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
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 1, 2005
Commission File Number: 000-50925
GOLD KIST INC.
(Exact name of registrant as specified in its charter)
DELAWARE 20-1163666
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
244 Perimeter Center Parkway, N.E., Atlanta, Georgia 30346
(Address of principal executive offices) (Zip Code)
(770) 393-5000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common stock, $0.01 Per
Share Par Value - 50,702,312 shares outstanding as of February 15, 2005.
GOLD KIST INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets -
October 2, 2004 and January 1, 2005 1
Consolidated Statements of Operations -
Three Months Ended December 27, 2003
and January 1, 2005 2
Consolidated Statement of Patrons' and
Stockholders' Equity and Comprehensive
Income - Three Months Ended
January 1, 2005 3
Consolidated Statements of Cash Flows -
Three Months Ended December 27, 2003
and January 1, 2005 4
Notes to Consolidated Financial
Statements 5 - 19
Item 2. Management's Discussion and Analysis of
Consolidated Results of Operations and
Financial Condition 20 - 34
Item 3. Quantitative and Qualitative Disclosure About
Market Risks 35
Item 4. Controls and Procedures 36
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 37
Item 6. Exhibits 38
Page 1
Item 1. Financial
Statements
GOLD KIST INC.
CONSOLIDATED BALANCE SHEETS
(Amounts, Except Share Amounts, in Thousands)
(Unaudited)
October 2, January 1,
2004 2005
ASSETS
Current assets:
Cash and cash equivalents $175,289 132,708
Receivables, net 115,015 114,558
Inventories 238,892 217,824
Deferred income taxes 15,732 15,649
Other current assets 38,577 30,633
Total current assets 583,505 511,372
Investments 13,072 13,179
Property, plant and equipment, net 247,398 255,368
Deferred income taxes 13,215 12,615
Other assets 65,652 58,230
$922,842 850,764
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current maturities of
long-term debt $ 20,875 20,402
Accounts payable 84,121 80,753
Accrued compensation and related expenses 42,556 24,508
Other current liabilities 88,049 78,450
Total current liabilities 235,601 204,113
Long-term debt, less current maturities 281,408 209,767
Accrued pension costs 37,387 31,157
Accrued postretirement benefit costs 6,760 5,798
Other liabilities 44,138 47,309
Total liabilities 605,294 498,144
Patrons' and other equity/stockholders' equity:
Preferred stock, authorized 100,000,000 shares - -
Common stock, $1.00 par value and authorized
500,000 shares as of October 2, 2004;
$.01 par value and authorized 900,000,000
shares as of January 1, 2005; issued
and outstanding 2,449 shares as of
October 2, 2004 and 50,726,435 and
50,702,312 shares as of January 1, 2005,
respectively 2 507
Additional paid-in capital - 397,800
Deferred stock compensation - (7,297)
Patronage reserves 232,569 -
Accumulated other comprehensive loss (42,318) (42,318)
Retained earnings 127,295 4,193
Common stock held in treasury, 24,123 shares - (265)
Total patrons' and other equity/stockholders'
equity 317,548 352,620
$922,842 850,764
See Accompanying Notes to Consolidated Financial Statements.
Page 2
GOLD KIST INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
Dec. 27, 2003 Jan. 1, 2005
Net sales $536,927 551,958
Cost of sales 468,717 504,122
Gross profit 68,210 47,836
Distribution, administrative and
general expenses 29,023 24,966
Conversion expenses - 1,418
Net operating income 39,187 21,452
Other income (expenses):
Interest and dividend income 144 825
Interest expense (6,782) (7,090)
Senior debt prepayment interest
and pro-rata write off of
fees and discount - (10,016)
Unrealized loss on investment (18,486) -
Miscellaneous, net 291 1,702
Total other expenses, net (24,833) (14,579)
Income before income taxes 14,354 6,873
Income tax expense 10,949 2,680
Net income $ 3,405 4,193
Net income per common share:
Basic - $.08
Diluted - $.08
Weighted average common shares outstanding:
Basic - 49,973
Diluted - 50,131
See Accompanying Notes to Consolidated Financial Statements.
Page 3
GOLD KIST INC.
CONSOLIDATED STATEMENT OF PATRONS' AND STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Three Months Ended January 1, 2005
(Amounts In Thousands)
Accumulated
Deferred Other Common
Additional stock comprehen- stock
Common stock paid-in compen- Patronage sive Retained held in
Shares Amount capital sation reserves (loss) earnings treasury Total
October 2,
2004 2 $ 2 - - 232,569 (42,318) 127,295 - 317,548
Cash
patronage
equity
redemptions (825) (825)
Common stock
issued and
cash
distributions
to members/
equity holders
in conversion
from
cooperative
association to
for-profit
corporation 36,394 362 252,714 - (231,744) - (127,295) - (105,963)
Initial public
offering of
common
stock, net of
underwriting
and offering
expenses 13,600 136 137,056 - - 137,192
Restricted
stock
grants issued 730 7 8,030 (8,037) - - - - -
Amortization
of stock
grants - - - 740 - - - - 740
Treasury stock
acquired - - - - - - - (265) (265)
Net income - - - - 4,193 - 4,193
January 1, 2005 50,726 $507 397,800 (7,297) - (42,318) 4,193 (265) 352,620
See Accompanying Notes to Consolidated Financial Statements.
Page 4
GOLD KIST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three Months Ended
Dec. 27, 2003 Jan. 1, 2005
Cash flows from operating activities:
Net income $ 3,405 4,193
Non-cash items included in income from
operations:
Depreciation and amortization 9,539 11,063
Unrealized loss on investment 18,486 -
Postretirement benefit plans expense in
excess of (less than) funding 1,480 (6,488)
Deferred income tax expense 8,051 683
Other (1,726) 2,398
Changes in operating assets and liabilities:
Receivables 3,708 457
Inventories (4,152) 21,068
Other current assets (31) 3,342
Accounts payable, accrued and other expenses 4,808 (22,270)
Net cash provided by operating activities 43,568 14,446
Cash flows from investing activities:
Acquisitions of property, plant and equipment (5,769) (17,688)
Proceeds from termination of cooperative equity
holder life insurance policies - 2,790
Other 441 1,586
Net cash used in investing activities (5,328) (13,312)
Cash flows from financing activities:
Principal repayments of long-term debt (35,688) (73,181)
Patronage refunds and other equity paid in cash (456) (3,165)
Proceeds from initial public offering, net of
underwriting and offering expenses paid - 138,859
Cash distributions to members and equity holders - (105,963)
Treasury stock acquired - (265)
Net cash used in financing activities (36,144) (43,715)
Net change in cash and cash equivalents 2,096 (42,581)
Cash and cash equivalents at beginning of period 13,875 175,289
Cash and cash equivalents at end of period $ 15,971 132,708
Supplemental disclosure of cash flow information:
Cash paid (received) during the periods for:
Interest (net of amounts capitalized) $ 7,280 10,557
Income taxes, net $ (438) 98
See Accompanying Notes to Consolidated Financial Statements.
Page 5
GOLD KIST INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements reflect
the accounts of Gold Kist Inc. and its subsidiaries ("Gold Kist" or the
"Company") as of January 1, 2005 and for the thirteen weeks ended
January 1, 2005. These 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 Article 10 of Regulation S-X. These statements should
be read in conjunction with Management's Discussion and Analysis of
Results of Operations and Financial Condition and the Notes to
Consolidated Financial Statements in the Company's previously filed
Annual Report on Form 10-K for the fiscal year ended June 26, 2004.
The Company employs a 52/53-week fiscal year. On October 20, 2004, the
Board of Directors of the Company approved changing the fiscal year-end
of the Company from the Saturday after the last Thursday in June to the
Saturday after the last Thursday in September. Fiscal 2005 will be a
52-week year beginning October 3, 2004 and ending October 1, 2005. The
three-month period ended January 1, 2005 and the three-month period
ended December 27, 2003 each consisted of thirteen weeks.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position,
the results of operations, and the cash flows of the Company. All
significant intercompany balances and transactions have been eliminated
in consolidation. Results of operations for interim periods are not
necessarily indicative of results for the entire fiscal year.
Management of Gold Kist has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities as of the balance sheet date and
the reporting of revenue and expenses during the period to prepare
these consolidated financial statements in conformity with U.S.
generally accepted accounting principles. Actual results could differ
from these estimates.
