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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 2, 1999
Commission File number 1-9273
PILGRIM'S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1285071
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 SOUTH TEXAS, PITTSBURG, TX 75686-0093
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (903) 855-1000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
TITLE OF EACH CLASS which registered
Class A Common Stock, Par Value $0.01 New York Stock Exchange
Class B Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Class B Common Stock, $0.01
par value, and Class A Common Stock, $0.01 par value, held by non-
affiliates of the Registrant as of November 22, 1999, was $81,546,439 and
$29,796,834 respectively. For purposes of the foregoing calculation only,
all directors, executive officers, and 5% beneficial owners have been
deemed affiliates.
27,589,250 shares of the Registrant's Class B Common Stock, $.01 par value,
were outstanding as of November 22, 1999.
13,794,529 shares of the Registrant's Class A Common Stock, $.01 par value,
were outstanding as of November 22, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the annual meeting of
stockholders to be held February 2, 2000 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..........................................................21
Item 3. Legal Proceedings...................................................23
Item 4. Submission of Matters to a Vote of Security Holders.................23
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters.............................................................24
Item 6. Selected Financial Data.............................................25
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.................................................26
Item 7a.Quantitative and Qualitative Disclosures About Market Risk..........31
Item 8. Financial Statements and Supplementary Data (see Index to Financial
Statements and Schedules below).....................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................35
PART III
Item 10. Directors and Executive Officers of Registrant.....................36
Item 11. Executive Compensation.............................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management.....36
Item 13. Certain Relationships and Related Transactions.....................36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....36
Signatures..................................................................41
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Ernst & Young LLP--Independent Auditors...........................43
Consolidated Balance Sheets as of October 2, 1999 and September 26, 1998....44
Consolidated Statements of Income (Loss) for the years ended
October 2, 1999, September 26, 1998 and September 27, 1997..............45
Consolidated Statements of Stockholders' Equity for the years ended
October 2, 1999, September 26, 1998 and September 27, 1997..............46
Consolidated Statements of Cash Flows for the years ended
....October 2, 1999, September 26, 1998 and September 27,1997...............47
Notes to Consolidated Financial Statements..................................48
Schedule II - Valuation and Qualifying Accounts for the years ended
October 2, 1999, September 26, 1998 and September 27, 1997..............53
PART I
ITEM 1. BUSINESS
GENERAL
Pilgrim's Pride Corporation (referred to herein as "the Company",
"we", "us", "our" and similar terms) is one of the largest producers of
prepared and fresh chicken products in North America and has one of the
best known brand names in the chicken industry. We are the fourth largest
producer of chicken in the United States and the second largest in Mexico.
Through vertical integration, we control the breeding, hatching and growing
of chickens and the processing, preparation, packaging and sale of our
product lines. Our U.S. operations, including U.S. produced chicken
products sold for export to Canada, Mexico, Eastern Europe, the Far East
and other world markets, accounted for 81.3% of our net sales in fiscal
1999. The remaining 18.7% of our net sales in fiscal 1999 arose from our
Mexico operations. In fiscal 1999, we sold 1.8 billion pounds of dressed
chicken and generated net sales of $1.4 billion, net income of $65.3
million and earnings before interest, taxes and depreciation ("EBITDA") of
$142.3 million.
Our objectives are to increase sales, profit margins and earnings and
outpace the growth of the chicken industry. To achieve these goals, we
plan to continue 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 this market segment continues to be one
of the fastest growing and most profitable segments in the chicken
industry. Products sold to this market segment require further
processing, which enables us to charge a premium for our products
and also reduces the impact of feed ingredient costs on our
profitability. Feed ingredient costs typically decrease from
approximately 40-50% of total production cost for fresh chicken
products to approximately 20-25% for prepared chicken products.
Our sales of prepared food products to the foodservice market grew
from $241.6 million in fiscal 1995 to $530.3 million in fiscal
1999, a compounded annual growth rate of 21.7%. In addition,
these sales increased as a percentage of our total U.S. chicken
revenues from 35.9% to 55.1% during the same five-year period.
- 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 where customers continue to place
greater importance on value-added services. Our research and
development personnel often work directly with institutional
customers in developing products for these customers, which we
believe helps promote long-term relationships. Approximately
$141.7 million or 21.6% of our sales to foodservice customers in
fiscal 1999 consisted of products which we did not sell in fiscal
1995.
- ENHANCE U.S. FRESH CHICKEN PROFITABILITY THROUGH VALUE-ADDED,
BRANDED PRODUCTS. Our U.S. fresh chicken business is an important
component of our business and grew from sales of $279.4 million in
fiscal 1995 to $286.6 million in fiscal 1999. 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. A majority of our fresh chicken products are sold under
the Pilgrim's Pride brand name, which is well known in many
southwestern markets for quality and freshness.
- IMPROVE OPERATING EFFICIENCIES AND INCREASE CAPACITY ON A COST-
EFFECTIVE BASIS. As production and sales have grown, we have
continued to focus on improving operating efficiencies by
investing in state-of-the-art technology, processes and training
and continuing to implement a 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.
We also made cost-effective acquisitions both in the U.S. and
Mexico and subsequently increased the capacity and improved the
efficiency of the acquired properties. As a result, according to
industry data, 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.
- CAPITALIZE ON THE GROWING MEXICAN MARKET. We seek to leverage our
leading market position and reputation for freshness and quality
in Mexico by focusing on the following four objectives:
- to be one of the most cost-efficient producers and processors of
chicken in Mexico by applying technology and expertise utilized
in the U.S.;
- to continually increase our distribution of higher margin, more
value-added products to national retail stores and restaurants;
- to continue to build and emphasize brand awareness and capitalize
on Mexican consumers' preference for branded products and their
insistence on freshness and quality; and
- to ensure that, as Mexican tariffs on imported chicken are
eliminated by 2003, a significant portion of the chicken imported
from the U.S. will be distributed through our existing and
planned distribution facilities. The location of our U.S.
operations in the Southwest gives us a strategic advantage to
capitalize on any exports of U.S. chicken to Mexico.
Our chicken products consist primarily of:
(1) Prepared foods, which are foods such as portion-controlled
breast fillets, tenderloins and strips, formed nuggets and
patties 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.
(2) Fresh chicken, which is refrigerated (non-frozen) whole or
cut-up chicken sold to the foodservice industry either pre-
marinated or non-marinated. Fresh chicken also includes
prepackaged chicken, which includes various combinations of
freshly refrigerated, whole chickens and chicken parts in trays,
bags or other consumer packs labeled and priced ready for the
retail grocer's fresh meat counter.
(3) Export and other products, which are parts and whole
chicken, either refrigerated or frozen for U.S. export or
domestic use. Our Mexico products primarily consist of value-
added products such as eviscerated chicken and chicken parts and
basic products such as New York dressed (whole chicken with only
feathers and blood removed) and live birds.
Our chicken products are primarily sold to:
(1) Foodservice customers, which are customers such as chain
restaurants, frozen entree producers, institutions and
distributors. We sell to our foodservice customers products
ranging from portion-controlled refrigerated chicken parts to
fully-cooked and frozen, breaded or non-breaded chicken parts
or formed products.
(2) Retail customers, which are customers such as grocery store
chains, retail distributors and wholesale clubs. We sell to
our retail customers branded, pre-packaged cut-up and whole
chicken, and fresh refrigerated whole chickens and chicken parts
in trays, bags or other consumer packs.
The following table sets forth, for the periods since fiscal 1995, net
sales attributable to each of our primary product lines and markets served
with those products. We based the table on our internal sales reports and
their classification of product types and customers.
FISCAL YEAR ENDED
Oct. 2, Sept. 26, Sept. 27, Sept. 28, Sept. 30,
1999 1998 1997 1996 1995
(53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
U.S. Chicken Sales: (IN THOUSANDS)
Prepared Foods:
Food Service $ 530,340 $ 420,396 $ 348,961 $ 305,250 $ 241,594
Retail 28,254 46,400 42,289 43,442 39,071
Total Prepared
Foods 558,594 466,796 391,250 348,692 280,665
Fresh Chicken:
Food Service 125,395 145,297 174,103 145,377 140,433
Retail 161,180 162,283 153,554 141,876 138,950
Total Fresh
Chicken 286,575 307,580 327,657 287,253 279,383
Export and Other 118,327 139,976 142,030 140,614 113,414
Total U.S.
Chicken 963,496 914,352 860,937 776,559 673,462
Mexico 254,500 278,087 274,997 228,129 159,491
Total Chicken
Sales 1,217,996 1,192,439 1,135,934 1,004,688 832,953
Sales of Other U.S.
Products 139,407 139,106 141,715 134,622 98,853
Total Net Sales $1,357,403 $1,331,545 $1,277,649 $1,139,310 $931,806
UNITED STATES
The following table sets forth, since fiscal 1995, the percentage of our
net U.S. chicken sales attributable to each of our primary product lines and
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
Oct. 2, Sept. 26, Sept. 27, Sept. 28, Sept. 30,
1999 1998 1997 1996 1995
U.S. Chicken Sales:
Prepared Foods:
Foodservice 55.1 % 46.0 % 40.5 % 39.3 % 35.9 %
Retail 2.9 5.1 4.9 5.6 5.8
Total Prepared
Foods 58.0 51.1 45.4 44.9 41.7
Fresh Chicken:
Foodservice 13.0 15.9 20.2 18.7 20.9
Retail 16.7 17.7 17.9 18.3 20.6
Total Fresh
Chicken 29.7 33.6 38.1 37.0 41.5
Export and Other 12.3 15.3 16.5 18.1 16.8
Total U.S. Chicken
Sales Mix 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
PRODUCT TYPES
U.S. PREPARED FOODS OVERVIEW. During fiscal 1999, $558.6 million of our
net U.S. chicken sales were in prepared food products to foodservice and
retail, as compared to $280.7 million in fiscal 1995. These numbers reflect the
strategic focus for our growth. The market for prepared food products has
experienced, and we believe that this market will continue to experience,
greater growth and higher margins than fresh chicken products. Also, the
production and sale in the U.S. of prepared food products reduce the impact of
the costs of feed ingredients on our profitability. Feed ingredient costs are
the single largest component of our cost of goods sold, representing
approximately 30.9% of our U.S. cost of goods sold in fiscal 1999. The
production of feed ingredients is positively or negatively affected primarily
by weather patterns throughout the world, the global level of supply
inventories 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.
We establish prices for our prepared food 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.
U.S. FRESH CHICKEN OVERVIEW. Our fresh chicken business is an important
component of our sales and has grown from sales of $279.4 million in fiscal
1995 to $286.6 million in fiscal 1999. In addition to maintaining sales of
mature, traditional fresh chicken products, our strategy is to shift the mix of
our U.S. fresh chicken products by continuing to increase sales of higher
margin, faster growing products, such as marinated chicken and chicken parts.
Most fresh chicken products are sold to established customers based upon
certain weekly or monthly market prices reported by the USDA and other public
price reporting services, plus a markup, which is dependent upon the customer's
location, volume, product specifications and other factors. We believe our
practices with respect to sales of fresh chicken are generally consistent with
those of our competitors. Prices of these products are negotiated daily or
weekly and are generally related to market prices quoted by the USDA or other
public reporting services.
EXPORT AND OTHER OVERVIEW. Our export and other products consist of whole
chickens and chicken parts sold primarily in bulk, non-branded form either
refrigerated to distributors in the U.S. or frozen for distribution to export
markets. In fiscal 1999, approximately $25.3 million of these sales were
attributable to exports of U.S. chicken. These exports and other products have
historically been characterized by lower prices and greater price volatility
than our more value-added product lines.
MARKETS
U.S. 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, frozen entree producers, institutions and distributors
located throughout the continental United States. We are a major supplier of
chicken to Wendy's (TM) and KFC (TM), and in 1998 began selling chicken to
Burger King (TM). 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. These
regional chain restaurants often offer better margin opportunities and a
growing base of business.
