UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
____________________
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended September
27,
2008
OR
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from
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to
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Commission File number 1-9273
PILGRIM’S PRIDE CORPORATION
(Exact name of registrant as specified
in its
charter)
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Delaware
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75-1285071
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(State or other jurisdiction
of
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(I.R.S. Employer Identification
No.)
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incorporation or
organization)
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4845 US Hwy 271 North
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Pittsburg, Texas
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75686-0093
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(Address of principal executive
offices)
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(Zip
code)
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Registrant’s telephone number, including area
code: (903)
434-1000
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Securities registered pursuant to
Section 12(b) of the Act: None
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Securities registered pursuant to
Section 12(g) of the Act: Common Stock, Par Value
$0.01
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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. Yes ¨ No x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes ¨ No x
Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days. Yes x No ¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12B-2 of the Exchange
Act.
Large
Accelerated Filer x Accelerated
Filer o
Non-accelerated
Filer o (Do not check if a smaller reporting
company) Smaller reporting company o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x
The aggregate market value of the
Registrant’s Common Stock, $0.01 par value, held by
non-affiliates of the Registrant as of March 29, 2008, was $829,596,309. For purposes of the foregoing
calculation only, all directors, executive officers and 5% beneficial owners have been deemed
affiliates.
Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Section
12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities
under a plan confirmed by a court. Yes x No ¨
Number of shares of the
Registrant’s Common Stock outstanding as of
December 11,
2008, was 74,055,733.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the Registrant’s proxy statement for the 2009 annual meeting of stockholders are
incorporated by reference into Part III.
PILGRIM’S PRIDE CORPORATION
FORM 10-K
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PART I
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Page
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Business
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4
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Risk
Factors
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22
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Unresolved Staff
Comments
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34
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Properties
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34
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Legal
Proceedings
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35
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Submission of Matters to a Vote of
Security Holders
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38
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PART II
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Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
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39
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Selected Financial
Data
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44
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Management’s Discussion and Analysis of
Financial Condition and Results
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48
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of
Operations
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Quantitative and Qualitative
Disclosures about Market Risk
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75
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Financial Statements and
Supplementary Data (see Index to Financial Statements
and
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77
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Schedules
below)
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Changes in and Disagreements with
Accountants on Accounting and Financial
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77
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Disclosure
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Controls and
Procedures
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78
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Other
Information
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82
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PART III
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Directors and Executive Officers and Corporate
Governance
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83
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Executive
Compensation
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83
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Security Ownership of Certain
Beneficial Owners and Management and Related
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83
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Stockholder
Matters
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Certain Relationships and Related
Transactions,
and Director
Independence
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83
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Principal Accounting Fees and
Services
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84
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PART IV
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Exhibits and Financial Statement
Schedules
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85
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93
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INDEX TO FINANCIAL STATEMENTS AND
SCHEDULES
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96
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Consolidated Balance
Sheets as of September 27, 2008 and September 29, 2007
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98
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Consolidated
Statements of Operations for each of the three years
ended
September 27, 2008
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99
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Consolidated
Statements of Stockholders’ Equity for each
of the three years
ended
September 27, 2008
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100
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Consolidated
Statements of Cash Flows for each of the three years
ended
September 27, 2008
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101
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102
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Schedule
II—Valuation and Qualifying Accounts
for each of the three
years ended
September 27, 2008
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153
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PART
I
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Item
1.
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Pilgrim’s
Pride Corporation (“Pilgrim’s Pride” or the “Company”) operates on the basis of
a 52/53-week fiscal year that ends on the Saturday closest to September 30. The
reader should assume any reference we make to a particular year (for example,
2008) in this report applies to our fiscal year and not the calendar
year.
Chapter
11 Bankruptcy Filings
On
December 1, 2008 (the "Petition Date"), the Company and certain of its
subsidiaries (collectively, the “Debtor Subsidiaries,” and together with the
Company, the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the Northern District of Texas, Fort Worth
Division (the "Bankruptcy Court"). The cases are being jointly administered
under Case No. 08-45664. The Company’s operations in Mexico and certain
operations in the United States were not included in the filing (the “Non-filing
Subsidiaries”) and will continue to operate outside of the Chapter 11
process.
Effective December
1, 2008, the New York Stock
Exchange delisted our common stock as a result of the Company's filing of
its Chapter 11 petitions. Our common stock is now quoted on the Pink Sheets Electronic
Quotation Service under the ticker symbol "PGPDQ.PK."
The
filing of the Chapter 11 petitions constituted an event of default under
certain of our debt obligations, and those debt obligations became automatically
and immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law. As a result, the accompanying Consolidated Balance
Sheet as of September 27, 2008 includes a reclassification of $1,872.1 million
to reflect as current certain long-term debt under its credit facilities that,
absent the stay, would have become automatically and immediately due and
payable.
Chapter
11 Process
The
Debtors are currently operating as "debtors in possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In
general, as debtors in possession, we are authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the prior approval of the
Bankruptcy Court.
On
December 2, 2008, the Bankruptcy
Court granted interim approval authorizing the Company and the
Debtor Subsidiaries organized in the
United States (the "US Subsidiaries") to enter into
a Post-Petition Credit Agreement (the
"DIP Credit Agreement") among the Company, as borrower, the US Subsidiaries, as
guarantors, Bank of
Montreal, as agent, and the lenders party thereto. On December 2, 2008, the
Company, the US Subsidiaries and the other parties entered into the DIP Credit
Agreement, subject to final approval of the Bankruptcy
Court.
The DIP Credit Agreement provides for an aggregate
commitment of up to $450 million, which permits borrowings on a revolving basis.
The Company received interim approval to access $365 million of the commitment pending
issuance of the final order by the Bankruptcy Court. Outstanding borrowings
under the DIP Credit Agreement will bear interest at a per annum rate equal to
8.0% plus the greatest of (i) the prime rate as established by the DIP agent
from time to time, (ii) the average federal funds rate plus 0.5%, or
(iii) the LIBOR rate plus 1.0%, payable monthly. The loans under the DIP Credit Agreement
were used to repurchase all receivables sold under the Company's Amended and Restated Receivables Purchase Agreement
dated September
26, 2008, as amended
(“RPA”) and may be used to fund the working capital
requirements of the Company and its subsidiaries according to a budget as
approved by the required lenders under the DIP Credit Agreement. For additional information on the
RPA, see Item 7. "Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital
Resources."
Actual borrowings by the Company under
the DIP Credit Agreement are subject to a borrowing base, which is a formula
based on certain eligible inventory and eligible receivables. The borrowing base
formula is reduced by pre-petition obligations under the Fourth
Amended and Restated Secured Credit Agreement dated as of February 8, 2007,
among the Company and certain of its subsidiaries, Bank of Montreal, as
administrative agent, and the lenders parties thereto, as amended, administrative and professional expenses,
and the amount owed by the Company and the Debtor Subsidiaries to any person on
account of the purchase price of agricultural products or services (including
poultry and livestock) if that person is entitled to any grower's or producer's lien or other
security arrangement. The borrowing base is also limited to 2.22 times the
formula amount of total eligible receivables. As of December 6, 2008, the applicable borrowing base
was $324.8 million and the amount available for borrowings under the DIP Credit
Agreement was $210.9 million.
The principal amount of outstanding
loans under the DIP Credit Agreement, together with accrued and unpaid interest
thereon, are payable in full at maturity on December 1, 2009, subject to
extension for an additional
six months with the approval of all lenders thereunder. All obligations under
the DIP Credit Agreement are unconditionally guaranteed by the US Subsidiaries
and are secured by a first priority priming lien on substantially all
of the assets of the Company and the US
Subsidiaries, subject to specified permitted liens in the DIP Credit
Agreement.
The DIP Credit Agreement allows the Company to provide advances to the Non-filing Subsidiaries of up to approximately $25 million at
any time
outstanding. Management believes that all of the Non-filing
Subsidiaries, including
the Company’s Mexican subsidiaries, will be able to operate within this
limitation.
For additional information on the DIP
Credit Agreement, see Item 7. "Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital
Resources."
The Bankruptcy Court has approved
payment of certain of the Debtors’ pre-petition obligations, including,
among other things, employee wages, salaries and benefits, and the Bankruptcy
Court has approved the Company's payment of vendors and other providers in the
ordinary course for goods and services received from and after the Petition Date
and other business-related payments necessary to maintain the operation of our businesses. The
Debtors have retained, subject to Bankruptcy Court approval, legal and
financial professionals to advise the Debtors on the bankruptcy proceedings and
certain other "ordinary course" professionals. From time to time, the
Debtors may seek Bankruptcy Court approval
for the retention of additional professionals.
Shortly
after the Petition Date, the Debtors began notifying all known current or
potential creditors of the Chapter 11 filing. Subject to certain exceptions
under the Bankruptcy Code, the Debtors’ Chapter 11 filing automatically
enjoined, or stayed, the continuation of any judicial or administrative
proceedings or other actions against the Debtors or their property to recover
on, collect or secure a claim arising prior to the Petition Date. Thus, for
example, most creditor actions to obtain possession of property from the
Debtors, or to create, perfect or enforce any lien against the property of the
Debtors, or to collect on monies owed or otherwise exercise rights or remedies
with respect to a pre-petition claim are enjoined unless and until the
Bankruptcy Court lifts the automatic stay. Vendors are being paid for goods
furnished and services provided after the Petition Date in the ordinary course
of business.
As
required by the Bankruptcy Code, the United States Trustee for the Northern
District of Texas appointed an official committee of unsecured creditors (the
"Creditors’ Committee"). The Creditors’ Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
with respect to the Debtors. There can be no assurance that the Creditors’
Committee will support the Debtors’ positions on matters to be presented to the
Bankruptcy Court in the future or on any plan of reorganization, once proposed.
Disagreements between the Debtors and the Creditors’ Committee could protract
the Chapter 11 proceedings, negatively impact the Debtors’ ability to operate
and delay the Debtors’ emergence from the Chapter 11 proceedings.
Under
Section 365 and other relevant sections of the Bankruptcy Code, we may assume,
assume and assign, or reject certain executory contracts and unexpired leases,
including, without limitation, leases of real property and equipment, subject to
the approval of the Bankruptcy Court and certain other conditions. Any
description of an executory contract or unexpired lease in this report,
including where applicable our express termination rights or a quantification of
our obligations, must be read in conjunction with, and is qualified by, any
overriding rejection rights we have under Section 365 of the Bankruptcy
Code.
In order
to successfully exit Chapter 11, the Debtors will need to propose, and obtain
confirmation by the Bankruptcy Court of a plan of reorganization that satisfies
the requirements of the Bankruptcy Code. A plan of reorganization would, among
other things, resolve the Debtors’ pre-petition obligations, set forth the
revised capital structure of the newly reorganized entity and provide for
corporate governance subsequent to exit from bankruptcy.
The
Debtors have the exclusive right for 120 days after the Petition Date to file a
plan of reorganization and, if we do so, 60 additional days to obtain necessary
acceptances of our plan. We will likely file one or more motions to request
extensions of these time periods. If the Debtors’ exclusivity period lapsed, any
party in interest would be able to file a plan of reorganization for any of the
Debtors. In addition to being voted on by holders of impaired claims and equity
interests, a plan of reorganization must satisfy certain requirements of the
Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in
order to become effective.
The
timing of filing a plan of reorganization by us will depend on the timing and
outcome of numerous other ongoing matters in the Chapter 11 proceedings. There
can be no assurance at this time that a plan of reorganization will be confirmed
by the Bankruptcy Court or that any such plan will be implemented
successfully.
We have
incurred and will continue to incur significant costs associated with our
reorganization. The amount of these costs, which are being expensed as incurred
commencing in November 2008, are expected to significantly affect our results of
operations.
Under the
priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, pre-petition liabilities and post-petition liabilities must be
satisfied in full before stockholders are entitled to receive any distribution
or retain any property under a plan of reorganization. The ultimate recovery to
creditors and/or stockholders, if any, will not be determined until confirmation
of a plan or plans of reorganization. No assurance can be given as to what
values, if any, will be ascribed in the Chapter 11 cases to each of these
constituencies or what types or amounts of distributions, if any, they would
receive. A plan of reorganization could result in holders of our liabilities
and/or securities, including our common stock, receiving no distribution on
account of their interests and cancellation of their holdings. Because of such
possibilities, the value of our liabilities and securities, including our common
stock, is highly speculative. Appropriate caution should be exercised with
respect to existing and future investments in any of the liabilities and/or
securities of the Debtors. At this time there is no assurance we will be able to
restructure as a going concern or successfully propose or implement a plan of
reorganization.
Going
Concern Matters
The
accompanying Consolidated Financial Statements have been prepared assuming that
the Company will continue as a going concern. However, there is substantial
doubt about the Company’s ability to continue as a going concern based on the
factors previously discussed. The Consolidated Financial Statements do not
include any adjustments related to the recoverability and classification of
recorded assets or the amounts and classification of liabilities or any other
adjustments that might be necessary should the Company be unable to continue as
a going concern. The Company’s ability to continue as a going concern is
dependent upon the ability of the Company to return to historic levels of
profitability and, in the near term, restructure its obligations in a manner
that allows it to obtain confirmation of a plan of reorganization by the
Bankruptcy Court.
Management
is addressing the Company’s ability to return to profitability by conducting
profitability reviews at certain facilities in an effort to reduce
inefficiencies and manufacturing costs. The Company reduced production capacity
in the near term by closing two production complexes and consolidating
operations at a third production complex into its other facilities. This action
resulted in a headcount reduction of approximately 2,300 production employees.
Subsequent to September 27, 2008, the Company also reduced headcount by 335
non-production employees.
On
November 7, 2008, the Board of
Directors appointed a Chief Restructuring Officer (“CRO”) for the Company. The appointment of a CRO was a
requirement included in the waivers received from the Company’s lenders on October 27, 2008.
The CRO will assist the Company with
cost reduction initiatives, restructuring plans development and long-term
liquidity improvement. The CRO reports to the Board of Directors of the
Company.
In order
to emerge from bankruptcy, the Company will need to obtain alternative financing
to replace the DIP Credit Agreement and to satisfy the secured claims of its
pre-bankruptcy creditors.
General
Development of Business
Overview
The
Company, which was incorporated in Texas in 1968 and re-incorporated in Delaware
in 1986, is the successor to a partnership founded in 1946 that operated a
retail feed store. Over the years, the Company grew as the result of expanding
markets, increased market penetration and various acquisitions of farming
operations and poultry processors. This included the significant acquisitions in
2004 and 2007 discussed below. Pilgrim’s Pride is one of the largest chicken
companies in the United States (“US”), Mexico and Puerto Rico. The Company’s prepared chicken products meet the needs of some of the
largest customers in the food service industry across the US. Under the well-established
Pilgrim's Pride brand name,
our fresh chicken retail line is sold in the southeastern, central, southwestern and western regions of the US, throughout Puerto Rico, and in the northern and central regions of Mexico. Additionally, the Company exports commodity chicken products to 80
countries. As a vertically integrated company, we
control every phase of the production of our products. We operate feed mills, hatcheries, processing
plants and distribution centers in 14 US states, Puerto Rico and Mexico. We believe this vertical integration has made us
one of the highest-quality producers of chicken in North America.
We have
consistently applied a long-term business strategy of focusing our growth
efforts on the historically higher-value prepared chicken products and have
become a recognized industry leader in this market. Accordingly, we focused our
sales efforts on the foodservice industry, principally chain restaurants and
food processors. More recently, we also focused our sales efforts on retailers
seeking value-added products. In 2008, we sold 8.4 billion pounds of dressed
chicken and generated net sales of $8.5 billion. In 2008, our US operations,
including Puerto Rico, accounted for 93.2% of our net sales. Our Mexico
operations generated the remaining 6.8% of our net sales.
Recent
Business Acquisition Activities
In
December 2006, we acquired a majority of the outstanding common stock of Gold
Kist Inc. (“Gold Kist”) through a tender offer. We subsequently acquired all
remaining Gold Kist shares and, in January 2007, Gold Kist became our wholly
owned subsidiary. Gold Kist operated a fully-integrated chicken production
business that included live production, processing, marketing and distribution.
This acquisition positioned us as the largest chicken company in the US, and
that position provided us with opportunities to expand our geographic reach and
customer base and further pursue value-added and prepared chicken
opportunities.
In
November 2003, we completed the purchase of all the outstanding stock of the
corporations represented as the ConAgra Foods, Inc. chicken division (“ConAgra
Chicken”). The acquisition provided us with additional lines of specialty
prepared chicken products, well-known brands, well-established distributor
relationships, and processing facilities located in the southeastern region of
the US. The acquisition also included the largest distributor of chicken
products in Puerto Rico.
Financial
Information about Segments
We
operate in two reportable business segments as (i) a producer and seller of
chicken products and (ii) a seller of other products. See a discussion of our
business segments in Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Narrative
Description of Business
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Products and
Markets
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Our
chicken products consist primarily of:
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(1)
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Fresh
chicken products, which are refrigerated (non-frozen) whole or cut-up
chickens sold to the foodservice industry either pre-marinated or
non-marinated. Fresh chicken also includes prepackaged case-ready chicken,
which includes various combinations of freshly refrigerated, whole
chickens and chicken parts in trays, bags or other consumer packs labeled
and priced ready for the retail grocer's fresh meat
counter.
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(2)
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Prepared
chicken products, which are products such as portion-controlled breast
fillets, tenderloins and strips, delicatessen products, salads, formed
nuggets and patties and bone-in chicken parts. These products are sold
either refrigerated or frozen and may be fully cooked, partially cooked or
raw. In addition, these products are breaded or non-breaded and either
pre-marinated or non-marinated.
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(3)
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Export
and other chicken products, which are primarily parts and whole chicken,
either refrigerated or frozen for US export or domestic use, and prepared
chicken products for US
export.
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Our
chicken products are sold primarily to:
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(1)
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Retail
customers, which are customers such as grocery store chains, wholesale
clubs and other retail distributors. We sell to our retail customers
branded, pre-packaged, cut-up and whole poultry, and fresh refrigerated or
frozen whole chicken and chicken parts in trays, bags or other consumer
packs.
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(2)
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Foodservice
customers, which are customers such as chain restaurants, food processors,
foodservice distributors and certain other institutions. We sell products
to our foodservice customers ranging from portion-controlled refrigerated
chicken parts to fully-cooked and frozen, breaded or non-breaded chicken
parts or formed products.
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(3)
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Export
and other product customers, who purchase chicken products for export to
Eastern Europe, including Russia; the Far East, including China; Mexico;
and other world markets. Our export and other chicken products, with the
exception of our exported prepared chicken products, consist of whole
chickens and chicken parts sold primarily in bulk, non-branded form,
either refrigerated to distributors in the US or frozen for distribution
to export markets.
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Our other
products consist of:
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(1)
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Other
types of meat along with various other staples purchased and sold by our
distribution centers as a convenience to our chicken customers who
purchase through the distribution
centers.
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(2)
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The
production and sale of table eggs, commercial feeds and related items,
live hogs and proteins.
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The
following table sets forth, for the periods beginning with 2004, net sales
attributable to each of our primary product lines and markets served with those
products. We based the table on our internal sales reports and their
classification of product types and customers.
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2008
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2007(a)
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2006
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2005
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2004(a)
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(52
weeks)
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(52
weeks)
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(52
weeks)
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(52
weeks)
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(53
weeks)
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US
chicken:
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(In
thousands)
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Prepared
chicken:
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Foodservice
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$ | 2,033,489 | $ | 1,897,643 | $ | 1,567,297 | $ | 1,622,901 | $ | 1,647,904 | ||||||||||
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Retail
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518,576 | 511,470 | 308,486 | 283,392 | 213,775 | |||||||||||||||
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Total
prepared chicken
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2,552,065 | 2,409,113 | 1,875,783 | 1,906,293 | 1,861,679 | |||||||||||||||
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Fresh
chicken:
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Foodservice
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2,550,339 | 2,280,057 | 1,388,451 | 1,509,189 | 1,328,883 | |||||||||||||||
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Retail
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1,041,446 | 975,659 | 496,560 | 612,081 | 653,798 | |||||||||||||||
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Total
fresh chicken
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3,591,785 | 3,255,716 | 1,885,011 | 2,121,270 | 1,982,681 | |||||||||||||||
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Export
and other:
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Export:
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Prepared
chicken
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94,795 | 83,317 | 64,338 | 59,473 | 34,735 | |||||||||||||||
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Fresh
chicken
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818,239 | 559,429 | 257,823 | 303,150 | 212,611 | |||||||||||||||
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Total
export(c)
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913,034 | 642,746 | 322,161 | 362,623 | 247,346 | |||||||||||||||
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Other
chicken by-products
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20,163 | 20,779 | 15,448 | 21,083 |
(b)
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|||||||||||||||
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Total
export and other
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933,197 | 663,525 | 337,609 | 383,706 | 247,346 | |||||||||||||||
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Total
US chicken
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7,077,047 | 6,328,354 | 4,098,403 | 4,411,269 | 4,091,706 | |||||||||||||||
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Mexico
chicken
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543,583 | 488,466 | 418,745 | 403,353 | 362,442 | |||||||||||||||
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Total
chicken
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7,620,630 | 6,816,820 | 4,517,148 | 4,814,622 | 4,454,148 | |||||||||||||||
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Other
products:
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||||||||||||||||||||
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US
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869,850 | 661,115 | 618,575 | 626,056 | 600,091 | |||||||||||||||
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Mexico
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34,632 | 20,677 | 17,006 | 20,759 | 23,232 | |||||||||||||||
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Total
other products
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904,482 | 681,792 | 635,581 | 646,815 | 623,323 | |||||||||||||||
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Total
net sales
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$ | 8,525,112 | $ | 7,498,612 | $ | 5,152,729 | $ | 5,461,437 | $ | 5,077,471 | ||||||||||
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Total
prepared chicken
|
$ | 2,646,860 | $ | 2,492,430 | $ | 1,940,121 | $ | 1,965,766 | $ | 1,896,414 | ||||||||||
|
(a)
|
The
Gold Kist acquisition on December 27, 2006 and the ConAgra Chicken
acquisition on November 23, 2003 have been accounted for as
purchases.
|
|
(b)
|
The
Export and other
category historically included the sales of certain chicken by-products
sold in international markets as well as the export of chicken products.
Prior to 2005, by-product sales were not specifically identifiable within
the Export and
other category. Accordingly, a detail breakout is not available
prior to such time; however, the Company believes that the relative split
between these categories as shown in 2005 would not be dissimilar in
2004.
|
|
(c)
|
Export
items include certain chicken parts that have greater value in the
overseas markets than in the
US.
|
The
following table sets forth, beginning with 2004, the percentage of net US
chicken sales attributable to each of our primary product lines and the markets
serviced with those products. We based the table and related discussion on our
internal sales reports and their classification of product types and
customers.
|
2008
|
2007(a)
|
2006
|
2005
|
2004(a)
|
||||||||||||||||
|
Prepared
chicken:
|
||||||||||||||||||||
|
Foodservice
|
28.8 | % | 30.1 | % | 38.2 | % | 36.8 | % | 40.3 | % | ||||||||||
|
Retail
|
7.3 | % | 8.1 | % | 7.5 | % | 6.4 | % | 5.2 | % | ||||||||||
|
Total
prepared chicken
|
36.1 | % | 38.2 | % | 45.7 | % | 43.2 | % | 45.5 | % | ||||||||||
|
Fresh
chicken:
|
||||||||||||||||||||
|
Foodservice
|
36.0 | % | 36.0 | % | 33.9 | % | 34.2 | % | 32.5 | % | ||||||||||
|
Retail
|
14.7 | % | 15.4 | % | 12.1 | % | 13.9 | % | 16.0 | % | ||||||||||
|
Total
fresh chicken
|
50.7 | % | 51.4 | % | 46.0 | % | 48.1 | % | 48.5 | % | ||||||||||
|
Export
and other:
|
||||||||||||||||||||
|
Export:
|
||||||||||||||||||||
|
Prepared
chicken
|
1.3 | % | 1.3 | % | 1.6 | % | 1.3 | % | 0.8 | % | ||||||||||
|
Fresh
chicken
|
11.6 | % | 8.8 | % | 6.3 | % | 6.9 | % | 5.2 | % | ||||||||||
|
Total
export(c)
|
12.9 | % | 10.1 | % | 7.9 | % | 8.2 | % | 6.0 | % | ||||||||||
|
Other
chicken by-products
|
0.3 | % | 0.3 | % | 0.4 | % | 0.5 | % |
(b)
|
|||||||||||
|
Total
export and other
|
13.2 | % | 10.4 | % | 8.3 | % | 8.7 | % | 6.0 | % | ||||||||||
|
Total
US chicken
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
|
Total
prepared chicken as a percent of US chicken
|
37.4 | % | 39.5 | % | 47.3 | % | 44.5 | % | 46.3 | % | ||||||||||
|
(a)
|
The
Gold Kist acquisition on December 27, 2006 and the ConAgra Chicken
acquisition on November 23, 2003 have been accounted for as
purchases.
|
|
(b)
|
The
Export and other
category historically included the sales of certain chicken by-products
sold in international markets as well as the export of chicken products.
Prior to 2005, by-product sales were not specifically identifiable within
the Export and
other category. Accordingly, a detail breakout is not available
prior to such time; however, the Company believes that the relative split
between these categories as shown in 2005 would not be dissimilar in
2004.
|
|
(c)
|
Export
items include certain chicken parts that have greater value in the
overseas markets than in the US.
|
UNITED
STATES
Product
Types
Fresh Chicken
Overview. Our fresh chicken business is an important component
of our sales and accounted for $3,591.8 million, or 50.7%, of our total US
chicken sales for 2008. In addition to maintaining sales of mature, traditional
fresh chicken products, our strategy has been to shift the mix of our US fresh
chicken products by continuing to increase sales of faster-growing products,
such as marinated whole chicken and chicken parts, and to continually shift
portions of this product mix into the higher-value prepared chicken
category.
Most
fresh chicken products are sold to established customers, based upon certain
weekly or monthly market prices reported by the US Department of Agriculture
(“USDA”) and other public price reporting services, plus a markup, which is
dependent upon the customer’s location, volume, product specifications and other
factors. We believe our practices with respect to sales of fresh chicken are
generally consistent with those of our competitors. The majority of these
products are sold pursuant to agreements with varying terms that either set a
fixed price for the products or set a price according to formulas based on an
underlying commodity market, subject in many cases to minimum and maximum
prices.
Prepared Chicken
Overview. During 2008, $2,522.1 million of our US chicken
sales were in prepared chicken products to foodservice customers and retail
distributors, as compared to $1,861.7 million in 2004. These numbers reflect the
impact of our historical strategic focus for growth in the prepared chicken
markets and our acquisition of Gold Kist. The market for prepared chicken
products has experienced, and we believe will continue to experience, greater
growth and higher average sales prices than fresh chicken products. Also,
the production and sale in the US of prepared chicken products reduce the impact
of the costs of feed ingredients on our profitability. Feed ingredient costs are
the single largest component of our total US cost of sales, representing
approximately 38.1% of our total US cost of sales for 2008. The production of
feed ingredients is positively or negatively affected primarily by the global
level of supply inventories, demand for feed ingredients, the agricultural
policies of the US and foreign governments and weather patterns throughout the
world. As further processing is performed, feed ingredient costs become a
decreasing percentage of a product’s total production cost, thereby reducing
their impact on our profitability. Products sold in this form enable us to
charge a premium, reduce the impact of feed ingredient costs on our
profitability and improve and stabilize our profit margins.
We
establish prices for our prepared chicken products based primarily upon
perceived value to the customer, production costs and prices of competing
products. The majority of these products are sold pursuant to agreements with
varying terms that either set a fixed price for the products or set a price
according to formulas based on an underlying commodity market, subject in many
cases to minimum and maximum prices. Many times, these prices are dependent upon
the customer's location, volume, product specifications and other
factors.
Export and Other
Chicken Products Overview. Our export and other products
consist of whole chickens and chicken parts sold primarily in bulk, non-branded
form, either refrigerated to distributors in the US or frozen for distribution
to export markets, and branded and non-branded prepared chicken products for
distribution to export markets. In 2008, approximately $933.2 million, or
13.2%, of our total US chicken sales were attributable to US chicken export and
other products. These exports and other products, other than the prepared
chicken products, have historically been characterized by lower prices and
greater price volatility than our more value-added product lines.
Markets
for Chicken Products
Foodservice. The
foodservice market principally consists of chain restaurants, food processors,
broad-line distributors and certain other institutions located throughout the
continental US. We supply chicken products ranging from portion-controlled
refrigerated chicken parts to fully-cooked and frozen, breaded or non-breaded
chicken parts or formed products.
We
believe the Company is positioned to be the primary or secondary supplier to
national and international chain restaurants who require multiple suppliers of
chicken products. Additionally, we believe we are well suited to be the sole
supplier for many regional chain restaurants. Regional chain restaurants often
offer better margin opportunities and a growing base of business.
We
believe we have operational strengths in terms of full-line product
capabilities, high-volume production capacities, research and development
expertise and extensive distribution and marketing experience relative to
smaller and non-vertically integrated producers. While the overall chicken
market has grown consistently, we believe the majority of this growth in recent
years has been in the foodservice market. According to the National Chicken
Council, from 2003 through 2007, sales of chicken products to the foodservice
market grew at a compounded annual growth rate of approximately 7.5%, versus
6.6% growth for the chicken industry overall. Foodservice growth, outside of any
temporary effects resulting from the current recessionary impacts being
experienced in the US, is anticipated to continue as food-away-from-home
expenditures continue to outpace overall industry rates. According to Technomic
Information Services, food-away-from-home expenditures grew at a compounded
annual growth rate of approximately 4.9% from 2003 through 2007 and are
projected to grow at a 4.8% compounded annual growth rate from 2008 through
2012. Due to internal growth and the impact of both the Gold Kist and ConAgra
Chicken acquisitions, our sales to the foodservice market from 2004 through 2008
grew at a compounded annual growth rate of 11.4% and represented 64.8% of the
net sales of our US chicken operations in 2008.
Foodservice—Prepared
Chicken. Our prepared chicken sales to the foodservice market
were $2,033.5 million in 2008 compared to $1,647.9 million in 2004, a compounded
annual growth rate of approximately 5.4%. In addition to the significant
increase in sales created by the acquisition of Gold Kist, we attribute this
growth in sales of prepared chicken to the foodservice market to a number of
factors:
|
·
|
There
has been significant growth in the number of foodservice operators
offering chicken on their menus and in the number of chicken items
offered.
|
|
·
|
Foodservice
operators are increasingly purchasing prepared chicken products, which
allow them to reduce labor costs while providing greater product
consistency, quality and variety across all restaurant
locations.
|
|
·
|
There
is a strong need among larger foodservice companies for a limited-source
supplier base in the prepared chicken market. A viable supplier must be
able to ensure supply, demonstrate innovation and new product development
and provide competitive pricing. We have been successful in our objective
of becoming a supplier of choice by being the primary or secondary
prepared chicken supplier to many large foodservice companies
because:
|
|
·
|
We
are vertically integrated, giving us control over our supply of chicken
and chicken parts;
|
|
·
|
Our
further processing facilities, with a wide range of capabilities, are
particularly well suited to the high-volume production as well as
low-volume custom production runs necessary to meet both the capacity and
quality requirements of the foodservice market;
and
|
|
·
|
We
have established a reputation for dependable quality, highly responsive
service and excellent technical
support.
|
|
·
|
As
a result of the experience and reputation developed with larger customers,
we have increasingly become the principal supplier to mid-sized
foodservice organizations.
|
|
·
|
Our
in-house product development group follows a customer-driven research and
development focus designed to develop new products to meet customers’
changing needs. Our research and development personnel often work directly
with institutional customers in developing products for these
customers.
|
|
·
|
We
are a leader in utilizing advanced processing technology, which enables us
to better meet our customers’ needs for product innovation, consistent
quality and cost efficiency.
|
Foodservice—Fresh
Chicken. We produce and market fresh, refrigerated chicken for
sale to US quick-service restaurant chains, delicatessens and other customers.
These chickens have the giblets removed, are usually of specific weight ranges
and are usually pre-cut to customer specifications. They are often marinated to
enhance value and product differentiation. By growing and processing to
customers’ specifications, we are able to assist quick-service restaurant chains
in controlling costs and maintaining quality and size consistency of chicken
pieces sold to the consumer. Our fresh chicken products sales to the foodservice
market were $2,550.3 million in 2008 compared to $1,328.9 million in 2004, a
compounded annual growth rate of approximately 17.7%.
Retail. The
retail market consists primarily of grocery store chains, wholesale clubs and
other retail distributors. We concentrate our efforts in this market on sales of
branded, prepackaged cut-up and whole chicken and chicken parts to grocery store
chains and retail distributors. For a number of years, we have invested in both
trade and retail marketing designed to establish high levels of brand name
awareness and consumer preferences.
We
utilize numerous marketing techniques, including advertising, to develop and
strengthen trade and consumer awareness and increase brand loyalty for consumer
products marketed under the Pilgrim’s Pride® brand.
Our co-founder, Lonnie “Bo” Pilgrim, is the featured spokesperson in our
television, radio and print advertising, and a trademark cameo of a person
wearing a Pilgrim’s hat serves as the logo on all of our primary branded
products. As a result of this marketing strategy, Pilgrim’s Pride® is a
well-known brand name in a number of markets. We believe our efforts to achieve
and maintain brand awareness and loyalty help to provide more secure
distribution for our products. We also believe our efforts at brand awareness
generate greater price premiums than would otherwise be the case in certain
markets. We also maintain an active program to identify consumer preferences.
The program primarily consists of discovering and validating new product ideas,
packaging designs and methods through sophisticated qualitative and quantitative
consumer research techniques in key geographic markets.
Due to
internal growth and the impact of both the Gold Kist and ConAgra Chicken
acquisitions, our sales to the retail market from 2004 through 2008 grew at a
compounded annual growth rate of 15.8% and represented 22.0% of the net sales of
our US chicken operations in 2008.
Retail—Prepared
Chicken. We sell retail-oriented prepared chicken products
primarily to grocery store chains located throughout the US. Our prepared
chicken products sales to the retail market were $518.6 million in 2008 compared
to $213.8 million in 2004, a compounded annual growth rate of approximately
24.8%. We believe that our growth in this market segment will continue as
retailers concentrate on satisfying consumer demand for more products that are
quick, easy and convenient to prepare at home.
Retail—Fresh
Chicken. Our prepackaged retail products include various
combinations of freshly refrigerated, whole chickens and chicken parts in trays,
bags or other consumer packs labeled and priced ready for the retail grocer’s
fresh meat counter. Our retail fresh chicken products are sold in the
midwestern, southwestern, southeastern and western regions of the US. Our fresh
chicken sales to the retail market were $1,041.4 million in 2008 compared to
$653.8 million in 2004, a compounded annual growth rate of approximately 12.3%
resulting primarily from our acquisition of Gold Kist in 2007. We believe the
retail prepackaged fresh chicken business will continue to be a large and
relatively stable market, providing opportunities for product differentiation
and regional brand loyalty.
Export and Other
Chicken Products. Our export and other chicken products, with
the exception of our exported prepared chicken products, consist of whole
chickens and chicken parts sold primarily in bulk, non-branded form either
refrigerated to distributors in the US or frozen for distribution to export
markets. In the US, prices of these products are negotiated daily or weekly and
are generally related to market prices quoted by the USDA or other public price
reporting services. We sell US-produced chicken products for export to Eastern
Europe, including Russia; the Far East, including China; Mexico; and other world
markets.
Historically,
we have targeted international markets to generate additional demand for our
dark chicken meat, which is a natural by-product of our US operations given our
concentration on prepared chicken products and the US customers’ general
preference for white chicken meat. We have also begun selling prepared chicken
products for export to the international divisions of our US chain restaurant
customers. We believe that US chicken exports will continue to grow as worldwide
demand increases for high-grade, low-cost meat protein sources. Also included in
this category are chicken by-products, which are converted into protein products
and sold primarily to manufacturers of pet foods.
Markets
for Other Products
We have
regional distribution centers located in Arizona, Texas and Utah that are
primarily focused on distributing our own chicken products; however, the
distribution centers also distribute certain poultry and non-poultry products
purchased from third parties to independent grocers and quick-service
restaurants. Our non-chicken distribution business is conducted as an
accommodation to our customers and to achieve greater economies of scale in
distribution logistics. Chicken sales from our regional distribution centers are
included in the chicken sales amounts contained in the above tables; however,
all non-chicken sales amounts are contained in the Other Products sales in the
above tables.
We market
fresh eggs under the Pilgrim’s Pride® brand
name, as well as under private labels, in various sizes of cartons and flats to
US retail grocery and institutional foodservice customers located primarily in
Texas. We have a housing capacity for approximately 2.1 million commercial egg
laying hens which can produce approximately 42 million dozen eggs annually. US
egg prices are determined weekly based upon reported market prices. The US egg
industry has been consolidating over the last few years, with the 25 largest
producers accounting for more than 65% of the total number of egg laying hens in
service during 2008. We compete with other US egg producers primarily on the
basis of product quality, reliability, price and customer service.
We market
a high-nutrient egg called EggsPlus™. This egg contains high levels of Omega-3
and Omega-6 fatty acids along with Vitamin E, making the egg a heart-friendly
product. Our marketing of EggsPlus™ has received national recognition for our
progress in being an innovator in the “functional foods” category.
We
produce and sell livestock feeds at our feed mill in Mt. Pleasant, Texas and at
our farm supply store in Pittsburg, Texas to dairy farmers and livestock
producers in northeastern Texas. We engage in similar sales activities at our
other US feed mills.
We also
have a small pork operation that we acquired through the Gold Kist acquisition
that raises and sells live hogs to processors.
MEXICO
Background
The
Mexico market represented approximately 6.8% of our net sales in 2008. We are
the second-largest producer and seller of chicken in Mexico. We believe that we
are one of the lower-cost producers of chicken in Mexico.
Product
Types
While the
market for chicken products in Mexico is less developed than in the US, with
sales attributed to fewer, more basic products, we have been successful in
differentiating our products through high-quality client service and product
improvements such as dry-air chilled, eviscerated products. The supermarket
chains consider us the leader in innovation for fresh products. The market for
value-added products is increasing. Our strategy is to capitalize on this trend
through our vast US experience in both products and quality and our well-known
service.
Markets
We sell
our chicken products primarily to wholesalers, large restaurant chains, fast
food accounts, supermarket chains and direct retail distribution in selected
markets. We have national presence and are currently present in all but 2 of the
32 Mexican States, which in total represent 99.7% of the Mexican
population.
Foreign
Operations Risks
Our
foreign operations pose special risks to our business and operations. A
discussion of foreign operations risks is included in Item 1A. “Risk
Factors.”
GENERAL
Competitive
Conditions
The
chicken industry is highly competitive and our largest US competitor has greater
financial and marketing resources than we do. In addition, our liquidity
constraints have had a negative effect on our competitive position, relative to
our competitors that are less highly leveraged. See Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.” In the US, Mexico and Puerto Rico,
we compete principally with other vertically integrated poultry companies. We
are one of the largest producers of chicken in the US, Mexico and Puerto
Rico, and the second largest producer in Mexico. The second largest producer in
the US is Tyson Foods, Inc. The largest producer in Mexico is Industrias Bachoco
S.A.B. de C.V.
In
general, the competitive factors in the US chicken industry include price,
product quality, product development, brand identification, breadth of product
line and customer service. Competitive factors vary by major market. In the US
retail market, we believe that product quality, brand awareness, customer
service and price are the primary bases of competition. In the foodservice
market, competition is based on consistent quality, product development, service
and price. There is some competition with non-vertically integrated further
processors in the US prepared chicken business. We believe vertical integration
generally provides significant, long-term cost and quality advantages over
non-vertically integrated further processors.
In
Mexico, where product differentiation has traditionally been limited, product
quality, service and price have been the most critical competitive factors. In
July 2003, the US and Mexico entered into a safeguard agreement with regard to
imports into Mexico of chicken leg quarters from the US. Under this agreement, a
tariff rate for chicken leg quarters of 98.8% of the sales price was
established. This tariff was imposed because of concerns that the duty-free
importation of such products as provided by the North American Free Trade
Agreement would injure Mexico’s poultry industry. This tariff rate was
eliminated on January 1, 2008. As a result of the elimination of this tariff, we
expect greater amounts of chicken to be imported into Mexico from the US. This
could negatively affect the profitability of Mexican chicken producers,
including our Mexico operations.
We are
not a significant competitor in the distribution business as it relates to
products other than chicken. We distribute these products solely as a
convenience to our chicken customers. The broad-line distributors do not
consider us to be a factor in those markets. The competition related to our
other products such as table eggs, feed and protein are much more regionalized
and no one competitor is dominant.
Key
Customers
Our two
largest customers accounted for approximately 16% of our net sales in 2008, and
our largest customer, Wal-Mart Stores Inc., accounted for 11% of our net
sales.
Regulation
and Environmental Matters
The
chicken industry is subject to government regulation, particularly in the health
and environmental areas, including provisions relating to the discharge of
materials into the environment, by the Centers for Disease Control, the USDA,
the Food and Drug Administration (“FDA”) and the Environmental Protection Agency
(“EPA”) in the US and by similar governmental agencies in Mexico. Our chicken
processing facilities in the US are subject to on-site examination, inspection
and regulation by the USDA. The FDA inspects the production of our feed mills in
the US. Our Mexican food processing facilities and feed mills are subject to
on-site examination, inspection and regulation by a Mexican governmental agency
that performs functions similar to those performed by the USDA and FDA. We
believe that we are in substantial compliance with all applicable laws and
regulations relating to the operations of our facilities.
We
anticipate increased regulation by the USDA concerning food safety, by the FDA
concerning the use of medications in feed and by the EPA and various other state
agencies concerning discharges to the environment. Although we do not anticipate
any regulations having a material adverse effect upon us, a material adverse
effect may occur.
Employees
and Labor Relations
As of
September 27, 2008, we employed approximately 44,750 persons in the US and
approximately 5,000 persons in Mexico. There are 13,771 employees at various
facilities in the US who are members of collective bargaining units. In Mexico,
2,832 employees are covered by collective bargaining agreements. We have not
experienced any work stoppage at any location in over five years. We believe our
relations with our employees are satisfactory. At any given time, we will be in
some stage of contract negotiation with various collective bargaining
units.
Financial
Information about Foreign Operations
The
Company’s foreign operations are in Mexico. Geographic financial information is
set forth in Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operation.”
Available
Information; NYSE CEO Certification
The
Company’s Internet website is http://www.pilgrimspride.com.
The Company makes available, free of charge, through its Internet website, the
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, Directors and Officers Forms 3, 4 and 5, and amendments to
those reports, as soon as reasonably practicable after electronically filing
such materials with, or furnishing them to, the Securities and Exchange
Commission. The public may read and copy any materials that the Company files
with the Securities and Exchange Commission at its Public Reference Room at 100
F Street, NE, Washington, DC 20549 and may obtain information about the
operation of the Public Information Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
In
addition, the Company makes available, through its Internet website, the
Company’s Business Code of Conduct and Ethics, Corporate Governance Guidelines
and the written charter of the Audit Committee, each of which is available in
print to any stockholder who requests it by contacting the Secretary of the
Company at 4845 US Highway 271 North, Pittsburg, Texas 75686-0093.
As
required by the rules of the New York Stock Exchange (“NYSE”), the Company
submitted its unqualified Section 303A.12(a) Co-Principal Executive Officers
Certification for the preceding year to the NYSE.
We
included the certifications of the Co-Principal Executive Officers and the Chief
Financial Officer of the Company required by Section 302 of the Sarbanes-Oxley
Act of 2002 and related rules, relating to the quality of the Company's public
disclosure, in this report on Form 10-K as Exhibits 31.1, 31.2 and
31.3.
Executive
Officers
Set forth
below is certain information relating to our current executive
officers:
|
Name
|
Age
|
Positions
|
||
|
Lonnie
"Bo" Pilgrim
|
80
|
Senior
Chairman of the Board
|
||
|
Lonnie
Ken Pilgrim
|
50
|
Chairman
of the Board
|
||
|
J.
Clinton Rivers
|
49
|
President,
Chief Executive Officer, and Director
|
||
|
Richard
A. Cogdill
|
48
|
Chief
Financial Officer, Secretary, Treasurer and Director
|
||
|
Robert
A. Wright
|
54
|
Chief
Operating Officer
|
||
|
William
K. Snyder
|
49
|
Chief
Restructuring Officer
|
Lonnie "Bo" Pilgrim has
served as Senior Chairman of the Board since July 2007. He served as
Chairman of the Board since the organization of Pilgrim's Pride in July 1968
until July 2007. He also served as Chief Executive Officer from July 1968 to
June 1998. Prior to the incorporation of Pilgrim's Pride, Mr. Pilgrim was a
partner in its predecessor partnership business founded in 1946.
Lonnie Ken Pilgrim has served
as Chairman of the Board since July 2007. Mr. Pilgrim served as Chairman of the
Board and Interim President from January 2008 to March 2008. He served as
Executive Vice President, Assistant to Chairman from November 2004 until July
2007, and he served as Senior Vice President, Transportation from August 1997 to
November 2004. Prior to that, he served as Vice President. He has been a member
of the Board of Directors since March 1985, and he has been employed by
Pilgrim’s Pride since 1977. He is a son of Lonnie “Bo” Pilgrim.
J. Clinton Rivers has served as President,
Chief Executive Officer and Director since March 2008. Mr. Rivers served as
Chief Operating Officer from October 2004 to March 2008. He served as Executive
Vice President of Prepared Food Operations from November 2002 to October 2004.
Mr. Rivers was the Senior Vice President of Prepared Foods Operations from 1999
to November 2002, and was the Vice President of Prepared Foods Operations from
1992 to 1999. From 1989 to 1992, he served as Plant Manager of the Mount
Pleasant, Texas Production Facility. Mr. Rivers joined Pilgrim’s Pride in
1986 as the Quality Assurance Manager, and also held positions at Perdue Farms
and Golden West Foods.
Richard A. Cogdill has served
as Chief Financial Officer, Secretary and Treasurer since January 1997. Mr.
Cogdill became a Director in September 1998. Previously he served as Senior Vice
President, Corporate Controller, from August 1992 through December 1996 and as
Vice President, Corporate Controller from October 1991 through August 1992.
Prior to October 1991, he was a Senior Manager with Ernst & Young LLP. Mr.
Cogdill is a Certified Public Accountant.
Robert A. Wright has served
as Chief Operating Officer since April 2008. Mr. Wright served as Executive Vice
President of Sales and Marketing from June 2004 to April 2008. He served as
Executive Vice President, Turkey Division from October 2003 to June 2004. Prior
to October 2003, Mr. Wright served as President of Butterball Turkey Company for
five years.
William K. Snyder has served
as Chief Restructuring Officer since November 2008. Mr. Snyder has served as a Managing Partner of CRG Partners Group, LLC ("CRG"), a
provider of corporate turnaround and restructuring services, since 2001. Mr.
Snyder will continue to be employed by CRG and will perform service as Chief
Restructuring Officer of the Company through CRG. In connection with his position as Managing Partner
of CRG, Mr. Snyder served as court-appointed examiner of Mirant Corporation, Corporate Responsible Partner of Furrs
Restaurant Group Inc., Chief Financial Officer of Reliant Building Products
Inc., and as a senior executive officer of a number of private
companies. Previously, Mr. Snyder was president of his own financial consulting
company, The Snyder Company.
