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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended: June 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-64180
PSF Group Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 43-1818535
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
423 West 8th Street, Suite 200, Kansas City, Missouri 64105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 472-7675
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant has (1) filed all
documents and 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 [ ]
As of June 29, 2002, there were 100,000 shares of the Registrant's
Class A Common Stock outstanding and 113,301 shares of the Registrant's Class B
Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 29, 2002 and March 30, 2002
(in 000's)
(Unaudited)
June 29, March 30,
2002 2002
------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,342 $ 7,182
Accounts receivable, net 22,545 21,332
Inventories 147,442 141,165
Federal income tax receivable 3,325 3,319
Deferred income taxes 15,680 15,680
Prepaid expenses and other 3,959 2,158
-------- --------
Total current assets 199,293 190,836
PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK, at cost:
Land and improvements 95,857 95,349
Buildings 292,506 292,154
Machinery and equipment 255,847 251,664
Breeding stock 38,081 38,126
Construction in progress 12,891 16,306
-------- --------
695,182 693,599
Less- accumulated depreciation 178,309 166,591
-------- --------
Total property, plant, equipment and breeding stock 516,873 527,008
GOODWILL 75,998 75,998
OTHER LONG-TERM ASSETS:
Deferred financing costs, net 6,910 7,241
Other 5,984 6,556
-------- --------
Total other long-term assets 12,894 13,797
Total assets $805,058 $807,639
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,462 $ 8,385
Accrued expenses 28,483 29,494
Due to related party 663 1,317
Accrued interest 1,014 4,914
Current maturities of long-term debt and capital leases 26,531 26,629
------ --------
Total current liabilities 63,153 70,739
LONG-TERM LIABILITIES:
Long-term debt and capital leases, less current maturities 258,923 246,153
Other long-term liabilities 8,209 8,243
Due to related party 921 921
Deferred income taxes 95,006 98,016
--------- -------
Total long-term liabilities 363,059 353,333
--------- -------
Total liabilities 426,212 424,072
SHAREHOLDERS' EQUITY:
Common stock 2 2
Additional paid-in capital 373,678 373,673
Accumulated other comprehensive (loss) income, net of tax (107) 345
Retained earnings 5,273 9,547
-------- ---------
Total shareholders' equity 378,846 383,567
Total liabilities and shareholders' equity $ 805,058 $ 807,639
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
13 weeks ended June 29, 2002 and June 30, 2001
(in 000's)
(Unaudited)
13 Weeks Ended
June 29, June 30,
2002 2001
----------- ----------
Net sales $ 149,049 $ 171,162
Cost of goods sold 146,149 141,376
--------- ---------
Gross profit 2,900 29,786
Selling, general and administrative expenses 4,949 5,636
Other income (627) (28)
--------- ---------
Operating (loss) income (1,422) 24,178
Interest expense (income):
Interest expense 5,610 6,926
Interest income (37) (130)
--------- ---------
Interest expense, net 5,573 6,796
--------- ---------
(Loss) income before income taxes and extraordinary items (6,995) 17,382
Income tax (benefit) expense (2,721) 6,969
--------- ---------
Net (loss) income before extraordinary items (4,274) 10,413
Loss on early extinguishment of debt, net of tax -- 1,315
--------- ---------
Net (loss) income $ (4,274) $ 9,098
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
13 Weeks ended June 29, 2002 and June 30, 2001
(in 000's)
(Unaudited)
June 29, June 30,
2002 2001
------------------------
OPERATING ACTIVITIES:
Net (loss) income ($ 4,274) $ 9,098
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities:
Depreciation and amortization 15,321 13,791
Amortization of deferred financing costs 342 209
Deferred income taxes (3,010) 3,739
Gain on sale of assets (196) (1,688)
Changes in operating assets and liabilities, net:
Accounts receivable (1,213) (84)
Inventories (6,277) (5,331)
Prepaid expenses and other assets (1,678) 3,782
Accounts payable, accrued expenses and other liabilities (7,517) (4,060)
-------- --------
Net cash (used in) provided by operating activities (8,502) 19,456
INVESTING ACTIVITIES:
Purchases of property, plant, equipment and breeding stock (7,858) (26,208)
Proceeds from disposal of fixed assets 2,859 3,724
------- ---------
Net cash used in investing activities (4,999) (22,484)
FINANCING ACTIVITIES:
Proceeds from long-term debt -- 173,591
Proceeds from (payments on) revolving debt, net 25,440 (4,000)
Deferred financing costs (11) (4,408)
Repayments on long-term debt (12,768) (169,287)
------- ---------
Net cash provided by (used in) financing activities 12,661 (4,104)
Net decrease in cash and cash equivalents (840) (7,132)
CASH AND CASH EQUIVALENTS, beginning of period 7,182 8,560
------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 6,342 $ 1,428
======== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 8,015 $ 4,741
Income tax paid 5 75
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PSF Group Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the accounting policies described in the
consolidated financial statements and related notes included in PSF Group
Holdings, Inc. and Subsidiaries (the "Company") consolidated financial
statements for the year ended March 30, 2002 filed with the Securities and
Exchange Commission on Form 10-K. It is suggested that those consolidated
statements be read in conjunction with this report. Certain information and note
disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The year-end financial statements presented were derived from the
Company's audited financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements reflect all adjustments
necessary for a fair presentation of the financial position of the Company and
the results of its operations.