2. Conversion and Initial Public Offering
On October 13, 2004, after completion of required approvals and
conditions, the Plan of Conversion (the "Plan") of Gold Kist Inc., a
Georgia cooperative marketing association, became effective and Gold
Kist converted from a cooperative marketing association to a for-profit
business corporation through a merger into a wholly owned subsidiary,
Gold Kist Holdings Inc., a Delaware corporation. In connection with
the conversion, Gold Kist Holdings Inc. changed its name to Gold Kist
Inc.
Page 6
The conversion was accounted for using the historical carrying values
of the assets and liabilities of Gold Kist. Immediately following the
conversion and the initial public offering, Gold Kist's cooperative
membership common stock and patronage reserves were reclassified to par
value of common stock and additional paid in capital.
On October 13, 2004, the date the conversion became effective, all
patronage interests in Gold Kist were extinguished and the members and
former member equity holders of Gold Kist became entitled to receive
consideration in the form of Gold Kist common stock or cash, or both,
as provided in the Plan. Patronage earnings from the end of the
quarter ended October 2, 2004 to October 13, 2004, the date of the
conversion, were not significant. Pursuant to the conversion,
approximately 36.4 million shares of common stock and $106.0 million in
cash were issued and distributed in December 2004 to members and former
member equity holders.
Also on October 13, 2004, Gold Kist completed an initial public
offering of 12,000,000 shares of common stock, par value $0.01 per
share, at an initial public offering price of $11.00 per share. In
November 2004, the underwriters exercised their overallotment option to
purchase an additional 1,600,000 shares at the offering price of $11.00
per share.
After underwriting discounts and other expenses, net proceeds from the
common stock offering were approximately $137.2 million. A portion of
the proceeds of this offering was used to repay $70.0 million in
aggregate principal amount of our 10.25% outstanding senior notes plus
an additional $7.2 million of prepayment interest on November 12, 2004.
The prepayment interest of $7.2 million and 35% of both the deferred
financing costs and discount totaling $2.8 million were recognized in
the statement of operations for the quarter ended January 1, 2005.
3. Receivables
Receivables are principally trade and are stated net of an allowance
for doubtful accounts of $1.5 million and $1.4 million as of October 2,
2004 and January 1, 2005, respectively.
4. Comprehensive Income
Comprehensive income was $4,371 and $4,193 for the three months ended
December 27, 2003 and January 1, 2005, respectively. Comprehensive
income consists of net income and pension liability adjustments, net of
tax, for the three months ended December 27, 2003. There were no
elements of other comprehensive income for the three months ended
January 1, 2005.
Page 7
5. Inventories
Inventories consist of the following:
Oct. 2, 2004 Jan. 1, 2005
Live poultry and hogs $102,936 95,318
Marketable products 87,562 73,417
Raw materials and supplies 48,394 49,089
$238,892 217,824
Live poultry and hogs consist of broilers, market hogs and breeding
stock. Broilers are stated at the lower of cost or market and breeders
are stated at cost less accumulated amortization. Costs include live
production costs (principally feed, chick cost, medications and other
raw materials), labor and production overhead. Breeder costs include
acquisition of chicks from parent stock breeders, feed, medication,
labor and production costs that are accumulated up to the production
stage and then amortized over their estimated useful life of thirty-six
weeks. Market hogs include costs of feed, medication, feeder pigs,
labor and production overhead. Pork breeder herds include cost of
breeder gilts acquired from parent stock breeders, feed, medications
and production costs that are accumulated up to production stage and
then amortized over twenty-four months. The pork breeders are included
in other assets - noncurrent in the consolidated financial statements
and are not significant. If market prices for inventories move below
carrying value, the Company records adjustments to write down the
carrying values of these inventories.
Marketable products consist primarily of dressed and further processed
poultry. The Company accounts for its marketable products inventory at
the lower of cost or market.
Raw materials and supplies consist of feed ingredients, hatching eggs,
packaging materials and operating supplies. These inventories are
stated, generally, at the lower of cost (first-in, first-out or
average) or market. Gold Kist engages in forward purchase contracts
and commodity futures and options transactions to secure necessary feed
ingredient requirements and manage the risk of adverse price
fluctuations with regard to its feed ingredient purchases. Changes in
the fair value of these derivatives, except for forward purchase
contracts, have been recorded through net income.
Page 8
6. Property, Plant and Equipment
Property, plant and equipment is summarized as follows:
Oct. 2, Jan. 1,
2004 2005
Land and land improvements $ 32,161 32,342
Buildings 214,368 226,942
Machinery and equipment 433,633 443,808
Construction in progress 33,959 28,448
714,121 731,540
Less accumulated depreciation 466,723 476,172
$247,398 255,368
Depreciation and amortization included in cost of sales in the
accompanying consolidated statements of operations were $8.4 million
and $9.0 million for the quarters ended December 27, 2003 and January
1, 2005, respectively.
Page 9
7. Long-Term Debt
Long-term debt is summarized as follows:
Oct. 2, Jan. 1,
2004 2005
Senior notes, due 2014 $197,092 128,159
Series B senior exchange notes, due in annual
installments of $2,728 and a final
installment of $5,450 due May 30, 2010 with
interest payable quarterly (interest rate
of 8.75% at January 1, 2005) 21,818 21,818
Series C senior exchange notes, due in annual
installments of $2,272 and a final
installment of $4,550 due May 30, 2010 with
interest payable quarterly (interest rate
of 9.00% at January 1, 2005) 18,182 18,182
Term loan agreement with agricultural credit
bank, due in semi-annual installments of
$1,785 with interest payable monthly
(interest rate of 8.41% at January 1, 2005) 30,365 28,580
Term loan agreement with agricultural credit
bank, due in quarterly installments of $600
with interest payable monthly (weighted
average interest rate of 5.43% at January 1,
2005) 7,800 7,200
Subordinated capital certificates of interest
with original fixed maturities ranging from
seven to fifteen years, unsecured (weighted
average interest rate of 8.15% at January 1,
2005) 17,147 16,449
Tax exempt industrial revenue bond due July 2015
with variable interest rate (1.8% at
January 1, 2005) 7,500 7,500
Mortgage loans, due in monthly installments to
January 2010, secured by an office building
(weighted average interest rate of 5.06%) 2,379 2,281
302,283 230,169
Less current maturities 20,875 20,402
$281,408 209,767
In March 2004, the Company issued the senior notes in a private offering
pursuant to Rule 144A and Regulation S of the Securities Act of 1933 in
the principal amount of $200 million and subsequently exchanged the
senior notes for identical registered notes. The stated interest rate
on the senior notes is 10.25%, with interest payable semi-annually on
March 15 and September 15. The Senior Notes were issued at a price of
98.47% and are reflected net of discount in the accompanying
consolidated balance sheet at January 1, 2005. The discount amount is
being amortized to interest expense over the ten-year term of the senior
notes under the interest method, yielding an effective interest rate of
approximately 10.50%.
Page 10
The Company repaid $70.0 million of principal of the senior notes, plus
$7.2 million in prepayment interest, on November 12, 2004 with a portion
of the proceeds from Gold Kist's initial public offering completed on
October 13, 2004 (see Note 2). In connection with this prepayment, $1.0
million of the discount was written off and recognized in the statement
of operations for the three months ended January 1, 2005.
Concurrent with the issuance of the senior notes, the Company amended
its Senior Secured Credit Facility to provide for a revolving line of
credit in an aggregate principal amount of $125 million, including a sub-
facility of up to $60 million for letters of credit, for a term of three
years. The interest rate on the facility ranges from 1.00% to 2.00%
over the prime rate for base rate advances or 2.25% to 3.25% over the
London InterBank Offered Rate (LIBOR) for Eurodollar advances, adjusted
quarterly based on the Company's financial position. Borrowings under
the facility will be limited to the lesser of $125 million and a
borrowing base determined by reference to a percentage of the collateral
value of the accounts receivable and inventories securing the facility.
As of January 1, 2005, there was approximately $93.7 million available
for borrowing under this facility. Approximately $31.3 million of
letters of credit are outstanding under the facility.
The Company's debt agreements place a limitation on capital expenditures,
equity distributions, cash dividends, commodity hedging contracts and
additional loans, advances or investments. The terms of debt agreements
(other than the senior notes) contain financial covenants, including
those that specify minimum consolidated tangible net worth, current
ratio and coverage ratio requirements, as well as a limitation on the
total debt to total capital ratio. At January 1, 2005, the Company
believes that it is in compliance with all applicable loan covenants
under its senior notes and credit facilities.
8. Employee Benefits
Effective January 1, 2004, the Company's qualified pension plan was
prospectively amended. For benefits earned in calendar 2004 and future
years, the basic pension formula was changed from 50% to 45% of final
average earnings, early retirement benefits were reduced and other
changes were made. The pension benefits earned by employees through
2003 were unchanged.
