings are
indefinitely reinvested in the Company and within individual companies and as
such taxes are not provided in the U.S. or local jurisdictions that would be
required in the event of distribution of these earnings. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some portion or all of the deferred tax asset will
not be realized. We review the recoverability of any tax assets recorded on
the balance sheet, primarily operating loss carryforwards, based on both
historical and anticipated earnings levels of the individual operations and
provide a valuation allowance when it is more likely than not that amounts will
not be recovered.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in our 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 28, 2002. Based on our feed consumption during fiscal 2002, such an
increase would have resulted in an increase to cost of sales of approximately
$69.5 million, excluding the impact of any hedging in that period. As of
September 28, 2002, we had hedged 1.7% of our 2003 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 $1.5 million in fiscal 2002 and a loss of $0.1
million and gain of $0.2 million in fiscal 2001 and 2000, respectively. On
December 2, 2002, the Mexican peso closed at 10.19 to 1 U.S. dollar, compared
to 10.02 at September 28, 2002. 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 42.4% of our long-term debt at September 28, 2002. 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 2002. These amounts are determined by considering the impact
of the hypothetical interest rates on our variable-rate long-term debt at
September 28, 2002.
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 $11.6 million as of September
28, 2002, using discounted cash flow analysis.
Impact of Inflation
Due to low to moderate inflation in the U.S. and Mexico and our rapid
inventory turnover rate, the results of operations have not been significantly
affected by inflation during the past three-year period.
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 those described under "Risk Factors" below and elsewhere in
this Annual Report on Form 10-K.
Actual results could differ materially from those projected in these
forward-looking statements as a result of these factors, among others, many of
which are beyond our control.
In making these statements, we are not undertaking, and specifically
decline to undertake, any obligation to address or update each or any factor in
future filings or communications regarding our business or results, and we are
not undertaking to address how any of these factors may have caused changes or
information contained in previous filings or communications. Though we have
attempted to list comprehensively these important cautionary risk factors, we
wish to caution investors and others that other factors may in the future prove
to be important in affecting our business or results of operations.
RISK FACTORS
Cyclicality and Commodity Prices. Industry cyclicality can affect our
earnings, especially due to fluctuations in commodity prices of feed
ingredients, chicken and turkey.
Profitability in the chicken and turkey industries is materially affected by
the commodity prices of feed ingredients, chicken and turkey, which are
determined by supply and demand factors. As a result, the chicken and turkey
industries are subject to cyclical earnings fluctuations.
The production of feed ingredients is positively or negatively affected
primarily by weather patterns throughout the world, the global level of supply
inventories and demand for feed ingredients, and the agricultural policies of
the United States and foreign governments. In particular, weather patterns
often change agricultural conditions in an unpredictable manner. A sudden and
significant change in weather patterns could affect supplies of feed
ingredients, as well as both the industry's and our ability to obtain feed
ingredients, grow chickens and turkeys or deliver products.
High feed ingredient prices have had a material adverse effect on our
operating results in the past. We periodically seek, to the extent available,
to enter into advance purchase commitments or financial hedging contracts for
the purchase of feed ingredients in an effort to manage our feed ingredient
costs. The use of such instruments may not be successful.
Substantial Leverage. Our substantial indebtedness could adversely affect our
financial condition.
We presently have, and expect to continue to have, a substantial amount of
indebtedness. Our substantial indebtedness could have important consequences to
you. For example, it could:
- Make it more difficult for us to satisfy our obligations under our
indebtedness, including our debt securities;
- Increase our vulnerability to general adverse economic conditions;
- Limit our ability to obtain necessary financing and to fund future
working capital, capital expenditures and other general corporate
requirements;
- Require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and for other general corporate purposes;
- Limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
- Place us at a competitive disadvantage compared to our competitors
that have less debt;
- Limit our ability to pursue acquisitions and sell assets;
- Make us vulnerable to increases in interest rates because a
substantial portion of our borrowings are at variable interest rates; and
- Limit, along with the financial and other restrictive covenants in
our indebtedness, our ability to borrow additional funds, and failing to
comply with those covenants could result in an event of default or
require redemption of indebtedness. Either of these events could have a
material adverse effect on us.
Our ability to make payments on and to refinance our indebtedness will
depend on our ability to generate cash in the future, which is dependent on
various factors. These factors include the commodity prices of feed
ingredients, chicken and chicken parts and general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Additional Borrowings Available. Despite our substantial indebtedness, we may
still be able to incur significantly more debt. This could intensify the risks
described above.
Despite our substantial indebtedness, we are not prohibited from incurring
additional indebtedness in the future. If additional debt is added to our
current debt levels, the related risks that we now face could intensify.
Integration of the Eastern Division. We have only recently acquired the
Eastern Division and may not be able to successfully integrate its operations
over the long term.
We only recently began to operate the businesses of Pilgrim's Pride and the
Eastern Division as a combined entity. The acquisition of the Eastern Division
has significantly increased our size and operations. Our prospects should be
considered in light of the numerous risks commonly encountered in business
combinations. Although our management has significant experience in the
chicken industry, there can be no assurance as to our ability to effectively
integrate WLR Foods or fully realize the associated cost savings and operating
synergies currently anticipated.
Contamination of Products. If our poultry products become contaminated, we
may be subject to product liability claims and product recalls.
Poultry products may be subject to contamination by disease producing
organisms, or pathogens, such as Listeria monocytogenes, Salmonella and generic
E coli. These pathogens are generally found in the environment and, as a
result, there is a risk that they, as a result of food processing, could be
present in our processed poultry products. These pathogens can also be
introduced as a result of improper handling at the further processing,
foodservice or consumer level. These risks may be controlled, but may not be
eliminated, by adherence to good manufacturing practices and finished product
testing. The Company has little, if any, control over proper handling once the
product has been shipped. Illness and death may result if the pathogens are
not eliminated at the further processing, foodservice or consumer level. Even
an inadvertent shipment of contaminated products is a violation of law and may
lead to increased risk of exposure to product liability claims, product recalls
and increased scrutiny by federal and state regulatory agencies and may have a
material adverse effect on our business, reputation and prospects.
As described in detail under "Item 1. Business - General - Overview and
Recent Developments," in October 2002 one product sample produced in our
Franconia, Pennsylvania facility that had not been shipped to customers tested
positive for Listeria and we later received information from the USDA
suggesting that environmental samples taken at the facility had tested positive
for both the strain of Listeria identified in the product and a strain having
characteristics similar to those of the strain identified in a Northeastern
Listeria outbreak. As a result of these findings, we recalled all cooked deli
products produced at the facility from May 1, 2002 through October 11, 2002 and
temporarily suspended operations at the facility to redouble our food safety
and sanitation efforts. There can be no assurance that there will not be
additional recalls of our products in the future or that this recall or any
such future recall or any litigation arising therefrom will not have a material
adverse effect on our ability to market our products successfully or on our
business, reputation, prospects, financial condition and results of operations.
Livestock and Poultry Disease. Outbreaks of livestock diseases in general, and
poultry disease in particular, can significantly restrict our ability to
conduct our operations.
We take all reasonable precautions to ensure that our flocks are healthy and
that our processing plants and other facilities operate in a sanitary and
environmentally sound manner. However, events beyond our control, such as the
outbreak of disease, could significantly restrict our ability to conduct our
operations. Furthermore, an outbreak of disease could result in governmental
restrictions on the import and export of our fresh chicken, turkey or other
products to or from our suppliers, facilities or customers, or require us to
destroy one or more of our flocks. This could result in the cancellation of
orders by our customers and create adverse publicity that may have a material
adverse effect on our ability to market our products successfully and on our
business, reputation and prospects.