Item 1A. Risk Factors
Forward
Looking Statements
Statements
of our intentions, beliefs, expectations or predictions for the future, denoted
by the words "anticipate," "believe," "estimate," "expect," "plan," "project,"
"imply," "intend," "foresee" and similar expressions, are forward-looking
statements that reflect our current views about future events and are subject to
risks, uncertainties and assumptions. Such risks, uncertainties and
assumptions include those described under "Risk Factors" below and elsewhere in
this Annual Report on Form 10-K.
Actual
results could differ materially from those projected in these forward-looking
statements as a result of these factors, among others, many of which are beyond
our control.
In making
these statements, we are not undertaking, and specifically decline to undertake,
any obligation to address or update each or any factor in future filings or
communications regarding our business or results, and we are not undertaking to
address how any of these factors may have caused changes in information
contained in previous filings or communications. The risks described below are
not the only risks we face, and additional risks and uncertainties may also
impair our business operations. The occurrence of any one or more of the
following or other currently unknown factors could materially adversely affect
our business and operating results.
Risk
Factors
The
following risk factors should be read carefully in connection with evaluating
our business and the forward-looking information contained in this Annual Report
on Form 10-K. Any of the following risks could materially adversely affect our
business, operations, industry or financial position or our future financial
performance. While we believe we have identified and discussed below the most
significant risk factors affecting our business, there may be additional risks
and uncertainties that are not presently known or that are not currently
believed to be significant that may adversely affect our business, operations,
industry, financial position and financial performance in the
future.
Chapter 11
Filing. We filed for protection under Chapter 11 of the
Bankruptcy Code on December 1, 2008.
During
our Chapter 11 proceedings, our operations, including our ability to execute our
business plan, are subject to the risks and uncertainties associated with
bankruptcy. Risks and uncertainties associated with our Chapter 11 proceedings
include the following:
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Actions
and decisions of our creditors and other third parties with interests in
our Chapter 11 proceedings may be inconsistent with our
plans;
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Our
ability to obtain court approval with respect to motions in the Chapter 11
proceedings prosecuted from time to
time;
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Our
ability to develop, prosecute, confirm and consummate a plan of
reorganization with respect to the Chapter 11
proceedings;
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Our
ability to obtain and maintain commercially reasonable terms with vendors
and service providers;
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Our
ability to maintain contracts that are critical to our
operations;
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Our
ability to retain management and other key individuals;
and
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Risks
associated with third parties seeking and obtaining court approval to
terminate or shorten the exclusivity period for us to propose and confirm
a plan of reorganization, to appoint a Chapter 11 trustee or to
convert the cases to Chapter 7
cases.
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These
risks and uncertainties could affect our business and operations in various
ways. For example, negative events or publicity associated with our Chapter 11
proceedings could adversely affect our sales and relationships with our
customers, as well as with vendors and employees, which in turn could adversely
affect our operations and financial condition, particularly if the Chapter 11
proceedings are protracted. Also, transactions outside the ordinary course of
business are subject to the prior approval of the Bankruptcy Court, which may
limit our ability to respond timely to certain events or take advantage of
certain opportunities.
Because
of the risks and uncertainties associated with our Chapter 11 proceedings, the
ultimate impact that events that occur during these proceedings will have on our
business, financial condition and results of operations cannot be
accurately predicted or quantified. We cannot provide any assurance as to what
values, if any, will be ascribed in our bankruptcy proceedings to our various
pre-petition liabilities, common stock and other securities. As a result of
Chapter 11 proceedings, our currently outstanding common stock could have
no value and may be canceled under any plan of reorganization we might propose
and, therefore, we believe that the value of our various pre-petition
liabilities and other securities is highly speculative. Accordingly, caution
should be exercised with respect to existing and future investments in any of
these liabilities or securities.
Our stock is no longer listed on a
national securities exchange. It will likely be more difficult
for stockholders and investors to sell our common stock or to obtain accurate
quotations of the share price of our common stock.
Effective
December 1, 2008, the NYSE delisted our common stock from trading. Our stock is
now traded over the counter and is quoted on the Pink Sheet Electronic Quotation
Service (“Pink Sheets”). We can provide no assurance that we will be able to
re-list our common stock on a national securities exchange or that the stock
will continue being traded on the Pink Sheets. The trading of our
common stock over the counter negatively impacts the trading price of our common
stock and the levels of liquidity available to our stockholders. In addition, securities that trade on the Pink Sheets are not
eligible for margin loans and make our common stock subject to the provisions of
Rule 15g-9 of the Securities Exchange Act of 1934, commonly referred to as the
"penny stock rule." In connection with the delisting of our stock, there may also be other negative implications, including the potential
loss of confidence in our Company by suppliers, customers and employees and the
loss of institutional investor interest in our common stock.
Substantial
Leverage. Our substantial indebtedness could adversely affect
our financial condition.
We
currently have a substantial amount of indebtedness, which could adversely
affect our financial condition and could have important consequences to you and
we are not in compliance with covenants in a substantial portion of our
indebtedness. Our indebtedness:
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Makes
it more difficult for us to satisfy our obligations under our debt
securities;
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Increases
our vulnerability to general adverse economic
conditions;
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Limits
our ability to obtain necessary financing and to fund future working
capital, capital expenditures and other general corporate
requirements;
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Requires
us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing the availability of our
cash flow to fund working capital, capital expenditures and for other
general corporate purposes;
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Limits
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate;
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Places
us at a competitive disadvantage compared to our competitors that have
less debt;
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Limits
our ability to pursue acquisitions and sell assets;
and
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Limits,
along with the financial and other restrictive covenants in our
indebtedness, our ability to borrow additional funds. Failing to comply
with those covenants could result in an event of default or require
redemption of indebtedness. Either of these events could have a material
adverse effect on us.
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Our
ability to make payments on and to refinance our indebtedness will depend on our
ability to generate cash in the future, which is dependent on various factors.
These factors include the commodity prices of feed ingredients and chicken and
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
Liquidity. Our liquidity
position imposes significant risks to our operations.
Because of the public disclosure of our
liquidity constraints, our ability to maintain normal credit terms with our
suppliers has become impaired. We have been required to pay cash in advance to certain vendors and have experienced
restrictions on the availability of trade credit, which has further reduced our
liquidity. If liquidity problems persist, our suppliers could refuse to provide
key products and services in the future. In addition, due to public perception
of our financial condition and results of operations, in particular with regard
to our potential failure to meet our debt obligations, some customers have
become reluctant to enter into long-term agreements with us.
The DIP Credit Agreement provides for an
aggregate commitment of up to $450 million, which permits borrowings on a
revolving basis. The Company received interim approval to access
$365 million of the commitment pending
issuance of the final order by the Bankruptcy Court. As of December 6, 2008, the applicable borrowing
base was approximately $324.8 million and the amount available for
borrowings under the DIP Credit Agreement was $210.9 million. There can be no
assurance that the amounts of cash from operations together with amounts
available under our DIP Credit Agreement will be sufficient to fund operations.
In the event that cash flows and available borrowings under the DIP
Credit Agreement are not sufficient to meet our liquidity
requirements, we may be required to seek additional financing. There can be no
assurance that such additional financing would be available or, if available,
offered on acceptable terms. Failure to secure any necessary additional
financing would have a material adverse impact on our operations. For additional
information on our liquidity, see Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.”
If the
Company is unable to return to profitability, we may be required to record an
impairment on tangible assets such as facilities and equipment as well as
intangible assets such as intellectual property, which would have a negative
impact on our financial results.
Cyclicality and Commodity Prices.
Industry cyclicality can affect our earnings, especially due to
fluctuations in commodity prices of feed ingredients and chicken.
Profitability
in the chicken industry is materially affected by the commodity prices of feed
ingredients and chicken, which are determined by supply and demand factors. As a
result, the chicken industry is subject to cyclical earnings
fluctuations.
The
production of feed ingredients is positively or negatively affected primarily by
the global level of supply inventories and demand for feed ingredients, the
agricultural policies of the United States and foreign governments and weather
patterns throughout the world. In particular, weather patterns often change
agricultural conditions in an unpredictable manner. A significant change in
weather patterns could affect supplies of feed ingredients, as well as both the
industry's and our ability to obtain feed ingredients, grow chickens or deliver
products.
The cost
of corn and soybean meal, our primary feed ingredients, increased significantly
from August 2006 to July 2008, before moderating by the date of this report, and
there can be no assurance that the price of corn or soybean meal will not
significantly rise again as a result of, among other things, increasing demand
for these products around the world and alternative uses of these products, such
as ethanol and biodiesel production.
High feed
ingredient prices have had, and may continue to have, a material adverse effect
on our operating results, which has resulted in, and may continue to result in,
additional non-cash expenses due to impairment of the carrying amounts of
certain of our assets. We periodically seek, to the extent available, to enter
into advance purchase commitments or financial derivative contracts for the
purchase of feed ingredients in an effort to manage our feed ingredient costs.
The use of such instruments may not be successful.
Livestock and Poultry Disease,
including Avian Influenza. Outbreaks of livestock diseases in
general and poultry diseases in particular, including avian influenza, can
significantly affect our ability to conduct our operations and demand for our
products.
We take
precautions designed to ensure that our flocks are healthy and that our
processing plants and other facilities operate in a sanitary and
environmentally-sound manner. However, events beyond our control, such as the
outbreaks of disease, either in our own flocks or elsewhere, could significantly
affect demand for our products or our ability to conduct our operations.
Furthermore, an outbreak of disease could result in governmental restrictions on
the import and export of our fresh chicken or other products to or from our
suppliers, facilities or customers, or require us to destroy one or more of our
flocks. This could also result in the cancellation of orders by our customers
and create adverse publicity that may have a material adverse effect on our
ability to market our products successfully and on our business, reputation and
prospects.
During
the first half of 2006, there was substantial publicity regarding a highly
pathogenic strain of avian influenza, known as H5N1, which has been affecting
Asia since 2002 and which has also been found in Europe and Africa. It is widely
believed that H5N1 is being spread by migratory birds, such as ducks and geese.
There have also been some cases where H5N1 is believed to have passed from birds
to humans as humans came into contact with live birds that were infected with
the disease.
Although
highly pathogenic H5N1 has not been identified in North America, there have been
outbreaks of low pathogenic strains of avian influenza in North America, and in
Mexico outbreaks of both high and low-pathogenic strains of avian influenza are
a fairly common occurrence. Historically, the outbreaks of low pathogenic avian
influenza have not generated the same level of concern, or received the same
level of publicity or been accompanied by the same reduction in demand for
poultry products in certain countries as that associated with the highly
pathogenic H5N1 strain. Accordingly, even if the highly pathogenic H5N1 strain
does not spread to North or Central America, there can be no assurance that it
will not materially adversely affect demand for North or Central American
produced poultry internationally and/or domestically, and, if it were to spread
to North or Central America, there can be no assurance that it would not
significantly affect our ability to conduct our operations and/or demand for our
products, in each case in a manner having a material adverse effect on our
business, reputation and/or prospects.
Contamination of
Products. If our poultry products become contaminated, we may
be subject to product liability claims and product recalls.
Poultry
products may be subject to contamination by disease-producing organisms, or
pathogens, such as Listeria
monocytogenes, Salmonella and generic E.coli. These pathogens are
generally found in the environment, and, as a result, there is a risk that they,
as a result of food processing, could be present in our processed poultry
products. These pathogens can also be introduced as a result of improper
handling at the further processing, foodservice or consumer level. These risks
may be controlled, although not eliminated, by adherence to good manufacturing
practices and finished product testing. We have little, if any, control over
proper handling once the product has been shipped. Illness and death may result
if the pathogens are not eliminated at the further processing, foodservice or
consumer level. Even an inadvertent shipment of contaminated products is a
violation of law and may lead to increased risk of exposure to product liability
claims, product recalls and increased scrutiny by federal and state regulatory
agencies and may have a material adverse effect on our business, reputation and
prospects.
In
October 2002, one product sample produced in our Franconia, Pennsylvania
facility that had not been shipped to customers tested positive for Listeria. We
later received information from the USDA suggesting environmental samples taken
at the facility had tested positive for both the strain of Listeria identified
in the product and a strain having characteristics similar to those of the
strain identified in a Northeastern Listeria outbreak. As a result, we
voluntarily recalled all cooked deli products produced at the plant from May 1,
2002 through October 11, 2002. We carried insurance designed to cover the direct
recall related expenses and certain aspects of the related business interruption
caused by the recall.
Product
Liability. Product liability claims or product recalls can
adversely affect our business reputation and expose us to increased scrutiny by
federal and state regulators.
The
packaging, marketing and distribution of food products entail an inherent risk
of product liability and product recall and the resultant adverse publicity. We
may be subject to significant liability if the consumption of any of our
products causes injury, illness or death. We could be required to recall certain
of our products in the event of contamination or damage to the products. In
addition to the risks of product liability or product recall due to deficiencies
caused by our production or processing operations, we may encounter the same
risks if any third party tampers with our products. We cannot assure you that we
will not be required to perform product recalls, or that product liability
claims will not be asserted against us, in the future. Any claims that may be
made may create adverse publicity that would have a material adverse effect on
our ability to market our products successfully or on our business, reputation,
prospects, financial condition and results of operations.
If our
poultry products become contaminated, we may be subject to product liability
claims and product recalls. There can be no assurance that any litigation or
reputational injury associated with product recalls will not have a material
adverse effect on our ability to market our products successfully or on our
business, reputation, prospects, financial condition and results of
operations.
Insurance. We are
exposed to risks relating to product liability, product recall, property damage
and injuries to persons for which insurance coverage is expensive, limited and
potentially inadequate.
Our
business operations entail a number of risks, including risks relating to
product liability claims, product recalls, property damage and injuries to
persons. We currently maintain insurance with respect to certain of these risks,
including product liability insurance, property insurance, workers compensation
insurance, business interruption insurance and general liability insurance, but
in many cases such insurance is expensive, difficult to obtain and no assurance
can be given that such insurance can be maintained in the future on acceptable
terms, or in sufficient amounts to protect us against losses due to any such
events, or at all. Moreover, even though our insurance coverage may be designed
to protect us from losses attributable to certain events, it may not adequately
protect us from liability and expenses we incur in connection with such events.
For example, the losses attributable to our October 2002 recall of cooked deli
products produced at one of our facilities significantly exceeded available
insurance coverage. Additionally, in the past, two of our insurers encountered
financial difficulties and were unable to fulfill their obligations under the
insurance policies as anticipated and, separately, two of our other insurers
contested coverage with respect to claims covered under policies purchased,
forcing us to litigate the issue of coverage before we were able to collect
under these policies.
Significant
Competition. Competition in the chicken industry with other
vertically integrated poultry companies may make us unable to compete
successfully in these industries, which could adversely affect our
business.
The
chicken industry is highly competitive. In both the US and Mexico, we primarily
compete with other vertically integrated chicken companies.
In
general, the competitive factors in the US chicken industry
include:
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Price;
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Product
quality;
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Product
development;
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Brand
identification;
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Breadth
of product line; and
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Customer
service.
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Competitive
factors vary by major market. In the foodservice market, competition is based on
consistent quality, product development, service and price. In the US retail
market, we believe that competition is based on product quality, brand
awareness, customer service and price. Further, there is some competition with
non-vertically integrated further processors in the prepared chicken business.
In addition, our filing for protection under Chapter 11 of the Bankruptcy Code
and the associated risks and uncertainties may be used by competitors in an
attempt to divert our existing customers or may discourage future customers from
purchasing our products under long-term arrangements.
In
Mexico, where product differentiation has traditionally been limited, product
quality and price have been the most critical competitive factors. The North
American Free Trade Agreement eliminated tariffs for chicken and chicken
products sold to Mexico on January 1, 2003. However, in July 2003, the US and
Mexico entered into a safeguard agreement with regard to imports into Mexico of
chicken leg quarters from the US. Under this agreement, a tariff rate for
chicken leg quarters of 98.8% of the sales price was established. On January 1,
2008, the tariff was eliminated. In connection with the elimination of those
tariffs in Mexico, increased competition from chicken imported into Mexico from
the US may have a material adverse effect on the Mexican chicken industry in
general, and on our Mexican operations in particular.
Loss of Key
Customers. The loss of one or more of our largest customers
could adversely affect our business.
Our two
largest customers accounted for approximately 16% of our net sales in 2008, and
our largest customer, Wal-Mart Stores Inc., accounted for 11% of our net sales.
Our filing for protection under Chapter 11 of the Bankruptcy Code and the
associated risks and uncertainties may affect our customers' perception of our
business and increase our risk of losing key customers. Our business could
suffer significant setbacks in revenues and operating income if we lost one or
more of our largest customers, or if our customers' plans and/or markets should
change significantly.
Continued Integration of Gold
Kist. There can be no assurance that Gold Kist can be combined
successfully with our business.
In
evaluating the terms of our acquisition of Gold Kist, we analyzed the respective
businesses of the Company and Gold Kist and made certain assumptions concerning
their respective future operations. A principal assumption was that the
acquisition will produce operating results better than those historically
experienced or expected to be experienced in the future by us in the absence of
the acquisition. There can be no assurance, however, that this assumption is
correct or that any remaining separate businesses of the Company and Gold Kist
will be successfully integrated in a timely manner.
Synergies of Gold
Kist. There can be no assurance that we will achieve
anticipated synergies from our acquisition of Gold Kist.
We
consummated the Gold Kist acquisition with the expectation that it will result
in beneficial synergies, such as cost savings and enhanced growth. Success in
realizing these benefits and the timing of this realization depend upon the
successful integration of the operations of Gold Kist into the Company, and upon
general and industry-specific economic factors. The integration of two
independent companies has been and remains a complex, costly and time-consuming
process. The difficulties of combining the operations of the companies include,
among others:
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Transitioning
and preserving Gold Kist's customer, contractor, supplier and other
important third-party
relationships;
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Integrating
corporate and administrative
infrastructures;
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Coordinating
sales and marketing functions;
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Minimizing
the diversion of management's attention from ongoing business
concerns;
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Coordinating
geographically separate organizations;
and
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Retaining
key employees.
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Even if
we are able to effectively integrate the remaining operations of Gold Kist into
our existing operations, there can be no assurance that the anticipated
synergies will be achieved.
Assumption of Unknown Liabilities in
Acquisitions. Assumption of unknown liabilities in
acquisitions may harm our financial condition and operating
results.
We do not
currently intend to make any acquisition in the near future. However, if we do,
acquisitions may be structured in such a manner that would result in the
assumption of unknown liabilities not disclosed by the seller or uncovered
during pre-acquisition due diligence. For example, our acquisition of Gold Kist
was structured as a stock purchase. In that acquisition we assumed all of the
liabilities of Gold Kist, including liabilities that may be unknown. These
obligations and liabilities could harm our financial condition and operating
results.
Foreign Operations
Risks. Our foreign operations pose special risks to our
business and operations.
We have
significant operations and assets located in Mexico and may participate in or
acquire operations and assets in other foreign countries in the future. Foreign
operations are subject to a number of special risks, including among
others:
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Currency
exchange rate fluctuations;
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Trade
barriers;
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Exchange
controls;
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Expropriation;
and
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Changes
in laws and policies, including those governing foreign-owned
operations.
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Currency
exchange rate fluctuations have adversely affected us in the past. Exchange rate
fluctuations or one or more other risks may have a material adverse effect on
our business or operations in the future.
Our
operations in Mexico are conducted through subsidiaries organized under the laws
of Mexico. We may rely in part on intercompany loans and distributions from our
subsidiaries to meet our obligations. Claims of creditors of our subsidiaries,
including trade creditors, will generally have priority as to the assets of our
subsidiaries over our claims. Additionally, the ability of our Mexican
subsidiaries to make payments and distributions to us will be subject to, among
other things, Mexican law. In the past, these laws have not had a material
adverse effect on the ability of our Mexican subsidiaries to make these payments
and distributions. However, laws such as these may have a material adverse
effect on the ability of our Mexican subsidiaries to make these payments and
distributions in the future.
Disruptions in International Markets
and Distribution Channels. Disruptions in international
markets and distribution channels could adversely affect our
business.
Historically, we have targeted
international markets to generate additional demand for our chicken dark meat,
specifically leg quarters, which are a natural by-product of our US operations, given our concentration on
prepared chicken products and the US customers’ general preference for white meat. As
part of this initiative, we have created a significant international
distribution network into several markets, including Eastern Europe, including
Russia; the Far East, including China; and Mexico. Our success in these markets could be,
and in recent periods has been, adversely affected by disruptions in poultry
export markets. These disruptions are often caused by restrictions on imports of
US-produced poultry products imposed by foreign governments for a variety of reasons, including the
protection of their domestic poultry producers and allegations of consumer
health issues, and may also be caused by outbreaks of disease such as avian
influenza, either in our own flocks or elsewhere in the world, and resulting changes in consumer
preferences. There can be no assurance that one or more of these or other
disruptions in our international markets and distribution channels will not
adversely affect our business.
Government
Regulation. Regulation, present and future, is a constant
factor affecting our business.
Our
operations are subject to federal, state and local governmental regulation,
including in the health, safety and environmental areas. We anticipate increased
regulation by various agencies concerning food safety, the use of medication in
feed formulations and the disposal of poultry by-products and wastewater
discharges.
Also,
changes in laws or regulations or the application thereof may lead to government
enforcement actions and the resulting litigation by private litigants. We are
aware of an industry-wide investigation by the Wage and Hour Division of the US
Department of Labor to ascertain compliance with various wage and hour issues,
including the compensation of employees for the time spent on such activities
such as donning and doffing work equipment. We have been named a defendant in a
number of related suits brought by employees. Due, in part, to the government
investigation and the recent US Supreme Court decision in IBP, Inc. v. Alvarez, it is
possible that we may be subject to additional employee claims.
Unknown
matters, new laws and regulations, or stricter interpretations of existing laws
or regulations may materially affect our business or operations in the
future.
Immigration
Legislation and Enforcement. New immigration legislation or
increased enforcement efforts in connection with existing immigration
legislation could cause our costs of doing business to increase, cause us to
change the way in which we do business or otherwise disrupt our
operations.
Immigration
reform continues to attract significant attention in the public arena and the
United States Congress. If new federal immigration legislation is enacted or if
states in which we do business enact immigration laws, such laws may contain
provisions that could make it more difficult or costly for us to hire United
States citizens and/or legal immigrant workers. In such case, we may incur
additional costs to run our business or may have to change the way we conduct
our operations, either of which could have a material adverse effect on our
business, operating results and financial condition. Also, despite our past and
continuing efforts to hire only United States citizens and/or persons legally
authorized to work in the United States, we are unable to ensure that all of our
employees are United States citizens and/or persons legally authorized to work
in the United States. US Immigration and Customs Enforcement has recently been
investigating identity theft within our workforce. With our cooperation,
during 2008 US Immigration and Customs Enforcement arrested approximately
350 of our employees believed to have engaged in identity theft at five of our
facilities. No assurances can be given that further enforcement efforts by
governmental authorities will not disrupt a portion of our workforce or our
operations at one or more of our facilities, thereby negatively impacting our
business.
Key Employee
Retention. Loss of essential employees could have a
significant negative impact on our business.
Our success is largely dependent on the
skills, experience, and efforts of our management and other employees.
Our deteriorating financial performance, along with our Chapter 11
proceedings, creates uncertainty that could lead to an increase in unwanted
attrition. The loss of the
services of one or more members of our senior management or of numerous
employees with essential skills could have a negative effect on our business,
financial condition and results of operations. If we are not able to attract
talented, committed individuals to fill vacant positions when needs arise, it
may adversely affect our ability to achieve our business
objectives.
Extreme Weather and Natural
Disasters. Extreme weather or natural disasters could
negatively impact our business.
Extreme
weather or natural disasters, including droughts, floods, excessive cold or
heat, hurricanes or other storms, could impair the health or growth of our
flocks, production or availability of feed ingredients, or interfere with our
operations due to power outages, fuel shortages, damage to our production and
processing facilities or disruption of transportation channels, among other
things. Any of these factors could have an adverse effect on our financial
results.
Control of Voting
Stock. Control over the Company is maintained by affiliates
and members of the family of Lonnie "Bo" Pilgrim.
As
described in more detail in Item 12. "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters," through two limited
partnerships and related trusts and voting agreements, Lonnie "Bo" Pilgrim,
Patricia R. Pilgrim, his wife, and Lonnie Ken Pilgrim, his son, control 62.25%
of the voting power of our outstanding common stock. Accordingly, they control
the outcome of all actions requiring stockholder approval, including the
election of directors and significant corporate transactions, such as a merger
or other sale of the Company or its assets. This ensures their ability to
control the foreseeable future direction and management of the Company. In
addition, an event of default under certain agreements related to our
indebtedness will occur if Lonnie "Bo" Pilgrim and certain members of his family
cease to own at least a majority of the voting power of the outstanding common
stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Operating
Facilities
We
operate 31 poultry processing plants located in Alabama, Arkansas, Florida,
Georgia, Kentucky, Louisiana, North Carolina, South Carolina, Tennessee, Texas,
Virginia, and West Virginia. We have one chicken processing plant in Puerto Rico
and three chicken processing plants in Mexico.
The US
chicken processing plants have weekly capacity to process 43.0 million broilers
and operated at 90.7% of capacity in 2008.
Our
Mexico facilities have the capacity to process 3.27 million broilers per week
and operated at 82% of capacity in 2008. Our Puerto Rico processing plant has
the capacity to process 0.3 million birds per week based on one eight-hour
shift per day. For segment reporting purposes, we include Puerto Rico with our
US operations.
In the
US, the processing plants are supported by 41 hatcheries, 29 feed mills and 12
rendering plants. The hatcheries, feed mills and rendering plants operated at
88%, 85% and 69% of capacity, respectively, in 2008. In Puerto Rico, the
processing plant is supported by one hatchery and one feed mill which operated
at 82% and 80% of capacity, respectively, in 2008. In Mexico, the processing
plants are supported by six hatcheries, four feed mills and two rendering
facilities. The Mexico hatcheries, feed mills and rendering facilities operated
at 97%, 84% and 69% of capacity, respectively, in 2008.
We also
operate eleven prepared chicken plants. These plants are located in Alabama,
Georgia, Louisiana, Pennsylvania, South Carolina, Tennessee, Texas and West
Virginia. These plants have the capacity to produce approximately 1,453 million
pounds of further processed product per year and in 2008 operated at
approximately 90% of capacity.
Other
Facilities and Information
We own a
partially automated distribution freezer located outside of Pittsburg, Texas,
which includes 125,000 square feet of storage area. We operate a commercial egg
operation and farm store in Pittsburg, Texas, a commercial feed mill in Mt.
Pleasant, Texas and a pork grow-out operation in Jefferson, Georgia. We own
office buildings in Pittsburg, Texas and Atlanta, Georgia, which house our
executive offices, our Logistics and Customer Service offices and our general
corporate functions as well as an office building in Mexico City, which houses
our Mexican marketing offices, and an office building in Broadway, Virginia,
which houses additional sales and marketing, research and development, and
support activities. We lease offices in Dallas, Texas and Duluth, Georgia, which
house additional sales and marketing and support activities.
We have
five regional distribution centers located in Arizona, Texas, and Utah, one of
which we own and four of which we lease.
Most of
our domestic property,
plant and equipment is pledged as collateral on our long-term debt and credit
facilities. See Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operation.”
Item 3. Legal Proceedings
As
discussed in Part I above, on December 1, 2008, the Debtors filed voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court. The cases are being jointly administered under Case No.
08-45664. The Debtors continue to operate their business as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. As of the date of the Chapter 11 filing,
virtually all pending litigation against the Company (including the actions
described below) is stayed as to the Company, and absent further order of the
Bankruptcy Court, no party, subject to certain exceptions, may take any action,
also subject to certain exceptions, to recover on pre-petition claims against
the Debtors. At this time it is not possible to predict the outcome of the
Chapter 11 filings or their effect on our business or the actions described
below.
On
October 29, 2008, Ronald Alcaldo filed suit in the U.S. District Court for the
Eastern District of Texas, Marshall Division, styled Ronald Alcaldo, Individually and On
Behalf of All Others Similarly Situated v. Pilgrim's Pride Corporation, et
al, against the Company and individual defendants Lonnie “Bo” Pilgrim,
Lonnie Ken Pilgrim, J. Clinton Rivers, Richard A. Cogdill and Clifford E.
Butler. The complaint alleges that the Company and the individual defendants
violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder, by allegedly failing to disclose
that "(a) the Company’s hedges to protect it from adverse changes in costs were
not working and in fact were harming the Company’s results more than helping;
(b) the Company’s inability to continue to use illegal workers would adversely
affect its margins; (c) the Company’s financial results were continuing to
deteriorate rather than improve, such that the Company’s capital structure was
threatened; (d) the Company was in a much worse position than its competitors
due to its inability to raise prices for consumers sufficient to offset cost
increases, whereas it competitors were able to raise prices to offset higher
costs affecting the industry; and (e) the Company had not made sufficient
changes to its business to succeed in the more difficult industry conditions."
Mr. Alcaldo further alleges that he purports to represent a class of all persons
or entities who acquired the common stock of the Company from May 5, 2008
through September 24, 2008. The complaint seeks unspecified injunctive relief
and an unspecified amount of damages. On November 21, 2008, the Company and the
individual defendants filed a Motion to Dismiss the lawsuit for failure to state
a claim, failure to plead fraud with particularity, and failure to satisfy the
heightened pleading requirements of the Private Securities Litigation Reform Act
of 1995. The Company intends to defend vigorously against the merits of the
action and any attempts by Alcaldo to certify a class action. The likelihood of
an unfavorable outcome or the amount or range of any possible loss to the
Company cannot be determined at this time.
The Wage
and Hour Division of the US Department of Labor conducted an industry-wide
investigation to ascertain compliance with various wage and hour issues,
including the compensation of employees for the time spent on activities such as
donning and doffing clothing and personal protective equipment. Due, in part, to
the government investigation and the recent US Supreme Court decision in IBP, Inc. v. Alvarez,
employees have brought claims against the Company. The claims filed against the
Company as of the date of this report include: “Juan Garcia, et al. v. Pilgrim’s
Pride Corporation, a/k/a Wampler Foods, Inc.”, filed in Pennsylvania state court
on January 27, 2006 and subsequently removed to the US District Court for the
Eastern District of Pennsylvania; “Esperanza Moya, et al. v. Pilgrim’s Pride
Corporation and Maxi Staff, LLC”, filed March 23, 2006 in the Eastern District
of Pennsylvania; “Barry Antee, et al. v. Pilgrim’s Pride Corporation” filed
April 20, 2006 in the Eastern District of Texas; “Stephania Aaron, et al. v.
Pilgrim’s Pride Corporation” filed August 22, 2006 in the Western District of
Arkansas; “Salvador Aguilar, et al. v. Pilgrim’s Pride Corporation” filed August
23, 2006 in the Northern District of Alabama; “Benford v. Pilgrim’s Pride
Corporation” filed November 2, 2006 in the Northern District of Alabama; “Porter
v. Pilgrim’s Pride Corporation” filed December 7, 2006 in the Eastern District
of Tennessee; “Freida Brown, et al v. Pilgrim’s Pride Corporation” filed March
14, 2007 in the Middle District of Georgia, Athens Division; “Roy Menser, et al
v. Pilgrim’s Pride Corporation” filed February 28, 2007 in the Western District
of Paducah, Kentucky; “Victor Manuel Hernandez v. Pilgrim’s Pride Corporation”
filed January 30, 2007 in the Northern District of Georgia, Rome Division;
“Angela Allen et al v. Pilgrim’s Pride Corporation” filed March 27, 2007 in
United States District Court, Middle District of Georgia, Athens Division; Daisy
Hammond and Felicia Pope v. Pilgrim’s Pride Corporation, in the
Gainesville
Division,
Northern District of Georgia, filed on June 6, 2007; Gary Price v. Pilgrim’s
Pride Corporation, in the US District Court for the Northern District of
Georgia, Atlanta Division, filed on May 21, 2007; Kristin Roebuck et al v.
Pilgrim’s Pride Corporation, in the US District Court, Athens, Georgia, Middle
District, filed on May 23, 2007; and Elaine Chao v. Pilgrim’s Pride Corporation,
in the US District Court, Dallas, Texas, Northern District, filed on August 6,
2007. The plaintiffs generally purport to bring a collective action for unpaid
wages, unpaid overtime wages, liquidated damages, costs, attorneys' fees, and
declaratory and/or injunctive relief and generally allege that they are not paid
for the time it takes to either clear security, walk to their respective
workstations, don and doff protective clothing, and/or sanitize clothing and
equipment. The presiding judge in the consolidated action in El Dorado
issued an initial Case Management order on July 9, 2007. Plaintiffs’ counsel
filed a Consolidated Amended Complaint and the parties filed a Joint Rule 26(f)
Report. A complete scheduling order has not been issued, and discovery has not
yet commenced. The parties are currently negotiating the scope of discovery. On
March 13, 2008, Judge Barnes issued an opinion and order finding that plaintiffs
and potential class members are similarly situated and conditionally certifying
the class for a collective action. On May 14, 2008, the Court issued its order
modifying and approving the court-authorized notice for current and former
employees to opt into the class. Persons who choose to opt into the class are to
do so within 90 days after the date on which the first notice was mailed. The
opt-in period is now closed. As of October 2, 2008, approximately 12,605
plaintiffs have opted into the class.
As of the
date of this report, the following suits have been filed against Gold Kist, now
merged into Pilgrim’s Pride Corporation, which make one or more of the
allegations referenced above: Merrell v. Gold Kist, Inc., in the US District
Court for the Northern District of Georgia, Gainesville Division, filed on
December 21, 2006; Harris v. Gold Kist, Inc., in the US District Court for the
Northern District of Georgia, Newnan Division, filed on December 21, 2006;
Blanke v. Gold Kist, Inc., in the US District Court for the Southern District of
Georgia, Waycross Division, filed on December 21, 2006; Clarke v. Gold Kist,
Inc., in the US District Court for the Middle District of Georgia, Athens
Division, filed on December 21, 2006; Atchison v. Gold Kist, Inc., in the US
District Court for the Northern District of Alabama, Middle Division, filed on
October 3, 2006; Carlisle v. Gold Kist, Inc., in the US District Court for the
Northern District of Alabama, Middle Division, filed on October 2, 2006; Benbow
v. Gold Kist, Inc., in the US District Court for the District of South Carolina,
Columbia Division, filed on October 2, 2006; Bonds v. Gold Kist, Inc., in the US
District Court for the Northern District of Alabama, Northwestern Division,
filed on October 2, 2006. On April 23, 2007, Pilgrim’s filed a Motion to
Transfer and Consolidate with the Judicial Panel on Multidistrict Litigation
(“JPML”) requesting that all of the pending Gold Kist cases be consolidated into
one case. Pilgrim’s Pride withdrew its Motion subject to the Plaintiffs’
counsel’s agreement to consolidate the seven separate actions into the pending
Benbow case by
dismissing those lawsuits and refiling/consolidating them into the Benbow action. Motions to
Dismiss have been filed in all of the pending seven cases, and all of these
cases have been formally dismissed. Pursuant to an agreement between the
parties, which was approved by Court-order on June 6, 2007, these cases have
been consolidated with the Benbow case. On that date,
Plaintiffs were authorized to send notice to individuals regarding the pending
lawsuits and were instructed that individuals had three months to file consents
to opting in as plaintiffs in the consolidated cases. The opt-in period is now
closed. To date, there are approximately 3,006 named plaintiffs and opt-in
plaintiffs in the consolidated cases. The Company and Plaintiffs have jointly
requested the Court to remove 367 opt-in plaintiffs because they do not fall
within
the class
definition. The Court recently ordered that Pilgrim’s can depose and serve
written discovery on the named plaintiffs and approximately 10% of the opt-in
class. The Company intends to assert a vigorous defense to the litigation. The
amount of ultimate liability with respect to any of these cases cannot be
determined at this time.
We are
subject to various other legal proceedings and claims, which arise in the
ordinary course of our business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect our
financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
PART
II
|
|
Item 5.Market for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
Market
Information
During
the period covered by this report, the Company’s common stock was traded on the
NYSE under the ticker symbol “PPC”. Effective December 1, 2008, the NYSE delisted our common stock
as a result of the Company's filing of its Chapter 11
petitions. Our common stock is now quoted on the Pink Sheets Electronic
Quotation Service under the ticker symbol "PGPDQ.PK."
High and low prices of and dividends
relating to the Company’s common stock for the periods indicated
were:
|
2008
Prices
|
2007
Prices
|
Dividends
|
||||||||||||||||||||||
|
Quarter
|
High
|
Low
|
High
|
Low
|
2008
|
2007
|
||||||||||||||||||
|
First
|
$ | 35.98 | $ | 22.52 | $ | 29.54 | $ | 23.64 | $ | 0.0225 | $ | 0.0225 | ||||||||||||
|
Second
|
$ | 28.96 | $ | 20.38 | $ | 33.19 | $ | 28.59 | $ | 0.0225 | $ | 0.0225 | ||||||||||||
|
Third
|
$ | 27.15 | $ | 12.90 | $ | 38.17 | $ | 32.77 | $ | 0.0225 | $ | 0.0225 | ||||||||||||
|
Fourth
|
$ | 18.16 | $ | 3.26 | $ | 40.59 | $ | 32.29 | $ | 0.0225 | $ | 0.0225 | ||||||||||||
Holders
The
Company estimates there were approximately 29,700 holders (including individual
participants in security position listings) of the Company’s common stock as of
December 9, 2008.
Dividends
Under the
terms of the DIP Credit Agreement and applicable bankruptcy law, the Company may
not pay dividends on the common stock while it is in bankruptcy. Any payment of
future dividends and the amounts thereof will depend on our emergence from
bankruptcy, our earnings, our financial requirements and other factors deemed
relevant by our Board of Directors at the time. See Note L—Notes Payable and
Long-Term Debt to the Consolidated Financial Statements included in Item 15 for
additional discussions of the Company's credit facilities.
Issuer
Purchases of Equity Security in 2008
The
Company did not repurchase any of its equity securities in 2008.
Total
Return on Registrant’s Common Equity
The
following graphs compare the performance of the Company with that of the Russell
2000 composite index and a peer group of companies with the investment weighted
on market capitalization. The total cumulative return on investment (change in
the year-end stock price plus reinvested dividends) for each of the periods for
the Company, the Russell 2000 composite index and the peer group is based on the
stock price or composite index at the beginning of the applicable period.
Companies in the peer group index include Cagle's, Inc., Sanderson Farms Inc.,
Hormel Foods Corp., Smithfield Foods Inc. and Tyson Foods Inc.
The first
graph covers the period from November 21, 2003 through September 27, 2008 and
shows the performance of the Company's single class of common stock. On November
21, 2003, each share of the Company's then outstanding Class A common stock and
Class B common stock was reclassified into one share of new common stock, which
is now the only authorized class of the Company's common stock.
The
second graph covers the five years ending September 27, 2008 and shows the
performance of the Company's Class A and Class B shares after giving effect to
the reclassification into the Company's single class of common stock on November
21, 2003 based on a one to one exchange ratio.
The third
graph covers the period from September 27, 2003 through November 20, 2003, the
last date on which the Company's Class A and Class B shares traded on the New
York Stock Exchange prior to reclassification into a single new class of shares
of common stock.
The stock
price performance represented by these graphs is not necessarily indicative of
future stock performance.
|
|
11/21/03
|
10/2/04
|
10/1/05
|
9/30/06
|
9/29/07
|
9/27/08
|
||||||||||||||||||
|
Pilgrim’s
Pride Corporation
|
$ | 100.00 | $ | 190.89 | $ | 254.14 | $ | 197.18 | $ | 251.08 | $ | 25.79 | ||||||||||||
|
Russell
2000
|
$ | 100.00 | $ | 113.10 | $ | 129.73 | $ | 142.61 | $ | 160.21 | $ | 160.21 | ||||||||||||
|
Peer
Group
|
$ | 100.00 | $ | 112.59 | $ | 131.40 | $ | 127.35 | $ | 140.41 | $ | 110.00 | ||||||||||||
|
9/27/03
|
11/20/03
|
10/2/04
|
10/1/05
|
9/30/06
|
9/29/07
|
9/27/08
|
||||||||||||||||||||||
|
Pilgrim's
Pride Corporation Class A(1)
|
$ | 100.00 | $ | 106.95 | $ | 212.12 | $ | 282.40 | $ | 219.11 | $ | 279.00 | $ | 28.65 | ||||||||||||||
|
Pilgrim's
Pride Corporation Class B(1)
|
$ | 100.00 | $ | 107.94 | $ | 211.79 | $ | 281.96 | $ | 218.77 | $ | 278.57 | $ | 28.61 | ||||||||||||||
|
Russell
2000
|
$ | 100.00 | $ | 107.93 | $ | 122.74 | $ | 140.79 | $ | 154.77 | $ | 173.86 | $ | 154.19 | ||||||||||||||
|
Peer
Group
|
$ | 100.00 | $ | 110.95 | $ | 123.52 | $ | 144.17 | $ | 139.71 | $ | 154.04 | $ | 120.69 | ||||||||||||||
|
(1)
|
On November 21, 2003, each share
of the Company’s then outstanding Class A common
stock and Class B common stock was reclassified
into one share of new common
stock, which is now
the only authorized class of the Company’s common
stock.
|
|
9/27/03
|
11/20/03
|
|||||||
|
Pilgrim's
Pride Corporation Class A(1)
|
$ | 100.00 | $ | 106.95 | ||||
|
Pilgrim's
Pride Corporation Class B(1)
|
$ | 100.00 | $ | 107.94 | ||||
|
Russell
2000
|
$ | 100.00 | $ | 107.93 | ||||
|
Peer
Group
|
$ | 100.00 | $ | 110.95 | ||||
|
(1)
|
On November 21, 2003, each share
of the Company’s then outstanding Class A common
stock and Class B common stock was reclassified
into one share of new common
stock, which is now the only authorized class of the Company’s common
stock.
|
Item 6. Selected Financial
Data
|
(In
thousands, except ratios and per share data)
|
Eleven
Years Ended September 27, 2008
|
|||||||||||||||||||
|
2008(a)
|
2007(a)(b)
|
2006(a)
|
2005(a)
|
|||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 8,525,112 | $ | 7,498,612 | $ | 5,152,729 | $ | 5,461,437 | ||||||||||||
|
Gross
profit (loss)(e)
|
(163,495 | ) | 592,730 | 297,083 | 751,317 | |||||||||||||||
|
Goodwill
impairment
|
501,446 | — | — | — | ||||||||||||||||
|
Operating
income (loss)(e)
|
(1,057,696 | ) | 237,191 | 11,105 | 458,351 | |||||||||||||||
|
Interest
expense, net
|
131,627 | 118,542 | 38,965 | 42,632 | ||||||||||||||||
|
Loss
on early extinguishment of debt
|
— | 26,463 | — | — | ||||||||||||||||
|
Income
(loss) from continuing operations before income taxes(e)
|
(1,187,093 | ) | 98,835 | (26,626 | ) | 427,632 | ||||||||||||||
|
Income
tax expense (benefit)(f)
|
(194,921 | ) | 47,319 | 1,573 | 147,543 | |||||||||||||||
|
Income
(loss) from continuing operations(e)
|
(992,172 | ) | 51,516 | (28,199 | ) | 279,819 | ||||||||||||||
|
Net
income (loss)(e)
|
(998,581 | ) | 47,017 | (34,232 | ) | 264,979 | ||||||||||||||
|
Ratio
of earnings to fixed charges(g)
|
(g)
|
1.63 | x |
(g)
|
7.69 | x | ||||||||||||||
|
Per
Common Share Data:(h)
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (14.31 | ) | $ | 0.77 | $ | (0.42 | ) | $ | 4.20 | ||||||||||
|
Net
income (loss)
|
(14.40 | ) | 0.71 | (0.51 | ) | 3.98 | ||||||||||||||
|
Cash
dividends
|
0.09 | 0.09 | 1.09 | 0.06 | ||||||||||||||||
|
Book
value
|
5.07 | 17.61 | 16.79 | 18.38 | ||||||||||||||||
|
Balance
Sheet Summary:
|
||||||||||||||||||||
|
Working
capital surplus (deficit)
|
$ | (1,262,242 | ) | $ | 395,858 | $ | 528,837 | $ | 404,601 | |||||||||||
|
Total
assets
|
3,298,709 | 3,774,236 | 2,426,868 | 2,511,903 | ||||||||||||||||
|
Notes
payable and current maturities of long-term debt
|
1,874,469 | 2,872 | 10,322 | 8,603 | ||||||||||||||||
|
Long-term
debt, less current maturities
|
67,514 | 1,318,558 | 554,876 | 518,863 | ||||||||||||||||
|
Total
stockholders’ equity
|
351,741 | 1,172,221 | 1,117,328 | 1,223,598 | ||||||||||||||||
|
Cash
Flow Summary:
|
||||||||||||||||||||
|
Cash
flows from operating activities
|
$ | (680,726 | ) | $ | 464,010 | $ | 30,329 | $ | 493,073 | |||||||||||
|
Depreciation
and amortization(i)
|
240,305 | 204,903 | 135,133 | 134,944 | ||||||||||||||||
|
Impairment
of goodwill and other assets
|
514,630 | — | 3,767 | — | ||||||||||||||||
|
Purchases
of investment securities
|
(38,043 | ) | (125,045 | ) | (318,266 | ) | (305,458 | ) | ||||||||||||
|
Proceeds
from sale or maturity of investment securities
|
27,545 | 208,676 | 490,764 | — | ||||||||||||||||
|
Acquisitions
of property, plant and equipment
|
(152,501 | ) | (172,323 | ) | (143,882 | ) | (116,588 | ) | ||||||||||||
|
Business
acquisitions, net of equity consideration(b)(c)(d)
|
— | (1,102,069 | ) | — | — | |||||||||||||||
|
Cash
flows from financing activities
|
797,743 | 630,229 | (38,750 | ) | 18,860 | |||||||||||||||
|
Other
Data:
|
||||||||||||||||||||
|
EBITDA(j)
|
$ | (820,878 | ) | $ | 414,139 | $ | 143,443 | $ | 599,274 | |||||||||||
|
Key
Indicators (as a percent of net sales):
|
||||||||||||||||||||
|
Gross
profit (loss)(e)
|
(1.9 | ) |
%
|
7.9 |
%
|
5.8 |
%
|
13.8 | % | |||||||||||
|
Selling,
general and administrative expenses
|
4.4 |
%
|
4.7 |
%
|
5.6 |
%
|
5.4 | % | ||||||||||||
|
Operating
income (loss)(e)
|
(12.4 | ) |
%
|
3.2 |
%
|
0.2 |
%
|
8.4 | % | |||||||||||
|
Interest
expense, net
|
1.5 |
%
|
1.6 |
%
|
0.8 |
%
|
0.8 | % | ||||||||||||
|
Income
(loss) from continuing operations(e)
|
(11.6 | ) |
%
|
0.7 |
%
|
(0.5 | ) |
%
|
5.1 | % | ||||||||||
|
Net
income (loss)(e)
|
(11.7 | ) |
%
|
0.6 |
%
|
(0.7 | ) |
%
|
4.9 | % | ||||||||||
|
Eleven
Years Ended September 27, 2008
|
|||||||||||||||||||||||||||||||||
|
2004(a)(c)
|
2003(a)
|
2002(a)
|
2001(a)(d)
|
2000
|
1999
|
1998
|
|||||||||||||||||||||||||||
|
(53
weeks)
|
(53
weeks)
|
||||||||||||||||||||||||||||||||
| $ | 5,077,471 | $ | 2,313,667 | $ | 2,185,600 | $ | 1,975,877 | $ | 1,499,439 | $ | 1,357,403 | $ | 1,331,545 | ||||||||||||||||||||
| 611,838 | 249,363 | 153,599 | 197,561 | 165,828 | 185,708 | 136,103 | |||||||||||||||||||||||||||
| — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| 385,968 | 137,605 | 48,457 | 90,253 | 80,488 | 109,504 | 77,256 | |||||||||||||||||||||||||||
| 48,419 | 30,726 | 24,199 | 25,619 | 17,779 | 17,666 | 20,148 | |||||||||||||||||||||||||||
| — | — | — | 1,433 | — | — | — | |||||||||||||||||||||||||||
| 332,899 | 144,482 | 28,267 | 62,728 | 62,786 | 90,904 | 56,522 | |||||||||||||||||||||||||||
| 127,142 | 37,870 | (2,475 | ) | 21,051 | 10,442 | 25,651 | 6,512 | ||||||||||||||||||||||||||
| 205,757 | 106,612 | 30,742 | 41,677 | 52,344 | 65,253 | 50,010 | |||||||||||||||||||||||||||
| 128,340 | 56,036 | 14,335 | 41,137 | 52,344 | 65,253 | 50,010 | |||||||||||||||||||||||||||
| 6.22 | x | 4.37 | x | 1.21 | x | 1.80 | x | 3.04 | x | 4.33 | x | 2.96 | x | ||||||||||||||||||||
| $ | 3.28 | $ | 2.59 | $ | 0.75 | $ | 1.01 | $ | 1.27 | $ | 1.58 | $ | 1.21 | ||||||||||||||||||||
| 2.05 | 1.36 | 0.35 | 1.00 | 1.27 | 1.58 | 1.21 | |||||||||||||||||||||||||||
| 0.06 | 0.06 | 0.06 | 0.06 | 0.06 | 0.05 | 0.04 | |||||||||||||||||||||||||||
| 13.87 | 10.46 | 9.59 | 9.27 | 8.33 | 7.11 | 5.58 | |||||||||||||||||||||||||||
| $ | 383,726 | $ | 211,119 | $ | 179,037 | $ | 203,350 | $ | 124,531 | $ | 154,242 | $ | 147,040 | ||||||||||||||||||||
| 2,245,989 | 1,257,484 | 1,227,890 | 1,215,695 | 705,420 | 655,762 | 601,439 | |||||||||||||||||||||||||||
| 8,428 | 2,680 | 3,483 | 5,099 | 4,657 | 4,353 | 5,889 | |||||||||||||||||||||||||||
| 535,866 | 415,965 | 450,161 | 467,242 | 165,037 | 183,753 | 199,784 | |||||||||||||||||||||||||||
| 922,956 | 446,696 | 394,324 | 380,932 | 342,559 | 294,259 | 230,871 | |||||||||||||||||||||||||||
| $ | 272,404 | $ | 98,892 | $ | 98,113 | $ | 87,833 | $ | 130,803 | $ | 81,452 | $ | 85,016 | ||||||||||||||||||||
| 113,788 | 74,187 | 70,973 | 55,390 | 36,027 | 34,536 | 32,591 | |||||||||||||||||||||||||||
| 45,384 | — | — | — | — | — | — | |||||||||||||||||||||||||||
| — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| (79,642 | ) | (53,574 | ) | (80,388 | ) | (112,632 | ) | (92,128 | ) | (69,649 | ) | (53,518 | ) | ||||||||||||||||||||
| (272,097 | ) | (4,499 | ) | — | (239,539 | ) | — | — | — | ||||||||||||||||||||||||
| 96,665 | (39,767 | ) | (21,793 | ) | 246,649 | (24,769 | ) | (19,634 | ) | (32,498 | ) | ||||||||||||||||||||||
| $ | 486,268 | $ | 239,997 | $ | 112,852 | $ | 136,604 | $ | 115,356 | $ | 142,043 | $ | 108,268 | ||||||||||||||||||||
| 12.1 |
%
|
10.8 |
%
|
7.0 |
%
|
10.0 |
%
|
11.1 |
%
|
13.7 |
%
|
10.2 | % | ||||||||||||||||||||
| 4.3 |
%
|
4.8 |
%
|
4.8 |
%
|
5.4 |
%
|
5.7 |
%
|
5.6 |
%
|
4.4 | % | ||||||||||||||||||||
| 7.6 |
%
|
5.9 |
%
|
2.2 |
%
|
4.6 |
%
|
5.4 |
%
|
8.1 |
%
|
5.8 | % | ||||||||||||||||||||
| 1.0 |
%
|
1.3 |
%
|
1.1 |
%
|
1.3 |
%
|
1.2 |
%
|
1.3 |
%
|
1.5 | % | ||||||||||||||||||||
| 4.1 |
%
|
4.6 |
%
|
1.4 |
%
|
2.1 |
%
|
3.5 |
%
|
4.8 |
%
|
3.8 | % | ||||||||||||||||||||
| 2.1 |
%
|
2.4 |
%
|
0.7 |
%
|
2.1 |
%
|
3.5 |
%
|
4.8 |
%
|
3.8 | % | ||||||||||||||||||||
|
(a)
|
In
March 2008, the Company sold certain assets of its turkey business. We are
reporting our operations with respect to this business as a discontinued
operation for all periods presented.
|
|
(b)
|
The
Company acquired Gold Kist Inc. on December 27, 2006 for $1.139 billion.