In October 2002, the Company substantially curtailed its postretirement
life insurance plans and in April 2003, the Company substantially
curtailed its postretirement medical plan for existing retirees.
Retired employees eligible under the plan between the ages of 55 and 65
could continue their coverage at rates above the average cost of the
medical insurance plan for active employees.
At October 2, 2004 and January 1, 2005, the Company had a minimum
pension liability of $42.3 million, net of the deferred tax benefit of
$25.2 million. The minimum pension liability, net of deferred taxes,
has been included as a component of patrons' and other equity/
stockholders' equity in accumulated other comprehensive loss.
Page 11
Components of net periodic benefit cost (income) for the quarters ended
December 27, 2003 and January 1, 2005 are as follows:
Postretirement
Pension Benefits Insurance Benefits
12/27/2003 1/1/2005 12/27/2003 1/1/2005
Service cost $ 1,674 1,175 - -
Interest cost 2,672 2,503 78 55
Estimated return on plan assets (3,398) (2,873) - -
Amortization of transition asset (60) - - -
Amortization of prior service
cost 455 120 (2,587) (2,587)
Amortization of net loss 570 1,023 2,089 1,759
Net periodic benefit cost
(income) $ 1,913 1,948 (420) (773)
The Company made a qualified pension plan contribution of $15.0 million
in August 2004 and another qualified pension plan contribution of $8.0
million in November 2004. The Company does not expect to make any more
qualified pension plan contributions during the fiscal year ending
October 1, 2005.
9. Long Term Incentive Plan
In connection with the conversion of the Company into a for-profit
corporation and the completion of its initial public offering, the
Company implemented the Gold Kist Long-Term Incentive Plan. At the
discretion of the Compensation Committee of the Board of Directors,
which administers the plan, employees, consultants and non-employee
directors may be granted awards in the form of stock options, stock
appreciation rights, performance awards, restricted stock, stock units,
dividend equivalents or other stock based awards. The Company reserved
up to 4,000,000 shares for issuance upon the exercise of awards under
the Long-Term Incentive Plan.
A grant of restricted stock to employees was authorized by the Board of
Directors and effective as of the closing of the offering on October
13, 2004. In addition, on October 20, 2004 the Board of Directors
authorized the issuance of the stock portion of their fiscal 2005
annual retainers in restricted shares. Total grants of 705,197 and
24,456 shares having a fair market value of approximately $8.0 million
were issued to employees and directors, respectively. The restricted
stock issued to employees will vest on the third anniversary of the
date of grant with the restricted stock issued to directors vesting in
July 2005. The Company is recognizing the fair market value of the
restricted stock granted as compensation expense in its consolidated
statements of operations ratably over the vesting period. Compensation
expense of $.7 million was recognized in the three months ended January
1, 2005.
Page 12
10. Contingent Liabilities
Four female employees of the Company's Corporate Office Information
Services (I/S) Department filed an EEOC sex discrimination suit against
the Company in the United States District Court for the Northern
District of Georgia asserting gender based claims about employment
and promotion decisions in the Corporate Office I/S Department. One of
the employees continues to be employed by the Company. After its
administrative consideration of the claims, the EEOC has issued "Right
to Sue" letters to the four complainants in these claims, meaning that
the EEOC will not sue or participate in a suit against the Company on
behalf of the parties in these actions nor will it pursue a systemic
discrimination charge in this matter. The letter provides that the
individuals may pursue their claims and litigation on their own should
they so desire. The four complainants filed an action in federal
district court on March 19, 2003, seeking class certification
for their claims of gender discrimination, unspecified monetary damages
and injunctive relief. Discovery for the class certification phase of
the litigation has ended, and a hearing on the motion for class
certification is expected to be scheduled. The Company intends to
defend the litigation vigorously.
The Company has been named as a defendant in a purported class
action lawsuit filed in the U.S. District Court for the Northern
District of Alabama along with four additional chicken-processing
firms. Plaintiffs allege that the defendants have conspired to prevent
competition for production contracts and seek to represent a putative
class of all contract farmers and sellers of hatching eggs and live
broilers who produced hatching eggs or live broilers in the United
States since February 23, 1998. Gold Kist moved to compel arbitration
of Plaintiff's claims based on arbitration agreements contained in Gold
Kist's production contracts, membership agreements, and by-laws. The
Court granted Gold Kist's motion to compel arbitration between
Plaintiffs and Gold Kist, and stayed Plaintiff's claims against the
other defendants pending completion of arbitration between Plaintiffs
and Gold Kist. Plaintiffs have not yet initiated an arbitration
against Gold Kist. Gold Kist believes that the claims are without
merit and intends to defend the matter vigorously, and while the
Company cannot predict its outcome, the Company believes that this
lawsuit will not have a material adverse effect on our financial
condition.
Gold Kist is a party to various other legal, environmental and
administrative proceedings, all of which management believes constitute
ordinary routine litigation incidental to the business conducted by
Gold Kist and are either accrued or not expected to be significant.
11. Investments
In October 1998, the Company completed the sale of assets of the Agri-
Services segment business to Southern States Cooperative, Inc. (SSC).
In connection with the transaction, the Company purchased from SSC $60
million principal amount of capital trust securities and $40 million
principal amount of cumulative preferred securities for $98.6 million
in October 1999.
Page 13
In October 2002, SSC notified the Company that, pursuant to the
provisions of the indenture under which the Company purchased the
capital trust securities, SSC would defer the capital trust securities
quarterly interest payment due on October 5, 2002. Quarterly interest
payments for subsequent quarters were also deferred. As a result of the
deferral of the interest payments, the Company reduced the carrying
value of the capital trust securities by $24.1 million with a
corresponding charge against the loss from continuing operations for
the year ended June 28, 2003. The carrying value of the SSC securities
was $57.3 million at June 28, 2003.
As of December 31, 2003, SSC's total stockholders' and patrons' equity
fell below the Company's carrying value of the preferred stock
investment, which the Company believed was a triggering event
indicating impairment. In the quarter ended December 27, 2003, the
Company recorded an "other-than-temporary" impairment charge of $18.5
million included in other expenses.
In June 2004, the Company notified SSC that it was abandoning the
investment and returning the securities. As a result of the
abandonment, the remaining investment balance of $38.8 million was
written off and reflected as an other expense in the consolidated
statement of operations for the year ended June 26, 2004.
12. Earnings Per Share
The net income for both the basic and diluted earnings per share
computations is $4.2 million. Following is a reconciliation of
weighted average shares - basic to weighted average shares - diluted.
Weighted average shares - basic 49,973
Deferred stock compensation - restricted shares 158
Weighted average shares - diluted 50,131
13. Subsequent Event
In January 2005, the Board of Directors approved replacement employment
agreements with the Chief Executive Officer and the Chief
Administrative Officer and replacement change in control agreements
with ten other officers.
Equity grants to the Company's officers under the Company's 2004 Long-
Term Incentive Plan, consisting of 355,722 shares of restricted stock,
96,558 performance share awards and stock-settled stock appreciation
rights with respect to 173,860 shares, were also approved and awarded in
January 2005.
Page 14
The restricted stock awards vest as to 25% of the shares on each
anniversary of the date of grant, beginning January 24, 2006, provided,
however, that the restrictions will lapse immediately upon (i) the
executive's termination of employment by reason of death, disability or
retirement, or (ii) the occurrence of a change in control.
The stock appreciation rights vest in two equal annual installments,
beginning on January 24, 2008; provided, however, that the stock
appreciation rights will vest and become immediately exercisable upon
(i) the executive's termination of employment by reason of death,
disability or retirement, or (ii) the occurrence of a change in
control.
The performance-share awards provide the holder the opportunity to earn
a number of shares of common stock of the Company at the end of a three-
year performance cycle, based upon the Company's profitability.
Additional equity grants for other management participants, consisting
of 89,304 performance share awards and stock-settled stock appreciation
rights with respect to 86,954 shares, were also approved and awarded
with the same vesting periods as outlined above. These grants will vest
and become immediately exercisable upon the participant's termination of
employment by reason of death, disability or retirement.
The Company determined to account for the plans under the provisions of
Statement of Financial Accounting Standards No. 123R, Share-Based
Payments. In early adopting the new rules, the fair value of the
equity classified awards at grant date will be recognized as
compensation expense over the vesting period starting in January 2005.