As described in more detail under "Item 1. Business - General - Overview and
Recent Developments," an outbreak of low-pathogenic avian influenza, a disease
contagious to turkey, chicken and other birds, has had a material adverse
effect on our fiscal 2002 operating results and is expected to continue to have
a material adverse effect on our results through at least the first six months
of fiscal 2003. There can be no assurance that the losses associated with this
avian influenza outbreak will not be greater than anticipated or that any
future poultry disease outbreaks will not have a material adverse effect on our
ability to market our products successfully or on our business, reputation,
prospects, financial condition and results of operations.
Product Liability. Product liability claims or product recalls can adversely
affect our business reputation and expose us to increased scrutiny by federal
and state regulators.
The packaging, marketing and distribution of food products entails an
inherent risk of product liability and product recall and the resultant adverse
publicity. We may be subject to significant liability if the consumption of
any of our products causes injury, illness or death. We could be required to
recall certain of our products in the event of contamination or damage to the
products. In addition to the risks of product liability or product recall due
to deficiencies caused by our production or processing operations, we may
encounter the same risks if any third party tampers with our products. We
cannot assure you that we will not be required to perform product recalls, or
that product liability claims will not be asserted against us, in the future.
Any claims that may be made may create adverse publicity that would have a
material adverse effect on our ability to market our products successfully or
on our business, reputation, prospects, financial condition and results of
operations.
As described above under "Contamination of Products - If our poultry
products become contaminated, we may be subject to product liability claims and
product recalls." We recently recalled all cooked deli products produced at one
of our facilities from May 1, 2002 through October 11, 2002. In connection
with this recall, a class action lawsuit was filed against us on behalf of a
putative class of persons that purchased and/or consumed meat products subject
to the recall and we have received a substantial amount of press. See Item 3.
Legal Proceedings. There can be no assurance that any class action litigation
or reputational injury associated with this or any future product recalls will
not have a material adverse effect on our ability to market our products
successfully and on our business, reputation, prospects, financial condition
and results of operations.
Insurance. We are exposed to risks relating to product liability, product
recalls, property damage and injuries to persons, for which insurance coverage
is expensive, limited and potentially inadequate.
Our business operations entail a number of risks, including risks relating
to product liability claims, product recalls, property damage and injuries to
persons. We currently maintain insurance with respect to certain of these
risks, including product liability and recall insurance, property insurance,
workers compensation insurance and general liability insurance, but in many
cases such insurance is expensive, difficult to obtain and no assurance can be
given that such insurance can be maintained in the future on acceptable terms,
or in sufficient amounts to protect us against losses due to any such events,
or at all. Moreover, even though our insurance coverage may be designed to
protect us from losses attributable to certain events, it may not adequately
protect us from liability and expenses we incur in connection with such events.
For example, in the past one of our insurers encountered financial difficulties
and was unable to fulfill its obligations under one of our insurance policies
and one of our insurers contested coverage with respect to a claim forcing us
to litigate the issue of coverage.
As described above under "Contamination of Products-If our poultry
products become contaminated, we may be subject to product liability claims and
product recalls," we recently recalled all cooked deli products produced at one
of our facilities from May 1, 2002 through October 11, 2002, and a class action
lawsuit was filed against us on behalf of a putative class of persons that
purchased and/or consumed meat products subject to the recall. We have
notified our insurers as to the occurrence of these events and made one claim
to date under our product recall insurance policy. While we carry insurance
designed to cover recall events such as this and we believe that the insurance
policies purchased will cover the direct costs associated with the product
recall and related product liability claims and, subject to the insurer's
reservation of rights, we have received a $4 million advance payment from our
insurer with respect to the product recall claim, no assurances can be given
that such insurance will in fact adequately protect us from liability and
expenses we incur in connection with this recall or any such future events.
Potential Acquisitions. We may pursue opportunities to acquire complementary
businesses, which could increase leverage and debt service requirements and
could adversely affect our financial situation if we fail to successfully
integrate the acquired business.
We intend to pursue selective acquisitions of complementary businesses in
the future. Inherent in any future acquisitions are certain risks such as
increasing leverage and debt service requirements and combining company
cultures and facilities, which could have a material adverse effect on our
operating results, particularly during the period immediately following such
acquisitions. Additional debt or equity capital may be required to complete
future acquisitions, and there can be no assurance that we will be able to
raise the required capital. Furthermore, acquisitions involve a number of
risks and challenges, including:
* Diversion of management's attention;
* The need to integrate acquired operations;
* Potential loss of key employees and customers of the acquired
companies;
* Lack of experience in operating in the geographical market of the
acquired business; and
* An increase in our expenses and working capital requirements.
Any of these and other factors could adversely affect our ability to achieve
anticipated cash flows at acquired operations or realize other anticipated
benefits of acquisitions.
Foreign Operations Risks. Our foreign operations pose special risks to our
business and operations.
We have substantial operations and assets located in Mexico. Foreign
operations are subject to a number of special risks, including among others:
* Currency exchange rate fluctuations;
* Trade barriers;
* Exchange controls;
* Expropriation; and
* Changes in laws and policies, including those governing foreign-
owned operations.
Currency exchange rate fluctuations have adversely affected us in the past.
Exchange rate fluctuations or one or more other risks may have a material
adverse effect on our business or operations in the future.
Our operations in Mexico are conducted through subsidiaries organized under
the laws of Mexico. We may rely in part on intercompany loans and distributions
from our subsidiaries to meet our obligations. Claims of creditors of our
subsidiaries, including trade creditors, will generally have priority as to the
assets of our subsidiaries over our claims. Additionally, the ability of our
Mexican subsidiaries to make payments and distributions to us will be subject
to, among other things, Mexican law. In the past, these laws have not had a
material adverse effect on the ability of our Mexican subsidiaries to make
these payments and distributions. However, laws such as these may have a
material adverse effect on the ability of our Mexican subsidiaries to make
these payments and distributions in the future.
Government Regulation. Regulation, present and future, is a constant factor
affecting our business.
The chicken and turkey industries are subject to federal, state and local
governmental regulation, including in the health and environmental areas. We
anticipate increased regulation by various agencies concerning food safety, the
use of medication in feed formulations and the disposal of poultry by-products
and wastewater discharges. Unknown matters, new laws and regulations, or
stricter interpretations of existing laws or regulations may materially affect
our business or operations in the future.
Control of Voting Stock. Voting control over Pilgrim's Pride is maintained by
Lonnie "Bo" Pilgrim and Lonnie Ken Pilgrim.
Through a limited partnership of which they are the only general partners,
Lonnie "Bo" Pilgrim and his son Lonnie Ken Pilgrim have voting control of 60.8%
of the voting power of our outstanding common stock. They are therefore in a
position to control the outcome of all actions requiring stockholder approval,
including the election of directors. This ensures their ability to control the
future direction and management of Pilgrim's Pride. If Lonnie "Bo" Pilgrim and
certain members of his family cease to own at least a majority of the voting
power of the outstanding common stock, it will constitute an event of default
under certain agreements relating to our indebtedness.
Risks Associated with Tax Status.
Potential payment of deferred taxes may affect our cash flow.
Before July 2, 1988, we used the cash method of accounting for income tax
purposes. Pursuant to changes in the laws enacted by the Revenue Act of 1987,
we were required to change our method of accounting for federal income tax
purposes from the cash method to the accrual method. As a consequence of this
change in our accounting method, we were permitted to create a "suspense
account" in the amount of approximately $89.7 million. The money in the
suspense account represents deferred income arising from our prior use of the
cash method of accounting.