For financial reporting purposes, we have not included the operating
results and cash flows of Gold Kist in our consolidated financial
statements for the period
from December 27, 2006 through December 30, 2006. The operating
results and cash flows of Gold Kist from December 27, 2006 through
December 30, 2006 were not material.
|
|
(c)
|
The
Company acquired the ConAgra Chicken division on November 23, 2003 for
$635.2 million including the non-cash value of common stock issued of
$357.5 million. The acquisition has been accounted for as a purchase and
the results of operations for this acquisition have been included in our
consolidated results of operations since the acquisition
date.
|
|
(d)
|
The
Company acquired WLR Foods on January 27, 2001 for $239.5 million and the
assumption of $45.5 million of indebtedness. The acquisition has been
accounted for as a purchase and the results of operations for this
acquisition have been included in our consolidated results of operations
since the acquisition date.
|
|
(e)
|
Gross
profit, operating income and net income include the following
non-recurring recoveries, restructuring charges and other unusual items
for each of the years presented:
|
|
2008
|
2005
|
2004
|
2003
|
|||||||||||||
|
Effect
on gross profit and operating income:
|
(In
millions)
|
|||||||||||||||
|
Operational
restructuring charges
|
$ | (13.1 | ) | $ | — | $ | — | $ | — | |||||||
|
Non-recurring
recoveries for recall insurance
|
$ | — | $ | — | $ | 23.8 | $ | — | ||||||||
|
Non-recurring
recoveries for avian influenza
|
$ | — | $ | — | $ | — | $ | 26.6 | ||||||||
|
Non-recurring
recoveries for vitamin and methionine litigation
|
$ | — | $ | — | $ | 0.1 | $ | 19.9 | ||||||||
|
Additional
effect on operating income:
|
||||||||||||||||
|
Goodwill
impairment
|
$ | (501.4 | ) | $ | — | $ | — | $ | — | |||||||
|
Administrative
restructuring charges
|
(16.2 | ) | $ | — | $ | — | $ | — | ||||||||
|
Other
income for litigation settlement
|
$ | — | $ | 11.7 | $ | — | $ | — | ||||||||
|
Other
income for vitamin and methionine litigation
|
$ | — | $ | — | $ | 0.9 | $ | 36.0 | ||||||||
|
In
addition, the Company estimates its losses related to the October 2002
recall (excluding insurance recoveries) and the 2002 avian influenza
outbreak negatively affected gross profit and operating income in each of
the years presented as follows (in
millions):
|
|
2004
|
2003
|
2002
|
||||||||||
|
Recall
effects (estimated)
|
$ | (20.0 | ) | $ | (65.0 | ) | $ | — | ||||
|
Losses
from avian influenza (estimated)
|
$ | — | $ | (7.3 | ) | $ | (25.6 | ) | ||||
|
(f)
|
Income
tax benefit recognized in 2008 resulted primarily from net operating
losses incurred in 2008 which are offset by the tax effect of goodwill
impairment and valuation allowances. Income tax expense recognized in 2006
included $25.8 million associated with the restructuring of the Mexico
operations and subsequent repatriation of foreign earnings under the
American Jobs Creation Act of 2004. Income tax expense recognized in 2003
included a non-cash tax benefit of $16.9 million associated with the
reversal of a valuation allowance on net operating losses in the Company’s
Mexico operations. Income tax benefit recognized in 2002 included a tax
benefit of $11.9 million from changes in Mexican tax
laws.
|
|
(g)
|
For
purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest (including
capitalized interest) on all indebtedness, amortization of capitalized
financing costs and that portion of rental expense that we believe to be
representative of interest. Earnings were inadequate to cover fixed
charges by $1.2 billion and $30.9 million in 2008 and 2006,
respectively.
|
|
(h)
|
Historical
per share amounts represent both basic and diluted and have been restated
to give effect to a stock dividend issued on July 30, 1999. The stock
reclassification on November 21, 2003 that resulted in the new common
stock traded as PPC did not affect the number of shares
outstanding.
|
|
(i)
|
Includes
amortization of capitalized financing costs of approximately $4.9 million,
$6.6 million, $2.6 million, $2.3 million, $2.0 million,
$1.5 million, $1.4 million, $1.9 million, $1.2 million, $1.1 million,
and $1.0 million in 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000,
1999, and 1998, respectively.
|
|
(j)
|
“EBITDA”
is defined as the sum of income (loss) from continuing operations plus
interest, taxes, depreciation and amortization. EBITDA is presented
because it is used by us and we believe it is frequently used by
securities analysts, investors and other interested parties, in addition
to and not in lieu of results prepared in conformity with accounting
principles generally accepted in the US (“GAAP”), to compare the
performance of companies. EBITDA is not a measurement of financial
performance under GAAP and should not be considered as an alternative to
cash flow from operating activities or as a measure of liquidity or an
alternative to net income as indicators of our operating performance or
any other measures of performance derived in accordance with
GAAP.
|
A
reconciliation of income (loss) from continuing operations to EBITDA is as
follows:
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (992,172 | ) | $ | 51,516 | $ | (28,199 | ) | $ | 279,819 | $ | 205,757 | ||||||||
|
Add:
|
||||||||||||||||||||
|
Interest
expense, net
|
131,627 | 118,542 | 38,965 | 42,632 | 48,419 | |||||||||||||||
|
Income
tax expense (benefit)
|
(194,921 | ) | 47,319 | 1,573 | 147,543 | 127,142 | ||||||||||||||
|
Depreciation
and amortization(i)
|
239,535 | 203,316 | 133,710 | 131,601 | 106,901 | |||||||||||||||
|
Minus:
|
||||||||||||||||||||
|
Amortization
of capitalized financing costs(i)
|
4,947 | 6,554 | 2,606 | 2,321 | 1,951 | |||||||||||||||
|
EBITDA
|
(820,878 | ) | 414,139 | 143,443 | $ | 599,274 | $ | 486,268 | ||||||||||||
|
Add:
|
||||||||||||||||||||
|
Goodwill
impairment
|
501,446 | — | — | |||||||||||||||||
|
Restructuring
charges
|
29,239 | — | 3,767 | |||||||||||||||||
|
Loss
on early extinguishment of debt
|
— | 26,463 | — | |||||||||||||||||
|
Adjusted
EBITDA
|
$ | (290,193 | ) | $ | 440,602 | $ | 147,210 | |||||||||||||
|
2003
|
2002
|
2001
|
2000
|
1999
|
1998
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | 106,612 | $ | 30,742 | $ | 41,677 | $ | 52,344 | $ | 65,253 | $ | 50,010 | ||||||||||||
|
Add:
|
||||||||||||||||||||||||
|
Interest
expense, net
|
30,726 | 24,199 | 25,619 | 17,779 | 17,666 | 20,148 | ||||||||||||||||||
|
Income
tax expense (benefit)
|
37,870 | (2,475 | ) | 21,051 | 10,442 | 25,651 | 6,512 | |||||||||||||||||
|
Depreciation
and amortization(i)
|
66,266 | 61,803 | 50,117 | 36,027 | 34,536 | 32,591 | ||||||||||||||||||
|
Minus:
|
||||||||||||||||||||||||
|
Amortization
of capitalized financing costs(i)
|
1,477 | 1,417 | 1,860 | 1,236 | 1,063 | 993 | ||||||||||||||||||
|
EBITDA
|
$ | 239,997 | $ | 112,852 | 136,604 | $ | 115,356 | $ | 142,043 | $ | 108,268 | |||||||||||||
|
Add:
|
||||||||||||||||||||||||
|
Loss
on early extinguishment of debt
|
1,433 | |||||||||||||||||||||||
|
Adjusted
EBITDA
|
$ | 138,037 | ||||||||||||||||||||||
Note: We
have included EBITDA adjusted to exclude goodwill impairment in 2008,
restructuring charges in 2008 and 2006, and losses on early extinguishment of
debt in 2007 and 2001. We believe investors may be interested in our EBITDA
excluding these items because this is how our management analyzes EBITDA from
continuing operations.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Description
of the Company
Pilgrim's Pride Corporation is one the largest chicken companies in the US, Mexico and Puerto Rico. Our fresh chicken retail line is sold in
the southeastern,
central, southwestern and western regions of the US, throughout Puerto Rico, and in the northern and central regions of Mexico. Our prepared chicken products meet the needs of some of the
largest customers in the food service industry across the US. Additionally, the Company exports commodity chicken
products to 80 countries. As a vertically integrated company, we
control every phase of the
production of our products. We operate feed mills, hatcheries, processing
plants and distribution centers in 14 US states, Puerto Rico and Mexico. Pilgrim’s Pride operates in two
business segments—Chicken and Other Products.
Our fresh
chicken products consist of refrigerated (non-frozen) whole or cut-up chicken,
either pre-marinated or non-marinated, and pre-packaged chicken in various
combinations of freshly refrigerated, whole chickens and chicken parts. Our
prepared chicken products include portion-controlled breast fillets, tenderloins
and strips, delicatessen products, salads, formed nuggets and patties and
bone-in chicken parts. These products are sold either refrigerated or frozen and
may be fully cooked, partially cooked or raw. In addition, these products are
breaded or non-breaded and either pre-marinated or non-marinated.
Business
Environment
The
Company faced an extremely challenging business environment in 2008. We reported
a net loss of $998.6 million, or $14.40 per common share, for the year, which
included a negative gross margin of $163.5 million. As of September 27, 2008,
the Company’s accumulated deficit aggregated $317.1 million. During 2008, the
Company used $680.7 million of cash in operations. At September 27, 2008, we had
cash and cash equivalents totaling $61.6 million. The following factors
contributed to this performance:
|
·
|
Feed
ingredient costs increased substantially to unprecedented levels between
the first quarter of 2007 and the end of 2008 principally because of
increasing demand for these products around the world and alternative uses
of these products, such as ethanol and biodiesel production. The following
table compares the highest prices reached on nearby futures for one bushel
of corn and one ton of soybean meal during the past four years and for
each quarter in 2008:
|
|
Corn
|
Soybean
Meal
|
|||||||
|
2008:
|
||||||||
|
Fourth
Quarter
|
$ | 7.50 | $ | 455.50 | ||||
|
Third
Quarter
|
7.63 | 427.90 | ||||||
|
Second
Quarter
|
5.70 | 384.50 | ||||||
|
First
Quarter
|
4.57 | 341.50 | ||||||
|
2007
|
4.37 | 286.50 | ||||||
|
2006
|
2.68 | 204.50 | ||||||
|
2005
|
2.63 | 238.00 | ||||||
|
·
|
While
chicken selling prices generally improved over the first 18 months of the
same period, prices did not improve sufficiently to offset the higher
costs of feed ingredients. More recently, prices have actually declined as
the result of weak demand for breast meat and a general oversupply of
chicken in the US. Although many producers within the industry, including
Pilgrim’s Pride, cut production in an effort to correct the oversupply
situation, the cuts were neither timely nor deep enough to cause
noticeable improvement to date.
|
|
·
|
The
Company recognized losses on derivative financial instruments, primarily
futures contracts and options on corn and soybean meal, during 2008
totaling $38.3 million. In the fourth quarter of 2008, it recognized
losses on derivative financial instruments totaling $155.7 million. In
late June and July of 2008, management executed various derivative
financial instruments for August and September soybean meal and corn
prices because they were concerned that prices could escalate based on
various factors such as the recent flooding in the areas where these
grains were produced and recent trends in commodity prices. After entering
into these positions, the prices of the commodities decreased
significantly in July and August of 2008 creating these
losses.
|
|
·
|
As
the result of the downward pressure placed on earnings by the increased
cost of feed ingredients, weak demand for breast meat and the oversupply
of chicken and other animal-based proteins in the US, the Company
evaluated the carrying amount of its goodwill for potential impairment at
September 27, 2008. We obtained valuation reports as of September 27,
2008 that indicated the carrying amount of our goodwill should be fully
impaired based on current conditions. As a result, we recognized a pretax
impairment charge of $501.4 million during
2008.
|
|
·
|
Because
of the current-year losses, the Company was in a cumulative loss position
in both the US and Mexico for the purpose of assessing the realizability
of its net deferred tax assets position. The Company did not believe it
had sufficient positive evidence to conclude that realization of its net
deferred tax assets position in the US and Mexico was more likely than not
to occur. Therefore, the Company increased its valuation allowance and
recognized related income tax expense of approximately $71.2 million
during 2008.
|
In
September 2008, the Company notified its lenders that it expected to incur a
significant loss in the fourth quarter of 2008 and entered into agreements with
them to temporarily waive the fixed-charge coverage ratio covenant under its
credit facilities. The lenders agreed to continue to provide liquidity under the
credit facilities during the thirty-day period ended October 28, 2008. On
October 27, 2008, the Company entered into further agreements with its lenders
to temporarily waive the fixed-charge coverage ratio and leverage ratio
covenants under its credit facilities. The lenders agreed to continue to provide
liquidity under the credit facilities during the thirty-day period ended
November 26, 2008. On that same day, the Company also announced its intention to
exercise its 30-day grace period in making a $25.7 million interest payment due
on November 3, 2008 under its 8 3/8% senior subordinated notes and its 7 5/8%
senior notes. On November 17, 2008, the Company exercised its 30-day grace
period in making a $0.3 million interest payment due on November 17, 2008 under
its 9 1/4% senior subordinated notes. On November 26, 2008, the Company
entered into further agreements with its lenders to extend the temporary waivers
until December 1, 2008.
Chapter
11 Bankruptcy Filings
On
December 1, 2008, the Debtors filed voluntary petitions for reorganization under
the Bankruptcy Code in the Bankruptcy Court as a result of many of the items
discussed under Business Environment. The cases are being jointly administered
under Case No. 08-45664. The Company’s Non-filing Subsidiaries will continue to
operate outside the Chapter 11 process.
Subject
to certain exceptions under the Bankruptcy Code, the Debtors’ Chapter 11 filing
automatically enjoined, or stayed, the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to the Petition
Date. Thus, for example, most creditor actions to obtain possession of property
from the Debtors, or to create, perfect or enforce any lien against the property
of the Debtors, or to collect on monies owed or otherwise exercise rights or
remedies with respect to a pre-petition claim are enjoined unless and until the
Bankruptcy Court lifts the automatic stay.
On
December 1, 2008, the New York
Stock Exchange delisted our common stock from trading as a result of the Company's filing of its Chapter 11 petitions.
Our common stock is now quoted on the Pink Sheets Electronic Quotation Service
under the ticker symbol "PGPDQ.PK."
The
filing of the Chapter 11 petitions constituted an event of default under
certain of our debt obligations, and those debt obligations became automatically
and immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law. As a result, the accompanying Consolidated Balance
Sheet as of September 27, 2008 includes a reclassification of $1,872.1 million
to reflect as current certain long-term debt under its credit facilities that,
absent the stay, would have become automatically and immediately due and
payable.
Chapter
11 Process
The
Debtors are currently operating as "debtors in possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In
general, as debtors in possession, we are authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the prior approval of the
Bankruptcy Court.
On
December 2, 2008, the Bankruptcy
Court granted interim approval authorizing the Company and the US Subsidiaries to enter into the DIP
Credit Agreement,
and the Company, the US
Subsidiaries and the other parties entered into the DIP Credit Agreement,
subject to final approval
of the Bankruptcy Court.
The DIP Credit Agreement provides for an
aggregate commitment of up to $450 million, which permits borrowings on a
revolving basis. The Company received interim approval to access
$365 million of the commitment pending
issuance of the final order by the Bankruptcy Court. Outstanding borrowings
under the DIP Credit Agreement will bear interest at a per annum rate equal to
8.0% plus the greatest of (i) the prime rate as established by the DIP agent
from time to time, (ii) the average federal funds rate plus 0.5%, or
(iii) the LIBOR rate plus 1.0%, payable monthly. The loans under the DIP Credit Agreement
were used to repurchase all receivables sold under the Company's RPA and may be used to fund the working
capital requirements of the Company and its subsidiaries according to a budget
as approved by the required lenders under the DIP Credit Agreement. For
additional information on the RPA, see Item 7. "Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital
Resources."
Actual borrowings by the Company under
the DIP Credit Agreement are subject to a borrowing base, which is a formula
based on certain eligible inventory and eligible receivables. The borrowing base
formula is reduced by pre-petition obligations under the Fourth Amended and
Restated Secured Credit Agreement dated as of February 8, 2007, among the
Company and certain of its subsidiaries, Bank of Montreal, as administrative
agent, and the lenders parties thereto, as amended, administrative and professional expenses, and the amount
owed by the Company and the Debtor Subsidiaries to any person on account of the
purchase price of agricultural products or services (including poultry and
livestock) if that person is entitled to any grower's or producer's lien or other security
arrangement. The borrowing base is also limited to 2.22 times the formula amount
of total eligible receivables. As of December 6, 2008, the applicable borrowing base
was $324.8
million and the amount
available for borrowings under the DIP Credit Agreement was
$210.9 million.
The principal amount of outstanding
loans under the DIP Credit Agreement, together with accrued and unpaid interest
thereon, are payable in full at maturity on December 1, 2009, subject to
extension for an additional
six months with the approval of all lenders thereunder. All obligations under
the DIP Credit Agreement are unconditionally guaranteed by the US Subsidiaries
and are secured by a first priority priming lien on substantially all of the
assets of the Company and the US Subsidiaries,
subject to specified permitted liens in the DIP Credit
Agreement.
The DIP Credit Agreement allows the Company to provide advances to the Non-filing Subsidiaries of up to
approximately $25 million at any time outstanding. Management believes that all of the Non-filing
Subsidiaries, including
the Company’s Mexican subsidiaries, will be able to operate within this
limitation.
For additional information on the DIP
Credit Agreement, see Item 7. "Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital
Resources."
The Bankruptcy Court has approved
payment of certain of the Debtors’ pre-petition obligations, including,
among other things, employee wages, salaries and benefits, and the Bankruptcy Court has
approved the Company's payment of vendors and other providers in the ordinary
course for goods and services received from and after the Petition Date and
other business-related payments necessary to maintain the operation of our businesses. The Debtors have
retained, subject to Bankruptcy Court approval, legal and financial
professionals to advise the Debtors on the bankruptcy proceedings and certain
other "ordinary course" professionals. From time to time, the Debtors may seek
Bankruptcy Court approval for the
retention of additional professionals.
Shortly
after the Petition Date, the Debtors began notifying all known current or
potential creditors of the Chapter 11 filing. Subject to certain exceptions
under the Bankruptcy Code, the Debtors’ Chapter 11 filing automatically
enjoined, or stayed, the continuation of any judicial or administrative
proceedings or other actions against the Debtors or their property to recover
on, collect or secure a claim arising prior to the Petition Date. Thus, for
example, most creditor actions to obtain possession of property from the
Debtors, or to create, perfect or enforce any lien against the property of the
Debtors, or to collect on monies owed or otherwise exercise rights or remedies
with respect to a pre-petition claim are enjoined unless and until the
Bankruptcy Court lifts the automatic stay. Vendors are being paid for goods
furnished and services provided after the Petition Date in the ordinary course
of business.
As
required by the Bankruptcy Code, the United States Trustee for the Northern
District of Texas appointed an official committee of unsecured creditors (the
"Creditors’ Committee"). The Creditors’ Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
with respect to the Debtors. There can be no assurance that the Creditors’
Committee will support the Debtors’ positions on matters to be presented to the
Bankruptcy Court in the future or on any plan of reorganization, once proposed.
Disagreements between the Debtors and the Creditors’ Committee could protract
the Chapter 11 proceedings, negatively impact the Debtors’ ability to operate
and delay the Debtors’ emergence from the Chapter 11 proceedings.
Under
Section 365 and other relevant sections of the Bankruptcy Code, we may assume,
assume and assign, or reject certain executory contracts and unexpired leases,
including, without limitation, leases of real property and equipment, subject to
the approval of the Bankruptcy Court and certain other conditions. Any
description of an executory contract or unexpired lease in this report,
including where applicable our express termination rights or a quantification of
our obligations, must be read in conjunction with, and is qualified by, any
overriding rejection rights we have under Section 365 of the Bankruptcy
Code.
In order
to successfully exit Chapter 11, the Debtors will need to propose, and obtain
confirmation by the Bankruptcy Court of a plan of reorganization that satisfies
the requirements of the Bankruptcy Code. A plan of reorganization would, among
other things, resolve the Debtors’ pre-petition obligations, set forth the
revised capital structure of the newly reorganized entity and provide for
corporate governance subsequent to exit from bankruptcy.
The
Debtors have the exclusive right for 120 days after the Petition Date to file a
plan of reorganization and, if we do so, 60 additional days to obtain necessary
acceptances of our plan. We will likely file one or more motions to request
extensions of these time periods. If the Debtors’ exclusivity period lapsed, any
party in interest would be able to file a plan of reorganization for any of the
Debtors. In addition to being voted on by holders of impaired claims and equity
interests, a plan of reorganization must satisfy certain requirements of the
Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in
order to become effective.
The
timing of filing a plan of reorganization by us will depend on the timing and
outcome of numerous other ongoing matters in the Chapter 11 proceedings. There
can be no assurance at this time that a plan of reorganization will be confirmed
by the Bankruptcy Court or that any such plan will be implemented
successfully.
We have
incurred and will continue to incur significant costs associated with our
reorganization. The amount of these costs, which are being expensed as incurred
commencing in November 2008, are expected to significantly affect our results of
operations.
Under the
priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, pre-petition liabilities and post-petition liabilities must be
satisfied in full before stockholders are entitled to receive any distribution
or retain any property under a plan of reorganization. The ultimate recovery to
creditors and/or stockholders, if any, will not be determined until confirmation
of a plan or plans of reorganization. No assurance can be given as to what
values, if any, will be ascribed in the Chapter 11 cases to each of these
constituencies or what types or amounts of distributions, if any, they would
receive. A plan of reorganization could result in holders of our liabilities
and/or securities, including our common stock, receiving no distribution on
account of their interests and cancellation of their holdings. Because of such
possibilities, the value of our liabilities and securities, including our common
stock, is highly speculative. Appropriate caution should be exercised with
respect to existing and future investments in any of the liabilities and/or
securities of the Debtors. At this time there is no assurance we will be able to
restructure as a going concern or successfully propose or implement a plan of
reorganization.
Going
Concern Matters
The
accompanying Consolidated Financial Statements have been prepared assuming that
the Company will continue as a going concern. However, there is substantial
doubt about the Company’s ability to continue as a going concern based on the
factors previously discussed. The Consolidated Financial Statements do not
include any adjustments related to the recoverability and classification of
recorded assets or the amounts and classification of liabilities or any other
adjustments that might be necessary should the Company be unable to continue as
a going concern. The Company’s ability to continue as a going concern is
dependent upon the ability of the Company to return to profitability and, in the
near term, restructure its obligations in a manner that allows it to obtain
confirmation of a plan or reorganization by the Bankruptcy Court.
Management
is addressing the Company’s ability to return to profitability by conducting
profitability reviews at certain facilities in an effort to reduce
inefficiencies and manufacturing costs. The Company has also reduced production
capacity in the near term by closing two production complexes and consolidating
operations at a third production complex into its other facilities. This action
resulted in a headcount reduction of approximately 2,300 production employees.
Subsequent to September 27, 2008, the Company also reduced headcount by 335
non-production employees.
On
November 7, 2008, the Board of
Directors appointed a Chief Restructuring Officer
(“CRO”) for the Company. The appointment of a CRO was a
requirement included in the waivers received from the Company’s lenders on October 27, 2008.
The CRO will assist the Company with
cost reduction initiatives, restructuring plans development and long-term
liquidity improvement. The CRO reports to the Board of Directors of the
Company.
In order
to emerge from bankruptcy, the Company will need to obtain alternative financing
to replace the DIP Credit Agreement and to satisfy the secured claims of its
pre-bankruptcy creditors.
Business
Segments
We
operate in two reportable business segments as (i) a producer and seller of
chicken products and (ii) a seller of other products. Our chicken segment
includes sales of chicken products we produce and purchase for resale in the US,
including Puerto Rico, and Mexico. Our chicken segment conducts separate
operations in the US, Puerto Rico and Mexico and is reported as two separate
geographical areas. Substantially all of the assets and operations of the Gold
Kist acquisition are included in our US chicken segment since the date of
acquisition.
Our other
products segment includes distribution of non-poultry products that are
purchased from third parties and sold to independent grocers and quick service
restaurants. Also included in this category are sales of table eggs, feed,
protein products, live hogs and other items, some of which are produced or
raised by the Company.
Inter-segment
sales, which are not material, are accounted for at prices comparable to normal
trade customer sales. Corporate expenses are allocated to Mexico based upon
various apportionment methods for specific expenditures incurred related thereto
with the remaining amounts allocated to the US portions of the segments based on
number of employees.
Assets
associated with our corporate functions, including cash and cash equivalents and
investments in available for sale securities, are included in our chicken
segment.
Selling,
general and administrative expenses related to our distribution centers are
allocated based on the proportion of net sales to the particular segment to
which the product sales relate.
Depreciation
and amortization, total assets and capital expenditures of our distribution
centers are included in our chicken segment based on the primary focus of the
centers.
The
following table presents certain information regarding our
segments:
|
As
of or for the Year Ended
|
September
27, 2008
|
September
29, 2007(a)
|
September
30, 2006
|
|||||||||
|
(In
thousands)
|
||||||||||||
|
Net
sales to customers:
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States
|
$ | 7,077,047 | $ | 6,328,354 | $ | 4,098,403 | ||||||
|
Mexico
|
543,583 | 488,466 | 418,745 | |||||||||
|
Subtotal
|
7,620,630 | 6,816,820 | 4,517,148 | |||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
869,850 | 661,115 | 618,575 | |||||||||
|
Mexico
|
34,632 | 20,677 | 17,006 | |||||||||
|
Subtotal
|
904,482 | 681,792 | 635,581 | |||||||||
|
Total
|
$ | 8,525,112 | $ | 7,498,612 | $ | 5,152,729 | ||||||
|
Operating
income (loss):
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States(b)
|
$ | (1,135,370 | ) | $ | 192,447 | $ | 28,619 | |||||
|
Mexico
|
(25,702 | ) | 13,116 | (17,960 | ) | |||||||
|
Subtotal
|
(1,161,072 | ) | 205,563 | 10,659 | ||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
98,863 | 28,636 | (1,192 | ) | ||||||||
|
Mexico
|
4,513 | 2,992 | 1,638 | |||||||||
|
Subtotal
|
103,376 | 31,628 | 446 | |||||||||
|
Total
|
$ | (1,057,696 | ) | $ | 237,191 | $ | 11,105 | |||||
|
Depreciation
and amortization(c)(d)(e):
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States
|
$ | 215,586 | $ | 183,808 | $ | 114,516 | ||||||
|
Mexico
|
10,351 | 11,015 | 11,305 | |||||||||
|
Subtotal
|
225,937 | 194,823 | 125,821 | |||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
13,354 | 8,278 | 7,743 | |||||||||
|
Mexico
|
244 | 215 | 146 | |||||||||
|
Subtotal
|
13,598 | 8,493 | 7,889 | |||||||||
|
Total
|
$ | 239,535 | $ | 203,316 | $ | 133,710 | ||||||
|
Total
assets(f):
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States
|
$ | 2,733,089 | $ | 3,247,812 | $ | 1,909,129 | ||||||
|
Mexico
|
372,952 | 348,894 | 361,887 | |||||||||
|
Subtotal
|
3,106,041 | 3,596,706 | 2,271,016 | |||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
153,607 | 104,644 | 89,447 | |||||||||
|
Mexico
|
5,542 | 4,120 | 1,660 | |||||||||
|
Subtotal
|
159,149 | 108,764 | 91,107 | |||||||||
|
Total
|
$ | 3,265,190 | $ | 3,705,470 | $ | 2,362,123 | ||||||
|
Acquisitions
of property, plant and equipment (excluding business
acquisition)(g):
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States
|
$ | 148,811 | $ | 164,449 | $ | 133,106 | ||||||
|
Mexico
|
545 | 1,633 | 6,536 | |||||||||
|
Subtotal
|
149,356 | 166,082 | 139,642 | |||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
2,815 | 5,699 | 3,567 | |||||||||
|
Mexico
|
330 | 40 | 416 | |||||||||
|
Subtotal
|
3,145 | 5,739 | 3,983 | |||||||||
|
Total
|
$ | 152,501 | $ | 171,821 | $ | 143,625 | ||||||
|
(a)
|
The
Company acquired Gold Kist on December 27, 2006 for $1.139
billion.
|
|
(b)
|
Includes
goodwill impairment of $501.4 million and restructuring charges of $29.3
million in 2008.
|
|
(c)
|
Includes
amortization of capitalized financing costs of approximately $4.9 million,
$6.6 million and $2.6 million in 2008, 2007 and 2006,
respectively.
|
|
(d)
|
Includes
amortization of intangible assets of $10.2 million, $8.1 million and $1.8
million recognized in 2008, 2007 and 2006 related primarily to the Gold
Kist and ConAgra Chicken acquisitions.
|
|
(e)
|
Excludes
depreciation costs incurred by our discontinued turkey business of $0.7
million, $1.6 million and $1.4 million during 2008, 2007 and 2006,
respectively.
|
|
(f)
|
Excludes
total assets of our discontinued turkey business of $33.5 million at
September 27, 2008, $68.8 million at September 29, 2007 and $64.7 million
at September 30, 2006.
|
|
(g)
|
Excludes
acquisitions of property, plant and equipment by our discontinued turkey
business of $0.5 million and $0.3 million during 2007 and 2006,
respectively. Acquisitions of property, plant and equipment by our
discontinued turkey business during 2008 were
immaterial.
|
The
following table presents certain items as a percentage of net sales for the
periods indicated:
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of sales
|
101.8 | % | 92.1 | % | 94.2 | % | ||||||
|
Operational
restructuring charges
|
0.1 | % | — | % | — | % | ||||||
|
Gross
profit (loss)
|
(1.9 | ) % | 7.9 | % | 5.8 | % | ||||||
|
Selling,
general and administrative (“SG&A”) expenses
|
4.4 | % | 4.7 | % | 5.6 | % | ||||||
|
Goodwill
impairment
|
5.9 | % | — | % | — | % | ||||||
|
Administrative
restructuring charges
|
0.2 | % | — | % | — | % | ||||||
|
Operating
income (loss)
|
(12.4 | ) % | 3.2 | % | 0.2 | % | ||||||
|
Interest
expense, net
|
1.5 | % | 1.6 | % | 0.8 | % | ||||||
|
Income
(loss) from continuing operations before income taxes
|
(13.9 | ) % | 1.3 | % | (0.5 | ) % | ||||||
|
Income
(loss) from continuing operations
|
(11.6 | ) % | 0.7 | % | (0.5 | ) % | ||||||
|
Net
income (loss)
|
(11.7 | ) % | 0.6 | % | (0.7 | ) % | ||||||
All
percentage of net sales ratios reported above are calculated from the face of
the Consolidated Statements of Operations included elsewhere
herein.
Results
of Operations
2008 Compared to
2007
Net Sales. Net
sales for 2008 increased $1,026.5 million, or 13.7%, over 2007. The following
table provides additional information regarding net sales:
|
Source
|
2008
|
Change
from 2007
|
|||||||||||
|
Amount
|
Percent
|
||||||||||||
|
(In
millions, except percent data)
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$ | 7,077.0 | $ | 748.7 | 11.8 | % |
(a)
|
||||||
|
Mexico
|
543.6 | 55.1 | 11.3 | % |
(b)
|
||||||||
|
Total
chicken
|
7,620.6 | 803.8 | 11.8 | % | |||||||||
|
Other
products:
|
|||||||||||||
|
United
States
|
869.9 | 208.8 | 31.6 | % |
(c)
|
||||||||
|
Mexico
|
34.6 | 13.9 | 67.1 | % |
(d)
|
||||||||
|
Total
other products
|
904.5 | 222.7 | 32.7 | % | |||||||||
|
Total
net sales
|
$ | 8,525.1 | $ | 1,026.5 | 13.7 | % | |||||||
|
(a)
|
US
chicken sales generated in 2008 increased 11.8% from US chicken sales
generated in 2007. Sales volume increased 8.6% primarily because of the
acquisition of Gold Kist on December 27, 2006. Net revenue per pound sold
increased 3.0% from the prior year.
|
||||||||||||||
|
(b)
|
Mexico
chicken sales generated in 2008 increased 11.3% from Mexico chicken sales
generated in 2007 primarily because of a 3.5% increase in revenue per
pound sold and a 7.6% increase in pounds sold. The increase in pounds sold
represents market penetration in Mexico’s avian influenza free states as
well as a shift in product mix toward live birds.
|
||||||||||||||
|
(c)
|
US
sales of other products generated in 2008 increased 31.6% from US sales of
other products generated in 2007 mainly as the result of improved pricing
on commercial eggs and protein conversion products and higher sales
volumes of protein conversion products. Protein conversion is the process
of converting poultry byproducts into raw materials for grease, animal
feed, biodiesel and feed-stock for the chemical
industry.
|
||||||||||||||
|
(d)
|
Mexico
sales of other products generated in 2008 increased 67.1% from Mexico
sales of other products generated in 2007 principally because of both
higher sales volumes and higher selling prices for commercial
feed.
|
||||||||||||||
Gross Profit
(Loss). Gross loss generated in 2008 decreased $756.2 million,
or 127.6%, from gross profit generated in 2007. The following table provides
gross profit (loss) information:
|
Change
from 2007
|
Percent
of Net Sales
|
||||||||||||||||||||
|
Components
|
2008
|
Amount
|
Percent
|
2008
|
2007
|
||||||||||||||||
|
(In
millions, except percent data)
|
|||||||||||||||||||||
|
Net
sales
|
$ | 8,525.1 | $ | 1,026.5 | 13.7 | % | 100.0 | % | 100.0 | % | |||||||||||
|
Cost
of sales
|
8,675.5 | 1,769.6 | 25.6 | % | 101.8 | % | 92.1 | % |
(a)
|
||||||||||||
|
Operational
restructuring charges
|
13.1 | 13.1 |
NM
|
0.1 | % | — | % |
(b)
|
|||||||||||||
|
Gross
loss
|
$ | (163.5 | ) | $ | (756.2 | ) | (127.6 | ) % | (1.9 | ) % | 7.9 | % |
(c)
|
||||||||
|
(a)
|
Cost
of sales incurred by the US operations during 2008 increased $1,661.6
million from cost of sales incurred by the US operations during 2007. This
increase occurred because of incremental costs resulting from increased
feed ingredients and energy costs as well as the acquisition of Gold Kist
on December 27, 2006. We also experienced in 2008, and continue to
experience, increased production and freight costs related to operational
inefficiencies, labor shortages at several facilities and higher fuel
costs. We believe the labor shortages are attributable in part to
heightened publicity of governmental immigration enforcement efforts,
ongoing Company compliance efforts and continued changes in the Company’s
employment practices in light of recently published governmental best
practices and new labor hiring regulations. During 2008, the Company
recognized losses totaling $38.3 million on derivative financial
instruments executed to manage its exposure to changes in corn and soybean
meal prices. The aggregate loss recognized on derivative financial
instruments in 2007 was immaterial. Cost of sales incurred by the Mexico
operations during 2008 increased $108.0 million from cost of sales
incurred by the Mexico operations during 2007 primarily because of
increased feed ingredients costs.
|
|
(b)
|
The
Company recognized operational restructuring charges, composed entirely of
non-cash asset impairment charges, in 2008 related to (i) the closing of
two operating complexes in Arkansas and North Carolina, (ii) the closing
of seven distribution centers in Florida (2), Iowa, Mississippi, Ohio,
Tennessee and Texas, and (iii) the idling of an operating complex in
Louisiana.
|
|
(c)
|
Gross
loss as a percent of net sales generated in 2008 decreased 9.8 percentage
points from gross profit as a percent of sales generated in 2007 primarily
because of incremental costs resulting from increased feed ingredients,
energy, production and freight costs, charges related to 2008
restructuring actions and the Gold Kist acquisition partially offset by
improved selling prices.
|
|
NM
|
Not
meaningful.
|
Operating Income
(Loss). Operating loss generated in 2008 decreased $1,294.9
million, or 545.9%, from operating income generated in 2007. The following
tables provide operating income (loss) information:
|
Source
|
2008
|
Change
from 2007
|
|||||||||||
|
Amount
|
Percent
|
||||||||||||
|
(In
millions, except percent data)
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$ | (1,135.4 | ) | $ | (1,327.8 | ) | (690.0 | ) % |
|
||||
|
Mexico
|
(25.7 | ) | (38.8 | ) | (296.2 | ) % |
|
||||||
|
Total
chicken
|
(1,161.1 | ) | (1,366.6 | ) | (694.8 | ) % | |||||||
|
Other
products:
|
|||||||||||||
|
United
States
|
98.9 | 70.2 | 245.2 | % |
|
||||||||
|
Mexico
|
4.5 | 1.5 | 50.0 | % |
|
||||||||
|
Total
other products
|
103.4 | 71.7 | 226.9 | % | |||||||||
|
Total
net sales
|
$ | (1,057.7 | ) | $ | (1,294.9 | ) | (545.9 | ) % | |||||
|
Change
from 2007
|
Percent
of Net Sales
|
||||||||||||||||||||
|
Components
|
2008
|
Amount
|
Percent
|
2008
|
2007
|
||||||||||||||||
|
(In
millions, except percent data)
|
|||||||||||||||||||||
|
Gross
profit (loss)
|
$ | (163.5 | ) | $ | (756.2 | ) | (127.6 | ) % | (1.9 | ) % | 7.9 | % | |||||||||
|
SG&A
expenses
|
376.6 | 21.1 | 5.9 | % | 4.4 | % | 4.7 | % |
(a)
|
||||||||||||
|
Goodwill
impairment
|
501.4 | 501.4 |
NM
|
5.9 | — |
(b)
|
|||||||||||||||
|
Administrative
restructuring charges
|
16.2 | 16.2 |
NM
|
0.2 | % | — | % |
(c)
|
|||||||||||||
|
Operating
loss
|
$ | (1,057.7 | ) | $ | (1,294.9 | ) | (545.9 | ) % | (12.4 | ) % | 3.2 | % |
(d)
|
||||||||
|
(a)
|
SG&A
expenses incurred by the US operations during 2008 increased 6.9% from
SG&A expenses incurred by the US operations during 2007 primarily
because of the acquisition of Gold Kist on December 27,
2006.
|
|
(b)
|
As
the result of the downward pressure placed on earnings by increased feed
ingredients costs, weak demand for breast meat and the oversupply of
chicken and other animal-based proteins in the US, the Company evaluated
the carrying amount of its goodwill for potential impairment at September
27, 2008. We obtained valuation reports as of September 27, 2008 that
indicated the carrying amount of our goodwill should be fully impaired
based on current conditions. As a result, we recognized a pretax
impairment charge of $501.4 million during 2008.
|
|
(c)
|
The
Company incurred administrative restructuring charges, composed entirely
of cash-based severance, employee retention, lease commitment and other
facility closing charges, in 2008 related to (i) the closing of two
operating complexes in Arkansas and North Carolina, (ii) the closing of
seven distribution centers in Florida (2), Iowa, Mississippi, Ohio,
Tennessee and Texas, (iii) the idling of an operating complex in
Louisiana, (iv) the transfer of operations from an operating complex in
Arkansas to several of the Company’s other operating complexes, and (v)
the closing of an administrative office in Georgia.
|
|
(d)
|
Operating
loss as a percent of net sales generated in 2008 decreased 15.6 percentage
points from operating income as a percent of sales generated in 2007
primarily because of deterioration in gross profit (loss) performance,
goodwill impairment recognized in 2008, charges related to 2008
restructuring actions and incremental SG&A expenses resulting from the
Gold Kist acquisition.
|
|
NM
|
Not
meaningful.
|
Interest
Expense. Consolidated interest expense increased 9.0% to
$134.2 million in 2008 from $123.2 million in 2007 primarily because of
increased borrowings related to the acquisition of Gold Kist and the funding of
losses as well as a decrease in amounts of interest capitalized during the year.
These factors were partially offset by early extinguishment of debt totaling
$299.6 million in September 2007 and lower interest rates on our
variable-rate credit facilities. Interest expense represented 1.6% of net sales
in both 2008 and 2007.
Loss on Early Extinguishment of
Debt. During 2007, the Company recognized loss on early
extinguishment of debt of $26.4 million, which included premiums of $16.9
million along with unamortized loan costs of $9.5 million. These losses related
to the redemption of $77.5 million of our 9 1/4/% Senior Subordinated Notes
due 2013 and all of our 9 5/8% Senior Notes due 2011.
Income Tax
Expense. The Company’s consolidated income tax benefit in 2008
was $(194.9) million, compared to tax expense of $47.3 million in 2007. The
change in income tax expense (benefit) resulted primarily from net operating
losses incurred in 2008 which are offset by the tax effect of goodwill
impairment and valuation allowances established for deferred tax assets we
believe no longer meet the more likely than not realization criteria of SFAS
109, Accounting for Income
Taxes. See Note M—Income Taxes to the Consolidated Financial
Statements.
Loss from operation of discontinued
business. The Company generated a loss from the operation of
its discontinued turkey business of $11.7 million ($7.3 million, net of tax)
during 2008 compared to a loss of $7.2 million ($4.5 million, net of tax) during
2007. Net sales generated by the discontinued turkey business in 2008 and 2007
were $86.3 million and $100.0 million, respectively.
Gain on disposal of discontinued
business. In March 2008, the Company sold certain assets of
its discontinued turkey business and recognized a gain of $1.5 million ($0.9
million, net of tax).