Note 2 - New accounting pronouncements
Derivative instruments and hedging activities
On April 1, 2001, the Company adopted Financial Accounting Standards Board
Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities" requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability at its fair value, and changes in
a derivative's fair value be recognized in current earnings or other
comprehensive income.
The Company believes that its current commodity derivative instruments are
economic hedges, however, as a result of the extensive record keeping
requirements of SFAS 133, management has elected not to designate and account
for these derivatives as hedges. Effective as of April 1, 2001, these
instruments are marked to market through earnings. Changes in the fair value of
the existing contracts and those contracts entered into subsequent to April 1,
2001 have been recorded in the period in which they occur. Net gains (losses)
recognized during the 13 weeks ended June 29, 2002 and June 30, 2001 in gross
profit were $2,510,000 and ($8,689,000), respectively.
During the year ended March 30, 2002 the Company entered into an interest rate
swap agreement in order to effectively convert the benchmark interest rate on
the $75 million term note from variable to fixed rate debt.
The Company's comprehensive (loss) income includes net (loss) income and the
change in the fair market value of the interest rate swap, net of tax.
Comprehensive (loss) income for the 13 weeks ended June 29, 2002 and June 30,
2001 was ($4,726,000) and $5,569,000, respectively.
Business combination, goodwill, and intangible assets
On June 30, 2001, the Financial Accounting Standards Board issued its Statements
of Financial Accounting Standards Nos. 141 (SFAS 141), "Business Combinations"
and 142 (SFAS 142), "Goodwill and Intangible Assets," which establish reporting
and accounting standards for business combinations, goodwill and intangible
assets. SFAS 141 requires all business combinations after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142, companies will no
longer amortize goodwill over the estimated useful life. Goodwill will be
assessed each year for impairment by applying a fair value based test.
The Company elected early adoption of these rules and recognized the effect of
the new pronouncements in fiscal year 2002. Assessment of the fair value of the
relevant reporting units was completed during the
4
second quarter of fiscal year 2002, resulting in no impairment of recorded
goodwill. The effect of discontinuing goodwill amortization increased income
before income taxes by approximately $685,000 for the 13 weeks ended June 29,
2002 and June 30, 2001.
Asset retirement obligations
On June 30, 2001 the Financial Accounting Standards Board issued its Statement
of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset
Retirement Obligations." SFAS 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development, and the normal operation of long-lived assets. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002 and earlier application is encouraged. The Company
has not determined the impact, if any, that the adoption of this new standard
will have on its financial statements.
Impairment of long-lived assets
In August 2001, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the
Impairment of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
and the accounting and reporting provisions of APB No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS 144 retains many of the provisions of SFAS 121, but
addresses certain implementation issues associated with that Statement. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company does not believe this statement
will have a material impact on its financial statements.
Note 3 - Inventories
Inventories are valued at the lower of cost, determined on a first-in, first-out
(FIFO) basis, or market. Inventories consist of the following at June 29, 2002
and March 30, 2002 (in thousands):
June 29, 2002 March 30, 2002
------------- --------------
Hogs $132,011 $124,449
Processed pork and pork products 9,604 10,704
Packaging and supplies 2,953 2,762
Grain, feed additives and other 2,874 3,250
-------- --------
$147,442 $141,165
Note 4 - Segment information
The accounting policies for the segments are the same as those described in the
footnotes included in the Company's March 30, 2002 audited financial statements.
