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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended December 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)
(903) 855-1000
(Telephone number of principal executive offices)
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
27,589,250 shares of the Registrant's Class B Common Stock, $.01 par value,
were outstanding as of January 21, 2003.
13,523,429 shares of the Registrant's Class A Common Stock, $.01 par value,
were outstanding as of January 21, 2003.
INDEX
PILGRIM'S PRIDE CORORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Consolidated balance sheets
December 28, 2002 and September 28, 2002
Consolidated income statements
Three months ended December 28, 2002 and December 29, 2001
Consolidated statements of cash flows
Three months ended December 28, 2002 and December 29, 2001
Notes to consolidated financial statements December 28, 2002
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Item 4.Controls and Procedures
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Item 6.Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pilgrim's Pride Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
December 28, 2002 September 28, 2002
ASSETS (in thousands except share and per share data)
CURRENT ASSETS:
Cash and cash equivalents $29,337 $ 14,913
Trade accounts and other receivables,
less allowance for doubtful accounts 91,916 85,347
Inventories 308,306 326,792
Other current assets 17,183 16,866
Total Current Assets 446,742 443,918
OTHER ASSETS 24,597 21,940
PROPERTY, PLANT AND EQUIPMENT
Land 38,203 38,718
Buildings, machinery and equipment 1,047,022 1,039,581
Autos and trucks 54,337 54,609
Construction-in-progress 26,800 30,433
1,166,362 1,163,341
Less accumulated depreciation 417,790 401,309
748,572 762,032
$1,219,911 $1,227,890
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 145,790 $163,892
Accrued expenses 112,963 84,618
Current deferred income tax 12,888 12,888
Current maturities of long-term debt 3,525 3,483
Total Current Liabilities 275,166 264,881
LONG-TERM DEBT, LESS CURRENT MATURITIES 434,102 450,161
DEFERRED INCOME TAXES 114,012 116,911
MINORITY INTEREST IN SUBSIDIARY 1,515 1,613
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;
13,794,529 issued and outstanding 138 138
Common stock - Class B, $.01 par value,
authorized 60,000,000 shares;
27,589,250 issued and outstanding 276 276
Additional paid-in capital 79,625 79,625
Retained earnings 316,761 314,626
Accumulated other comprehensive (loss)
income (117) 1,227
Less treasury stock, 271,100 shares (1,568) (1,568)
Total Stockholders' Equity 395,115 394,324
$1,219,911 $1,227,890
See notes to consolidated financial statements.
Pilgrim's Pride Corporation and Subsidiaries
Consolidated Income Statements
(Unaudited)
Three Months Ended
December 28, 2002 December 29, 2001
(in thousands, except share and per share data)
NET SALES $627,405 $656,030
COSTS AND EXPENSES:
Cost of sales 599,406 598,165
Non-recurring recoveries (14,387) --
Selling, general and administrative 32,045 34,535
617,064 632,700
Operating income 10,341 23,330
OTHER EXPENSE (INCOME):
Interest expense, net 9,476 8,573
Foreign exchange gain (350) (535)
Miscellaneous, net (1,766) (387)
7,360 7,651
INCOME BEFORE INCOME TAXES 2,981 15,679
INCOME TAX EXPENSE 225 2,688
NET INCOME $ 2,756 $ 12,991
NET INCOME PER COMMON SHARE
- BASIC AND DILUTED $ 0.07 $ 0.32
DIVIDENDS DECLARED PER COMMON SHARE $ 0.015 $ 0.015
WEIGHTED AVERAGE SHARES OUTSTANDING 41,112,679 41,112,679
See notes to consolidated financial statements.
Pilgrim's Pride Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
December 28, 2002 December 29, 2001
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,756 $12,991
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 17,510 17,399
Loss (Gain) on property disposals (24) 32
Provision for doubtful accounts 78 128
Deferred income taxes 56 (138)
Changes in operating assets and liabilities:
Accounts and other receivables (6,647) 2,683
Inventories 18,486 54,260
Other current assets (317) (1,064)
Accounts payable and accrued expenses 10,244 (2,613)
Other (1,525) (1,905)
Cash Provided By Operating
Activities 40,617 81,773
INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (9,116) (17,333)
Proceeds from property disposals 149 84
Other, net (517) (278)
Net Cash Used In Investing
Activities (9,484) (17,527)
FINANCING ACTIVITIES:
Proceeds from notes payable to banks 80,500 18,500
Repayments of notes payable to banks (80,500) (18,500)
Proceeds from long-term debt 50,725 10,223
Payments on long-term debt (66,741) (80,441)
Cash dividends paid (621) (621)
Cash Used In Financing
Activities (16,637) (70,839)
Effect of exchange rate changes on cash and
cash Equivalents (72) 75
Increase (decrease) in cash and cash
equivalents 14,424 (6,518)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,913 20,916
CASH AND CASH EQUIVALENTS AT END OF PERIOD $29,337 $14,398
SUPPLEMENTAL DISCLOSURE INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $4,646 $4,148
Income taxes $ 169 $ 178
See notes to consolidated financial statements.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pilgrim's Pride
Corporation ("Pilgrim's" or the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States ("U.S.") for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the period ended
December 28, 2002 are not necessarily indicative of the results that may be
expected for the year ended September 27, 2003. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Pilgrim's Annual Report on Form 10-K for the fiscal year ended September 28,
2002.