We believe we have significant competitive strengths in terms of product
capability, production capacity, research and development expertise,
distribution and marketing experience relative to smaller and to non-vertically
integrated producers. As a result of these competitive strengths, our sales to
the foodservice market from fiscal 1995 through fiscal 1999 grew at a
compounded annual growth rate of 14.5% and represented 59.5% of the net sales
of our U.S. operations in fiscal 1999. Based on industry data, we estimate
that total industry dollar sales to the foodservice market grew at a compounded
annual growth rate of 6.9% during the five calendar year period from 1994 to
1998. According to the FOOD INSTITUTE REPORT, food expenditures on "food-away-
from-home" are estimated to increase by a 4.8% compounded annual growth rate
from 1999 through 2010 as a result of the growth of quick service restaurants
and the continuing trend of consumers spending money on food-away-from-home
rather than "food-at-home". Food-away-from-home is projected by THE FOOD
INSTITUTE REPORT to account for 53% of total food expenditures by 2010, as
compared with 45% in 1998.
FOODSERVICE--PREPARED FOODS. The majority of our sales to the foodservice
market consist of prepared food products. Prepared food sales to the
foodservice market were $530.3 million in fiscal 1999 compared to $241.6
million in fiscal 1995, a compounded annual growth rate of approximately 21.7%.
We attribute this growth in sales of prepared foods 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 foods 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 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 U.S. 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 $141.7 million or 21.6% of our sales to
foodservice customers in fiscal 1999 consisted of new products which were
not sold by us in fiscal 1995.
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.
U.S. RETAIL. The U.S. retail market consists primarily of grocery store
chains and retail distributors. We concentrate our efforts in this market on
sales of branded, prepackaged cut-up and whole chicken to grocery chains and
retail distributors in the midwestern, southwestern and western 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 within these markets.
We utilize numerous marketing techniques, including advertising, to
develop and strengthen trade and consumer awareness and increase brand loyalty
for consumer products marketed under the "Pilgrim's Pride" brand. Our founder,
Lonnie "Bo" Pilgrim, is the featured spokesman in our television, radio and
print advertising, and a trademark cameo of a person in a Pilgrim's hat serves
as the logo on all of our primary branded products. As a result of this
marketing strategy, Pilgrim's Pride is a well-known brand name in several
southwestern markets, including in 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 foods primarily
to grocery store chains located in the midwestern, southwestern and western
regions of the U.S. Being a major, national competitor in retail, branded
frozen foods is not a part of our current business strategy. After an absence
of several years, we have again begun servicing the wholesale club industry.
While traditionally this market segment has been characterized as a "high-
volume, low-margin" business, with the recent acquisition of Hudson Foods by
Tyson Foods, servicing this market segment has become more attractive. We
believe that our growth in this market segment will remain relatively modest,
however, as we concentrate our efforts primarily on faster-growing, higher-
margin market segments.
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. Our export and other products consist of whole
chickens and chicken parts sold primarily in bulk, non-branded form either
refrigerated to distributors in the U.S. or frozen for distribution to export
markets. In recent years, we have de-emphasized our marketing of bulk-packaged
chicken in the U.S. in favor of more value-added products and export
opportunities. In the U.S., prices of these products are negotiated daily or
weekly and are generally related to market prices quoted by the USDA or other
public price reporting services. We also sell U.S.-produced chicken products
for export to Canada, Mexico, Eastern Europe, the Far East and other world
markets. Due to U.S. consumers' preference for a chicken's white meat, the
U.S. chicken industry has traditionally targeted international markets to
generate sales for a chicken's dark meat. We have also begun selling prepared
food 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 for high-grade, low-cost protein sources increases.
We also believe that worldwide demand for higher margin prepared food products
will increase over the next five years. Accordingly, we believe we are well
positioned to capitalize on such growth.
OTHER U.S. PRODUCTS. We market fresh eggs under the Pilgrim's Pride brand
name as well as private labels in various sizes of cartons and flats to U.S.
retail grocery and institutional foodservice customers located primarily in
Texas. We have a housing capacity for approximately 2.3 million commercial egg
laying hens which can produce approximately 41 million dozen eggs annually.
U.S. egg prices are determined weekly based upon reported market prices. The
U.S. egg industry has been consolidating over the last few years, with the 25
largest producers accounting for more than 54% of the total number of egg
laying hens in service during 1999. We compete with other U.S. egg producers
primarily on the basis of product quality, reliability, price and customer
service. According to an industry publication, Pilgrim's Pride is the thirty-
seventh largest producer of eggs in the United States.
In 1997, we introduced a high-nutrient egg called EggsPlus (TM). 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 (TM) has
received national recognition for our progress in being an innovator in the
"functional foods" category.
We also convert chicken by-products into protein products primarily for
sale to manufacturers of pet foods. In addition, we produce and sell livestock
feeds at our feed mills in Pittsburg and Mt. Pleasant, Texas and at our farm
supply store in Pittsburg, Texas to dairy farmers and livestock producers in
northeastern Texas.
TOTAL QUALITY MANAGEMENT AND PRODUCTIVITY IMPROVEMENTS. Beginning in
1991, we implemented a total quality management program to increase the
emphasis by all of our employees on maintaining the highest quality products
and lowest cost production. The successful implementation of these initiatives
for a company with a size of production base and the number of employees such
as we have usually takes several years. As this new management culture has
become more entrenched within Pilgrim's Pride, we have begun to experience
significant gains resulting from these efforts. For example, cross-
geographical business process teams have been formed and are producing
significant gains in performance characteristics. The gains range from waste
reductions to process yield improvements resulting in annualized cost savings
in excess of $25.0 million. Additionally, in fiscal 1999, centralizing
purchasing and combining our purchasing power across company locations has
successfully reduced the cost of procured materials by more than $4.0 million.
We have also employed new technology to consolidate administrative support
activities such as accounts payable processing, treasury management and
accounts receivable management. This consolidation has reduced the transaction
costs of providing these services.
MEXICO
BACKGROUND
The Mexican market represented approximately 18.7% of our net sales in
1999. We entered the Mexican market in 1979 by seasonally selling eggs to the
Mexican government. Recognizing favorable long-term demographic trends and
improving economic conditions in Mexico, we began exploring opportunities to
produce and market chicken in Mexico. In fiscal 1988, we acquired four
vertically integrated chicken production operations in Mexico for approximately
$15.1 million. From fiscal 1988 through fiscal 1999, we made acquisitions and
capital expenditures in Mexico totaling $188.7 million to expand and improve
these operations. As a result of these expenditures, we have increased weekly
production in our Mexican operations by over 400% since our original investment
in fiscal 1988. We are now the second largest producer of chicken in Mexico.
We believe our facilities are among the most technologically advanced in Mexico
and that we are one of the lowest cost producers of chicken in Mexico.
PRODUCT TYPES
While the market for chicken products in Mexico is less developed than in
the United States, with sales attributed to fewer, more basic products, the
market for value-added products is increasing. Our strategy is to lead this
trend. The products currently sold by us in Mexico consist primarily of value-
added products such as eviscerated chicken and chicken parts and basic products
such as New York dressed (whole chickens with only feathers and blood removed)
and live birds. We have increased our sales of value-added products, primarily
through national retail chains and restaurants, and it is our business strategy
to continue to do so. In addition, we remain opportunistic, utilizing our low
cost production to enter markets where profitable opportunities exist. For
example, we have increased our sales of live birds since 1994, as many smaller
producers exited this segment of the business as a result of the recession in
Mexico in 1995 and 1996.
MARKETS
We sell our Mexico chicken products primarily to large wholesalers and
retailers. Our customer base in Mexico covers a broad geographic area from
Mexico City, the capital of Mexico with a population estimated to be over 20
million, to Saltillo, the capital of the State of Coahuila, about 500 miles
north of Mexico City, and from Tampico on the Gulf of Mexico to Acapulco on the
Pacific, which region includes the cities of San Luis Potosi and Queretaro,
capitals of the states of the same name.
COMPETITION
The chicken industry is 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 companies.
In general, the competitive factors in the U.S. chicken industry include
price, product quality, product development, brand identification, breadth of
product line and customer service. Competitive factors vary by major market.
In the foodservice market, competition is based on consistent quality, product
development, service and price. In the U.S. retail market, we believe that
product quality, brand awareness and customer service are the primary bases of
competition. There is some competition with non-vertically integrated further
processors in the U.S. prepared food business. We believe we have significant,
long-term cost and quality advantages over non-vertically integrated further
processors.
In Mexico, where product differentiation has traditionally been limited,
product quality and price have been the most critical competitive factors. The
North American Free Trade Agreement, which went into effect on January 1, 1994,
requires annual reductions in tariffs for chicken and chicken products in order
to eliminate those tariffs by January 1, 2003. As 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, or on our
Mexican operations in particular.
While the extent of the impact of the elimination of tariffs is uncertain,
we believe we are uniquely positioned to benefit from this elimination for two
reasons. First, we have an extensive distribution network in Mexico which
distributes products to 19 of the 32 Mexican states, encompassing approximately
74% of the total population of Mexico. We believe this distribution network
will be an important asset in distributing our own U.S.-produced chicken.
Second, we have the largest U.S. production and distribution capacities near
the Mexican border, which will provide us with cost advantages in exporting
U.S. chicken into Mexico. These facilities include our processing facilities in
Mt. Pleasant, Pittsburg, Lufkin, Nacogdoches, Dallas and Waco, Texas, and
distribution facilities in San Antonio and El Paso, Texas and Phoenix, Arizona.
OTHER ACTIVITIES
We have regional distribution centers located in Arlington, El Paso, Mt.
Pleasant and San Antonio, Texas; Phoenix, Arizona; and Oklahoma City, Oklahoma
that distribute our own poultry products along with certain poultry and non-
poultry products purchased from third parties to independent grocers and quick
service restaurants. Our non-poultry distribution business is conducted as an
accommodation to our customers and to achieve greater economies of scale in
distribution logistics. The store-door delivery capabilities for our own
poultry products provide a strategic service advantage in selling to quick
service, national chain restaurants.
REGULATION
The chicken industry is subject to government regulation, particularly in
the health and environmental areas, including provisions relating to the
discharge of materials into the environment, by the Centers for Disease
Control, the United States Department of Agriculture, the Food and Drug
Administration and the Environmental Protection Agency in the United States and
by similar governmental agencies in Mexico. Our chicken processing facilities
in the U.S. are subject to on-site examination, inspection and regulation by
the USDA. The FDA inspects the production of our feed mills in the U.S. Our
Mexican food processing facilities and feed mills are subject to on-site
examination, inspection and regulation by a Mexican governmental agency, which
performs functions similar to those performed by the USDA and FDA. Since
commencement of operations by our predecessor in 1946, compliance with
applicable regulations has not had a material adverse effect upon our earnings
or competitive position and such compliance is not anticipated to have a
materially adverse effect in the future. We believe that we are in substantial
compliance with all applicable laws and regulations relating to the operations
of our facilities.
We anticipate increased regulation by the USDA concerning food safety, by
the FDA concerning the use of medications in feed and by the Texas Natural
Resources and Conservation Commission, the Arkansas State Veterinarian Office
and the EPA concerning the disposal of chicken by-products and wastewater
discharges. Although we do not anticipate any regulations having a material
adverse effect upon us, we can give no assurance that such regulations will not
have such a material adverse effect.
