Cagles 10Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended January 2, 2010

	or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

COMMISSION FILE NUMBER: 1-7138

CAGLE’S, INC.

(Exact Name Of Registrant As Specified In Its Charter)

GEORGIA		58-0625713
(State Of Incorporation)		(I.R.S. Employer Identification No.)

1385 COLLIER ROAD NW, ATLANTA, GA		30318
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (404) 355-2820

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 l934 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. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (section 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class A Common Stock at $1.00 par value

4,615,233 shares as of February 15, 2010.

Table of Contents

FORM 10-Q

Cagle’s, Inc.

January 2, 2010

TABLE OF CONTENTS

		Page
	PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	18

	PART II OTHER INFORMATION

Item 1.	Legal Proceedings	19
Item 1.A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults upon Senior Securities	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 5.	Other Information	21
Item 6.	Exhibits	22

Signatures

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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CAGLE’S, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(In Thousands, Except Par Values)

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

	(Unaudited)
	January 2, 2010			March 28, 2009
Assets
Current assets
Cash and cash equivalents	$	1,294		$	1,246
Trade accounts receivable, less allowance for doubtful accounts of $182 and $186 at January 2010 and March 2009	13,875			14,170
Inventories	24,228			27,181
Other current assets	421			201
Total current assets	39,818			42,798
Property, plant and equipment, at cost
Land	1,976			1,976
Buildings and improvements	59,698			59,686
Machinery, furniture and equipment	42,166			41,034
Vehicles	5,156			4,691
Construction in progress	459			645
	109,455			108,032
Less accumulated depreciation	74,414			71,249
Property, plant and equipment, net	35,041			36,783
Other assets
Deferred financing costs, net	88			103
Deferred income taxes	8,373			9,775
Other assets	1,498			1,693
Total other assets	9,959			11,571
Total assets	$	84,818		$	91,152

Liabilities and Stockholders’ Equity
Current liabilities
Current maturities of long-term debt	$	2,643		$	2,488
Accounts payable	15,735			19,989
Accrued expenses	4,286			4,462
Deferred income taxes	3,180			3,180
Total current liabilities	25,844			30,119
Long-term debt, less current maturities	24,547			29,049
Stockholders’ equity			��
Preferred stock, $1 par value; 1,000 shares authorized, none issued	—			—
Common stock, $1 par value; 9,000 shares authorized, 4,616 and 4,638 shares issued and 4,615 and 4,637 shares outstanding at January 2010 and March 2009, respectively	4,615			4,637
Treasury stock, at cost	(80		)	(80		)
Additional paid-in capital	3,601			3,627
Retained earnings	26,291			24,662
Accumulated other comprehensive (loss)	—			(862		)
Total stockholders’ equity	34,427			31,984
Total liabilities and stockholders’ equity	$	84,818		$	91,152

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CAGLE’S, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Share Data)

(Unaudited)

	13 Weeks Ended			14 Weeks Ended			40 Weeks Ended			40 Weeks Ended
	January 2, 2010			January 3, 2009			January 2, 2010			January 3, 2009

Net sales	$	70,411		$	73,526		$	235,996		$	226,078

Costs and expenses
Cost of sales	66,943			72,905			220,470			230,184
Selling and delivery	2,124			2,138			6,596			6,825
General and administrative	1,498			1,737			5,148			4,460
Total costs and expenses	70,565			76,780			232,214			241,469

Operating income (loss)	(154		)	(3,254		)	3,782			(15,391		)

Other income (expense)
Interest expense	(393		)	(593		)	(1,250		)	(1,688		)
Other income (expense), net	9			(2		)	14			(18		)
Total other income (expense), net	(384		)	(595		)	(1,236		)	(1,706		)

Income (loss) before income taxes	(538		)	(3,849		)	2,546			(17,097		)

Income tax expense (benefit)	(193		)	(1,329		)	917			(6,098		)

Net income (loss)	$	(345	)	$	(2,520	)	$	1,629		$	(10,999	)

Weighted-average common shares outstanding
Basic	4,615			4,658			4,616			4,658
Diluted	4,615			4,658			4,616			4,658