2007 Compared to
2006
Net Sales. Net sales
generated in 2007 increased $2,345.9 million, or 45.5%, from net sales generated
in 2006. The following table provides additional information regarding net
sales:
|
Source
|
2007
|
Change
from 2006
|
|||||||||||
|
Amount
|
Percent
|
||||||||||||
|
(In
millions, except percent data)
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$ | 6,328.3 | $ | 2,229.9 | 54.4 | % |
(a)
|
||||||
|
Mexico
|
488.5 | 69.8 | 16.7 | % |
(b)
|
||||||||
|
Total
chicken
|
6,816.8 | 2,299.7 | 50.9 | % | |||||||||
|
Other
products:
|
|||||||||||||
|
United
States
|
661.1 | 42.5 | 6.9 | % |
(c)
|
||||||||
|
Mexico
|
20.7 | 3.7 | 21.6 | % |
(d)
|
||||||||
|
Total
other products
|
681.8 | 46.2 | 7.3 | % | |||||||||
|
Total
net sales
|
$ | 7,498.6 | $ | 2,345.9 | 45.5 | % | |||||||
|
(a)
|
US
chicken sales generated in 2007 increased 54.4% from US chicken sales
generated in 2006 primarily as the result of a 41.1% increase in volume
due to the acquisition of Gold Kist on December 27, 2006, increases
in the average selling prices of chicken and, for legacy Pilgrim’s Pride
products, an improved product mix containing more higher-margin,
value-added products.
|
||||||||||||||
|
(b)
|
Mexico
chicken sales generated in 2007 increased 16.7% from Mexico chicken sales
generated in 2006 due primarily to increases in production and a 21.2%
increase in pricing per pound sold.
|
||||||||||||||
|
(c)
|
US
sales of other products generated in 2007 increased 6.9% from US sales of
other products generated in 2007 primarily due to the acquisition of Gold
Kist on December 27, 2006 and improved pricing on protein conversion
products.
|
||||||||||||||
|
(d)
|
Mexico
sales of other products generated in 2007 increased 21.6% from Mexico
sales of other products generated in 2006 principally because of both
higher sales volumes and higher selling prices for commercial
feed.
|
||||||||||||||
Gross Profit. Gross profit
generated in 2007 increased $295.7 million, or 99.5%, from gross profit
generated in 2006. The following table provides gross profit
information:
|
Change
from 2006
|
Percent
of Net Sales
|
||||||||||||||||||||
|
Components
|
2007
|
Amount
|
Percent
|
2007
|
2006
|
||||||||||||||||
|
(In
millions, except percent data)
|
|||||||||||||||||||||
|
Net
sales
|
$ | 7,498.6 | $ | 2,345.9 | 45.5 | % | 100.0 | % | 100.0 | % | |||||||||||
|
Cost
of sales
|
6,905.9 | 2,050.2 | 42.2 | % | 92.1 | % | 94.2 | % |
(a)
|
||||||||||||
|
Gross
profit
|
$ | 592.7 | $ | 295.7 | 99.5 | % | 7.9 | % | 5.8 | % |
(b)
|
||||||||||
|
(a)
|
Cost
of sales incurred by the US operations in 2008 increased $2,007.7 million
due primarily to the acquisition of Gold Kist and increased quantities and
costs of energy and feed ingredients. We also experienced in 2007, and
continue to experience, increased production and freight costs related to
operational inefficiencies, labor shortages at several facilities and
higher fuel costs. We believe the labor shortages are attributable in part
to heightened publicity of governmental immigration enforcement efforts,
ongoing Company compliance efforts and continued changes in the Company’s
employment practices in light of recently published governmental best
practices and new labor hiring regulations. Cost of sales incurred by our
Mexico operations increased $42.5 million primarily due to increased feed
ingredient costs.
|
||||||||||||||||||||
|
(b)
|
Gross
profit as a percent of net sales generated in 2007 improved 2.1 percentage
points from gross profit as a percent of net sales generated in 2006 due
primarily to increased selling prices throughout the industry in response
to increased feed ingredients
costs.
|
||||||||||||||||||||
Operating Income. Operating
income generated in 2007 increased $226.1 million, or 2,035.9%, from operating
income generated in 2006. The following table provides operating income
information:
|
Source
|
2007
|
Change
from 2006
|
|||||||||||
|
Amount
|
Percent
|
||||||||||||
|
(In
millions, except percent data)
|
|||||||||||||
|
Chicken:
|
|||||||||||||
|
United
States
|
$ | 192.5 | $ | 163.9 | 572.4 | % |
|
||||||
|
Mexico
|
13.1 | 31.0 | 173.0 | % |
|
||||||||
|
Total
chicken
|
205.6 | 194.96 | 1,828.5 | % | |||||||||
|
Other
products:
|
|||||||||||||
|
United
States
|
28.6 | 29.8 | 2,502.3 | % |
|
||||||||
|
Mexico
|
3.0 | 1.4 | 82.7 | % |
|
||||||||
|
Total
other products
|
31.6 | 31.2 | 6,691.5 | % | |||||||||
|
Total
net sales
|
$ | 237.2 | $ | 226.1 | 2,035.9 | % | |||||||
|
Change
from 2006
|
Percent
of Net Sales
|
|||||||||||||||||||||
|
Components
|
2007
|
Amount
|
Percent
|
2007
|
2006
|
|||||||||||||||||
|
(In
millions, except percent data)
|
||||||||||||||||||||||
|
Gross
profit
|
$ | 592.7 | $ | 295.7 | 99.5 | % | 7.9 | % | 5.8 |
%
|
|
|||||||||||
|
SG&A
expenses
|
355.5 | 69.6 | 24.3 | % | 4.7 | % | 5.6 | % |
|
(a)
|
||||||||||||
|
Operating
income
|
$ | 237.2 | $ | 226.1 | 2,035.9 | % | 3.2 | % | 0.2 | % |
|
(b)
|
||||||||||
|
(a)
|
SG&A
expenses incurred during 2007 increased from SG&A expenses incurred
during 2006 primarily because of the acquisition of Gold Kist on December
27, 2006.
|
|||||||||||||||||||||
|
(b)
|
Operating
income as a percent of net sales generated in 2007 increased 3.0
percentage points from operating income as a percent of sales generated in
2006 primarily because of the acquisition of Gold Kist, increases in the
average selling prices of chicken, improved product mix and a reduction of
SG&A expenses as a percentage of net sales partially offset by
increased production and freight costs and the other factors described
above.
|
|||||||||||||||||||||
Interest Expense.
Consolidated interest expense increased 151.3% to $123.2 million in 2007 from
$49.0 million in 2006 due primarily to increased borrowing for the acquisition
of Gold Kist.
Interest Income. Interest
income decreased 53.8% to $4.6 million in 2007 from $10.0 million in 2006
because of lower investment balances.
Loss on Early Extinguishment of
Debt. During 2007, the Company recognized loss on early extinguishment of
debt of $26.4 million, which included premiums of $16.9 million along with
unamortized loan costs of $9.5 million. These losses related to the redemption
of $77.5 million of our 9 1/4% Senior Subordinated Notes due 2013 and all
of our 9 5/8% Senior Notes due 2011.
Income Tax Expense.
Consolidated income tax expense in 2007 was $47.3 million compared to tax
benefit of $1.6 million in 2006. The increase in consolidated income tax expense
is the result of the pretax earnings in 2007 versus pretax loss in 2006 and an
increase in tax contingency reserves. In addition, 2006 results included income
tax expense of $25.8 million for the restructuring of the Mexico operations and
subsequent repatriation of earnings from Mexico under the American Jobs Creation
Act of 2004 and a $10.6 million benefit from a change in an estimate. See Note
M—Income Taxes to the Consolidated Financial Statements.
Loss from operation of discontinued
business. The Company incurred a loss from the operation of its
discontinued turkey business of $7.2 million ($4.5 million, net of tax) during
2007 compared to $9.7 million ($6.0 million, net of tax) during 2006. Net sales
generated by the discontinued turkey business in 2007 and 2006 were $100.0
million and $82.8 million, respectively.
Liquidity
and Capital Resources
Our disclosure regarding liquidity and
capital resources has three distinct sections,
the first relating to our historical flow of funds, the second relating to our
liquidity, debt obligations and off-balance sheet
arrangements at
September 27, 2008 and the third discussing our liquidity
after filing for Chapter 11
bankruptcy protection on
December 1, 2008.
Historical Flow of
Funds
Cash
flows used in operating activities were $680.7 million in 2008 compared to cash
flows provided by operating activities of $464.0 million in 2007. The decrease
in operating cash flows from 2007 to 2008 was primarily due to the net loss
incurred in 2008 as compared to net income generated in 2007 and unfavorable
changes in operating assets and liabilities.
At
September 27, 2008, our working capital decreased to a deficit of $1,262.2
million and our current ratio decreased to 0.53 to 1, compared with a working
capital surplus of $394.7 million and a current ratio of 1.44 to 1 at September
29, 2007 primarily due to an increase in the balance of current maturities of
long-term debt and a decrease in the income taxes receivable balance partially
offset by higher accounts receivable, inventories as well as lower accounts
payable and accrued expenses balances.
Current
maturities of long-term debt were $1,874.5 million at September 27, 2008
compared to $2.9 million at September 29, 2007. The $1,871.6 million increase in
current maturities was primarily due to the Company’s reclassification of
$1,872.1 million to reflect as current the long-term debt under its various
credit facilities that will become payable on November 27, 2008 unless the
lenders thereunder agree to extend previously granted waivers.
Income
taxes receivable were $21.7 million at September 27, 2008 compared to
$61.9 million at September 29, 2007. The $40.2 million decrease in income
taxes receivable was primarily due to the reclassification of net operating
losses incurred in 2007 to deferred income taxes.
Trade
accounts and other receivables were $144.2 million at September 27, 2008
compared to $114.7 million at September 29, 2007. The $29.5 million increase in
trade accounts and other receivables was primarily due to higher sales volumes
in the later portion of the fourth quarter of 2008 than were generated in the
later portion of the fourth quarter of 2007.
Inventories
were $1,036.2 million at September 27, 2008 compared to $925.3 million at
September 29, 2007. The $110.9 million increase in inventories was primarily due
to increased product costs in finished chicken products and live inventories as
a result of higher feed ingredient costs.
Current
deferred tax assets were $54.3 million at September 27, 2008 compared to $8.1
million at September 29, 2007. The $46.2 million increase in deferred tax assets
was primarily the result of net operating losses incurred during 2007 and
2008.
Accounts
payable decreased $19.6 million to $378.9 million at September 27, 2008 compared
to $398.5 million at September 29, 2007. The decrease was primarily due to the
impact of closing one operating complex and six distribution centers in the
second quarter of 2008 partially offset by higher feed ingredients
costs.
Accrued
expenses decreased $48.4 million to $448.8 million at September 27, 2008
compared to $497.3 million at September 29, 2007. This decrease is due
principally to a reduction in interest payable resulting from lower interest
rates on our variable-rate notes payable, decreased incentive compensation
accruals and amortization of acquisition-related liabilities such as unfavorable
sales contracts and unfavorable lease contracts.
Cash
flows used in investing activities were $121.6 million and $1,184.5 million in
2008 and 2007, respectively. Cash of $1.102 billion was used to acquire Gold
Kist in 2007. Capital expenditures (excluding business acquisitions) of $152.5
million and $172.3 million in 2008 and 2007, respectively, were primarily
incurred to acquire and expand certain facilities, improve efficiencies, reduce
costs and for the routine replacement of equipment. Capital expenditures for
2009 will be restricted to routine replacement of equipment in our current
operations in addition to important projects we began in 2008 and will not
exceed the $150 million amount allowed under the DIP Credit Agreement. Cash was
used to purchase investment securities of $38.0 million in 2008 and $125.0
million in 2007. Cash proceeds received in 2008 and 2007 from the sale or
maturity of investment securities totaled $27.5 million and $208.7 million,
respectively. Cash proceeds received in 2008 and 2007 totaled $41.4 million and
$6.3 million from the disposal of property, plant and equipment.
Cash
flows provided by financing activities totaled $797.7 million and $630.2 million
in 2008 and 2007, respectively. Cash proceeds received in 2008 and 2007 from
long-term debt were $2,264.9 million and $1,981.3 million, respectively.
Cash proceeds received in 2008 from the sale of the Company’s common stock
totaled $177.2 million (net of costs incurred to complete the sale). Cash was
used to repay long-term debt totaling $1,646.0 million in 2008 and
$1,368.7 million in 2007. Cash provided in 2008 and 2007 because of an
increase in outstanding cash management obligations totaled $13.6 million and
$39.2 million, respectively. Cash was used to pay debt issue and amendment costs
totaling $5.6 million and $15.6 million in 2008 and 2007,
respectively. Cash was also used to pay dividends of $6.3 million and $6.0
million to holders of the Company’s common stock in 2008 and 2007,
respectively.
Liquidity, Debt Obligations
and Off-Balance Sheet Arrangements at September 27, 2008
Liquidity. The
following table presents our available sources of liquidity as of September 27,
2008.
|
Facility
|
Amount
|
Amount
|
|||||||||||
|
Source
of Liquidity
|
Amount
|
Outstanding
|
Available
|
||||||||||
|
(In
millions)
|
|||||||||||||
|
Cash
and cash equivalents
|
$ | — | $ | — | $ | 61.6 | |||||||
|
Investments
in available-for-sale securities
|
$ | — | — | $ | 10.4 | ||||||||
|
Receivables
purchase agreement
|
$ | 300.0 | $ | 236.3 | $ | — |
(a)
|
||||||
|
Debt
facilities:
|
|||||||||||||
|
Revolving
credit facilities
|
$ | 351.6 | $ | 233.5 | $ | 32.1 |
(b)(c)
|
||||||
|
Revolving/term
facility
|
$ | 550.0 | $ | 415.0 | $ | 135.0 |
(c)
|
||||||
|
(a)
|
The aggregate amount of
receivables sold plus the remaining receivables available for sale
declined from $300.0 million at September 29, 2007 to $236.3 million at September 27, 2008.
|
|||||||
|
(b)
|
At
September 27, 2008, the Company had $86.0 million in letters of credit
outstanding relating to normal business transactions that reduce the
amount of available liquidity under the revolving credit
facilities.
|
|||||||
|
(c)
|
The
Company entered into waiver agreements with certain of its lenders on
September 26, 2008. In connection with those agreements, the Company
agreed to have at all times during the term of those waiver agreements
undrawn commitments in an aggregate amount not less than $100 million,
which effectively reduced the aggregate available amount under these
facilities as of September 27, 2008 to approximately $67.1 million. On
October 10, 2008, the required lenders under the Company's credit
agreements agreed to reduce the required undrawn commitment holdback to
$75 million. On October 26, 2008, the required lenders agreed
to further reduce the required undrawn commitment holdback to $35
million.
|
|||||||
Debt Obligations. In September 2006, the Company entered into an amended and restated revolver/term credit agreement with a maturity date of September 21, 2016. At September 27, 2008, this revolver/term credit agreement provided for an aggregate commitment of $1.172 billion consisting of (i) a $550 million revolving/term loan commitment and (ii) $622.4 million in various term loans. At September 27, 2008, the Company had $415.0 million outstanding under the revolver and $620.3 million outstanding in various term loans. The total credit facility is presently secured by certain fixed assets. On September 21, 2011, outstanding borrowings under the revolving/term loan commitment will be converted to a term loan maturing on September 21, 2016. The fixed rate term loans bear interest at rates ranging from 7.34% to 7.56%. The voluntary converted loans bear interest at rates ranging from LIBOR plus 1.0%-2.0%, depending upon the Company’s total debt to capitalization ratio. The floating rate term loans bear interest at LIBOR 1.50%-1.75% based on the ratio of the Company’s debt to EBITDA, as defined in the agreement. The revolving/term loans provide for interest rates ranging from LIBOR plus 1.0%-2.0%, depending upon the Company’s total debt to capitalization ratio. Commitment fees charged on the unused balance of this facility range from 0.20% to 0.40%, depending upon the Company’s total debt to capitalization ratio. In connection with temporary amendments to certain of the financial covenants in this agreement on April 30, 2008, the interest rates were temporarily increased until September 26, 2009 to the following ranges: (i) voluntary converted loans: LIBOR plus 1.5%-3.0%; (ii) floating rate terms loans: LIBOR plus 2.00%-2.75%; and (iii) revolving term loans: LIBOR plus 1.5%-3.0%. In connection with these amendments, the commitment fees were temporarily increased for the same period to range from 0.275%-0.525%. As a result of the Company's Chapter 11 filing, after December 1, 2008, interest will accrue at the default rate, which is two percent above the interest rate otherwise applicable under the credit agreement. One-half of the outstanding obligations under the revolver/term credit agreement are guaranteed by Pilgrim
Interests,
Ltd., an entity affiliated with our Senior Chairman, Lonnie “Bo” Pilgrim. The filing of the bankruptcy petitions
also constituted an event
of default under this credit agreement. The total principal amount owed under
this credit agreement was approximately $1,126.4 million as of December 1, 2008. As a result of such event of default,
all obligations under the agreement became automatically and immediately due and payable, subject
to an automatic stay of any action to collect, assert, or recover a claim
against the Company and the application of applicable bankruptcy
law.
In
January 2007, the Company borrowed (i) $780 million under our revolver/term
credit agreement and (ii) $450 million under our Bridge Loan agreement to fund
the Gold Kist acquisition. On January 24, 2007, the Company closed on the sale
of $400 million of 7 5/8% Senior Notes due 2015 (the “Senior Notes”) and $250
million of 8 3/8% Senior Subordinated Notes due 2017 (the “Subordinated Notes”),
sold at par. Interest is payable on May 1 and November 1 of each year, beginning
November 1, 2007. Prior to the Chapter 11 filings, the notes were subject to
certain early redemption features. The proceeds from the sale of the notes,
after underwriting discounts, were used to (i) retire the loans outstanding
under our Bridge Loan agreement, (ii) repurchase $77.5 million of the Company’s
9 1/4% Senior Subordinated Notes due 2013 at a premium of $7.4 million plus
accrued interest of $1.3 million and (iii) reduce outstanding revolving loans
under our revolving/term credit agreement. Loss on early extinguishment of debt
includes the $7.4 million premium along with unamortized loan costs of $7.1
million related to the retirement of these Notes.
In
September 2007, the Company redeemed all of its 9 5/8% Senior Notes due 2011 at
a total cost of $307.5 million. To fund a portion of the aggregate redemption
price, the Company sold $300 million of trade receivables under its RPA. Loss on
early extinguishment of debt includes the $9.5 million premium along with
unamortized loan costs of $2.5 million related to the retirement of these
Notes.
In
February 2007, the Company entered into a domestic revolving credit agreement of
up to $300.0 million with a final maturity date of February 18, 2013. The
associated revolving credit facility provides for interest rates ranging from
LIBOR plus 0.75-1.75%, depending upon our total debt to capitalization ratio.
The obligations under this facility are secured by domestic chicken inventories
and receivables that were not sold pursuant to the RPA. Commitment fees charged
on the unused balance of this facility range from 0.175% to 0.35%, depending
upon the Company’s
total debt to capitalization ratio. In
connection with temporary amendments to certain of the financial covenants in
this agreement on April 30, 2008, the interest rates were temporarily increased
until September 26, 2009 to range between LIBOR plus 1.25%-2.75%. In connection
with these amendments, the commitment fees were temporarily increased for the
same period to range from 0.25%-0.50%. As a result of the Company's Chapter 11
filing, after December 1, 2008, interest will accrue at the default rate, which
is two percent above the interest rate otherwise applicable under the credit
agreement. One-half of the outstanding obligations under the domestic revolving
credit facility are guaranteed by Pilgrim Interests, Ltd., an entity affiliated
with our Senior Chairman, Lonnie “Bo” Pilgrim. The filing of the bankruptcy petitions
also constituted an event of default under this credit agreement. The total
principal amount owed under this credit agreement was approximately
$199.5 million as of December 1,
2008. As a result of such event of default, all
obligations under the agreement
became automatically and immediately due
and payable, subject to an automatic stay of any action to collect, assert, or
recover a claim against the Company and the application of applicable
bankruptcy law.
In
September 2006, a subsidiary of the Company, Avícola Pilgrim’s Pride de México,
S. de R.L. de C.V. (the “Borrower”), entered into a secured revolving
credit agreement of up to $75 million with a final maturity date of September
25, 2011. In March 2007, the Borrower elected to reduce the commitment under
this agreement to 558 million Mexican pesos, a US dollar-equivalent 51.6 million
at September 27, 2008. Outstanding amounts bear interest at rates ranging from
the higher of the Prime Rate or Federal Funds Effective Rate plus 0.5%; LIBOR
plus 1.65%-3.125%; or TIIE plus 1.05%-2.55% depending on the loan designation.
Obligations under this agreement are secured by a security interest in and lien
upon all capital stock and other equity interests of the Company’s Mexican
subsidiaries. All the obligations of the Borrower are secured by unconditional
guaranty by the Company. At September 27, 2008, $51.6 million was outstanding
and no other funds were available for borrowing under this line. Borrowings are
subject to “no material adverse effect” provisions.
On
November 30, 2008, the Company and certain non-Debtor Mexico subsidiaries of the
Company (the "Mexico Subsidiaries") entered into a Waiver Agreement and Second
Amendment to Credit Agreement (the "Waiver Agreement") with ING Capital LLC, as
agent (the "Mexico Agent"), and the lenders signatory thereto (the "Mexico
Lenders"). Under the Waiver Agreement, the Mexico Agent and the Mexico Lenders
waived any default or event of default under the Credit Agreement dated as of
September 25, 2006, by and among the Company, the Mexico Subsidiaries, the
Mexico Agent and the Mexico Lenders, the administrative agent, and the lenders
parties thereto (the "ING Credit Agreement"), resulting from the Company's
filing of its bankruptcy petition with the Bankruptcy Court. Pursuant to the
Waiver Agreement, outstanding amounts under the ING Credit Agreement now bear
interest at a rate per annum equal to: the LIBOR Rate, the Base Rate, or the
TIIE Rate, as applicable, plus the Applicable Margin (as those terms are defined
in the ING Credit Agreement). While the Company is operating under its petitions
for reorganization relief, the Waiver Agreement provides for an Applicable
Margin for LIBOR loans, Base Rate loans, and TIIE loans of 6.0%, 4.0%, and 5.8%,
respectively. The Waiver Agreement further amended the ING Credit Agreement to
require the Company to make a mandatory prepayment of the revolving loans, in an
aggregate amount equal to 100% of the net cash proceeds received by any Mexico
Subsidiary, as applicable, in excess of thresholds specified in the ING Credit
Agreement (i) from the occurrence of certain asset sales by the Mexico
Subsidiaries; (ii) from the occurrence of any casualty or other insured damage
to, or any taking under power of eminent domain or by condemnation or similar
proceedings of, any property or asset of any Mexico Subsidiary; or (iii) from
the incurrence of certain indebtedness by a Mexico Subsidiary. Any such
mandatory prepayments will permanently reduce
the
amount of
the commitment under the ING Credit Agreement. In connection with the
Waiver Agreement, the Mexico Subsidiaries pledged substantially all of their
receivables, inventory, and equipment and certain fixed assets.
Our loan
agreements generally obligate us to reimburse the applicable lender for
incremental increased costs due to a change in law that imposes (i) any reserve
or special deposit requirement against assets of, deposits with or credit
extended by such lender related to the loan, (ii) any tax, duty or other charge
with respect to the loan (except standard income tax) or (iii) capital adequacy
requirements. In addition, some of our loan agreements contain a withholding tax
provision that requires us to pay additional amounts to the applicable lender or
other financing party, generally if withholding taxes are imposed on such lender
or other financing party as a result of a change in the applicable tax law.
These increased cost and withholding tax provisions continue for the entire term
of the applicable transaction, and there is no limitation on the maximum
additional amounts we could be obligated to pay under such
provisions.
At September 27, 2008, the Company was
not in compliance with the provisions that required it to maintain levels of working capital and net worth
and to maintain various fixed charge, leverage, current and debt-to-equity
ratios. In September 2008, the Company notified its lenders that it
expected to incur a significant loss in the fourth quarter of 2008 and entered
into agreements with them to temporarily waive the fixed-charge coverage ratio
covenant under its credit facilities. The lenders agreed to continue to provide
liquidity under the credit facilities during the thirty-day period ended October
28, 2008. On October 27, 2008, the Company entered into further agreements with
its lenders to temporarily waive the fixed-charge coverage ratio and leverage
ratio covenants under its credit facilities. The lenders agreed to continue to
provide liquidity under the credit facilities during the thirty-day period ended
November 26, 2008. On November 26, 2008, the Company entered into further
agreements with its lenders to extend the temporary waivers until December 1,
2008.
The filing of the bankruptcy petitions
also constituted an event of default under the 7 5/8% Senior Notes due 2015, the
8 3/8% Senior Subordinated Notes due 2017 and the 9 1/4% Senior Subordinated
Notes due 2013. The total principal amount of the Notes was approximately
$657 million as of December 1,
2008. As a result of such event of
default, all obligations under the Notes became automatically and immediately
due and payable, subject to an automatic stay of any action to collect, assert,
or recover a claim against the Company and the application of applicable
bankruptcy law.
Off-Balance Sheet
Arrangements. In
June 1999, the Camp County Industrial Development Corporation issued
$25.0 million of variable-rate environmental facilities revenue bonds
supported by letters of credit obtained by us. At September 27, 2008 and prior
to our bankruptcy filing, the proceeds were available for the Company to draw
from over the construction period in order to construct new sewage and solid
waste disposal facilities at a poultry by-products plant in Camp County, Texas.
There was no requirement that we borrow the full amount of the proceeds from
these revenue bonds and we had not drawn on the proceeds or commenced
construction of the facility as of September 27, 2008. Had the Company borrowed
these funds, they would have become due in 2029. The revenue bonds are supported
by letters of credit obtained by us under our revolving credit facilities, which
are secured by our domestic chicken inventories. The bonds would have been
recorded as debt of the Company if and when they were spent to fund
construction. The original proceeds from the issuance of the revenue bonds
continue to be held by the trustee of the bonds. The interest payment on the
revenue bonds, which was due on December 1, 2008, was not paid. The
filing of the bankruptcy petitions constituted an event of default under these
bonds. As a result of the
event of default, the trustee has the right to accelerate all obligations under
the bonds such that they become immediately due
and payable, subject to an automatic stay of any action to collect, assert, or
recover a claim against the Company and the application of applicable bankruptcy
law.
In addition, the holders of the bonds may tender the bonds for remarketing at
any time. We
have been notified that the holders have tendered the bonds, which are required
to be remarketed on or before December 16, 2008. If the bonds are not
successfully remarketed by that date, the holders of the bonds may draw upon the
letters of credit supporting
the bonds.
In
connection with the RPA, the Company sold, on a revolving basis, certain of its
trade receivables (the “Pooled Receivables”) to a special purpose entity (“SPE”)
wholly owned by the Company, which in turn sold a percentage ownership interest
to third parties. The SPE was a separate corporate entity and its assets
were available first and foremost to satisfy the claims of its creditors. The
aggregate amount of Pooled
Receivables sold plus the
remaining Pooled Receivables available for sale under the RPA declined from $300.0 million at
September 29, 2007 to $236.3 million at September 27,
2008. The outstanding amount of Pooled Receivables sold at September 27,
2008 and September 29, 2007
were $236.3 million and $300.0 million, respectively. The gross
proceeds resulting from the sale are included in cash flows from operating
activities in the Consolidated Statements of Cash Flows. The losses recognized on the sold receivables
during 2008 and
2007 were not material. On December 3, 2008, the RPA was
terminated and all receivables thereunder were repurchased with proceeds of
borrowings under the DIP Credit Agreement.
We
maintain operating leases for various types of equipment, some of which contain
residual value guarantees for the market value of assets at the end of the term
of the lease. The terms of the lease maturities range from one to seven years.
We estimate the maximum potential amount of the residual value guarantees is
approximately $19.9 million; however, the actual amount would be offset by any
recoverable amount based on the fair market value of the underlying leased
assets. No liability has been recorded related to this contingency as the
likelihood of payments under these guarantees is not considered to be probable
and the fair value of the guarantees is immaterial. We historically have not
experienced significant payments under similar residual guarantees.
We are a
party to many routine contracts in which we provide general indemnities in the
normal course of business to third parties for various risks. Among other
considerations, we have not recorded a liability for any of these indemnities
as, based upon the likelihood of payment, the fair value of such indemnities is
immaterial.
Liquidity after Chapter 11
Bankruptcy Filings
As
previously discussed, on December 1, 2008, the Debtors filed voluntary petitions
in the Bankruptcy Court seeking reorganization relief under the Bankruptcy Code.
The filing of the Chapter 11 petitions constituted an event of default
under certain of our debt obligations, and those debt obligations became
automatically and immediately due and payable, subject to an automatic stay of
any action to collect, assert, or recover a claim against the Company and the
application of applicable bankruptcy law. As a result, the accompanying
Consolidated Balance Sheet as of September 27, 2008 includes a reclassification
of $1,872.1 million to reflect as current certain long-term debt under its
credit facilities that became automatically and immediately due and
payable.
On December 2, 2008, the Bankruptcy Court granted interim
approval authorizing the Company and US Subsidiaries to enter into the DIP
Credit Agreement, and the Company, the US Subsidiaries
and the other parties
entered into the DIP Credit Agreement, subject to final approval of the
Bankruptcy Court.The DIP Credit Agreement provides for an
aggregate commitment of up to $450 million, which permits borrowings on a
revolving basis. The Company received interim approval to access
$365 million of the commitment pending issuance of the final order
by the Bankruptcy Court. Outstanding borrowings
under the DIP Credit Agreement will bear interest at a per annum rate equal to
8.0% plus the greatest of (i) the prime rate as established by the DIP agent
from time to time, (ii) the average federal funds rate plus 0.5%, or
(iii) the LIBOR rate plus 1.0%, payable monthly. The loans under the DIP Credit Agreement
were used to repurchase all receivables sold under the Company's RPA and may be used to fund the working
capital requirements of the
Company and its subsidiaries according to a budget as approved by the required
lenders under the DIP Credit Agreement. For additional information on the
RPA, see Item 7. "Management’s Discussion and Analysis of Financial
Condition and Results of
Operations—Liquidity and Capital
Resources."
Actual borrowings by the Company under the DIP Credit Agreement are subject to a borrowing base, which is a formula based on certain eligible inventory and eligible receivables. The borrowing base formula is reduced by pre-petition obligations under the Fourth Amended and Restated Secured Credit Agreement dated as of February 8, 2007, among the Company and certain of its subsidiaries, Bank of Montreal, as administrative agent, and the lenders parties thereto, as amended, administrative and professional expenses, and the amount owed by the Company and the Debtor Subsidiaries to any person on account of the purchase price of agricultural products or services (including poultry and livestock) if that person is entitled to any grower's or producer's lien or other security arrangement. The borrowing base is also limited to 2.22 times the formula amount of total eligible receivables. As of December 6, 2008, the applicable borrowing base was $324.8 million and the amount available for borrowings under the DIP Credit Agreement was $210.9 million.
The principal amount of outstanding
loans under the DIP Credit Agreement, together with accrued and unpaid interest
thereon, are payable in full at maturity on December 1, 2009, subject to
extension for an additional six months with the approval of all lenders
thereunder. All obligations under the DIP Credit Agreement are unconditionally guaranteed by the
US Subsidiaries and are
secured by a first priority priming lien on substantially all of the
assets of the Company and the US Subsidiaries, subject to specified permitted
liens in the DIP Credit Agreement.
Under the
terms of the DIP Credit Agreement and applicable bankruptcy law, the Company may
not pay dividends on the common stock while it is in bankruptcy. Any payment of
future dividends and the amounts thereof will depend on our emergence from
bankruptcy, our earnings, our financial requirements and other factors deemed
relevant by our Board of Directors at the time.
Capital
expenditures for 2009 will be restricted to routine replacement of equipment in
our current operations in addition to important projects we began in 2008 and
will not exceed the $150 million amount allowed under the DIP Credit
Agreement.
In addition to our debt commitments at
September 27, 2008, we had other commitments and contractual obligations that
obligate us to make specified payments in the future. The filing of the
Chapter 11 petitions constituted an event of default under certain of our
debt obligations, and those debt obligations became automatically and
immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law. The
following table summarizes the total amounts due as of September 27, 2008
under all debt agreements, commitments and other contractual obligations.
We are in the process of
evaluating our executory contracts in order to determine which contracts will be
assumed in our Chapter 11 proceedings. Therefore, obligations as currently
quantified in the table below and in the footnotes to the table are expected to
change. The table indicates
the years in which payments are due under the contractual
obligations.
Assuming
that acceleration of certain long-term debt maturities did not occur,
contractual obligations at September 27, 2008 were as follows:
|
Payments
Due By Period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Long-term
debt(a)(b(c))
|
$ | 1,941.9 | $ | 2.4 | $ | 56.7 | $ | 203.4 | $ | 1,679.4 | ||||||||||
|
Guarantee
fees(d)
|
43.5 | 6.1 | 12.1 | 12.1 | 13.2 | |||||||||||||||
|
Operating
leases
|
130.7 | 43.6 | 62.1 | 23.3 | 1.7 | |||||||||||||||
|
Purchase
obligations(e)
|
164.9 | 164.9 | — | — | — | |||||||||||||||
|
Other
commitments(f)
|
65.3 | — | 33.1 | 32.2 | — | |||||||||||||||
|
Total
|
$ | 2,346.3 | $ | 217.0 | $ | 164.0 | $ | 271.0 | $ | 1,694.3 | ||||||||||
|
(a)
|
Excludes
$86.0 million in letters of credit outstanding related to normal business
transactions.
|
|
(b)
|
As a result of the Chapter 11
filing, substantially all long-term debt became automatically and
immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the
application of applicable bankruptcy
law.
|
|
(c)
|
Interest
rates on long-term debt were increased as a result of the Chapter 11
filing and the amounts that will actually be paid related to interest are
uncertain as they will be subject to the claims process in the bankruptcy
case.
|
|
(d)
|
Pursuant to the terms of the DIP
Credit Agreement, the
Company may not pay any guarantee fees without the consent of the lenders
party thereto.
|
|
(e)
|
Includes agreements to purchase
goods or services that are enforceable and legally binding on us and that
specify all significant terms, including fixed or minimum quantities to be purchased;
fixed, minimum, or variable price provisions; and the approximate timing
of the transaction.
|
|
(f)
|
Includes unrecognized tax benefits
under FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes – an
interpretation of FASB Statement No. 109 (“FIN 48”).
|
Pending
Adoption of Recent Accounting Pronouncements
Discussion
regarding our pending adoption of Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements; SFAS No. 141(R), Business Combinations; SFAS
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No.
51; and SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133, is
included in Note B—Summary of Significant Accounting Policies to our
Consolidated Financial Statements included elsewhere in this Annual
Report.
Critical
Accounting Policies and Estimates
General. Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the US. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing
basis, we evaluate our estimates, including those related to revenue
recognition, customer programs and incentives, allowance for doubtful accounts,
inventories, income taxes and product recall accounting. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial
statements.
Revenue
Recognition. Revenue is recognized upon shipment and transfer
of ownership of the product to the customer and is recorded net of estimated
incentive offerings including special pricing agreements, promotions and other
volume-based incentives. Revisions to these estimates are charged back to net
sales in the period in which the facts that give rise to the revision become
known.
Inventory. Live
chicken inventories are stated at the lower of cost or market and breeder hens
at the lower of cost, less accumulated amortization, or market. The costs
associated with breeder hens are accumulated up to the production stage and
amortized over their productive lives using the unit-of-production method.
Finished poultry products, feed, eggs and other inventories are stated at the
lower of cost (first-in, first-out method) or market. We record valuations and
adjustments for our inventory and for estimated obsolescence at or equal to the
difference between the cost of inventory and the estimated market value based
upon known conditions affecting inventory obsolescence, including significantly
aged products, discontinued product lines, or damaged or obsolete products. We
allocate meat costs between our various finished chicken products based on a
by-product costing technique that reduces the cost of the whole bird by
estimated yields and amounts to be recovered for certain by-product parts. This
primarily includes leg quarters, wings, tenders and offal, which are carried in
inventory at the estimated recovery amounts, with the remaining amount being
reflected as our breast meat cost. Generally, the Company performs an evaluation
of whether any lower of cost or market adjustments are required at the segment
level based on a number of factors, including: (i) pools of related inventory,
(ii) product continuation or discontinuation, (iii) estimated market selling
prices and (iv) expected distribution channels. If actual market conditions or
other factors are less favorable than those projected by management, additional
inventory adjustments may be required. At September 27, 2008, the Company has
lowered the carrying value of its inventories by $26.6 million due to
lower-of-cost-or-market adjustments.
Property, Plant and
Equipment. The
Company records impairment charges on long-lived assets used in operations when
events and circumstances indicate that the assets may be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. The impairment charge is determined based
upon the amount the net book value of the assets exceeds their fair market
value. In making these determinations, the Company utilizes certain assumptions,
including, but not limited to: (i) future cash flows estimated to be generated
by these assets, which are based on additional assumptions such as asset
utilization, remaining length of service and estimated salvage values; (ii)
estimated fair market value of the assets; and (iii) determinations with respect
to the lowest level of cash flows relevant to the respective impairment test,
generally groupings of related operational facilities. Given the interdependency
of the Company’s individual facilities during the production process, which
operate as a vertically integrated network, and the fact that the Company does
not price transfers of inventory between its vertically integrated facilities at
market prices, it evaluates impairment of assets held and used at the country
level (i.e., the US and Mexico) within each segment. Management believes this is
the lowest level of identifiable cash flows for its assets that are held and
used in production activities. At the present time, the Company’s forecasts
indicate that it can recover the carrying value of its assets based on the
projected cash flows of the operations. A key assumption in management’s
forecast is that the Company’s sales volumes will return to historical margins
as supply and demand between commodities and chicken and other animal-based
proteins become more balanced. However, the exact timing of the return to
historical margins is not certain and if the return to historical margins is
delayed, impairment charges could become necessary in the future. The Company
recognized impairment charges related to closed production complexes and
distribution centers totaling $10.2 million during 2008.
Goodwill. The Company evaluates goodwill for impairment annually or at
other times when events and circumstances indicate the carrying
value of this asset may no longer be fully recoverable. The Company first compares the fair value of each reporting
unit, determined using both
income and market approaches, to its carrying value. To determine the fair value of each
reporting unit, the Company utilizes certain assumptions, including, but not
limited to: (i) future cash flows estimated to be generated by each reporting
unit, which are based on additional assumptions such as future market growth and trends,
forecasted revenue and costs, appropriate discount rates and other
variables, (ii) estimated
value of the enterprise in the equity markets, and (iii) determinations with
respect to the combination of operations that comprise a reporting unit.
If the fair value of
a reporting unit exceeds the carrying
value of the net assets assigned to that unit, goodwill is not impaired and
the Company does
not perform further
testing. If the carrying value of a reporting unit’s net assets exceeds the
fair value of the reporting unit, then the Company determines the implied fair
value of the reporting
unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds
its implied fair value, then an impairment of goodwill has occurred and
the Company recognizes an impairment loss for the difference
between the carrying amount and the implied fair value of goodwill. At September 27, 2008, the Company
recognized an impairment charge of $501.4 million, which eliminated all
goodwill.
Litigation and Contingent
Liabilities. The Company is subject to lawsuits,
investigations and other claims related to employment, environmental, product,
and other matters. It is required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of reserves required, including legal
defense costs, if any, for these contingencies is made when losses are
determined to be probable and loss amounts can be reasonably estimated, and
after considerable analysis of each individual issue. With respect to our
environmental remediation obligations, the accrual for environmental remediation
liabilities is measured on an undiscounted basis. These reserves may change in
the future due to favorable or adverse judgments, changes in the Company’s
assumptions, the effectiveness of strategies or other factors beyond the
Company’s control.
Accrued Self
Insurance. Insurance expense for casualty claims and
employee-related health care benefits are estimated using historical experience
and actuarial estimates. Stop-loss coverage is maintained with third party
insurers to limit the Company’s total exposure. Certain categories of claim
liabilities are actuarially determined. The assumptions used to arrive at
periodic expenses are reviewed regularly by management. However, actual expenses
could differ from these estimates and could result in adjustments to be
recognized.
Business
Combinations. The Company allocates the total purchase price
in connection with acquisitions to assets and liabilities based upon their
estimated fair values. For property, plant and equipment and intangible assets
other than goodwill, for significant acquisitions, the Company has historically
relied upon the use of third party valuation experts to assist in the estimation
of fair values. Historically, the carrying value of acquired accounts
receivable, inventory and accounts payable have approximated their fair value as
of the date of acquisition, though adjustments are made within purchase price
accounting to the extent needed to record such assets and liabilities at fair
value. With respect to accrued liabilities, the Company uses all available
information to make its best estimate of the fair value of the acquired
liabilities and, when necessary, may rely upon the use of third party actuarial
experts to assist in the estimation of fair value for certain liabilities,
primarily self-insurance accruals.
Income Taxes. The
provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred income
taxes reflect the net tax effect of temporary differences between the book and
tax bases of recorded assets and liabilities, net operating losses and tax
credit carry forwards. The amount of deferred tax on these temporary differences
is determined using the tax rates expected to apply to the period when the asset
is realized or the liability is settled, as applicable, based on the tax rates
and laws in the respective tax jurisdiction enacted as of the balance sheet
date.
Realizability of Deferred Tax
Assets. The Company reviews its deferred tax assets for
recoverability and establishes a valuation allowance based on historical taxable
income, projected future taxable income, applicable tax strategies, and the
expected timing of the reversals of existing temporary differences. A valuation
allowance is provided when it is more likely than not that some or all of the
deferred tax assets will not be realized. Valuation allowances have been
established primarily for US federal and state net operating loss carry forwards
and Mexico net operating loss carry forwards. See Note M—Income Taxes to the
Consolidated Financial Statements.
Indefinite Reinvestment in Foreign
Subsidiaries. Taxes are provided for foreign subsidiaries
based on the assumption that their earnings will be indefinitely reinvested. As
such, US deferred income taxes have not been provided on these earnings. If such
earnings were not considered indefinitely reinvested, certain deferred foreign
and US income taxes would be provided.
Accounting for Uncertainty in Income
Taxes. On September 30, 2007, and effective for 2008, we
adopted the provisions of FIN 48. FIN 48 provides a recognition threshold and
measurement criteria for the financial statement recognition of a tax benefit
taken or expected to be taken in a tax return. Tax benefits are recognized only
when it is more likely than not, based on the technical merits, that the
benefits will be sustained on examination. Tax benefits that meet the
more-likely-than-not recognition threshold are measured using a probability
weighting of the largest amount of tax benefit that has greater than 50%
likelihood of being realized upon settlement. Whether the more-likely-than-not
recognition threshold is met for a particular tax benefit is a matter of
judgment based on the individual facts and circumstances evaluated in light of
all available evidence as of the balance sheet date. See Note M—Income Taxes to
the Consolidated Financial Statements.
Pension and Other
Postretirement Benefits. The Company’s pension and other postretirement benefit costs and obligations are
dependent on the various actuarial assumptions used in calculating such amounts.
These assumptions relate to discount rates, salary growth, long-term return on
plan assets, health care cost trend rates and other factors. The Company bases the discount rate assumptions on
current investment yields on high-quality corporate long-term bonds. The salary
growth assumptions reflect our long-term actual experience and future or
near-term outlook. Long-term return on plan assets is determined based on
historical portfolio results and management’s expectation of the future economic
environment. Our health care cost trend assumptions are developed based on
historical cost data, the near-term outlook and an assessment of likely
long-term trends. Actual results that differ from our assumptions are
accumulated and, if in excess of the lesser of 10% of the project benefit
obligation or the fair market value of plan assets, amortized over the estimated
future working life of the plan participants.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
Market
Risk-Sensitive Instruments and Positions
The risk
inherent in our market risk-sensitive instruments and positions is primarily the
potential loss arising from adverse changes in the price of feed ingredients,
foreign currency exchange rates, interest rates and the credit quality of its
available-for-sale securities as discussed below. The sensitivity analyses
presented do not consider the effects that such adverse changes may have on
overall economic activity, nor do they consider additional actions our
management may take to mitigate our exposure to such changes. Actual results may
differ.
Feed
Ingredients. We purchase certain commodities, primarily corn
and soybean meal, for use as ingredients in the feed we either sell commercially
or consume in our live operations. As a result, our earnings are affected by
changes in the price and availability of such feed ingredients. As market
conditions dictate, we will attempt to minimize our exposure to the changing
price and availability of such feed ingredients using various techniques,
including, but not limited to: (i) executing purchase agreements with suppliers
for future physical delivery of feed ingredients at established prices and (ii)
purchasing or selling derivative financial instruments such as futures and
options. We do not use such financial instruments for trading purposes and are
not a party to any leveraged derivatives. Market risk is estimated as a
hypothetical 10% increase in the weighted-average cost of our primary feed
ingredients as of September 27, 2008. Based on our feed consumption during 2008,
such an increase would have resulted in an increase to cost of sales of
approximately $343.0 million, excluding
the impact of any feed ingredients derivative financial instruments in that
period. A 10% change in ending feed ingredients inventories at September 27,
2008 would be $9.5 million, excluding any potential impact on the production
costs of our chicken inventories. As of September 27, 2008, the fair market
value of the Company’s open derivative commodity positions was an $18.0 million
liability. During October 2009, all of the Company’s positions were liquidated
and an additional loss of $21.8 million was recognized.
Foreign
Currency. Our earnings are affected by foreign exchange rate
fluctuations related to the Mexican peso net monetary position of our Mexico
subsidiaries. We manage this exposure primarily by attempting to minimize our
Mexican peso net monetary position. We are also exposed to the effect of
potential exchange rate fluctuations to the extent that amounts are repatriated
from Mexico to the US. However, we currently anticipate that the future cash
flows of our Mexico subsidiaries will be reinvested in our Mexico operations. In
addition, the Mexican peso exchange rate can directly and indirectly impact our
financial condition and results of operations in several ways, including
potential economic recession in Mexico because of devaluation of their currency.
The impact on our financial position and results of operations resulting from a
hypothetical change in the exchange rate between the US dollar and the Mexican
peso cannot be reasonably estimated. Foreign currency exchange gains and losses,
representing the change in the US dollar value of the net monetary assets of our
Mexico subsidiaries denominated in Mexican pesos, was a gain of $0.6 million in
2008, a loss of $1.4 million in 2007 and a loss of $0.1 million in 2006.
The average exchange rates for 2008, 2007 and 2006 were 10.61 Mexican pesos to 1
US dollar, 10.95 Mexican pesos to 1 US dollar and 10.87 Mexican pesos to 1 US
dollar, respectively. No assurance can be given as to how future movements in
the Mexican peso could affect our future financial condition or results of
operations.
Interest
Rates. Our earnings are also affected by changes in interest
rates due to the impact those changes have on our variable-rate debt
instruments. We had variable-rate debt instruments representing approximately
54.7% of our total debt at September 27, 2008. Holding other variables constant,
including levels of indebtedness, an increase in interest rates of 25 basis
points would have increased our interest expense by $2.7 million for 2008. These
amounts are determined by considering the impact of the hypothetical interest
rates on our variable-rate debt at September 27, 2008.
Market
risk for fixed-rate debt is estimated as the potential increase in fair value
resulting from a hypothetical decrease in interest rates of 25 basis points.
Using a discounted cash flow analysis, the market risk on fixed-rate debt
totaled $30.1 million as of September 27, 2008. Due to our current financial
condition, our public debt is trading at a substantial discount. As of November
28, 2008, the most recent trades of our 7 5/8% senior unsecured notes and 8 3/8%
senior subordinated unsecured notes were executed at $14.00 per $100.00 par
value and $4.50 per $100.00 par value, respectively. Management also expects
that the fair value of our non-public credit facilities has also decreased, but
cannot reliably estimate the fair value at this time.