The fair value of the stock appreciation rights was determined under
the Black-Sholes valuation method. Compensation expense of these
plans is estimated at approximately $0.8 million per quarter starting
in the quarter ending April 2, 2005.
14. Supplemental Combining Condensed Financial Statements
The Company's senior notes are jointly and severally guaranteed by the
Company's domestic subsidiaries, which are 100% owned by Gold Kist (the
"Parent"), except for GK Insurance Inc., a wholly owned captive
insurance company domiciled in the State of Vermont.
The following are the unaudited supplemental combining condensed
balance sheets as of October 2, 2004 and January 1, 2005, the
supplemental combining condensed statements of operations for the
quarters ended December 27, 2003 and January 1, 2005, and the
supplemental combining condensed statements of cash flows for the
quarters ended December 27, 2003 and January 1, 2005. The only
intercompany eliminations are the normal intercompany revenues,
borrowings and investments in wholly owned subsidiaries. Separate
complete financial statements of the guarantor subsidiaries, which are
100% owned by the Parent, are not presented because the guarantors are
jointly and severally, fully and unconditionally liable under the
guarantees.
Page 15
As of October 2, 2004
Balance Sheet: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
ASSETS
Current assets:
Cash and cash
equivalents $166,430 313 8,546 - 175,289
Receivables, net 113,478 11,474 31,636 (41,573) 115,015
Inventories 238,432 460 - - 238,892
Deferred income taxes
and other current
assets 27,503 545 26,261 - 54,309
Total current assets 545,843 12,792 66,443 (41,573) 583,505
Investments 35,252 - - (22,180) 13,072
Property, plant and
equipment, net 247,118 280 - - 247,398
Deferred income taxes
and other assets 64,144 5,363 9,360 - 78,867
$892,357 18,435 75,803 (63,753) 922,842
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and
current maturities
of long-term debt $ 20,875 - - - 20,875
Accounts payable 125,372 322 - (41,573) 84,121
Accrued compensation
and related expenses 42,540 16 - - 42,556
Other current
liabilities 47,671 5 40,373 - 88,049
Total current
liabilities 236,458 343 40,373 (41,573) 235,601
Long-term debt, less
current maturities 281,408 - - - 281,408
Accrued pension costs 37,387 - - - 37,387
Accrued postretirement
benefit costs 6,760 - - - 6,760
Other liabilities 12,796 325 31,017 - 44,138
Total liabilities 574,809 668 71,390 (41,573) 605,294
Patrons' and other equity 317,548 17,767 4,413 (22,180) 317,548
$892,357 18,435 75,803 (63,753) 922,842
Page 16
As of January 1, 2005
Balance Sheet: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
ASSETS
Current assets:
Cash and cash
equivalents $129,997 199 2,512 - 132,708
Receivables, net 113,494 12,678 34,737 (46,351) 114,558
Inventories 217,562 262 - - 217,824
Deferred income taxes
and other current
assets 24,267 537 21,478 - 46,282
Total current assets 485,320 13,676 58,727 (46,351) 511,372
Investments 35,411 - - (22,232) 13,179
Property, plant and
equipment, net 255,097 271 - - 255,368
Deferred income taxes
and other assets 55,760 4,876 10,209 - 70,845
$831,588 18,823 68,936 (68,583) 850,764
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and
current maturities
of long-term debt $ 20,402 - - - 20,402
Accounts payable 126,409 162 533 (46,351) 80,753
Accrued compensation
and related expenses 24,500 8 - - 24,508
Other current
liabilities 47,541 536 30,373 - 78,450
Total current
liabilities 218,852 706 30,906 (46,351) 204,113
Long-term debt, less
current maturities 209,767 - - - 209,767
Accrued pension costs 31,157 - - - 31,157
Accrued postretirement
benefit costs 5,798 - - - 5,798
Other liabilities 13,394 325 33,590 - 47,309
Total liabilities 478,968 1,031 64,496 (46,351) 498,144
Stockholders' equity 352,620 17,792 4,440 (22,232) 352,620
$831,588 18,823 68,936 (68,583) 850,764
Page 17
Three Months (13 Weeks) Ended December 27, 2003
Statement of Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $535,400 732 3,971 (3,176) 536,927
Cost of sales 464,889 739 6,265 (3,176) 468,717
Gross profit (loss) 70,511 (7) (2,294) - 68,210
Distribution,
administrative and
general expenses 28,761 241 21 - 29,023
Net operating income
(loss) 41,750 (248) (2,315) - 39,187
Interest, income taxes
and other, net (38,345) 234 1,086 1,243 (35,782)
Net income (loss) $ 3,405 (14) (1,229) 1,243 3,405
Three Months (13 Weeks) Ended January 1, 2005
Statement of Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $551,129 795 3,526 (3,492) 551,958
Cost of sales 502,819 830 3,965 (3,492) 504,122
Gross profit (loss) 48,310 (35) (439) - 47,836
Distribution,
administrative and
general expenses 26,239 122 23 - 26,384
Net operating income
(loss) 22,071 (157) (462) - 21,452
Interest, income taxes
and other, net (17,878) 182 489 (52) (17,259)
Net income (loss) $ 4,193 25 27 (52) 4,193
Page 18
Three Months (13 Weeks) Ended December 27, 2003
Statement of Cash Flows: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net cash provided by
(used in) operating
activities $ 44,273 (710) 5 - 43,568
Cash flows from investing
activities:
Acquisitions of property,
plant and equipment (5,769) - - - (5,769)
Other (151) 592 - - 441
Net cash provided by
(used in) investing
activities (5,920) 592 - - (5,328)
Cash flows from financing
activities:
Principal repayments of
long-term debt (35,688) - - - (35,688)
Payments of capitalized
financing costs - - - - -
Patronage refunds and
other equity paid in
cash (456) - - - (456)
Net cash used in
financing activities (36,144) - - - (36,144)
Net change in cash and
cash equivalents 2,209 (118) 5 - 2,096
Cash and cash equivalents,
beginning of period 11,088 273 2,514 - 13,875
Cash and cash equivalents,
end of period $ 13,297 155 2,519 - 15,971
Page 19
Three Months (13 Weeks) Ended January 1, 2005
Statement of Cash Flows: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net cash provided by
(used in) operating
activities $ 21,080 (600) (6,034) - 14,446
Cash flows from
investing activities:
Acquisitions of
property, plant and
equipment (17,687) (1) - - (17,688)
Other 3,889 487 - - 4,376
Net cash provided by
(used in) investing
activities (13,798) 486 - - (13,312)
Cash flows from
financing activities:
Principal repayments
of long-term debt (73,181) - - - (73,181)
Patronage refunds and
other equity paid in
cash (3,165) - - - (3,165)
Proceeds from initial
public offering, net
of underwriting and
offering expenses
paid 138,859 - - - 138,859
Cash distributions to
members and equity
holders (105,963) - - - (105,963)
Treasury stock acquired (265) - - - (265)
Net cash used in
financing activities (43,715) - - - (43,715)
Net change in cash and
cash equivalents (36,433) (114) (6,034) - (42,581)
Cash and cash equivalents,
beginning of period 166,430 313 8,546 - 175,289
Cash and cash equivalents,
end of period $129,997 199 2,512 - 132,708
Page 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
General
After two decades of rapid growth, the broiler industry is maturing and will
be dependent on new and value-added product development, as well as expanded
export opportunities, for continued revenue growth. Production and operating
efficiencies will also be necessary for increased profitability. In
addition, the industry is undergoing consolidation as a number of
acquisitions and mergers have occurred in the last five years. The market
share of the top five U.S. firms in terms of ready-to-cook broiler meat
production has increased from approximately 49% to 60% during that period,
and this trend is expected to continue.
The industry has experienced volatility in results of operations over the
last five years and expects the volatility to continue in the foreseeable
future. Volatility in results of operations is generally attributable to
fluctuations, which can be substantial, in broiler sales prices and cost of
feed grains. Broiler sales prices tend to fluctuate due to supply of
chicken, viability of export markets, supply and prices of competing meats
and proteins, animal health factors in the global meat sector and general
economic conditions.
Broiler sales prices were generally strong during most of fiscal 2002 due to
an improved supply/demand balance. Strong export demand, principally from
Russia, favorably impacted both foreign and domestic markets and fueled
higher broiler prices through the first eight months of fiscal 2002. However,
on March 10, 2002, Russia banned the import of U.S. poultry. This led to
downward pressure on broiler sales prices due to excess domestic supply.