Per common share
Net income (loss)
Basic	$	(0.08	)	$	(0.54	)	$	0.35		$	(2.36	)
Diluted	$	(0.08	)	$	(0.54	)	$	0.35		$	(2.36	)
Dividends per common share	$	—		$	—		$	—		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CAGLE’S, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	40 Weeks Ended			40 Weeks Ended
	January 2, 2010			January 3, 2009
Cash flows from operating activities
Net income (loss)	$	1,629		$	(10,999	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation	3,238			3,094
Amortization	63			56
Gain on sale of property, plant and equipment	(3		)	—
Deferred income tax expense (benefit)	917			(6,745		)
Changes in operating assets and liabilities
Trade accounts receivable, net	295			573
Inventories	2,953			3,256
Other current assets	(220		)	(1,707		)
Accounts payable	(5,209		)	2,883
Accrued expenses	1,171			(325		)
Other assets	15			296
Net cash provided by (used in) operating activities	4,849			(9,618		)
Cash flows from investing activities
Purchases of property, plant and equipment	(1,400		)	(1,267		)
Proceeds from sale of property, plant and equipment	3			—
Proceeds from redemption of life insurance	180			1,241
Net cash used in investing activities	(1,217		)	(26		)
Cash flows from financing activities
Proceeds on revolving line of credit	66,450			67,876
Payments on revolving line of credit	(69,025		)	(57,425		)
Payments of long-term debt	(1,868		)	(1,638		)
Payments of deferred financing costs	(48		)	(128		)
Increase in negative book cash balances	955			1,351
Repurchase of stock	(48		)	(22		)
Net cash provided by (used in) financing activities	(3,584		)	10,014
Net increase in cash and cash equivalents	48			370
Cash and cash equivalents - beginning of period	1,246			1,279
Cash and cash equivalents - end of period	$	1,294		$	1,649
Supplementary disclosures of cash flow information
Cash paid (received) during the period for:
Interest	$	1,246		$	1,610
Income taxes, net	—			(108		)
Supplementary disclosures of noncash transactions
Net unrealized gain (loss) on hedging activities, net of income tax expense (benefit) of $485 and $(647), respectively	$	862		$	(1,546	)
Assets acquired pursuant to capital lease obligations	96			74

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

January 2, 2010

(In Thousands)

(Unaudited)

1. Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments which are of a normal and recurring nature necessary to present fairly the consolidated financial position of Cagle’s, Inc. and its wholly owned subsidiary Cagle Farms, Inc. (collectively, the “Company”) as of January 2, 2010 and the results of their operations for the 13 and 40 weeks ended January 2, 2010 and the 14 and 40 weeks ended January 3, 2009. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Results of operations for the 13 and 40 weeks ended January 2, 2010 are not necessarily indicative of results to be expected for the full fiscal year ending April 3, 2010.

The consolidated balance sheet at March 28, 2009 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, reference is made to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended March 28, 2009.

2. Significant Accounting Policies

Refer to the Company’s 2009 annual report on Form 10-K, Note 1 to Consolidated Financial Statements, for a description of significant accounting policies. There have been no material changes to these accounting policies.

3. Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash management system allows the Company to fund outstanding checks when presented to the financial institution for payment resulting in book overdrafts. Book overdrafts are recorded in accounts payable in the consolidated balance sheets and changes are reflected as a financing activity in the consolidated statements of cash flows. As of January 2, 2010 and March 28, 2009, the Company had book overdrafts of $5,917 and $4,962, respectively.

4. Inventories

Inventories consist of the following at January 2, 2010 and March 28, 2009:

	January 2010		March 2009

Finished products	$	3,400	$	5,692
Field inventory and breeders	15,022		15,509
Feed, eggs and medication	4,389		4,659
Supplies	1,417		1,321

	$	24,228	$	27,181

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

January 2, 2010

(In Thousands)

(Unaudited)

5. Long-Term Debt

Long-term debt consists of the following at January 2, 2010 and March 28, 2009:

	January 2010		March 2009
Long-term revolving line of credit, maturing March 31, 2012, interest payable monthly, variable interest rate of LIBOR plus 3.50%; secured by accounts receivable, inventories and the Atlanta and Pine Mountain Valley facilities.	$	14,725	$	17,300

Term note payable; fixed interest rate of 7.86%, principal and interest payable monthly of $290 through March 1, 2011 with a maturity payable of $9,382 on April 1, 2011; secured by the Collinsville plant, Dalton hatchery and Rockmart feedmill.	12,377		14,199

Capital leases payable, fixed interest ranges from 6.4% to 7.9%, principal and interest payable monthly of $6, through maturity ranges of March 2010 to August 2012; secured by the leased equipment.	88		38
	27,190		31,537
Less current maturities	2,643		2,488