Available-for-Sale
Securities. The Company and certain
retirement plans that it sponsors invest in a variety of financial instruments.
In response to the continued turbulence in global financial markets, we have
analyzed our portfolios of investments and, to the best of our knowledge, none
of our investments, including money market funds units, commercial paper and
municipal securities, have been downgraded because of this turbulence, and
neither we nor any fund in which we participate hold significant amounts of
structured investment vehicles, mortgage backed securities, collateralized debt
obligations, auction-rate securities, credit derivatives, hedge funds
investments, fund of funds investments or perpetual preferred securities. At
September 27, 2008, the fair value of the Company’s available-for-sale portfolio
was $66.3 million. Management does not believe a hypothetical change in interest
rates of 25 basis points or a 10% decrease in equity prices would be material to
the Company.
Impact of
Inflation. Due to low to moderate inflation in the US and
Mexico and our rapid inventory turnover rate, the results of operations have not
been significantly affected by inflation during the past three-year
period.
Item 8. Financial Statements and Supplementary
Data
The
consolidated financial statements together with the report of our independent
registered public accounting firm and financial statement schedule are included
on pages 95 through 151 of this report. Financial statement schedules other than
those included herein have been omitted because the required information is
contained in the consolidated financial statements or related notes, or such
information is not applicable.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Not
applicable.
Item 9A. Controls and Procedures
As of
September 27, 2008, an evaluation was performed under the supervision and with
the participation of the Company’s management, including the Senior Chairman of
the Board of Directors, Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s “disclosure
controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation,
the Company’s management, including the Senior Chairman of the Board of
Directors, Chief Executive Officer and Chief Financial Officer, concluded the
Company’s disclosure controls and procedures were 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, and that information we are required to disclose in our reports filed
with the Securities and Exchange Commission is accumulated and communicated to
our management, including our Senior Chairman of the Board of Directors, Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
In
connection with the evaluation described above, the Company’s management,
including the Senior Chairman of the Board, Chief Executive Officer and Chief
Financial Officer, identified no other change in the Company’s internal control
over financial reporting that occurred during the Company’s quarter ended
September 27, 2008 and that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Pilgrim's
Pride Corporation’s (“PPC”) management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). PPC’s internal control system is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with
generally accepted accounting principles.
Under the
supervision and with the participation of management, including its principal
executive officer and principal financial officer, PPC’s management assessed the
design and operating effectiveness of internal control over financial reporting
as of September 27, 2008 based on the framework set forth in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organization of the
Treadway Commission.
Based on
this assessment, management concluded that PPC’s internal control over financial
reporting was effective as of September 27, 2008. Ernst & Young LLP, an
independent registered public accounting firm, has issued an attestation report
on the effectiveness of the Company’s internal control over financial reporting
as of September 27, 2008. That report is included herein.
/s/ Lonnie “Bo”
Pilgrim
Lonnie
“Bo” Pilgrim
Senior
Chairman of the Board of Directors
/s/ J. Clinton
Rivers
J.
Clinton Rivers
President,
Chief
Executive Officer
Director
/s/ Richard A.
Cogdill
Richard
A. Cogdill
Chief
Financial Officer,
Secretary
and Treasurer
Director
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Board
of Directors and Stockholders
Pilgrim’s
Pride Corporation
We have
audited Pilgrim's Pride Corporation’s internal control over financial reporting
as of September 27, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Pilgrim's Pride Corporation’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Pilgrim's Pride Corporation maintained, in all material respects,
effective internal control over financial reporting as of September 27, 2008,
based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pilgrim's
Pride Corporation as of September 27, 2008 and September 29, 2007, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended September 27, 2008, of
Pilgrim's Pride Corporation, and our report dated December 10, 2008, expressed
an unqualified opinion thereon.
Ernst
& Young LLP
Dallas,
Texas
December
10, 2008
Item 9B. Other Information
Not
applicable.
|
|
PART
III
|
Item 10. Directors and Executive Officers and
Corporate Governance
Certain
information regarding our executive officers has been presented under “Executive
Officers” included in Item 1. “Business,” above.
Reference
is made to the section entitled “Election of Directors” of the Company’s Proxy
Statement for its 2009 Annual Meeting of Stockholders, which section is
incorporated herein by reference.
Reference
is made to the section entitled “Section 16(a) Beneficial Ownership Reporting
Compliance” of the Company’s Proxy Statement for its 2009 Annual Meeting of
Stockholders, which section is incorporated herein by reference.
We have
adopted a Code of Business Conduct and Ethics, which applies to all employees,
including our Chief Executive Officer and our Chief Financial Officer and
Principal Accounting Officer. The full text of our Code of Business Conduct and
Ethics is published on our website, at www.pilgrimspride.com,
under the “Investors-Corporate Governance” caption. We intend to disclose future
amendments to, or waivers from, certain provisions of this Code on our website
within four business days following the date of such amendment or
waiver.
See Item
13. “Certain Relationships and Related Transactions, and Director
Independence.”
Item
11. Executive
Compensation
See Item
13. “Certain Relationships and Related Transactions, and Director
Independence.”
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
See Item
13. “Certain Relationships and Related Transactions, and Director
Independence.”
As of
September 27, 2008, the Company did not have any compensation plans (including
individual compensation arrangements) under which equity securities of the
Company are authorized for issuance by the Company.
Item
13. Certain
Relationships and Related Transactions, and Director Independence
Additional
information responsive to Items 10, 11, 12 and 13 is incorporated by reference
from the sections entitled “Security Ownership,” “Board of Directors
Independence,” “Committees of the Board of Directors,” “Election of Directors,”
“Report of the Compensation Committee,” “Compensation Discussion and Analysis,”
“Executive Compensation,” “Compensation Committee Interlocks and Insider
Participation” and “Certain Transactions” of the Company’s Proxy Statement for
its 2009 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and
Services
The
information required by this item is incorporated herein by reference from the
section entitled “Independent Registered Public Accounting Firm Fee Information”
of the Company’s Proxy Statement for its 2009 Annual Meeting of
Stockholders.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
|
(a)
|
Financial
Statements
|
|
|
(1)
|
The
financial statements and schedules listed in the index to financial
statements and schedules on page 3 of this report are filed as part of
this report.
|
|
|
(2)
|
All
other schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instructions or
are not applicable and therefore have been omitted.
|
|
|
(3)
|
The
financial statements schedule entitled “Valuation and Qualifying Accounts
and Reserves” is filed as part of this report on page
151.
|
|
|
(b)
|
Exhibits
|
Exhibit
Number
|
2.1
|
Agreement
and Plan of Reorganization dated September 15, 1986, by and among
Pilgrim’s Pride Corporation, a Texas corporation; Pilgrim’s Pride
Corporation, a Delaware corporation; and Doris Pilgrim Julian, Aubrey Hal
Pilgrim, Paulette Pilgrim Rolston, Evanne Pilgrim, Lonnie “Bo” Pilgrim,
Lonnie Ken Pilgrim, Greta Pilgrim Owens and Patrick Wayne Pilgrim
(incorporated by reference from Exhibit 2.1 to the Company’s Registration
Statement on Form S-1 (No. 33-8805) effective November 14,
1986).
|
|
|
2.2
|
Agreement
and Plan of Merger dated September 27, 2000 (incorporated by reference
from Exhibit 2 of WLR Foods, Inc.’s Current Report on Form 8-K
(No. 000-17060) dated September 28, 2000).
|
|
|
2.3
|
Agreement
and Plan of Merger dated as of December 3, 2006, by and among the Company,
Protein Acquisition Corporation, a wholly owned subsidiary of the Company,
and Gold Kist Inc. (incorporated by reference from Exhibit 99.(D)(1) to
Amendment No. 11 to the Company’s Tender Offer Statement on Schedule TO
filed on December 5, 2006).
|
|
|
3.1
|
Certificate
of Incorporation of the Company, as amended (incorporated by reference
from Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year
ended October 2, 2004).
|
|
|
3.2
|
Amended
and Restated Corporate Bylaws of the Company (incorporated by reference
from Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (No.
333-111929) filed on January 15, 2004).
|
|
|
4.1
|
Certificate
of Incorporation of the Company, as amended (included as Exhibit
3.1).
|
|
|
4.2
|
Amended
and Restated Corporate Bylaws of the Company (included as
Exhibit 3.2).
|
|
|
4.3
|
Indenture,
dated November 21, 2003, between Pilgrim's Pride Corporation and The Bank
of New York as Trustee relating to Pilgrim’s Pride’s 9 1/4% Senior Notes
due 2013 (incorporated by reference from Exhibit 4.1 of the Company's
Registration Statement on Form S-4 (No. 333-111975) filed on January 16,
2004).
|
|
|
4.4
|
Form
of 9 1/4% Note due 2013 (incorporated by reference from Exhibit 4.3 of the
Company's Registration Statement on Form S-4 (No. 333-111975) filed on
January 16, 2004).
|
|
|
4.5
|
Senior
Debt Securities Indenture dated as of January 24, 2007, by and between the
Company and Wells Fargo Bank, National Association, as trustee
(incorporated by reference from Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed on January 24, 2007).
|
|
|
4.6
|
First
Supplemental Indenture to the Senior Debt Securities Indenture dated as of
January 24, 2007, by and between the Company and Wells Fargo Bank,
National Association, as trustee (incorporated by reference from Exhibit
4.2 to the Company’s Current Report on Form 8-K filed on January 24,
2007).
|
|
|
4.7
|
Form
of 7 5/8% Senior Note due 2015 (incorporated by reference from Exhibit 4.3
to the Company’s Current Report on Form 8-K filed on January 24,
2007).
|
|
|
4.8
|
Senior
Subordinated Debt Securities Indenture dated as of January 24, 2007, by
and between the Company and Wells Fargo Bank, National Association, as
trustee (incorporated by reference from Exhibit 4.4 to the Company’s
Current Report on Form 8-K filed on January 24, 2007).
|
|
|
4.9
|
First
Supplemental Indenture to the Senior Subordinated Debt Securities
Indenture dated as of January 24, 2007, by and between the Company and
Wells Fargo Bank, National Association, as trustee (incorporated by
reference from Exhibit 4.5 to the Company’s Current Report on Form 8-K
filed on January 24, 2007).
|
|
|
4.10
|
Form
of 8 3/8% Subordinated Note due 2017 (incorporated by reference from
Exhibit 4.6 to the Company’s Current Report on Form 8-K filed on January
24, 2007).
|
|
|
10.1
|
Pilgrim’s
Industries, Inc. Profit Sharing Retirement Plan, restated as of July 1,
1987 (incorporated by reference from Exhibit 10.1 of the Company’s Form
8-K filed on July 1, 1992). …
|
|
|
10.2
|
Senior
Executive Performance Bonus Plan of the Company (incorporated by reference
from Exhibit A in the Company’s Proxy Statement dated December 13, 1999).
…
|
|
|
10.3
|
Aircraft
Lease Extension Agreement between B.P. Leasing Co. (L.A. Pilgrim,
individually) and Pilgrim’s Pride Corporation (formerly Pilgrim’s
Industries, Inc.) effective November 15, 1992 (incorporated by reference
from Exhibit 10.48 of the Company’s Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
|
|
|
10.4
|
Broiler
Grower Contract dated May 6, 1997 between Pilgrim’s Pride Corporation and
Lonnie “Bo” Pilgrim (Farm 30) (incorporated by reference from Exhibit
10.49 of the Company’s Quarterly Report on Form 10-Q for the three months
ended March 29, 1997).
|
|
|
10.5
|
Commercial
Egg Grower Contract dated May 7, 1997 between Pilgrim’s Pride Corporation
and Pilgrim Poultry G.P. (incorporated by reference from
Exhibit 10.50 of the Company’s Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
|
|
|
10.6
|
Agreement
dated October 15, 1996 between Pilgrim’s Pride Corporation and Pilgrim
Poultry G.P. (incorporated by reference from Exhibit 10.23 of the
Company’s Quarterly Report on Form 10-Q for the three months ended
January 2, 1999).
|
|
|
10.7
|
Heavy
Breeder Contract dated May 7, 1997 between Pilgrim’s Pride Corporation and
Lonnie “Bo” Pilgrim (Farms 44, 45 & 46) (incorporated by reference
from Exhibit 10.51 of the Company’s Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
|
|
|
10.8
|
Broiler
Grower Contract dated January 9, 1997 by and between Pilgrim’s Pride and
O.B. Goolsby, Jr. (incorporated by reference from Exhibit 10.25 of the
Company’s Registration Statement on Form S-1 (No. 333-29163) effective
June 27, 1997).
|
|
|
10.9
|
Broiler
Grower Contract dated January 15, 1997 by and between Pilgrim’s Pride
Corporation and B.J.M. Farms (incorporated by reference from Exhibit 10.26
of the Company’s Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
|
|
|
10.10
|
Broiler
Grower Agreement dated January 29, 1997 by and between Pilgrim’s Pride
Corporation and Clifford E. Butler (incorporated by reference from Exhibit
10.27 of the Company’s Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
|
|
|
10.11
|
Purchase
and Contribution Agreement dated as of June 26, 1998 between Pilgrim’s
Pride Funding Corporation and Pilgrim’s Pride Corporation (incorporated by
reference from Exhibit 10.34 of the Company’s Quarterly Report on Form
10-Q for the three months ended June 27, 1998).
|
|
|
10.12
|
Guaranty
Fee Agreement between Pilgrim’s Pride Corporation and Pilgrim Interests,
Ltd., dated June 11, 1999 (incorporated by reference from Exhibit 10.24 of
the Company’s Annual Report on Form 10-K for the year ended
October 2, 1999).
|
|
|
10.13
|
Commercial
Property Lease dated December 29, 2000 between Pilgrim’s Pride Corporation
and Pilgrim Poultry G.P. (incorporated by reference from
Exhibit 10.30 of the Company’s Quarterly Report on Form 10-Q for the
three months ended December 30, 2000).
|
|
|
10.14
|
Amendment
No. 1 dated as of December 31, 2003 to Purchase and Contribution Agreement
dated as of June 26, 1998, between Pilgrim’s Pride Funding Corporation and
Pilgrim’s Pride Corporation (incorporated by reference from Exhibit 10.5
of the Company’s Quarterly Report on Form 10-Q filed February 4,
2004).
|
|
|
10.15
|
Employee
Stock Investment Plan of the Company (incorporated by reference from
Exhibit 4.1 of the Company’s Registration Statement on Form S-8 (No.
333-111929) filed on January 15, 2004). …
|
|
|
10.16
|
2005
Deferred Compensation Plan of the Company (incorporated by reference from
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated December
27, 2004). …
|
|
|
10.17
|
Vendor
Service Agreement dated effective December 28, 2005 between Pilgrim's
Pride Corporation and Pat Pilgrim (incorporated by reference from Exhibit
10.2 of the Company's Current Report on Form 8-K dated January 6,
2006).
|
|
|
10.18
|
Transportation
Agreement dated effective December 28, 2005 between Pilgrim's Pride
Corporation and Pat Pilgrim (incorporated by reference from Exhibit 10.3
of the Company's Current Report on Form 8-K dated January 6,
2006).
|
|
|
10.19
|
Credit
Agreement by and among the Avícola Pilgrim’s Pride de México, S. de R.L.
de C.V. (the "Borrower"), Pilgrim's Pride Corporation, certain Mexico
subsidiaries of the Borrower, ING Capital LLC, and the lenders signatory
thereto dated as of September 25, 2006 (incorporated by reference from
Exhibit 10.1 of the Company's Current Report on Form 8-K filed on
September 28, 2006).
|
|
|
10.20
|
2006
Amended and Restated Credit Agreement by and among CoBank, ACB, Agriland,
FCS and the Company dated as of September 21, 2006 (incorporated by
reference from Exhibit 10.2 of the Company's Current Report on Form 8-K
filed on September 28, 2006).
|
|
|
10.21
|
First
Amendment to the Pilgrim’s Pride Corporation Amended and Restated 2005
Deferred Compensation Plan Trust, dated as of November 29, 2006
(incorporated by reference from Exhibit 10.03 of the Company’s Current
Report on Form 8-K filed on December 05, 2006). …
|
|
|
10.22
|
Agreement
and Plan of Merger dated as of December 3, 2006, by and among the Company,
Protein Acquisition Corporation, a wholly owned subsidiary of the Company,
and Gold Kist Inc. (incorporated by reference from Exhibit 99.(D)(1) to
Amendment No. 11 to the Company’s Tender Offer Statement on Schedule TO
filed on December 5, 2006).
|
|
|
10.23
|
First
Amendment to Credit Agreement, dated as of December 13, 2006, by and among
the Company, as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as a
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.01 to the Company’s Current
Report on Form 8-K filed on December 19, 2006).
|
|
|
10.24
|
Second
Amendment to Credit Agreement, dated as of January 4, 2007, by and among
the Company, as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as a
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.01 to the Company’s Current
Report on Form 8-K filed on January 9, 2007).
|
|
|
10.25
|
Fourth
Amended and Restated Secured Credit Agreement, dated as of February 8,
2007, by and among the Company, To-Ricos, Ltd., To-Ricos Distribution,
Ltd., Bank of Montreal, as agent, SunTrust Bank, as syndication agent,
U.S. Bank National Association and Wells Fargo Bank, National Association,
as co-documentation agents, BMO Capital Market, as lead arranger, and the
other lenders signatory thereto (incorporated by reference from Exhibit
10.01 of the Company’s Current Report on Form 8-K dated February 12,
2007).
|
|
|
10.26
|
Third
Amendment to Credit Agreement, dated as of February 7, 2007, by and among
the Company as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and the sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as a
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.02 of the Company’s Current
Report on Form 8-K dated February 12, 2007).
|
|
|
10.27
|
First
Amendment to Credit Agreement, dated as of March 15, 2007, by and among
the Borrower, the Company, the Subsidiary Guarantors, ING Capital LLC, and
the Lenders (incorporated by reference from Exhibit 10.01 of the Company’s
Current Report on Form 8-K dated March 20, 2007).
|
|
|
10.28
|
Fourth
Amendment to Credit Agreement, dated as of July 3, 2007, by and among the
Company as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and the sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q filed July 31, 2007).
|
|
|
10.29
|
Retirement
and Consulting Agreement dated as of October 10, 2007, between the Company
and Clifford E. Butler (incorporated by reference from Exhibit 10.1 of the
Company’s Current Report on Form 8-K dated October 10, 2007). …
|
|
|
10.30
|
Fifth
Amendment to Credit Agreement, dated as of August 7, 2007, by and among
the Company as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and the sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.39 of the Company’s Annual
Report on Form 10-K filed on November 19, 2007).
|
|
|
10.31
|
Sixth
Amendment to Credit Agreement, dated as of November 7, 2007, by and among
the Company as borrower, CoBank, ACB, as administrative agent, and the
other syndication parties signatory thereto (incorporated by reference
from Exhibit 10.1 of the Company’s Current Report on Form 8-K dated
November 13, 2007).
|
|
|
10.32
|
Ground
Lease Agreement effective February 1, 2008 between Pilgrim's Pride
Corporation and Pat Pilgrim (incorporated by reference from Exhibit 10.1
of the Company's Current Report on Form 8-K dated February 1,
2008).
|
|
|
10.33
|
Seventh
Amendment to Credit Agreement, dated as of March 10, 2008, by and among
the Company as borrower, CoBank, ACB, as administrative agent, and the
other syndication parties signatory thereto (incorporated by reference
from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
February 20, 2008).
|
|
|
10.34
|
First
Amendment to the Fourth Amended and Restated Secured Credit Agreement,
dated as of March 11, 2008, by and among the Company, To-Ricos, Ltd.,
To-Ricos Distribution, Ltd., Bank of Montreal, as administrative agent,
and the other lenders signatory thereto (incorporated by reference from
Exhibit 10.2 to the Company's Current Report on Form 8-K filed on February
20, 2008).
|
|
|
10.35
|
Eighth
Amendment to Credit Agreement, dated as of April 30, 2008, by and among
the Company as borrower, CoBank, ACB, as administrative agent, and the
other syndication parties signatory thereto (incorporated by reference
from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May
5, 2008).
|
|
|
10.36
|
Second
Amendment to the Fourth Amended and Restated Secured Credit Agreement,
dated as of April 30, 2008, by and among the Company, To-Ricos, Ltd.,
To-Ricos Distribution, Ltd., Bank of Montreal, as administrative agent,
and the other lenders signatory thereto (incorporated by reference from
Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 5,
2008).
|
|
|
10.37
|
Change
to Company Contribution Amount Under the Amended and Restated 2005
Deferred Compensation Plan of the Company (incorporated by reference from
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed July 30,
2008). …
|
|
|
10.38
|
Limited Duration Waiver
of Potential Defaults and Events of Default under Credit Agreement dated
September 26, 2008 by and among Pilgrim's Pride Corporation, as
borrower, CoBank, ACB, as administrative agent, and the other syndication
parties signatory thereto (incorporated by reference from Exhibit
10.1 to the Company's Current Report on Form 8-K filed on September 29,
2008).
|
|
|
10.39
|
Limited Duration Waiver
Agreement dated as of September 26, 2008 by and among Pilgrim's Pride
Corporation, as borrower, Bank of Montreal, as administrative agent, and
certain other bank parties thereto (incorporated
by reference from Exhibit 10.2 to the Company's Current Report on Form 8-K
filed on September 29, 2008).
|
|
|
10.40
|
Limited Duration Waiver
Agreement dated as of September 26, 2008 by and among Pilgrim's Pride
Corporation, Pilgrim's Pride Funding Corporation,
BMO Capital Markets Corp., as administrator, and Fairway Finance Company,
LLC (incorporated by reference from Exhibit 10.3 to the Company's
Current Report on Form 8-K filed on September 29,
2008).
|
|
|
10.41
|
Amended and Restated
Receivables Purchase
Agreement dated as of September 26, 2008 among Pilgrim's Pride
Corporation, Pilgrim's Pride Funding Corporation, BMO Capital Markets
Corp., as administrator, and the various purchasers and purchaser agents
from time to time parties thereto (incorporated
by reference from Exhibit 10.4 to the Company's Current Report on Form 8-K
filed on September 29, 2008).
|
|
|
10.42
|
Amendment
No. 1 dated as of October 10, 2008 to Amended and Restated Receivables
Purchase Agreement, dated as of September 26, 2008 among Pilgrim's Pride
Corporation, Pilgrim's Pride Funding Corporation, BMO Capital Markets
Corp., as administrator, and the various purchasers and purchaser agents
from time to time parties thereto.*
|
|
|
10.43
|
Amendment No. 2 to
Purchase and Contribution Agreement
dated as of September 26, 2008 among Pilgrim's Pride Funding Corporation
and Pilgrim's Pride Corporation (incorporated by reference from
Exhibit 10.5 to the Company's Current Report on Form 8-K filed on
September 29, 2008).
|
|
|
10.44
|
Limited Duration Waiver
of Potential Defaults and Events of Default under Credit Agreement dated
October 26, 2008 by and among Pilgrim's Pride Corporation, as borrower,
CoBank, ACB, as administrative agent, and the other syndication parties
signatory thereto (incorporated
by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on October 27, 2008).
|
|
|
10.45
|
Limited Duration Waiver
Agreement dated as of October 26, 2008 by and among Pilgrim's Pride
Corporation, as borrower, Bank of Montreal, as
administrative agent, and certain other bank parties thereto
(incorporated by reference from Exhibit 10.2 to the Company's
Current Report on Form 8-K filed on October 27, 2008).
|
|
|
10.46
|
Limited Duration Waiver
Agreement dated as of October 26, 2008 by and
among Pilgrim's Pride Corporation, Pilgrim's Pride Funding Corporation,
BMO Capital Markets Corp., as administrator, and Fairway Finance Company,
LLC (incorporated by reference from Exhibit 10.3 to the Company's
Current Report on Form 8-K filed on October 27, 2008).
|
|
|
10.47
|
Form of Change in
Control Agreement dated as of October 21, 2008 between the Company and
certain of its executive officers (incorporated by reference from
Exhibit 10.4 to the Company's Current Report on Form 8-K filed on October
27, 2008). …
|
|
|
10.48
|
First
Amendment to Limited Duration Waiver
of Potential Defaults and Events of Default under Credit Agreement dated
November 25, 2008 by and among Pilgrim's Pride Corporation, as
borrower, CoBank, ACB, as administrative agent, and the
other syndication parties signatory thereto.*
|
|
|
10.49
|
First
Amendment to Limited Duration Waiver Agreement dated as of
November 25, 2008 by and among Pilgrim's Pride Corporation, as
borrower, Bank of Montreal, as administrative agent, and certain other
bank parties thereto.*
|
|
|
10.50
|
First
Amendment to Limited Duration Waiver Agreement dated as of
November 25, 2008 by and among Pilgrim's Pride Corporation, Pilgrim's
Pride Funding Corporation, BMO Capital Markets Corp., as administrator,
and Fairway Finance Company, LLC. *
|
|
|
10.51
|
Waiver
Agreement and Second Amendment to Credit Agreement dated November 30,
2008, by and among the Company and certain non-debtor Mexico subsidiaries
of the Company, ING Capital LLC, as agent, and the lenders signatory
thereto.*
|
|
|
10.52
|
Post-Petition
Credit Agreement dated December 2, 2008 by and among the Company, as
borrower, the US Subsidiaries, as guarantors, Bank of Montreal, as agent,
and the lenders party thereto.*
|
|
|
12
|
Ratio
of Earnings to Fixed Charges for the years ended September 27, 2008,
September 29, 2007, September 30, 2006, October 1, 2005, October 2, 2004,
and September 27, 2003.*
|
|
|
21
|
Subsidiaries
of Registrant.*
|
|
|
23
|
Consent
of Ernst & Young LLP.*
|
|
|
31.1
|
Certification
of Co-Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
31.2
|
Certification
of Co-Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
31.3
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
|
|
32.1
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.2
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.3
|
Certification
of Chief Financial Officer of Pilgrim's Pride Corporation pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
|
*Filed
herewith
|
|
|
…Represents
a management contract or compensation plan
arrangement
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 11th day of December
2008.
PILGRIM’S PRIDE
CORPORATION
|
By:
|
/s/ Richard A. Cogdill
|
|
Richard
A. Cogdill
|
|
|
Chief
Financial Officer, Secretary and Treasurer
|
|
|
(Principal
Financial and Accounting
Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Lonnie “Bo” Pilgrim
|
Senior
Chairman of the Board
|
12/11/08
|
||
|
Lonnie
“Bo” Pilgrim
|
||||
|
/s/
Lonnie Ken Pilgrim
|
Chairman
of the Board
|
12/11/08
|
||
|
Lonnie
Ken Pilgrim
|
||||
|
/s/
J. Clinton Rivers
|
President
|
12/11/08
|
||
|
J.
Clinton Rivers
|
Chief
Executive Officer and Director
|
|||
|
/s/
Richard A. Cogdill
|
Chief
Financial Officer, Secretary, Treasurer and
|
12/11/08
|
||
|
Richard
A. Cogdill
|
Director
|
|||
|
(Principal
Financial and Accounting Officer)
|
||||
|
/s/
Charles L. Black
|
Director
|
12/11/08
|
||
|
Charles
L. Black
|
||||
|
/s/
Linda Chavez
|
Director
|
12/11/08
|
||
|
Linda
Chavez
|
||||
|
/s/
S. Key Coker
|
Director
|
12/11/08
|
||
|
S.
Key Coker
|
||||
|
/s/
Keith W. Hughes
|
Director
|
12/11/08
|
||
|
Keith
W. Hughes
|
||||
|
/s/
Blake D. Lovette
|
Director
|
12/11/08
|
||
|
Blake
D. Lovette
|
|
Signature
|
Title
|
Date
|
||
|
/s/
Vance C. Miller, Sr.
|
Director
|
12/11/08
|
||
|
Vance
C. Miller, Sr.
|
||||
|
/s/
James G. Vetter, Jr.
|
Director
|
12/11/08
|
||
|
James
G. Vetter, Jr.
|
||||
|
/s/
Donald L. Wass, Ph.D.
|
Director
|
12/11/08
|
||
|
Donald
L. Wass, Ph.D.
|
||||
Report of Independent Registered Public Accounting
Firm
The Board
of Directors and Stockholders
Pilgrim’s
Pride Corporation
We have
audited the accompanying consolidated balance sheets of Pilgrim’s Pride
Corporation (the “Company”) as of September 27, 2008 and September 29, 2007, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended September 27, 2008.
Our audits also include the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Pilgrim’s Pride
Corporation at September 27, 2008 and September 29, 2007, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 27, 2008, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
The
accompanying financial statements have been prepared assuming that Pilgrim’s
Pride Corporation will continue as a going concern. As more fully described in
Note A, the Company filed for reorganization under Chapter 11 of the United
States Bankruptcy Code on December 1, 2008. This, and the other business
environment factors discussed, raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to this
matter are also described in Note A. The accompanying consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
As
discussed in Note M to the consolidated financial statements, Pilgrim’s Pride
Corporation adopted Financial Accounting Standards Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109," effective September 30, 2007.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Pilgrim’s Pride Corporation’s internal control
over financial reporting as of September 27, 2008, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated December 10, 2008, expressed an
unqualified opinion thereon.
Ernst & Young LLP
Dallas,
Texas
December
10, 2008
Consolidated
Balance Sheets
Pilgrim’s
Pride Corporation
|
September
27, 2008
|
September
29, 2007
|
|||||||
|
Assets
|
(In
thousands, except shares and per share data)
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 61,553 | $ | 66,168 | ||||
|
Investment
in available-for-sale securities
|
10,439 | 8,153 | ||||||
|
Trade
accounts and other receivables, less
allowance
for doubtful accounts
|
144,156 | 114,678 | ||||||
|
Inventories
|
1,036,163 | 925,340 | ||||||
|
Income
taxes receivable
|
21,656 | 61,901 | ||||||
|
Current
deferred taxes
|
54,312 | 8,095 | ||||||
|
Prepaid
expenses and other current assets
|
71,552 | 47,959 | ||||||
|
Assets
held for sale
|
17,370 | 15,534 | ||||||
|
Assets
of discontinued business
|
33,519 | 53,232 | ||||||
|
Total
current assets
|
1,450,720 | 1,301,060 | ||||||
|
Investment
in available-for-sale securities
|
55,854 | 46,035 | ||||||
|
Other
assets
|
51,768 | 60,113 | ||||||
|
Identified
intangible assets, net
|
67,363 | 78,433 | ||||||
|
Goodwill
|
— | 505,166 | ||||||
|
Property,
plant and equipment, net
|
1,673,004 | 1,783,429 | ||||||
| $ | 3,298,709 | $ | 3,774,236 | |||||
|
Liabilities
and stockholders’ equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 378,887 | $ | 398,512 | ||||
|
Accrued
expenses
|
448,823 | 497,262 | ||||||
|
Current
maturities of long-term debt
|
1,874,469 | 2,872 | ||||||
|
Liabilities
of discontinued business
|
10,783 | 6,556 | ||||||
|
Total
current liabilities
|
2,712,962 | 905,202 | ||||||
|
Long-term
debt, less current maturities
|
67,514 | 1,318,558 | ||||||
|
Deferred
income taxes
|
80,755 | 326,570 | ||||||
|
Other
long-term liabilities
|
85,737 | 51,685 | ||||||
|
Commitments
and contingencies
|
— | — | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $.01 par value, 5,000,000 shares authorized; no shares
issued
|
— | — | ||||||
|
Common
stock, $.01 par value, 160,000,000 shares authorized; 74,055,733 and
66,555,733 shares issued and outstanding at year end 2008 and 2007,
respectively
|
740 | 665 | ||||||
|
Additional
paid-in capital
|
646,922 | 469,779 | ||||||
|
Accumulated
earnings (deficit)
|
(317,082 | ) | 687,775 | |||||
|
Accumulated
other comprehensive income
|
21,161 | 14,002 | ||||||
|
Total
stockholders’ equity
|
351,741 | 1,172,221 | ||||||
| $ | 3,298,709 | $ | 3,774,236 | |||||
The accompanying notes are an integral
part of these Consolidated Financial Statements.
Consolidated
Statements of Operations
Pilgrim’s
Pride Corporation
|
Three
Years Ended September 27, 2008
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands, except per share data)
|
||||||||||||
|
Net
sales
|
$ | 8,525,112 | $ | 7,498,612 | $ | 5,152,729 | ||||||
|
Costs
and expenses:
|
||||||||||||
|
Cost
of sales
|
8,675,524 | 6,905,882 | 4,855,646 | |||||||||
|
Operational
restructuring charges
|
13,083 | — | — | |||||||||
|
Gross
profit (loss)
|
(163,495 | ) | 592,730 | 297,083 | ||||||||
|
Selling,
general and administrative expenses
|
376,599 | 355,539 | 285,978 | |||||||||
|
Goodwill
impairment
|
501,446 | — | — | |||||||||
|
Administrative
restructuring charges
|
16,156 | — | — | |||||||||
|
Total
costs and expenses
|
9,582,808 | 7,261,421 | 5,141,624 | |||||||||
|
Operating
income (loss)
|
(1,057,696 | ) | 237,191 | 11,105 | ||||||||
|
Other
expenses (income):
|
||||||||||||
|
Interest
expense
|
134,220 | 123,183 | 49,013 | |||||||||
|
Interest
income
|
(2,593 | ) | (4,641 | ) | (10,048 | ) | ||||||
|
Loss
on early extinguishment of debt
|
— | 26,463 | — | |||||||||
|
Miscellaneous,
net
|
(2,230 | ) | (6,649 | ) | (1,234 | ) | ||||||
| 129,397 | 138,356 | 37,731 | ||||||||||
|
Income
(loss) from continuing operations before income taxes
|
(1,187,093 | ) | 98,835 | (26,626 | ) | |||||||
|
Income
tax expense (benefit)
|
(194,921 | ) | 47,319 | 1,573 | ||||||||
|
Income
(loss) from continuing operations
|
(992,172 | ) | 51,516 | (28,199 | ) | |||||||
|
Income
(loss) from operations of discontinued business, net of
tax
|
(7,312 | ) | (4,499 | ) | (6,033 | ) | ||||||
|
Gain
on disposal of discontinued business, net of tax
|
903 | — | — | |||||||||
|
Net
income (loss)
|
$ | (998,581 | ) | $ | 47,017 | $ | (34,232 | ) | ||||
|
Net
income (loss) per common share—basic and
diluted:
|
||||||||||||
|
Continuing
operations
|
$ | (14.31 | ) | $ | 0.77 | $ | (0.42 | ) | ||||
|
Discontinued
business
|
(0.09 | ) | (0.06 | ) | (0.09 | ) | ||||||
|
Net
income (loss)
|
$ | (14.40 | ) | $ | 0.71 | $ | (0.51 | ) | ||||
|
The accompanying notes
are an integral part
of these Consolidated Financial Statements.
|
||||||||||||
Consolidated
Statements of Stockholders’ Equity
Pilgrim’s
Pride Corporation
|
Accumulated
|
||||||||||||||||||||||||||||
|
Additional
|
Accumulated
|
Other
|
||||||||||||||||||||||||||
|
Common Stock
|
Paid-In
|
Earnings
|
Comprehensive
|
Treasury
|
||||||||||||||||||||||||
|
Shares
|
Value
|
Capital
|
(Deficit)
|
Income (Loss)
|
Stock
|
Total
|
||||||||||||||||||||||
|
(In
thousands, except shares and per share data)
|
||||||||||||||||||||||||||||
|
Balance
at October 1, 2005
|
66,826,833 | $ | 668 | $ | 471,344 | $ | 753,527 | $ | (373 | ) | $ | (1,568 | ) | $ | 1,223,598 | |||||||||||||
|
Net
loss
|
(34,232 | ) | (34,232 | ) | ||||||||||||||||||||||||
|
Other
comprehensive income
|
507 | 507 | ||||||||||||||||||||||||||
|
Total
comprehensive loss
|
(33,725 | ) | ||||||||||||||||||||||||||
|
Cancellation
of treasury stock
|
(271,100 | ) | (3 | ) | (1,565 | ) | 1,568 | — | ||||||||||||||||||||
|
Cash
dividends declared
($1.09
per share)
|
(72,545 | ) | (72,545 | ) | ||||||||||||||||||||||||
|
Balance
at September 30, 2006
|
66,555,733 | 665 | 469,779 | 646,750 | 134 | — | 1,117,328 | |||||||||||||||||||||
|
Net
income
|
47,017 | 47,017 | ||||||||||||||||||||||||||
|
Other
comprehensive income
|
13,868 | 13,868 | ||||||||||||||||||||||||||
|
Total
comprehensive income
|
60,885 | |||||||||||||||||||||||||||
|
Cash
dividends declared
($.09
per share)
|
(5,992 | ) | (5,992 | ) | ||||||||||||||||||||||||
|
Balance
at September 29, 2007
|
66,555,733 | 665 | 469,779 | 687,775 | 14,002 | — | 1,172,221 | |||||||||||||||||||||
|
Net
loss
|
(998,581 | ) | (998,581 | ) | ||||||||||||||||||||||||
|
Other
comprehensive income
|
7,159 | 7,159 | ||||||||||||||||||||||||||
|
Total
comprehensive loss
|
(991,422 | ) | ||||||||||||||||||||||||||
|
Sale
of common stock
|
7,500,000 | 75 | 177,143 | 177,218 | ||||||||||||||||||||||||
|
Cash
dividends declared
($.09
per share)
|
(6,328 | ) | (6,328 | ) | ||||||||||||||||||||||||
|
Other
|
52 | 52 | ||||||||||||||||||||||||||
|
Balance
at September 27, 2008
|
74,055,733 | $ | 740 | $ | 646,922 | $ | (317,082 | ) | $ | 21,161 | $ | — | $ | 351,741 | ||||||||||||||
The accompanying notes are an
integral part of these
Consolidated Financial Statements.
Consolidated
Statements of Cash Flows
Pilgrim’s
Pride Corporation
|
Three
Years Ended September 27, 2008
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | (998,581 | ) | $ | 47,017 | $ | (34,232 | ) | ||||
|
Adjustments
to reconcile net income (loss) to cash provided by (used in) operating
activities
|
||||||||||||
|
Depreciation
and amortization
|
240,305 | 204,903 | 135,133 | |||||||||
|
Non-cash
loss on early extinguishment of debt
|
— | 9,543 | — | |||||||||
|
Tangible
asset impairment
|
13,184 | — | 3,767 | |||||||||
|
Goodwill
impairment
|
501,446 | — | — | |||||||||
|
Loss
(gain) on property disposals
|
(14,850 | ) | (446 | ) | 1,781 | |||||||
|
Deferred
income taxes
|
(195,944 | ) | 83,884 | 20,455 | ||||||||
|
Changes
in operating assets and liabilities, net of the effect of business
acquired
|
||||||||||||
|
Accounts
and other receivables
|
(19,864 | ) | 247,217 | 31,121 | ||||||||
|
Income
taxes payable/receivable
|
(1,552 | ) | 5,570 | (55,363 | ) | |||||||
|
Inventories
|
(103,937 | ) | (129,645 | ) | (58,612 | ) | ||||||
|
Prepaid
expenses and other current assets
|
(23,392 | ) | (2,981 | ) | (6,594 | ) | ||||||
|
Accounts
payable and accrued expenses
|
(71,293 | ) | (5,097 | ) | (3,501 | ) | ||||||
|
Other
|
(6,248 | ) | 4,045 | (3,626 | ) | |||||||
|
Cash
provided by (used in) operating activities
|
(680,726 | ) | 464,010 | 30,329 | ||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Acquisitions
of property, plant and equipment
|
(152,501 | ) | (172,323 | ) | (143,882 | ) | ||||||
|
Purchase
of investment securities
|
(38,043 | ) | (125,045 | ) | (318,266 | ) | ||||||
|
Proceeds
from sale or maturity of investment securities
|
27,545 | 208,676 | 490,764 | |||||||||
|
Business
acquisition, net of cash acquired
|
— | (1,102,069 | ) | — | ||||||||
|
Proceeds
from property disposals
|
41,367 | 6,286 | 4,148 | |||||||||
|
Other,
net
|
— | — | (506 | ) | ||||||||
|
Cash
provided by (used in) investing activities
|
(121,632 | ) | (1,184,475 | ) | 32,258 | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from notes payable to banks
|
— | — | 270,500 | |||||||||
|
Repayments
on notes payable to banks
|
— | — | (270,500 | ) | ||||||||
|
Proceeds
from long-term debt
|
2,264,912 | 1,981,255 | 74,683 | |||||||||
|
Payments
on long-term debt
|
(1,646,028 | ) | (1,368,700 | ) | (36,950 | ) | ||||||
|
Changes
in cash management obligations
|
13,558 | 39,231 | — | |||||||||
|
Sale
of common stock
|
177,218 | — | — | |||||||||
|
Debt
issue costs
|
(5,589 | ) | (15,565 | ) | (3,938 | ) | ||||||
|
Cash
dividends paid
|
(6,328 | ) | (5,992 | ) | (72,545 | ) | ||||||
|
Cash
provided by (used in) financing activities
|
797,743 | 630,229 | (38,750 | ) | ||||||||
|
Increase
(decrease) in cash and cash equivalents
|
(4,615 | ) | (90,236 | ) | 23,837 | |||||||
|
Cash
and cash equivalents, beginning of year
|
66,168 | 156,404 | 132,567 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 61,553 | $ | 66,168 | $ | 156,404 | ||||||
|
Supplemental
Disclosure Information:
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
(net of amount capitalized)
|
$ | 142,339 | $ | 104,394 | $ | 48,590 | ||||||
|
Income
taxes paid
|
$ | 6,411 | $ | 11,164 | $ | 37,813 | ||||||
|
The accompanying notes are an
integral part of these Consolidated Financial Statements.
|
||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE
A—BUSINESS, CHAPTER 11 BANKRUPTCY FILINGS AND PROCESS, AND GOING CONCERN
MATTERS
|
Business
Pilgrim's Pride Corporation (referred to herein as “the Company,” “we,” “us,” “our,” or similar terms) is one of the largest chicken companies in the United States (“US”), Mexico and Puerto Rico. Our fresh chicken retail line is sold in
the southeastern,
central, southwestern and western regions of the US, throughout Puerto Rico, and in the northern and central regions of Mexico. Our prepared-foods products meet the
needs of some of the largest customers in the food service industry across the
US. Additionally, the Company exports commodity chicken
products to 80 countries. As a vertically integrated company, we control every phase of the
production of our products. We operate feed mills, hatcheries, processing
plants and distribution centers in 14 US states, Puerto Rico and Mexico.
Our fresh
chicken products consist of refrigerated (non-frozen) whole or cut-up chicken,
either pre-marinated or non-marinated, and pre-packaged chicken in various
combinations of freshly refrigerated, whole chickens and chicken parts. Our
prepared chicken products include portion-controlled breast fillets, tenderloins
and strips, delicatessen products, salads, formed nuggets and patties and
bone-in chicken parts. These products are sold either refrigerated or frozen and
may be fully cooked, partially cooked or raw. In addition, these products are
breaded or non-breaded and either pre-marinated or non-marinated.
We
reported a net loss of $998.6 million, or $14.40 per common share, for the year,
which included a negative gross margin of $163.5 million. As of September 27,
2008, the Company’s accumulated deficit aggregated $317.1 million. During 2008,
the Company used $680.7 million of cash in operations. At September 27, 2008, we
had cash and cash equivalents totaling $61.6 million. The following factors
contributed to this performance:
|
·
|
Feed
ingredient costs increased substantially between the first quarter of 2007
and the end of 2008. While chicken selling prices generally improved over
the same period, prices did not improve sufficiently to offset the higher
costs of feed ingredients. More recently, prices have actually declined as
the result of weak demand for breast meat and a general oversupply of
chicken in the US.
|
|
·
|
The
Company recognized losses on derivative financial instruments, primarily
futures contracts and options on corn and soybean meal, during 2008
totaling $38.3 million. In the fourth quarter of 2008, it recognized
losses on derivative financial instruments totaling $155.7 million. In
late June and July of 2008, management executed various derivative
financial instruments for August and September soybean meal and corn
prices. After entering into these positions, the prices of the commodities
decreased significantly in July and August of 2008 creating these
losses.
|
|
·
|
The
Company evaluated the carrying amount of its goodwill for potential
impairment at September 27, 2008. We obtained valuation reports as of
September 27, 2008 that indicated the carrying amount of our goodwill
should be fully impaired based on current conditions. As a result, we
recognized a pretax impairment charge of $501.4 million during
2008.
|
|
·
|
The
Company assessed the realizability of its net deferred tax assets position
and increased its valuation allowance and recognized additional income tax
expense of approximately $71.2 million during
2008.
|
In
September 2008, the Company entered into agreements with its lenders to
temporarily waive the fixed-charge coverage ratio covenant under its credit
facilities. The lenders agreed to continue to provide liquidity under the credit
facilities during the thirty-day period ended October 28, 2008. On October 27,
2008, the Company entered into further agreements with its lenders to
temporarily waive the fixed-charge coverage ratio and leverage ratio covenants
under its credit facilities. The lenders agreed to continue to provide liquidity
under the credit facilities during the thirty-day period ended November 26,
2008. On that same day, the Company also announced its intention to exercise its
30-day grace period in making a $25.7 million interest payment due on November
3, 2008 under its 8 3/8% senior subordinated notes and its 7 5/8% senior notes.
On November 17, 2008, the Company exercised its 30-day grace period in making a
$0.3 million interest payment due on November 17, 2008 under its 9 1/4% senior
subordinated notes. On November
26, 2008, the Company entered into further agreements with its lenders to extend
the temporary waivers until December 1, 2008.
Chapter
11 Bankruptcy Filings
On
December 1, 2008 (the "Petition Date"), the Company and certain of its
subsidiaries (collectively, the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Northern
District of Texas, Fort Worth Division (the "Bankruptcy Court"). The cases are
being jointly administered under Case No. 08-45664. The Company’s operations in
Mexico and certain operations in the US were not included in the filing (the
“Non-filing Subsidiaries) and will continue to operate outside the Chapter 11
process.
Subject
to certain exceptions under the Bankruptcy Code, the Debtors’ Chapter 11 filing
automatically enjoined, or stayed, the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to the Petition
Date. Thus, for example, most creditor actions to obtain possession of property
from the Debtors, or to create, perfect or enforce any lien against the property
of the Debtors, or to collect on monies owed or otherwise exercise rights or
remedies with respect to a pre-petition claim are enjoined unless and until the
Bankruptcy Court lifts the automatic stay.
The
filing of the Chapter 11 petitions constituted an event of default under
certain of our debt obligations, and those debt obligations became automatically
and immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law. As a result, the accompanying Consolidated Balance
Sheet as of September 27, 2008 includes a reclassification of $1,872.1 million
to reflect as current certain long-term debt under its credit facilities that,
absent the stay, would have become automatically and immediately due and
payable.
Chapter
11 Process
The
Debtors are currently operating as "debtors in possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In
general, as debtors in possession, we are authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the prior approval of the
Bankruptcy Court.
On
December 2, 2008, the Bankruptcy
Court granted interim approval authorizing the Company and the Subsidiaries
organized in the United States (the "US Subsidiaries") to enter into that
certain Post-Petition Credit Agreement (the "DIP Credit Agreement") among the
Company, as borrower, the
US Subsidiaries, as guarantors, Bank of Montreal, as agent (the "DIP Agent"),
and the lenders party thereto. On December 2, 2008, the Company, the US
Subsidiaries and the other parties entered into the DIP Credit Agreement,
subject to final approval of the Bankruptcy
Court.