The Company operates a vertically integrated business with two operating
segments, Pork Processing and Hog Production. The Pork Processing segment sells
fresh and value-added pork products to food retailers, distributors,
wholesalers, further processors, pharmaceutical and animal feed manufacturers in
both domestic and international markets. The Hog Production segment supplies a
majority of the live hogs used in the Pork Processing segment and sells the
excess production to other hog processing operations. Intersegment live hog
sales are based on market prices. The following table presents specific
financial information about each segment as reviewed by the Company's
management. The Corporate and Other classification in the following table
represents unallocated corporate expenses and assets, deferred and current
taxes, the Company's goodwill and goodwill amortization, interest expense and
intersegment elimination (in thousands):
5
Pork Hog Corporate
Processing Production and Other Total
----------- ------------ ------------ ---------
As of and for the 13 weeks ended June 29, 2002-
Net sales $ 135,569 $ 90,108 $ (76,628) $ 149,049
Intersegment sales (1,295) (75,333) -- --
Operating income (loss) 5,120 (3,375) (3,167) (1,422)
Assets 196,305 514,089 94,664 805,058
For the 13 weeks ended June 30, 2001-
Net sales 159,958 113,775 (102,571) 171,162
Intersegment sales (617) (101,954) -- --
Operating income (loss) 2,497 26,334 (4,653) 24,178
As of March 30, 2002-
Assets 199,714 514,787 93,138 807,639
Note 5 - Early extinguishment of debt
On June 7, 2001, Premium Standard Farms, Inc., a wholly-owned subsidiary of the
Company, issued $175,000,000 of 9 1/4% senior unsecured notes due 2011 ("9 1/4%
Notes"). A portion of the net proceeds from the private placement debt offering
was used to redeem all $137.9 million principal amount of the 11% senior secured
payment-in-kind notes ("PIK Notes") with the remaining net proceeds used to pay
down its bank credit facility. An extraordinary charge of $2,191,483, net of tax
of $876,593, was recorded in the Condensed Consolidated Statement of Operations
for the 13 weeks ended June 30, 2001 resulting from the loss on the early
extinguishment of the PIK Notes. Premium Standard Farms, the Company, and the
Company's other wholly-owned subsidiaries subsequently filed a joint
registration statement on Form S-4 with the Securities and Exchange Commission,
as amended and declared effective on August 14, 2001, to register exchange notes
("Exchange Notes") and the guarantees of the Exchange Notes. The Exchange Notes
have substantially identical terms to the privately placed 9 1/4% Notes, except
that the Exchange Notes are freely tradeable. All of the holders of the
privately placed 9 1/4% Notes tendered their notes for the registered Exchange
Notes.
Note 6 - Amendment to Credit Agreement
Effective June 28, 2002, the Company and its bank group amended the Credit
Agreement to extend the revolving credit facility one year, increase the letter
of credit commitment from $10.0 million to $15.0 million, and amend certain
financial covenants and pricing terms. Obligations under the Credit Agreement
are secured by liens on substantially all the Company's assets. In addition to
customary financial covenants, the Credit Agreement contains customary
restrictions on, among other things, encumbrance or disposal of assets,
acquisitions, additional indebtedness, capital investment, payment of
subordinated debt and construction of new hog production facilities. In addition
to customary fees payable under credit facilities of this type, amounts borrowed
under the Credit Agreement bear interest at fluctuating rates selected by the
Company based on the agent bank's prime rate, the Federal Funds Rate plus one
half of one percent or LIBOR plus, in each case, an applicable margin,
determined by the Company's leverage ratio, ranging from zero to 3.125%
depending on the type of fluctuating rate the Company is using. All borrowings
under the revolving credit facility mature on August 21, 2004 and term credit
facility matures on September 30, 2004.
Note 7 - Litigation
The Company has settled two citizens' action suits which sought to enforce
alleged violations of the Clean Air Act, Clean Water Act and CERCLA against the
Company and ContiGroup Companies, Inc. ("ContiGroup"). In 1998, the Company
engaged in a series of transactions with ContiGroup pursuant to which it
purchased from ContiGroup its North Missouri Farms hog production operations and
ContiGroup purchased a 51.0% ownership interest in the Company (the "1998
ContiGroup transaction"). To the extent
6
that ContiGroup incurs any liability in this litigation, the Company assumed
that liability pursuant to the terms of the 1998 ContiGroup transaction. The
U.S. Environmental Protection Agency (the "E.P.A.") had intervened in the same
action and filed a separate notice of violation against the Company under the
Clean Air Act. This settlement resolves all outstanding issues of ContiGroup and
the Company with the E.P.A. This consent decree built upon the 1999 consent
decree with the State of Missouri referenced below. The recent consent decree
with the E.P.A. (the "2001 Consent Decree") requires the Company and ContiGroup
to meet certain performance standards, such as a 50 percent reduction in
nitrogen content concentration of effluent applied to area fields over a
prescribed time period. Other key elements of the 2001 Consent Decree include:
monitoring air emissions from lagoons and barns; compliance with certain best
management practices to reduce the risk of spills; testing of selective lagoons
to ensure integrity, and the payment of a $350,000 civil penalty. The new
counsel for the citizens has submitted a petition for recovery of attorneys'
fees in connection with the lawsuits against both the Company and ContiGroup.
The Company believes the majority of these fees have been previously paid and
resolved. The Company believes the resolution of this matter will not have a
material adverse effect upon its financial position or results of operations.