EMPLOYEES AND LABOR RELATIONS
As of November 23, 1999 we employed approximately 11,200 persons in the
U.S. and 3,950 persons in Mexico. Approximately 2,000 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 expire on August 10, 2001 with
respect to our Lufkin employees and on October 6, 2001 with respect to our
Nacogdoches employees. We believe that the terms of each of these agreements
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 most employees in Mexico are. We have not experienced any work
stoppage since a two-day work stoppage at our Lufkin facility in May 1993, and
we believe our relations with our employees are satisfactory.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements made by (or on behalf of) the Company.
Except for historical information contained herein, Management's Discussion and
Analysis of Results of Operations and Financial Condition and statements
included in Business elsewhere in this Form 10-K are forward-looking statements
that are dependent upon a number of risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statement. These risks and uncertainties include changes in commodity prices
of feed ingredients and chicken, the Company's substantial indebtedness, risks
associated with the Company's foreign operations, including currency exchange
rate fluctuations, trade barriers, exchange controls, expropriation and changes
in laws and practices, the impact of current and future laws and regulations,
the impact of the year 2000 and the other risks described in the Company's SEC
filings. The Company does not intend to provide updated information about the
matters referred to in these forward looking statements, other than in the
context of Management's Discussion and Analysis of Results of Operations and
Financial Condition and other disclosures in the Company's SEC filings.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information relating to our current directors
and executive officers:
EXECUTIVE OFFICERS OF THE COMPANY AGE POSITIONS
Lonnie "Bo" Pilgrim (1) 71 Chairman of the Board
Clifford E. Butler 57 Vice Chairman of the Board
David Van Hoose 58 Chief Executive Officer
President
Chief Operating Officer
Director
(Principal Executive Officer)
Richard A. Cogdill 39 Executive Vice President
Chief Financial Officer
Secretary and Treasurer
Director
(Principal Financial and
Accounting Officer)
O.B. Goolsby, Jr. 52 Executive Vice President
Prepared Foods Complexes
Robert L. Hendrix 63 Executive Vice President
Growout and Processing
Michael J. Murray 41 Executive Vice President
Sales and Marketing and
Distribution
Randy P. Stroud 44 Executive Vice President
Mexican Operations
Ray Gameson 51 Senior Vice President
Human Resources
David Hand 42 Senior Vice President
Sales and Marketing
Retail and Fresh Products
Michael D. Martin 45 Senior Vice President
Complex Manager
DeQueen and Nashville
Arkansas Complex
James J. Miner, Ph.D. 71 Senior Vice President
Technical Services
Robert N. Palm 56 Senior Vice President
Complex Manager
Lufkin/Nacogdoches and Center
Texas Complex
Lonnie Ken Pilgrim (1) 41 Senior Vice President
Director of Transportation
Director
CHARLES L. BLACK (1) (2) 70 DIRECTOR
ROBERT E. HILGENFELD (1) (2) 74 DIRECTOR
VANCE C. MILLER, SR. (1) (2) 65 DIRECTOR
JAMES G. VETTER, JR. (1) (2) 65 DIRECTOR
DONALD L. WASS, PH.D. (1) (2) 67 DIRECTOR
_________
(1) MEMBER OF THE COMPENSATION COMMITTEE
(2) MEMBER OF THE AUDIT COMMITTEE
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, President and Chief
Operating Officer, (Principal 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.
RICHARD A. COGDILL has served as Executive Vice President, Chief Financial
Officer, Secretary and Treasurer, (Principal Financial and Accounting Officer)
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.
O.B. GOOLSBY, JR. has served as Executive Vice President, Prepared Foods
Operations since June 1998. 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.
ROBERT L. HENDRIX has been Executive Vice President, Grow-Out and
Processing, of Pilgrim's Pride since March 1994. He was a Director from March
1994 to September 1998. Prior to that he served as Senior Vice President, NETEX
Processing from August 1992 to March 1994 and as President and Chief of Complex
Operations from September 1988 to March 1992. He was on leave from the Company
from March 1992 to August 1992. From July 1983 to March 1992 he served as a
Director. He was President and Chief Operating Officer of Pilgrim's Pride from
July 1983 to September 1988. He joined us as Senior Vice President in September
1981 when Pilgrim's Pride acquired Mountaire Corporation of DeQueen, Arkansas,
and, prior thereto, he was Vice President of Mountaire Corporation.
MICHAEL J. MURRAY has been Executive Vice President, Sales & Marketing and
Distribution since June 1998. He previously served as Senior Vice President,
Sales & Marketing, Prepared Foods from October 1994 to June 1998 and as Vice
President of Sales and Marketing, Food Service from August 1993 to October
1994. From 1990 to July 1993, he was employed by Cargill, Inc. Prior to that,
from March 1987 to 1990 he was employed by us as a Vice President for sales and
marketing and prior thereto, he was employed by Tyson Foods, Inc.
RANDY P. STROUD has served as Executive Vice President, Mexico Operations
since August 1998. Previously he was Live Production Manager at the Lufkin,
Texas Complex from May 1989 to August 1998 and as Breeder Department Manager
from June 1985 to May 1989. Prior to that he was employed in various operating
management positions by Plus-Tex Poultry, Inc., a Lufkin, Texas based company
acquired by Pilgrim's Pride in June of 1985.
RAY GAMESON has been Senior Vice President, Human Resources since October
1994. He previously served as Vice President of Human Resources since August
1993. From December 1991 to July 1993, he was employed by Townsends, Inc. and
served as Complex Human Resource, Manager. Prior to that, he was employed by
us as Complex Human Resource, Manager, at our Mt. Pleasant, Texas location.
DAVID HAND has served as Senior Vice President of Sales and Marketing,
Retail and Fresh Products since January 1998. Previously he was Vice President
of Commodity and Export Sales from November 1996 to June 1998. Prior to that
he was Director of Commodity and Export Sales from October 1992 to November
1996. He joined Pilgrim's Pride in June 1990 and was Export Sales Manager from
June 1990 to October 1992. Prior to that he was President of Plantation
Marketing and was with ConAgra from 1979 to 1986.
MICHAEL D. MARTIN has been Senior Vice President, DeQueen, Arkansas
Complex Manager since April 1993. He previously served as Plant Manager at our
Lufkin, Texas operations and Vice President, Processing, at our Mt. Pleasant,
Texas, operations up to April 1993. He has served in various other operating
management positions in the Arkansas Complex since September 1981. Prior to
that, he was employed by Mountaire Corporation of DeQueen, Arkansas, until it
was acquired by the Company in September 1981.
JAMES J. MINER, PH.D., has been Senior Vice President, Technical Services,
since April 1994. He has been employed by Pilgrim's Pride and its predecessor
partnership since 1966 and served as Senior Vice President responsible for live
production and feed nutrition from 1968 to April 1994. He was a Director from
the incorporation of the Company in 1968 through September 1998.
ROBERT N. PALM has been Senior Vice President, Lufkin, Nacogdoches and
Center, Texas Complex since June 1985 and was previously employed in various
operating management positions by Plus-Tex Poultry, Inc., a Lufkin, Texas based
company acquired by Pilgrim's Pride in June 1985.
LONNIE KEN PILGRIM has been employed by the Company since 1977 and has
been Senior Vice President, Transportation since August 1997. Prior to that he
served as the Vice President, Director of Transportation. He has been a member
of the Board of Directors since March 1985. He is a son of Lonnie "Bo"
Pilgrim.
CHARLES L. BLACK was Senior Vice President, Branch President of
NationsBank, Mt. Pleasant, Texas, from December 1981 to his retirement in
February 1995. He previously was a Director of Pilgrim's Pride from 1968 to
August 1992 and has served as a director since his re-election in February
1995.
ROBERT E. HILGENFELD was elected a Director in September 1986. Mr.
Hilgenfeld was a Senior Vice President, Marketing/Processing for us from 1969
to 1972 and for seventeen years prior to that worked in various sales and
management positions for the Quaker Oat Company. From 1972 until April 1986, he
was employed by Church's Fried Chicken Company ("Church's") as Vice President-
Purchasing Group, Vice President and Senior Vice President. He was elected a
Director of Church's in 1985 and retired from Church's in April 1986. Since
retirement he has served as a consultant to various companies including
Pilgrim's Pride.
VANCE C. MILLER, SR. was elected a Director in September 1986. Mr. Miller
has been Chairman of Vance C. Miller Interests, a real estate development
company formed in 1977 and has served as the Chairman of the Board and Chief
Executive Officer of Henry S. Miller Cos., a Dallas, Texas real estate services
firm since 1991. Mr. Miller also serves as a director of Resurgence
Properties, Inc.
JAMES G. VETTER, JR. has practiced law in Dallas, Texas since 1966. He is
a shareholder of the Dallas law firm of Godwin, White & Gruber, P.C., (formerly
Godwin & Carlton, P.C.) and has served as general counsel and a Director since
1981. Mr. Vetter is a Board Certified-Tax Law Specialist and serves as a
lecturer and author in tax matters.
DONALD L. WASS, Ph.D. was elected a Director of the Company in May 1987.
He has been President of the William Oncken Company of Texas, a time management
consulting company, since 1970.
ITEM 2. PROPERTIES
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 19.0% of them are maintained on 41 company-owned breeder farms.
In the U.S., we currently own or contract for approximately 10.4 million square
feet of breeder housing on approximately 274 breeder farms. In Mexico, all of
our breeder flocks are maintained on company-owned farms totaling approximately
3.5 million square feet.
We own seven hatcheries in the United States. These hatcheries are
located in Nacogdoches, Center and Pittsburg, Texas, and DeQueen and Nashville,
Arkansas, 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 seven
hatcheries in the U.S. have an aggregate production capacity of approximately
10.2 million chicks per week. In Mexico, we own seven hatcheries, which have
an aggregate production capacity of approximately 3.3 million chicks per week.
GROW-OUT
We place our U.S. grown chicks on contract grow-out farms located in
Texas, Arkansas and Oklahoma, some of which are owned by our affiliates. These
contract grow-out farms contain approximately 3,985 chicken houses with
approximately 53.4 million square feet of growing facilities. Additionally, we
own and operate grow-out farms containing approximately 390 chicken houses with
approximately 4.4 million square feet of growing facilities in the U.S., which
account for approximately 7.6% of our total annual U.S. chicken capacity. On
the contracted grow-out farms, the farmers provide the facilities, utilities
and labor; we supply the chicks, the feed and all veterinary and technical
services. Contract grow-out farmers are paid based on live weight under an
incentive arrangement. In Mexico, we place our grown chicks on contract grow-
out farms containing approximately 844 chicken houses with approximately 10.9
million square feet of growing facilities. Additionally, we own and operate
grow-out farms containing approximately 523 chicken houses with approximately
7.9 million square feet of growing facilities in Mexico, which account for
approximately 42.0% of our total annual Mexican chicken capacity. Arrangements
with independent farmers in Mexico are similar to our arrangements with
contractors in the United States.
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 components of our total production costs. In the U.S., we operate
seven feed mills located in Nacogdoches, Mt. Pleasant, Tenaha and Pittsburg,
Texas and Nashville and Hope, Arkansas. In the U.S., we currently have annual
feed requirements of approximately 2.4 million tons and the capacity to produce
approximately 4.2 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 0.9 million tons. In fiscal 1999, approximately 26% of the feed
ingredients used by us in Mexico were imported from the United States, but this
percentage fluctuates based on the availability and cost of local feed
ingredient supplies.
PROCESSING
Once the chickens reach processing weight, they are transported in our
trucks to our processing plants. These plants utilize modern, highly automated
equipment to process and package the chickens. We periodically review possible
application of new processing technologies in order to enhance productivity and
reduce costs. Our six 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, and DeQueen, Arkansas, have the capacity, under present USDA
inspection procedures, to slaughter approximately 8.2 million head of chicken
per week, assuming a five-day work week. Our three processing plants located
in Mexico have the capacity to slaughter approximately 2.6 million head of
chicken per week, assuming a six-day work week, which is typical in Mexico.