Long-term debt, less current maturities	$	24,547	$	29,049

On January 29, 2009, the Company entered into an amended long-term revolving line of credit agreement, effective as of that date. There were eight primary changes to the existing Agreement between the parties: (1) An increase in the capacity of the revolving credit facility to $25,150. (2) The creation of a supplemental revolving master note in the principal amount of $4,150 and maturing on October 31, 2009. (3) The addition of the right to obtain letters of credit issued by lender in favor of third persons in face principal amounts not exceeding $1,000 at any time outstanding. (4) The limiting of borrowers’ rights to obtain letters of credit issued by lender only pursuant to such supplemental revolving master note and only when borrowers have available revolving credit (which will be determined by including in the definition thereof both the unpaid principal amount of all unpaid revolving loans and also the aggregate face principal amount of all outstanding letters of credit). (5) Additions of the limitations of the borrowers’ rights to obtain revolving loans pursuant to the supplemental revolving master note only when lender has fully advanced the entire $21,000 principal amount of the primary revolving master note and borrowers also still have available revolving credit. (6) The addition of the collateral consisting of Cagle’s processing plant located in Pine Mountain Valley, Georgia. (7) The advance rate with respect to eligible inventories is being increased from 40% to 60% and the advance rate with respect to eligible receivables is being increased from 70% to 80%. (8) The interest rates were modified by the following provisions: (a) Interest will accrue on the unpaid principal balance of the revolving loans,

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

January 2, 2010

(In Thousands)

(Unaudited)

from time to time outstanding, evidenced by the primary revolving master note at the LIBOR variable rate plus 3.50% (350 basis points), (b) Interest will accrue on the unpaid principal balance of the revolving loans, from time to time outstanding, evidenced by the supplemental revolving master note at the LIBOR variable rate plus 5.00% (500 basis points).

On November 23, 2009, the Company entered into Amendment Number 4 to the long-term revolving line of credit agreement, effective as of October 31, 2009. There were four primary changes to the existing Agreement between the parties: (1) The maturity date of the $21,000 portion of the revolving credit facility is being extended to March 31, 2012. (2) The maturity date of the $4,150 portion of the revolving credit facility is being extended to November 23, 2010. (3) The minimum tangible net worth covenant remains at $30,000 until July 3, 2010; commencing as of July 4, 2010 and ending on January 3, 2011, the minimum tangible net worth must not be less than $35,000 at any time; and commencing as of January 4, 2011, and at all times thereafter, the minimum tangible net worth must not be less than $40,000 at any time. (4) The facility advance rate with respect to eligible inventories is restored to 40% from 60% and the advance rate with respect to eligible receivables is maintained at 80%. As of January 2, 2010, the Company is in compliance with the revolving line of credit agreement’s covenants.

As of January 2, 2010, and in accordance with the amended long-term revolving line of credit agreement, the lender has issued a $1,000 letter of credit in favor of a third party related to the Company’s self-insurance workers’ compensation liabilities.

The Company’s inventory and accounts receivable levels support collateralized borrowing of up to $19,863 of the $21,000 primary revolving master note in the long-term revolving line of credit agreement. The Company’s $14,725 principal balance and $1,000 letter of credit results in $4,138 of available borrowings on the long-term revolving line of credit as of January 2, 2010.

In addition to the covenants, described above, on the long-term revolving line of credit agreement, the Company must also comply with certain restrictive covenants associated with the term note payable. These covenants require the Company to maintain (1) a maximum leverage ratio (2) minimum fixed charge coverage ratio (3) minimum adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) and (4) capital expenditures not to exceed certain limits. The Company is not in compliance with the term note payable debt covenants, but has waivers through April 5, 2010. The Company is currently negotiating an extension of the waivers, revisions to the covenants, and an extension of the payment period.

Aggregate maturities of long-term debt during the next twelve months and subsequent annual periods are as follows:

January 3, 2010 - January 1, 2011	$	2,643
January 2, 2011 - December 31, 2011	9,808
January 1, 2012 - December 29, 2012	14,739
Long-term debt	$	27,190

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

January 2, 2010

(In Thousands)

(Unaudited)

6. Stockholders’ Equity

The Board of Directors (the “Board”) has authorized the purchase of up to $15,000 of the Company’s stock on the open market. The Company did not purchase any of the Company’s stock during the 13 weeks ended January 2, 2010. The Company did purchase 22 shares for $48 during the 40 weeks ended January 2, 2010. Through January 2, 2010, 819 shares had been purchased by the Company at a total cost of $10,207. The Company has accounted for these shares using the retirement method.

7. Related Parties

Members of the Cagle’s family beneficially own, in the aggregate, 64.56% of our outstanding common stock, giving them control of approximately 65% of the total voting power of our outstanding voting stock. In addition, three members of the Cagle’s family serve on our Board of Directors. As a result, members of the Cagle’s family have the ability to exert substantial influence or actual control over our management and affairs and over substantially all matters requiring action by our stockholders, including amendments to our certificate of incorporation and by-laws, the election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets, and other corporate transactions. This concentration of ownership may also delay or prevent a change in control otherwise favored by our other stockholders and could depress our stock price.

Included in other assets at January 2, 2010 and March 28, 2009 is a receivable of $1,242 due to the Company from two related party life insurance irrevocable trusts.