In 1999, the Company settled a suit filed by the Attorney General of the State
of Missouri against the Company and ContiGroup. The Company assumed ContiGroup's
liability in this action in connection with the 1998 ContiGroup transaction. The
settlement required the Company and ContiGroup to enter into a consent judgment
pursuant to which the Company is obligated to invest $25 million over the course
of five years for researching, installing and operating improved technology to
control wastewater, air and odor emissions from its Missouri farms. The Company
is currently beginning the fourth year of that five year period and has spent
$11.1 million to satisfy the settlement. In addition, pursuant to the consent
judgment the Company and ContiGroup were issued a $1 million civil penalty. Of
this, $650,000 has been paid and $350,000 is suspended pending certain
conditions.
In addition to the suits discussed above, the Company has received notices of
violations from the Missouri Department of Natural Resources alleging releases
of wastewater. The Company has responded to these notices in an effort to
resolve these matters. The State of Missouri has recently filed a lawsuit
seeking penalties and injunctive relief for these violations. The Company is
preparing a response, but is seeking to resolve this matter through a negotiated
settlement.
In addition, the Company is involved from time to time in routine litigation
incidental to its business. Although no assurance can be given as to the outcome
or expense associated with any of these routine proceedings, the Company
believes that none of such proceedings currently pending should, individually or
in the aggregate, have a material adverse effect on its financial statements.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In this report on Form 10-Q, the terms "we," "us," and "our" refer collectively
to PSF Group Holdings, Inc., Premium Standard Farms, Inc. and their
subsidiaries. Premium Standard Farms, Inc. is a wholly-owned subsidiary of PSF
Group Holdings, Inc. The terms "expect," "anticipate," "may," "believe," "will,"
and similar expressions made with respect to our earnings and outlook for the
future contain some forward-looking information. Naturally, all forward-looking
statements involve risk and uncertainty and actual results or events could be
materially different. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our goals will be
achieved. Important factors that could cause actual results to differ include:
economic conditions generally and in our principal markets; competitive
practices and consolidation in the pork production and processing industries;
the impact of current and future laws, governmental regulations and fiscal
policies affecting our industry and operations, including environmental laws and
regulations, trade embargoes and tariffs; food safety; the availability of
additional capital to fund future commitments and expansion and the cost and
terms of financing; outbreaks of disease in our herds; feed ingredient costs;
fluctuations in live hog and wholesale pork prices; customer demands and
preferences; and the occurrence of natural disasters and other occurrences
beyond our control. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed might not occur. Please review our Annual
Report on Form 10-K for other important factors that could cause results to
differ materially from those in any such forward-looking statements. Information
in these archived materials may not be current and may be superceded by more
recent information published by us.
Results of Operations
13 Weeks Ended June 29, 2002 Compared to the 13 Weeks Ended June 30, 2001
The following table presents selected financial information for our
production and processing segments for the 13 weeks ended June 29, 2002 and June
30, 2001. Net sales, gross profit and operating (loss) income by segment are
also presented as a percentage of their respective totals. The two columns under
quarter-to-quarter change show the dollar and percentage change from the quarter
ended June 29, 2002 to the quarter ended June 30, 2001. Intersegment sales are
based on market prices.
For the 13 Weeks Ended Qtr to Qtr Change
-----------------------------------------------------------
June 29, 2002 % June 30, 2001 % 2002 to 2001 %
------------- ---- ------------- ----- ------------ ---
(In millions except percentages)
Net Sales
Production $ 90.1 60.4 % $ 113.8 66.5 % $ (23.7) (20.8)%
Processing 135.6 90.9 % 160.0 93.5 % (24.4) (15.3)%
Intersegment (76.6) (51.4)% (102.6) (59.9)% 26.0 (25.3)%
-------- ------- -------- ------- ----- -----
Total Net Sales $ 149.1 100.0 % $ 171.2 100.0 % $ (22.1) (12.9)%
======== ======= ======== ======= ===== =====
Gross Profit
Production $ (3.5)(120.7)% $ 26.6 89.3 % $ (30.1) (113.2)%
Processing 6.4 220.7 % 3.2 10.7 % 3.2 100.0 %
-------- ------- -------- ------- ----- ------
Total Gross Profit $ 2.9 100.0 % $ 29.8 100.0 % $ (26.9) (90.3)%
======== ======= ======== ======= ===== ======
Operating (Loss) Income
Production $ (3.4) 242.9 % $ 26.3 108.7 % $ (29.7) (112.9)%
Processing 5.1 (364.3)% 2.5 10.3 % 2.6 104.0 %
Corporate (3.1) 221.4 % (4.6) 19.0)% 1.5 (32.6)%
-------- ------- -------- ------- ------- -----
Total Operating (Loss) Income $ (1.4) 100.0 % $ 24.2 100.0 % $ (25.6) (105.8)%
======== ======= ======== ======= ======= ======
8
Consolidated
Net Sales. Net sales decreased by $22.1 million, or 12.9%, to $149.1 million in
the first quarter of fiscal year 2003 from $171.2 million in the comparable
period last year. The decrease was attributed to a decrease in prices of $35.3
million, which was offset by an increase in volume of $13.2 million. Overall,
pork prices were severely impacted by several factors, including, an increased
supply of pork industry wide, compounded by an increased supply of all meat
proteins. Much of the increase in meat proteins was attributed to the Russian
ban on poultry imports from the United States. See Segment Analysis below for
comments on changes in sales by business segment.