The consolidated financial statements include the accounts of Pilgrim's and its
wholly and majority owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
Non-recurring recoveries, which is a component of operating income, include
reimbursements received from the U.S. federal government under a relief plan
related to the avian influenza outbreak in The Commonwealth of Virginia
("Virginia") on March 12, 2002 in the amount of $14.3 million and proceeds
received from litigation initiated by the Company in antitrust lawsuits
alleging a world-wide conspiracy to control production capacity and raise
prices of vitamins and methionine in the amount of $0.1 million. See Note F -
Contingencies below.
The assets and liabilities of the foreign subsidiaries are translated at end-
of-period exchange rates, except for any non-monetary assets, which are
translated at equivalent dollar costs at dates of acquisition using historical
rates. Operations of foreign subsidiaries are translated at average exchange
rates in effect during the period.
Total comprehensive income for the three months ending December 28, 2002 and
December 29, 2001 was $1.4 million and $11.3 million, respectively.
NOTE B-ACCOUNTS RECEIVABLE
On June 26, 1998 the Company entered into an Asset Sale Agreement to sell up to
$60 million of accounts receivable, which expires in June of 2003. 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 both December 28, 2002 and
September 28, 2002, an interest in these Pooled Receivables of $58.5 million
had been sold to third parties and is reflected as a reduction to accounts
receivable. These transactions have been recorded as sales in accordance with
Financial Accounting Standards Board ("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 C-INVENTORIES
Inventories consist of the following:December 28, 2002September 28, 2002
(in thousands)
Chicken:
Live chicken and hens $ 79,306 $ 106,450
Feed, eggs and other 69,557 57,854
Finished chicken products 71,025 73,494
219,888 237,798
Turkey:
Live turkey and hens 31,997 29,140
Feed, eggs and other 12,924 12,871
Finished turkey products 32,994 46,983
77,915 88,994
Total Inventories $297,803 $326,792
NOTE D-LONG TERM DEBT
At December 28, 2002, the Company maintained $130.0 million in revolving credit
facilities, $30.0 million of which relates to our Mexico operations, and $400.0
million in a secured revolving/term borrowing facility. The $400.0 million
revolving/term borrowing facility provides for $285.0 million and $115.0
million of 10-year and 7-year commitments, respectively. Borrowings under this
facility 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-eights 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 December 28, 2002 ranged from LIBOR plus
one and one-quarter percent to LIBOR plus two and one-quarter percent. These
facilities are secured by inventory and fixed assets. The $30.0 million
facility in Mexico is secured by Mexico's accounts receivable, inventories and
certain fixed assets. Borrowings against these facilities are subject to the
availability of collateral and no material adverse change provisions. During
the quarter ended December 28, 2002, the Company repaid approximately $16.0 on
a net basis under its revolving/term borrowing facility. In the first quarter
of fiscal 2003, we borrowed $12.6 million in peso denominated debt from our
revolving credit facility in Mexico for working capital needs and to hedge net
monetary exposures in Mexico. At December 28, 2002, $101.6 million was
available under the revolving credit facilities, including $17.4 million in
Mexico and $228.5 million was available under the revolving/term borrowing
facility. Annual maturities of long-term debt for the remainder of fiscal 2003
and for the following four fiscal years are: 2003 -- $2.6 million; 2004 --
$3.7 million; 2005 -- $4.0 million; 2006 -- $5.6 million; and 2007 -- $7.5
million.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
NOTE E-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 quarters ended
December 28, 2002 and December 29, 2001 purchases made by the Company under
this agreement resulted in a net operating profit to the major stockholder of
$209,000 and $403,000, respectively. Included in accrued expenses are amounts
from our major stockholder of $28.0 million which represent goods sold in
advance of delivery and amounts owed for purchases made by the Company from
such major stockholder, related to the sales of chickens and feed as described
above, at the end of the first quarter of fiscal 2003.