Beginning in fiscal 1998, we are generally required to include 1/20th of the
amount in the suspense account, or approximately $4.5 million, in taxable
income each year for the next 20 years. As of September 28, 2002, the balance
in the suspense account was approximately $64 million. However, the full amount
must be included in taxable income in any year that Pilgrim's Pride ceases to
be a "family corporation." We will cease to be a "family corporation" if Lonnie
"Bo" Pilgrim's family ceases to own at least 50% of the total combined voting
power of all classes of stock entitled to vote. If that occurs, we would be
required to recognize the balance of the suspense account in taxable income.
Currently there exists no plan or intention on the part of Lonnie "Bo"
Pilgrim's family to transfer enough Pilgrim's Pride stock so that we cease to
qualify as a family corporation. However, this may happen, and the suspense
account might be required to be included in our taxable income.
Potential accrual of deferred taxes may affect our net income and cash flow.
The Company has not provided any 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 28, 2002, the
cumulative undistributed earnings of these subsidiaries were approximately
$191.7 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.
Significant Competition. Competition in the chicken and turkey industries with
other vertically integrated poultry companies, especially companies with
greater resources, may make us unable to compete successfully in these
industries, which could adversely affect our business.
The chicken and turkey industries are highly competitive. Some of our
competitors have greater financial and marketing resources than us. In both the
United States and Mexico, we primarily compete with other vertically integrated
poultry companies.
In general, the competitive factors in the U.S. poultry industry include:
* Price;
* Product quality;
* 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 competition is based on
product quality, brand awareness and customer service. Further, there is some
competition with non-vertically integrated further processors in the U.S.
prepared food business.
In Mexico, where product differentiation has traditionally been limited,
product quality and price have been the most critical competitive factors.
Additionally, 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
those tariffs are reduced, increased competition from chicken imported into
Mexico from the U.S. may have a material adverse effect on the Mexican chicken
industry in general, and on our Mexican operations in particular.
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 71
through 95 this document. Financial statement schedules other than those
included herein have been omitted because the required information is contained
in the consolidated financial statements 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
Certain information regarding our executive officers has been presented
under "Executive Officers" included in Item 1. Business, above.
Reference is made to the section entitled "Election of Directors" of the
Company's Proxy Statement for its 2002 Annual Meeting of Stockholders, which
section is incorporated herein by reference.
Reference is made to the section entitled "Compliance with Section 16(a) of
the Exchange Act" of the Company's Proxy Statement for its 2002 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 AND
RELATED STOCKHOLDER MATTERS
As of September 28, 2002, the Company did not have any compensation plans
(including individual compensation arrangements) under which equity securities
of the Company are authorized for issuance by the Company.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Additional 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 2002 Annual Meeting of Stockholders.
ITEM 14. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chairman, Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
within 90 days of the filing date of this Annual Report on Form 10-K. Based on
that evaluation, the Company's management, including the Chairman, CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these internal controls
subsequent to the date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)Financial Statements
(1) The financial statements and schedule 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 92.
(a)Reports on Form 8-K
(1) The Company filed a Form 8-K on July 17, 2002, to report certain
supplemental historical financial information including quarterly
information regarding net sales by primary market line that had
generally previously only been reported on an annual basis.
(1) The Company filed a Form 8-K on August 8, 2002, attaching two
exhibits entitled "Statement under Oath of Principal Executive
Officer" and "Statement Under Oath of Principal Financial Officer",
that were executed to comply with Securities and Exchange Commission
Order No. 4-460.
(2) The Company filed a Form 8-K on October 15, 2002, to report two press
releases announcing a voluntary recall of cooked deli products
produced at its Franconia, Pennsylvania facility.
(3) The Company filed a Form 8-K on October 30, 2002, to report certain
supplemental historical financial information including quarterly
information regarding net sales by primary market line.
(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, as amended.*
3.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation, a
Delaware Corporation, effective May 14,1999.
4.1 Certificate of Incorporation of the Company, as amended (included as Exhibit
3.1).
4.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation, a
Delaware Corporation, effective May 14, 1999 (included as Exhibit 3.2).
4.3 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).
4.4 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).
4.5 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 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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 thereto as lenders, dated
November 5, 1999 (incorporated by reference from Exhibit 10.23 of the
Company's Annual Report on Form 10-K for the fiscal year ended October 2,
1999).
10.15 Guaranty Fee Agreement between Pilgrim's Pride Corporation and Pilgrim
Interests, LTD., dated June 11, 1999 (incorporated by reference from Exhibit
10.24 of the Company's Annual Report on Form 10-K for the fiscal year ended
October 2, 1999).
10.16 Heavy Breeder Contract dated October 27, 1999 between Pilgrim's Pride
Corporation and David Van Hoose (Timberlake Farms) (incorporated by
reference from Exhibit 10.25 of the Company's Annual Report on Form 10-K
for the fiscal year ended October 2, 1999).
10.17 First Amendment to the 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
thereto as lenders, dated November 5, 1999 (incorporated by reference from
Exhibit 10.27 of the Company's Quarterly Report on Form 10-Q for the three
months ended December 30, 2000).
10.18 Second Amendment to the 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
thereto as lenders, dated November 5, 1999 (incorporated by reference from
Exhibit 10.28 of the Company's Quarterly Report on Form 10-Q for the three
months ended December 30, 2000).
10.19 Second Amended and Restated Credit Agreement between Pilgrim's Pride
Corporation and CoBank, ACB, individually and as agent and the lenders
from time to time parties hereto as lenders, dated November 16, 2000
(incorporated by reference from Exhibit 10.29 of the Company's Quarterly
Report on Form 10-Q for the three months ended December 30, 2000).
10.20 Commercial Property Lease dated December 29, 2000 between Pilgrim's Pride
Corporation and Pilgrim Poultry G.P. (incorporated by reference from Exhibit
10.30 of the Company's Quarterly Report on Form 10-Q for the three months
ended December 30, 2000).
10.21 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 (incorporated by reference
from Exhibit 10.27 of the Company's Annual Report on Form 10-K for the fiscal
year ended September 29, 2001).
10.22 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 (incorporated by reference from Exhibit 10.28 of
the Company's Annual Report on Form 10-K for the fiscal year ended
September 29, 2001).
10.23 Promissory note dated January 4, 2002 signed by David Van Hoose in
favor of Pilgrim's Pride Corporation (incorporated by reference from
Exhibit 10.29 of the Company's Quarterly Report on Form 10-Q for the
three months ended March 30, 2002).
10.24 Promissory note dated January 4, 2002 signed by Clifford E. Butler in favor
of Pilgrim's Pride Corporation (incorporated by reference from Exhibit 10.30
of the Company's Quarterly Report on Form 10-Q for the three months ended
March 30, 2002).
10.25 Promissory note dated January 4, 2002 signed by Richard A. Cogdill in favor
of Pilgrim's Pride Corporation (incorporated by reference from Exhibit 10.31
of the Company's Quarterly Report on Form 10-Q for the three months ended
March 30, 2002).
10.26 Promissory note dated January 4, 2002 signed by Robert L. Hendrix in favor
of Pilgrim's Pride Corporation (incorporated by reference from Exhibit
10.32 of the Company's Quarterly Report on Form 10-Q for the three months
ended March 30, 2002).
10.27 Promissory note dated January 4, 2002 signed by Mike Murray in favor of
Pilgrim's Pride Corporation (incorporated by reference from Exhibit 10.33
of the Company's Quarterly Report on Form 10-Q for the three months ended
March 30, 2002).
10.28 Promissory note dated January 4, 2002 signed by O.B. Goolsby, Jr. in
favor of 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 March 30, 2002).
10.29 Promissory note dated January 4, 2002 signed by Lonnie Ken Pilgrim in
favor of Pilgrim's Pride Corporation (incorporated by reference from
Exhibit 10.35 of the Company's Quarterly Report on Form 10-Q for the
three months ended March 30, 2002).