Gross Profit. Gross profit decreased by $26.9 million, or 90.3%, to $2.9 million
in the first quarter of fiscal year 2003 from $29.8 million in the comparable
period last year. The current year gross profit decrease is primarily the result
of lower live hog and pork product prices during the first quarter of fiscal
year 2003 compared to the same period last year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were consistent as a percentage of net sales at 3.3% in
the first quarter of fiscal year 2003 and in the comparable period last year. In
dollar terms, selling, general and administrative expenses decreased by $0.7
million, or 12.5%, to $4.9 million in the first quarter of fiscal year 2003 from
$5.6 million in the comparable period last year. The majority of the decrease is
attributable to legal expenses incurred in the first quarter of fiscal year 2002
to settle outstanding litigation.
Operating (Loss) Income. Operating income decreased by $25.6 million, or 105.8%,
to an operating loss of ($1.4) million in the first quarter of fiscal year 2003
from an operating income of $24.2 million in the comparable period last year.
The decrease is attributable to the factors mentioned above.
Interest Expense, net. Interest expense, net, decreased by $1.2 million, or
18.0%, to $5.6 million in the first quarter of fiscal year 2003 from $6.8
million in the comparable period last year. The decrease was caused by a
decrease in interest rates on our variable rate debt, offset slightly by an
increase in total interest bearing debt outstanding. See Liquidity and Capital
Resources below for more information.
Income Tax Benefit / Expense. Our effective tax rate was a benefit of 38.9% in
the first quarter of fiscal year 2003 compared to an expense of 40.1% in the
comparable period last year. The difference was primarily attributable to the
utilization of state income tax credits.
Segment Analysis
Hog Production. Net sales decreased by $23.7 million, or 20.8%, to $90.1 million
in the first quarter of fiscal year 2003 from $113.8 million in the comparable
period last year. The decrease resulted from a 27.9% decrease in net market hog
sales prices, partially offset by a 9.8% increase in volume attributable to
increased productivity, the effects of our Texas sow herd expansion, better
growing conditions and additional contract production. Intersegment sales to our
pork processing segment transferred at market prices are eliminated in the
Consolidated Statements of Operations.
Gross profit decreased by $30.1 million, or 113.2%, to a loss of $3.5
million in the first quarter of fiscal year 2003 from a gross profit of $26.6
million in the comparable period last year. The decrease was the result of a
higher volume of hogs produced at a negative margin due to the lower net market
hog sales price mentioned above. Hog production costs were 2.2% lower during the
first quarter of fiscal year 2003 compared to the same period last year mainly
due to lower feed input costs.
Operating income decreased by $29.7 million, or 112.9%, to an operating
loss of $3.4 million in the first quarter of fiscal year 2003 from an operating
income of $26.3 million in the comparable period last year. The decrease is
attributed to the factors mentioned above.
9
Pork Processing. Net sales decreased $24.4 million, or 15.3%, to $135.6 million
in the first quarter of fiscal year 2003 from $160.0 million in the comparable
period last year. The decrease resulted from a 21.8% decrease in pork product
sales prices, partially offset by an 8.4% increase in volume processed compared
to the same period last year. The increase in volume was primarily attributable
to the expansion at the Clinton, North Carolina plant completed in late fiscal
year 2002, which increased capacity from 6,500 hogs per day to 10,000 hogs per
day.
Gross profit increased by $3.2 million, or 100.0%, to $6.4 million in
the first quarter of fiscal year 2003 from $3.2 million in the comparable period
last year. The increase resulted from higher margins on pork products due to
32.5% lower market hog costs. Processing costs increased 5.7% during the first
quarter of fiscal year 2003 compared to the same period last year, primarily the
result of increased depreciation expense related to the Clinton plant expansion
and added emphasis on value-added products, which cost more to produce.
Operating income increased by $2.6 million, or 104.0%, to $5.1 million
in the first quarter of fiscal year 2003 from $2.5 million in the comparable
period last year. The increase was attributed to the factors mentioned above.
Liquidity and Capital Resources
Our primary source of financing has been cash flow from operations and
bank borrowings. Our ongoing operations will require the availability of funds
to service debt, fund working capital and make capital expenditures on our
facilities. We expect to finance these activities through cash flow from
operations and from amounts available under our revolving credit facility.