8. Financial Instruments

The Company is a purchaser of certain commodities, such as corn and soybean meal in the course of normal operations. The Company has used derivative financial instruments to reduce its exposure to various market risks. Generally, contract terms of a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are designated and highly effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting, as defined by ASC 815-10, “Accounting for Derivative Instruments and Hedging Activities.” If a derivative instrument is a hedge, as defined by ASC 815-10, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings as a component of cost of sales. Instruments the Company holds as part of its risk management activities that do not meet the criteria for hedge accounting, as defined by ASC 815-10, are marked to fair value with unrealized gains or losses reported currently in earnings.

9. Comprehensive Income

Comprehensive income includes net earnings and all other changes in equity during a period except those resulting from investments by or distributions to stockholders. Other comprehensive income for all periods presented consists of fair value adjustments associated with cash flow hedges pursuant to ASC 815-10, “Accounting for Derivative Instruments and Hedging Activities.”

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

January 2, 2010

(In Thousands)

(Unaudited)

	13 Weeks Ended			14 Weeks Ended			40 Weeks Ended			40 Weeks Ended
	January 2, 2010			January 3, 2009			January 2, 2010			January 3, 2009

Net income (loss)	$	(345	)	$	(2,520	)	$	1,629		$	(10,999	)
Cash flow hedges	—			(397		)	—			(2,866		)
Reclassification to net earnings	449			(396		)	1,347			673
Tax (expense) benefit	(162		)	143			(485		)	647

Total comprehensive income (loss)	$	(58	)	$	(3,170	)	$	2,491		$	(12,545	)

Prior to the end of the second quarter of the fiscal year ended March 28, 2009, the Company held commodity futures contracts which were designated as cash flow hedges, whereby the contracts were recorded at fair value on the consolidated balance sheets as either an asset or liability with any changes in fair value recorded in accumulated other comprehensive income (loss). In a cash flow hedge, a futures contract would exactly match the pricing date of the relevant anticipated inventory purchases. Through the end of the second quarter of the fiscal year ended March 28, 2009, the Company continued to be able to match the futures contract with the anticipated inventory purchases, therefore, entering into an effective hedge transaction. However, due to the volatility of the grain markets, the Company concluded it was no longer practical to keep the futures.

For the 40 week period ended January 2, 2010, the Company recognized $1,347 of expense in cost of sales related to our cash flow hedge which was determined to be fully effective.

As a result, the Company voluntarily discontinued hedge accounting in the second quarter of the fiscal year ended March 28, 2009 by de-designating the previously defined hedge relationship. The de-designation of the cash flow hedge was done in accordance with Derivatives Implementation Group (“DIG”) Issue Nos. G3, G17, G18 and G20, which generally require that the net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated other comprehensive income (loss), unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. As such the Company continues to hold inventory purchase agreements in excess of futures contracts and have no indication that the futures commitment on the hedged inventory purchases is in jeopardy of discontinuing. Therefore, the deferred losses related to the derivative that were de-designated were not recognized immediately and are expected to be reclassified into earnings during the contractual terms of the inventory purchases. The Company had pretax losses totaling $1,347, recorded as accumulated other comprehensive income (loss) as of the fiscal year ended March 28, 2009 related to cash flow hedges, recognized prorata through the third quarter ended January 2, 2010. The Company generally has no hedge cash flows related to commodities beyond 12 months.

10. Reclassifications

Certain reclassifications have been made to the January 3, 2009 Consolidated Statements of Cash Flows in order for it to conform to the current presentation. There was no impact on earnings.

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

January 2, 2010

(In Thousands)

(Unaudited)

11. New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles, which established the FASB Accounting Standards Codification as the sole source of authoritative generally accepted accounting principles. Pursuant to the provisions of FASB ASC 105, the Company has updated references to GAAP in its financial statements issued for the period ended October 3, 2009. The adoption of FASB ASC 105 did not impact the Company’s financial position or results of operations.

Determination of the Useful Life of Intangible Assets. In April 2008, the FASB issued new U.S. GAAP guidance related to the determination of the useful life of intangible assets that requires entities to consider their own historical experience in renewing or extending similar arrangements when developing assumptions regarding the useful lives of intangible assets and also mandates certain related disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The adoption of this guidance did not have an effect on the Company’s consolidated financial statements.

Interim Disclosures About Fair Value of Financial Instruments. In April 2009, the FASB issued new U.S. GAAP guidance that requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods and is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have an effect on the Company’s consolidated financial statements.