Export sales industry-wide declined by approximately 20% during the fourth
quarter of fiscal 2002. Although the Russian ban on U.S. imports was lifted
in April 2002 and product specifications and other issues were resolved in
August 2002, fiscal 2003 sales to Russia were 60% below levels prior to the
embargo. Increased domestic supplies and higher supplies of competing meats
continued the downward pressure on broiler sales prices through the majority
of fiscal 2003. Resumption of export sales to Russia and improved domestic
demand for chicken products contributed to improved broiler prices through
fiscal 2004. Domestic demand was driven by new product introductions in fast
food and quick service restaurants and higher overall per capita consumption
of chicken.
Market prices for broiler products reached their highest levels since 1999
during our 2004 fiscal year. However, broiler sales prices have declined in
the quarter ended January 1, 2005 from the quarter ended October 2, 2004 due
to increased supply and the seasonal drop in demand.
According to the USDA World Agricultural Outlook Board (WAOB), the forecast
for calendar 2004 U.S. broiler meat production is 33.72 billion pounds, ready-
to-cook weight, 4.1% above the 32.40 billion pounds produced in calendar
2003. The WAOB October estimate for calendar 2005 broiler meat production is
34.75 billion pounds, which is a 3.1% increase from the calendar 2004
estimate.
Page 21
Our export sales, which we define as sales other than to customers in the
United States or Canada, for fiscal 2002, 2003, 2004 and for the quarters
ending October 2, 2004 and January 1, 2005 were $74.2 million, $56.4 million,
$99.2 million, $25.8 million and $30.7 million, respectively. The U.S.
poultry industry historically has exported 15% to 20% of domestic production,
principally dark meat products, however our export sales have historically
been less than 10% of net sales. Any disruption in the export markets can
significantly impact domestic broiler sales prices by creating excess
domestic supply. Starting in fiscal 2000, poultry export markets strengthened
as demand from Russia increased due to changes in import tariffs and improved
economic conditions due to the rise in world oil prices, which led to
increased consumption. Increased demand continued through fiscal 2001 due in
part to the ban on red meat imports from the European Union. Strong export
sales continued through our first half of fiscal 2002, increasing 49% over
the same period in fiscal 2001. However, due to the Russian ban, our export
sales for the last quarter of fiscal 2002 decreased 32.6% from export sales
in the same period in fiscal 2001. The drop in export sales continued in
fiscal 2003, decreasing 24% from fiscal 2002. Due to the resumption of sales
to Russia, our export sales in fiscal 2004 and for the quarters ending
October 2, 2004 and January 1, 2005 were significantly higher than for the
same periods in 2003.
In December 2003, Russia implemented a quota system that has reduced U.S.
poultry imports by an estimated 30% from levels prior to the embargo. This
quota could negatively affect our exports in future periods. During several
months in 2004, China, Japan and several smaller chicken importing countries
banned all imports of certain broiler products from the United States due to
chickens in several states testing positive for avian influenza. Also, as a
result of this event, Russia and Hong Kong banned the import of broiler
products from the affected states. Although our broiler production
operations are not located in the states that were affected, any
implementation of similar bans in the future could negatively affect our
results of operations.
The cost of feed grains, primarily corn and soybean meal, represents
approximately 60% of total live broiler production costs or approximately 35%
of the Company's cost of sales. Prices of feed grains fluctuate in response
to worldwide supply and demand. Corn and soybean meal prices increased
significantly in fiscal 2003 with soybean meal prices further increasing
significantly in fiscal 2004, due to stronger worldwide demand and reduced
U.S. crops due to weather problems in grain producing areas. Barring
widespread weather or other problems, worldwide soybean and corn production
is expected to increase, which may favorably impact feed ingredient costs in
fiscal 2005. The U.S. grain harvest is complete, and both cash and futures
market prices for soybean meal and corn have declined. The Company's cost of
sales was negatively impacted in the quarters ended October 2, 2004 and
January 1, 2005 due to grain forward contracts priced in the summer of 2004.
These positions resulted in ingredient costs in excess of cash market prices
during those periods. The majority of deliveries under these contracts have
been completed and the Company expects to benefit from lower feed ingredient
costs during the remainder of fiscal 2005 as compared to the quarter ended
January 1, 2005 and the transition period ended October 2, 2004.
Page 22
We believe that we can reduce the impact of industry volatility on our
results by increasing our value-added product lines, continuing to improve
our cost structure and continuing our commitment to a strategy to grow
private label sales.
General issues such as increased domestic and global competition in the meat
industry, heightened concerns over the safety of the U.S. food supply,
volatility in feed grain commodity prices and export markets, increasing
government regulation over animal production and animal welfare activism
continue as significant risks and challenges to profitability and growth both
for Gold Kist and the broiler industry. References in this report to "fiscal
2005," "fiscal 2004," "fiscal 2003," "fiscal 2002," "fiscal 2001," and
"fiscal 2000" refer to the Company's fiscal years ending or ended October 1,
2005, June 26, 2004, June 28, 2003, June 29, 2002, June 30, 2001 and July 1,
2000, respectively.
RESULTS OF OPERATIONS
The following table presents certain statement of operations items as a
percentage of net sales for the periods indicated:
Quarter Ended: Fiscal Year Ended:
Dec. 27, Jan. 1, June 26,
2003 2005 2004
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.3 91.3 84.0
Gross profit 12.7 8.7 16.0
Distribution, administrative,
general and other expenses 5.4 4.8 5.3
Net operating income 7.3 3.9 10.7
Interest expense (1.3) (1.3) (1.6)
Other income (expenses)
(including income taxes) (5.4) (1.8) (4.2)
Net income .6% .8% 4.9%
Net Sales
Gold Kist's net sales for the quarter ended January 1, 2005 increased 2.8%
compared to the quarter ended December 27, 2003. The increase in net sales
was due primarily to an approximate 5.4% increase in broiler pounds produced
and sold for the quarter ended January 1, 2005, partially offset by a decline
of 2.9% in average broiler sales prices. Average broiler sales prices for
the quarter ended January 1, 2005 were 11.3% below prices for the quarter
ended October 2, 2004. Increased supply and the seasonal drop in demand were
the principal factors leading to the decline of prices from the September
2004 and December 2003 quarters.
Our export sales of $30.7 million for the quarter ended January 1, 2005 were
1.3% higher than the December 2003 quarter, due to increased shipments to
Russia and increased demand from other countries, partially offset by a 12.0%
reduction in average sales price. Our export sales to Russia
Page 23
increased 35.7% in pounds shipped and 28.9% in dollar value from $12.9
million for the quarter ended December 27, 2003 to $16.6 million for the
quarter ended January 1, 2005.
Net Operating Income
The Company had net operating income of $21.5 million for the quarter ended
January 1, 2005 compared to net operating income of $39.2 million in the
comparable period last year. The decrease in net operating income in the
January 1, 2005 period as compared to the December 27, 2003 period was due
primarily to lower broiler selling prices and higher feed ingredient costs,
principally soybean meal. Feed costs for the quarter ended January 1, 2005
were 6.6% higher than the quarter ended December 27, 2003. This increase was
due primarily to a 5.3% increase in the Company's average per ton price of
soybean meal compared to prices in the comparable period in the prior year.
Although cash market prices for both soybean meal and corn declined in the
quarter ended January 1, 2005, the Company's ability to benefit from the
price declines was mitigated by priced forward purchase contracts that were
executed in order to secure a portion of the Company's feed ingredient
requirements.
The 14.0% year-to-date decrease in distribution, administrative and general
expenses was principally due to decreased incentive compensation accruals
associated with the lower net income before income taxes for the quarter
ended January 1, 2005 compared to the December 2003 quarter.
Expenses of $1.4 million, principally advisory fees related to the conversion
of the Company from a cooperative marketing association to a for-profit
corporation, were deducted in determining net operating income.
Other Expenses
Other expenses, including interest and miscellaneous, net totaled $14.6
million for the quarter ended January 1, 2005, compared to $24.8 million for
the comparable period last year.
Interest expense was $7.1 million for the quarter ended January 1, 2005,
compared to $6.8 million for the comparable period last year. The increase in
interest expense was principally due to the higher interest rate on the
senior notes as compared to the average rates on other indebtedness
outstanding at December 27, 2003 that was repaid with the proceeds from the
offering of senior notes in March 2004. In connection with the repayment of
$70 million principal amount of the senior notes with a portion of the
proceeds from Gold Kist's initial public offering completed on October 13,
2004, the Company incurred a $7.2 million prepayment interest. In addition,
deferred financing costs of $1.8 million and 35% of the unamortized discount
on the issuance of the senior notes of $1.0 million were written off and
recognized as interest expense.