Net cash flow (used in) and provided by operating activities was ($8.5)
million and $19.5 million for the first quarter ended in fiscal years 2003 and
2002, respectively. The decrease in the first quarter of fiscal year 2003
compared to the same period last year was primarily due to a decrease in net
income, the change in deferred taxes and an increase in working capital
requirements partially offset by an increase in non-cash depreciation charges.
Non-cash charges increased in the first quarter of fiscal year 2003 compared to
the same period last year due to incremental depreciation expense of expansion
projects completed and capitalized in fiscal year 2002.
Net cash flow used in investing activities was $5.0 million and $22.5
million for the first quarter ended in fiscal years 2003 and 2002, respectively.
Net cash used in investing activities consisted of $7.9 million and $26.2
million for capital expenditures relating to property, plant and equipment and
breeding stock during the first quarter ended in fiscal years 2003 and 2002,
respectively. The Company received proceeds from disposal of fixed assets of
$2.9 million and $3.7 million during the first quarter ended in fiscal years
2003 and 2002, respectively, primarily representing culled breeding stock. The
decrease in capital expenditures relating to property, plant and equipment and
breeding stock is the result of expansion projects at our Clinton, North
Carolina plant and our Texas production facilities completed during fiscal year
2002.
Net cash flow provided by and (used in) financing activities was $12.7
million and ($4.1) million for the first quarter ended in fiscal years 2003 and
2002, respectively. As of June 29, 2002, our total debt was $285.5 million. In
the first quarter of fiscal year 2002, Premium Standard Farms issued $175
million of 9 1/4% senior unsecured notes due 2011("9 1/4% Notes"), which were
used to retire $137.9 million of 11% senior secured payment-in-kind notes ("PIK
Notes") on July 7, 2001. An associated 1% prepayment penalty on these PIK Notes,
which was also paid on July 7, 2001, resulted in an extraordinary charge of $1.3
million, net of taxes. With the remaining proceeds, we also prepaid $25 million
of bank term debt, made a $6.3 million quarterly payment on bank term debt and
paid down $4.0 million on our revolving credit facility. The 9 1/4% Notes
contain customary covenants and are redeemable by Premium Standard Farms under
certain circumstances.
10
Working capital is provided under a Credit Agreement that provides for
up to $100 million of revolving credit (with actual credit limit determined
monthly by reference to a borrowing base formula) and a term loan facility with
$56.3 million outstanding at June 29, 2002. Effective June 28, 2002, the Credit
Agreement was amended to extend our revolving credit facility one year, increase
our letter of credit commitment from $10.0 million to $15.0 million, and amend
certain financial covenants and pricing terms. Obligations under the Credit
Agreement are secured by liens on substantially all our assets. In addition to
customary financial covenants, the Credit Agreement contains customary
restrictions on, among other things, encumbrance or disposal of assets,
acquisitions, additional indebtedness, capital investment, payment of
subordinated debt and construction of new hog production facilities. In addition
to customary fees payable under credit facilities of this type, amounts borrowed
under the Credit Agreement bear interest at fluctuating rates selected by us
based on the agent bank's prime rate, the Federal Funds Rate plus one half of
one percent or LIBOR plus, in each case, an applicable margin, determined by our
leverage ratio, ranging from zero to 3.125% depending on the type of fluctuating
rate we are using. All borrowings under the revolving credit facility mature on
August 21, 2004 and term credit facility matures on September 30, 2004.
Total indebtedness at June 29, 2002 was $285.5 million, as compared to
$268.9 million at June 30, 2001. At June 29, 2002, we had $48.7 million
outstanding under our revolving credit facility, $10.0 million in letters of
credit and $41.3 million available for borrowing under our revolving credit
facility.
In fiscal 2003, we plan to spend approximately $36 million on capital
expenditures, of which we expect to spend approximately:
o $12 million in upgrades and improvements in our processing
operations;
o $15 million in upgrades and improvements in our production
operations; and
o $9 million in net breedstock purchases.
Under our consent decree with the Attorney General of the State of
Missouri we are required to invest $13.9 million in research and development
over the next two years.
We believe that available borrowings under our credit facility,
available cash and internally generated funds will be sufficient to support our
working capital, capital expenditures and debt service requirements for the
foreseeable future. Our ability to generate cash, however, is subject to a
certain extent to general economic, financial, competitive, legislative,
regulatory and other factors beyond our control. We cannot assure you that our
business will generate sufficient cash flow from operations or that future
borrowings will be available under our revolving credit facility in an amount
sufficient to enable us to pay our indebtedness, including the 9 1/4% Notes, or
to fund our other liquidity needs. If we consummate any acquisitions, we may
need to raise additional capital. In addition, it is our long-term intent to add
processing capabilities to our Texas operations when justified by market
conditions, customer relationships and other circumstances. If we consummate any
material acquisitions or expand our Texas operations in this manner, we will
need to seek additional sources of funding, which might potentially come from
the issuance of additional equity, debt or the pursuit of joint ventures to the
extent that such options are available.
