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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 quarterly period ended: June 28, 2003
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
incorporation or organization Identification No.)
805 Pennsylvania, Suite 200, Kansas City, Missouri 64105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 472-7675
423 West 8th Street, Suite 200, Kansas City, Missouri 64105
- --------------------------------------------------------------------------------
(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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of June 28, 2003, 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 28, 2003 and March 29, 2003
(in 000's)
(Unaudited)
June 28, March 29,
2003 2003
-------------------------------
ASSETS
CURRENT ASSETS:
Accounts receivable, net $ 27,686 $ 21,907
Inventories 163,360 158,402
Federal income tax receivable 4,522 4,525
Deferred income taxes 13,064 13,064
Prepaid expenses and other 3,298 2,341
-------------------------------
Total current assets 211,930 200,239
PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK:
Land and improvements 100,578 100,510
Buildings 293,923 293,538
Machinery and equipment 268,084 266,268
Breeding stock 39,631 36,672
Construction in progress 5,948 4,287
-------------------------------
708,164 701,275
Less- accumulated depreciation 225,428 213,314
-------------------------------
Total property, plant, equipment and breeding stock 482,736 487,961
GOODWILL 75,998 75,998
OTHER LONG-TERM ASSETS:
Deferred financing costs, net 6,648 7,085
Other 7,942 7,779
-------------------------------
Total other long-term assets 14,590 14,864
Total assets $ 785,254 $ 779,062
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks issued against future deposits $ 7,502 $ 5,129
Accounts payable 6,076 6,581
Accrued expenses 31,731 28,576
Due to related party 966 979
Accrued interest 2,241 6,178
Current maturities of long-term debt and capital leases 19,531 13,273
-------------------------------
Total current liabilities 68,047 60,716
LONG-TERM LIABILITIES:
Long-term debt and capital leases, less current maturities 293,275 291,911
Other long-term liabilities 6,559 6,345
Deferred income taxes 74,736 75,795
-------------------------------
Total long-term liabilities 374,570 374,051
-------------------------------
Total liabilities 442,617 434,767
SHAREHOLDERS' EQUITY:
Common stock 2 2
Additional paid-in capital 373,698 373,693
Accumulated other comprehensive loss, net of tax (270) (347)
Accumulated deficit (30,793) (29,053)
-------------------------------
Total shareholders' equity 342,637 344,295
Total liabilities and shareholders' equity $ 785,254 $ 779,062
===============================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
13 weeks ended June 28, 2003 and June 29, 2002
(in 000's)
(Unaudited)
13 Weeks Ended
June 28, June 29,
2003 2002
----------------------- ----------------------
Net sales $ 171,132 $ 149,049
Cost of goods sold 163,600 146,149
----------------------- ----------------------
Gross profit 7,532 2,900
Selling, general and administrative expenses 4,242 4,949
Other income (250) (627)
----------------------- ----------------------
Operating income (loss) 3,540 (1,422)
Interest expense (income):
Interest expense 6,418 5,610
Interest income (29) (37)
----------------------- ----------------------
Interest expense, net 6,389 5,573
----------------------- ----------------------
Loss before income taxes (2,849) (6,995)
Income tax benefit (1,108) (2,721)
----------------------- ----------------------
Net loss $ (1,741) $ (4,274)
----------------------- ----------------------
Unrealized gain (loss) on interest rate swap, net of tax 77 (452)
----------------------- ----------------------
Comprehensive loss $ (1,664) $ (4,726)
======================= ======================
The accompanying notes are an integral part of the condensed
financial statements.