The DIP Credit Agreement provides for an
aggregate commitment of up to $450 million, which permits borrowings on a
revolving basis. The Company received interim approval to access
$365 million of the commitment
pending issuance of the
final order by the Bankruptcy Court. Outstanding borrowings
under the DIP Credit Agreement will bear interest at a per annum rate equal to
8.0% plus the greatest of (i) the prime rate as established by the DIP agent
from time to time, (ii) the average federal funds rate plus 0.5%, or
(iii) the LIBOR rate plus 1.0%, payable monthly. The loans under the DIP Credit Agreement were
used to repurchase all receivables sold under the Company's Receivables Purchase
Agreement (“RPA”) and may be used to fund the working capital requirements of the
Company and its subsidiaries according to a budget as approved by the required
lenders under the DIP Credit Agreement. For additional information on the
RPA, see Note F—Accounts
Receivable.
Actual borrowings by the Company under the DIP Credit
Agreement are subject to a borrowing base, which is a formula based on certain
eligible inventory and eligible receivables. The borrowing base formula is
reduced by pre-petition obligations under the Fourth Amended and Restated Secured Credit Agreement dated
as of February 8, 2007, among the Company and certain of its subsidiaries, Bank
of Montreal, as administrative agent, and the lenders parties thereto, as
amended, administrative and professional expenses, and the amount owed by the Company and the Debtor
Subsidiaries to any person on account of the purchase price of agricultural
products or services (including poultry and livestock) if that person is
entitled to any grower's or producer's lien or other security arrangement. The borrowing base is also
limited to 2.22 times the formula amount of total eligible receivables.
As of December 6, 2008, the applicable borrowing base
was $324.8
million and the amount
available for borrowings under the DIP Credit Agreement was $210.9 million.
The principal amount of outstanding
loans under the DIP Credit Agreement, together with accrued and unpaid interest
thereon, are payable in full at maturity on December 1, 2009, subject to
extension for an additional six months with the approval of all lenders thereunder. All
obligations under the DIP Credit Agreement are unconditionally guaranteed by the
US Subsidiaries and are secured by a first priority priming lien on
substantially all of the assets of the Company and the US
Subsidiaries, subject to specified permitted liens
in the DIP Credit Agreement.
The DIP Credit Agreement allows the Company to provide advances to the Non-filing Subsidiaries of up to
approximately $25 million at any time outstanding. Management believes that all of the Non-filing Subsidiaries, including the Company’s Mexican subsidiaries, will be able to operate within this
limitation.
For additional information on the DIP
Credit Agreement, see Note
L—Notes Payable and Long-Term
Debt.
The Bankruptcy Court has
approved payment of certain
of the Debtors’ pre-petition obligations, including,
among other things, employee wages, salaries and benefits, and the Bankruptcy
Court has approved the Company's payment of vendors and other providers in the
ordinary course for goods and services received from and after
the Petition Date and other business-related payments necessary to maintain the
operation of our businesses. The Debtors have retained, subject to Bankruptcy Court approval, legal and
financial professionals to advise the Debtors on the bankruptcy
proceedings and certain other "ordinary course" professionals. From time to
time, the Debtors may seek Bankruptcy Court approval for the retention of
additional professionals.
Shortly
after the Petition Date, the Debtors began notifying all known current or
potential creditors of the Chapter 11 filing. Subject to certain exceptions
under the Bankruptcy Code, the Debtors’ Chapter 11 filing automatically
enjoined, or stayed, the continuation of any judicial or administrative
proceedings or other actions against the Debtors or their property to recover
on, collect or secure a claim arising prior to the Petition Date. Thus, for
example, most creditor actions to obtain possession of property from the
Debtors, or to create, perfect or enforce any lien against the property of the
Debtors, or to collect on monies owed or otherwise exercise rights or remedies
with respect to a pre-petition claim are enjoined unless and until the
Bankruptcy Court lifts the automatic stay. Vendors are being paid for goods
furnished and services provided after the Petition Date in the ordinary course
of business.
As
required by the Bankruptcy Code, the United States Trustee for the Northern
District of Texas appointed an official committee of unsecured creditors (the
"Creditors’ Committee"). The Creditors’ Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
with respect to the Debtors. There can be no assurance that the Creditors’
Committee will support the Debtors’ positions on matters to be presented to the
Bankruptcy Court in the future or on any plan of reorganization, once proposed.
Disagreements between the Debtors and the Creditors’ Committee could protract
the Chapter 11 proceedings, negatively impact the Debtors’ ability to operate
and delay the Debtors’ emergence from the Chapter 11 proceedings.
Under
Section 365 and other relevant sections of the Bankruptcy Code, we may assume,
assume and assign, or reject certain executory contracts and unexpired leases,
including, without limitation, leases of real property and equipment, subject to
the approval of the Bankruptcy Court and certain other conditions. Any
description of an executory contract or unexpired lease in this report,
including where applicable our express termination rights or a quantification of
our obligations, must be read in conjunction with, and is qualified by, any
overriding rejection rights we have under Section 365 of the Bankruptcy
Code.
In order
to successfully exit Chapter 11, the Debtors will need to propose, and obtain
confirmation by the Bankruptcy Court of a plan of reorganization that satisfies
the requirements of the Bankruptcy Code. A plan of reorganization would, among
other things, resolve the Debtors’ pre-petition obligations, set forth the
revised capital structure of the newly reorganized entity and provide for
corporate governance subsequent to exit from bankruptcy.
The
Debtors have the exclusive right for 120 days after the Petition Date to file a
plan of reorganization and, if we do so, 60 additional days to obtain necessary
acceptances of our plan. We will likely file one or more motions to request
extensions of these time periods. If the Debtors’ exclusivity period lapsed, any
party in interest would be able to file a plan of reorganization for any of the
Debtors. In addition to being voted on by holders of impaired claims and equity
interests, a plan of reorganization must satisfy certain requirements of the
Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy Court in
order to become effective.
The
timing of filing a plan of reorganization by us will depend on the timing and
outcome of numerous other ongoing matters in the Chapter 11 proceedings. There
can be no assurance at this time that a plan of reorganization will be confirmed
by the Bankruptcy Court or that any such plan will be implemented
successfully.
We have
incurred and will continue to incur significant costs associated with our
reorganization. The amount of these costs, which are being expensed as incurred
commencing in November 2008, are expected to significantly affect our results of
operations.
Under the
priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, pre-petition liabilities and post-petition liabilities must be
satisfied in full before stockholders are entitled to receive any distribution
or retain any property under a plan of reorganization. The ultimate recovery to
creditors and/or stockholders, if any, will not be determined until confirmation
of a plan or plans of reorganization. No assurance can be given as to what
values, if any, will be ascribed in the Chapter 11 cases to each of these
constituencies or what types or amounts of distributions, if any, they would
receive. A plan of reorganization could result in holders of our liabilities
and/or securities, including our common stock, receiving no distribution on
account of their interests and cancellation of their holdings. Because of such
possibilities, the value of our liabilities and securities, including our common
stock, is highly speculative. Appropriate caution should be exercised with
respect to existing and future investments in any of the liabilities and/or
securities of the Debtors. At this time there is no assurance we will be able to
restructure as a going concern or successfully propose or implement a plan of
reorganization.
Going
Concern Matters
The
accompanying Consolidated Financial Statements have been prepared assuming that
the Company will continue as a going concern. However, there is substantial
doubt about the Company’s ability to continue as a going concern based on the
factors previously discussed. The Consolidated Financial Statements do not
include any adjustments related to the recoverability and classification of
recorded assets or the amounts and classification of liabilities or any other
adjustments that might be necessary should the Company be unable to continue as
a going concern. The Company’s ability to continue as a going concern is
dependent upon the ability of the Company to return to historic levels of
profitability and, in the near term, restructure its obligations in a manner
that allows it to obtain confirmation of a plan of reorganization by the
Bankruptcy Court.
Management
is addressing the Company’s ability to return to profitability by conducting
profitability reviews at certain facilities in an effort to reduce
inefficiencies and manufacturing costs. The Company reduced production capacity
in the near term by closing two production complexes and consolidating
operations at a third production complex into its other facilities. This action
resulted in a headcount reduction of approximately 2,300 production employees.
Subsequent to September 27, 2008, the Company also reduced headcount by 335
non-production employees.
On
November 7, 2008, the Board of
Directors appointed a Chief Restructuring Officer
(“CRO”) for the Company. The appointment of a CRO was a requirement included in the waivers
received from the Company’s lenders on October 27, 2008. The CRO will assist the Company with
cost reduction initiatives, restructuring plans development and long-term
liquidity improvement. The CRO reports to the Board of Directors of the
Company.
In order
to emerge from bankruptcy, the Company will need to obtain alternative financing
to replace the DIP Credit Agreement and to satisfy the secured claims of its
pre-bankruptcy creditors.
NOTE
B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of Pilgrim’s Pride
Corporation and its majority owned subsidiaries. We eliminate all significant affiliate
accounts and transactions upon consolidation.
The
Company reports on the basis of a 52/53-week year that ends on the Saturday
closest to September 30. As a result, 2008, 2007, and 2006 each had 52
weeks.
The
Company re-measures the financial statements of its Mexico subsidiaries as if
the US dollar were the functional currency. Accordingly, we translate assets and
liabilities, other than non-monetary assets, of the Mexico subsidiaries at
current exchange rates. We translate non-monetary assets using the historical
exchange rate in effect on the date of each asset’s acquisition. We translate
income and expenses at average exchange rates in effect during the period.
Currency exchange gains or losses are included in the line item Other Expenses (Income) in
the Consolidated Statements of Operations.
Accounting
Adjustments and Reclassifications
In 2006,
the Company recognized tax-effected costs totaling $4.6 million related to
events that occurred prior to 2006 affecting the Pilgrim’s Pride Retirement Plan
for Union Employees and certain postretirement obligations in Mexico. The
Company believes these costs, considered individually and in the aggregate, are
not material to our Consolidated Financial Statements for 2006.
We have made certain reclassifications
to the 2007 and 2006 Consolidated Financial Statements with
no impact to reported net income (loss) in order to conform to the 2008 presentation.
Revenue
Recognition
Revenue
is recognized upon shipment and transfer of ownership of the product to the
customer and is recorded net of estimated incentive offerings including special
pricing agreements, promotions and other volume-based incentives. Revisions to
these estimates are charged back to net sales in the period in which the facts
that give rise to the revision become known.
Shipping
and Handling Costs
Costs
associated with the products shipped to customers are recognized in cost of
sales.
Cash
Equivalents
The
Company considers highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
Current
and Long-Term Investments
The
Company’s current and long-term investments consist primarily of
investment-grade debt and equity securities, bond and equity mutual funds, and
insurance contracts. The investment-grade debt and equity securities as well as
the bond and equity mutual funds are classified as available-for-sale. These
securities are recorded at fair value, and unrealized holding gains and losses
are recorded, net of tax, as a separate component of accumulated other
comprehensive income. Debt securities with remaining maturities of less than one
year and those identified by management at the time of purchase for funding
operations in less than one year are classified as current. Debt securities with
remaining maturities greater than one year that management has not identified at
the time of purchase for funding operations in less than one year are classified
as long-term. All equity securities are classified as long-term. Unrealized
losses are charged against net earnings when a decline in fair value is
determined to be other than temporary. Management reviews several factors to
determine whether a loss is other than temporary, such as the length of time a
security is in an unrealized loss position, the extent to which fair value is
less than amortized cost, the impact of changing interest rates in the short and
long term, and the Company’s intent and ability to hold the security for a
period of time sufficient to allow for any anticipated recovery in fair value.
The Company determines the cost of each security sold and each amount
reclassified out of accumulated other comprehensive income into earnings using
the specific identification method. Purchases and sales are recorded on a trade
date basis. The insurance contracts are held in the Company’s deferred
compensation trusts. They are recorded at fair value with the gains and losses
resulting from changes in fair value immediately recognized in
earnings.
Investments
in joint ventures and entities in which the Company has an ownership interest
greater than 50% and exercises control over the venture are consolidated in the
Consolidated Financial Statements. Minority interests in the years presented,
amounts of which are not material, are included in the line item Other Long-Term Liabilities
in the Consolidated Balance Sheets. Investments in joint ventures and entities
in which the Company has an ownership interest between 20% and 50% and exercises
significant influence are accounted for using the equity method. The Company
owns a 49% interest in Merit Provisions LLC (“Merit”) that it consolidates
because the Company provided financial support to the entity that owns a 51%
interest in Merit. The operations of Merit are not significant to the Company as
a whole at this time. The Company invests from time to time in ventures in which
its ownership interest is less than 20% and over which it does not exercise
significant influence. Such investments are accounted for under the cost method.
The fair values for investments not traded on a quoted exchange are estimated
based upon the historical performance of the ventures, the ventures’ forecasted
financial performance and management’s evaluation of the ventures’ viability and
business models. To the extent the book value of an investment exceeds its
assessed fair value, the Company will record an appropriate impairment charge.
Thus, the carrying value of the Company’s investments approximates fair
value.
Accounts
Receivable
The
Company records accounts receivable upon shipment and transfer of ownership of
its products to customers. We record an allowance for doubtful accounts,
reducing our receivables balance to an amount we estimate is collectible from
our customers. Estimates used in determining the allowance for doubtful accounts
are based on historical collection experience, current trends, aging of accounts
receivable, and periodic credit evaluations of our customers’ financial
condition. We write off accounts receivable when it becomes apparent, based upon
age or customer circumstances, that such amounts will not be collected.
Generally, the Company does not require collateral for its accounts
receivable.
Inventories
Live
poultry inventories are stated at the lower of cost or market and breeder hens
at the lower of cost, less accumulated amortization, or market. The costs
associated with breeder hens are accumulated up to the production stage and
amortized over the productive lives using the unit-of-production method.
Finished poultry products, feed, eggs and other inventories are stated at the
lower of cost (first-in, first-out method) or market. We record valuations and
adjustments for our inventory and for estimated obsolescence at or equal to the
difference between the cost of inventory and the estimated market value based
upon known conditions affecting the inventory’s obsolescence, including
significantly aged products, discontinued product lines, or damaged or obsolete
products. We allocate meat costs between our various finished poultry products
based on a by-product costing technique that reduces the cost of the whole bird
by estimated yields and amounts to be recovered for certain by-product parts,
primarily including leg quarters, wings, tenders and offal, which are carried in
inventory at the estimated recovery amounts, with the remaining amount being
reflected as our breast meat cost. Generally, the Company performs an evaluation
of whether any lower-of-cost-or-market adjustments are required at the segment
level based on a number of factors, including (i) pools of related inventory,
(ii) product age, condition and continuation or discontinuation, (iii) estimated
market selling prices and (iv) expected distribution channels. If actual market
conditions or other factors are less favorable than those projected by
management, additional inventory adjustments may be required.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost, and repair and maintenance costs are
expensed as incurred. Depreciation is computed using the straight-line method
over the estimated useful lives of these assets. Estimated useful lives for
building, machinery and equipment are 5 years to 33 years and for automobiles
and trucks are 3 years to 10 years. The charge to income resulting from
amortization of assets recorded under capital leases is included with
depreciation expense.
The
Company recognizes impairment charges on long-lived assets used in operations
when events and circumstances indicate that the assets may be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. The impairment charge is determined based
upon the amount the net book value of the assets exceeds their fair market
value. In making these determinations, the Company utilizes certain assumptions,
including, but not limited to (i) future cash flows estimates expected to be
generated by these assets, which are based on additional assumptions such as
asset utilization, remaining length of service and estimated salvage values;
(ii) estimated fair market value of the assets; and (iii) determinations with
respect to the lowest level of cash flows relevant to the respective impairment
test, generally groupings of related operational facilities.
Given the
interdependency of the Company’s individual facilities during the production
process, which operate as a vertically integrated network, and the fact that the
Company does not price transfers of inventory between its vertically integrated
facilities at market prices, it evaluates impairment of assets held and used at
the country level (i.e., the US and Mexico) within each segment. Management
believes this is the lowest level of identifiable cash flows for its assets that
are held and used in production activities. At the present time, the Company’s
forecasts indicate that it can recover the carrying value of its assets based on
the projected cash flows of the operations. A key assumption in management’s
forecast is that the Company’s sales volumes will return to historical margins
as supply and demand between commodities and chicken and other animal-based
proteins become more balanced. However, the exact timing of the return to
historical margins is not certain, and if the return to historical margins is
delayed, impairment charges could become necessary in the future.
Goodwill
and Other Intangible Assets
Our intangible assets consist of
goodwill and assets subject to amortization such as
trade names, customer
relationships and non-compete agreements. We calculate amortization of
those assets that are
subject to amortization on
a straight-line basis over the estimated useful lives of the related
assets. The useful
lives range from three years for trade names and
non-compete agreements to thirteen years for customer
relationships.
We evaluate goodwill for impairment
annually or at other times if events have occurred or circumstances exist that
indicate the carrying value of goodwill may no longer be recoverable. We compare
the fair value of each reporting unit to its carrying value. We determine the
fair value using a weighted
average of results derived from both the income approach and the market approach. Under the income approach, we
calculate the fair value of a reporting unit based on the present value of
estimated future cash flows. Under the market approach, we calculate
the fair value of a reporting unit based on the market values of key
competitors. If the fair
value of the reporting unit exceeds the carrying value of the net assets
including goodwill assigned to that unit, goodwill is not impaired. If the
carrying value of the reporting unit’s net assets including goodwill exceeds the
fair value of the reporting unit, then we determine the implied fair value of
the reporting unit’s goodwill. If the carrying value of a reporting unit’s
goodwill exceeds its implied fair value, then an impairment of goodwill has
occurred and we recognize an impairment loss for the difference between the
carrying amount and the implied fair value of goodwill as a component of operating income.
We review intangible assets subject to
amortization for impairment
whenever an event or change
in circumstances indicates the carrying values of the assets may not be
recoverable. We test intangible assets subject to amortization for impairment
and estimate their fair values using the same assumptions and techniques we
employ on property, plant and equipment.
Litigation
and Contingent Liabilities
The
Company is subject to lawsuits, investigations and other claims related to
employment, environmental, product, and other matters. The Company is required
to assess the likelihood of any adverse judgments or outcomes, as well as
potential ranges of probable losses, to these matters. The Company estimates the
amount of reserves required, including anticipated cost of defense, if any, for
these contingencies when losses are determined to be probable and after
considerable analysis of each individual issue. With respect to our
environmental remediation obligations, the accrual for environmental remediation
liabilities is measured on an undiscounted basis. These reserves may change in
the future due to changes in the Company’s assumptions, the effectiveness of
strategies, or other factors beyond the Company’s control.
Accrued
Self Insurance
Insurance
expense for casualty claims and employee-related health care benefits are
estimated using historical and current experience and actuarial estimates.
Stop-loss coverage is maintained with third-party insurers to limit the
Company’s total exposure. Certain categories of claim liabilities are
actuarially determined. The assumption used to arrive at periodic expenses is
reviewed regularly by management. However, actual expenses could differ from
these estimates and could result in adjustments to be recognized.
Income
Taxes
The
provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred income
taxes reflect the net tax effect of temporary differences between the book and
tax bases of recorded assets and liabilities, net operating losses and tax
credit carry forwards. The amount of deferred tax on these temporary differences
is determined using the tax rates expected to apply to the period when the asset
is realized or the liability is settled, as applicable, based on the tax rates
and laws in the respective tax jurisdiction enacted as of the balance sheet
date.
The
Company reviews its deferred tax assets for recoverability and establishes a
valuation allowance based on historical taxable income, projected future taxable
income, applicable tax strategies, and the expected timing of the reversals of
existing temporary differences. A valuation allowance is provided when it is
more likely than not that some or all of the deferred tax assets will not be
realized. Valuation allowances have been established primarily for US federal
and state net operating loss carry forwards and Mexico net operating loss carry
forwards. See Note M—Income Taxes to the Consolidated Financial
Statements.
Taxes are
provided for foreign subsidiaries based on the assumption that their earnings
will be indefinitely reinvested. As such, US deferred income taxes have not been
provided on these earnings. If such earnings were not considered indefinitely
reinvested, certain deferred foreign and US income taxes would be
provided.
On
September 30, 2007, and effective for our year ended 2008, we adopted the
provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an
interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 provides a
recognition threshold and measurement criteria for the financial statement
recognition of a tax benefit taken or expected to be taken in a tax return. Tax
benefits are recognized only when it is more likely than not, based on the
technical merits, that the benefits will be sustained on examination. Tax
benefits that meet the more-likely-than-not recognition threshold are measured
using a probability weighting of the largest amount of tax benefit that is
greater than 50% likely of being realized upon settlement. Whether the
more-likely-than-not recognition threshold is met for a particular tax benefit
is a matter of judgment based on the individual facts and circumstances
evaluated in light of all available evidence as of the balance sheet date. See
Note M—Income Taxes to the Consolidated Financial Statements.
Pension and Other
Postretirement Benefits
Our pension and other postretirement
benefit costs and obligations are dependent on the various actuarial assumptions
used in calculating such amounts. These assumptions relate to discount rates,
salary growth, long-term return on plan assets, health care cost trend rates and
other factors. We base the discount rate assumptions on current investment
yields on high-quality corporate long-term bonds. The salary growth assumptions
reflect our long-term actual experience and future or near-term outlook. We
determine the long-term return on plan assets based on historical portfolio
results and management’s expectation of the future economic environment. Our
health care cost trend assumptions are developed based on historical cost data,
the near-term outlook and an assessment of likely long-term trends. Actual
results that differ from our assumptions are accumulated and, if in excess of
the lesser of 10% of the projected benefit obligation or the fair market value
of plan assets, amortized over the estimated future working life of the plan
participants.
Business
Combinations
The
Company allocates the total purchase price in connection with acquisitions to
assets and liabilities based upon their estimated fair values. For significant
acquisitions, the Company has historically relied upon the use of third-party
valuation experts to assist in the estimation of the fair values of property,
plant and equipment and intangible assets other than goodwill. Historically, the
carrying value of acquired accounts receivable, inventory and accounts payable
have approximated their fair value as of the date of acquisition, though
adjustments are made within purchase price accounting to the extent needed to
record such assets and liabilities at fair value. With respect to accrued
liabilities, the Company uses all available information to make its best
estimate of the fair value of the acquired liabilities and, when necessary, may
rely upon the use of third-party actuarial experts to assist in the estimation
of fair value for certain liabilities, primarily pension and self-insurance
accruals.
Operating
Leases
Rent
expense for operating leases is recorded on a straight-line basis over the lease
term unless the lease contains an escalation clause which is not fixed and
determinable. The lease term begins when we have the right to control the use of
the leased property, which is typically before rent payments are due under the
terms of the lease. If a lease has a fixed and determinable escalation clause,
the difference between rent expense and rent paid is recorded as deferred rent
and is included in the Consolidated Balance Sheets. Rent for operating leases
that do not have an escalation clause or where escalation is based on an
inflation index is expensed over the lease term as it is payable.
Derivative
Financial Instruments
The
Company attempts to mitigate certain financial exposures, including commodity
purchase exposures and interest rate risk, through a program of risk management
that includes the use of derivative financial instruments. We recognize all
derivative financial instruments in the Consolidated Balance Sheets at fair
value.
We have
elected not to designate derivative financial instruments executed to mitigate
commodity purchase exposures as hedges of forecasted transactions or of the
variability of cash flows to be received or paid related to recognized assets or
liabilities (“cash flow hedges”). Therefore, we recognize changes in the fair
value of these derivative financial instruments immediately in earnings. Gains
or losses related to these derivative financial instruments are included in the
line item Cost of sales
in the Consolidated Statements of Operations. We generally do not attempt to
mitigate price change exposure on anticipated commodities transactions beyond 18
months.
We
occasionally execute derivative financial instruments to manage exposure to
interest rate risk. In particular, we executed a Treasury lock instrument in
2007 to “lock in”, or secure, the Treasury rate that served as the basis for the
pricing of a prospective public debt issue. A “treasury lock” is a synthetic
forward sale of a US Treasury note or bond that is settled in cash based upon
the difference between an agreed upon Treasury rate and the prevailing Treasury
rate at settlement. We designated the lock instrument as a cash flow hedge and
recognized changes in the fair value of the instrument in accumulated other
comprehensive income until the prospective public debt issue occurred. Once the
public debt was issued, we began recognizing the change in the fair value of the
lock instrument as an adjustment to interest expense over the term of the
related debt.
Fair
Value of Financial Instruments
The asset
(liability) amounts recorded in the Consolidated Balance Sheet (carrying
amounts) and the estimated fair values of financial instruments at September 27,
2008 consisted of the following:
|
Carrying
Amount
|
Fair
Value
|
Reference
|
|||||||
|
(In
thousands)
|
|||||||||
|
Cash
and cash equivalents
|
$ | 61,553 | $ | 61,553 | |||||
|
Investments
in available-for-sale securities
|
66,293 | 66,293 |
Note
H
|
||||||
|
Accounts
receivable
|
144,156 | 144,156 |
Note
F
|
||||||
|
Derivative
financial instruments
|
(17,968 | ) | (17,968 | ) |
Note
Q
|
||||
|
Accounts
payable and accrued expenses
|
(827,710 | ) | (827,710 | ) |
Note
K
|
||||
|
Public
debt obligations
|
(656,996 | ) | (371,206 | ) |
Note
L
|
||||
|
Non-public
credit facilities
|
(1,284,987 | ) |
(a)
|
Note
L
|
|||||
|
(a)
|
Management
also expects that the fair value of our non-public credit facilities has
also decreased, but cannot reliably estimate the fair value at this
time.
|
||||||||
The
carrying amounts of our cash and cash equivalents, accounts receivable, accounts
payable and certain other liabilities approximate their fair values due to their
relatively short maturities. The Company adjusts its investments to fair value
based on quoted market prices. Derivative financial instruments are adjusted to
fair value at least once each quarter using inputs that are readily available in
public markets or can be derived from information available in public
markets.
Concentrations
of Various Risks
The
Company’s financial instruments that are exposed to concentrations of credit
risk consist primarily of cash equivalents, investment securities, derivative
financial instruments and trade accounts receivable. The Company’s cash
equivalents and investment securities are high-quality debt and equity
securities placed with major banks and financial institutions. Our derivative
financial instruments are generally exchange-traded futures or options contracts
placed with major financial institutions. The Company’s trade accounts
receivable are generally unsecured. Credit evaluations are performed on all
significant customers and updated as circumstances dictate. Concentrations of
credit risk with respect to trade accounts receivable are limited due to the
large number of customers and their dispersion across geographic areas. With the
exception of one customer that accounts for approximately 13% of trade accounts
receivable at September 27, 2008 and approximately 11% of net sales for
2008 primarily related to our chicken segment, the Company does not believe it
has significant concentrations of credit risk in its trade accounts
receivable.
At
September 27, 2008, approximately 33% of the Company’s employees were covered
under collective bargaining agreements and approximately 26% of the employees
covered under collective bargaining agreements are covered under agreements that
will expire in 2009. We have not experienced any work stoppage at any location
in over five years. We believe our relations with our employees are
satisfactory. At any given time, we will be in some stage of contract
negotiation with various collective bargaining units.
Net
Income (Loss) per Common Share
Net
income (loss) per common share is based on the weighted average number of shares
of common stock outstanding during the year. The weighted average number of
shares outstanding (basic and diluted) included herein were 69,337,326 shares in
2008 and 66,555,733 shares in both 2007 and 2006.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the US requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. We make significant estimates in regard
to receivables collectibility; inventory valuation; realization of deferred tax
assets; valuation of long-lived assets,
including goodwill;
valuation of contingent
liabilities and self
insurance liabilities; valuation of pension and other postretirement
benefits obligations; and valuation of acquired
businesses.
Pending
Adoption of Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements. However, for some enterprises, the application of this Statement
will change current practice. The Company must adopt SFAS No. 157 in the
first quarter of fiscal 2009. The adoption of SFAS No. 157 will not require
material modification of our fair value measurements and will be substantially
limited to expanded disclosures in the notes to our Consolidated Financial
Statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This
Statement improves the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects by establishing
principles and requirements for how the acquirer (i) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. The Company must apply prospectively SFAS No.
141(R) to business combinations for which the acquisition date occurs during or
subsequent to the first quarter of 2010. The impact that adoption of SFAS No.
141(R) will have on the Company’s financial condition, results of operations and
cash flows is dependent upon many factors. Such factors would include, among
others, the fair values of the assets acquired and the liabilities assumed in
any applicable business combination, the amount of any costs the Company would
incur to effect any applicable business combination, and the amount of any
restructuring costs the Company expected but was not obligated to incur as the
result of any applicable business combination. Thus, we cannot accurately
predict the effect SFAS No. 141(R) will have on future acquisitions at this
time.
In
December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51. This
Statement improves the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards for how
that reporting entity (i) identifies, labels and presents in its consolidated
statement of financial position the ownership interests in subsidiaries held by
parties other than itself, (ii) identifies and presents on the face of its
consolidated statement of operations the amount of consolidated net income
attributable to itself and to the noncontrolling interest, (iii) accounts
for changes in its ownership interest while it retains a controlling financial
interest in a subsidiary, (iv) initially measures any retained noncontrolling
equity investment in a subsidiary that is deconsolidated, and (v) discloses
other information about its interests and the interests of the noncontrolling
owners. The Company must apply prospectively the accounting requirements of
SFAS No. 160 in the first quarter of 2010. The Company should also apply
retroactively the presentation and disclosure requirements of the Statement for
all periods presented at that time. The Company does not expect the adoption of
SFAS No. 160 will have a material impact on its financial position,
financial performance or cash flows.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133. This Statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items are accounted for
under Statement 133 and its related interpretations, and (iii) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. The Company must apply the requirements
of SFAS No. 161 in the first quarter of 2010. The Company does not expect
the adoption of SFAS No. 161 will have a material impact on its financial
position, financial performance or cash flows.
NOTE
C—BUSINESS ACQUISITION
On
December 27, 2006, we acquired 45,343,812 shares, representing 88.9% of shares
outstanding, of Gold Kist Inc. (“Gold Kist”) common stock through a tender
offer. We subsequently acquired all remaining Gold Kist shares and, on January
9, 2007, Gold Kist became a wholly owned subsidiary of the Company. Gold Kist,
based in Atlanta, Georgia, was the third largest chicken company in the United
States, accounting for more than nine percent of chicken produced in the United
States in recent years. Gold Kist operated a fully-integrated chicken production
business that included live production, processing, marketing and
distribution.
For
financial reporting purposes, we have not included the operating results and
cash flows of Gold Kist in our consolidated financial statements for the period
from December 27, 2006 through December 30, 2006. The operating results and
cash flows of Gold Kist from December 27, 2006 through December 30, 2006
were not material. We have included the acquired assets and assumed liabilities
in our balance sheet using an allocation of the purchase price based on an
appraisal received from a third-party valuation specialist.
The
following summarizes the purchase price for Gold Kist at December 27, 2006 (in
thousands):
|
Purchase
of 50,146,368 shares at $21.00 per share
|
$ | 1,053,074 | ||
|
Premium
paid on retirement of debt
|
22,208 | |||
|
Retirement
of share-based compensation awards
|
25,677 | |||
|
Transaction
costs and fees
|
37,740 | |||
|
Total
purchase price
|
$ | 1,138,699 |
We
retired the Gold Kist 10 1/4% Senior Notes due 2014 with a book value of $128.5
million at a cost of $149.8 million plus accrued interest and the Gold Kist
Subordinated Capital Certificates of Interest at par plus accrued interest and a
premium of one year’s interest. We also paid acquisition transaction costs and
funded change in control payments to certain Gold Kist employees. This
acquisition was initially funded by (i) $780.0 million borrowed under our
revolving-term secured credit facility and (ii) $450.0 million borrowed under
our $450.0 million Senior Unsecured Term Loan Agreement (“Bridge Loan”). For
additional information, see Note L—Notes
Payable and Long-Term Debt.
In
connection with the acquisition, we elected to freeze certain of the Gold Kist
benefit plans with the intent to ultimately terminate them. We recorded a
purchase price adjustment of $65.6 million to increase the benefit plans
liability to the $82.5 million current estimated cost of these plan
terminations. We do not anticipate any material net periodic benefit costs
(income) related to these plans in the future. Additionally, we conformed Gold
Kist’s accounting policies to our accounting policies and provided for deferred
income taxes on all related purchase adjustments.
The
following summarizes our estimates of the fair value of the assets acquired and
liabilities assumed at the date of acquisition (in thousands):
|
Current
assets
|
$ | 418,583 | ||
|
Property,
plant and equipment
|
674,444 | |||
|
Goodwill
|
499,669 | |||
|
Intangible
assets
|
64,500 | |||
|
Other
assets
|
65,597 | |||
|
Total
assets acquired
|
1,722,793 | |||
|
Current
liabilities
|
269,619 | |||
|
Long-term
debt, less current maturities
|
140,674 | |||
|
Deferred
income taxes
|
93,509 | |||
|
Other
long-term liabilities
|
80,292 | |||
|
Total
liabilities assumed
|
584,094 | |||
|
Total
purchase price
|
$ | 1,138,699 |
Goodwill and other intangible assets
reflected above were determined to meet the criteria for recognition apart from tangible
assets acquired and liabilities assumed. Intangible assets related to the
acquisition consisted of the following at December 27,
2006:
|
Estimated
|
Amortization
|
|||||||
|
Fair Value
|
Period
|
|||||||
|
(In
millions)
|
(In years)
|
|||||||
|
Intangible assets subject to
amortization:
|
||||||||
|
Customer
relationships
|
$ | 51,000 | 13.0 | |||||
|
Trade name
|
13,200 | 3.0 | ||||||
|
Non-compete
agreements
|
300 | 3.0 | ||||||
|
Total intangible assets subject to
amortization
|
64,500 | |||||||
|
Goodwill
|
499,669 | |||||||
|
Total intangible
assets
|
$ | 564,169 | ||||||
|
Weighted average amortization
period
|
10.9 | |||||||
Goodwill,
which is recognized in the Company’s chicken segment, represents the purchase
price in excess of the value assigned to identifiable tangible and intangible
assets. We elected to acquire Gold Kist at a price that resulted in the
recognition of goodwill because we believed the following strategic and
financial benefits were present:
|
·
|
The
combined company would be positioned as the world’s leading chicken
producer and that position would provide us with enhanced abilities
to:
|
|
§
|
Compete
more efficiently and provide even better customer
service;
|
|
§
|
Expand
our geographic reach and customer
base;
|
|
§
|
Further
pursue value-added and prepared chicken opportunities;
and
|
|
§
|
Offer
long-term growth opportunities for our stockholders, employees, and
growers.
|
|
·
|
The
combined company would be better positioned to compete in the industry
both internationally and in the US as additional consolidation
occurred.
|
As
discussed in Note I—Goodwill, because of the deterioration in the chicken
industry subsequent to the acquisition, the Company determined that this
goodwill was fully impaired at September 27, 2008.
The amortizable intangible assets were
determined by us to have finite lives. The useful life for the customer
relationships intangible asset we recognized was based on our forecasts of customer
turnover. The useful life for the trade name intangible asset we recognized was based on the estimated length of
our use of the Gold Kist trade name while it is phased out and replaced with the
Pilgrim’s Pride trade name. The useful life of
the non-compete agreements intangible asset we recognized was based on the remaining life of the
agreements. We amortize these intangible assets over their remaining useful
lives on a straight-line basis. Annual amortization expense for these
intangible assets was $8.4 million in 2008 and $6.3 million in 2007. We
expect to recognize annual
amortization expense of $8.4 million in 2009, $5.1 million in 2010,
$3.9 million in each
year from 2011 through 2019, and $1.0 million in
2020.
The
following unaudited pro forma financial information has been presented as if the
acquisition had occurred at the beginning of each period
presented.
|
2007
|
2006
|
|||||||
|
Pro
forma
|
Pro
forma
|
|||||||
|
(In
thousands, except shares and per share data)
|
||||||||
|
Net
sales
|
$ | 8,026,422 | $ | 7,269,182 | ||||
|
Depreciation
and amortization
|
$ | 228,539 | $ | 221,512 | ||||
|
Operating
income (loss)
|
$ | 206,640 | $ | (45,482 | ) | |||
|
Interest
expense, net
|
$ | 144,354 | $ | 123,726 | ||||
|
Income
(loss) from continuing operations before taxes
|
$ | 43,900 | $ | (163,049 | ) | |||
|
Income
(loss) from continuing operations
|
$ | 17,331 | $ | (112,538 | ) | |||
|
Net
income (loss)
|
$ | 12,832 | $ | (118,571 | ) | |||
|
Income
(loss) from continuing operations per common share
|
$ | 0.26 | $ | (1.69 | ) | |||
|
Net
income (loss) per common share
|
$ | 0.19 | $ | (1.78 | ) | |||
|
Weighted
average shares outstanding
|
66,555,733 | 66,555,733 | ||||||
NOTE
D—DISCONTINUED BUSINESS
The
Company sold certain assets of its turkey business for $18.6 million and recognized a gain
of $1.5 million ($0.9 million, net of tax) during 2008 that is included in the
line item Gain on sale of
discontinued business, net of tax in the 2008 Consolidated Statement of
Operations. This business was composed of substantially our entire former
turkey segment. The results of this business are included in the line item Income (loss) from operation of
discontinued business, net of tax in the Consolidated Statements of
Operations for all periods presented.
For a
period of time, we will continue to incur cash flow activities that are
associated with our former turkey business. These activities are transitional in
nature. We have entered into a short-term co-pack agreement with the acquirer of
the former turkey business under which they will process turkeys for sale to our
customers through the end of 2008. For the period of time until we have
collected funds on the sale of these turkeys, we will continue to incur cash
flow activity and to report operating activity, although at a substantially
reduced level. Upon completion of these activities, the cash flows and the
operating activity will be eliminated.
Neither
our continued involvement in the distribution and sale of these turkeys or the
co-pack agreement confers upon us the ability to influence the operating and/or
financial policies of the turkey business under its new ownership.
No debt was assumed by the acquirer of
the discontinued turkey business or required to be repaid as a result of the
disposal transaction. We elected to allocate to the discontinued turkey
operation other
consolidated interest that was not
directly attributable to or related to other operations of the Company based on
the ratio of net assets to be sold or discontinued to the sum of the total net
assets of the Company plus consolidated debt. Interest allocated to the
discontinued business totaled $1.4 million, $2.6 million, and $1.6 million in
2008, 2007 and 2006, respectively.
The
following amounts related to our turkey business have been segregated from
continuing operations and included in the line items Income (loss) from operation of
discontinued business, net of tax and Gain on sale of
discontinued business, net of tax in the Consolidated Statements of
Operations:
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Net
sales
|
$ | 86,261 | $ | 99,987 | $ | 82,836 | ||||||
|
Loss
from operation of discontinued business before income
taxes
|
$ | (11,746 | ) | $ | (7,228 | ) | $ | (9,691 | ) | |||
|
Income
tax benefit
|
(4,434 | ) | (2,729 | ) | (3,658 | ) | ||||||
|
Loss
from operation of discontinued business, net of tax
|
$ | (7,312 | ) | $ | (4,499 | ) | $ | (6,033 | ) | |||
|
Gain
on sale of discontinued business before income taxes
|
$ | 1,450 | $ | — | $ | — | ||||||
|
Income
tax expense
|
547 | — | — | |||||||||
|
Gain
on sale of discontinued business, net of tax
|
$ | 903 | $ | — | $ | — | ||||||
Property,
plant and equipment related to our turkey business in the amount of $15.5
million was segregated and included in the line item Assets held for sale in the
Consolidated Balance Sheet as of September 29, 2007. The following assets and
liabilities related to our turkey business have been segregated and included in
the line items Assets of
discontinued business and Liabilities of discontinued
business, as appropriate, in the Consolidated Balance Sheets as of
September 27, 2008 and September 29, 2007.
|
September
27,
2008
|
September
29,
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Trade
accounts and other receivables, less allowance for doubtful
accounts
|
$ | 5,881 | $ | 16,687 | ||||
|
Inventories
|
27,638 | 36,545 | ||||||
|
Assets
of discontinued business
|
$ | 33,519 | $ | 53,232 | ||||
|
Accounts
payable
|
$ | 7,737 | $ | 3,804 | ||||
|
Accrued
expenses
|
3,046 | 2,752 | ||||||
|
Liabilities
of discontinued business
|
$ | 10,783 | $ | 6,556 | ||||
NOTE
E—RESTRUCTURING ACTIVITIES
During
2008, the Company completed the following restructuring activities:
|
·
|
Closed
two processing complexes in Arkansas and North
Carolina,
|
|
·
|
Idled
a processing complex in Louisiana,
|
|
·
|
Transferred
certain operations previously performed at a processing complex in
Arkansas to other complexes,
|
|
·
|
Closed
seven distribution centers in Florida (2), Iowa, Mississippi, Ohio,
Tennessee and Texas, and
|
|
·
|
Closed
an administrative office building in
Georgia.
|
The
Company’s Board of Directors approved the actions as part of a plan intended to
curtail losses amid record-high costs for corn, soybean meal and other feed
ingredients and an oversupply of chicken in the United States. The actions began
in March 2008 and were completed in September 2008. The affected processing
complexes and distribution centers employed approximately 2,300 individuals.
Virtually all of these individuals were impacted by the restructuring
activities.
The Company recognized impairment
charges during 2008 to reduce the carrying amounts of the following
assets located at or related to the facilities discussed above to their
estimated fair values:
|
Impairment
Charge
|
||||
|
(In
thousands)
|
||||
|
Property, plant and
equipment
|
$ | 10,210 | ||
|
Inventories
|
2,021 | |||
|
Intangible
assets
|
852 | |||
|
Total
|
$ | 13,083 | ||
Consistent
with our previous practice and because management believes the realization of
the carrying amount of the affected assets is directly related to the Company's
production activities, the charges were reported as a component of gross profit
(loss).
Results
of operations for 2008 included restructuring charges totaling
$16.2 million related to these actions. All of the restructuring charges,
with the exception of certain lease commitment costs, have resulted in cash
expenditures or will result in cash expenditures within one year.
The following table sets forth
restructuring activity that occurred during 2008:
|
September
29, 2007
|
2008
|
September
27, 2008
|
||||||
|
Accruals
|
Payments
|
|||||||
|
(In
thousands)
|
||||||||
|
Lease
continuation
|
$
|
—
|
$
|
4,778
|
$
|
312
|
$
|
4,466
|
|
Severance
and employee retention
|
—
|
4,000
|
1,306
|
2,694
|
||||
|
Grower
compensation
|
—
|
3,989
|
—
|
3,989
|
||||
|
Other
restructuring costs
|
—
|
3,389
|
1,727
|
1,662
|
||||
|
Total
|
$
|
—
|
$
|
16,156
|
$
|
3,345
|
$
|
12,811
|
Consistent
with the Company's previous practice and because management believes these costs
are related to ceasing production at these facilities and not directly related
to the Company's ongoing production, they are classified as a component of
operating income (expense).
We continue to review our business
strategies and evaluate further restructuring activities. This could result in additional
restructuring charges in
future periods.
NOTE
F—RECEIVABLES
Trade
accounts and other receivables, less allowance for doubtful accounts, consisted
of the following:
|
September
27, 2008
|
September
29, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Trade
accounts receivable
|
$ | 135,003 | $ | 89,555 | ||||
|
Other
receivables
|
13,854 | 30,140 | ||||||
| 148,857 | 119,695 | |||||||
|
Allowance
for doubtful accounts
|
(4,701 | ) | (5,017 | ) | ||||
|
Receivables,
net
|
$ | 144,156 | $ | 114,678 | ||||
In
connection with the RPA, the Company sold, on a revolving basis, certain of its
trade receivables (the “Pooled Receivables”) to a special purpose entity (“SPE”)
wholly owned by the Company, which in turn sold a percentage ownership interest
to third parties. The SPE was a separate corporate entity and its assets
were available first and foremost to satisfy the claims of its creditors. The
aggregate amount of Pooled
Receivables sold plus the remaining Pooled Receivables available for sale under
this RPA declined from $300.0 million at
September 29, 2007 to $236.3 million at September 27, 2008. The
outstanding amount of
Pooled Receivables sold at September 27, 2008 and September 29, 2007 were
$236.3 million and $300.0 million, respectively. The gross
proceeds resulting from the sale are included in cash flows from operating
activities in the Consolidated Statements of Cash Flows. The losses recognized on the sold
receivables during 2008 and 2007 were not material. On December 3, 2008, the RPA was
terminated and all receivables thereunder were repurchased with proceeds of
borrowings under the DIP Credit Agreement.
NOTE
G—INVENTORIES
Inventories
consist of the following:
|
September
27,
2008
|
September
29,
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Chicken:
|
||||||||
|
Live
chicken and hens
|
$ | 385,511 | $ | 343,185 | ||||
|
Feed
and eggs
|
265,959 | 223,631 | ||||||
|
Finished
chicken products
|
365,123 | 337,052 | ||||||
|
Total
chicken inventories
|
1,016,593 | 903,868 | ||||||
|
Other
products:
|
||||||||
|
Commercial
feed, table eggs, retail farm store and other
|
$ | 13,358 | $ | 11,327 | ||||
|
Distribution
inventories (other than chicken products)
|
6,212 | 10,145 | ||||||
|
Total
other products inventories
|
19,570 | 21,472 | ||||||
|
Total
inventories
|
$ | 1,036,163 | $ | 925,340 | ||||
Inventories
included a lower-of-cost-or-market allowance of $26.6 million at September 27,
2008. Inventories did not include a lower-of-cost-or-market allowance at
September 29, 2007.
NOTE
H—INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
The
following is a summary of our current and long-term investments in
available-for-sale securities:
|
September
27, 2008
|
September
29, 2007
|
|||||||
|
Current
investments:
|
(In
thousands)
|
|||||||
|
Fixed
income securities
|
$ | 9,835 | $ | 7,549 | ||||
|
Other
|
604 | 604 | ||||||
|
Total
current investments
|
$ | 10,439 | $ | 8,153 | ||||
|
Long-term
investments:
|
||||||||
|
Fixed
income securities
|
$ | 44,127 | $ | 35,451 | ||||
|
Equity
securities
|
9,775 | 9,591 | ||||||
|
Other
|
1,952 | 993 | ||||||
| $ | 55,854 | $ | 46,035 | |||||
The
Company and certain retirement plans that it sponsors invest in a variety of
financial instruments. In response to the continued turbulence in global
financial markets, we have analyzed our portfolios of investments and, to the
best of our knowledge, none of our investments, including money market funds
units, commercial paper and municipal securities, have been downgraded because
of this turbulence, and neither we nor any fund in which we participate hold
significant amounts of structured investment vehicles, mortgage backed
securities, collateralized debt obligations, auction-rate securities, credit
derivatives, hedge funds investments, fund of funds investments or perpetual
preferred securities.
Certain
investments are held in trust as compensating balance arrangements for our
insurance liability and are classified as long-term based on a maturity date
greater than one year from the balance sheet date and management’s intention not
to use such assets in the next twelve months.
Maturities
for the Company’s investments in fixed income securities as of September 27,
2008 were as follows:
|
Amount
|
Percent
|
|||||||
|
(In
thousands)
|
||||||||
|
Matures
in less than one year
|
$ | 9,835 | 18.2 | % | ||||
|
Matures
between one and two years
|
7,952 | 14.8 | % | |||||
|
Matures
between two and five years
|
28,690 | 53.1 | % | |||||
|
Matures
in excess of five years
|
7,485 | 13.9 | % | |||||
| $ | 53,962 | 100.0 | % | |||||
The
Company has recorded unrealized pretax losses totaling $1.4 million, related to
its investments at September 27, 2008 as accumulated other comprehensive income,
a separate component of stockholders’ equity.