10.30 First Amendment to Amended and Restated Credit Agreement made as of
December 14, 2001 by and among the Company, CoBank, ACB, individually
and as agent for the benefit of the present and future lenders,
Farm Credit Services of America, FLCA, individually and as a
co-arranger, and the lenders parties thereto individually
(incorporated by reference from Exhibit 10.36 of the Company's Quarterly
Report on Form 10-Q for the three months ended June 29, 2002).
10.31 Second Amendment to Amended and Restated Credit Agreement made as of
June 17, 2002 by and among the Company, CoBank, ACB, Individually and as
agent for the benefit of the present and future lenders, Farm Credit
Services of America, FLCA, individually and as co-arranger, and the
lenders parties thereto individually (incorporated by reference from Exhibit
10.37 of the Company's Quarterly Report on Form 10-Q for the three months
ended June 29, 2002).
10.32 Amendment No. 1 dated as of July 12, 2002 to Receivables Purchase
Agreement dated as of June 26, 1998 among Pilgrim's Pride Funding
Corporation, the Company, Fairway Finance Corporation (as successor
in interest to Pooled Accounts Receivable Capital Corporation) and BMO
Nesbitt Burns Corp. (f/k/a Nesbitt Burns Securities Inc.).*
10.33 Third Amended and Restated Note Purchase Agreement dated as of August 30,
2002 between the Company and John Hancock Life Insurance Company (formerly
known as John Hancock Mutual Life Insurance Company).*
10.34 Retirement agreement dated November 11, 2002 between Pilgrim's Pride
Corporation and David Van Hoose.*
10.35 Third Amendment to Amended and Restated Credit Agreement made as of
October 17, 2002 by and among the Company, CoBank, ACB, individually
and as agent for the benefit of the present and future lenders,
Farm Credit Services of America, FLCA, individually and as co-arranger,
and the lenders parties thereto individually.*
12 Ratio of Earnings to Fixed Charges for the years ended September 28, 2002,
September 29, 2001, September 30, 2000, October 2, 1999 and September 26,
1998.*
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 2nd day of December
2002.
PILGRIM'S PRIDE CORPORATION
By: /S/ Richard A. Cogdill
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
/s/ Lonnie "Bo" Pilgrim
________________________ Chairman of the Board 12/5/2002
Lonnie "Bo" Pilgrim (Co-Principal Executive Officer)
/s/ Clifford E. Butler
_______________________ Vice Chairman of the Board 12/5/2002
Clifford E. Butler
/s/ David Van Hoose
________________________ Chief Executive Officer 12/5/2002
David Van Hoose Director
(Co-Principal Executive Officer)
/s/ Richard A. Cogdill
_______________________ Executive Vice President 12/5/2002
Richard A. Cogdill Chief Financial Officer
Secretary and Treasurer
Director
(Principal Financial and Accounting
Officer)
Signature Title Date
/s/ Lonnie Ken Pilgrim
_______________________ Senior Vice President 12/5/2002
Lonnie Ken Pilgrim Director of Transportation
Director
/s/ Charles L. Black
_______________________ Director 12/5/2002
Charles L. Black
/s/ S. Key Coker
_______________________ Director 12/5/2002
S. Key Coker
/s/ Vance C. Miller
______________________ Director 12/5/2002
Vance C. Miller
/s/ James J. Vetter, Jr.
______________________ Director 12/5/2002
James J. Vetter, Jr.
/s/ Donald L. Wass, Ph.D.
_______________________ Director 12/5/2002
Donald L. Wass, Ph.D.
CERTIFICATIONS
I, Lonnie "Bo" Pilgrim, certify that:
1. I have reviewed this annual report on Form 10-K of Pilgrim's Pride
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Lonnie "Bo" Pilgrim
Date: December 5, 2002
Lonnie "Bo" Pilgrim
Chairman of the Board
Co-Principal Executive Officer
CERTIFICATIONS
I, David Van Hoose, certify that:
1. I have reviewed this annual report on Form 10-K of Pilgrim's Pride
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 5, 2002 /s/ David Van Hoose
David Van Hoose
Chief Executive Officer
Co-Principal Executive Officer
CERTIFICATIONS
I, Richard A. Cogdill, certify that:
1. I have reviewed this annual report on Form 10-K of Pilgrim's Pride
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Richard A. Cogdill
Date: December 5, 2002
Richard A. Cogdill
Chief Financial Officer
PILGRIM'S PRIDE CORPORATION
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Pilgrim's Pride Corporation, (the "Company"), does
hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the year ended September 28, 2002 (the "Form
10-K") of the Company fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, and information contained in the
Form 10-K fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ Lonnie "Bo" Pilgrim
Date: December 5, 2002
Lonnie "Bo" Pilgrim
Chairman of the Board
Co-Principal Executive Officer
PILGRIM'S PRIDE CORPORATION
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Pilgrim's Pride Corporation, (the "Company"), does
hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the year ended September 28, 2002 (the "Form
10-K") of the Company fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, and information contained in the
Form 10-K fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ David Van Hoose
Date: December 5, 2002
David Van Hoose
Chief Executive Officer
Co-Principal Executive Officer
PILGRIM'S PRIDE CORPORATION
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Pilgrim's Pride Corporation, (the "Company"), does
hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the year ended September 28, 2002 (the "Form
10-K") of the Company fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, and information contained in the
Form 10-K fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: December 5, 2002
/s/Richard A. Cogdill
Richard A. Cogdill
Chief Financial Officer
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 28, 2002 and September 29,
2001, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended September 28,
2002. Our audits also included the financial statement schedule listed in the
index at Item 15(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 28, 2002 and September 29, 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 28, 2002, 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, 2002,
except for Note J and the first paragraph
of Note C as to which
the date is December 2, 2002
Consolidated Balance Sheets
Pilgrim's Pride Corporation
(In thousands, except share and per share data) September 28, September 29,
2002 2001
ASSETS
CURRENT ASSETS :
Cash and cash equivalents $ 14,913 $ 20,916
Trade accounts and other receivables, less
allowance for doubtful accounts 85,347 95,022
Inventories 326,792 314,400
Other current assets 16,866 12,934
Total Current Assets 443,918 443,272
OTHER ASSETS 21,940 20,067
PROPERTY, PLANT AND EQUIPMENT:
Land 38,718 36,350
Buildings, machinery and equipment 1,039,581 929,922
Autos and trucks 54,609 53,264
Construction-in-progress 30,433 71,427
1,163,341 1,090,963
Less accumulated depreciation 401,309 338,607
762,032 752,356
$1,227,890 $1,215,695
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 163,892 $ 151,265
Accrued expenses 84,618 78,658
Current deferred income tax 12,888 4,900
Current maturities of long-term debt 3,483 5,099
Total Current Liabilities 264,881 239,922
LONG-TERM DEBT, LESS CURRENT MATURITIES 450,161 467,242
DEFERRED INCOME TAXES 116,911 126,710
MINORITY INTEREST IN SUBSIDIARY 1,613 889
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 2002
and 2001, respectively; 138 138
Common stock - Class B, $.01 par value,
authorized 60,000,000 shares; 27,589,250 issued
and outstanding in 2002 and 2001 276 276
Additional paid-in capital 79,625 79,625
Retained earnings 314,626 302,758
Accumulated other comprehensive income (loss) 1,227 (297)
Less treasury stock, 271,100 shares (1,568) (1,568)
Total Stockholders' Equity 394,324 380,932
$1,227,890 $1,215,695
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
Pilgrim's Pride Corporation
(In thousands, except per share data) Three Years Ended September 28, 2002
2002 2001 2000
NET SALES $2,533,718 $2,214,712 $1,499,439
COST AND EXPENSES:
Cost of sales 2,368,553 2,000,762 1,333,611