2
PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
13 Weeks ended June 28, 2003 and June 29, 2002
(in 000's)
(Unaudited)
June 28, June 29,
2003 2002
--------------------------------
OPERATING ACTIVITIES:
Net loss $ (1,741) $ (4,274)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 15,510 15,321
Amortization of deferred financing costs 437 342
Deferred income taxes (1,059) (3,010)
Net gain on sale of fixed assets (1,015) (196)
Changes in operating assets and liabilities, net:
Accounts receivable (5,778) (1,213)
Inventories (4,959) (6,277)
Prepaid expenses and other assets (1,040) (1,678)
Accounts payable, accrued expenses and other liabilities (1,079) (7,517)
-------------------------------
Net cash used in operating activities (724) (8,502)
INVESTING ACTIVITIES:
Purchases of property, plant, equipment and breeding stock (13,476) (7,858)
Proceeds from disposal of property, plant, equipment and breeding stock 4,205 2,859
-------------------------------
Net cash used in investing activities (9,271) (4,999)
FINANCING ACTIVITIES:
Checks issued against future deposits 2,373 -
Proceeds from revolving debt, net 7,792 25,440
Payments for deferred financing costs - (11)
Repayments on long-term debt (170) (12,768)
-------------------------------
Net cash provided by financing activities 9,995 12,661
Net decrease in cash and cash equivalents - (840)
CASH AND CASH EQUIVALENTS, beginning of period - 7,182
-------------------------------
CASH AND CASH EQUIVALENTS, end of period $ - $ 6,342
===============================
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 9,877 $ 8,015
Income tax paid - 5
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 29, 2003 filed with the Securities and
Exchange Commission on Form 10-K. It is suggested that this report be read in
conjunction with those consolidated statements. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
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
Asset retirement obligations
On June 30, 2001 the Financial Accounting Standards Board (FASB) 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 was adopted by the Company March 30, 2003. The
Company has determined that it has a legal obligation to close lagoons in the
future should the Company ever cease operations or plan to close lagoons
voluntarily in accordance with a changed operating plan. Based on estimates and
assumptions as to the cost and timing of any potential lagoon closure, the
Company has determined that the present value of the projected costs are not
considered material to the condensed consolidated financial statements. However,
should laws, assumptions or other circumstances change which require lagoon
closure before the periods assumed in the present value calculations, the costs
could have a material impact on the consolidated financial statements in the
period the change occurs.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." FIN 45 supersedes Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," and provides
guidance to guarantors on the recognition and disclosure concerning obligations
under certain guarantees in interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 are effective for guarantees
issued or modified after December 31, 2002, and are to be applied prospectively.
The disclosure requirements are effective for financial statements for interim
or annual periods ending after December 15, 2002. The adoption of FIN 45 did not
have a material impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 applies to entities if its
total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support or if the equity investors
lack certain characteristics of a controlling financial interest. If an entity
is determined to meet those certain characteristics, FIN 46 requires a test to
identify the primary beneficiary based on expected losses and
4
expected returns associated with the variable interest. The primary beneficiary
is then required to consolidate the entity. The consolidation requirements apply
to all variable interest entities (VIEs) created after January 31, 2003. The
Company must apply the consolidation requirements for VIEs that existed prior to
February 1, 2003 and remain in existence as of July 1, 2003. Management does not
believe the adoption of FIN 46 will have a material impact on the Company's
consolidated financial statements.
Note 3 - 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 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 exchange traded commodity contracts serve as
economic hedges, however, management has elected not to designate and account
for these contracts as hedges. Effective as of April 1, 2001, these contracts
were marked to market through earnings. For the quarter ended June 28, 2003, the
Company recognized losses under SFAS 133 of $2.6 million in net sales for losses
related to lean hog futures and gains of $1.5 million in costs of goods sold
relating to the hedging of feed components.
During the fiscal year ended March 30, 2002, the Company entered into an
interest rate swap agreement in order to effectively convert the base interest
rate on the bank term note from variable to a fixed rate. The Company has
designated the interest rate swap as a cash flow hedge and for the quarter ended
June 28, 2003, recorded the fair value of ($442,000) in the condensed
consolidated balance sheet relating to the swap. For the quarter ended June 28,
2003, the Company decreased accumulated other comprehensive loss by $77,000, net
of $49,000 in deferred taxes. The interest rate swap will mature on September
30, 2004.
Note 4 - Goodwill and intangible assets
On June 30, 2001, the Financial Accounting Standards Board issued its Statements
of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Intangible
Assets," which establish reporting and accounting standards for goodwill and
intangible assets. Under SFAS 142, companies no longer amortize goodwill over
the estimated useful life. Goodwill is assessed each year during the second
quarter for impairment by applying a fair value based test. No impairment value
was recorded during the first quarter ended June 28, 2003.