Transactions with related parties are summarized as follows:
Three Months Ended
December 28, 2002 December 29, 2001
(in thousands)
Lease payment to major stockholder $ 188 $ 188
Chick, feed and other sales to, or amounts from,
the major stockholder 43,658 37,107
Live chicken purchases from major stockholder 10,640 20,550
Loan guarantee fees 964 606
Lease payments on airplane 99 99
NOTE F-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 that the
Company 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 joined this lawsuit with respect to vitamin purchases
not included in the Company's previous settlement with the named defendants as
a member of a class action lawsuit settled in fiscal 2000. The Company,
individually and as successor to WLR Foods in this suit, received $1.4 million
in the first quarter of fiscal 2003 in partial settlement of its claims, $1.3
million of which was recorded by the Company as a component of "Other Expense
(Income): Miscellaneous, Net". Additionally, subsequent to the end of the
first quarter of fiscal 2003, under this suit, the Company received additional
partial settlements of $22.5 million. This amount will be reported by the
Company in its second quarter of fiscal 2003, $21.1 million of which will be
reported as a component of "Other Expense (Income): Miscellaneous, Net" and
$1.4 million of which will be reported as "Non-recurring recoveries". To date,
claims related to approximately 82% 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 $32.1
million. No assurances can be made regarding the likelihood or timing of
future settlements or whether or not future recoveries, if any, on the
remaining 18% of the vitamin purchases covered by the suit 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 $50.0 million, which
includes purchases made by the former WLR Foods, in connection with the alleged
conspiracy and expects the litigation of this matter to be resolved during
calendar year 2003. Subsequent to the end of the first quarter of fiscal 2003,
under this suit, the Company received $6.5 million in partial settlement of
this claim. This amount will be reported by the Company in its second quarter
of fiscal 2003, $2.6 million of which will be reported as a component of "Other
Expense (Income): Miscellaneous, Net" and $3.9 million of which will be
reported as "Non-recurring recoveries". To date, claims related to
approximately 53% of the purchases have been settled by the Company. No
assurances can be made regarding the likelihood or timing of future awards or
settlements or whether or not future recoveries, if any, will be proportionally
less than, equal to or greater than these previous recovery amounts.
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.
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. We carried 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 $4.0 million advance payment from our insurer with respect to
the product recall claim. As of December 28, 2002, we had recorded $14.7
million, less the deductible amount of $0.5 million and the $4.0 million
advance payment from our insurer, in recall related expenses as a component of
"Current Assets - Trade and Other Accounts Receivable", which we believe to be
covered by insurance. Additionally, we estimate that sales at the Franconia,
Pennsylvania plant were negatively affected by approximately $30.0 million
during the quarter and operating margins were negatively affected by $5.0 -
$10.0 million. 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 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 or that such insurance will in fact adequately
protect us from liability and expenses we incur in connection with the recall.
Further, although we have maintained product recall insurance in recent
periods, in recent years the availability of this type of insurance to the food
industry has been limited and at times not available. We have been seeking
quotes from insurers regarding an insurance policy that would cover any product
recall that may arise in calendar 2003. However, to date the insurance market
has been unsettled for this line of coverage and we have not obtained an
insurance policy that would cover any product recall that may arise in calendar
2003 and there can be no assurance as to when or if we will be successful in
obtaining such a policy on acceptable terms.
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.
On December 6, 2002, the Company filed its Petition for Removal to Federal
court transferring this matter to the United States District Court for the
Eastern District of Pennsylvania. Plaintiff filed a Motion to Remand to State
court on January 6, 2003. The Company's response is due on January 23, 2003.
In addition, on January 13, 2003, the Company filed its Motion to Dismiss the
plaintiff's class action complaint. We intend to challenge vigorously the
motion to remand, the certification of the 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 continue to be significantly reduced over the next three
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. On
November 4, 2002 the Department of Agriculture made public their estimate of
total federal compensation at $51.0 million, with growers projected to be
compensated $13.9 million and owners projected to be compensated $37.1 million.
We received $14.3 million in federal compensation in the first quarter of
fiscal 2003, which was recorded as Non-recurring recoveries and $0.5 million
subsequent to the end of the quarter, which will be recorded as Non-recurring
recoveries in the second quarter of fiscal 2003. Based on the recovery amounts
received to date, we estimate that 71.6% of the projected $51.0 million has
been distributed by the U.S. federal government. No additional possible
recoveries have been recorded, although the National Turkey Federation and the
National Chicken Council are in discussions with the USDA regarding
distribution of the shortfall between the anticipated compensation and the
amounts distributed to date. No assurance can be given as to the amount of
further federal compensation that we may receive or that any state agencies
will provide any economic assistance to the poultry growers and producers
affected by the avian influenza outbreak in Virginia. 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 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 G - BUSINESS SEGMENTS
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. Corporate assets and
expenses are included with chicken and other products.