Selling, general and
administrative 135,261 119,408 85,340
2,503,814 2,120,170 1,418,951
Operating Income 29,904 94,542 80,488
OTHER EXPENSES (INCOME):
Interest expense, net 32,003 30,775 17,779
Foreign exchange (gain) loss 1,463 122 (152)
Miscellaneous, net (5,472) 351 75
27,994 31,248 17,702
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE 1,910 63,294 62,786
INCOME TAX (BENEFIT) EXPENSE (12,425) 21,263 10,442
INCOME BEFORE EXTRAORDINARY CHARGE 14,335 42,031 52,344
EXTRAORDINARY CHARGE, NET OF TAX -- 894 --
NET INCOME $ 14,335 $ 41,137 $ 52,344
INCOME PER COMMON SHARE BEFORE EXTRAORDINARY
CHARGE - BASIC AND DILUTED $ 0.35 $ 1.02 $ 1.27
EXTRAORDINARY CHARGE, NET OF TAX -- (.02) --
NET INCOME PER COMMON SHARE-BASIC AND DILUTED $ 0.35 $ 1.00 $ 1.27
See Notes to Consolidated Financial Statements
Consolidated Statements of Stockholders' Equity
Pilgrim's Pride Corporation
( In thousands, except share data)
Shares of Common Stock Total Additional
Par Paid-In
Class A Class B Value Capital
Balance at October 2, 1999 13,794,529 27,589,250 $414 $79,625
Treasury stock purchased (271,100)
Net income for year
Cash dividends declared
($.06 per share)
Balance at September 30, 2000 13,523,429 27,589,250 414 79,625
Net income for year
Other comprehensive income (loss):
Losses on commodity hedging
Hedging losses reclassified as earnings
Total comprehensive income
Cash dividends declared
($.06 per share)
Balance at September 29, 2001 13,523,429 27,589,250 $414 $79,625
Net income for year
Other comprehensive income
Gains on commodity hedging
Hedging income reclassified as
earnings
Total comprehensive income
Cash dividends declared
($.06 per share)
Balance at September 28, 2002 13,523,429 27,589,250 $414 $79,625
Accumulated
Other
Retained Comprehensive Treasury
Earnings Loss Stock Total
Balance at October 2, 1999 $214,220 -- -- $294,259
Treasury stock purchased (1,568) (1,568)
Net income for year 52,344 52,344
Cash dividends declared
($.06 per share) (2,476) (2,476)
Balance at September 30, 2000 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
($.06 per share) (2,467) (2,467)
Balance at September 29, 2001 302,758 (297) (1,568) 380,932
Net income for year 14,335 14,335
Other comprehensive income
Gains on commodity hedging 81 81
Hedging income reclassified as
earnings 1,443 1,443
Total comprehensive income 15,858
Cash dividends declared
($.06 per share) (2,467) (2,467)
Balance at September 28, 2002 $314,626 $1,227 ($1,568) $394,324
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Pilgrim's Pride Corporation
(In thousands) Three Years Ended September 28, 2002
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $14,335 $41,137 $52,344
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 70,973 55,390 36,027
(Gain) loss on property disposals (149) 301 1,093
Deferred income taxes (1,811) 12,737 444
Extraordinary charge -- 1,434 --
Changes in operating assets and liabilities:
Accounts and other receivables 9,675 10,445 34,082
Inventories (12,392) (26,952) (13,202)
Other current assets (3,932) (4,494) 245
Accounts payable and accrued expenses 18,587 (1,030) 19,982
Other 2,827 (1,135) (212)
Cash Provided by Operating Activities 98,113 87,833 130,803
INVESTING ACTIVITIES:
Acquisitions of property, plant
and equipment (80,388) (112,632) (92,128)
Business acquisition -- (239,539) --
Proceeds from property disposals 1,426 2,472 2,319
Other, net (3,497) 571 (6,055)
Cash Used in Investing Activities (82,459) (349,128) (95,864)
FINANCING ACTIVITIES:
Borrowing for acquisition -- 285,070 --
Repayment on WLR Foods debt -- (45,531) --
Proceeds from notes payable to banks 214,500 136,000 71,000
Repayments on notes payable to banks (214,500) (136,000) (71,000)
Proceeds from long-term debt 182,950 425,423 20,047
Payments on long-term debt (201,646) (408,316) (38,622)
Purchase of treasury stock -- -- (1,568)
Cash dividends paid (2,467) (2,467) (2,476)
Cash Provided By (Used In) Financing Activities (21,163) 254,179 (22,619)
Effect of exchange rate changes on cash and
cash equivalents (494) (28) 37
Increase (decrease) in cash and cash
equivalents (6,003) (7,144) 12,357
Cash and cash equivalents at beginning of year 20,916 28,060 15,703
CASH AND CASH EQUIVALENTS AT END OF YEAR $14,913 $20,916 $28,060
SUPPLEMENTAL DISCLOSURE INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $35,234 $26,948 $17,178
Income taxes ($ 4,839) $ 7,255 $13,258
See Notes to Consolidated Financial Statements
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
September 28, 2002
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, 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.
Our prepared turkey products include products such as turkey sausages, ground
turkey, turkey hams and roasts, ground turkey breast products, salads and
flavored turkey burgers. We also have an array of cooked, further processed
deli products. Effective November 13, 2002 we are no longer producing
frankfurters, although we continue to sell frankfurters produced by others.
Our fresh turkey includes fresh traypack products, turkey burgers and fresh and
frozen whole birds, as well as semi-boneless whole turkey, which has all bones
except the drumsticks removed.
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 has been allocated based on the estimated fair value of assets and
liabilities.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
September 28, 2002
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information for the year ended
September 29, 2001 has been presented as if the acquisition of WLR Foods, Inc.
had occurred as of the beginning of fiscal 2001. The pro forma financial
information does not necessarily reflect what the results of operations would
have been if the acquisition had been completed at the beginning of fiscal
2001. 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
Net Sales $2,479,259
Operating Income 99,128
Interest Expense, Net 39,790
Income Before Taxes 58,607
Income before Extraordinary Charge 39,171
Net Income 38,277
Income per Common Share before Extraordinary
Charge - Basic and Diluted $ 0.95
Extraordinary Charge, Net of Tax (0.02)
Net Income per Common Share $ 0.93
Other Information:
Depreciation and Amortization $ 64,565
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, 2002, 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
Revenue is recognized upon shipment or upon transfer of ownership of the
product to the customer and is recorded net, estimated incentive offerings
including special pricing agreements, promotions and other volume-based
incentives. Revisions to these estimates are charged to income in the period
in which the facts that give rise to the revision become known.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain allowances for doubtful accounts
reflecting estimated losses resulting from the inability of our customers to
make required payments. The accounts receivable balances and review of
significant past due accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
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.
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 $69.6 million, $54.4 million and $34.7 million in
2002, 2001 and 2000, respectively. Estimated useful lives for building,
machinery and equipment is 5 years to 33 years and for automobiles and trucks
is 3 years to 5 years.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of (SFAS 121), the Company records impairment charges on long-lived
assets used in operations when events and circumstances indicate that the
assets may be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those assets.
The impairment charge is determined based upon the amount the net book value of
the assets exceeds their fair market value. In making these determinations,
the Company utilizes certain assumptions, including, but not limited to: (i)
estimated fair market value of the assets, and (ii) estimated future cash flows
expected to be generated by these assets, which are based on additional
assumptions such as asset utilization, length of service the asset will be used
in the Company's operations and estimated salvage values.