Note 5 - Stock-based compensation
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation - Transition and Disclosure, and amendment of FASB Statement No.
123." SFAS 148 requires prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on report results.
In the fiscal year ended March 31, 2001, the Company's board of directors
authorized an equity incentive plan whereby options have been granted to senior
management for the purchase of 7,428 shares of Class B common stock at an
exercise price of $1,666.48 per share. Substantially all of the options are
fully exercisable at June 28, 2003. At December 31, 2005, 6,714 shares expire
and at December 31, 2007, 714 shares expire. No options have been exercised as
of June 28, 2003.
The Company records stock compensation in accordance with Accounting Principles
Board Opinion No. 25 (APB 25). For the quarter ended June 28, 2003, the Company
recorded compensation expense of $5,000 in accordance with APB 25. The fair
value of stock options granted was calculated using the minimum value method as
defined in the Statement of Financial Accounting Standards No. 123 (SFAS 123).
Under SFAS 123, the pro forma net income is disclosed as if it reflected the
estimated fair value of options as compensation at the date of grant or issue
over the vesting period. For the quarter ended June 28, 2003 there was no pro
forma expense as the effect of option grants are recorded in the year of grant.
5
Note 6 - 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 (in thousands):
June 28, 2003 March 29, 2003
------------- --------------
Hogs $ 144,754 $ 142,675
Processed pork products 11,184 9,568
Packaging and supplies 2,941 2,822
Grain, feed additives and other 4,481 3,337
------------- -------------
$ 163,360 $ 158,402
============= =============
Note 7 - Segment information
The accounting policies for the Company's business segments are the same as
those described in the footnotes included in the Company's March 29, 2003
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, interest expense and
intersegment elimination (in thousands):
Pork Hog Corporate
Processing Production and Other Total
---------------- ---------------- ---------------- ----------------
As of and for the 13 weeks ended June 28, 2003-
Net sales $ 161,547 $ 110,856 $(101,271) $ 171,132
Intersegment sales (5,679) (95,592) - -
Operating income (loss) 5,002 1,875 (3,337) 3,540
Assets 192,330 505,437 87,487 785,254
Goodwill 25,020 50,978 - 75,998
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)
As of March 29, 2003-
Assets $ 186,164 $ 504,972 $ 87,926 $ 779,062
Goodwill 25,020 50,978 - 75,998
Note 8 - Amendments 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.
Effective September 27, 2002, the Company and its bank group amended the Credit
Agreement to increase the Company's revolving credit facility by $50.0 million
to $150.0 million in total availability subject to a borrowing base calculation,
among other things. The amendment also defers quarterly principal payments on
the Company's term debt for a one year period and amends certain financial
covenants. Obligations
6
under the Credit Agreement are secured by liens on substantially all of 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. These rates are based on the agent bank's base rate
(the greater of the agent bank's prime rate or the federal funds rate plus one
half of one percent) or LIBOR plus, in each case, an applicable margin,
currently ranging from 1.5% to 3.125%, determined by the Company's leverage
ratio. All borrowings under the revolving credit facility mature on August 21,
2004 and the term debt matures on August 21, 2005. Financing costs associated
with the amendment have been capitalized and are being amortized over the life
of the amended Credit Agreement.