The following table presents certain information regarding our segments:
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
Three Months Ended
December 28, 2002 December 29, 2001
(in thousands)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $ 438,557 $ 448,710
Mexico 94,469 90,916
Sub-total 533,026 539,626
Turkey 94,379 116,404
Total $ 627,405 $ 656,030
OPERATING INCOME:
Chicken and Other Products:
United States $ 6,052(1) $ 9,356
Mexico 6,214 8,471
Sub-total 12,266 17,827
Turkey (1,925)(2) 5,503
Total $ 10,341 $ 23,330
DEPRECIATION AND AMORTIZATION:
Chicken and Other Products:
United States $ 12,546 $ 11,533
Mexico 3,150 3,417
Sub-total 15,696 14,950
Turkey 1,814 2,449
Total $ 17,510 $ 17,399
(1) Includes $1.8 million from the federal government related to the avian
influenza outbreak. See Note F - Contingencies.
(2) Includes $12.5 million from the federal government related to the avian
influenza outbreak. See Note F - Contingencies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 reduces 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 costs, thereby reducing their impact
on our profitability. Products sold in this form enable us to charge a
premium, reduce the impact of feed ingredient costs on our profitability and
improve and stabilize our profit margins.
As a significant portion of U.S. poultry production is exported, the commodity
prices of chicken and turkey can be, and in recent periods have been, adversely
affected by disruptions in poultry export markets. These disruptions are often
caused by restrictions on imports of U.S.-produced poultry products imposed by
foreign governments for a variety of reasons, including to protect their
domestic poultry producers and for alleged consumer health reasons. For
example, Russia and Japan have restricted the importation of U.S.-produced
poultry for both of these reasons in recent periods and Mexico initiated a ban
on the importation of all uncooked poultry produced in a six state area in the
western U. S. because of the recent outbreak of Newcastle's Disease in the
western U.S., and seeks a tariff level, starting at 98% of the sales price of
imported chicken leg quarters and declining approximately 20% per year for five
years, because of concerns that the duty-free importation of such products as
provided by the North American Free Trade Agreement would injure the Mexico
poultry industry. Because these disruptions in poultry export markets are
often political, no assurances can be given as to when the existing disruptions
will be alleviated or that new ones will not arise.
The following table presents certain information regarding our segments:
Three Months Ended
December 28, 2002 December 29, 2001
(in thousands)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $ 438,557 $ 448,710
Mexico 94,469 90,916
Sub-total 533,026 539,626
Turkey 94,379 116,404
Total $ 627,405 $ 656,030
OPERATING INCOME:
Chicken and Other Products:
United States $ 6,052(1) $ 9,356
Mexico 6,214 8,471
Sub-total 12,266 17,827
Turkey (1,925)(2) 5,503
Total $ 10,341 $ 23,330
DEPRECIATION AND AMORTIZATION:
Chicken and Other Products:
United States $ 12,546 $ 11,533
Mexico 3,150 3,417
Sub-total 15,696 14,950
Turkey 1,814 2,449
Total $ 17,510 $ 17,399
(1) Includes $1.8 million from the federal government related to the avian
influenza outbreak. See Note F - Contingencies.
(2) Includes $12.5 million from the federal government related to the avian
influenza outbreak. See Note F - Contingencies.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
The following table presents certain items as a percentage of net sales for the
periods indicated:
Percentage of Net Sales
Three Months Ended
December 28, 2002 December 29, 2001
(in thousands)
Net Sales 100.0% 100.0%
Costs and Expenses:
Cost of sales 95.5 91.2
Non-recurring recoveries 2.2 --
Gross profit 6.8 8.8
Selling, general and administrative 5.1 5.3
Operating Income 1.6 3.6
Interest Expense 1.5 1.3
Income Before Income Taxes 0.5 2.4
Net Income 0.4 2.0
RESULTS OF OPERATIONS
Our Eastern Division 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 the first quarter of fiscal 2003, ignoring the
federal compensation described below, we estimate that our operating income was
negatively impacted by approximately $3.0 million due to the continuing
negative impact of the avian influenza. As of December 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% of the
destroyed poultry, with chickens representing approximately 30%. 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 continue to be significantly reduced over the next three 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 second quarter of fiscal 2003
between $4.0 and $7.0 million, when compared to second quarter of fiscal 2002.
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. On November 4, 2002, the Department of Agriculture made
public their estimate of total federal compensation at $51.0 million, with
growers projected to be compensated $13.9 million and owners projected to be
compensated $37.1 million. We received $14.3 million in federal compensation
in the first quarter of fiscal 2003, which has been classified as Non-recurring
recoveries and $0.5 million subsequent to the end of the quarter, which will be
recorded as Non-recurring recoveries in the second quarter of fiscal 2003.
Based on the recovery amounts received to date, we estimate that 71.6% of the
projected $51.0 million has been distributed by the U.S. federal government.