ACCRUED SELF INSURANCE. Insurance expense for casualty claims and employee-
related health care benefits are estimated using historical experience and
actuarial estimates. Stop-loss coverage is maintained with third party
insurers to limit the Company's total exposure. The assumption used to arrive
at periodic expenses is reviewed regularly by management. However, actual
expenses could differ from these estimates and could result in adjustments to
be recognized.
INCOME TAXES. We account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires that deferred tax assets and
liabilities be recognized for the effect of temporary differences between the
book and tax bases of recorded assets and liabilities. Taxes are provided for
international subsidiaries based on the assumption that these earning are
indefinitely reinvested in the Company and within individual companies and as
such taxes are not provided in the U.S. or local jurisdiction that would be
required in the event of distribution of these earnings. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some portion or all of the deferred tax asset will
not be realized. We review the recoverability of any tax assets recorded on
the balance sheet, primarily operating loss carryforwards, based on both
historical and anticipated earnings levels of the individual operations and
provided a valuation allowance when it is more likely than not that these
amounts will not be recovered.
ACCUMULATED OTHER COMPREHENSIVE INCOME
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 2002. 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.
As of September 28, 2002 and September 29, 2001, accumulated other
comprehensive income consisted exclusively of mark-to-market adjustments on
commodity future contracts. Comprehensive income for the years ended September
28, 2002 and September 29, 2001 was net of the related tax expense of $738
thousand, and benefit of $179 thousand, respectively.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
September 28, 2002
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 2002 and 2001 and 41,289,142 in 2000.
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.
NOTE B - INVENTORIES
Inventories consist of the following:
(In thousands) 2002 2001
Chicken:
Live chicken and hens $106,450 $97,073
Feed, eggs and other 57,854 77,970
Finished chicken products 73,494 70,493
237,798 245,536
Turkey:
Live turkey and hens 29,140 30,694
Feed, eggs and other 12,871 3,906
Finished turkey products 46,983 34,264
88,994 68,864
Total Inventory $326,792 $314,400
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
At September 28, 2002, the Company maintained $130.0 million in revolving
credit facilities, $30 million of which related to our Mexican Operations, and
$400.0 million in a secured revolving/term borrowing facility in the U.S. and
Mexico. 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 the Company's total debt to
capitalization ratio. Interest rates on debt outstanding under these
facilities at September 28, 2002 ranged from LIBOR plus one and one-quarter
percent to LIBOR plus two. These facilities are secured by inventory and fixed
assets; the $30 million facility in Mexico is secured by Mexican accounts
receivables, inventories and certain fixed assets Borrowings against these
facilities are subject to the availability of collateral, and no material
adverse change provisions. At September 28, 2002, $115.9 million was available
under the revolving credit facilities, including $30.0 million in Mexico, and
$209.0 million was available under the term borrowing facilities. At December
2, 2002 we had $76.1 million available under revolving credit facilities,
$180.0 million available under the revolving/term borrowing facility and cash
on hand of $81.3 million compared to $14.9 million at September 28, 2002, due
primarily to advances subsequent to year end on the various facilities, for a
total liquidity of $337.4 million at December 2, 2002 compared to $339.8
million at September 28, 2002.
Annual maturities of long-term debt for the five years subsequent to September
28, 2002 adjusted to consider the subsequent borrowing are: 2003 -- $3.4
million; 2004 -- $3.7 million; 2005 -- $17.9 million; 2006 -- $23.8 million;
and 2007 -- $25.3 million.
In August 2002, the Company consolidated several notes payable from an
insurance company with fixed interest rates ranging from 7.11% to 9.45% into
one note with a fixed interest rate of 6.68% and extended the maturities from
2006 to 2012. The consolidation did not result in any gain or loss being
recognized.
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 draw 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 the 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
for the year ended September 29, 2001.
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, except those in its turkey
segment, are pledged as collateral on its long-term debt and credit facilities.
The Mexico credit facility is secured by accounts receivable, inventories and
certain fixed assets.
Total interest was $40.4 million, $38.9 million and $21.7 million in 2002, 2001
and 2000, respectively. Interest related to new construction capitalized in
2002, 2001 and 2000 was $6.0 million, $7.2 million and $3.3 million,
respectively.
Long-term debt consists of the following:
(In thousands) Final 2002 2001
Maturity
Senior unsecured notes, interest at 9 5/8% 2011 $200,000 $200,000
Revolving term/credit facility - 10 year
tranche at LIBOR plus 2.00%
payable monthly 2009 136,087 124,688
Note payable to an insurance company at 6.68%
payable Monthly 2012 60,958 65,474
Revolving term/credit facility - 7 year
tranche at LIBOR plus 1.75% payable monthly 2006 54,913 50,313
Notes payable to a bank at LIBOR plus
1.25 to 1.50 2004 -- 30,000
Other notes payable Various 1,686 1,866
453,644 472,341
Less current maturities 3,483 5,099
$450,161 $467,242
The fair value of long-term debt, at September 28, 2002 and September 29, 2001
based upon quoted market prices for the same or similar issues where available
or by using discounted cash flow analysis, was approximately $456.6 million and
$469.6 million, respectively.
NOTE D - INCOME TAXES
Income before income taxes after allocation of certain expenses to foreign
operations for 2002, 2001 and 2000 was ($7.3) million, $57.8 million and $32.7
million, respectively, for U.S. operations and $9.2 million, $5.5 million and
$30.0 million, respectively, for foreign operations. The provisions for income
taxes are based on pre-tax financial statement income.
Effective January 1, 2002, the Mexican Congress passed the Mexican tax reform
(the "Reform") legislation, which eliminated the previous tax exemption under
Simplified Regime for the Company's Mexico subsidiaries. The Reform requires
the Company's Mexico subsidiaries to calculate and pay taxes under a new
simplified regime pursuant to Mexico's income tax laws beginning January 1,
2002, subject to certain transitional provisions. The primary transitional
provision was an exit calculation, which generated a net operating loss
carryforward for Mexican income tax purposes.
As a result of the Reform, the Company recognized a tax benefit of
approximately $11.9 million during fiscal 2002, primarily to reflect the
benefit of the net operating loss carryforward for Mexican tax purposes. The
components of income tax expense (benefit) are set forth below:
(In thousands) 2002 2001 2000
Current:
Federal ($11,570) $6,045 $ 9,239
Foreign 1,712 1,594 138
State and other (756) 348 621
(10,614) 7,987 9,998
Deferred (1,811) 12,737 444
($12,425) $20,724 $10,442
The following is a reconciliation between the statutory U.S. federal income tax
rate and the Company's effective income tax rate:
2002 2001 2000
Federal income tax rate 35.0% 35.0% 35.0%
State tax rate, net (16.6) 2.4 1.4
Difference in U.S. statutory tax rate and
Mexico's effective tax rate (42.6) (3.9) (19.8)
Change in Mexico Tax Law (626.3)
(650.5)% 33.5% 16.6%
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) 2002 2001
Deferred tax liabilities:
Property and equipment $ 115,364 $ 97,667
Inventories 37,917 27,926
Prior use of cash accounting 24,188 26,625
Other 11,666 2,419
Total deferred tax liabilities 189,135 154,637
Deferred tax assets:
Net operating losses 44,821 --
Expenses deductible in different years 22,148 23,027
Total deferred tax asset 66,969 23,027
Valuation allowance 7,633 --
Net deferred tax liabilities $129,799 $131,610
The Company has not provided any 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 28, 2002, the
cumulative undistributed earnings of these subsidiaries were approximately
$191.7 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.
The valuation allowance reflects the portion of the net operating losses
attributable to certain of the Company's Mexico subsidiaries that currently do
not have significant operations and, accordingly, such losses are expected to
expire unutilized.
The Mexican tax operating loss carryforwards expire in the years ranging from
2008 through 2012.