Note 9 - Litigation
Environmental matters
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"). The U.S. Environmental
Protection Agency (the "E.P.A.") had intervened in this action and filed a
separate notice of violation against the Company under the Clean Air Act. This
settlement, in the form of a consent decree ("EPA Consent Decree"), resolved all
outstanding issues of ContiGroup and the Company with the E.P.A. 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 that ContiGroup incurred any liability
in this litigation, the Company assumed that liability pursuant to the terms of
the 1998 ContiGroup transaction. The EPA Consent Decree, built upon the 1999
consent decree with the State of Missouri referenced below, requires the Company
and ContiGroup to meet certain performance standards, such as a 50 percent
reduction in nitrogen concentration of the effluent applied to area fields over
a prescribed time period. Other key elements of the EPA 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 counsel
for the citizen plaintiffs 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. As referenced above, 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 ("Missouri Consent Decree") pursuant to which the
Company is obligated to invest $25 million on or before May 19, 2004, for
researching, installing and operating improved technology to control wastewater,
air and odor emissions from its Missouri farms. All such investments are subject
to the approval of an expert panel of independent university experts. To date
the Company has spent $12.1 million to satisfy the settlement. The Company
anticipates an extension of this expenditure deadline because both the State of
Missouri and the expert panel want further confirmation of the efficacy of any
chosen technology. In addition, pursuant to the Missouri Consent Decree 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 filed a lawsuit in June 2002
seeking penalties and injunctive relief for these violations. The Company has
filed an answer, believes it has good defenses, and intends to vigorously defend
the suit.
7
Two nuisance suits were filed against ContiGroup and the Company during the
second quarter of fiscal year 2003 in the Circuit Court of Jackson County,
Kansas City, Missouri. There are multiple plaintiffs in each suit, who claim to
live near swine farms owned by ContiGroup but under production contracts with
the Company. The primary allegation is that offensive odors from these farms
interfered with the plaintiffs' right to use and have quiet enjoyment of their
respective properties. The Company is obligated by contract to indemnify
ContiGroup for any liabilities arising from this litigation. The Company has
filed an answer, believes it has good defenses to these actions, and intends to
vigorously defend these suits.
Other legal matters
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.
8
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; domestic and international
transportation disruptions; 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 28, 2003 Compared to the 13 Weeks Ended June 29, 2002
The following table presents selected financial information for our
production and processing segments for the 13 weeks ended June 28, 2003 and June
29, 2002. 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 28, 2003 to the quarter ended June 29, 2002. Intersegment sales are
based on market prices.
For the 13 Weeks Ended Qtr to Qtr Change
------------------------------------------------------------------- ---------------------------
June 28, 2003 % June 29, 2002 % 2003 to 2002 %
------------------- ------------ ------------------ ------------ ------------- ------------
(In millions except percentages)
Net Sales
Production $ 110.9 64.8 % $ 90.1 60.4% $ 20.8 23.1 %
Processing 161.5 94.4 % 135.6 90.9% 25.9 19.1 %
Intersegment (101.3) (59.2)% (76.6) (51.3)% (24.7) (32.2)%
------------------- ------------ ------------------ ------------ ------------ ------------
Total Net Sales $ 171.1 100.0 % $ 149.1 100.0 % $ 22.0 14.8 %
=================== ============ ================== ============ ============= ============
Gross Profit
Production $ 1.8 24.0 % $ (3.5) (120.7)% $ 5.3 151.4 %
Processing 5.7 76.0 % 6.4 220.7 % (0.7) (10.9)%
------------------- ------------ ------------------ ------------ ------------- ------------
Total Gross Profit $ 7.5 100.0 % $ 2.9 100.0 % $ 4.6 158.6 %
=================== ============ ================== ============ ============= ============
Operating (Loss) Income
Production $ 1.8 51.4 % $ (3.4) 242.9 % $ 5.2 152.9 %
Processing 5.0 142.9 % 5.1 (364.3)% (0.1) (2.0)%
Corporate (3.3) (94.3)% (3.1) 221.4 % (0.2) (6.5)%
------------------- ------------ ------------------ ---------- ------------- -------------
Total Operating (Loss) Income $ 3.5 100.0 % $ (1.4) 100.0 % $ 4.9 350.0 %
=================== ============ ================== ========== ============== ============
9
Consolidated
Net Sales. Net sales increased by $22.0 million, or 14.8%, to $171.1 million in
the first quarter of fiscal year 2004 from $149.1 million in the comparable
period last year. The increase was attributed to an increase in prices of $16.1
million, combined with an increase in volume of $5.9 million. Overall, live hog
and wholesale pork prices increased compared to the prior period due to lower
supplies of pork industry wide and an overall decrease in supplies of all meat
proteins. See Segment Analysis below for comments on changes in sales by
business segment.