NOTE
I—GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
The
Company generally plans to perform its annual impairment test of goodwill at the
beginning of its fourth quarter. However, the Company evaluated goodwill as of
September 27, 2008 because of the significant deterioration in the
operating environment during the fourth quarter of 2008. The Company’s
impairment test resulted in a non-cash, pretax impairment charge of $501.4
million ($7.40 per share) related to a write-down of the goodwill reported in
the Chicken segment. The goodwill was primarily related to the 2007 acquisition
of Gold Kist. The charge is not tax deductible because the acquisition of Gold
Kist was structured as a tax-free stock transaction. The impairment charge is
included in the line item Goodwill impairment in the
Consolidated Statement of Operations for the year ended September 27,
2008.
The
impairment of goodwill mainly resulted from declines in current and projected
operating results and cash flows of the Company because of, among other factors,
record-high costs for corn, soybean meal and other feed ingredients and an
oversupply of chicken and other animal-based proteins in the United States.
These factors resulted in the carrying value of the goodwill being greater than
its implied fair value; therefore, a write-down to the implied fair value was
required.
The
implied fair value of goodwill is the residual fair value after allocating the
total fair value of the Company to its other assets, net of liabilities. The
total fair value of the Company was estimated using a combination of a
discounted cash flow model (present value of future cash flows) and a market
approach model (a multiple of various metrics based on comparable businesses and
market transactions).
Identified
intangible assets consisted of the following:
|
Useful
Life
(Years)
|
Original
Cost
|
Accumulated
Amortization
|
Carrying
Amount
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
September
27, 2008:
|
||||||||||||||||
|
Trade
names
|
3–15 | $ | 39,271 | $ | (16,168 | ) | $ | 23,103 | ||||||||
|
Customer
relationships
|
13 | 51,000 | (6,865 | ) | 44,135 | |||||||||||
|
Non-compete
agreement and other identified intangibles
|
3–15 | 300 | (175 | ) | 125 | |||||||||||
|
Total
intangible assets
|
$ | 90,571 | $ | (23,208 | ) | $ | 67,363 | |||||||||
|
September
29, 2007:
|
||||||||||||||||
|
Trade
names
|
$ | 39,271 | $ | (10,007 | ) | $ | 29,264 | |||||||||
|
Customer
relationships
|
51,000 | (2,943 | ) | 48,057 | ||||||||||||
|
Non-compete
agreement and other identified intangibles
|
1,343 | (231 | ) | 1,112 | ||||||||||||
|
Total
identified intangible assets
|
$ | 91,614 | $ | (13,181 | ) | $ | 78,433 | |||||||||
We
recognized amortization expense of $10.2 million, $8.1 million and $1.8 million
in 2008, 2007 and 2006, respectively.
We expect
to recognize amortization expense associated with identified intangible assets
of $10.2 million in 2009, $6.8 million in 2010 and $5.7 million in each year from 2011 through
2013.
NOTE
J—PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment, net consisted of the following:
|
September
27,
2008
|
September
29,
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Land
|
$ | 111,567 | $ | 114,365 | ||||
|
Buildings,
machinery and equipment
|
2,465,608 | 2,366,418 | ||||||
|
Autos
and trucks
|
64,272 | 59,489 | ||||||
|
Construction-in-progress
|
74,307 | 123,001 | ||||||
|
Property,
plant and equipment, gross
|
2,715,754 | 2,663,273 | ||||||
|
Accumulated
depreciation
|
(1,042,750 | ) | (879,844 | ) | ||||
|
Property, plant
and equipment, net
|
$ | 1,673,004 | $ | 1,783,429 | ||||
Impairment
The
Company recognized non-cash asset impairment charges totaling $10.2 million
during 2008 to reduce the carrying amounts of certain property, plant and
equipment located at the facilities discussed in Note E—Restructuring Activities
to their estimated fair values.
Depreciation
We
recognized depreciation expense related to our continuing operations of $224.4
million, $188.6 million and $129.3 million in 2008, 2007 and 2006, respectively.
We also recognized depreciation charges related to our discontinued turkey
business of $0.7 million, $1.6 million and $1.4 million in 2008, 2007 and 2006,
respectively.
Assets
Held for Sale
During
2008, the Company classified certain assets in the amount of $19.8 million
related to its closed production complexes in North Carolina and Arkansas and
its closed distribution centers in Florida and Texas as assets held for sale.
The Company sold certain assets related to one of its closed distribution
centers in Florida for $4.4 million in the third quarter of 2008 and recognized
a gain of $2.0 million. At September 27, 2008, the Company reported $17.4
million of assets held for sale on its Consolidated Balance Sheet.
NOTE
K—ACCRUED EXPENSES
Accrued
expenses consisted of the following:
|
September
27, 2008
|
September
29, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Compensation
and benefits
|
$ | 118,803 | $ | 159,322 | ||||
|
Interest
and debt maintenance
|
35,488 | 49,100 | ||||||
|
Self
insurance
|
170,787 | 158,851 | ||||||
|
Other
|
123,745 | 129,989 | ||||||
|
Total
|
$ | 448,823 | $ | 497,262 | ||||
NOTE
L—NOTES PAYABLE AND LONG-TERM DEBT
As
previously discussed under Note A—Business, Chapter 11 Bankruptcy Filing and
Process and Going Concern Matters, the Company filed for bankruptcy protection
on December 1, 2008. The following discussion has two distinct sections, the first relating
to our notes payable and
long-term debt at
September 27, 2008 and the second discussing our notes payable and long-term
debt after filing for
Chapter 11 bankruptcy protection on December 1, 2008.
Notes
Payable and Long-Term Debt at September 27, 2008
Our notes
payable and long-term debt consisted of the following:
|
Final
Maturity
|
September
27, 2008
|
September
29, 2007
|
|||||||
|
(In
thousands)
|
|||||||||
|
Senior
unsecured notes, at 7 5/8%
|
2015
|
$ | 400,000 | $ | 400,000 | ||||
|
Senior
subordinated unsecured notes, at 8 3/8%
|
2017
|
250,000 | 250,000 | ||||||
|
Secured
revolving credit facility with notes payable at LIBOR plus 1.25% to LIBOR
plus 2.75%
|
2013
|
181,900 | — | ||||||
|
Secured
revolving credit facility with notes payable at LIBOR plus 1.65% to LIBOR
plus 3.125%
|
2011
|
51,613 | 26,293 | ||||||
|
Secured
revolving/term credit facility with four notes payable at LIBOR plus a
spread, one note payable at 7.34% and one note payable at
7.56%
|
2016
|
1,035,250 | 622,350 | ||||||
|
Other
|
Various
|
23,220 | 22,787 | ||||||
|
Notes
payable and long-term debt
|
1,941,983 | 1,321,430 | |||||||
|
Current
maturities of long-term debt
|
(1,874,469 | ) | (2,872 | ) | |||||
|
Notes
payable and long-term debt, less current maturities
|
$ | 67,514 | $ | 1,318,558 | |||||
In
September 2006, the Company entered into an amended and restated revolver/term
credit agreement with a maturity date of September 21, 2016. At September 27,
2008 this revolver/term credit agreement provided for an aggregate commitment of
$1.172 billion consisting of (i) a $550 million revolving/term loan
commitment and (ii) $622.4 million in various term loans. At September 27, 2008,
the Company had $415.0 million outstanding under the revolver and
$620.3 million outstanding in various term loans. The total credit facility
is presently secured by certain fixed assets. On September 21, 2011, outstanding
borrowings under the revolving/term loan commitment will be converted to a term
loan maturing on September 21, 2016. The fixed rate term loans bear
interest at rates ranging from 7.34% to 7.56%. The voluntary converted loans
bear interest at rates ranging from LIBOR plus 1.0%-2.0%, depending upon the
Company’s total debt to capitalization ratio. The floating rate term loans bear
interest at LIBOR plus 1.50%-1.75% based on the ratio of the Company’s debt to
EBITDA, as defined in the agreement. The revolving/term loans provide for
interest rates ranging from LIBOR plus 1.0%-2.0%, depending upon the Company’s
total debt to capitalization ratio. Commitment fees charged on the unused
balance of this facility range from 0.20% to 0.40%, depending upon the Company’s
total debt to capitalization ratio. In connection with temporary amendments to
certain of the financial covenants in this agreement on April 30, 2008, the
interest rates were temporarily increased until September 26, 2009 to the
following ranges: (i) voluntary converted loans: LIBOR plus 1.5%-3.0%; (ii)
floating rate terms loans: LIBOR plus 2.00%-2.75%; and (iii) revolving term
loans: LIBOR plus 1.5%-3.0%. In connection with these amendments, the commitment
fees were temporarily increased for the same period to range from 0.275%-0.525%.
As a result of the Company's Chapter 11 filing, after December 1, 2008, interest
will accrue at the default rate, which is two percent above the interest rate
otherwise applicable under the credit agreement. One-half of the outstanding
obligations under the revolver/term credit agreement are guaranteed by Pilgrim
Interests, Ltd., an entity affiliated with our Senior Chairman, Lonnie “Bo”
Pilgrim. The filing of the
bankruptcy petitions also
constituted an event of default under this credit agreement. The total principal
amount
owed under this credit agreement was approximately $1,126.4 million as of December 1,
2008. As a result of such event of
default, all obligations under the agreement became automatically
and immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law.
In
January 2007, the Company borrowed (i) $780 million under our revolver/term
credit agreement and (ii) $450 million under our Bridge Loan agreement to fund
the Gold Kist acquisition. On January 24, 2007, the Company closed on the sale
of $400 million of 7 5/8% Senior Notes due 2015 (the “Senior Notes”) and $250
million of 8 3/8% Senior Subordinated Notes due 2017 (the “Subordinated Notes”),
sold at par. Interest is payable on May 1 and November 1 of each year, beginning
November 1, 2007. Prior to the Chapter 11 filings, the notes were subject to
certain early redemption features. The proceeds from the sale of the notes,
after underwriting discounts, were used to (i) retire the loans outstanding
under our Bridge Loan agreement, (ii) repurchase $77.5 million of the Company’s
9 1/4% Senior Subordinated Notes due 2013 at a premium of $7.4 million plus
accrued interest of $1.3 million and (iii) reduce outstanding revolving loans
under our revolving/term credit agreement. Loss on early extinguishment of debt
includes the $7.4 million premium along with unamortized loan costs of $7.1
million related to the retirement of these Notes.
In
September 2007, the Company redeemed all of its 9 5/8% Senior Notes due 2011 at
a total cost of $307.5 million. To fund a portion of the aggregate redemption
price, the Company sold $300 million of trade receivables under the RPA. Loss on
early extinguishment of debt includes the $9.5 million premium along with
unamortized loan costs of $2.5 million related to the retirement of these
Notes.
In
February 2007, the Company entered into a domestic revolving credit agreement of
up to $300.0 million with a final maturity date of February 18, 2013. The
associated revolving credit facility provided for interest rates ranging from
LIBOR plus 0.75-1.75%, depending upon our total debt to capitalization ratio.
The obligations under this facility are secured by domestic chicken inventories
and receivables that were not sold pursuant to the RPA. Commitment fees charged
on the unused balance of this facility range from 0.175% to 0.35%, depending
upon the Company’s total debt to capitalization ratio. In connection with
temporary amendments to certain of the financial covenants in this agreement on
April 30, 2008, the interest rates were temporarily increased until September
26, 2009 to range between LIBOR plus 1.25%-2.75%. In connection with these
amendments, the commitment fees were temporarily increased for the same period
to range from 0.25%-0.50%. As a result of the Company's Chapter 11 filing, after
December 1, 2008, interest will accrue at the default rate, which is two percent
above the interest rate otherwise applicable under the credit agreement.
One-half of the outstanding obligations under the domestic revolving credit
facility are guaranteed by Pilgrim Interests, Ltd., an entity affiliated with
our Senior Chairman, Lonnie “Bo” Pilgrim. The filing of the bankruptcy petitions
also constituted an event of default under this credit agreement. The total
principal amount owed under this credit agreement was approximately
$199.5 million as of December 1,
2008. As a result of such event of
default, all obligations under the agreement became automatically and
immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law.
In September 2006, a subsidiary of the Company, Avícola Pilgrim’s
Pride de México, S. de R.L. de C.V. (the “Borrower”), entered into a
secured revolving credit agreement of up to $75 million with a final maturity
date of September 25, 2011. In March 2007, the Borrower elected to reduce the
commitment under this agreement to 558 million Mexican pesos, a US
dollar-equivalent 51.6 million at September 27, 2008. Outstanding amounts bear
interest at rates ranging from the higher of the Prime Rate or Federal Funds
Effective Rate plus 0.5%; LIBOR plus 1.65%-3.125%; or TIIE plus 1.05%-2.55%
depending on the loan designation. Obligations under this agreement are secured
by a security interest in and lien upon all capital stock and other equity
interests of the Company’s Mexican subsidiaries. All the obligations of the
Borrower are secured by unconditional guaranty by the Company. At September 27,
2008, $51.6 million was outstanding and no other funds were available for
borrowing under this line. Borrowings are subject to “no material adverse
effect” provisions.
On
November 30, 2008, the Company and certain non-Debtor Mexico subsidiaries of the
Company (the "Mexico Subsidiaries") entered into a Waiver Agreement and Second
Amendment to Credit Agreement (the "Waiver Agreement") with ING Capital LLC, as
agent (the "Mexico Agent"), and the lenders signatory thereto (the "Mexico
Lenders"). Under the Waiver Agreement, the Mexico Agent and the Mexico Lenders
waived any default or event of default under the Credit Agreement dated as of
September 25, 2006, by and among the Company, the Mexico Subsidiaries, the
Mexico Agent and the Mexico Lenders, the administrative agent, and the lenders
parties thereto (the "ING Credit Agreement"), resulting from the Company's
filing of its bankruptcy petition with the Bankruptcy Court. Pursuant to the
Waiver Agreement, outstanding amounts under the ING Credit Agreement now bear
interest at a rate per annum equal to: the LIBOR Rate, the Base Rate, or the
TIIE Rate, as applicable, plus the Applicable Margin (as those terms are defined
in the ING Credit Agreement). While the Company is operating under its petitions
for reorganization relief, the Waiver Agreement provides for an Applicable
Margin for LIBOR loans, Base Rate loans, and TIIE loans of 6.0%, 4.0%, and 5.8%,
respectively. The Waiver Agreement further amended the ING Credit Agreement to
require the Company to make a mandatory prepayment of the revolving loans, in an
aggregate amount equal to 100% of the net cash proceeds received by any Mexico
Subsidiary, as applicable, in excess of thresholds specified in the ING Credit
Agreement (i) from the occurrence of certain asset sales by the Mexico
Subsidiaries; (ii) from the occurrence of any casualty or other insured damage
to, or any taking under power of eminent domain or by condemnation or similar
proceedings of, any property or asset of any Mexico Subsidiary; or (iii) from
the incurrence of certain indebtedness by a Mexico Subsidiary. Any such
mandatory prepayments will permanently reduce the amount of the commitment under
the ING Credit Agreement. In connection with the Waiver Agreement,
the Mexico Subsidiaries pledged substantially all of their receivables,
inventory, and equipment and certain fixed assets.
Our loan agreements generally obligate
us to reimburse the applicable lender for incremental increased costs due to a
change in law that imposes (i) any reserve or special deposit requirement
against assets of, deposits with or credit extended by such lender related to
the loan, (ii) any tax, duty or other charge with respect to the loan (except
standard income tax) or (iii) capital adequacy requirements. In addition, some
of our loan agreements contain a withholding tax provision that requires us to
pay additional amounts to the applicable lender or other financing party,
generally if withholding taxes are imposed on such lender or other financing
party as a result of a change in the applicable tax law. These increased cost
and withholding tax provisions continue for the entire term of the applicable
transaction, and there is no limitation on the maximum additional amounts we
could be obligated to pay under such provisions.
In June
1999, the Camp County Industrial Development Corporation issued
$25.0 million of variable-rate environmental facilities revenue bonds
supported by letters of credit obtained by us. At September 27, 2008 and prior
to our bankruptcy filing, the proceeds were available for the Company to draw
from over the construction period in order to construct new sewage and solid
waste disposal facilities at a poultry by-products plant in Camp County, Texas.
There was no requirement that we borrow the full amount of the proceeds from
these revenue bonds and we had not drawn on the proceeds or commenced
construction of the facility as of September 27, 2008. Had the Company borrowed
these funds, they would have become due in 2029. The revenue bonds are supported
by letters of credit obtained by us under our revolving credit facilities, which
are secured by our domestic chicken inventories. The bonds would have been
recorded as debt of the Company if and when they were spent to fund
construction. The original proceeds from the issuance of the revenue bonds
continue to be held by the trustee of the bonds. The interest payment on the
revenue bonds, which was due on December 1, 2008, was not paid. The filing of the bankruptcy petitions constituted an
event of default under these bonds. As a result of the event of default, the trustee has the
right to accelerate all obligations under the bonds such that they become immediately due
and payable, subject to an automatic stay of any action to collect,
assert, or recover a claim against the Company and the application of applicable
bankruptcy law. In
addition, the holders of the bonds may tender the bonds for remarketing at any
time. We have been notified that the holders have tendered the bonds, which
are required to be remarketed on or before December 16, 2008. If the bonds are
not successfully remarketed by that date, the holders of the bonds may draw upon
the letters of credit supporting the bonds.
Most of our domestic inventories and domestic fixed
assets are pledged as collateral on our long-term debt and credit
facilities.
At
September 27, 2008, the Company was not in compliance with the provisions that
required it to maintain levels of working capital and net worth and to maintain various fixed
charge, leverage, current and debt-to-equity ratios. In September 2008,
the Company notified its lenders that it expected to incur a significant loss in
the fourth quarter of 2008 and entered into agreements with them to temporarily
waive the fixed-charge coverage ratio covenant under its credit facilities. The
lenders agreed to continue to provide liquidity under the credit facilities
during the thirty-day period ended October 28, 2008. On October 27, 2008, the
Company entered into further agreements with its lenders to temporarily waive
the fixed-charge coverage ratio and leverage ratio covenants under its credit
facilities. The lenders agreed to continue to provide liquidity under the credit
facilities during the thirty-day period ended November 26, 2008. On November 26,
2008, the Company entered into further agreements with its lenders to extend the
temporary waivers until December 1, 2008.
The filing of the bankruptcy petitions
also constituted an event of default under the 7 5/8% Senior Notes due 2015, the
8 3/8% Senior Subordinated Notes due 2017 and the 9 1/4% Senior Subordinated
Notes due 2013. The total principal amount of the Notes was approximately
$657 million as of December 1,
2008. As a result of such event of
default, all obligations under the Notes became automatically and immediately
due and payable, subject to an automatic stay of any action to collect, assert,
or recover a claim against the Company and the application of applicable
bankruptcy law.
Assuming no amounts are accelerated,
annual maturities of
long-term debt for the five years subsequent to September 27, 2008 are: 2009—$2.4 million; 2010—$2.4 million; 2011—$54.3 million; 2012—$2.5 million; 2013—$200.9 million and thereafter—$1,679.4 million.
Total interest expense was $134.2 million, $123.2 million and $49.0 million in 2008, 2007 and 2006, respectively. Interest related to new
construction capitalized in 2008, 2007 and 2006 was $5.3 million, $5.7 million and $4.3 million,
respectively.
The fair
value of our public debt obligations at September 27, 2008 based upon quoted
market prices for the issues, was approximately $371.2 million. Due to our
current financial condition, our public debt is trading at a substantial
discount. As of November 28, 2008, the most recent trades of our 7 5/8% senior
unsecured notes and 8 3/8% senior subordinated unsecured notes were executed at
$14.00 per $100.00 par value and $4.50 per $100.00 par value, respectively.
Management also expects that the fair value of our non-public credit facilities
has also decreased, but cannot reliably estimate the fair value at this
time.
Notes
Payable and Long-Term Debt after Chapter 11 Bankruptcy Filings
The
filing of the Chapter 11 petitions constituted an event of default under
certain of our debt obligations, and those debt obligations became automatically
and immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law. As a result, the accompanying Consolidated Balance
Sheet as of September 27, 2008 includes a reclassification of $1,872.1 million
to reflect as current certain long-term debt under its credit facilities that
became automatically and immediately due and payable.
On December 2, 2008, the Bankruptcy Court granted interim approval
authorizing the Company and US Subsidiaries to enter into the DIP Credit
Agreement among the Company, as borrower, the US Subsidiaries, as guarantors,
Bank of Montreal, as agent, and the lenders party thereto. On December 2, 2008,
the Company, the US Subsidiaries and the other parties entered into the DIP
Credit Agreement, subject to final approval of the Bankruptcy Court.
The DIP Credit Agreement provides for an
aggregate commitment of up
to $450 million, which permits borrowings on a revolving basis. The Company
received interim approval to access $365 million of the commitment pending
issuance of the final order by the Bankruptcy Court. Outstanding borrowings
under the DIP Credit Agreement will bear interest at a per annum rate equal to
8.0% plus the greatest of (i) the prime rate as established by the DIP agent
from time to time, (ii) the average federal funds rate plus 0.5%, or
(iii) the LIBOR rate plus 1.0%, payable monthly. The loans under the DIP Credit Agreement
were used to repurchase all receivables sold under the Company's RPA and may be used to fund the working
capital requirements of the Company and its subsidiaries according to a budget
as approved by the required
lenders under the DIP Credit Agreement. For additional information on the
RPA, see Note F—Accounts Receivable.
Actual borrowings by the Company under
the DIP Credit Agreement are subject to a borrowing base, which is a formula
based on certain eligible
inventory and eligible receivables. The borrowing base formula is reduced by
pre-petition obligations under the Fourth Amended and Restated Secured Credit
Agreement dated as of February 8, 2007, among the Company and certain of its
subsidiaries, Bank of Montreal, as administrative agent,
and the lenders parties thereto, as amended, administrative and professional
expenses, and the amount owed by the Company and the Debtor Subsidiaries to any
person on account of the purchase price of agricultural products or services (including poultry and
livestock) if that person is entitled to any grower's or producer's lien or
other security arrangement. The borrowing base is also limited to 2.22 times the
formula amount of total eligible receivables. As of December 6, 2008, the applicable borrowing base
was $324.8
million and the amount
available for borrowings under the DIP Credit Agreement was $201.2 million.
The principal amount of outstanding
loans under the DIP Credit Agreement, together with accrued and unpaid interest thereon, are payable in
full at maturity on December 1, 2009, subject to extension for an additional six
months with the approval of all lenders thereunder. All obligations under the
DIP Credit Agreement are unconditionally guaranteed by the US Subsidiaries and are secured by a
first priority priming lien on substantially all of the assets of the Company
and the US Subsidiaries, subject to specified permitted liens in the DIP Credit
Agreement.
Under the
terms of the DIP Credit Agreement and applicable bankruptcy law, the Company may
not pay dividends on the common stock while it is in bankruptcy. Any payment of
future dividends and the amounts thereof will depend on our emergence from
bankruptcy, our earnings, our financial requirements and other factors deemed
relevant by our Board of Directors at the time.
On December 2, 2008, the
Bankruptcy Court granted interim approval authorizing the Company and US
Subsidiaries to enter into the DIP Credit Agreement among the Company, as
borrower, the US Subsidiaries, as guarantors, Bank of Montreal, as agent, and
the lenders party thereto. On December 2, 2008, the Company, the US Subsidiaries
and the other parties entered into the DIP Credit Agreement, subject to final
approval of the Bankruptcy Court.
The DIP Credit
Agreement provides for an aggregate commitment of
up to $450 million, which permits borrowings on a revolving basis. The Company
received interim approval to access $365 million of the
commitment pending issuance of the final order by the Bankruptcy
Court. Outstanding
borrowings under the DIP Credit Agreement will bear interest at a per annum rate
equal to 8.0% plus the greatest of (i) the prime rate as established by the DIP
agent from time to time, (ii) the average federal funds rate plus 0.5%, or
(iii) the LIBOR rate plus 1.0%, payable monthly. The loans under the
DIP Credit Agreement were used to repurchase all receivables sold under the
Company's RPA and may be used to
fund the working capital requirements of the Company and its subsidiaries
according to a budget as approved by the required lenders
under the DIP Credit Agreement. For additional information on the RPA, see Note F—Accounts
Receivable.
Actual borrowings
by the Company under the DIP Credit Agreement are subject to a borrowing base,
which is a formula based on certain eligible inventory
and eligible receivables. The borrowing base formula is reduced by pre-petition
obligations under the Fourth Amended and Restated Secured Credit Agreement dated
as of February 8, 2007, among the Company and certain of its subsidiaries,
Bank of Montreal, as
administrative agent, and the lenders parties thereto, as amended,
administrative and professional expenses, and the amount owed by the Company and
the Debtor Subsidiaries to any person on account of the purchase price of
agricultural products or services
(including poultry and livestock) if that person is entitled to any grower's or
producer's lien or other security arrangement. The borrowing base is also
limited to 2.22 times the formula amount of total eligible receivables.
As of
December 6, 2008, the
applicable borrowing base was $324.8 million and the amount available for borrowings under the
DIP Credit Agreement was $210.9 million.
The
principal amount of outstanding loans under the DIP Credit Agreement, together
with accrued and unpaid interest
thereon, are payable in full at maturity on December 1, 2009, subject to
extension for an additional six months with the approval of all lenders
thereunder. All obligations under the DIP Credit Agreement are unconditionally
guaranteed by the US Subsidiaries and
are secured by a first priority priming lien on substantially all of the assets
of the Company and the US Subsidiaries, subject to specified permitted liens in
the DIP Credit Agreement.
Under
the terms of the DIP Credit Agreement and applicable bankruptcy law, the Company
may not pay dividends on the common stock while it is in bankruptcy. Any payment
of future dividends and the amounts thereof will depend on our emergence from
bankruptcy, our earnings, our financial requirements and other factors deemed
relevant by our Board of Directors at the time.
NOTE
M—INCOME TAXES
Income
(loss) from continuing operations before income taxes by jurisdiction is as
follows:
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
US
|
$ | (1,165,208 | ) | $ | 87,235 | $ | (10,026 | ) | ||||
|
Foreign
|
(21,885 | ) | 11,600 | (16,600 | ) | |||||||
|
Total
|
$ | (1,187,093 | ) | $ | 98,835 | $ | (26,626 | ) | ||||
The
components of income tax expense (benefit) are set forth below:
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 925 | $ | (35,434 | ) | $ | (20,294 | ) | ||||
|
Foreign
|
(1,649 | ) | 1,573 | 5,130 | ||||||||
|
State
and other
|
1,747 | (2,704 | ) | (3,718 | ) | |||||||
|
Total
current
|
1,023 | (36,565 | ) | (18,882 | ) | |||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(212,151 | ) | 73,285 | 9,511 | ||||||||
|
Foreign
|
35,277 | (1,637 | ) | 10,221 | ||||||||
|
State
and other
|
(19,070 | ) | 12,236 | 723 | ||||||||
|
Total
deferred
|
(195,944 | ) | 83,884 | 20,455 | ||||||||
| $ | (194,921 | ) | $ | 47,319 | $ | 1,573 | ||||||
The
effective tax rate for continuing operations for 2008 was (16.4%) compared to
47.9% for 2007. The effective tax rate for 2008 differed from 2007 primarily as
a result of net operating losses incurred in 2008 which are offset by the tax
effect of goodwill impairment and valuation allowances established for deferred
tax assets we believe no longer meet the more likely than not realization
criteria of SFAS 109, Accounting for Income
Taxes.
NOTE
M—INCOME TAXES
Income
(loss) from continuing operations before income taxes by jurisdiction is as
follows:
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
US
|
$ | (1,165,208 | ) | $ | 87,235 | $ | (10,026 | ) | ||||
|
Foreign
|
(21,885 | ) | 11,600 | (16,600 | ) | |||||||
|
Total
|
$ | (1,187,093 | ) | $ | 98,835 | $ | (26,626 | ) | ||||
The
components of income tax expense (benefit) are set forth below:
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 925 | $ | (35,434 | ) | $ | (20,294 | ) | ||||
|
Foreign
|
(1,649 | ) | 1,573 | 5,130 | ||||||||
|
State
and other
|
1,747 | (2,704 | ) | (3,718 | ) | |||||||
|
Total
current
|
1,023 | (36,565 | ) | (18,882 | ) | |||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(212,151 | ) | 73,285 | 9,511 | ||||||||
|
Foreign
|
35,277 | (1,637 | ) | 10,221 | ||||||||
|
State
and other
|
(19,070 | ) | 12,236 | 723 | ||||||||
|
Total
deferred
|
(195,944 | ) | 83,884 | 20,455 | ||||||||
| $ | (194,921 | ) | $ | 47,319 | $ | 1,573 | ||||||
The
effective tax rate for continuing operations for 2008 was (16.4%) compared to
47.9% for 2007. The effective tax rate for 2008 differed from 2007 primarily as
a result of net operating losses incurred in 2008 which are offset by the tax
effect of goodwill impairment and valuation allowances established for deferred
tax assets we believe no longer meet the more likely than not realization
criteria of SFAS 109, Accounting for Income
Taxes.
The
following table reconciles the statutory US federal income tax rate to the
Company’s effective income tax rate:
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
income tax rate
|
(35.0 | ) % | 35.0 | % | (35.0 | ) % | ||||||
|
State
tax rate, net
|
(2.2 | ) | 2.6 | — | ||||||||
|
Permanent
items
|
0.8 | 2.7 | — | |||||||||
|
Difference
in US statutory tax rate and foreign country effective tax
rate
|
0.2 | (0.7 | ) | (1.4 | ) | |||||||
|
Goodwill
impairment
|
14.8 | — | — | |||||||||
|
Tax
credits
|
(0.5 | ) | (7.4 | ) | (17.9 | ) | ||||||
|
Tax
effect of American Jobs Creation Act repatriation
|
— | — | 93.1 | |||||||||
|
Currency
related differences
|
— | 3.5 | 11.5 | |||||||||
|
Change
in contingency / FIN 48 reserves
|
0.2 | 6.3 | (40.5 | ) | ||||||||
|
Change
in valuation allowance
|
6.0 | — | — | |||||||||
|
Change
in tax rate
|
— | 3.0 | — | |||||||||
|
Other
|
(0.7 | ) | 2.9 | (4.0 | ) | |||||||
|
Total
|
(16.4 | ) % | 47.9 | % | 5.8 | % | ||||||
Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax liabilities and assets are as follows:
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property
and equipment
|
$ | 207,706 | $ | 256,341 | ||||
|
Inventories
|
84,261 | 109,410 | ||||||
|
Prior
use of cash accounting
|
15,243 | 16,936 | ||||||
|
Acquisition-related
items
|
13,832 | 14,820 | ||||||
|
Deferred
foreign taxes
|
30,361 | 25,002 | ||||||
|
Identified
intangibles
|
23,346 | 29,266 | ||||||
|
Other
|
6,722 | 51,654 | ||||||
|
Total
deferred tax liabilities
|
381,471 | 503,429 | ||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating losses
|
212,421 | — | ||||||
|
Foreign
net operating losses
|
50,824 | 41,257 | ||||||
|
Credit
carry forwards
|
20,322 | — | ||||||
|
Expenses
deductible in different years
|
142,619 | 143,697 | ||||||
|
Subtotal
|
426,186 | 184,954 | ||||||
|
Valuation
allowance
|
(71,158 | ) | — | |||||
|
Total
deferred tax assets
|
355,028 | 184,954 | ||||||
|
Net
deferred tax liabilities
|
$ | 26,443 | $ | 318,475 | ||||
The
Company maintains valuation allowances when it is more likely than not that all
or a portion of a deferred tax asset will not be realized. Changes in valuation
allowances from period to period are included in the tax provision in the period
of change. We evaluate the recoverability of our deferred income tax assets by
assessing the need for a valuation allowance on a quarterly basis. If we
determine that it is more likely than not that our deferred income tax assets
will be recovered, the valuation allowance will be reduced.
At
September 27, 2008, domestically we have recorded gross deferred tax assets of
approximately $1,717.2 million with a valuation allowance of $24.6 million,
offset by gross deferred tax liabilities of $1,693.0 million. In Mexico, we have
recorded gross deferred tax assets of approximately $87.0 million with a
valuation allowance of approximately $46.6 million, offset by deferred tax
liabilities of $66.9 million.
Due to a
recent history of losses, the Company does not believe it has sufficient
positive evidence to conclude that realization of its net deferred tax asset
position at September 27, 2008 in the US and Mexico is more likely than
not.
As of
September 27, 2008, the Company had US federal net operating loss carry forwards
in the amount of $608.0 million that will begin to expire in 2027 and state net
operating loss carry forwards in the amount of $523.7 million that will begin to
expire in 2009. The Company also had Mexico net operating loss carry forwards at
September 27, 2008 approximating $191.3 million that will begin to expire
in 2011.
The
Company has not provided any deferred income taxes on the undistributed earnings
of its Mexico subsidiaries based upon the determination that such earnings will
be indefinitely reinvested. As of September 27, 2008, the cumulative
undistributed earnings of these subsidiaries were approximately $38.0 million.
If such earnings were not considered indefinitely reinvested, certain deferred
foreign and US income taxes would have been provided, after consideration of
estimated foreign tax credits.
In
October 2007, Mexico’s legislative bodies enacted La Ley del Impuesto Empresarial a
Tasa Unica (“IETU”), a new minimum corporate tax that was assessed on
companies doing business in Mexico beginning January 1, 2008. While the Company
has determined that it does not anticipate paying any significant taxes under
IETU, the new law did affect the Company’s tax planning strategies to fully
realize its deferred tax assets under Mexico’s regular income tax. The Company
has evaluated the impact of IETU on its Mexico operations, and because of the
treatment of net operating losses under the new law, established a valuation
allowance for net operating losses it believes do not meet the more likely than
not realization criteria of SFAS No. 109, Accounting for Income Taxes.
This valuation allowance resulted in a $24.5 million charge to tax expense for
2008.
During
the fourth quarter of 2006, the Company repatriated $155.0 million in previously
unremitted, untaxed earnings under the provisions of the American Jobs Creation
Act (“AJCA”). The AJCA, which was enacted in October 2004, included a temporary
incentive to US multinationals to repatriate foreign earnings at an approximate
effective 5.25% US federal tax rate. The total income tax effect of
repatriations under the AJCA was $28.2 million.
The
Company adopted the provisions of FIN 48 on September 30, 2007, effective for
its year ended September 27, 2008. FIN 48 clarifies the accounting for income
taxes by prescribing a minimum recognition threshold a tax benefit is required
to meet before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. As a result
of the implementation of FIN 48, the Company increased deferred tax assets by
$22.9 million and goodwill by $0.5 million. Unrecognized tax benefits at
September 27, 2008 relate to various US jurisdictions.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
2008
|
||||
|
(In
thousands)
|
||||
|
Unrecognized
tax benefits, beginning of year
|
$ | 58,557 | ||
|
Increases
in tax positions for the current year
|
3,716 | |||
|
Increases
in tax positions for prior years
|
4,120 | |||
|
Decreases
in tax positions for prior years
|
(1,071 | ) | ||
|
Unrecognized
tax benefits, end of year
|
$ | 65,322 | ||
Included
in unrecognized tax benefits of $65.3 million at September 27, 2008 was
$36.6 million of tax benefits that, if recognized, would reduce the
Company’s effective tax rate.
The Company recognizes interest and penalties
related to unrecognized tax benefits in its provision for income taxes. As of
September 27, 2008, the Company had recorded a liability of $15.0 million for
interest and penalties. This amount includes an increase of $3.3 million
recognized for 2008.
The
Company operates in the United States (including multiple state jurisdictions),
Puerto Rico and Mexico. With few exceptions, the Company is no longer
subject to US federal, state or local income tax examinations for years prior to
2003 and is no longer subject to Mexico income tax examinations by taxing
authorities for years prior to 2005. We are currently under audit by the
Internal Revenue Service for the tax years ended September 26, 2003 to
September 30, 2006. It is likely that the examination phase of the audit
will conclude in late 2009. As a result, no adjustments to our FIN 48
liability is expected within the next 12 months.
NOTE
N—COMPREHENSIVE INCOME (LOSS)
For
the year ending September 27, 2008, comprehensive loss, net of taxes, was $991.4
million, consisting of net loss of $998.6 million, unrealized loss related to
our investments in debt securities of $2.2 million, gains related to
pension and other postretirement benefits plans of $9.8 million and loss on
cash flow hedges of $0.4 million. This compares to the year ended September 29,
2007 in which comprehensive income, net of taxes, was $60.9 million, consisting
of net income of $47.0 million, unrealized gains related to our investments in
debt securities of $0.8 million, gains related to pension and other
postretirement benefits plans of $7.9 million and realized gains on cash flow
hedges of $3.4 million. Comprehensive loss for the year ended September 30, 2006
was $33.7 million, consisting of net loss of $34.2 million and
unrealized gains related to our investments in debt securities of $0.5
million.
Accumulated other comprehensive income at September
27, 2008 was $21.2 million, net of taxes of $13.4 million, and consisted of
pretax adjustments for gains related to pension and other postretirement
benefits plans totaling $31.2 million, accumulated unrealized gains on cash flow
hedges totaling $4.8 million and accumulated unrealized loss on our investments
in debt securities totaling $1.4 million. Accumulated other comprehensive income
at September 29, 2007 was $14.0 million, net of taxes of $6.6 million, and
consisted of pretax adjustments for gains related to pension and postretirement
benefits plans totaling $14.3 million, accumulated unrealized gains on cash flow hedges totaling $5.3
million and accumulated unrealized gain on our investments in debt securities
totaling $0.9 million.
NOTE O—COMMON STOCK
Prior
to November 21, 2003, the Company had two classes of authorized common stock,
Class A common stock and Class B common stock. After the New York Stock Exchange
(“NYSE”) closed on November 21, 2003, each share of Class A common stock and
each share of Class B common stock was reclassified into one share of new common
stock. The new common stock is our only class of authorized common stock. The
new common stock was listed on the NYSE under the symbol “PPC” and registered
under the Securities Exchange Act of 1934. Except as to voting rights, the
rights of the new common stock are substantially identical to the rights of the
Class A common stock and Class B common stock. Each share of common stock that
was reclassified into our new common stock is generally entitled to cast twenty
votes on all matters submitted to a vote of the stockholders until there is a
change in the beneficial ownership of such share. The reclassification had no
significant effect on our Consolidated Financial Statements, as the combination
of the Class A and Class B shares into a new class of common stock did not
affect the overall shares of common stock outstanding. As of September 27, 2008,
we estimate that approximately 25.9 million shares of our common stock still
carry twenty votes per share. We also estimate that 25.3 million shares of this
common stock are beneficially owned by our Senior Chairman, Lonnie “Bo” Pilgrim,
or certain affiliated entities.
In
May 2008, the Company completed a public offering of 7.5 million shares of its
common stock for total consideration of approximately $177.4 million ($177.2
million, net of costs incurred to complete the sale). The Company used the net
proceeds of the offering to reduce outstanding indebtedness under two of its
revolving credit facilities and for general corporate purposes.
Effective December
1, 2008, the
NYSE delisted our common stock
as a result of the Company's filing of its Chapter 11 petitions. Our
common
stock is now quoted on the Pink Sheets Electronic Quotation Service under the
ticker symbol "PGPDQ.PK."
NOTE
P—PENSION AND OTHER POSTRETIREMENT BENEFITS
Retirement
Plans
The
Company maintains the following retirement plans for eligible
employees:
|
·
|
The
Pilgrim’s Pride Retirement Savings Plan (the “RS Plan”), a Section 401(k)
salary deferral plan,
|
|
·
|
The
Pilgrim’s Pride Retirement Plan for Union Employees (the “Union Plan”), a
defined benefit plan,
|
|
·
|
The
Pilgrim’s Pride Retirement Plan for El Dorado Union Employees (the “El
Dorado” Plan), a defined benefit
plan,
|
|
·
|
The
To-Ricos Employee Cash or Deferred Arrangement Profit Sharing Plan (the
“To-Ricos Plan”), a Section 1165(e) salary deferral plan,
and
|
|
·
|
The
Gold Kist Pension Plan (the “GK Pension Plan”), a defined benefit
plan.
|
The
Company also maintains three postretirement plans for eligible Mexico employees
as required by Mexico law that primarily cover termination benefits. Separate
disclosure of plan obligations is not considered material.
The
RS Plan is maintained for certain eligible US employees. Under the RS Plan,
eligible employees may voluntarily contribute a percentage of their compensation
and there are various Company matching provisions. The Union Plan covers certain
locations or work groups within the Company. The El Dorado Plan was spun off
from the Union Plan effective January 1, 2008 and covers certain eligible
locations or work groups within the Company. The To-Ricos Plan is maintained for
certain eligible Puerto Rican employees. Under the To-Ricos Plan, eligible
employees may voluntarily contribute a percentage of their compensation and
there are various Company matching provisions. The GK Pension Plan covers
certain eligible US employees who were employed at locations that Pilgrim’s
Pride acquired in its acquisition of Gold Kist in 2007. Participation in the GK
Pension Plan was frozen as of February 8, 2007 for all participants with the
exception of terminated vested participants who are or may become permanently
and totally disabled. The plan was frozen for that group as of March 31,
2007.
Under
all of our retirement plans, the Company’s expenses were $4.1 million,
$10.0 million and $16.0 million in 2008, 2007 and 2006, respectively,
including the correction of $4.6 million, pretax, in 2006 as described in Note
B—Summary of Significant Accounting Policies.
The
Company used a year-end measurement date of September 27, 2008 for its pension
and postretirement benefits plans. Certain disclosures are listed below; other
disclosures are not material to the financial statements.
Medical
and Life Insurance Plans
Pilgrim’s
Pride assumed postretirement medical and life insurance obligations through its
acquisition of Gold Kist in 2007. In January 2001, Gold Kist began to
substantially curtail its programs for active employees. On July 1, 2003, Gold
Kist terminated medical coverage for retirees age 65 and older, and only retired
employees in the closed group between ages 55 and 65 could continue their
coverage at rates above the average cost of the medical insurance plan for
active employees. These retired employees will all reach the age of 65 by 2012
and liabilities of the postretirement medical plan will then end.
Benefit
Obligations and Plan Assets
The following tables provide
reconciliations of the changes in the plans’ projected benefit obligations and fair value of
assets as well as statements of the funded status, balance sheet reporting and economic assumptions for these plans.
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Change
in projected benefit obligation:
|
(In
thousands)
|
|||||||||||||||
|
Projected
benefit obligation, beginning of year
|
$ | 196,803 | $ | 9,882 | $ | 2,432 | $ | — | ||||||||
|
Service
cost
|
1,246 | 2,029 | — | — | ||||||||||||
|
Interest
cost
|
9,576 | 8,455 | 132 | 103 | ||||||||||||
|
Plan
participant contributions
|
29 | 61 | 79 | 681 | ||||||||||||
|
Actuarial
gains
|
(56,589 | ) | (12,933 | ) | (477 | ) | (41 | ) | ||||||||
|
Acquisitions
|
— | 218,623 | — | 2,689 | ||||||||||||
|
Prior
year service cost
|
— | 237 | — | — | ||||||||||||
|
Benefits
paid
|
(23,553 | ) | (29,551 | ) | (273 | ) | (1,000 | ) | ||||||||
|
Other
|
(158 | ) | — | — | — | |||||||||||
|
Projected
benefit obligation, end of year
|
$ | 127,354 | $ | 196,803 | $ | 1,893 | $ | 2,432 | ||||||||
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Change
in plan assets:
|
(In
thousands)
|
|||||||||||||||
|
Fair
value of plan assets, beginning of year
|
$ | 138,024 | $ | 6,252 | $ | — | $ | — | ||||||||
|
Acquisitions
|
— | 139,229 | — | — | ||||||||||||
|
Actual
return on plan assets
|
(24,063 | ) | 11,571 | — | — | |||||||||||
|
Contributions
by employer
|
2,543 | 10,462 | 194 | 319 | ||||||||||||
|
Plan
participant contributions
|
29 | 61 | 79 | 681 | ||||||||||||
|
Benefits
paid
|
(23,553 | ) | (29,551 | ) | (273 | ) | (1,000 | ) | ||||||||
|
Fair
value of plan assets, end of year
|
$ | 92,980 | $ | 138,024 | $ | — | $ | — | ||||||||
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Funded
status:
|
(In
thousands)
|
|||||||||||||||
|
Funded
status
|
$ | (34,374 | ) | $ | (58,779 | ) | $ | (1,893 | ) | $ | (2,432 | ) | ||||
|
Unrecognized
prior service cost
|
121 | 237 | — | — | ||||||||||||
|
Unrecognized
net actuarial gain
|
(30,714 | ) | (14,824 | ) | (670 | ) | (41 | ) | ||||||||
|
Accrued
benefit cost
|
$ | (64,967 | ) | $ | (73,366 | ) | $ | (2,563 | ) | $ | (2,473 | ) | ||||
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Amounts
recognized in the balance sheets:
|
(In
thousands)
|
|||||||||||||||
|
Accrued
benefit cost (current)
|
$ | (13,596 | ) | $ | (17,614 | ) | $ | (203 | ) | $ | (380 | ) | ||||
|
Accrued
benefit cost (long-term)
|
(20,778 | ) | (41,165 | ) | (1,690 | ) | (2,052 | ) | ||||||||
|
Long-term
deferred income taxes
|
(11,549 | ) | (4,942 | ) | (253 | ) | (16 | ) | ||||||||
|
Accumulated
other comprehensive income
|
(19,044 | ) | (9,645 | ) | (417 | ) | (25 | ) | ||||||||
|
Net
amount recognized
|
$ | (64,967 | ) | $ | (73,366 | ) | $ | (2,563 | ) | $ | (2,473 | ) | ||||
The accumulated benefit obligation for
all defined benefit plans was $126.8 million and $196.2 million at September 27, 2008 and September 29,
2007, respectively.
All of the Company’s
defined benefit plans
had an accumulated benefit obligation in
excess of plan assets at
September 27, 2008 and September 29, 2007.
Net
Periodic Benefit Cost (Income)
The following table provides the
components of net periodic benefit cost (income) for the plans.
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Service
cost
|
$ | 1,246 | $ | 2,029 | $ | 2,242 | $ | — | $ | — | $ | — | ||||||||||||
|
Interest
cost
|
9,576 | 8,455 | 458 | 132 | 103 | — | ||||||||||||||||||
|
Estimated return on plan
assets
|
(10,200 | ) | (8,170 | ) | (454 | ) | — | — | — | |||||||||||||||
|
Settlement
gain
|
(6,312 | ) | (2,327 | ) | — | 153 | — | — | ||||||||||||||||
|
Amortization of prior service
cost
|
116 | — | — | — | — | — | ||||||||||||||||||
|
Effect of special
events
|
(158 | ) | — | — | — | — | — | |||||||||||||||||
|
Amortization of net
gain
|
(125 | ) | — | — | — | — | — | |||||||||||||||||
|
Net periodic benefit cost
(income)
|
$ | (5,857 | ) | $ | (13 | ) | $ | 2,246 | $ | 285 | $ | 103 | $ | — | ||||||||||
Economic
Assumptions
The following table presents the
assumptions used in determining the benefit obligations and the net periodic
benefit cost amounts.