PREPARED FOODS PLANT
Our prepared foods plant in Mt. Pleasant, Texas was constructed in 1986
and has been expanded significantly since that time. This facility has
deboning lines, marination systems, batter/breading systems, fryers, ovens,
both mechanical and cryogenic freezers, a variety of packaging systems and cold
storage. This plant is currently operating at the equivalent of two shifts a
day for six days a week. If necessary, we could add additional shifts during
the seventh day of the week. We completed construction of a new prepared foods
facility at our Dallas, Texas location during the first quarter of fiscal 1998.
The Dallas, Texas facility is functionally equivalent to the Mt. Pleasant,
Texas facility. During the first calendar quarter of 1999, we acquired a
prepared foods plant in Waco, Texas from Plantation Foods, Inc. The Waco,
Texas facility is functionally equivalent to the Mt. Pleasant and Dallas, Texas
facilities.
EGG PRODUCTION
We produce table eggs at three farms near Pittsburg, Texas. One farm is
owned by us, while two farms are operated under contract by an entity owned by
our major stockholder. The eggs are cleaned, sized, graded and packaged for
shipment at processing facilities located on the egg farms. The farms have a
housing capacity for approximately 2.3 million producing hens and are currently
housing approximately 2.0 million hens.
OTHER FACILITIES AND INFORMATION
We operate a rendering plant located in Mt. Pleasant, Texas. The rendering
plant currently processes by-products from approximately 8.9 million chickens
weekly into protein products. These products are used in the manufacture of
chicken and livestock feed and pet foods. We operate a commercial feed mill in
Mt. Pleasant, Texas which produces various bulk and sacked livestock feed,
which are 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 in Mexico City, which
houses our Mexican marketing offices.
Substantially all of our U.S. property, plant and equipment is pledged as
collateral on our secured debt.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are named as a defendant or co-defendant in lawsuits
arising in the course of our business. We do not believe that such pending
lawsuits will have a material adverse impact on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pilgrim's Pride Corporation held a Special Meeting of Shareholders on July
20, 1999. The meeting was held to amend the Company's Certificate of
Incorporation to permit dividends of either Class A Common Stock or Class B
Common Stock of the Company, as specified by the Board of Directors of the
Company, to holders of the Company's Class B Common Stock. The number of shares
represented at the meeting was 20,885,680 with 417,713,600 votes. The
amendment was passed with 381,515,040 voting for the amendment, 36,149,000
voting against the amendment and 49,560 votes abstaining. The measure passed
and the articles are now amended.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
QUARTERLY STOCK PRICES AND DIVIDENDS
High and low sales prices of and dividends on the Company's Class B and
Class A common stock for the periods indicated (as adjusted for the
June 30, 1999 stock dividend referred to in Note F of the Consolidated
Financial Statements) were:
Prices Prices
1999 1998 DIVIDENDS
QUARTER HIGH LOW HIGH LOW 1999 1998
Class B Common Stock
First $16 1/16 $11 5/16 $11 1/16 $ 8 1/2 $.01 $.01
Second 15 7/8 10 9/16 10 9/16 7 3/16 .01 .01
Third 20 9 7/8 13 1/8 9 3/16 .01 .01
Fourth 16 5/16 6 1/4 16 1/16 12 3/16 .01 .01
Class A Common Stock
First N/A N/A N/A N/A N/A N/A
Second N/A N/A N/A N/A N/A N/A
Third N/A N/A N/A N/A N/A N/A
Fourth(1) $14 3/4 $ 4 5/8 N/A N/A N/A N/A
(1) On July 2, 1999, the Company's board of directors declared a dividend
of one share of the Company's Class A common stock for every two shares
of the Company's Class B common stock. The additional shares were
issued on July 30, 1999. The prices listed above are adjusted to
reflect such dividend. Please refer to Note F of the Consolidated
Financial Statements for more information regarding the stock dividend.
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 13,400 and 12,800 holders
(including individual participants in security position listings) of the
Company's Class B and Class A common stock, respectively, as of November 22,
1999. See Note F--Common Stock, of the Notes to Consolidated Financial
Statements for additional discussion of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA) TEN YEARS ENDED OCTOBER 2, 1999
1999(a) 1998 1997 1996 1995
Income Statement Data:
Net sales $1,357,403 $1,331,545 $1,277,649 $1,139,310 $931,806
Gross margin 185,708 136,103 114,467 70,640 74,144
Operating income (loss) 109,504 77,256 63,894 21,504(b) 24,930(b)
Income (loss) before
income taxes and
extraordinary charge 90,904 56,522 43,824 47 2,091
Income tax expense
(benefit) (c) 25,651 6,512 2,788 4,551 10,058
Income (loss) before
extraordinary charge 65,253 50,010 41,036 (4,504) (7,967)
Extraordinary charge -
early repayment of debt,
net of tax -- -- -- (2,780) --
Net income (loss) 65,253 50,010 41,036 (7,284) (7,967)
Per Common Share Data: (d)
Income (loss) before
extraordinary charge $ 1.58 $ 1.21 $ 0.99 $ (0.11) $ (0.19)
Extraordinary charge -
early repayment of debt -- -- -- (0.07) --
Net income (loss) 1.58 1.21 0.99 (0.18) (0.19)
Cash dividends 0.045 0.04 0.04 0.04 0.04
Book value 7.11 5.58 4.41 3.46 3.67
Balance Sheet Summary:
Working captial $154,242 $ 147,040 $ 133,542 $ 88,455 $ 88,395
Total assets 655,762 601,439 579,124 536,722 497,604
Notes payable and current
maturities of
long-term debt 4,353 5,889 11,596 35,850 18,187
Long-term debt, less
current maturities 183,753 199,784 224,743 198,334 182,988
Total stockholders'
equity 294,259 230,871 182,516 143,135 152,074
Key Indicators (as a percentage of net sales):
Gross Margin 13.7% 10.2% 9.0% 6.2% 8.0%
Selling, general and
administrative expenses 5.6% 4.4% 4.0% 4.3% 5.3%
Operating income (loss) 8.1% 5.8% 5.0% 1.9% 2.7%
Interest expense, net 1.3% 1.5% 1.7% 1.9% 1.9%
Net income (loss) 4.8% 3.8% 3.2% (0.6%) (0.9%)
(IN THOUSANDS, EXCEPT PER SHARE DATA) TEN YEARS ENDED OCTOBER 2, 1999
1994 1993(a) 1992 1991 1990
Income Statement Data:
Net Sales $922,609 $887,843 $817,361 $786,651 $720,555
Gross Margin 110,827 106,036 32,802 75,567 74,190
Operating income
(loss) 59,698 56,345 (12,475) 31,039 33,379
Income (loss) before income
taxes and extraordinary
charge 42,448 32,838 (33,712) 12,235 20,463
Income tax expense
(benefit) (c) 11,390 10,543 (4,048) (59) 4,826
Income (loss)
before extraordinary
charge 31,058 22,295 (29,664) 12,294 15,637
Extraordinary charge-
early repayment of
debt, net of tax -- (1,286) -- -- --
Net income (loss) 31,058 21,009 (29,664) 12,294 15,637
Per Common Share Data (d)
Income (loss)
before extraordinary
charge $ 0.75 $ 0.51 $ (0.83) $ 0.36 $ 0.46
Extraordinary charge-
early repayment of
debt, net of tax -- (0.03) -- -- --
Net income (loss) 0.75 0.51 (0.83) 0.36 0.46
Cash dividneds 0.04 0.02 0.04 0.04 0.04
Book value 3.91 3.20 2.71 2.72 2.45
Balance Sheet Summary:
Working capital $ 99,724 $ 72,688 $ 11,227 $ 44,882 $ 54,161
Total assets 438,683 422,846 434,566 428,090 379,694
Notes payable and
current maturities of
long-term debt 4,493 25,643 86,424 44,756 30,351
Long-term debt, less
current maturities 152,631 159,554 131,534 175,776 154,227
Total stockholders'
equity 161,696 132,293 112,112 112,353 101,414
Key Indicators (as a percentage of net sales):
Gross margin 12.0% 11.9% 4.0% 9.6% 10.3%
Selling, general and
administrative
expenses 5.5% 5.6% 5.7% 5.7% 5.7%
Operating income (loss) 6.5% 6.3% (1.6%) 3.9% 4.6%
Interest expense, net 2.1% 2.9% 2.8% 2.5% 2.3%
Net income (loss) 3.4% 2.4% (3.6%) 1.6% 2.2%
(a) Fiscal 1999 and 1993 had 53 weeks.
(b) In addition to foreign exchange losses, the peso decline and the related
economic recession in Mexico contributed significantly to the operating
losses experienced by the Company's Mexico Operations of $8.2 million and
$17.0 million for fiscal years 1996 and 1995, respectively.
(c) The Company does not include income or losses from its Mexico Operations in
its determination of taxable income for U.S. income tax purposes based upon
its determination that such earnings will be indefinitely reinvested in
Mexico. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note D of the Consolidated Financial
Statements of the Company.
(d) Historical per share amounts have been restated to give effect to a stock
dividend issued on July 30, 1999. See Note F of the Consolidated Financial
Statements of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Profitability in the chicken industry can be materially affected by the
commodity prices of chicken, chicken parts and feed ingredients. Those
commodity prices are determined largely by supply and demand. As a result, the
chicken industry as a whole has been characterized by cyclical earnings. These
cyclical fluctuations in earnings of individual chicken companies 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 food products. Prepared food products generally have higher profit
margins than our other products. Also, the production and sale in the U.S. of
prepared food 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 30.9% of our cost of
goods sold in 1999. The production of feed ingredients is positively or
negatively affected primarily by weather patterns throughout the world, the
global level of supply inventories 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.
The following table presents certain information regarding the Company's U.S.
and Mexico operations.
FISCAL YEAR ENDED
October 2, 1999 September 26, 1998 September 27,1997
(53 weeks) (52 weeks) (52 weeks)
(in thousands)
Sales to unaffiliated customers:
United States $1,102,903 $1,053,458 $1,002,652
Mexico 254,500 278,087 274,997
Total sales to
unaffiliated customers $1,357,403 $1,331,545 $1,277,649
Operating income:
United States $ 88,177 $ 36,279 $ 29,321
Mexico 21,327 40,977 34,573
Total operating income $ 109,504 $ 77,256 $ 63,894
The following table presents certain items as a percentage of net sales for the
periods indicated:
1999 1998 1997
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 86.3 89.8 91.0
Gross profit 13.7 10.2 9.0
Selling, general and
administrative expense 5.6 4.4 4.0
Operating income 8.1 5.8 5.0
Interest expense, net 1.3 1.5 1.7
Income before income taxes 6.7 4.2 3.4
Net income 4.8 3.8 3.2
Results of Operations
FISCAL 1999 COMPARED TO FISCAL 1998:
Our accounting cycle resulted in 53 weeks of operations in fiscal 1999
compared to 52 weeks in fiscal 1998.
NET SALES. Consolidated net sales were $1.36 billion for fiscal 1999, an
increase of $25.9 million, or 1.9% from fiscal 1998. The increase in
consolidated net sales resulted from a $49.1 million increase in U.S. chicken
sales to $963.5 million and by a $0.4 million increase of sales of other U.S.
products to $139.4 million offset by a $23.6 million decrease in Mexico chicken
sales to $254.5 million. The increase in U.S. chicken sales was primarily due
to an 8.7% increase in dressed pounds produced and partially offset by a 3.0%
decrease in total revenue per dressed pound. The decrease in Mexico chicken
sales was primarily due to a 19.6% decrease in revenue per dressed pound
partially offset by a 13.9% increase in dressed pounds sold.