Page 24
Miscellaneous, net was income of $1.7 million for the quarter ended January
1, 2005, compared to $0.3 million for the comparable period last year.
Income from a hog production joint venture was $0.9 million for the quarter
ended January 1, 2005 as compared to $0.1 million for the quarter ended
December 27, 2003 due to improved hog market prices brought about by
increased demand. Interest and dividend income was $0.8 million in the
quarter ended January 1, 2005 as compared to $0.1 million for the quarter
ended December 27, 2003, principally due to interest income from cash
invested in short-term interest bearing instruments.
Income Tax Expense
For the quarter ended January 1, 2005, our combined federal and state
effective income tax rate used for purposes of calculating the tax expense on
income before income taxes was 39.0%, as compared to 35.6% for the quarter
ended October 2, 2004. The rate at October 2, 2004 reflects the deduction
for cash patronage refunds and equity redemptions no longer applicable to the
Company after the conversion from a cooperative marketing association to a
for-profit corporation. Income tax expense for the quarter ended January 1,
2005 reflects income taxes at statutory rates adjusted principally for
available tax credits and the deductibility of state income taxes for federal
tax purposes.
For the three months ended December 27, 2003, the Company's combined federal
and state effective income tax rate was 76.3%. The increased effective tax
rate over the federal and state statutory rates for the three months ended
December 27, 2003 was due to the deferred income tax valuation allowance
established for the unrealized loss resulting from the write down of the SSC
preferred stock investment.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is dependent upon cash flow from operations and external
sources of financing.
In March 2004, the Company issued $200.0 million aggregate principal amount
of senior notes. The interest rate on the senior notes is 10.25%, with
interest payable semi-annually on March 15 and September 15. The senior
notes were issued at a price of 98.47% and are reflected net of the
unamortized discount in the accompanying consolidated balance sheet at
January 1, 2005. We repaid approximately $70.0 million of these notes, plus
the payment of $7.2 million in prepayment interest, on November 12, 2004 with
a portion of the proceeds from the Company's initial public offering
completed on October 13, 2004.
In connection with the offering of our senior notes, we amended the terms of
our senior credit facility to provide for a revolving line of credit in an
aggregate principal amount of $125.0 million, including a sub-facility of up
to $60.0 million for letters of credit, for a term of three years. The
facility is secured by a security interest in substantially all of our
assets, including all of our present and future accounts receivable and
inventory, property, plant and equipment and the stock of certain of our
subsidiaries. Borrowings under the facility are limited to the lesser of
$125.0 million and a borrowing base determined by reference to a percentage
of the collateral value of the accounts receivable and inventories, including
our broiler and breeder flocks, securing the facility. As of
Page 25
January 1, 2005, we had approximately $93.7 million available for borrowing
under this facility. Approximately $31.3 million of letters of credit are
outstanding under the facility.
Our debt agreements place a limitation on capital expenditures, equity
distributions, cash patronage refunds, cash dividends, commodity hedging
contracts and additional loans, advances or investments. The terms of our
debt agreements (other than the senior notes) contain financial covenants,
including those that specify minimum consolidated tangible net worth, current
ratio and coverage ratio requirements, as well as a limitation on the total
debt to total capital ratio. The agreements also include other financial
covenants. These covenants are described in more detail in the Annual Report
on Form 10-K for the fiscal year ended June 26, 2004 for Gold Kist Inc. (the
Georgia cooperative marketing association). At January 1, 2005, we believe
we were in compliance with all applicable loan covenants under our senior
notes and credit facilities.
For the quarter ended January 1, 2005, cash provided by operating activities
was $14.4 million compared to cash provided from operating activities of
$43.6 million for the quarter ended December 27, 2003. The lower cash flow
was due principally to the reduction in net operating income and the pension
plan contribution in excess of benefit plan expenses in the quarter ended
January 1, 2005.
Cash used in financing activities for the quarter ended January 1, 2005 was
$43.7 million compared to $36.1 million for the comparable December 2003
period. Pursuant to the conversion, approximately 36.4 million shares of
common stock and $106.0 million in cash were issued and distributed in
December 2004 to members and former member equity holders. We issued
12,000,000 shares of our common stock in our initial public offering at a
price of $11.00 per share and converted to a for-profit corporation on
October 13, 2004. Including proceeds from the exercise, in November 2004, of
the underwriters' overallotment option to purchase an additional 1.6 million
shares at the offering price of $11.00 per share, total proceeds, net of
expenses, were $137.2 million. Part of the proceeds was used for the
repayment of 35% of the principal amount of senior notes in the amount of
$70.0 million. The payment of the $2.4 million cash portion of the
nonqualified patronage refund for the period from June 27, 2004 up to the
conversion of October 12, 2004 and patronage equity cashings of $.8 million
are also reflected in the net cash used in financing activities for the
quarter ended January 1, 2005. At January 1, 2005, the Company had cash of
$119.0 million invested in short term interest bearing instruments.
Working capital and patrons' and other equity/stockholders' equity were
$307.3 million and $352.6 million, respectively, at January 1, 2005 as
compared to $347.9 million and $317.5 million, respectively, at October 2,
2004.
The reduction in cash for the distribution to members and equity holders,
partially offset by cash provided by operations and other changes in current
assets and liabilities, was the principal factor for the lower working
capital level. The increase in total equity resulted from the additional
paid in capital in excess of the cash distributions to members and equity
holders from the initial public offering in October 2004 and to a lesser
extent, net income for the quarter.
Page 26
We spent $17.7 million in capital expenditures for the quarter ended January
1, 2005 and expect to spend a total of approximately $80 million in the
fiscal year ending October 1, 2005. This includes expenditures for expansion
of further processing capacity and technological advances in our poultry
production and processing. In addition, capital expenditures included other
asset improvements and necessary replacements. Management plans to fund
fiscal 2005 capital expenditures, including a planned $47.0 million expansion
of our Live Oak, Florida facility over the next two years, and related
working capital needs with existing cash balances and cash expected to be
provided from operations.
Effective January 1, 2004, we prospectively amended our qualified pension
plan. For benefits earned in 2004 and future years, the basic pension formula
was changed from 50% to 45% of final average earnings, early retirement
benefits were reduced, and the lump sum distribution option is no longer
available. The pension benefits earned by employees through 2003 were
unchanged. We made a pension plan contribution of $15.0 million in August
2004 and made an additional contribution of $8.0 million in November 2004.
We believe cash on hand, cash equivalents and cash expected to be provided
from operations, in addition to borrowings available under our amended senior
credit facility, will be sufficient to maintain cash flows adequate for our
operational objectives during fiscal 2005.
Important Considerations Related to Forward-Looking Statements
The statements contained in this report regarding our future financial and
operating performance and results, business strategy, market prices, future
commodity price risk management activities, plans and forecasts and other
statements that are not historical facts are forward-looking statements, as
defined in Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended. We have based these forward-
looking statements on our current assumptions, expectations and projections
about future events.
We use the words "may," "will," "expect," "anticipate," "estimate,"
"believe," "continue," "intend," "should," "would," "could", "plan," "budget"
and other similar words to identify forward-looking statements. You should
read statements that contain these words carefully because they discuss
future expectations, contain projections of results of operations or of our
financial condition and/or state other "forward-looking" information. These
statements may also involve risks and uncertainties that could cause our
actual results of operations or financial condition to materially differ from
our expectations, including, but not limited to:
- fluctuations in the cost and availability of raw materials, such
as feed ingredients;
- changes in the availability and relative costs of labor and
contract growers;
- market conditions for finished products, including competitive
factors and the supply and pricing of alternative meat proteins;
- effectiveness of our sales and marketing programs;
- disease outbreaks affecting broiler production and/or
marketability of our products;
Page 27
- contamination of products, which can lead to product liability
and product recalls;
- access to foreign markets together with foreign economic
conditions;
- acquisition activities and the effect of completed acquisitions;
- pending or future litigation;
- the ability to obtain additional financing or make payments on
our debt;
- regulatory developments, industry conditions and market
conditions; and
- general economic conditions.
Any forward-looking statements in this report are based on certain
assumptions and analysis made by us in light of our experience and perception
of historical trends, current conditions, expected future developments and
other factors that we believe are appropriate under the current
circumstances. However, events may occur in the future that we are unable to
accurately predict, or over which we have no control. Forward-looking
statements are not a guarantee of future performance and actual results or
developments may differ materially from expectations. You are therefore
cautioned not to place undue reliance on such forward-looking statements. We
do not intend to update any forward-looking statements contained in this
document. When considering our forward-looking statements, also keep in mind
the risk factors and other cautionary statements in this report and in other
reports that we file with the Securities and Exchange Commission.