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 $2.4 million and $3.9 million
at September 28, 2002 and September 29, 2001, 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 28, 2002 and 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 during each period. This sales
agreement expires on June 30, 2003. If this facility is not replaced or
extended, the Company will likely use its revolving/term borrowing facility to
provide this liquidity. 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.
During fiscal 2000, the Company repurchased 271,100 shares of Class A common
stock at a total cost of $1.6 million. There was no repurchase of stock during
fiscal 2001 or fiscal 2002.
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 $2.3 million, $3.7 million and $2.3 million in 2002,
2001 and 2000, respectively.
NOTE H - RELATED PARTY TRANSACTIONS
The major stockholder of the Company owns an egg laying and a chicken growing
operation. In addition, at certain times during the year the major stockholder
purchases from the Company live chickens and hens and certain feed inventories
during the grow-out process and then contracts with the Company to resell the
birds at maturity, determined on a market based formula price subject to a
ceiling price calculated at his cost plus 2%. During the years ended September
28, 2002, September 29, 2001 and September 30, 2000 the formula resulted in a
net operating profit (loss) to the major stockholder of ($428,000),
$1,103,000 and $100,000, respectively.
Transactions with related entities are summarized as follows:
(In thousands) 2002 2001 2000
Contract egg grower fees to
major stockholder $ -- $ 1,537 $ 5,100
Lease payment on commercial egg
property to major stockholder 750 564 --
Chick, feed and other
sales to major stockholder 44,857 38,771 31,879
Live chicken purchases from
major stockholder 44,429 39,784 31,979
Loan guaranty fees 2,615 3,142 795
Lease payments on airplane 396 396 396
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 pays fees to the Company's major stockholder in return for the
major stockholder's personal guarantee on certain debt obligations of the
Company.
The Company leases an airplane from its major stockholder under an operating
lease agreement that is renewable annually. 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 2002, 2001 and 2000. Operating expenses were
$212,520, $234,066, and $127,680 in 2002, 2001 and 2000, respectively.
The Company maintains depository accounts with a financial institution in which
the Company's major stockholder is also a major stockholder. Fees paid to
this bank in 2002, 2001 and 2000 are insignificant, and as of September 28,
2002 the Company had bank balances at this financial institution of
approximately $3.5 million.
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 $28.1 million, $28.7 million and $22.4 million in 2002,
2001 and 2000, respectively. The Company's future minimum lease commitments
under non-cancelable operating leases are as follows: 2003 -- $31.7 million;
2004 -- $20.9 million; 2005 -- $15.8 million; 2006 -- $13.9 million; 2007 --
$11.4 million and thereafter $10.5 million.
At September 28, 2002, the Company had $14.1 million in letters of credit
outstanding relating to normal business transactions.
NOTE J - CONTINGENCIES
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 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 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.
On August 20, 1999, the former WLR Foods brought legal action as a plaintiff in
an antitrust lawsuit filed in the U.S. District Court in Washington D.C.
alleging a world-wide conspiracy by approximately 34 named defendants to
control production capacity and raise prices of common vitamins such as A, B-4,
C, and E. The Company, as successor to WLR Foods in this suit, received $9.5
million in fiscal 2002 in partial settlement of its claims, $4.3 million of
which was recorded by the Company as a component of "Other Expense (Income):
Miscellaneous, Net" in fiscal 2002 as the recovery amount received during the
period exceeded the $5.2 million recovery amount recorded at the time of the
acquisition of WLR Foods. The initial estimate of the amount that would be
recovered under the WLR Foods claims was based on the ratio of recoveries to
vitamin purchases that was inherent in similar claims settled by the Company in
fiscal 2001 on substantially similar claims. To date, claims related to
approximately one-third of the WLR Foods affected vitamin purchases have been
settled by or on behalf of the former WLR Foods, which settlements resulted in
payments to the Company or the former WLR Foods, Inc. of $11.0 million. No
assurances can be made regarding the likelihood or timing of future settlements
or whether or not future recoveries, if any, will be proportionally less than,
equal to or greater than these previous recovery amounts.
In October 2002 a limited number of USDA samples from our Franconia,
Pennsylvania plant tested positive for Listeria. As a result, we voluntarily
recalled all cooked deli products produced at the plant from May 1, 2002
through October 11, 2002. The amount of product covered by the recall was
approximately 7% of our annual turkey production and less than 1% of our total
poultry production. As an additional precautionary measure, we immediately
suspended operations at our Franconia facility to redouble our food safety and
sanitation efforts. No illnesses associated with the Listeria strain in a
Northeastern outbreak have been linked to any of our products. Our Franconia
facility has been reviewed and inspected by the USDA and was reopened on
November 13, 2002. As the recall occurred in early fiscal 2003, it did not
have any significant impact on our consolidated financial statements as of
September 28, 2002. In addition, we carry insurance designed to cover the
direct recall related expenses and certain aspects of the related business
interruption caused by the recall, and subject to the insurer's reservation of
rights, we have received a $4 million advance payment from our insurer with
respect to the product recall claim. The Company believes that the recall and
its direct effects will not have a material impact on our financial position,
results of operations, or liquidity after considering available insurance
coverage. However, there will likely be differences between the accounting
periods in which certain recall effects are realized and when insurance
recoveries are received, and there can be no assurances as to our ability to
re-establish the products and sales affected by the recall.
As a result of the recall, on November 4, 2002, an individual who allegedly
consumed our meat products filed a putative class action lawsuit in the
Philadelphia County Court of Common Pleas in the Commonwealth of Pennsylvania.
Plaintiff allegedly contracted Listeriosis. The case is styled Frank Niemtzow,
individually and on behalf of all others similarly situated, v. Pilgrim's Pride
Corporation and Wampler Foods, Inc. The complaint seeks recovery on behalf of
a putative class of all persons that purchased and/or consumed meat products
manufactured at the Company's Franconia, Pennsylvania facility between May 1,
2002, and October 11, 2002, who have suffered an injury. This class represents
all individuals who have suffered Listeriosis and symptoms of Listeriosis and
other medical injuries. Plaintiff also seeks to represent a putative class of
all persons that purchased and/or consumed meat products manufactured at the
Company's Franconia, Pennsylvania facility between May 1, 2002 and October 11,
2002, who have not suffered any personal injury. The complaint seeks
compensatory and punitive damages under theories of negligence, alleged
violation of the Pennsylvania Unfair Trade Practices Act and Consumer
Protection Law, strict liability in tort, and unjust enrichment. The time for
responding to the complaint has not yet arrived. We intend to defend
vigorously both certification of the case as a class action and questions
concerning ultimate liability and damages, if any. No discovery has been
conducted to date. 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. After considering our available insurance coverage,
we do not expect this matter to have a material impact on our financial
position, operation or liquidity.
On March 12, 2002 an outbreak of low-pathogenic avian influenza, a disease
contagious to turkey, chicken and other birds, was discovered in Virginia. As
a result we have destroyed a significant amount of poultry affected as a result
of the virus. No new flocks have tested positive for the presence of avian
influenza in Virginia since July 2, 2002 and the Company believes that the
outbreak has been contained. We currently estimate that production in our
turkey operation will be significantly reduced over the next six months due to
the effects of this viral outbreak. On June 19, 2002, U.S. Secretary of
Agriculture Ann Veneman proposed to the Office of Management and Budget that
the U.S. Department of Agriculture cover one-half of the total estimated
economic loss suffered by the poultry industry and independent growers in
Virginia due to the avian influenza outbreak. Secretary Veneman also
recommended that the government of Virginia cover the remaining portion. It is
our understanding that, as part of her proposal, Secretary Veneman is
suggesting that independent chicken and turkey growers are to be fully
compensated for their losses first and that the remainder is to be allocated to
other poultry producers (including us) whose flocks were destroyed by the
virus. On November 4, 2002 the Department of Agriculture made public their
estimate of total federal compensation at $51 million, with growers being
compensated $13.9 million and owners being compensated $37.1 million. No
assurance can be given as to the amount of federal compensation that we may
receive or that any state agencies will in fact provide further economic
assistance to the poultry growers and producers affected by the avian influenza
outbreak in Virginia. No anticipated recoveries have been recorded by us as
our portion of the compensation has not yet been determined. In the event that
state agencies do decide to grant economic assistance to the affected poultry
growers and producers, it is impossible at this time to estimate how the state
agencies would allocate any such assistance between affected poultry growers
and producers whose flocks were destroyed by the virus.