COST OF SALES. Consolidated cost of sales was $1.2 billion in fiscal
1999, a decrease of $23.7 million, or 2.0% compared to fiscal 1998. The
decrease resulted primarily from an $18.4 million decrease in the cost of sales
of U.S. operations and by a $5.3 million decrease in the cost of sales in
Mexico operations. The cost of sales decrease in U.S. operations of $18.4
million was due primarily to a 22.1% decrease in feed ingredients cost per
pound partially offset by an 8.7% increase in dressed pounds produced.
The $5.3 million cost of sales decrease in Mexico operations was primarily
due to a 15.4% decrease in feed ingredient costs per pound offset partially by
a 13.9% increase in dressed pounds produced.
GROSS PROFIT. Gross profit was $185.7 million for fiscal 1999, an
increase of $49.6 million, or 36.5% over the same period last year. Gross
profit as a percentage of sales increased to 13.7% in fiscal 1999 from 10.2% in
fiscal 1998. The increased gross profit resulted primarily from lower feed
ingredient costs per pound and higher production volumes.
Beginning in the fourth quarter of fiscal 1999, commodity chicken margins
have been under pressure due, in part, to increased levels of chicken
production in the U.S. and Mexico. To the extent that these trends continue,
subsequent period's gross margins could be negatively affected to the extent
not offset by other factors such as those discussed under "-General" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $76.2 million in fiscal 1999 and $58.8
million in fiscal 1998. Consolidated selling, general and administrative
expenses as a percentage of sales increased in fiscal 1999 to 5.6%, compared to
4.4% in fiscal 1998, due primarily to increased retirement and variable
compensation costs which are dependent upon U.S. profits.
OPERATING INCOME. Consolidated operating income was $109.5 million for
fiscal 1999, an increase of $32.2 million, or 41.7% when compared to fiscal
1998, resulting primarily from lower feed ingredient costs per pound and higher
production volumes.
INTEREST EXPENSE. Consolidated net interest expense decreased 12.4% to
$17.7 million in fiscal 1999, when compared to $20.2 million for fiscal 1998,
due to lower average outstanding debt levels.
MISCELLANEOUS, NET. Consolidated miscellaneous, net, a component of Other
Expenses (Income), was $1.0 million in fiscal 1999, a $2.7 million decrease
when compared to ($1.7) for fiscal 1998 due primarily to losses on disposal of
assets.
INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 1999
increased to $25.7 million compared to an expense of $6.5 million in fiscal
1998. This increase resulted from higher U.S. earnings in fiscal 1999 than in
fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997:
NET SALES. Consolidated net sales were $1.33 billion for fiscal 1998, an
increase of $53.9 million, or 4.2% over fiscal 1997. The increase in
consolidated net sales resulted from a $53.4 million increase in U.S. chicken
sales to $914.4 million and a $3.1 million increase in Mexican chicken sales to
$278.1 million offset by a $2.6 million decrease of sales of other U.S.
products to $139.1 million. The increase in U.S. chicken sales was due
primarily to a 3.9% increase in dressed pounds produced resulting primarily
from the Company's expansion of existing facilities and the purchase of poultry
assets capable of producing 650,000 chickens per week from Green Acre Foods,
Inc., on April 15, 1997, and by a 2.3% increase in total revenue per dressed
pound produced. The increase in Mexico chicken sales was due primarily to a
6.5% increase in total revenue per dressed pound offset partially by a 5.0%
decrease in dressed pounds produced. Increased revenues per dressed pound
produced in Mexico were primarily the result of higher sales prices as well as
generally improved economic conditions in Mexico compared to the previous year.
COST OF SALES. Consolidated cost of sales was $1.2 billion in fiscal
1998, an increase of $32.3 million, or 2.8% over fiscal 1997. The increase
resulted primarily from a $37.4 million increase in cost of sales of U.S.
operations, offset by a $5.1 million decrease in the cost of sales in Mexico
operations. The cost of sales increase in U.S. operations of $37.4 million was
due to a 3.9% increase in dressed pounds produced and increased production of
higher cost and margin products in prepared foods, offset by a 16.5% decrease
in the cost of feed ingredient purchases per pound during the period. The $5.1
million cost of sales decrease in Mexico operations was due primarily to a 5.0%
decrease in dressed pounds produced partially offset by a 2.9% increase in
average costs of sales per dressed pound produced.
GROSS PROFIT. Gross profit was $136.1 million for fiscal 1998, an
increase of $21.6 million, or 18.9% over the same period last year. Gross
profit as a percentage of sales increased to 10.2% in fiscal 1998 from 9.0% in
fiscal 1997. The increased gross profit resulted from higher margins for
poultry products in the U.S. and Mexico.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $58.8 million in fiscal 1998 and $50.6
million in fiscal 1997. Consolidated selling, general and administrative
expenses as a percentage of sales increased in fiscal 1998 to 4.4% compared to
4.0% in fiscal 1997 due primarily to higher administration costs.
OPERATING INCOME. Consolidated operating income was $77.3 million for
fiscal 1998, an increase of $13.4 million, or 20.9% when compared to fiscal
1997, resulting primarily from higher margins experienced in the U.S. and
Mexico operations.
INTEREST EXPENSE. Consolidated net interest expense decreased 8.7% to
$20.2 million in fiscal 1998, compared to $22.1 million for fiscal 1997, due to
lower outstanding debt levels.
MISCELLANEOUS, NET. Consolidated miscellaneous, net, a component of Other
Expenses (Income), was ($1.7) million in fiscal 1998, a $0.7 million, or a
30.4% decrease when compared to ($2.4) million for fiscal 1997. Consolidated
miscellaneous, net in fiscal 1997 included a $2.2 million final settlement of
claims resulting from the January 8, 1992, fire at our prepared foods plant in
Mt. Pleasant, Texas.
INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 1998
increased to $6.5 million compared to an expense of $2.8 million in fiscal
1997. This increase resulted from higher U.S. earnings in fiscal 1998 than in
fiscal 1997. While Mexico earnings were also higher in fiscal 1998 than in
fiscal 1997, Mexico earnings are not currently subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains $70 million in revolving credit facilities and $30
million in secured-term borrowing facilities. The credit facilities provide
for interest at rates ranging from LIBOR plus one and three-eighths percent to
LIBOR plus one and three-quarters percent and are secured by inventory and
fixed assets or are unsecured. As of November 23, 1999, $63.2 million was
available under the revolving credit facilities and $28.3 million was available
under the term borrowing facilities.
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 our 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. Any
amounts we do not borrow by June 2002 will not be available to us. The amounts
we do borrow will be reflected as debt when we receive them from the Camp
County Industrial Development Corporation. It is expected that the reflection
of the bonds as debt on our books will occur before June 2002. The interest
rates on amounts borrowed will closely follow the tax-exempt commercial paper
rates.
On June 26, 1998 the Company entered into an asset sale agreement to sell
up to $60 million of accounts receivable. Under this agreement, we sell, on a
revolving basis, certain of our trade receivables to a special purpose
corporation, wholly owned by the Company, which in turn may sell a percentage
ownership interest to third parties. As of October 2, 1999, no sold trade
receivables were outstanding and the entire facility was available for sales of
qualifying receivables.
At October 2, 1999, the Company's working capital increased to $154.2
million and our current ratio was 2.24 to 1 compared with working capital of
$147.0 million and a current ratio of 2.32 to 1 at September 26, 1998. Strong
profits were primarily responsible for the increases in working capital.
Trade accounts and other receivables were $84.4 million at October 2,
1999, compared to $81.8 million at September 26, 1998. The 3.1% increase was
primarily due to an increase in sales of prepared food products, which normally
have longer credit terms than fresh chicken sales.
Inventories were $168.0 million at October 2, 1999, compared to $141.7
million at September 26, 1998. The $26.4 million, or 18.6%, increase in
inventories between September 26, 1998 and October 2, 1999 was due primarily to
the continuing shift in the sales mix toward prepared foods, which requires a
higher level of inventory relative to sales as well as increased production
levels in both the U.S. and Mexico.
Accounts payable were $81.6 million at October 2, 1999, compared to $70.1
million at September 26, 1998. The 16.4% increase in accounts payable between
September 26, 1998 and October 2, 1999 was due primarily to higher levels of
purchases needed to support the increased production levels in both U.S. and
Mexico.
Capital expenditures of $69.6 million, $53.5 million and $50.2 million for
fiscal years 1999, 1998 and 1997, respectively, were primarily incurred to
acquire and expand certain facilities, improve efficiencies, reduce costs and
for the routine replacement of equipment. We have budgeted an aggregate of
approximately $100.0 million for capital expenditures in each of fiscal years
2000, 2001 and 2002, primarily to increase capacity through either building or
acquiring new facilities, to improve efficiencies and for the routine
replacement of equipment. However, actual levels of capital expenditures in any
fiscal year may be greater or less than those budgeted. We expect to finance
such expenditures with available operating cash flows and long-term financing.
Cash flows provided by operating activities were $81.5 million, $85.0
million and $49.6 million in fiscal 1999, 1998 and 1997, respectively. The
decrease in cash flows provided by operating activities for fiscal 1999, when
compared to fiscal 1998, was due primarily to increased inventory levels offset
by increases in payables and accrued expenses. The significant increase in cash
flows provided by operating activities for fiscal 1998, when compared to fiscal
1997 was due primarily to increased net income, a reduction of inventory levels
and a substantially smaller increase in accounts receivable for fiscal 1998,
when compared to fiscal 1997.
Cash flows provided by (used in) financing activities were ($19.6)
million, ($32.5) million and $0.3 million for fiscal years 1999, 1998 and 1997,
respectively. The cash provided by (used in) financing activities primarily
reflects the net proceeds (payments) from notes payable and long-term financing
and debt retirements.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price of
feed ingredients, foreign currency exchange rates and interest rates as
discussed below. The sensitivity analyses presented do not consider the
effects that such adverse changes may have on overall economic activity nor do
they consider additional actions management may take to mitigate its exposure
to such changes. Actual results may differ.
FEED INGREDIENTS. The Company is a purchaser of certain commodities,
primarily corn and soybean meal. As a result, the Company's earnings are
affected by changes in the price and availability of such feed ingredients. As
market conditions dictate, the Company from time to time will lock-in future
feed ingredient prices using various hedging techniques, including forward
purchase agreements with suppliers and futures contracts. The Company does not
use such financial instruments for trading purposes and is not a party to any
leverage derivatives. Market risk is estimated as a hypothetical 10% increase
in the weighted-average cost of the Company's primary feed ingredients as of
October 2, 1999. Based on projected 2000 feed consumption, such an increase
would result in an increase to cost of sales of approximately $26.6 million in
fiscal 2000 after considering the effect of forward purchase commitments and
future contracts outstanding as of October 2, 1999. As of October 2, 1999, the
Company had hedged none of its fiscal 2000 feed requirements but had entered
into forward purchase contracts for 12.7% of its fiscal 2000 feed ingredient
requirements.
FOREIGN CURRENCY. The Company's earnings are affected by foreign exchange
rate fluctuations related to the Mexican peso net monetary position of its
Mexico subsidiaries. The Company primarily manages this exposure by attempting
to minimize its Mexican peso net monetary position, but has also from time to
time considered executing hedges to help minimize this exposure. However, such
instruments have historically not been economically feasible. The Company is
also exposed to the effect of potential exchange rate fluctuations to the
extent that amounts are repatriated from Mexico to the United States. However,
the Company currently anticipates that the cash flows of its Mexico
subsidiaries will continue to be reinvested in its Mexico operations. In
addition, the Mexican peso exchange rate can directly and indirectly impact the
Company 's results of operations and financial position in several manners,
including potential economic recession in Mexico resulting from a devalued
peso. The impact on the Company's 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 the Company's Mexico subsidiaries, were a gain of $0.1
million in fiscal 1999 and a loss of $2.3 million and $0.4 million for fiscal
1998 and 1997, respectively. On November 10, 1999, the Mexican peso closed at
9.39 to 1 U.S. dollar, a decrease from 9.41 at October 2, 1999. No assurance
can be given as to the future movements in the peso that could affect future
earnings of the Company.