Measuring Liabilities at Fair Value. In August 2009, the FASB issued new U.S. GAAP guidance clarifying the measurement of liabilities at fair value. Among other things, the guidance clarifies how the price of a traded debt security (an asset value) should be considered in estimating the fair value of the issuer’s liability and is effective for the first reporting period beginning after its issuance. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Multiple-Deliverable Revenue Arrangements. In October 2009, the FASB issued new U.S. GAAP guidance that requires an entity to allocate revenue arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices (the relative-selling-price method). The guidance eliminates the use of the residual method of allocation, in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration, and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. The new guidance must be adopted no later than the beginning of the first fiscal year beginning on or after June 15, 2010, with early adoption permitted through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The Company does not expect the adoption of this guidance to have an effect on its consolidated financial statements.

12. Subsequent Events

The Company has performed a review of events subsequent to the balance sheet date of January 2, 2010 through February 15, 2010, the date the financial statements were issued.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The disclosures in this quarterly report are complementary to those made in the Company’s 2009 annual report on Form 10-K.

This Quarterly Report, and other periodic reports filed by the Company under the Securities Exchange Act of 1934, and other written or oral statements made by it or on its behalf, may include forward-looking statements, which are based on a number of assumptions about future events and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and estimates expressed in such statements. These risks, uncertainties and other factors include, but are not limited to the following:

· Changes in the market price for the Company’s finished products and feed grains, both of which may fluctuate substantially and exhibit cyclical characteristics typically associated with commodity markets.

· Changes in economic and business conditions, monetary and fiscal policies or the amount of growth, stagnation or recession in the global or U.S. economies, either of which may affect the value of inventories, the collectability of accounts receivable or the financial integrity of customers, and the ability of the end user or consumer to afford protein.

· Changes in the political or economic climate, trade policies, laws and regulations or the domestic poultry industry of countries to which the Company or other companies in the poultry industry ship product, and other changes that might limit the Company’s or the industry’s access to foreign markets.

· Changes in laws, regulations, and other activities in government agencies and similar organizations applicable to the Company and the poultry industry and changes in laws, regulations and other activities in government agencies and similar organizations related to food safety.

· Various inventory risks due to changes in market conditions.

· Changes in and effects of competition, which is significant in all markets in which the Company competes, and the effectiveness of marketing and advertising programs. The Company competes with regional and national firms, some of which have greater financial and marketing resources than the Company.

· Changes in accounting policies and practices adopted voluntarily by the Company or required to be adopted by accounting principles generally accepted in the United States.

· Disease outbreaks affecting the production performance and/or marketability of the Company’s poultry products.

· Changes in the availability and cost of labor and growers.

Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of the Company. Each such statement speaks only as of the day it was made. The Company undertakes no obligation to update or to revise any forward-looking statements. The factors described above cannot be controlled by the Company. When used in this quarterly report, the words “believes”, “estimates”, “plans”, “expects”, “should”, “outlook”, and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

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Cagle’s, Inc. (the “Company”), which began business in 1945 and was first incorporated in Georgia in 1953, and its wholly owned subsidiary (Cagle’s Farms, Inc., formerly Strain Poultry Farms, Inc.) produce, market, and distribute a variety of fresh and frozen poultry products. The vertically integrated operations of the Company consist of breeding, hatching, and growing of chickens; feed milling; processing; further processing; and marketing operations. The Company’s products are sold to national and regional independent and chain supermarkets, food distributors, food processing companies, national fast-food chains, and institutional users, such as restaurants, schools, and distributors, by the Company’s sales staff located in Georgia, Alabama, New York, Arizona and through brokers selected by the Company.

All of the Company’s business activities are conducted on a vertically integrated basis within one industry segment, poultry products. The Company’s various poultry products are closely related, have similar purposes and uses, and are similar in terms of profitability and types and degrees of risks. In addition, the production processes are similar to the extent that (a) production facilities are shared or are interchangeable and (b) the same types of raw materials, labor, and capital are used. Markets and marketing methods are comparable for all products to the extent that they are generally sold to the same types of customers by a common sales force and are sensitive to changes in economic conditions to the same degree.

Results of Operations

Net Sales

Revenues for the third quarter were $70.4 million down 4.2% and pounds sold decreased 2.0% both due to a thirteen week period in 2010 versus a fourteen week period in 2009. For the nine month period revenues were $236.0 million up 4.4% and sales pounds increased 2.7% when compared to the same period in the prior year.

Quoted market prices for products for the third quarter of fiscal 2010 versus the same period last quarter and last year fluctuated as follows:

	% Change		% Change		% Change
	3rd qtr. 10 vs		3rd qtr. 10 vs		9 Mos. 10 vs
	2nd qtr. 10		3rd qtr. 09		9 Mos. 09

Tenders	(10.2	)%	15.4	%	15.8	%
Wings	9.8	%	36.5	%	41.0	%
Drums	(9.3	)%	(1.9	)%	(8.2	)%
Boneless Breast	(11.1	)%	8.8	%	4.9	%
Boneless Thigh	(13.8	)%	(12.8	)%	(10.1	)%
Leg Quarters	(15.8	)%	(6.2	)%	(12.5	)%
Whole Bird without Giblets	(4.3	)%	(12.5	)%	(6.0	)%

Cost of sales

Cost of sales for the third quarter of fiscal 2010 decreased 8.2% as compared with the same period last year, from $72.9 million to $66.9 million due to the thirteen week period versus the prior year fourteen week period and a 2.0% decrease in pounds sold coupled with a 7.1% reduction in the cost of feed. For the first nine months of 2010 cost of sales was $220.5 million down 4.2% from $230.2 million in fiscal 2009 principally due to a reduction in the cost of feed.