Gross Profit. Gross profit increased by $4.6 million, or 158.6%, to $7.5 million
in the first quarter of fiscal year 2004 from $2.9 million in the comparable
period last year. As a percentage of net sales, gross profit increased to 4.4%
from 1.9%. The current year gross profit increase is primarily the result of
higher live hog and wholesale pork prices as mentioned above, partially offset
by a 7.6% increase in costs to produce our products during the first quarter of
fiscal year 2004 compared to the same period last year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of net sales to 2.5% in the
first quarter of fiscal year 2004 from 3.3% in the comparable period last year.
In dollar terms, selling, general and administrative expenses decreased by $0.7
million, or 14.3%, to $4.2 million in the first quarter of fiscal year 2004 from
$4.9 million in the comparable period last year. The majority of the decrease is
attributable to a reduction in incentive accruals for employee bonus plans.
Operating Income (Loss). Operating income increased by $4.9 million, or 350.0%,
to $3.5 million in the first quarter of fiscal year 2004 from an operating loss
of $1.4 million in the comparable period last year. The increase is attributable
to the factors mentioned above.
Interest Expense, net. Interest expense, net, increased by $0.8 million, or
14.3%, to $6.4 million in the first quarter of fiscal year 2004 from $5.6
million in the comparable period last year. The majority of the increase was
caused 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 2004 and the comparable period last year.
Segment Analysis
Hog Production. Net sales increased by $20.8 million, or 23.1%, to $110.9
million in the first quarter of fiscal year 2004 from $90.1 million in the
comparable period last year. The increase primarily resulted from a 16.7%
increase in net market hog sales prices, combined with a 4.9% increase in volume
attributable to the effects of our Texas sow herd expansion and additional
contract production. Intersegment sales to our pork processing segment
transferred at market prices are eliminated in the Condensed Consolidated
Statements of Operations.
Gross profit increased by $5.3 million, or 151.4%, to $1.8 million in
the first quarter of fiscal year 2004 from a loss of $3.5 million in the
comparable period last year. The increase was the result of a higher volume of
hogs produced at higher net market hog sales prices mentioned above, partially
offset by a 10.5% increase in hog production costs on a per hundred weight
basis. The majority of the increase in hog production cost were due to higher
feed input costs compared to the same period last year.
Operating income increased by $5.2 million, or 152.9%, to $1.8 million
in the first quarter of fiscal year 2004 from an operating loss of $3.4 million
in the comparable period last year. The increase is attributed to the factors
mentioned above.
10
Pork Processing. Net sales increased $25.9 million, or 19.1%, to $161.5 million
in the first quarter of fiscal year 2004 from $135.6 million in the comparable
period last year. The increase resulted from a 14.3% increase in pork product
sales prices, combined with a 4.2% increase in volume processed compared to the
same period last year. The increase in volume was primarily attributable to
increased capacity utilization at the Clinton processing plant.
Gross profit decreased by $0.7 million, or 10.9%, to $5.7 million in
the first quarter of fiscal year 2004 from $6.4 million in the comparable period
last year. The decrease primarily resulted from lower margins on pork products
due to 21.2% higher market hog costs. Processing costs increased 3.6% during the
first quarter of fiscal year 2004 compared to the same period last year,
primarily the result of increased emphasis on higher cost value-added products.
Operating income decreased by $0.1 million, or 2.0%, to $5.0 million in
the first quarter of fiscal year 2004 from $5.1 million in the comparable period
last year. The decrease 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 operating activities was $0.7 million and $8.5
million for the first quarter ended in fiscal years 2004 and 2003, respectively.
The improvement in the first quarter of fiscal year 2004 compared to the same
period last year was primarily due to a decrease in net loss, the change in
deferred taxes and a decrease in working capital requirements partially offset
by an increase in non-cash gains on the sale of assets.
Net cash flow used in investing activities was $9.3 million and $5.0
million for the first quarter ended in fiscal years 2004 and 2003, respectively.