No additional possible recoveries have been recorded, although the National
Turkey Federation and the National Chicken Council are in discussions with the
USDA regarding distribution of the shortfall between the anticipated
compensation and the amounts distributed to date. No assurance can be given as
to the amount of further federal compensation that we may receive or that any
state agencies will provide any economic assistance to the poultry growers and
producers affected by the avian influenza outbreak in Virginia. 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. 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. We carried
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 $4.0 million in
advance payments from our insurer with respect to the product recall claim. As
of December 28, 2002, we had recorded $14.7 million, less the deductible amount
of $0.5 million and the $4.0 million in advance from our insurer, in recall
related expenses as a component of "Current Assets - Trade and Other Accounts
Receivable", which we believe to be covered by insurance. Additionally, sales
at the Franconia, Pennsylvania plant were negatively affected by approximately
$30.0 million during the quarter and operating margins were negatively affected
by $5.0 - $10.0 million. 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 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 or that such insurance will in fact adequately
protect us from liability and expenses we incur in connection with the recall.
Further, although we have maintained product recall insurance in recent
periods, in recent years the availability of this type of insurance to the food
industry has been limited and at times not available. We have been seeking
quotes from insurers regarding an insurance policy that would cover any product
recall that may arise in calendar 2003. However, to date the insurance market
has been unsettled for this line of coverage and we have not obtained an
insurance policy that would cover any product recall that may arise in calendar
2003 and there can be no assurance as to when or if we will be successful in
obtaining such a policy on acceptable terms.
Fiscal First Quarter 2003 Compared to Fiscal First Quarter 2002
Consolidated Net Sales. Consolidated net sales were $627.4 million for the
first quarter of fiscal 2003, a decrease of $28.6 million, or 4.4%, from the
first quarter of fiscal 2002. The decrease in consolidated net sales resulted
from a $15.7 million decrease in U.S. chicken sales to $390.0 million and a
$22.0 million decrease in turkey sales to $94.4 million, offset partially by a
$1.6 million increase in Mexico chicken sales to $88.1 million and a $7.5
million increase in sales of other products to $54.9 million. The decrease in
U.S. chicken sales was primarily due to a 6.5% 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, which resulted in
production being liquidated at less favorable pricing levels, offset partially
by a 2.8% increase in dressed pounds produced. The decrease in turkey sales was
due primarily to the impact of the recall of turkey deli meat products and the
continuing effects of last year's avian influenza outbreak discussed above. The
$1.6 million increase in Mexico chicken sales was primarily due to a 1.5%
increase in average revenue per dressed pound produced and a 0.3% increase in
pounds produced. The $7.5 million increase in sales of other products was due
to a $5.5 million increase in U.S. other sales and a $2.0 million increase in
Mexico's other sales.
Cost of Sales. Consolidated cost of sales was $599.4 million in the first
quarter of fiscal 2003, an increase of $1.2 million, or 0.2%, when compared to
the first quarter of fiscal 2002. The U.S. operations had a decrease in cost of
sales of $5.3 million, which was more than offset by a $6.5 million increase in
cost of sales incurred by our Mexico operations. $3.8 million of the cost of
sales decrease in our U.S. operations was related to the turkey sales decrease
mentioned above.
The $6.5 million cost of sales increase in our Mexico operations was primarily
due to higher feed ingredient costs and production of a higher cost, more value
added product mix compared to the prior year.
Non-recurring recoveries. Non-recurring recoveries of $14.4 million consisted
of $14.3 million in avian influenza recovery and $0.1 million of litigation
settlements.
Gross Profit. Gross profit was $42.4 million for the first quarter of fiscal
2003, a decrease of $15.5 million, or 26.8%, from the same period last year,
due primarily to the negative effects of the turkey deli meat recall and the
continuing effects of last year's avian influenza outbreak in our Eastern
Division, lower dark meat selling prices in the U.S., caused in part by import
restrictions on poultry products typically sold to Russia and Japan by the
industry, and higher feed ingredient costs, partially offset by the $14.4
million of non-recurring recoveries.
Gross profit as a percentage of sales decreased to 6.8% in the first quarter of
fiscal 2003, from 8.8% in the first quarter of fiscal 2002, primarily due to
the negative affects of the turkey deli meat recall and the continuing effects
of last year's avian influenza outbreak in our Eastern Division, lower dark
meat selling prices in the U.S., caused in part by import restrictions on
poultry products typically sold to Russia and Japan by the industry, and higher
feed costs, partially offset by the $14.4 million of non-recurring recoveries.