11
The following table represents a summary of our contractual cash
obligations as of June 29, 2002:
Payments due by period
Contractual Cash Obligations Total Current 1-3 years 4-5 years Thereafter
- ---------------------------- ----- ------- --------- --------- ----------
(in thousands)
Long Term Debt $ 280,748 $ 25,788 $ 79,960 $ - $175,000
Capital Lease Obligations 4,706 746 1,625 1,913 422
Operating Leases 19,998 5,202 7,117 3,119 4,560
Unconditional Purchase Obligations 5,275 5,275 - - -
Other Long Term Obligations 2,000 1,000 1,000 - -
---------- --------- --------- -------- --------
Total Contractual Cash Obligations $ 312,727 $ 38,011 $ 89,702 $ 5,032 $179,982
========== ========= ========= ======== ========
Most of our hogs are raised in facilities that we own. Some of our
hogs, however, are raised under farrowing, nursery, or finishing contracts with
individual farmers. In these relationships, we typically own the livestock and
provide the necessary feed, genetics, and veterinary supplies, while the
contract producer provides the land, facilities, labor, utilities, and other
costs of production. These contracts vary from terms of less than one year to up
to 12 years. These payments represented approximately 12 percent of our hog
production segment's cost of goods sold for the 13 weeks ended June 29, 2002.
All of these contracts are cancelable by us if the producer fails to perform to
an acceptable level.
Critical Accounting Policies
In preparing the consolidated financial statements in accordance with
generally accepted accounting principles, we are required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosures at the date of the consolidated financial
statements and during the reporting period. Actual results may differ from those
estimates due to the complexity and subjectivity of those estimates. Management
has identified the accounting policies it believes to be the most important as
inventory valuation of livestock, contingent liabilities, and accounting for
derivative instruments.
Inventory valuation of livestock is calculated based on a standard cost
model for each geographic hog production region. This model is based on the
current year's budgeted costs and inventory projections at each age and phase of
the production cycle, adjusted to actual costs and reduced to the lower of cost
or market when required. Management believes this method for valuing livestock
most accurately represents actual inventory costs.
Contingent liabilities, such as self-insured workers' compensation and
health insurance, bonuses, and legal obligations are estimated based on
information received from third parties and management estimates. These
obligations are provided for when the loss is probable and the amount is
reasonably estimable. Actual settlement costs may vary from estimates we made.
Management believes that any difference in the actual results from the estimates
will not have a material adverse effect upon our financial position or results
of operations.
Derivative instruments are accounted for in accordance with Financial
Standards Board Statement No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." Because of the complexity involved in
getting hedge treatment for our commodity contracts, we mark these exchange
traded contracts to market with the resulting gain or loss recorded in sales for
lean hog contracts or cost of sales for all other commodity contracts. This may
result in large fluctuations in our earnings depending on the volume of
commodity contracts and their corresponding volatility.
12
Market Risk
Our operating results are influenced by fluctuations in the price of
our primary feed components, corn and soybean meal, and by fluctuations in
market hog and wholesale pork sales prices. The cost and supply of feed
components and market hog and wholesale pork sales prices are determined by
constantly changing market forces of supply and demand, which are driven by
matters over which we have no control, including weather, current and projected
worldwide grain stocks and prices, grain export prices and supports, hog
production and governmental agricultural policies. In our hog production segment
we use forward contracts, as well as futures and options contracts, to establish
adequate supplies of future grain requirements, to secure margins and to reduce
the risk of market fluctuations. To secure margins and minimize earnings
volatility in our pork processing segment, we utilize lean hog futures to hedge
future pork product sales. While this may tend to limit our ability to
participate in gains from favorable commodity price fluctuation, it also tends
to minimize earnings volatility and secure future margins. For the 13 weeks
ended June 29, 2002, we recognized gains under SFAS 133 of $2.1 million in net
sales for gains related to lean hog futures and gains of $0.4 million in costs
of goods sold relating to the hedging of feed components. For open futures
contracts, we use a sensitivity analysis technique to evaluate the effect that
changes in the market value of commodities will have on these commodity
derivative instruments. As of June 29, 2002, the potential change in fair value
of open future contracts, assuming a 10% change in the underlying commodity
price, was $3.7 million.
We are exposed to changes in interest rates. Our term and revolving
credit facilities have variable interest rates. Interest rate changes therefore
generally do not affect the market value of such debt but do impact the amount
of our interest payments and, therefore, our future earnings and cash flows,
assuming other factors are held constant. Conversely, for fixed rate debt,
interest rate changes do not impact future cash flows and earnings, but do
impact the fair market value of such debt, assuming other factors are held
constant. During the fiscal year ended March 30, 2002, we entered into an
interest rate swap agreement to convert the variable base interest rate of our
bank term debt to a fixed rate of 3.0125% plus its spread (currently 1.875% at
June 29, 2002). The swap has an identical maturity schedule as the term debt and
is accounted for as a cash flow hedge under SFAS 133. During the 13 weeks ended
June 29, 2002, we recognized a $0.5 million loss, net of tax, into Other
Comprehensive Income for the change in the market value of the swap.