INTEREST RATES. The Company's earnings are also affected by changes in
interest rates due to the impact those changes have on its variable-rate debt
instruments. The Company has variable-rate debt instruments representing
approximately 10.5% of its long-term debt at October 2, 1999. If interest
rates average 25 basis points more in fiscal 2000 than they did during fiscal
1999, the Company's interest expense would be increased by $79,374. These
amounts are determined by considering the impact of the hypothetical interest
rates on the Company's variable-rate long-term debt at October 2, 1999.
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 $1.5 million, using discounted
cash flow analysis.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), which is required to be adopted by the
Company in fiscal years beginning after October 1, 2000. SFAS 133 permits
early adoption as of the beginning of any fiscal quarter after its issuance.
SFAS 133 will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company is currently evaluating the impact of SFAS 133; however, it is not
expected to have a material adverse impact on the Company's financial condition
or results of operations.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the Year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The Company began assessment of its future business system requirements in
1996. As a part of the Company's review, it determined that it would be
required to modify or replace portions of its software and hardware so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter.
To date, the Company has tested the identified systems and updated those
systems in the U.S., including the software and hardware components deemed
necessary to ensure the uninterrupted fulfillment of the Company's core
business processes as they relate to the timely, accurate and quality
production and delivery of our products to our customers, the processing of
accounting information, and the associated processing and reporting of
information as required by our business partners, banks and government
agencies. The Company has updated its core systems in Mexico. The Company
presently believes that with these modifications and replacements, the Year
2000 issue will not pose significant operational problems for its computer
systems.
The Company has reviewed Year 2000 disclosures of the packaged software
applications it uses to ensure Year 2000 readiness. The suppliers of these
software products have provided approaches for the Company to ensure compliance
of core software, either through program options, upgrades or new products.
These solutions have been implemented and are operational.
The Company regularly upgrades and replaces hardware platforms such
as database and application servers as well as its telephone systems. The
Company currently believes that all of its servers are Year 2000 ready and
100% of our core personal computers are Year 2000 compliant. There are
35 core telephone switching systems, all of which the Company believes are Year
2000 ready.
The embedded technology in the production environment, such as
programmable logic controllers, computer-controlled valves and other equipment,
has been inventoried and all issues identified have been resolved. Based on
current evidence, the Company believes there will be no significant exposure
with regard to its production equipment.
Systems assessments and minor system modifications were completed using
existing internal resources and, as a result, incremental costs were minimal.
System replacement, consisting primarily of capital projects, were initiated
for other business purposes while at the same time achieving Year 2000
compliance. System replacement projects were completed primarily using
external resources. The total cost of the Year 2000 project is not expected to
have a material adverse effect on the Company's results of operations.
Additionally, the Company has initiated communications will all of its
significant suppliers and certain large customers to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 issues. To date the significant
suppliers, such as fuel, electrical, water, rail, grain and container, have
responded favorably. Other key vendor and customer assessments are 98%
complete with favorable responses. The Company believes it has no significant
exposure from the remaining vendors or customers that have not responded.
However, there can be no assurance that the systems of other parties upon which
the Company relies will be converted on a timely basis. The Company's
business, financial condition or results of operations could be materially
adversely impacted by the failure of its systems and applications or those
operated by others to properly operate or manage dates beyond 1999.
The Company has instituted a two-fold approach to contingency planning;
technical and business continuity. The technical contingency planning took
place in conjunction with the implementation of the Company's new information
systems in the U.S., and will continue through the end of 1999 picking up the
non-core hardware and support technology in both the U.S. and Mexico. Business
contingency planning is currently underway and the Company will establish
contingency plans, if needed, based on supplier evaluation and assessment of
risk.
The Company believes that its initiatives and its existing business
recovery plans are adequate to reasonably address likely Year 2000 issues; if
unforeseen circumstances arise, the Company will attempt to develop contingency
plans for these situations.
IMPACT OF INFLATION
Due to moderate inflation in the U.S. and the Company's rapid inventory
turnover rate, the results of operations have not been significantly affected
by inflation during the past three-year period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements together with the report of
independent auditors, and financial statement schedules are included on pages
44 through 55 of 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
Reference is made to "Election of Directors" on pages 3 through 5 of
Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders, which
section is incorporated herein by reference.
Reference is made to "Compliance with Section 16(a) of the Exchange Act"
on page 9 of Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders, which section is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to Items 11, 12 and 13 is incorporated by reference
from the sections entitled "Security Ownership", "Election of Directors",
"Executive Compensation", and "Certain Transactions" of the Registrant's Proxy
Statement for its 2000 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements listed in the accompanying index to financial
statements and schedules are filed as part of this report.
(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission 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 53.
(4) Exhibits
(b) The Company filed a Form 8-K dated July 20, 1999, to report the amending of
the Articles of Incorporation to permit dividends of either of its Class A
Common Stock or Class B Common Stock to holders of its Class B Common
Stock.
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).
3.1 Certificate of Incorporation of the Company (incorporated by reference from
Exhibit 3.1 of the Company's Registration Statement on Form S-1
(No.33-8805) effective November 14, 1986).
3.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation, a
Delaware Corporation, effective May 14,1999 (incorporated by reference from
Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the three
months ended July 3, 1999).
4.1 Certificate of Incorporation of the Company (incorporated by reference from
Exhibit 3.1 of the Company's Registration Statement on Form S-1 (No.
33-8805) effective November 14, 1986).
4.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation, a
Delaware Corporation, effective May 14, 1999 (incorporated by reference
from Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the
three months ended July 3, 1999).
4.3 Form of Indenture between the Company and Ameritrust Texas National
Association relating to the Company's 10 7/8% Senior Subordinated Notes Due
2003 (incorporated by reference from Exhibit 4.6 of the Company's
Registration Statement on Form S-1 (No. 33-59626) filed on March 16, 1993).
4.4 Form of 10 7/8% Senior Subordinated Note Due 2003 (incorporated by
reference from Exhibit 4.8 of the Company's Registration Statement on
Form S-1 (No. 33-61160) filed on June 16, 1993).
10.1 Pilgrim's Industries, Inc. Profit Sharing Retirement Plan, restated as of
July 1, 1987 (incorporated by reference from Exhibit 10.1 of the Company's
Form 8 filed on July 1, 1992).
10.2 Bonus Plan of the Company (incorporated by reference from Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (No. 33-8805) effective
November 14, 1986).
10.3 Employee Stock Investment Plan of the Company (incorporated by reference
from Exhibit 10.28 of the Company's Registration Statement on Form S-1
(No. 33-21057) effective May 2, 1988).
10.4 Second Amended and Restated Loan and Security Agreement dated July 31,
1995, by and among the Company, the banks party thereto and Creditanstalt-
Bankverein, as agent (incorporated by reference from Exhibit 10.38 of the
Company's annual report on Form 10-K for the fiscal year ended
September 28, 1996).
10.5 Revolving Credit Loan Agreement dated March 27, 1995 by and among the
Company and Agricultural Production Credit Association (incorporated by
reference from Exhibit 10.39 of the Company's annual report on Form 10-K
for the fiscal year ended September 28, 1996).
10.6 First Supplement to Revolving Credit Loan Agreement dated July 6, 1995 by
and among the Company and Agricultural Production Credit Association
(incorporated by reference from Exhibit 10.40 of the Company's annual
report on Form 10-K for the fiscal year ended September 28, 1996).
10.7 Second Supplement to Revolving Credit Loan Agreement dated June 28, 1996
by and among the Company and Agricultural Production Credit Association
(incorporated by reference from Exhibit 10.44 of the Company's annual
report on Form 10-K for the fiscal year ended September 28, 1996).
10.8 Third Supplement to Revolving Credit Loan Agreement dated August 22, 1996
by and among the Company and Agricultural Production Credit Association
(incorporated by reference from Exhibit 10.45 of the Company's annual
report on Form 10-K for the fiscal year ended September 28, 1996).
10.9 Note Purchase Agreement dated April 14, 1997 by and between John Hancock
Mutual Life Insurance Company and Signature 1A (Cayman), Ltd. And the
Company (incorporated by reference from Exhibit 10.46 of the Company's
Quarterly Report on Form 10-Q for the three months ended March 29, 1997).
10.10 Aircraft Lease Extension Agreement between B.P. Leasing Co., (L.A.
Pilgrim, Individually) and Pilgrim's Pride Corporation, (formerly Pilgrim's
Industries, Inc.) effective November 15, 1992 (incorporated by reference
from Exhibit 10.48 of the Company's Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
10.11 Broiler Grower Contract dated May 6, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farm 30) (incorporated by reference
from Exhibit 10.49 of the Company's Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
10.12 Commercial Egg Grower Contract dated May 7, 1997 between Pilgrim's Pride
Corporation and Pilgrim Poultry G.P. (incorporated by reference from Exhibit
10.50 of the Company's Quarterly Report on Form 10-Q for the three months
ended March 29, 1997).
10.13 Agreement dated October 15, 1996 between Pilgrim's Pride Corporation and
Pilgrim Poultry G.P. (incorporated by reference from Exhibit 10.23 of the
Company's Quarterly Report on Form 10-Q for the three months ended
January 2, 1999).
10.14 Heavy Breeder Contract dated May 7, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farms 44, 45 & 46) (incorporated by
reference from Exhibit 10.51 of the Company's Quarterly Report on Form 10-Q
for the three months ended March 29, 1997).
10.15 Broiler Grower Contract dated January 9, 1997 by and between Pilgrim's
Pride and O.B. Goolsby, Jr. (incorporated by reference from Exhibit 10.25
of the Company's Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
10.16 Broiler Grower Contract dated January 15, 1997 by and between Pilgrim's
Pride Corporation and B.J.M. Farms. (incorporated by reference from Exhibit
10.26 of the Company's Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
10.17 Broiler Grower Agreement dated January 29, 1997 by and between Pilgrim's
Pride Corporation and Clifford E. Butler (incorporated by reference from
Exhibit 10.27 of the Company's Registration Statement on Form S-1 (No. 333-
29163) effective June 27, 1997).
10.18 Second Amendment to Second Amended and Restated Loan and Security
Agreement dated September 18, 1997 by and among the Company, the banks party
thereto and Creditanstalt-Bankverein, as agent.
10.19 Revolving Credit Agreement dated March 2, 1998 by and between Pilgrim's
Pride de Mexico, S.A. de C.V., (the borrower); Avicola Pilgrim's Pride de
Mexico, S.A. de C.V. (the Mexican Guarantor), Pilgrim's Pride Corporation
(the U.S. Guarantor), and COAMERICA Bank (the bank), (incorporated by
reference from Exhibit 10.32 of the Company's Quarterly report on form 10-Q
for the three months ended March 28, 1998.
10.20 Receivables Purchase Agreement between Pilgrim's Pride Funding
Corporation, as Seller, Pilgrim's Pride Corporation, as Servicer, Pooled
Accounts Receivable Capital Corporation, as Purchaser, and Nesbitt Burns
Securities Inc., as Agent (incorporated by reference from Exhibit 10.33 of
the Company's Quarterly report on form 10-Q for the three months ended
June 27, 1998).
10.21 Purchase and Contribution Agreement Dated as of June 26, 1998 between
Pilgrim's Pride Funding Corporation and Pilgrim's Pride Corporation
(incorporated by reference from Exhibit 10.34 of the Company's Quarterly
report on form 10-Q for the three months ended June 27, 1998).
10.22 Second Amendment to Security Agreement Re: Accounts Receivable, Farm
Products and Inventory between Pilgrim's Pride Corporation and Harris Trust
and Savings Bank (incorporated by reference from Exhibit 10.35 of the
Company's Quarterly report on form 10-Q for the three months ended June 27,
1998).