Selling, General and Administrative Expenses. Consolidated selling, general
and administrative expenses were $32.0 million in the first quarter of fiscal
2003 and $34.5 million in the first quarter of fiscal 2002. The $2.5 million
decrease was due primarily to realized synergies from the integration of our
Eastern Division. As a percentage of sales, consolidated selling, general and
administrative expenses remained relatively stable in the first quarter of
fiscal 2003 at 5.1%, when compared to the first quarter of fiscal 2002.
Operating Income. Consolidated operating income was $10.3 million for the first
quarter of fiscal 2003, decreasing by approximately $13.0 million when compared
to the first quarter of fiscal 2002. The decrease was due primarily to the
negative effects of the turkey deli meat recall and the continuing effects of
last year's avian influenza outbreak in our Eastern Division, lower dark meat
selling prices in the U.S., caused in part by import restrictions on poultry
products typically sold to Russia and Japan by the industry, and higher feed
ingredient costs, partially offset by the $14.4 million of non-recurring
recoveries.
Interest Expense. Consolidated net interest expense increased 10.5% to $9.5
million in the first quarter of fiscal 2003, when compared to $8.6 million for
the first quarter of fiscal 2002, due primarily to higher average outstanding
debt balances experienced in the quarter.
Income Tax Expense. Consolidated income tax expense in the first quarter of
fiscal 2003 was $0.2 million, compared to an income tax expense of $2.7 million
in the first quarter of fiscal 2002. This decrease in consolidated income tax
expense was primarily caused by lower pretax earnings in the first quarter of
fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
We maintain $130.0 million in revolving credit facilities, $30.0 million of
which is related to our Mexico 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 this facility 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 December 28, 2002 ranged from LIBOR plus one and three-quarters percent
to LIBOR plus two and one quarter percent. These facilities are secured by
inventory and fixed assets. The $30.0 million facility in Mexico is secured by
Mexico's accounts receivable, inventories and certain fixed assets. Borrowings
against these facilities are subject to the availability of collateral and no
material adverse change provisions.
During the quarter ended December 28, 2002, the Company repaid approximately
$16.0 million on a net basis under its revolving/term borrowing facility. In
the first quarter of fiscal 2003, we borrowed $12.6 million of peso denominated
debt from our revolving credit facility in Mexico for working capital needs and
to hedge our net monetary asset exposure in Mexico. At December 28, 2002,
$101.6 million was available under the revolving credit facilities including
$17.4 million in Mexico and $228.5 million was available under the
revolving/term borrowing facility.
On June 26, 1998, we entered into an Asset Sale Agreement to sell up to $60
million of accounts receivable, which agreement expires in June 2003. 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 both December 28, 2002 and September
28, 2002, 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. The Company will likely use its revolving/term borrowing
facility to provide this liquidity if this facility is not replaced. 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 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 the Company. 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.
Obligations under long-term debt and non-cancelable operating leases at
December 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) $437.6 $2.6 $13.2 $23.4 $398.4
Guarantee Fees 13.2 1.6 6.0 3.7 1.8
Operating Leases 104.9 25.5 53.8 20.9 4.7
Total $555.6 $29.7 $73.0 $48.0 $404.9
(a) Excludes $15.9 million in letters of credit outstanding related to normal
business transactions.
At December 28, 2002, our working capital decreased to $171.6 million and our
current ratio decreased to 1.62 to 1, compared with working capital of $179.0
million and a current ratio of 1.68 to 1 at September 28, 2002, primarily due
to the working capital changes discussed below.
Trade accounts and other receivables were $91.9 million at December 28, 2002,
compared to $85.3 million at September 28, 2002. The $6.6 million, or 7.7%,
increase in trade accounts and other receivables was primarily due to the
inclusion of $10.1 million in insurance receivables related to the recall and
normal seasonal variations offset partially by improvements in collection
efficiencies. Excluding the sale of receivables, trade accounts and other
receivables would have been $150.4 million at the end of the first quarter of
fiscal 2003 and $143.8 million at the end of fiscal 2002.
Inventories were $308.3 million at December 28, 2002, compared to $326.8
million at September 28, 2002. The $18.5 million, or 5.7%, decrease in
inventories was primarily due to seasonal variations in sales of our turkey
division, which lowers turkey finished product inventories, and to lower live
chicken and hen inventories resulting from seasonal variations in sales of
chicken and feed products to the Company's major stockholder.
Accounts payable and accrued expenses increased $10.2 million to $258.8 million
at December 28, 2002, compared to $248.5 million at September 28, 2002,
primarily due to accrued expenses owed to the Company's major stockholder. See
Note E - Related Party Transactions.