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Weighted
average assumptions for benefit obligations at year end:
|
||||||||||||||||
|
Discount
rate
|
7.38 | % | 5.06 | % | 7.53 | % | 5.87 | % | ||||||||
|
Rate
of increase in compensation levels
|
3.00 | % | 3.00 | % |
NA
|
NA
|
||||||||||
|
Weighted
average assumptions for net periodic cost for the year:
|
||||||||||||||||
|
Discount
rate
|
5.08 | % | 5.06 | % | 5.87 | % | 5.50 | % | ||||||||
|
Rate
of increase in compensation levels
|
3.00 | % | 3.00 | % |
NA
|
NA
|
||||||||||
|
Expected
return on plan assets
|
7.77 | % | 7.75 | % | 7.75 | % | 7.75 | % | ||||||||
|
Assumed
health care cost trend rates:
|
||||||||||||||||
|
Health
care cost trend rate assumed for next year
|
NA
|
NA
|
9.00 | % | 8.00 | % | ||||||||||
|
Rate
to which the cost trend rate gradually declines
|
NA
|
NA
|
6.00 | % | 5.00 | % | ||||||||||
|
Year
that the rate will reach the rate at which it is assumed to
remain
|
NA
|
NA
|
2015
|
2014
|
||||||||||||
The Company changed its approach in determining the discount
rate from an annuity purchase rate approach to a yield curve approach. The effect
has been an increase in the discount rate from September 29, 2007 to September
27, 2008. The yield curve approach better mirrors the Company’s expectation that the termination of
the GK Pension Plan and
other benefit plans will
not occur in the near future.
A one percentage-point change in the
assumed health care cost trend rates would have an insignificant impact on 2008 expense and year-end liabilities.
Plan
Assets
The following table reflects the pension
plans’ actual asset allocations.
|
2008
|
2007
|
|||||||
|
Asset
allocation:
|
||||||||
|
Cash
and money market funds
|
1 | % | 2 | % | ||||
|
Equity
securities
|
68 | % | 71 | % | ||||
|
Debt
securities
|
31 | % | 27 | % | ||||
|
Total
assets
|
100 | % | 100 | % | ||||
Absent regulatory or statutory
limitations, the target asset allocation for the investment of the assets for
our ongoing pension plans is 25% in debt securities and 75% in equity
securities. The plans only invest in debt and equity instruments for which there is a ready public
market. We develop our expected long-term rate of return assumptions based on
the historical rates of returns for equity and debt securities of the type in
which our plans invest.
Benefit
Payments
The following table reflects the benefits as of
December 31, 2007 expected to be paid in each of the next five years and in
the aggregate for the five years thereafter from our pension and other
postretirement plans.
Because our pension plans
are primarily funded plans, the anticipated benefits with respect to
these plans will come primarily from the trusts established for these
plans. Because our other postretirement plans
are unfunded, the anticipated benefits with respect to these plans will come
from our own assets.
|
Pension
Benefits
|
Other
Benefits
|
|||||||||
|
Expected
benefit payments for year:
|
(In
thousands)
|
|||||||||
|
2009
|
$ | 13,596 | $ | 204 | ||||||
|
2010
|
13,235 | 197 | ||||||||
|
2011
|
12,554 | 171 | ||||||||
|
2012
|
11,996 | 174 | ||||||||
|
2013
|
11,459 | 176 | ||||||||
| 2014—2018 | 51,807 | 887 | ||||||||
|
Total
|
$ | 114,647 | $ | 1,809 | ||||||
We anticipate contributing $1.8 million and $0.2 million to our pension and other
postretirement plans, respectively, during 2009.
Unrecognized
Benefit Amounts in Accumulated Other Comprehensive Income
The amounts in accumulated other
comprehensive income that have not yet been recognized as components of net
periodic benefits cost at September 27, 2008 and the changes in these amounts during
2008 are as
follows.
|
Pension
Benefits
|
Other
Benefits
|
|||||||
|
Components
of accumulated other comprehensive income, before tax:
|
(In
thousands)
|
|||||||
|
Net
actuarial gain
|
$ | (30,714 | ) | $ | (670 | ) | ||
|
Net
prior service cost
|
121 | — | ||||||
|
Total
|
$ | (30,593 | ) | $ | (670 | ) | ||
|
Pension
Benefits
|
Other
Benefits
|
|||||||
|
Changes
in accumulated other comprehensive income, before tax:
|
(In
thousands)
|
|||||||
|
Net
actuarial gain, beginning of year
|
$ | (14,824 | ) | $ | (41 | ) | ||
|
Amortization
|
125 | — | ||||||
|
Curtailment
and settlement adjustments
|
6,312 | (153 | ) | |||||
|
Liability
gain
|
(56,589 | ) | (477 | ) | ||||
|
Asset
loss
|
34,264 | — | ||||||
|
Other
|
(2 | ) | 1 | |||||
|
Net
actuarial gain, end of year
|
$ | (30,714 | ) | $ | (670 | ) | ||
|
Net
prior service cost, beginning of year
|
$ | 237 | $ | — | ||||
|
Amortization
|
(116 | ) | — | |||||
|
Net
prior service cost, end of year
|
$ | 121 | $ | — | ||||
NOTE
Q—DERIVATIVE FINANCIAL INSTRUMENTS
The
Company purchases certain commodities, primarily corn and soybean meal, for use
as ingredients in the feed it either sells commercially or consumes in its live
operations. As a result, the Company’s operating results and cash flows are
affected by changes in the price and availability of such feed ingredients. The
Company attempts to mitigate its exposure to these changes through a program of
risk management that includes the use of (i) contracts for the future delivery
of commodities at fixed prices and (ii) derivative financial instruments such as
exchange-traded futures and options. The Company has elected not to designate
the derivative financial instruments it executes to mitigate its exposure to
commodity price changes as cash flow hedges. The Company recognized $38.3
million in losses related to changes in the fair value of these derivative
financial instruments during 2008. These losses are recorded in cost of sales.
The impact of changes in the fair value of these derivative financial
instruments in 2007 and 2006 was immaterial. The impact of changes in the fair value
of these derivative financial instruments in 2007 and 2006 was immaterial. At
September 27, 2008, the Company recorded a liability for futures contracts with an aggregate
fair value of $18.0 million executed to manage the price
risk on 19.1 million bushels of corn and
0.3 million tons of soybean
meal.
In
October 2008, the Company suspended the use of derivative financial instruments
in response to its current financial condition. It immediately settled all
outstanding derivative financial instruments and recognized losses in October
totaling $18.4 million.
NOTE
R—RELATED PARTY TRANSACTIONS
Lonnie
“Bo” Pilgrim, the Senior Chairman, and certain entities related to Mr. Pilgrim
are, collectively, the major stockholder of the Company (the “major
stockholder”).
Transactions
with the major stockholder or related entities are summarized as
follows:
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Loan
guaranty fees
|
$ | 4,904 | $ | 3,592 | $ | 1,615 | ||||||
|
Contract
grower pay
|
1,008 | 885 | 976 | |||||||||
|
Lease
payments on commercial egg property
|
750 | 750 | 750 | |||||||||
|
Other
sales to major stockholder
|
710 | 620 | 747 | |||||||||
|
Lease
payments and operating expenses on airplane
|
456 | 507 | 492 | |||||||||
|
Live
chicken purchases from major stockholder
|
— | — | 231 | |||||||||
Pilgrim
Interests, Ltd., an entity related to Lonnie “Bo” Pilgrim, guarantees a portion
of the Company's debt obligations. In consideration of such guarantees, the
Company has paid Pilgrim Interests, Ltd. a quarterly fee equal to 0.25% of
one-half of the average aggregate outstanding balance of such guaranteed debt.
During 2008, 2007 and 2006, we paid $4.9 million, $3.6 million and $1.6
million, respectively, to Pilgrim Interests, Ltd. Pursuant to the terms of the DIP Credit
Agreement, the Company may not pay any guarantee fees without the consent of the
lenders party thereto.
The
Company has executed chicken grower contracts involving farms owned by the major
stockholder as well as a farm owned by one former officer and director that
provide for the placement of Company-owned flocks on these farms during the
grow-out phase of production. These contracts are on terms substantially the
same as contracts executed by the Company with unaffiliated parties and can be
terminated by either party upon completion of the grow-out phase for each flock.
The aggregate amounts paid by the Company to the officers and directors party to
these grower contracts were less than $2.0 million in each of the years 2008,
2007 and 2006.
The
Company leases a commercial egg property including all of the ongoing costs of
the operation from the Company’s major stockholder. The lease, which was
executed in December 2000, runs for ten years with a monthly lease payment of
$62.5 thousand.
The major
stockholder owns both an egg laying operation and a chicken growing operation.
At certain times during the year, the major stockholder may purchase live
chickens and hens, and certain feed inventories during the grow-out phase for
his flocks, from the Company and then sell the birds to the Company at maturity
using a market-based formula in which the price is subject to a ceiling
calculated at his cost plus two percent. The Company has not purchased chickens
under this agreement since the first quarter of 2006 when the major stockholder
recognized an operating margin of $4.5 thousand on the aggregate amount paid by
the Company to the major stockholder reflected in the line item Live chicken purchases from major
stockholder in the table above.
The
Company leases an airplane from its major stockholder under an operating lease
agreement that is renewable annually. The terms of the lease agreement require
monthly payments of $33.0 thousand plus operating expenses. Lease expense was
$396.0 thousand for each of the years 2008, 2007 and 2006. Operating expenses
were $60.0 thousand, $111.2 thousand and $96.5 thousand in 2008, 2007 and 2006,
respectively. The lease was terminated on November 18, 2008.
The
Company maintains depository accounts with a financial institution in which the
Company’s major stockholder is also a major stockholder. Fees paid to this bank
in 2008, 2007 and 2006 were insignificant. As of September 27, 2008, the Company
had account balances at this financial institution of approximately $2.4
million.
The major
stockholder has deposited $0.3 million with the Company as an advance on
miscellaneous expenditures.
A son of
the major stockholder sold commodity feed products and a limited amount of other
services to the Company aggregating approximately $0.4 million and $0.6 million
in 2008 and 2007, respectively. He also leases an insignificant amount of land
from the Company.
NOTE
S—COMMITMENTS AND CONTINGENCIES
General
We are a
party to many routine contracts in which we provide general indemnities in the
normal course of business to third parties for various risks. Among other
considerations, we have not recorded a liability for any of these indemnities as
based upon the likelihood of payment, the fair value of such indemnities is
immaterial.
Purchase
Obligations
The
Company will sometimes enter into non-cancelable contracts to purchase capital
equipment and certain commodities such as corn, soybean meal, cooking oil and
natural gas. At September 27, 2008, the Company was party to outstanding
purchase contracts totaling $164.9 million. Payments for purchases made
under these contracts are due in less than 1 year.
Operating
Leases
The
Consolidated Statements of Operations include rental expense for operating
leases of approximately $71.3 million, $67.3 million and $54.0 million in 2008,
2007 and 2006, respectively. The Company’s future minimum lease commitments
under non-cancelable operating leases are as follows: 2009—$43.6 million;
2010—$34.6 million; 2011—$27.4 million; 2012—$15.3 million; 2013—$8.0
million and thereafter—$1.7 million.
Certain
of the Company’s operating leases include rent escalations. The Company includes
the rent escalation in its minimum lease payments obligations and recognizes
them as a component of rental expense on a straight-line basis over the minimum
lease term.
The
Company also maintains operating leases for various types of equipment, some of
which contain residual value guarantees for the market value of assets at the
end of the term of the lease. The terms of the lease maturities range from one
to seven years. The maximum potential amount of the residual value guarantees is
estimated to be approximately $19.9 million; however, the actual amount would be
offset by any recoverable amount based on the fair market value of the
underlying leased assets. No liability has been recorded related to this
contingency as the likelihood of payments under these guarantees is not
considered to be probable and the fair value of such guarantees is immaterial.
The Company historically has not experienced significant payments under similar
residual guarantees.
Financial
Instruments
At
September 27, 2008, the Company had $111.2 million in letters of credit
outstanding relating to normal business transactions. Letters of credit totaling
$86.0 million affect the availability of credit under our $300.0 million secured
revolving credit facility with notes payable at LIBOR plus 1.25% to LIBOR plus
2.75%.
The
Company’s loan agreements generally obligate the Company to reimburse the
applicable lender for incremental increased costs due to a change in law that
imposes (i) any reserve or special deposit requirement against assets of,
deposits with or credit extended by such lender related to the loan, (ii) any
tax, duty or other charge with respect to the loan (except standard income tax)
or (iii) capital adequacy requirements. In addition, some of the Company’s loan
agreements contain a withholding tax provision that requires the Company to pay
additional amounts to the applicable lender or other financing party, generally
if withholding taxes are imposed on such lender or other financing party as a
result of a change in the applicable tax law. These increased cost and
withholding tax provisions continue for the entire term of the applicable
transaction, and there is no limitation on the maximum additional amounts the
Company could be obligated to pay under such provisions. Any failure to pay
amounts due under such provisions generally would trigger an event of default,
and, in a secured financing transaction, would entitle the lender to foreclose
upon the collateral to realize the amount due.
Litigation
The
Company is subject to various legal proceedings and claims which arise in the
ordinary course of business. In the Company’s opinion, it has made appropriate
and adequate accruals for claims where necessary, and the Company believes the
probability of material losses beyond the amounts accrued to be remote; however,
the ultimate liability for these matters is uncertain, and if significantly
different than the amounts accrued, the ultimate outcome could have a material
effect on the financial condition or results of operations of the Company. On
December 1, 2008, the Debtors filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The cases are being
jointly administered under Case No. 08-45664. The Debtors continue to operate
their business as "debtors-in-possession" under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. As of the date of the
Chapter 11 filing, virtually all pending litigation against the Company
(including the actions described below) is stayed as to the Company, and absent
further order of the Bankruptcy Court, no party, subject to certain exceptions,
may take any action, also subject to certain exceptions, to recover on
pre-petition claims against the Debtors. At this time it is not possible to
predict the outcome of the Chapter 11 filings or their effect on our business.
Below is a summary of the most significant claims outstanding against the
Company. The Company believes it has substantial defenses to the claims made and
intends to vigorously defend these cases.
Among the
claims presently pending against the Company are claims seeking unspecified
damages brought by a stockholder, individually and on behalf of a putative
class, alleging violations of certain antifraud provisions of the Securities
Exchange Act of 1934. The Company intends to defend vigorously against the
merits of the action and any attempts by the plaintiff to certify a class
action. The likelihood of an unfavorable outcome or the amount or range of any
possible loss to the Company cannot be determined at this time.
Other
claims presently pending against the Company are claims seeking unspecified
damages brought by current and former employees seeking compensation for the
time spent donning and doffing clothing and personal protective equipment. We
are aware of an industry-wide investigation by the Wage and Hour Division of the
US Department of Labor to ascertain compliance with various wage and hour
issues, including the compensation of employees for the time spent on activities
such as donning and doffing clothing and personal protective equipment. Due, in
part, to the government investigation and the recent US Supreme Court decision
in IBP, Inc. v. Alvarez, it is
possible that we may be subject to additional employee claims. We intend to
assert vigorous defenses to the litigation. Nonetheless, there can be no
assurances that other similar claims may not be brought against the
Company.
US
Immigration and Customs Enforcement has recently been investigating identity
theft within our workforce. With our cooperation, during the past eleven months
US Immigration and Customs Enforcement has arrested approximately 350 of our
employees believed to have engaged in identity theft at five of our facilities.
No assurances can be given that further enforcement efforts by governmental
authorities against our employees or the Company will not disrupt a portion of
our workforce or our operations at one or more of our facilities, thereby
negatively impacting our business.
NOTE
T—BUSINESS SEGMENTS
We
operate in two reportable business segments as (i) a producer and seller of
chicken products and (ii) a seller of other products.
Our
chicken segment includes sales of chicken products we produce and purchase for
resale in the US, including Puerto Rico, and Mexico. Our chicken segment
conducts separate operations in the US and Puerto Rico and in Mexico and is
reported as two separate geographical areas.
Our other
products segment includes distribution of non-poultry products that are
purchased from third parties and sold to independent grocers and quick service
restaurants. Also included in this category are sales of table eggs, feed,
protein products, live hogs and other items, some of which are produced or
raised by the Company.
Inter-area
sales and inter-segment sales, which are not material, are accounted for at
prices comparable to normal trade customer sales. Corporate expenses are
allocated to Mexico based upon various apportionment methods for specific
expenditures incurred related thereto with the remaining amounts allocated to
the US portions of the segments based on number of employees.
Assets
associated with our corporate functions, included cash and cash equivalents and
investments in available for sale securities are included in our chicken
segment.
Selling,
general and administrative expenses related to our distribution centers are
allocated based on the proportion of net sales to the particular segment to
which the product sales relate.
Depreciation
and amortization, total assets and capital expenditures of our distribution
centers are included in our chicken segment based on the primary focus of the
centers.
The
following table presents certain information regarding our
segments:
|
As
of or for the Year Ended
|
September
27, 2008
|
September
29, 2007(a)
|
September
30, 2006
|
|||||||||
|
(In
thousands)
|
||||||||||||
|
Net
sales to customers:
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States
|
$ | 7,077,047 | $ | 6,328,354 | $ | 4,098,403 | ||||||
|
Mexico
|
543,583 | 488,466 | 418,745 | |||||||||
|
Subtotal
|
7,620,630 | 6,816,820 | 4,517,148 | |||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
869,850 | 661,115 | 618,575 | |||||||||
|
Mexico
|
34,632 | 20,677 | 17,006 | |||||||||
|
Subtotal
|
904,482 | 681,792 | 635,581 | |||||||||
|
Total
|
$ | 8,525,112 | $ | 7,498,612 | $ | 5,152,729 | ||||||
|
Operating
income (loss):
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States(b)
|
$ | (1,135,370 | ) | $ | 192,447 | $ | 28,619 | |||||
|
Mexico
|
(25,702 | ) | 13,116 | (17,960 | ) | |||||||
|
Subtotal
|
(1,161,072 | ) | 205,563 | 10,659 | ||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
98,863 | 28,636 | (1,192 | ) | ||||||||
|
Mexico
|
4,513 | 2,992 | 1,638 | |||||||||
|
Subtotal
|
103,376 | 31,628 | 446 | |||||||||
|
Total
|
$ | (1,057,696 | ) | $ | 237,191 | $ | 11,105 | |||||
|
Depreciation
and amortization(c)(d)(e):
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States
|
$ | 215,586 | $ | 183,808 | $ | 114,516 | ||||||
|
Mexico
|
10,351 | 11,015 | 11,305 | |||||||||
|
Subtotal
|
225,937 | 194,823 | 125,821 | |||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
13,354 | 8,278 | 7,743 | |||||||||
|
Mexico
|
244 | 215 | 146 | |||||||||
|
Subtotal
|
13,598 | 8,493 | 7,889 | |||||||||
|
Total
|
$ | 239,535 | $ | 203,316 | $ | 133,710 | ||||||
|
Total
assets(f):
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States
|
$ | 2,733,089 | $ | 3,247,812 | $ | 1,909,129 | ||||||
|
Mexico
|
372,952 | 348,894 | 361,887 | |||||||||
|
Subtotal
|
3,106,041 | 3,596,706 | 2,271,016 | |||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
153,607 | 104,644 | 89,447 | |||||||||
|
Mexico
|
5,542 | 4,120 | 1,660 | |||||||||
|
Subtotal
|
159,149 | 108,764 | 91,107 | |||||||||
|
Total
|
$ | 3,265,190 | $ | 3,705,470 | $ | 2,362,123 | ||||||
|
Acquisitions
of property, plant and equipment (excluding business
acquisition)(g):
|
||||||||||||
|
Chicken:
|
||||||||||||
|
United
States
|
$ | 148,811 | $ | 164,449 | $ | 133,106 | ||||||
|
Mexico
|
545 | 1,633 | 6,536 | |||||||||
|
Subtotal
|
149,356 | 166,082 | 139,642 | |||||||||
|
Other
Products:
|
||||||||||||
|
United
States
|
2,815 | 5,699 | 3,567 | |||||||||
|
Mexico
|
330 | 40 | 416 | |||||||||
|
Subtotal
|
3,145 | 5,739 | 3,983 | |||||||||
|
Total
|
$ | 152,501 | $ | 171,821 | $ | 143,625 | ||||||
|
(a)
|
The
Company acquired Gold Kist on December 27, 2006 for $1.139
billion.
|
|
(b)
|
Includes
goodwill impairment of $501.4 million and restructuring charges of $29.3
million in 2008.
|
|
(c)
|
Includes
amortization of capitalized financing costs of approximately $4.9 million,
$6.6 million and $2.6 million in 2008, 2007 and 2006,
respectively
|
|
(d)
|
Includes
amortization of intangible assets of $10.2 million, $8.1 million and $1.8
million recognized in 2008, 2007 and 2006 related primarily to the Gold
Kist and ConAgra Chicken acquisitions.
|
|
(e)
|
Excludes
depreciation costs incurred by our discontinued turkey business of $0.7
million, $1.6 million and $1.4 million during 2008, 2007 and 2006,
respectively.
|
|
(f)
|
Excludes
total assets of our discontinued turkey business of $33.5 million at
September 27, 2008, $68.8 million at September 29 2007 and $64.7 million
at September 30, 2006.
|
|
(g)
|
Excludes
acquisitions of property, plant and equipment by our discontinued turkey
business of $0.5 million and $0.3 million during 2007 and 2006,
respectively. Acquisitions of property, plant and equipment by our
discontinued turkey business during 2008 were
immaterial.
|
The
Company had one customer that represented 10% or more of annual net sales in
2008, 2007 and 2006.
The
Company’s Mexico operations had net long-lived assets of $97.2 million,
$106.2 million, and $116.9 million at September 27, 2008, September 29,
2007 and September 30, 2006, respectively.
The
Company’s Mexico operations had net assets of $230.5 million and $284.8 million
and at September 27, 2008 and September 29, 2007, respectively.
NOTE
U—QUARTERLY RESULTS (UNAUDITED)
|
2008
|
First
|
Second(a)
|
Third(b)
|
Fourth(c)
|
Year
|
|||||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||||||
|
Net
sales
|
$ | 2,047,353 | $ | 2,100,794 | $ | 2,207,476 | $ | 2,169,489 | $ | 8,525,112 | ||||||||||
|
Gross
profit (loss)
|
105,103 | (35,401 | ) | 53,211 | (286,408 | ) | (163,495 | ) | ||||||||||||
|
Operating
income (loss)
|
670 | (143,629 | ) | (42,531 | ) | (872,206 | ) | (1,057,696 | ) | |||||||||||
|
Loss
from continuing operations
|
(33,166 | ) | (111,501 | ) | (48,344 | ) | (799,161 | ) | (992,172 | ) | ||||||||||
|
Income
(loss) from operation of discontinued business
|
837 | (850 | ) | (4,437 | ) | (2,862 | ) | (7,312 | ) | |||||||||||
|
Gain
on disposal of discontinued business
|
— | 903 | — | — | 903 | |||||||||||||||
|
Net
loss
|
(32,329 | ) | (111,448 | ) | (52,781 | ) | (802,023 | ) | (998,581 | ) | ||||||||||
|
Per
share amounts:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (0.50 | ) | $ | (1.67 | ) | $ | (0.69 | ) | $ | (10.79 | ) | $ | (14.31 | ) | |||||
|
Discontinued
business
|
0.01 | — | (0.06 | ) | (0.04 | ) | (0.09 | ) | ||||||||||||
|
Net
loss
|
(0.49 | ) | (1.67 | ) | (0.75 | ) | (10.83 | ) | (14.40 | ) | ||||||||||
|
Dividends
|
0.0225 | 0.0225 | 0.0225 | 0.0225 | 0.0900 | |||||||||||||||
|
Number
of days in quarter
|
91 | 91 | 91 | 91 | 364 | |||||||||||||||
|
(a)
|
The
company recognized restructuring charges of $17.7 million in the second
quarter of 2008.
|
|||||||||||||||||||
|
(b)
|
The
Company recognized gains on derivative financial instruments of $102.4
million in the third quarter of 2008.
|
|||||||||||||||||||
|
(c)
|
The
Company recognized goodwill impairment of $501.4 million, losses on
derivative financial instruments of $155.7 million, restructuring charges
of $8.1 million and valuation allowances of $34.6 million in the fourth
quarter of 2008.
|
|||||||||||||||||||
|
2007
|
First(a)
|
Second
|
Third
|
Fourth
|
Year
|
|||||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,291,957 | $ | 1,987,185 | $ | 2,104,499 | $ | 2,114,971 | $ | 7,498,612 | ||||||||||
|
Gross
profit
|
62,238 | 84,049 | 234,825 | 211,618 | 592,730 | |||||||||||||||
|
Operating
income (loss)
|
(4,902 | ) | (10,674 | ) | 136,896 | 115,871 | 237,191 | |||||||||||||
|
Income
(loss) from continuing operations
|
(9,827 | ) | (39,018 | ) | 63,277 | 37,084 | 51,516 | |||||||||||||
|
Income
(loss) from operation of discontinued business
|
1,091 | (1,059 | ) | (636 | ) | (3,895 | ) | (4,499 | ) | |||||||||||
|
Net
income (loss)
|
(8,736 | ) | (40,077 | ) | 62,641 | 33,189 | 47,017 | |||||||||||||
|
Per
share amounts:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (0.15 | ) | $ | (0.59 | ) | $ | 0.95 | $ | 0.56 | $ | 0.77 | ||||||||
|
Discontinued
business
|
0.02 | (0.01 | ) | (0.01 | ) | (0.06 | ) | (0.06 | ) | |||||||||||
|
Net
income (loss)
|
(0.13 | ) | (0.60 | ) | 0.94 | 0.50 | 0.71 | |||||||||||||
|
Dividends
|
0.0225 | 0.0225 | 0.0225 | 0.0225 | 0.0900 | |||||||||||||||
|
Number
of days in quarter
|
91 | 91 | 91 | 91 | 364 | |||||||||||||||
|
(a)
|
The
Company acquired Gold Kist on December 27, 2006 for $1.139 billion. For
financial reporting purposes, we have not included the operating results
and cash flows of Gold Kist in our consolidated financial statements for
the period from December 27, 2006 through December 30, 2006. The operating
results and cash flows of Gold Kist from December 27, 2006 through
December 30, 2006 were not
material.
|
||||||||||
|
PILGRIM'S
PRIDE CORPORATION
|
||||||||||||||||||||||
|
VALUATION
AND QUALIFYING ACCOUNTS
|
||||||||||||||||||||||
|
Additions
|
||||||||||||||||||||||
|
Beginning
Balance
|
Charged
to Costs and Expenses
|
Charged
to Other Accounts
|
Deductions
(b)
|
Ending
Balance
|
||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||
|
Trade
Accounts and Other Receivables—
Allowance
for Doubtful Accounts:
|
||||||||||||||||||||||
|
2008
|
$ | 5,017 | $ | 1,956 | $ | — | $ | 2,272 | $ | 4,701 | ||||||||||||
|
2007
|
2,155 | 4,751 | 424 |
(a)
|
2,313 | 5,017 | ||||||||||||||||
|
2006
|
4,818 | (185 | ) | — | 2,478 | 2,155 | ||||||||||||||||
|
Deferred
Tax Assets—
Valuation
Allowance:
|
||||||||||||||||||||||
|
2008
|
$ | 308 | $ | 70,850 | $ | — | $ | — | $ | 71,158 | ||||||||||||
|
2007
|
— | — | 308 | — | 308 | |||||||||||||||||
|
2006
|
— | — | — | — | — | |||||||||||||||||
|
(a)
|
Adjustment
to balance established for accounts receivable acquired from Gold
Kist.
|
|||||||||||||||||||||
|
(b)
|
Uncollectible
accounts written off, net of
recoveries.
|
|||||||||||||||||||||
Exhibit
Index
|
2.1
|
Agreement
and Plan of Reorganization dated September 15, 1986, by and among
Pilgrim’s Pride Corporation, a Texas corporation; Pilgrim’s Pride
Corporation, a Delaware corporation; and Doris Pilgrim Julian, Aubrey Hal
Pilgrim, Paulette Pilgrim Rolston, Evanne Pilgrim, Lonnie “Bo” Pilgrim,
Lonnie Ken Pilgrim, Greta Pilgrim Owens and Patrick Wayne Pilgrim
(incorporated by reference from Exhibit 2.1 to the Company’s Registration
Statement on Form S-1 (No. 33-8805) effective November 14,
1986).
|
|
|
2.2
|
Agreement
and Plan of Merger dated September 27, 2000 (incorporated by reference
from Exhibit 2 of WLR Foods, Inc.’s Current Report on Form 8-K
(No. 000-17060) dated September 28, 2000).
|
|
|
2.3
|
Agreement
and Plan of Merger dated as of December 3, 2006, by and among the Company,
Protein Acquisition Corporation, a wholly owned subsidiary of the Company,
and Gold Kist Inc. (incorporated by reference from Exhibit 99.(D)(1) to
Amendment No. 11 to the Company’s Tender Offer Statement on Schedule TO
filed on December 5, 2006).
|
|
|
3.1
|
Certificate
of Incorporation of the Company, as amended (incorporated by reference
from Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year
ended October 2, 2004).
|
|
|
3.2
|
Amended
and Restated Corporate Bylaws of the Company (incorporated by reference
from Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (No.
333-111929) filed on January 15, 2004).
|
|
|
4.1
|
Certificate
of Incorporation of the Company, as amended (included as Exhibit
3.1).
|
|
|
4.2
|
Amended
and Restated Corporate Bylaws of the Company (included as
Exhibit 3.2).
|
|
|
4.3
|
Indenture,
dated November 21, 2003, between Pilgrim's Pride Corporation and The Bank
of New York as Trustee relating to Pilgrim’s Pride’s 9 1/4% Senior Notes
due 2013 (incorporated by reference from Exhibit 4.1 of the Company's
Registration Statement on Form S-4 (No. 333-111975) filed on January 16,
2004).
|
|
|
4.4
|
Form
of 9 1/4% Note due 2013 (incorporated by reference from Exhibit 4.3 of the
Company's Registration Statement on Form S-4 (No. 333-111975) filed on
January 16, 2004).
|
|
|
4.5
|
Senior
Debt Securities Indenture dated as of January 24, 2007, by and between the
Company and Wells Fargo Bank, National Association, as trustee
(incorporated by reference from Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed on January 24, 2007).
|
|
|
4.6
|
First
Supplemental Indenture to the Senior Debt Securities Indenture dated as of
January 24, 2007, by and between the Company and Wells Fargo Bank,
National Association, as trustee (incorporated by reference from Exhibit
4.2 to the Company’s Current Report on Form 8-K filed on January 24,
2007).
|
|
|
4.7
|
Form
of 7 5/8% Senior Note due 2015 (incorporated by reference from Exhibit 4.3
to the Company’s Current Report on Form 8-K filed on January 24,
2007).
|
|
|
4.8
|
Senior
Subordinated Debt Securities Indenture dated as of January 24, 2007, by
and between the Company and Wells Fargo Bank, National Association, as
trustee (incorporated by reference from Exhibit 4.4 to the Company’s
Current Report on Form 8-K filed on January 24, 2007).
|
|
|
4.9
|
First
Supplemental Indenture to the Senior Subordinated Debt Securities
Indenture dated as of January 24, 2007, by and between the Company and
Wells Fargo Bank, National Association, as trustee (incorporated by
reference from Exhibit 4.5 to the Company’s Current Report on Form 8-K
filed on January 24, 2007).
|
|
|
4.10
|
Form
of 8 3/8% Subordinated Note due 2017 (incorporated by reference from
Exhibit 4.6 to the Company’s Current Report on Form 8-K filed on January
24, 2007).
|
|
|
10.1
|
Pilgrim’s
Industries, Inc. Profit Sharing Retirement Plan, restated as of July 1,
1987 (incorporated by reference from Exhibit 10.1 of the Company’s Form
8-K filed on July 1, 1992). …
|
|
|
10.2
|
Senior
Executive Performance Bonus Plan of the Company (incorporated by reference
from Exhibit A in the Company’s Proxy Statement dated December 13, 1999).
…
|
|
|
10.3
|
Aircraft
Lease Extension Agreement between B.P. Leasing Co. (L.A. Pilgrim,
individually) and Pilgrim’s Pride Corporation (formerly Pilgrim’s
Industries, Inc.) effective November 15, 1992 (incorporated by reference
from Exhibit 10.48 of the Company’s Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
|
|
|
10.4
|
Broiler
Grower Contract dated May 6, 1997 between Pilgrim’s Pride Corporation and
Lonnie “Bo” Pilgrim (Farm 30) (incorporated by reference from Exhibit
10.49 of the Company’s Quarterly Report on Form 10-Q for the three months
ended March 29, 1997).
|
|
|
10.5
|
Commercial
Egg Grower Contract dated May 7, 1997 between Pilgrim’s Pride Corporation
and Pilgrim Poultry G.P. (incorporated by reference from
Exhibit 10.50 of the Company’s Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
|
|
|
10.6
|
Agreement
dated October 15, 1996 between Pilgrim’s Pride Corporation and Pilgrim
Poultry G.P. (incorporated by reference from Exhibit 10.23 of the
Company’s Quarterly Report on Form 10-Q for the three months ended
January 2, 1999).
|
|
|
10.7
|
Heavy
Breeder Contract dated May 7, 1997 between Pilgrim’s Pride Corporation and
Lonnie “Bo” Pilgrim (Farms 44, 45 & 46) (incorporated by reference
from Exhibit 10.51 of the Company’s Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
|
|
|
10.8
|
Broiler
Grower Contract dated January 9, 1997 by and between Pilgrim’s Pride and
O.B. Goolsby, Jr. (incorporated by reference from Exhibit 10.25 of the
Company’s Registration Statement on Form S-1 (No. 333-29163) effective
June 27, 1997).
|
|
|
10.9
|
Broiler
Grower Contract dated January 15, 1997 by and between Pilgrim’s Pride
Corporation and B.J.M. Farms (incorporated by reference from Exhibit 10.26
of the Company’s Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
|
|
|
10.10
|
Broiler
Grower Agreement dated January 29, 1997 by and between Pilgrim’s Pride
Corporation and Clifford E. Butler (incorporated by reference from Exhibit
10.27 of the Company’s Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
|
|
|
10.11
|
Purchase
and Contribution Agreement dated as of June 26, 1998 between Pilgrim’s
Pride Funding Corporation and Pilgrim’s Pride Corporation (incorporated by
reference from Exhibit 10.34 of the Company’s Quarterly Report on Form
10-Q for the three months ended June 27, 1998).
|
|
|
10.12
|
Guaranty
Fee Agreement between Pilgrim’s Pride Corporation and Pilgrim Interests,
Ltd., dated June 11, 1999 (incorporated by reference from Exhibit 10.24 of
the Company’s Annual Report on Form 10-K for the year ended
October 2, 1999).
|
|
|
10.13
|
Commercial
Property Lease dated December 29, 2000 between Pilgrim’s Pride Corporation
and Pilgrim Poultry G.P. (incorporated by reference from
Exhibit 10.30 of the Company’s Quarterly Report on Form 10-Q for the
three months ended December 30, 2000).
|
|
|
10.14
|
Amendment
No. 1 dated as of December 31, 2003 to Purchase and Contribution Agreement
dated as of June 26, 1998, between Pilgrim’s Pride Funding Corporation and
Pilgrim’s Pride Corporation (incorporated by reference from Exhibit 10.5
of the Company’s Quarterly Report on Form 10-Q filed February 4,
2004).
|
|
|
10.15
|
Employee
Stock Investment Plan of the Company (incorporated by reference from
Exhibit 4.1 of the Company’s Registration Statement on Form S-8 (No.
333-111929) filed on January 15, 2004). …
|
|
|
10.16
|
2005
Deferred Compensation Plan of the Company (incorporated by reference from
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated December
27, 2004). …
|
|
|
10.17
|
Vendor
Service Agreement dated effective December 28, 2005 between Pilgrim's
Pride Corporation and Pat Pilgrim (incorporated by reference from Exhibit
10.2 of the Company's Current Report on Form 8-K dated January 6,
2006).
|
|
|
10.18
|
Transportation
Agreement dated effective December 28, 2005 between Pilgrim's Pride
Corporation and Pat Pilgrim (incorporated by reference from Exhibit 10.3
of the Company's Current Report on Form 8-K dated January 6,
2006).
|
|
|
10.19
|
Credit
Agreement by and among the Avícola Pilgrim’s Pride de México, S. de R.L.
de C.V. (the "Borrower"), Pilgrim's Pride Corporation, certain Mexico
subsidiaries of the Borrower, ING Capital LLC, and the lenders signatory
thereto dated as of September 25, 2006 (incorporated by reference from
Exhibit 10.1 of the Company's Current Report on Form 8-K filed on
September 28, 2006).
|
|
|
10.20
|
2006
Amended and Restated Credit Agreement by and among CoBank, ACB, Agriland,
FCS and the Company dated as of September 21, 2006 (incorporated by
reference from Exhibit 10.2 of the Company's Current Report on Form 8-K
filed on September 28, 2006).
|
|
|
10.21
|
First
Amendment to the Pilgrim’s Pride Corporation Amended and Restated 2005
Deferred Compensation Plan Trust, dated as of November 29, 2006
(incorporated by reference from Exhibit 10.03 of the Company’s Current
Report on Form 8-K filed on December 05, 2006). …
|
|
|
10.22
|
Agreement
and Plan of Merger dated as of December 3, 2006, by and among the Company,
Protein Acquisition Corporation, a wholly owned subsidiary of the Company,
and Gold Kist Inc. (incorporated by reference from Exhibit 99.(D)(1) to
Amendment No. 11 to the Company’s Tender Offer Statement on Schedule TO
filed on December 5, 2006).
|
|
|
10.23
|
First
Amendment to Credit Agreement, dated as of December 13, 2006, by and among
the Company, as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as a
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.01 to the Company’s Current
Report on Form 8-K filed on December 19, 2006).
|
|
|
10.24
|
Second
Amendment to Credit Agreement, dated as of January 4, 2007, by and among
the Company, as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as a
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.01 to the Company’s Current
Report on Form 8-K filed on January 9, 2007).
|
|
|
10.25
|
Fourth
Amended and Restated Secured Credit Agreement, dated as of February 8,
2007, by and among the Company, To-Ricos, Ltd., To-Ricos Distribution,
Ltd., Bank of Montreal, as agent, SunTrust Bank, as syndication agent,
U.S. Bank National Association and Wells Fargo Bank, National Association,
as co-documentation agents, BMO Capital Market, as lead arranger, and the
other lenders signatory thereto (incorporated by reference from Exhibit
10.01 of the Company’s Current Report on Form 8-K dated February 12,
2007).
|
|
|
10.26
|
Third
Amendment to Credit Agreement, dated as of February 7, 2007, by and among
the Company as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and the sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as a
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.02 of the Company’s Current
Report on Form 8-K dated February 12, 2007).
|
|
|
10.27
|
First
Amendment to Credit Agreement, dated as of March 15, 2007, by and among
the Borrower, the Company, the Subsidiary Guarantors, ING Capital LLC, and
the Lenders (incorporated by reference from Exhibit 10.01 of the Company’s
Current Report on Form 8-K dated March 20, 2007).
|
|
|
10.28
|
Fourth
Amendment to Credit Agreement, dated as of July 3, 2007, by and among the
Company as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and the sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q filed July 31, 2007).
|
|
|
10.29
|
Retirement
and Consulting Agreement dated as of October 10, 2007, between the Company
and Clifford E. Butler (incorporated by reference from Exhibit 10.1 of the
Company’s Current Report on Form 8-K dated October 10, 2007). …
|
|
|
10.30
|
Fifth
Amendment to Credit Agreement, dated as of August 7, 2007, by and among
the Company as borrower, CoBank, ACB, as lead arranger and co-syndication
agent, and the sole book runner, and as administrative, documentation and
collateral agent, Agriland, FCS, as co-syndication agent, and as
syndication party, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.39 of the Company’s Annual
Report on Form 10-K filed on November 19, 2007).
|
|
|
10.31
|
Sixth
Amendment to Credit Agreement, dated as of November 7, 2007, by and among
the Company as borrower, CoBank, ACB, as administrative agent, and the
other syndication parties signatory thereto (incorporated by reference
from Exhibit 10.1 of the Company’s Current Report on Form 8-K dated
November 13, 2007).
|
|
|
10.32
|
Ground
Lease Agreement effective February 1, 2008 between Pilgrim's Pride
Corporation and Pat Pilgrim (incorporated by reference from Exhibit 10.1
of the Company's Current Report on Form 8-K dated February 1,
2008).
|
|
|
10.33
|
Seventh
Amendment to Credit Agreement, dated as of March 10, 2008, by and among
the Company as borrower, CoBank, ACB, as administrative agent, and the
other syndication parties signatory thereto (incorporated by reference
from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
February 20, 2008).
|
|
|
10.34
|
First
Amendment to the Fourth Amended and Restated Secured Credit Agreement,
dated as of March 11, 2008, by and among the Company, To-Ricos, Ltd.,
To-Ricos Distribution, Ltd., Bank of Montreal, as administrative agent,
and the other lenders signatory thereto (incorporated by reference from
Exhibit 10.2 to the Company's Current Report on Form 8-K filed on February
20, 2008).
|
|
|
10.35
|
Eighth
Amendment to Credit Agreement, dated as of April 30, 2008, by and among
the Company as borrower, CoBank, ACB, as administrative agent, and the
other syndication parties signatory thereto (incorporated by reference
from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May
5, 2008).
|
|
|
10.36
|
Second
Amendment to the Fourth Amended and Restated Secured Credit Agreement,
dated as of April 30, 2008, by and among the Company, To-Ricos, Ltd.,
To-Ricos Distribution, Ltd., Bank of Montreal, as administrative agent,
and the other lenders signatory thereto (incorporated by reference from
Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 5,
2008).
|
|
|
10.37
|
Change
to Company Contribution Amount Under the Amended and Restated 2005
Deferred Compensation Plan of the Company (incorporated by reference from
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed July 30,
2008). …
|
|
|
10.38
|
Limited Duration Waiver
of Potential Defaults and Events of
Default under Credit Agreement dated September 26, 2008 by and among
Pilgrim's Pride Corporation, as borrower, CoBank, ACB, as administrative
agent, and the other syndication parties signatory thereto
(incorporated by reference from Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on September 29,
2008).
|
|
|
10.39
|
Limited Duration Waiver
Agreement dated as of September 26, 2008 by and among Pilgrim's Pride
Corporation, as borrower, Bank of Montreal, as administrative
agent, and
certain other bank parties thereto (incorporated by reference from
Exhibit 10.2 to the Company's Current Report on Form 8-K filed on
September 29, 2008).
|
|
|
10.40
|
Limited Duration Waiver
Agreement dated as of September 26, 2008 by and among Pilgrim's Pride Corporation,
Pilgrim's Pride Funding Corporation, BMO Capital Markets Corp., as
administrator, and Fairway Finance Company, LLC (incorporated by
reference from Exhibit 10.3 to the Company's Current Report on Form 8-K
filed on September 29, 2008).
|
|
|
10.41
|
Amended and Restated
Receivables Purchase Agreement dated as of September 26, 2008 among
Pilgrim's Pride Corporation, Pilgrim's Pride Funding Corporation, BMO
Capital Markets Corp., as administrator, and the various purchasers and
purchaser agents from time to time
parties thereto (incorporated by reference from Exhibit 10.4 to the
Company's Current Report on Form 8-K filed on September 29,
2008).
|
|
|
Amendment
No. 1 dated as of October 10, 2008 to Amended and Restated Receivables
Purchase Agreement, dated as of September 26, 2008 among Pilgrim's Pride
Corporation, Pilgrim's Pride Funding Corporation, BMO Capital Markets
Corp., as administrator, and the various purchasers and purchaser agents
from time to time parties thereto.*
|
||
|
10.43
|
Amendment No. 2 to
Purchase and Contribution Agreement dated as of September 26, 2008 among
Pilgrim's Pride Funding Corporation and Pilgrim's Pride Corporation
(incorporated by reference from Exhibit 10.5 to the Company's
Current Report on Form 8-K filed on September 29,
2008).
|
|
|
10.44
|
Limited Duration Waiver
of Potential Defaults and Events of Default under Credit Agreement dated
October 26, 2008 by and among Pilgrim's Pride Corporation, as borrower,
CoBank, ACB, as administrative agent, and the other syndication
parties signatory thereto (incorporated by reference from Exhibit
10.1 to the Company's Current Report on Form 8-K filed on October 27,
2008).
|
|
|
10.45
|
Limited Duration Waiver
Agreement dated as of October 26, 2008 by and among Pilgrim's Pride Corporation,
as borrower, Bank of Montreal, as administrative agent, and certain other
bank parties thereto (incorporated by reference from Exhibit 10.2
to the Company's Current Report on Form 8-K filed on October 27,
2008).
|
|
|
10.46
|
Limited Duration Waiver
Agreement dated as of October 26, 2008 by and among Pilgrim's Pride
Corporation, Pilgrim's Pride Funding Corporation, BMO Capital Markets
Corp., as administrator, and Fairway Finance Company, LLC
(incorporated by reference from Exhibit 10.3 to the Company's
Current Report on Form 8-K filed on October 27, 2008).
|
|
|
10.47
|
Form of Change in
Control Agreement dated as of October 21, 2008 between the Company and
certain of its executive officers (incorporated by reference from
Exhibit 10.4 to the Company's Current Report on Form 8-K filed on October
27, 2008). …
|
|
|
First
Amendment to Limited Duration Waiver
of Potential Defaults and Events of Default under Credit Agreement dated
November 25, 2008 by and among Pilgrim's Pride
Corporation, as borrower, CoBank,
ACB, as administrative agent, and the other syndication parties signatory
thereto.*
|
||
|
First
Amendment to Limited Duration Waiver Agreement dated as of
November 25, 2008 by and among Pilgrim's Pride Corporation, as
borrower, Bank of Montreal, as administrative agent, and certain other
bank parties thereto.*
|
||
|
First
Amendment to Limited Duration Waiver Agreement dated as of
November 25, 2008 by and among Pilgrim's Pride Corporation, Pilgrim's
Pride Funding Corporation, BMO Capital Markets Corp., as administrator,
and Fairway Finance Company, LLC. *
|
||
|
Waiver
Agreement and Second Amendment to Credit Agreement dated November 30,
2008, by and among the Company and certain non-debtor Mexico subsidiaries
of the Company, ING Capital LLC, as agent, and the lenders signatory
thereto.*
|
||
|
Post-Petition
Credit Agreement dated December 2, 2008 by and among the Company, as
borrower, the US Subsidiaries, as guarantors, Bank of Montreal, as agent,
and the lenders party thereto.*
|
|
Ratio
of Earnings to Fixed Charges for the years ended September 27, 2008,
September 29, 2007, September 30, 2006, October 1, 2005, October 2, 2004,
and September 27, 2003.*
|
||
|
Subsidiaries
of Registrant.*
|
||
|
Consent
of Ernst & Young LLP.*
|
||
|
Certification
of Co-Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
||
|
Certification
of Co-Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
||
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
|
||
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
||
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
||
|
Certification
of Chief Financial Officer of Pilgrim's Pride Corporation pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
|
*Filed
herewith
|
|
|
…Represents
a management contract or compensation plan
arrangement
|