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Selling and Delivery

These expenses decreased $14 thousand, or 0.7%, for the 13 weeks ended January 2, 2010 versus the 14 weeks ended January 3, 2009. Selling and delivery expenses decreased $229 thousand, or 3.4%, for the nine months ended January 2, 2010 versus the nine months ended January 3, 2009.

General and Administrative

These expenses decreased $239 thousand, or 13.8%, for the 13 weeks ended January 2, 2010 versus the 14 weeks ended January 3, 2009. General and administrative expenses increased $688 thousand, or 15.4%, for the nine months ended January 2, 2010 versus the nine months ended January 3, 2009. This three-quarter comparison increase is due to a $416 thousand nonrecurring quarter ended June 28, 2008 recovery of a prior year bad debt reserve, a $120 thousand increase in general insurance expense, a $112 thousand increase in group medical insurance expense, and a $40 thousand increase in various expenses, net. Excluding the fiscal year 2009 $416 nonrecurring event, the three-quarter increase is $272, or 5.6%, due to the aforementioned insurance expense increases.

Interest Expense

Interest expense decreased $200 thousand, or 33.7%, for the 13 weeks ended January 2, 2010 versus the 14 weeks ended January 3, 2009. Interest expense decreased $438 thousand, or 25.9%, for the nine months ended January 2, 2010 versus the nine months ended January 3, 2009. This reflects the favorable changes in the variable interest rate component on the Company’s long-term revolving line of credit agreement.

Other Income (Expense)

Other income (expense) was $9 thousand for the 13 weeks ended January 2, 2010 versus $(2) thousand for the 14 weeks ended January 3, 2009. Other income (expense) was $14 thousand for the nine months ended January 2, 2010 versus $(18) thousand for the nine months ended January 3, 2009.

Income Taxes

Income tax expense (benefit) was $(193) thousand, or 36.0% of pre-tax (loss) of $(538) thousand for the 13 weeks ended January 2, 2010. The income tax (benefit) was $(1.3) million, or 34.5% of pre-tax (loss) of $(3.8) million for the 14 weeks ended January 2, 2009. Income tax expense was $917 thousand, or 36.0% of pre-tax income of $2.5 million for the nine months ended January 2, 2010. The income tax (benefit) was $(6.1) million, or 35.7% of pre-tax (loss) of $(17.1) million for the nine months ended January 3, 2009. The entire $917 thousand of income tax expense for the nine months ended January 2, 2010 was charged against deferred tax assets, as none is currently payable due to the Company’s federal and state net operating loss carryforwards. The Company has federal and state net operating loss carryforwards of $24.4 million and $21.7 million, respectively, as of the fiscal year ended March 28, 2009. The Company also has federal and state tax credit carryforwards of $10.7 million as of the fiscal year ended March 28, 2009. The net operating loss and tax credit carryforwards are available to reduce income taxes through 2028. Realization of these future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Due to the significant amount of income that would be needed to fully utilize the credits available, the Company has recorded a valuation allowance for a significant portion of the deferred tax asset associated with the tax credit carryforwards. The Company expects to fully utilize the federal and state net operating loss carryforwards and, accordingly, there is no valuation allowance associated with the net operating loss carryforwards.

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The Company adopted ASC 740-10, “Accounting for Uncertainty in Income Taxes,” effective April 1, 2007. ASC 740-10 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. ASC 740-10 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company had no significant unrecognized tax benefits at the date of adoption or at October 3, 2009. Accordingly, the Company does not have any interest or penalties related to uncertain tax positions. However, if interest or penalties were to be incurred related to uncertain tax positions, such amounts would be recognized in income tax expense. Tax periods for all years after 2005 remain open to examination by the federal and state taxing jurisdictions to which it is subject.

Financial Condition and Liquidity

As of January 2, 2010, the Company’s working capital was $14.0 million and its current ratio was 1.54. The Company’s working capital as of the year ended March 28, 2009 was $12.7 million and its current ratio was 1.42. The Company’s working capital as of January 3, 2009 was $15.0 million and its current ratio was 1.54.