Net cash used in investing activities consisted of $13.5 million and $7.9
million for capital expenditures relating to property, plant and equipment and
breeding stock during the first quarter ended in fiscal years 2004 and 2003,
respectively. The Company received proceeds from disposal of fixed assets of
$4.2 million and $2.9 million during the first quarter ended in fiscal years
2004 and 2003, respectively, primarily representing culled breeding stock.
Net cash flow provided by financing activities was $10.0 million and
$12.7 million for the first quarter ended in fiscal years 2004 and 2003,
respectively. As of June 28, 2003, our total debt was $312.8 million.
Borrowings are provided under a Credit Agreement that provides for up
to $150 million of revolving credit (with actual credit limit determined monthly
by reference to a borrowing base formula), including up to $15 million of
letters of credit, and a term loan facility with $56.3 million outstanding at
June 28, 2003. Obligations under the Credit Agreement are secured by liens on
substantially all of 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. These rates are based on the agent
bank's base rate (the greater of the agent bank's prime rate or the federal
funds rate plus one half of one percent) or LIBOR plus, in each case, an
applicable margin, currently ranging from 1.5% to 3.125%, determined by our
leverage ratio. All borrowings under the revolving credit facility mature on
August 21, 2004, and all borrowings under the term debt mature on August 21,
2005. Quarterly term loan payments have been deferred until September 30, 2003,
as a result of our September 2002 Amendment to the Credit Agreement.
11
Total indebtedness at June 28, 2003 was $312.8 million, as compared to
$285.5 million at June 29, 2002. At June 28, 2003, we had $77.6 million
outstanding under our revolving credit facility, $10.5 million in letters of
credit and $61.9 million available for borrowing under our revolving credit
facility.
In fiscal 2004, we expect to spend approximately $33 million on net capital
expenditures, of which we expect to spend:
o Approximately $13 million in upgrades and improvements in our
processing operations;
o Approximately $9 million in upgrades and improvements in our
production operations; and
o Approximately $11 million in net breedstock purchases.
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 material acquisitions or
expand our operations, we may 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.
The following table represents a summary of our contractual cash
obligations as of June 28, 2003:
Payments due by period
Contractual Cash Obligations Total Current 1-3 years 4-5 years Thereafter
- ---------------------------- ----- ------- --------- --------- ----------
(in thousands)
Long Term Debt $ 308,841 $ 18,750 $ 115,091 $ - $175,000
Capital Lease Obligations 3,965 781 1,774 1,360 50
Operating Leases 26,873 6,060 9,950 5,812 5,051
Unconditional Purchase Obligations 10,639 10,639 - - -
Other Long Term Obligations 1,000 1,000 - - -
------ ------ ---------- -------- --------
Total Contractual Cash Obligations $ 351,318 $ 37,230 $ 126,815 $ 7,172 $180,101
========== ========= ========== ======== =========
Amounts not included in above table
Most of our hog production is raised in company-owned facilities. Some
of the production, however, is 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 twelve years. Payments under these agreements are included in cost of
goods sold. These payments represented approximately 11 percent of our hog
production segment's cost of goods sold for the quarter ended June 28, 2003. All
of these contracts are cancelable by us if the producer fails to perform to an
acceptable level.
At our North Carolina pork processing facility, we have contracts with
producers to provide us with market hogs for the amount we don't produce at our
hog production facilities in order to meet our processing needs. These contracts
vary in length but are all based on a market price and grade and yield formula.
Over the next 5 years we are contracted to purchase approximately 1,600,000
market hogs under these contracts.
12
Under the Missouri Consent Decree with the Attorney General we are
required to spend $12.9 million on additional investments in research and
development on or before May 19, 2004. We anticipate an extension of this
expenditure deadline because both the State of Missouri and the expert panel
want further confirmation of the efficacy of any chosen technology.
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
actual 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 the estimates are reasonable based on current information.
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
qualifying for 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.
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 quarter ended
June 28, 2003, we recognized losses under SFAS 133 of $2.6 million in net sales
for losses related to lean hog futures and gains of $1.5 million in costs of
goods sold relating to the hedging of feed components. As of June 28, 2003, we
had deposits with brokers for outstanding futures contracts of $0.7 million,
included in prepaid expenses and other current assets. 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 28, 2003, the potential change in fair value
of exchange-traded contracts, assuming a 10% change in the underlying commodity
price, was $4.3 million.