Capital expenditures of $9.1 million and $17.3 million, for the three months
ended December 28, 2002 and December 29, 2001, 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 $40.6 million and $81.8
million, for the three months ended December 28, 2002 and December 29, 2001,
respectively. Cash provided by operating activities includes positive cash
flows from a transaction with the Company's major stockholder in the amount of
$43.3 million and $36.8 million in the quarters ended December 28, 2002 and
December 29, 2001, respectively. See Note E - Related Party Transactions. The
decrease in cash flows provided by operating activities for the first quarter
of fiscal 2003, when compared to the first quarter of fiscal 2002, was due to
lower income in the first quarter of fiscal 2003 and inventory changes when
compared to the prior year's inventories.
Cash flows used in financing activities were $16.6 million and $70.8 million
for the three months ended December 28, 2002 and December 29, 2001,
respectively. The decrease in cash used in financing activities for the first
quarter of fiscal 2003, when compared to the first quarter of fiscal 2002,
primarily reflects the higher net payments on long-term financing and debt
retirement amounts in the prior year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FEED INGREDIENTS
We purchase certain commodities, primarily corn and soybean meal. As a result,
our earnings are affected by changes in the price and availability of such feed
ingredients. As market conditions dictate, we will from time to time lock-in
future feed ingredient prices using various hedging techniques, including
forward purchase agreements with suppliers and futures contracts. We do not use
such financial instruments for trading purposes and are not a party to any
leveraged derivatives. Market risk is estimated as a hypothetical 10% increase
in the weighted-average cost of our primary feed ingredients as of December 28,
2002. Based on our feed consumption during the first quarter of fiscal 2003,
such an increase would have resulted in an increase to cost of sales of
approximately $17.5 million, excluding the impact of any hedging in that
period.
FOREIGN CURRENCY
Our earnings are affected by foreign exchange rate fluctuations related to the
Mexican peso net monetary position of our Mexico subsidiaries. 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
ways, including potential economic recession in Mexico resulting from a
devalued peso. The impact on our financial position and results of operations
resulting from a hypothetical change in the exchange rate between the U.S.
dollar and the 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 gain of $0.4 million in the first three months of fiscal 2003
compared to a gain of $0.5 million for the first three months of fiscal 2002.
During the first quarter of fiscal 2003, the Company borrowed $12.6 million in
peso denominated debt from our revolving credit facility in Mexico for working
capital needs and to hedge its monetary exposure in Mexico. On January 17,
2003, the Mexican peso closed at 10.56 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.
There have been no material changes from the information provided in Item 7A of
the Company's Annual Report on Form 10-K for the fiscal year ended September
28, 2002, other than described above.
FORWARD LOOKING STATEMENTS
Statements of our intentions, beliefs, expectations or predictions for the
future, denoted by the words "anticipate", "believe", "estimate", "expect",
"project", "imply", "intend", "foresee" and similar expressions, are forward-
looking statements that reflect our current views about future events and are
subject to risks, uncertainties and assumptions. Such risks, uncertainties and
assumptions include the following:
- - Matters affecting the poultry industry generally, including
fluctuations in the commodity prices of feed ingredients, chicken and
turkey;
- - Disease outbreaks affecting the production performance and/or
marketability of the Company's poultry products;
- - Contamination of our products, which has recently and can in the future
lead to product liability claims and product recalls;
- - Exposure to risks related to product liability, product recalls,
property damage and injuries to persons, for which insurance coverage is
expensive, limited and potentially inadequate;
- - Management of our cash resources, particularly in light of our
substantial leverage;
- - Restrictions imposed by, and as a result of, our substantial leverage;
- - Currency exchange rate fluctuations, trade barriers, exchange controls,
expropriation and other risks associated with foreign operations;
- - Changes in laws or regulations affecting our operations, as well as
competitive factors and pricing pressures;
- - Inability to effectively integrate WLR Foods or realize the associated
cost savings and operating synergies currently anticipated; and
- - The impact of uncertainties of litigation as well as other risks
described herein and under "Risk Factors" in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
Actual results could differ materially from those projected in these forward-
looking statements as a result of these factors, among others, many of which
are beyond our control.