The Company has decreased long-term debt by $1.3 and $4.4 million during the three and nine months ended January 2, 2010, respectively. The Company has spent $666 thousand and $1.4 million on capital projects during the three and nine months ended January 2, 2010, respectively. The Company has remaining availability of $4.1 million on its revolving credit facility, as of January 2, 2010.

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2011, the minimum tangible net worth must not be less than $35,000 at any time; and commencing as of January 4, 2011, and at all times thereafter, the minimum tangible net worth must not be less than $40,000 at any time. (4) The facility advance rate with respect to eligible inventories is restored to 40% from 60% and the advance rate with respect to eligible receivables is maintained at 80%. As of January 2, 2010, the Company is in compliance with the revolving line of credit agreement’s covenants.

We expect that cash flow from operations and cash on hand should be sufficient to fund operations, to make all payments of principal and interest when due, and to fund capital expenditures for at least the next twelve months. We may elect to finance certain capital expenditure requirements through borrowings under our credit facilities or leases.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. The following accounting policies involve “critical accounting estimates” because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used in the current period, or changes in the accounting estimates we used are reasonably likely to occur from period to period which may have a material impact on the presentation of our financial condition and results of operations. We review these estimates and assumptions periodically and reflect the effects of revisions in the period that they are determined to be necessary. We have disclosed our critical accounting policies in our Annual Report on Form 10-K for the year ended March 28, 2009, and that disclosure should be read in conjunction with this Quarterly Report on Form 10-Q.

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Item 3: Quantitative and Qualitative Disclosures about Market Risk

Risk Factors

Industry cyclicality can affect our earnings, especially due to fluctuations in the commodity prices of feed ingredients and chicken.

Profitability in the chicken industry is materially affected by the commodity prices of chicken and feed ingredients, which are determined by supply and demand factors, which result in cyclical earnings fluctuations. The production of feed ingredients is positively or negatively affected primarily by weather patterns throughout the world, the global level of supply inventories and demand for feed ingredients, and the agricultural policies of the United States and foreign governments. In particular, weather patterns often change agricultural conditions in an unpredictable manner. A sudden and 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, and deliver products. High feed ingredient prices have had a material adverse effect on our operating results in the past. We periodically seek, to the extent available, to enter into advance purchase commitments for the purchase of feed ingredients in an effort to manage our feed ingredient costs. The use of such instruments may not be successful.

Raw Materials

The primary raw materials used by the Company are corn, soybean meal, and other ingredients; packaging materials; cryogenic materials; and breeder chicks. The Company believes the sources of supply for these materials are adequate and does not expect significant difficulty in acquiring required supplies. The major source of supply is the midwestern grain belt of the United States, although local supplies are utilized when available. Prices for the feed ingredients are sensitive to supply fluctuations worldwide, and weather conditions, especially drought, can cause significant price volatility. Since feed is the most significant factor in the cost of producing a broiler chicken, those fluctuations can have significant effects on margins. The Company also purchases poultry products from outside vendors for further processing requirements.

The Company may choose to utilize derivatives as offered on the Chicago Board of Trade for the purpose of protecting the feed cost for fixed price sales commitments negotiated with our customers. The Company’s two primary feed ingredients are corn and soybean meal. A $0.10 per bushel price change in corn or a $10 per ton price change in soybean meal impacts our cost of sales $0.75 million dollars per year.

Interest Rates

We currently have a term note payable with no exposure to interest rate fluctuations, as our existing indebtedness carries a fixed interest rate. We have a revolving credit facility which carries a variable interest rate equal to the 90-day LIBOR rate published by the Wall Street Journal, plus 3.5%.

The Company had variable interest rate exposure on the revolving credit facility at January 2, 2010. The Company’s theoretical interest rate exposure on variable rate borrowings at January 2, 2010, would be, with a one percentage point increase in average interest rates on the Company’s borrowings would increase future interest expense by $12.3 thousand per month and a two percentage point increase would increase future interest expense by $24.5 thousand per month. The Company determined these amounts based on $14.725 million of variable rate borrowings at January 2, 2010, multiplied by 1.0% and 2.0%, respectively, and divided by twelve. The Company is currently not using any interest rate collars, hedges, or other derivative financial instruments to manage or reduce interest rate risk. As a result, any increase in interest rates on the Company’s variable rate borrowings would increase interest expense and reduce net income.

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Concentration of Credit Risk

The Company deposits its cash with financial institutions which have Federal Deposit Insurance Corporation (FDIC) depository insurance, which insures bank balances up to $250 thousand per bank. At January 2, 2010, the Company’s cash balances in FDIC insured bank accounts totaled approximately $1.3 million which exceeds the Federal Deposit Insurance Corporation limit of $250 thousand.

The Company is not a party to any other market risk sensitive instruments requiring disclosure.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on that evaluation, management, including the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.