The 9 1/4% Notes had a fair value of approximately $168.0 million as of
June 29, 2002 based on inter-dealer prices, as compared to the book value of
$175.0 million as of June 29, 2002.
13
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Please see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk" above.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We have settled two citizens' action suits which sought to enforce
alleged violations of the Clean Air Act, Clean Water Act and CERCLA against us
and ContiGroup Companies, Inc. ("ContiGroup"). In 1998, we engaged in a series
of transactions with ContiGroup pursuant to which we purchased from ContiGroup
its North Missouri Farms hog production operations and ContiGroup purchased a
51.0% ownership interest in us (the "1998 ContiGroup transaction"). To the
extent that ContiGroup incurs any liability in this litigation, we assumed that
liability pursuant to the terms of our 1998 ContiGroup transaction. The U.S.
Environmental Protection Agency (the "E.P.A.") had intervened in our action and
filed a separate notice of violation against us under the Clean Air Act. This
settlement resolves all outstanding issues of ContiGroup and us with the E.P.A.
This consent decree built upon the 1999 consent decree with the State of
Missouri referenced below. The recent consent decree with the E.P.A. (the "2001
Consent Decree") requires us and ContiGroup to meet certain performance
standards, such as a 50 percent reduction in nitrogen content concentration of
effluent applied to area fields over a prescribed time period. Other key
elements of the 2001 Consent Decree include: monitoring air emissions from
lagoons and barns; compliance with certain best management practices to reduce
the risk of spills; testing of selective lagoons to ensure integrity, and the
payment of $350,000 civil penalty. The new counsel for the citizens has
submitted a petition for recovery of attorneys' fees in connection with the
lawsuits against both us and ContiGroup. We believe the majority of these fees
have been previously paid and resolved. We believe the resolution of this matter
will not have a material adverse effect upon our financial position or results
of operations.
In 1999, we settled a suit filed by the Attorney General of the State
of Missouri against us and ContiGroup. We assumed ContiGroup's liability in this
action in connection with the 1998 ContiGroup transaction. The settlement
required us and ContiGroup to enter into a consent judgment pursuant to which we
are obligated to invest $25 million over the course of five years for
researching, installing and operating improved technology to control wastewater,
air and odor emissions from our Missouri farms. We are currently beginning the
fourth year of that five year period and have spent $11.1 million to satisfy the
settlement. In addition, pursuant to the consent judgment we and ContiGroup were
issued a $1 million civil penalty. Of this, $650,000 has been paid and $350,000
is suspended pending certain conditions.
In addition to the suits discussed above, we have received notices of
violations from the Missouri Department of Natural Resources alleging releases
of wastewater. We have responded to these notices in an effort to resolve these
matters. The State of Missouri has recently filed a lawsuit seeking penalties
and injunctive relief for these violations. We are preparing a response, but are
seeking to resolve this matter through a negotiated settlement.
In addition, we are involved from time to time in routine litigation
incidental to our business. Although no assurance can be given as to the outcome
or expense associated with any of these routine proceedings, we believe that
none of such proceedings currently pending should, individually or in the
aggregate, have a material adverse effect on our financial statements.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
14
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.3(i) Seventh Amendment to Credit Agreement dated June 28, 2002
99.1 Section 906 Certification of John M. Meyer, CEO
99.2 Section 906 Certification of Stephen A. Lightstone, CFO
(b) Reports on Form 8-K.
1. A Current Report on Form 8-K was filed with the SEC on May
14, 2002, to report, under Item 5, our fiscal year 2002
earnings. The earnings release, including our Condensed
Consolidated Statements of Operations for the 13 weeks ended
March 30, 2002, the 14 weeks ended March 31, 2001, and our
fiscal years ended March 30, 2002, and March 31, 2001, was
filed as Exhibit 99.1 to the Current Report on Form 8-K.
2. A Current Report on Form 8-K was filed with the SEC on May
17, 2002, to report, under Item 4, the dismissal of Arthur
Andersen LLP as our auditors. The letter of Arthur Andersen
LLP dated May 16, 2002, was filed as Exhibit 16.1 to the
Current Report on Form 8-K.
3. A Current Report on Form 8-K was filed with the SEC on June
3, 2002, to report, under Item 4, the appointment of
Deloitte & Touche LLP as our auditors.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSF GROUP HOLDINGS, INC.
August 8, 2002 /s/ Stephen A. Lightstone
- -------------- ------------------------------------------
Date Stephen A. Lightstone
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)