10.23 Second Amended and Restated Secured Credit Agreement between Pilgrim's
Pride Corporation and Harris Trust and Savings Bank, individually and as
agent and the lenders from time to time parties hereto as lenders, dated
November 5, 1999.*
10.24 Guaranty Fee Agreement between Pilgrim's Pride Corporation and Pilgrim
Interests, LTD. Dated June 11, 1999.*
10.25 Heavy Breeder Contract dated October 27, 1999 between Pilgrim's Pride
Corporation and David Van Hoose (Timberlake Farms).*
12 Ratio of Earnings to Fixed Charges for the years ended October 2, 1999,
September 26, 1998, September 27, 1997, September 28, 1996 and September 30,
1995.
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 issuer has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 24th day of November 1999.
PILGRIM'S PRIDE CORPORATION
/s/
Richard A. Cogdill
By:
Richard A. Cogdill
Chief Financial Officer
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/ Lonnie "Bo" Pilgrim
_______________________ Chairman of the Board 11/24/99
Lonnie "Bo" Pilgrim
/s/ Clifford E. Butler
_______________________ Vice Chairman of the Board 11/24/99
Clifford E. Butler
/s/ David Van Hoose
_______________________ Chief Executive Officer 11/24/99
David Van Hoose President
Chief Operating Officer
Director
(Principal Executive Officer)
/s/ Richard A. Cogdill
_______________________ Executive Vice President 11/24/99
Richard A. Cogdill Chief Financial Officer
Secretary and Treasurer
Director
(Principal Financial and Accounting Officer)
/s/ Lonnie Ken Pilgrim
_______________________ Senior Vice Presdient 11/24/99
Lonnie Ken Pilgrim Director of Transportation
Director
_______________________ Director 11/24/99
Charles L. Black
_______________________ Director 11/24/99
Robert E. Hilgenfeld
_______________________ Director 11/24/99
Vance C. Miller, Sr.
_______________________ Director 11/24/99
James J. Vetter, Jr.
_______________________ Director 11/24/99
Donald L. Wass, Ph.D.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Pilgrim's Pride Corporation
Stockholders and Board of Directors
Pilgrim's Pride Corporation
We have audited the accompanying consolidated balance sheets of
Pilgrim's Pride Corporation and subsidiaries as of October 2, 1999, and
September 26, 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended October 2, 1999. Our audits also included the financial
statements schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 October 2, 1999, and September 26, 1998,
and the consolidated results of its operations and its cash flows for each
of the three years in the period ended October 2, 1999, in conformity with
generally accepted accounting principles. 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.
ERNST & YOUNG LLP
Dallas, Texas
November 2, 1999
Consolidated Balance Sheets
Pilgrim's Pride Corporation
(IN THOUSANDS) TWO YEARS ENDED OCTOBER 2, 1999
1999 1998
Assets
Current Assets:
Cash and cash equivalents $ 15,703 $ 25,125
Trade accounts and other receivables,
less allowance for doubtful accounts 84,368 81,813
Inventories 168,035 141,684
Deferred income taxes 6,913 7,010
Prepaid expenses and other
current assets 3,376 2,902
Total Current Assets 278,395 258,534
Other Assets 13,632 11,757
Property, Plant and Equipment:
Land 26,177 26,404
Buildings, machinery and equipment 514,984 470,763
Autos and trucks 38,479 35,547
Construction-in-progress 42,694 29,385
622,334 562,099
Less accumulated depreciation 258,599 230,951
363,735 331,148
$655,762 $601,439
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 81,587 $ 70,069
Accrued expenses 38,213 35,536
Current maturities of long-term debt 4,353 5,889
Total Current Liabilities 124,153 111,494
Long-Term Debt, Less Current Maturities 183,753 199,784
Deferred Income Taxes 52,708 58,401
Minority Interest in Subsidiary 889 889
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred stock, $.01 par value,
authorized 5,000,000 shares; none issued -- --
Common stock -- Class A, $.01 par value,
authorized 100,000,000 shares; 1999 -
13,794,529 shares issued and outstanding;
1998 - no shares issued or outstanding 138 --
Common stock -- Class B, $.01 par value,
authorized 60,000,000 shares; 1999 and
1998 - 27,589,250 issued and outstanding 276 276
Additional paid-in capital 79,625 79,763
Retained earnings 214,220 150,832
Total Stockholders' Equity 294,259 230,871
$655,762 $601,439
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE YEARS ENDED OCTOBER 2, 1999
1999 1998 1997
Net Sales $1,357,403 $1,331,545 $1,277,649
Cost and Expenses:
Cost of sales 1,171,695 1,195,442 1,163,152
Selling, general and
administrative 76,204 58,847 50,603
1,247,899 1,254,289 1,213,755
Operating Income 109,504 77,256 63,894
Other Expenses (Income):
Interest expense, net 17,666 20,148 22,075
Foreign exchange
(gain) loss (50) 2,284 434
Miscellaneous, net 984 (1,698) (2,439)
18,600 20,734 20,070
Income Before Income Taxes 90,904 56,522 43,824
Income Tax Expense 25,651 6,512 2,788
Net Income $ 65,253 $ 50,010 $ 41,036
Net Income per
Common Share-Basic
and Diluted $ 1.58 $ 1.21 $ 0.99
See Notes to Consolidated Financial Statements
Consolidated Statements of Stockholders' Equity
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SHARES OF COMMON STOCK TOTAL ADDITIONAL RETAINED
CLASS A CLASS B PAR PAID-IN EARNINGS TOTAL
VALUE CAPITAL
Balance at
September 28,
1996 -- 27,589,250 $276 $79,763 $63,096 $143,135
Net income for year 41,036 41,036
Cash dividends declared
($.04 per share) (1,655) (1,655)
Balance at
September 27,
1997 -- 27,589,250 276 79,763 102,477 182,516
Net income for year 50,010 50,010
Cash dividends declared
($.04 per share) (1,655) (1,655)
Balance at
September 26,
1998 -- 27,589,250 276 79,763 150,832 230,871
Dividend
of Class A Common
Stock 13,794,529 -- 138 (138) -- --
Net income for year 65,253 65,253
Cash dividends declared
($.045 per share) (1,865) (1,865)
Balance at
October 2,
1999 13,794,529 27,589,250 $414 $79,625 $214,220 $294,259
See notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Pilgrim's Pride Corporation
(IN THOUSANDS) THREE YEARS ENDED OCTOBER 2, 1999
1999 1998 1997
Cash Flows From Operating Activities:
Net income $65,253 $50,010 $41,036
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 34,536 32,591 29,796
Loss on property disposals 2,668 132 874
Provisions for doubtful accounts 1,122 409 (60)
Deferred income taxes (5,595) 571 2,613
Changes in operating assets and liabilities:
Accounts and other receivables (3,677) (4,255) (15,213)
Inventories (26,351) 4,496 (9,314)
Prepaid expenses and
other current assets (474) (246) (999)
Accounts payable and accrued expenses 14,195 996 1,056
Other (225) 312 (174)
Cash Provided by Operating Activities 81,452 85,016 49,615
Investing Activities:
Acquisitions of property,
plant and equipment (69,649) (53,518) (50,231)
Proceeds from property disposals 1,178 5,629 3,853
Other, net (2,822) 595 (1,291)
Cash Used in Investing Activities (71,293) (47,294) (47,669)
Financing Activities:
Proceeds from notes payable to banks 24,500 35,500 68,500
Repayments on notes payable to banks (24,500) (35,500) (95,500)
Proceeds from long-term debt 15,258 21,125 39,030
Payments on long-term debt (33,029) (51,968) (10,027)
Cash dividends paid (1,865) (1,655) (1,655)
Cash Provided by (Used in)
Financing Activities (19,634) (32,498) 348
Effect of exchange rate changes on cash
and cash equivalents 53 (437) 4
(Decrease) increase in cash and
cash equivalents (9,422) 4,787 2,298
Cash and cash equivalents at
beginning of year 25,125 20,338 18,040
Cash and Cash Equivalents
at End of Year $15,703 $25,125 $20,338
Supplemental Disclosure Information:
Cash paid during the year for:
Interest (net of amount capitalized) $18,130 $20,979 $22,026
Income taxes $31,835 $ 4,543 $ 2,021
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Pilgrim's Pride Corporation
Note A
Business and Summary of Significant Accounting Policies:
Pilgrim's Pride Corporation (referred to herein as "the Company", "we", "us",
"our" and similar terms) is a vertically integrated producer of chicken
products, controlling the breeding, hatching and growing of chickens, and the
processing, preparation and packaging of its product lines. The Company is
the fourth-largest producer of chicken in the United States, with production
and distribution facilities located in Texas, Arkansas, Oklahoma and Arizona,
and is one of the two largest producers of chicken in Mexico, with production
and distribution facilities located in Mexico City and the states of Coahuila,
San Louis Potosi, Queretaro and Hidalgo. The Company's chicken products
consist primarily of prepared foods, which include portion-controlled breast
fillets, tenderloins and strips, formed nuggets and patties, bone-in chicken
parts, fresh foodservice chicken, pre-packaged chicken and bulk packaged
chicken.
Principles of Consolidation:
The consolidated financial statements include the accounts of Pilgrim's Pride
Corporation and its wholly and majority owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
The Company reports on the basis of a 52/53-week fiscal year, which ends on
the Saturday closest to September 30. As a result, fiscal year 1999 had 53
weeks while fiscal years 1998 and 1997 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 components of "Other
Expenses (Income)" in the Consolidated Statement of Income.
Cash Equivalents:
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
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 $4.7 million
and $3.7 million at October 2, 1999, and September 26, 1998, respectively.
Inventories:
Live chicken 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 chicken 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 to 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. For financial reporting
purposes, depreciation is computed using the straight-line method over the
estimated useful lives of these assets. Depreciation expense was $33.4
million, $31.5 million and $28.7 million in 1999, 1998 and 1997, respectively.
Net Income (Loss) Per Common Share:
Net income (loss) 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 was 41,383,779 as adjusted for the common stock dividend
referred to in Note F.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note B
Inventories:
Inventories consist of the following:
(IN THOUSANDS)
1999 1998
Live chicken and hens $ 68,116 $ 61,295
Feed, eggs and other 48,021 46,199
Finished chicken products 51,898 34,190
$168,035 $141,684
Note C
Notes Payable and Long-Term Debt:
The Company maintains $70 million in revolving credit facilities and $30
million in secured term borrowing facilities. The credit facilities provide
for interest at rates ranging from LIBOR plus one and three-eights percent to
LIBOR plus one and three quarters percent and are secured by inventory and
fixed assets or are unsecured. At October 2, 1999, $64.8 million was available
under the revolving credit facilities and $28.3 million was available under the
term borrowing facilities. Annual maturities of long-term debt for the five
years subsequent to October 2, 1999 are: 2000 -- $4.4 million; 2001 -- $9.0
million; 2002 -- $9.3 million; 2003 -- $109.9 million and 2004 -- $5.6 million.
On March 30, 1999, the Company borrowed $15 million on a pre-existing
secured term borrowing facility, the proceeds of which were used primarily to
acquire additional production facilities.
On June 29, 1999, the Camp County Industrial Development Corporation issued
$25.0 million of variable-rate environmental facilities revenue bonds supported
by letters of credit obtained by the Company. The Company may borrow from
these proceeds over the construction period of its new sewage and solid waste
disposal facilities at a poultry by-products plant to be built in Camp County,
Texas. The Company is not required to borrow the full amount of the proceeds
from the bonds and any amounts not borrowed by June 2002 will not be available.
All amounts borrowed from these funds will be due in 2029 and will be reflected
as debt when received. The interest rates on amounts borrowed will closely
follow the tax-exempt commercial paper rates.