Changes in internal controls

The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is 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. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report, and they have concluded that there was an enhancement to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. This enhancement was the Company’s approval of a new position and subsequent hiring of a corporate accountant, first reporting to work at the Company on September 25, 2009.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is routinely involved in various lawsuits and legal matters on an ongoing basis as a result of day to day operations; however, the Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company or its business.

Item 1.A. Risk Factors

Leverage

Our indebtedness could adversely affect our financial condition. We presently have, and expect to continue to have, an amount of indebtedness. Our indebtedness could have important consequences to stockholders. For example, it could: increase our vulnerability to general adverse economic conditions; require 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; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; limit, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds, and 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. 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.

Additional Borrowings Available

Despite our indebtedness, we are not prohibited from incurring additional indebtedness in the future.

Contamination of Products

If our products become contaminated, we may be subject to product liability claims and product recalls.

Livestock and Poultry Disease

Outbreaks of livestock diseases, in general, and poultry disease, in particular, can significantly restrict our ability to conduct our operations. We take all reasonable precautions 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 outbreak of disease, could significantly restrict 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, to or from our suppliers, facilities, or customers, or require us to destroy one or more of our flocks. This could 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.

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.

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Significant Competition

Competition in the chicken industry with other vertically integrated poultry companies could adversely affect our business.

Government Regulation

Regulation, present and future, is a constant factor affecting our business. The chicken industry is subject to federal, state, and local governmental regulation, including health 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. Unknown matters, new laws and regulations, or stricter interpretations of existing laws or regulations may materially affect our business or operations in the future.

Deterioration of Economic Conditions

Our business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects of governmental initiatives to manage economic conditions. Any such changes could adversely affect the demand for our poultry products, or the cost and availability of our needed raw materials and packaging materials, thereby negatively affecting our financial results.

The recent disruptions in credit and other financial markets and deterioration of national and global economic conditions, could, among other things:

· make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future;

· cause our lenders to depart from prior credit industry practice and make more difficult or expensive the granting of any technical or other waivers under our credit agreements to the extent we may seek them in the future;

· impair the financial condition of some of our customers and suppliers thereby increasing customer bad debts or non-performance by suppliers;

· negatively impact demand for protein products, which could result in a reduction of sales, operating income and cash flows.

Changes in Consumer Preference

The food industry in general is subject to changing consumer trends, demands, and preferences. Trends within the food industry change often, and failure to identify and react to changes in these trends could lead to, among other things, reduced demand and price reductions for our products, and could have an adverse effect on our financial results.

The Loss of One or More of Our Largest Customers

Our business could suffer significant set backs in sales and operating income if our customers’ plans and/or markets should change significantly, or if we lost one or more of our largest customers. Many of our agreements with our customers are generally short-term, primarily due to the nature of our products, industry practice, and the fluctuation in demand and price for our products. One of our largest customers did not renew their sales contract for calendar 2010. However, the Company has been able to attract new contract-based customers of similar volume that will approximate this former customer’s sales volume. These new customers should provide a market for our products without a significant deterioration in operating income. We continually monitor our production output and will adjust accordingly.

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Members of the Cagle’s Family can Exercise Significant Control

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below provides information regarding the Company’s purchase of its own common stock during the periods indicated. Amounts in thousands except Average Price Paid Per Share.

				Approximate
				Dollar Value
	Total Number	Average		of Shares that
	of Shares	Price Paid		May Yet Be
	Purchased	Per Share		Purchased (1)

March 29, 2009 - January 2, 2010	22	$	2.20	$	4,793
March 30, 2008 - March 28, 2009	27	2.13		4,841
April 1, 2007 - March 29, 2008	79	7.74		4,898
April 2, 2006 - March 31, 2007	55	7.92		5,508

The Board of Directors (the “Board”) has authorized the purchase of up to $15,000 of the Company’s stock.

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

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Item 6. Exhibits

3.1	Articles of Incorporation of the Registrant. (2)
3.2	Bylaws of the Registrant. (3)
14.1	Code of Ethics. (4)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a). (1)
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a). (1)
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. (1)
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. (1)

(1) Filed herewith.

(2) Previously filed and incorporated by reference herein from the Registrant’s Form 10-K for the year ended April 2, 2005.

(3) Previously filed and incorporated by reference herein from the Registrant’s Form 10-Q for the quarter ended October 2, 2004.

(4) Previously filed and incorporated by reference herein from the Registrant’s Form 10-K for the year ended April 3, 2004.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Cagle’s, Inc. (Registrant)

BY:	/s/	J. Douglas Cagle
		Chairman, Chief Executive Officer and President
		February 15, 2010

BY:	/s/	Mark M. Ham IV
		Executive Vice President and Chief Financial Officer
		February 15, 2010

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Cagles (CGLA) Inactive 10-Q2010 Q3 Quarterly report

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