On June 7, 2001, the Company brought legal action as a plaintiff in an
antitrust lawsuit filed in the U.S. District Court in San Francisco alleging a
world-wide conspiracy by defendant suppliers and producers of methionine to
control production capacity and raise prices of methionine. The Company
estimates that it was overcharged by approximately $50 million in connection
with the alleged conspiracy and expects the litigation of this matter to be
resolved during calendar year 2003. No assurances can be made regarding the
likelihood or timing of future awards or settlements.
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 28, 2002, the Company held the following commodity contracts
consisting of delivery contracts settling between October 2002 and December
2003. 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
Weighted Average Fair Value
Units Notional Amount Contract/Strike Price Gain
Hedging Position:
Long positions in corn Bushels 2,645,000 $2.53 $50
Long positions in
Soybean Meal Tons 30,000 $149.7 $667
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, feed and other items. 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 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
(IN THOUSANDS)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $1,842,749 $1,652,199 $1,192,077
Mexico 342,851 323,678 307,362
Sub-total 2,185,600 1,975,877 1,499,439
Turkey 348,118 238,835 --
Total $2,533,718 $2,214,712 $1,499,439
OPERATING INCOME:
Chicken and Other Products:
United States $ 32,663 $ 78,096 $ 45,928
Mexico 17,064 12,157 34,560
Sub-total 49,727 90,253 80,488
Turkey (19,823) 4,289 --
Total $ 29,904 $ 94,542 $ 80,488
DEPRECIATION AND AMORTIZATION: (B)
Chicken and Other Products:
United States $ 47,528 $ 38,155 $ 24,444
Mexico 13,526 11,962 11,583
Sub-total 61,054 50,117 36,027
Turkey 9,919 5,273 --
Total $ 70,973 $ 55,390 $ 36,027
TOTAL ASSETS:
Chicken and Other Products:
United States $ 769,561 $ 764,073
Mexico 241,281 247,681
Sub-total $1,010,842 1,011,754
Turkey 210,576 203,941
Total $1,221,418 $1,215,695
CAPITAL EXPENDITURES: (A)
Chicken and Other Products
United States $ 65,775 $ 80,173
Mexico 7,934 29,425
Sub-total 73,709 109,598
Turkey 6,679 3,034
Total $ 80,388 $ 112,632
(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 $1.4
million, $0.9 million and $1.2 million in fiscal years 2002, 2001 and 2000,
respectively.
As of September 28, 2002, the Company had net assets in Mexico of $226.4
million. There were no customers representing 10% or more of revenue in fiscal
2002 and 2001. During 2000 revenue from one customer represented 13.5% of
consolidated net sales.
NOTE M - QUARTERLY RESULTS
Quarterly Results (Unaudited)
(In thousands, except per share data) Year ended September 28, 2002
First Second(a) Third(b) Fourth(a) Fiscal
Quarter Quarter Quarter Quarter Year
Net sales $656,030 $600,753 $637,116 $639,819 $2,533,718
Gross profit 57,865 28,631 47,000 31,670 165,166
Operating income (loss) 23,330 (4,372) 14,046 (3,100) 29,904
Net income (loss) 12,991 1,252 3,266 (3,174) 14,335
Per Share:
Net income (loss) 0.32 0.03 0.08 (0.08) 0.35
Cash dividends 0.015 0.015 0.015 0.015 0.060
(In thousands, except per share data) Year ended September 28, 2002
First Second(a) Third(b) Fourth(a) Fiscal
Quarter Quarter 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
(a) Includes tax benefit of $9.7 million in the second quarter and $2.2
million in the fourth quarter resulting from the change in the Mexico tax
law. See Note D.
(b) Includes settlement from vitamin lawsuit of $4.3 million. See Note J
(c) 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.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C
ADDITIONS
Balance at
Beginning Charged to Charged to
Costs Other
DESCRIPTION of Period and Expenses Accounts
Describe
Year ended September 28, 2002:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts
$3,961,000 $(506,000) $ --
Year ended September 29, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful
accounts $4,086,000 $1,132,000 $ --
Year ended September 30, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful
accounts $4,703,000 $(611,000) $ --
Col. A Col. D Col. E
Deductions- Balance at end
DESCRIPTION Describe of Period
Year ended September 28, 2002:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $1,111,000(1) $ 2,344,000
Year ended September 29, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $1,257,000(1) $ 3,961,000
Year ended September 30, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 6,000(1) $ 4,086,000
(1)Uncollectable accounts written off, net of recoveries.
EXHIBIT 12
PILGRIM'S PRIDE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended
C>
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
(amounts in thousands, except ratio)
EARNINGS:
Income before income taxes
and extraordinary charge $1,910 $63,294 $62,786
Add: Total fixed charges
(see below) 49,801 48,406 29,168
Less: Interest Capitalized 6,014 7,153 3,313
Total Earnings $45,697 $104,547 $88,641
FIXED CHARGES:
Interest (1) 40,444 $38,852 $21,712
Portion of rental expense representative of the
interest factor (2) 9,357 9,554 7,456
Total fixed charges $49,801 $48,406 $29,168
Ratio of earnings to fixed
charges (3) 2.16 3.04
Year Ended
C>
OCTOBER 2, SEPTEMBER 26,
1999 1998
(amounts in thousands, except ratio)
EARNINGS:
Income before income taxes
and extraordinary charge $90,904 $56,522
Add: Total fixed charges
(see below) 26,706 27,987
Less: Interest Capitalized 2,032 1,675
Total Earnings $115,578 $82,834
FIXED CHARGES:
Interest (1) $ 20,889 $23,239
Portion of rental expense representative of the
interest factor (2) 5,817 4,748
Total fixed charges $ 26,706 $27,987
Ratio of earnings to fixed
charges 4.33 2.96
(1) Interest includes amortization of capitalized financing fees.
(2) One-third of rental expenses is assumed to be representative of
the interest factor.
(3) Earnings were insufficient to cover fixed charges by $4,104.
EXHIBIT 21- SUBSIDIARIES OF REGISTRANT
1. COMERCIALIZADORA DE CARNES 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. PILGRIM'S PRIDE MKTG, 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. (FOREIGN SALES CORP.)
14. VALLEY RAIL SERVICE, INC.
15. PILGRIM'S PRIDE OF NEVADA, INC.
16. PILGRIM'S PRIDE DUTCH FUNDING B.V.
17. DALLAS REINSURANCE COMPANY, LTD
18. NACRAIL LLC
19. SERVICIOS ADMINISTRATIVOS PILGRIM'S PRIDE S.A. DE C.V.
20. FOOD PROCESSORS WATER COOPERATIVE INC.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 3-12043, Form S-8 No. 333-74984 and Form S-3 No. 333-84861) of
Pilgrim's Pride Corporation, and in the related Prospectuses, of our report
dated October 29, 2002, except for Note J and the first paragraph of Note C, as
to which the date is December 2, 2002, 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 28, 2002.
ERNST & YOUNG LLP
Dallas, Texas
December 2, 2002