13
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, a 1% change in interest rates would
have an approximately $1.3 million impact on interest expense. 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 the agent
bank's applicable margin (currently 3.125% at June 28, 2003). The swap is
accounted for as a cash flow hedge under SFAS 133. During the first quarter
ended June 28, 2003, we recognized a $0.1 million gain, net of tax, into
Accumulated Other Comprehensive Loss for the market value of the swap.
The 9 1/4% Notes had a fair value of approximately $167.1 million as of
June 28, 2003 based on inter-dealer prices, as compared to the book value of
$175.0 million as of June 28, 2003.
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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Within 90 days prior to the filing date of this report (the "Evaluation
Date"), the Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
chief executive officer and its chief financial officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange
Act of 1934 (the "Exchange Act"). Based upon that evaluation, the chief
executive officer and chief financial officer concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Exchange Act) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent
to the date of their most recent evaluation nor were there any significant
deficiencies or material weaknesses in the Company's internal controls.
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"). The U.S. Environmental Protection
Agency (the "E.P.A.") had intervened in this action and filed a separate notice
of violation against us under the Clean Air Act. This settlement, in the form of
a consent decree ("EPA Consent Decree"), resolved all outstanding issues of
ContiGroup and us with the E.P.A. 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 incurred any liability in this litigation, we assumed that liability
pursuant to the terms of our 1998 ContiGroup transaction. The EPA Consent
Decree, built upon the 1999 consent decree with the State of Missouri referenced
below, requires
14
us and ContiGroup to meet certain performance standards, such as a 50 percent
reduction in nitrogen concentration of the effluent applied to area fields over
a prescribed time period. Other key elements of the EPA 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 counsel
for the citizen plaintiffs 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. As referenced above, 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 ("Missouri Consent Decree") pursuant to which we are obligated to
invest $25 million on or before May 19, 2004, for researching, installing and
operating improved technology to control wastewater, air and odor emissions from
our Missouri farms. All such investments are subject to the approval of an
expert panel of independent university experts. To date, we have spent $12.1
million to satisfy the settlement. We anticipate an extension of this
expenditure deadline because both the State of Missouri and the expert panel
want further confirmation of the efficacy of any chosen technology. In addition,
pursuant to the Missouri Consent Decree 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 filed a lawsuit in June 2002 seeking penalties
and injunctive relief for these violations. We have filed an answer, believe we
have good defenses, and intend to vigorously defend this suit.
Two nuisance suits were filed against ContiGroup and us during the
third quarter of fiscal year 2003 in the Circuit Court of Jackson County, Kansas
City, Missouri. There are multiple plaintiffs in each suit, who claim to live
near swine farms owned by ContiGroup but under production contracts with us. The
primary allegation is that offensive odors from these farms interfered with the
plaintiffs' right to use and have quiet enjoyment of their respective
properties. We are obligated by contract to indemnify ContiGroup for any
liabilities arising from this litigation. We have filed an answer, believe we
have good defenses to these actions, and intend to vigorously defend these
suits.
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
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K.
1. A Current Report on Form 8-K was filed with the SEC on June
4, 2003, to report, under Item 5, our fiscal year 2003
earnings. The earnings release, including our Condensed
Consolidated Statements of Operations for the 13 weeks ended
March 29, 2003, and March 30, 2002, and our fiscal years
ended March 29, 2003, and March 30, 2002, was filed as
Exhibit 99.1 to the Current Report on Form 8-K.
16
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 12, 2003 /s/ Stephen A. Lightstone
- --------------- -------------------------------------------
Date Stephen A. Lightstone
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, John M. Meyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PSF Group
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: August 12, 2003
/s/ John M. Meyer
------------------------------
John M. Meyer
Chief Executive Officer
(Principal Executive Officer)
18
I, Stephen A. Lightstone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PSF Group
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: August 12, 2003
/s/ Stephen A. Lightstone
----------------------------------
Stephen A. Lightstone
Chief Financial Officer
(Principal Financial Officer)