In making these statements, we are not undertaking, and specifically decline to
undertake, any obligation to address or update 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 to
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.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chairman, Chief Executive Officer
("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 Quarterly Report on Form 10-Q. 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 II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 that the
Company 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 joined this lawsuit with respect to vitamin purchases
not included in the Company's previous settlement with the named defendants as
a member of a class action lawsuit settled in fiscal 2000. The Company,
individually and as successor to WLR Foods in this suit, received $1.4 million
in the first quarter of fiscal 2003 in partial settlement of its claims, $1.3
million of which was recorded by the Company as a component of "Other Expense
(Income): Miscellaneous, Net". Additionally, subsequent to the end of the
first quarter of fiscal 2003, under this suit, the Company received additional
partial settlements of $22.5 million. This amount will be reported by the
Company in its second quarter of fiscal 2003, $21.1 million of which will be
reported as a component of "Other Expense (Income): Miscellaneous, Net" and
$1.4 million of which will be reported as "Non-recurring recoveries". To date,
claims related to approximately 82% 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 $32.1
million. No assurances can be made regarding the likelihood or timing of
future settlements or whether or not future recoveries, if any, on the
remaining 18% of the vitamin purchases covered by the suit 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 $50.0 million, which
includes purchases made by the former WLR Foods, in connection with the alleged
conspiracy and expects the litigation of this matter to be resolved during
calendar year 2003. Subsequent to the end of the first quarter of fiscal 2003,
under this suit, the Company received $6.5 million in partial settlement of
this claim. This amount will be reported by the Company in its second quarter
of fiscal 2003, $2.6 million of which will be reported as a component of "Other
Expense (Income): Miscellaneous, Net" and $3.9 million of which will be
reported as "Non-recurring recoveries". To date, claims related to
approximately 53% of the purchases have been settled by the Company. No
assurances can be made regarding the likelihood or timing of future awards or
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. We carried 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 $4.0 million advance payment from our insurer with respect to
the product recall claim. As of December 28, 2002 we had recorded $14.7
million, less the deductible amount of $0.5 million and the $4.0 million
recovery, in recall related expenses as a component of "Current Assets -Trade
and Other Accounts Receivable", which we believe to be covered by insurance.
Additionally, we estimate that sales at the Franconia, Pennsylvania plant were
negatively affected by approximately $30.0 million during the quarter and
operating margins were negatively affected by $5.0 - $10.0 million. 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 or that such insurance will in fact adequately protect us from
liability and expenses we incur in connection with the recall. Further,
although we have maintained product recall insurance in recent periods, in
recent years the availability of this type of insurance to the food industry
has been limited and at times not available. We have been seeking quotes from
insurers regarding an insurance policy that would cover any product recall that
may arise in calendar 2003. However, to date the insurance market has been
unsettled for this line of coverage and we have not obtained an insurance
policy that would cover any product recall that may arise in calendar 2003 and
there can be no assurance as to when or if we will be successful in obtaining
such a policy on acceptable terms.
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.
On December 6, 2002, the Company filed its Petition for Removal to Federal
court transferring this matter to the United States District Court for the
Eastern District of Pennsylvania. Plaintiff filed a Motion to Remand to State
court on January 6, 2003. The Company's response is due on January 23, 2003.
In addition, on January 13, 2003, the Company filed its Motion to Dismiss the
plaintiff's class action complaint. We intend to challenge vigorously the
motion to remand, the certification of the 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 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.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number
1.1 First Amendment to the 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 Mexico, S.A., Institucion de Banca
Multiple dated as of June 28, 2002.
1.2 Second Amendment to the 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 Mexico, S.A., Institucion de Banca
Multiple dated as of September 10, 2002.
1.3 Third Amendment to the 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 Mexico, S.A., Institucion de Banca
Multiple dated as of December 13, 2002
(b) Reports on Form 8-K
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.
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.
The Company filed a current report on Form 8-K on January 15, 2003, to
report certain supplemental historical financial information regarding net
sales by primary market line.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PILGRIM'S PRIDE CORPORATION
/s/ Richard A. Cogdill
Date: January 21, 2003 Richard A. Cogdill
Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
CERTIFICATIONS
I, Lonnie "Bo" Pilgrim, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pilgrim's Pride
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function):
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
quarterly report whether or not 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: January 21, 2003 /s/ Lonnie "Bo" Pilgrim
Lonnie "Bo" Pilgrim
Chairman of the Board
Co-Principal Executive Officer
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
CERTIFICATIONS
I, David Van Hoose, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pilgrim's Pride
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function):
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
quarterly report whether or not 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: January 21, 2003 /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 quarterly report on Form 10-Q of Pilgrim's Pride
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function):
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
quarterly report whether or not 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: January 21, 2003 /s/ Richard A. Cogdill
Richard A. Cogdill
Chief Financial Officer
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
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 Quarterly Report on Form 10-Q for the quarter ended December 28, 2002 (the
"Form 10-Q") 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-Q fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: January 21, 2003 /s/ Lonnie "Bo" Pilgrim
Lonnie "Bo" Pilgrim
Chairman of the Board
Co-Principal Executive Officer
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
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 Quarterly Report on Form 10-Q for the quarter ended December 28, 2002 (the
"Form 10-Q") 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-Q fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: January 21, 2003 /s/ David Van Hoose
David Van Hoose
Chief Executive Officer
Co-Principal Executive Officer
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
December 29, 2001
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 Quarterly Report on Form 10-Q for the quarter ended December 28, 2002 (the
"Form 10-Q") 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-Q fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: January 21, 2003 /s/ Richard A. Cogdill
Richard A. Cogdill
Chief Financial Officer