Contractual Obligations
Obligations under long-term debt, non-cancelable operating leases and feed
ingredient purchase commitments at January 1, 2005 are as follows (in
millions):
Payments Due by Period
Less than After
Total 1 year 1-3 years 4-5 years 5 years
Long-term debt (a) $230.2 20.4 26.1 23.1 160.6
Operating leases (b) 50.9 14.8 20.6 13.5 2.0
Feed ingredient purchase
commitments (c) 129.0 129.0 - - -
Total (d) $410.1 164.2 46.7 36.6 162.6
(a) Excludes $31.3 million in total letters of credit outstanding related to
normal business transactions.
(b) Operating lease commitments as of June 26, 2004. There have not been
any significant changes in the three months ended January 1, 2005.
Page 28
(c) Feed ingredient purchase commitments include both priced and unpriced
contracts in the ordinary course of business. Unpriced feed ingredient
commitments are priced at market as of January 1, 2005 for the month of
delivery.
(d) We contract with broiler, breeder, pullet, layer, hog and nursery pig
producers. Although these contracts are subject to acceptable grower
performance on a flock-to-flock or herd-to-herd basis, we expect the
grow out activity to continue through the periods covered by the grower
contracts. Annual grower pay has averaged approximately $240.0 million
per year over the past two years with the actual amounts determined by
relative performance and other factors. Grower payments have not been
included in the contractual obligations table due to the inherent
uncertainty of the future amounts.
Critical Accounting Policies
There were no material changes in the Company's critical accounting policies
during the quarter ended January 1, 2005.
Effects of Inflation
The major factor affecting our net sales and cost of sales is the change in
market prices for broilers, hogs and feed grains. The prices of these
commodities are affected by world market conditions and are volatile in
response to supply and demand, as well as political and economic events. The
price fluctuations of these commodities do not necessarily correlate with the
general inflation rate. Inflation can, however, adversely affect our
operating costs such as labor, energy and material costs.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costs," effective for fiscal years beginning after June 15, 2005. The
Company does not expect that SFAS No. 151 will have a significant impact on
our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payments." The
Statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance. This
Statement establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services. It focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. Effective in January 2005, the
Company early adopted the provisions of SFAS 123R. See Notes 9 and 13 of
Notes to Consolidated Financial Statements.
In October 2004, the American Jobs Creation Act (AJCA) was signed into law.
The AJCA allows for a federal income tax deduction for a percentage of income
generated from certain domestic production activities. The Company's
production activities will qualify for the deduction. Based on the effective
date of the AJCA, the Company will be eligible for this deduction in the
first quarter of fiscal 2006. Additionally, in December 2004, the
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FASB issued FASB Staff Position 109-1, "Application of SFAS No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004" (FSP 109-1).
FSP 109-1, which was effective upon issuance, states the deduction under
this provision of the AJCA should be accounted for as a special deduction in
accordance with SFAS 109. The Company has not yet determined the benefit
that may be realized from this provision.
Risks Relating to Our Business
Industry cyclicality, especially fluctuations in the supply of broiler
products, affects the prevailing market price of broiler products, our sales
and our earnings.
Profitability in the broiler industry is materially affected by the
prevailing price of broiler products, which is primarily determined by supply
and demand factors in the market. In recent years, the profitability of
companies in the broiler industry has been adversely affected from time to
time by excess supplies of broiler products in the market. As a result of the
efficiencies in the U.S. broiler market, even modest increases in the broiler
supply in the United States can significantly decrease the market prices at
which we can sell our broiler products. Such increases in domestic
supply can arise as a result of unanticipated decreases in export demand,
among other reasons. Given the perishable nature of broiler products, we are
unable to manage inventories to address any short-term changes in market
prices. As a result, from time to time we are forced to sell our broiler
products at a loss. Because we sell a relatively small percentage of our
products under fixed-price contracts, increases in the overall supply of
broiler products and any related decrease in broiler prices adversely affect
our operating results. This has resulted and will continue to result in
fluctuations in our earnings. Market prices for broiler products reached
their highest levels since 1999 during our 2004 fiscal year, but have
declined through December 2004.
Fluctuations in commodity prices of feed ingredients materially affect our
earnings.
A significant portion of the cost of producing our broiler products consists
of amounts spent in connection with purchasing corn and soybean meal, our
primary feed ingredients. As a result, fluctuations in feed ingredient prices
materially affect our earnings. While prices of these items increase from
time to time, we may not be able to pass through any increase in the cost of
feed ingredients to our customers. 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 or
commodity futures contracts for the purchase of a portion of our feed
ingredients in an effort to manage our feed ingredient costs. However, the
use of such instruments may not be successful in limiting our exposure to
market fluctuations in the cost of feed and may limit our ability to benefit
from favorable price movements.
Furthermore, the production of feed ingredients is positively or negatively
affected by weather patterns throughout the world, the global level of supply
inventories and demand for feed ingredients, as well as the agricultural
policies of the United States and foreign governments. In
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particular, weather patterns often change agricultural conditions in an
unpredictable manner. A sudden and significant change in weather patterns
could affect the supply of feed ingredients, as well as both the industry's
and our ability to obtain feed ingredients, grow broilers and deliver
products. Any such change would have a material negative impact on our
business and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Significant competition in the broiler industry with other vertically
integrated broiler companies, especially companies with greater resources,
may make us unable to compete successfully in this industry, which would
adversely affect our business.
The broiler industry is highly competitive. Some of our competitors have
greater financial and marketing resources than we do. In general, the
competitive factors in the U.S. broiler industry include price, product
quality, brand identification, breadth of product line and customer service.
Competitive factors vary by major market. In the foodservice market, we
believe competition is based on consistent quality, product development,
customer service and price. In the U.S. retail market, we believe that
competition is based on product quality, brand awareness, customer service
and price. We also face competition from non-vertically integrated further
processors with regard to our further-processed products. The highly
competitive conditions in the broiler industry could force us to reduce
prices for our products, which would adversely affect our results of
operations and financial condition.
The loss of one of our large customers could have a material adverse effect
on our results of operations.
Sales to our top ten customers represented approximately 32.9% of our net
sales during the quarter ended January 1, 2005 and during such period,
approximately 11.8% of our net sales were to our largest customer. We do not
have long-term contracts with any of our major customers and, as a result,
any of our major customers could significantly decrease or cease their
business with us with limited or no notice. If we lost one or more of our
major customers, or if one or more of our major customers significantly
decreased its orders from us, our business, sales and results of operations
could be materially and adversely affected.
Foreign embargos, decreased export demand, oversupply of broiler products and
competing products and bans on exported chicken and livestock would have an
adverse effect on our business.
We are an exporter to Russia and other former Soviet republics, China, the
Pacific Rim, the Middle East, South and Central America and the Caribbean
Islands. Any decrease in exports to foreign countries based on embargos,
decreased demand, oversupply of broiler products or competing products or
bans on exported chicken may have an adverse effect on our ability to export
chicken and other products. Such occurrences would also likely increase the
supply of broilers and competing products in the United States, which would
likely result in lower prices for broiler products and could adversely affect
our business. For example, in 2002 and 2003, export sales to Russia declined
due to an embargo on certain imported meats, leading to a domestic oversupply
and a decrease in the market price of chicken. Russia has
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implemented import quotas on chicken and other meats that reduce U.S.
broiler imports to approximately 70% of 2002 levels. In addition, for
several months in 2004, China, Japan and several smaller chicken importing
countries banned all imports of broiler products from the United States due
to several chickens in Delaware and Texas testing positive for avian
influenza. Also as a result of this event, Russia and Hong Kong banned the
import of broiler products from Delaware and Texas for a period of time.
Any implementation of similar bans in the future or the implementation of
quotas or other import restrictions would adversely affect our domestic and
export sales and our results of operations.
We have been, and may in the future be, subject to claims and liabilities
under environmental, health, safety and other laws and regulations, which
could be significant.