The company is required, by certain provisions of its debt agreements, to
maintain levels of working capital and net worth, to limit dividends to a
maximum of $3.4 million per year, and to maintain various fixed charge,
leverage, current and debt-to-equity ratios. Substantially all of the
Company's domestic property, plant and equipment is pledged as collateral on
its long-term debt and credit facilities.
Total interest was $20.8 million, $23.2 million and $23.4 million in 1999,
1998 and 1997, respectively. Interest related to new construction capitalized
in 1999, 1998 and 1997 was $2.0 million, $1.7 million and $0.5 million,
respectively.
The fair value of long-term debt, at October 2, 1999, and September 26,
1998, based upon quoted market prices for the same or similar issues where
available or by using discounted cash flow analysis, was approximately $209.7
million and $206.7 million, respectively.
Long-term debt consists of the following:
(IN THOUSANDS) MATURITY 1999 1998
Senior subordinated notes, interest at 10 7/8%
(effective rate of 11 1/8%) 2003 $ 93,364 $ 95,512
Notes payable to an insurance company at 7.07% -
7.21% 2006 67,843 56,554
Notes payable to bank at LIBOR plus 1.8% 2003 18,000 32,000
Notes payable to an agricultural lender at a rate
approximating libor plus 1.65% 2003 1,729 14,224
Other notes payable Various 7,170 7,383
188,106 205,673
Less current maturities 4,353 5,889
$183,753 $199,784
Note D
Income Taxes:
Income before income taxes after allocation of certain expenses to foreign
operations for 1999, 1998 and 1997 was $76.6 million, $23.7 million and $15.8
million, respectively, for U.S. operations and $14.3 million, $32.8 million and
$28.0 million, respectively, for foreign operations. The provisions for income
taxes are based on pre-tax financial statement income.
The components of income tax expense (benefit) are set forth below:
(IN THOUSANDS)
1999 1998 1997
Current:
Federal $28,449 $4,985 $1,113
Foreign 318 948 245
State and other 2,480 8 (1,183)
31,247 5,941 175
Deferred (5,596) 571 2,613
$25,651 $6,512 $2,788
The following is a reconciliation between the statutory U.S. federal income
tax rate and the Company's effective income tax rate:
(IN THOUSANDS)
1999 1998 1997
Federal income tax rate 35.0% 35.0% 35.0%
State tax rate, net 1.3 (0.4) (0.8)
Difference in U.S.
statutory tax rate and
Mexico's effective tax
rate (8.1) (23.1) (27.8)
Other, net - - -
28.2% 11.5% 6.4%
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)
1999 1998
Deferred tax liabilities:
Tax over book depreciation $24,345 $25,304
Prior use of cash accounting 30,130 32,905
Other 1,210 1,059
Total deferred tax liabilities 55,685 59,268
Deferred tax assets:
AMT credit carryforward - 234
Expense deductible
in different years 9,889 7,643
Total deferred tax asset 9,889 7,877
Net deferred tax liabilities $45,796 $51,391
The Company has not provided any U.S. deferred income taxes on the
undistributed earnings of its Mexico subsidiaries based upon its determination
that such earnings will be indefinitely reinvested. As of October 2, 1999, the
cumulative undistributed earnings of these subsidiaries were approximately
$116.2 million. If such earnings were not considered indefinitely reinvested,
deferred U.S. and foreign income taxes would have been provided after
consideration of estimated foreign tax credits. However, determination of the
amount of deferred federal and foreign income taxes is not practical.
Note E
Accounts Receivable:
On June 26, 1998, the Company entered into an asset sale agreement to sell
up to $60 million of accounts receivable. Under this agreement, the Company
sells on a revolving basis certain of its accounts receivable to a special
purpose corporation, which in turn may sell a percentage ownership interest in
the receivables to third parties. As of October 2, 1999, no interest in sold
accounts receivable was outstanding and the entire facility was available for
sales of qualifying receivables.
Note F
Common Stock:
The Company has two series of authorized common stock, Class A common stock
and Class B common stock. The shares have substantially the same rights,
powers and limitations, except that each share of Class B common stock entitles
the holder thereof to 20 votes per share, except as otherwise provided by law,
on any matter submitted for a stockholder vote, while each share of Class A
common stock entitles the holder thereof to one vote per share on any such
matter.
On July 2, 1999, the Company's board of directors declared a stock dividend
of the Company's Class A common stock. Stockholders of record on July 20, 1999
received one share of the Company's Class A common stock for every two shares
of the Company's Class B common stock held as of that date. The additional
shares were issued on July 30, 1999. Historical per share and weighted average
shares outstanding amounts have been restated to give effect to the stock
dividend.
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 $4.6 million, $1.7 million and $1.2 million in 1999,
1998 and 1997, respectively.
Note H
Related Party Transactions:
The major stockholder of the Company owns an egg laying and a chicken
growing operation. Transactions with related entities are summarized as
follows:
(IN THOUSANDS)
1999 1998 1997
Contract egg grower
fees to major
stockholder $ 4,501 $ 4,989 $ 4,926
Chick, feed and other
sales to major
stockholder 25,076 21,396 20,116
Live chicken purchases
from major
stockholder 26,899 21,883 20,442
The Company leases an airplane from its major stockholder under an operating
lease agreement. The terms of the lease agreement require monthly payments of
$33,000 plus operating expenses. Lease expense was $396,000 for each of the
years 1999, 1998 and 1997. Operating expenses were $135,786, $52,950 and
$107,000 in 1999, 1998 and 1997, respectively. As of October 2, 1999 the
Company had accounts receivable of $1.2 million from related parties, including
its major stockholder.
Note I
Commitments and Contingencies:
The Consolidated Statements of Income include rental expense for operating
leases of approximately $17.3 million, $14.3 million and $11.3 million in 1999,
1998 and 1997, respectively. The Company's future minimum lease commitments
under non-cancelable operating leases are as follows: 2000 -- $16.0 million;
2001 -- $15.3 million; 2002 -- $13.3 million; 2003 -- $10.8 million; 2004 --
$7.0 million and thereafter $11.7 million.
At October 2, 1999, the Company had $5.2 million in letters of credit
outstanding relating to normal business transactions.
The Company is subject to various 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 J
Business Segments:
The Company operates in a single business segment as a producer of
agricultural products and conducts separate operations in the United States and
Mexico.
Inter-area sales, which are not material, are accounted for at prices
comparable to normal trade customer sales. Identifiable assets by geographic
area are those assets which are used in the Company's operations in each area.
Information about the Company's operations in these geographic areas is as
follows:
(IN THOUSANDS)
1999 1998 1997
Sales to unaffiliated customers:
United States $1,102,903 $1,053,458 $1,002,652
Mexico 254,500 278,087 274,997
$1,357,403 $1,331,545 $1,277,649
Operating income:
United States $ 88,177 $ 36,279 $ 29,321
Mexico 21,327 40,977 34,573
$ 109,504 $ 77,256 $ 63,894
Long-lived assets:
United States $ 260,456 $ 227,273 $ 214,976
Mexico 116,911 115,632 113,001
$ 377,367 $ 342,905 $ 327,977
As of October 2, 1999, the Company had net assets in Mexico of $151.7 million.
During the year ended October 2, 1999, revenue from one customer represented
13.9% of Consolidated Net Sales.
Note K
Quarterly Results (Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED OCTOBER 2, 1999
FIRST SECOND THIRD FOURTH FISCAL
QUARTER(A) QUARTER QUARTER QUARTER YEAR
Net sales $336,088 $329,894 $344,160 $347,261 $1,357,403
Gross profit 43,901 46,262 49,415 46,130 185,708
Operating income 26,186 25,292 29,212 28,814 109,504
Net income 15,920 14,580 18,317 16,436 65,253
Per Share: (b)
Net income .39 .35 .44 .40 1.58
Cash dividends .01 .01 .01 .015 .045
Market price:
Class B common stock
High 16 11/16 15 7/8 20 16 5/16 20
Low 11 5/16 10 9/16 9 7/8 6 1/4 6 1/4
Class A common stock
High n/a n/a n/a 14 3/4 14 3/4
Low n/a n/a n/a 4 5/8 4 5/8
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED SEPTEMBER 26, 1998
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
Net sales $337,887 $324,446 $328,500 $340,712 $1,331,545
Gross profit 29,380 26,861 32,736 47,126 136,103
Operating income 15,371 11,398 19,043 31,444 77,256
Net income 11,117 6,768 11,835 20,290 50,010
Per Share: (b)
Net income .27 .16 .29 .49 1.21
Cash dividends .01 .01 .01 .01 .04
Market price:
Class B common stock
High 11 1/16 10 9/16 13 1/8 16 1/16 16 1/16
Low 8 1/2 7 3/16 9 3/16 12 3/16 7 3/16
(a) The first quarter of 1999 includes 14 weeks.
(b) Historical per share amounts have been restated to give effect to a stock
dividend issued on July 30, 1999. See Note F of the Consolidated
Financial Statements of the Company.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E
ADDITIONS
Balance at
Beginning Charged to Charged to Deductions- Balance
DESCRIPTION of Period Costs and Other Describe at End
Expenses Accounts- of Period
Describe
Year ended October 2, 1999:
Reserves and allowances deducted
From asset accounts:
Allowance for doubtful
accounts $3,694,000 $1,122,000 $ -- $112,527(1) $4,703,483
Year ended September 26, 1998:
Reserves and allowances deducted
From asset accounts:
Allowance for doubtful
accounts $3,823,000 $ 409,000 $ -- $538,000(1) $3,694,000
Year ended September 27, 1997:
Reserves and allowances deducted
From asset accounts:
Allowance for doubtful
accounts $3,985,000 $ (60,000) $ -- $102,000(1) $3,823,000
(1) Uncollectable accounts written off, net of recoveries.
EXHIBIT 12
PILGRIM'S PRIDE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED
OCTOBER 2, SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1999 1998 1997 1996 1995
(amounts in thousands)
EARNINGS:
Income before income taxes
and extraordinary
charge $90,904 $56,522 $43,824 $47 $2,091
Add: Total fixed charges
(see below) 26,706 27,987 27,647 26,788 22,309
Less: Interest
Capitalized 2,032 1,675 502 1,250 634
Total
Earnings $115,578 $82,834 $70,969 $25,585 $23,766
FIXED CHARGES:
Interest(1) $20,889 $23,239 $23,889 $23,423 $19,076
Portion of rental expense
representative of the
Interest
factor 5,817 4,748 3,758 3,365 3,233
Total fixed
charges $26,706 $27,987 $27,647 $26,788 $22,309
Ratio of earnings to fixed
charges 4.33 2.96 2.57 - 1.07
Coverage
deficiency - - - $1,203 -
(1) Interest includes amortization of capitalized financing fees.
EXHIBIT 22- SUBSIDIARIES OF REGISTRANT
1. AVICOLA PILGRIM'S PRIDE DE MEXICO, S.A. DE C.V.
2. COMPANIA INCUBADORA HIDALGO, S.A. DE C.V.
3. INMOBILIARIA AVICOLA PILGRIM'S PRIDE, S. DE R.L. DE C.V.
4. PILGRIM'S PRIDE, S.A. DE C.V.
5. GALLINA PESADA S.A. DE C.V.
6. PILGRIM'S PRIDE FUNDING CORPORATION
7. PILGRIM'S PRIDE INTERNATIONAL, INC.
8. PPC OF DELAWARE BUSINESS TRUST
9. PPC MARKETING, LTD.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 3-12043 and Form S-3 No. 333-84861) of Pilgrim's Pride
Corporation, and in the related Prospectuses, of our report dated November
2, 1999, 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 October 2, 1999.
ERNST & YOUNG LLP
Dallas, Texas
November 24, 1999