Our operations are subject to various federal, state, local and foreign
environmental, health, safety and other laws and regulations, including those
governing air emissions, wastewater discharges and the use, storage,
treatment and disposal of hazardous materials. The applicable requirements
under these laws are subject to amendment, to the imposition of new or
additional requirements and to changing interpretations by governmental
agencies or courts. In addition, we anticipate increased regulation by
various governmental agencies concerning food safety, the use of medication
in feed formulations, the disposal of animal by-products and wastewater
discharges. Furthermore, business operations currently conducted by us or
previously conducted by others at real property owned or operated by us,
business operations of others at real property formerly owned or operated by
us and the disposal of waste at third party sites expose us to the risk of
claims under environmental, health and safety laws and regulations. For
example, we have received notice letters designating us as a potentially
responsible party for alleged environmental contamination at a site that we
previously owned. Other properties we own or owned in the past have been
designated for cleanup under federal and state environmental remediation
statutes, which could result in further liabilities to us. In addition, we
are subject to potential claims for residual environmental liabilities
arising out of our sale of our Agri-Services business in 1998. The agreements
related to our disposition of certain properties require that we indemnify
the buyer of such properties with regard to any associated environmental
liabilities. We could incur material costs or liabilities in connection with
claims related to any of the foregoing. The discovery of presently unknown
environmental conditions, changes in environmental, health, safety and other
laws and regulations, enforcement of existing or new laws and regulations and
other unanticipated events could give rise to expenditures and liabilities,
including fines or penalties, that could have a material adverse effect on
our business, operating results and financial condition.
If our products become contaminated, we may be subject to product liability
claims and product recalls.
Our products may be subject to contamination by disease producing organisms,
or pathogens, such as Listeria monocytogenes, Salmonella and generic E. coli.
These pathogens are found generally in the environment and, therefore, there
is a risk that they, as a result of food processing, could be present in our
processed products. These pathogens can also be introduced to our products as
a result of improper handling at the further processing,
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foodservice or consumer level. These risks may be controlled, but may not be
eliminated, by adherence to good manufacturing practices and finished
product testing. We have little, if any, control over proper handling
procedures once our products have been shipped for distribution. Even if a
product is not contaminated when it leaves our facility, illness and death
may result if the pathogens are not also eliminated at the further
processing, foodservice or consumer level. Increased sales of further-
processed products could lead to increased risks in this area. 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 (which may not entirely mitigate the risk of product liability
claims) and increased scrutiny by federal and state regulatory agencies and
may have a material adverse effect on our business, reputation and prospects.
Outbreaks of livestock diseases in general, and broiler diseases in
particular, could significantly restrict our ability to conduct our
operations.
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 broiler products, pork or other products 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. For example, because several chickens in
Delaware and Texas tested positive for avian influenza earlier this year,
several countries imposed import bans and the infected flocks were destroyed.
See "--Foreign embargos, decreased export demand, oversupply of broiler
products and competing products and bans on exported chicken and livestock
would have an adverse effect on our business."
Increased water, energy and gas costs would increase our expenses and reduce
our profitability.
We require a substantial amount, and as we expand our business we will
require additional amounts, of water, electricity and natural gas to produce
and process our broiler products. The prices of water, electricity and
natural gas fluctuate significantly over time. One of the primary competitive
factors in the U.S. broiler market is price, and we may not be able to pass
on increased costs of production to our customers. As a result, increases in
the cost of water, electricity or natural gas would substantially harm our
business and results of operations.
Increased costs of transportation would negatively affect our profitability.
Our transportation costs are a material portion of the cost of our products.
We primarily ship our products and receive our inputs via truck and rail and
rely on third party transportation companies for the delivery of most of our
products and inputs. The costs associated with the transportation of our
products and inputs fluctuate with the price of fuel, the costs to our
transportation providers of labor and the capacity of our transportation
sources. Increases in costs of transportation would negatively affect our
profitability.
Page 33
We are exposed to risks relating to product liability, product recalls,
property damage and injury 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 injury to
persons. Insurance for these risks is expensive and difficult to obtain, and
we may not be able to maintain this insurance in the future on acceptable
terms, in amounts sufficient to protect us against losses due to any such
events or at all. Moreover, our insurance coverage may not adequately protect
us from all of the liabilities and expenses that we incur in connection with
such events. If we were to suffer a loss that is not adequately covered by
insurance, our results of operations and financial condition would be
adversely affected.
Any acquisition we make could disrupt our business and harm our financial
condition.
We may seek to expand our business through the acquisition of companies,
technologies, products and services from others. Acquisitions may involve a
number of problems, including:
- difficulty integrating acquired technologies, operations and personnel
with our existing business;
- diversion of management attention in connection with negotiating
acquisitions and integrating the businesses acquired;
- exposure to unforeseen liabilities of acquired companies; and
- the need to obtain additional debt financing for any acquisition.
We may not be able to address these problems and successfully develop these
acquired companies or businesses into profitable units of our company.
The loss of key members of our management may adversely affect our business.
We believe our continued success depends on the collective abilities and
efforts of our senior management. We do not maintain key person life
insurance policies on any of our employees. The loss of one or more key
personnel could have a material adverse effect on our results of operations.
Additionally, if we are unable to find, hire and retain needed key personnel
in the future, our results of operations could be materially and adversely
affected.
The inability to maintain good relations with our employees could adversely
affect our business.
Page 34
We have approximately 17,000 employees, approximately 3,000 of which are
covered by collective bargaining agreements and approximately 575 of which
are members of labor unions. We may be unable to maintain good relationships
with these labor unions or to successfully negotiate new collective
bargaining agreements on satisfactory terms in the future. If we fail to
maintain good relationships with our employees generally or with such labor
unions or fail to negotiate satisfactory collective bargaining agreements, or
if non-unionized operations were to become unionized, we could face labor
strikes or work stoppages or other activity that could adversely affect our
business and operations.
Page 35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Market Risk
Our principal market risks are exposure to changes in broiler and commodity
prices and interest rates on borrowings. Although we have international sales
and related accounts receivable from foreign customers, there is no foreign
currency exchange risk, as all sales are denominated in U.S. dollars.
Commodities Risk
We are a purchaser of certain agricultural commodities used for the
manufacture of poultry feeds. We use commodity futures and options for
economic hedging purposes to reduce the effect of changing commodity prices
and to ensure supply of a portion of our feed ingredient inventories. Feed
ingredient futures and option contracts, primarily corn and soybean meal, are
accounted for at fair value. Changes in fair value on these commodity futures
and options are recorded as a component of product cost in the consolidated
statements of operations. Terms of our senior credit facility limit the use
of forward purchase contracts and commodities futures and options
transactions. As of January 1, 2005, the notional amounts and fair value of
our outstanding commodity futures and options positions were not material.
Feed ingredient purchase commitments for corn and soybean meal in the
ordinary course of business were $129.0 million at January 1, 2005. These
commitments include both priced and unpriced contracts. Unpriced feed
ingredient commitments are valued at market for the month of delivery as of
January 1, 2005.
Based on estimated annual feed usage, a 10% increase in the weighted average
cost of feed ingredients would increase annualized cost of sales by an
estimated $70.0 million.
Interest Rate Risk
We have exposure to changes in interest rates on certain debt obligations.
The interest rates on our amended senior credit facilities fluctuate based on
the London Interbank Offered Rate (LIBOR). Assuming the $125.0 million
revolver was fully drawn, a 1% increase in LIBOR would increase annual
interest expense by approximately $1.4 million.
Page 36
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation
of the Company's management, including the President and Chief Executive
Officer ("CEO"), and the Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that
evaluation, the Company's management, including the CEO and the CFO,
concluded that as of the end of the period covered by this report the Company
maintained disclosure controls and procedures that were effective in ensuring
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms, and that such information is
accumulated and communicated to management, including the CEO and CFO, as
appropriate, to allow timely decisions regarding required disclosure. There
has not been any change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Page 37
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
In connection with the Company's conversion from a cooperative
marketing association to a for-profit corporation and the
distribution of cash and shares of common stock to Gold Kist's
members and former member equity holders in December 2004, Gold Kist
repurchased 19,146 shares of common stock issuable to members and
former member equity holders who owed past-due indebtedness to Gold
Kist of $210,606 in exchange for the cancellation of such
indebtedness. In addition, Gold Kist also repurchased 4,977 shares
of common stock for $54,747 from certain other members in connection
with administrative errors relating to the redemption election in the
conversion. To calculate the number of shares to be repurchased,
Gold Kist's stock was assigned a value equal to the initial public
offering price of $11.00 per share. Gold Kist does not expect to
make any additional repurchases of this type in the future.
Page 38
Item 6. Exhibits.
Exhibits
Designation of Exhibit
in This Report Description of Exhibit
10.1 Form of Deferred Stock Unit
Award for Directors Under the 2004
Non-Employee Director Compensation
Plan
31 Section 302, Sarbanes-
Oxley Act, Certifications
32 * Section 906, Sarbanes-
Oxley Act, Certifications
* This exhibit is furnished to the Securities and Exchange
Commission and is not deemed to be filed.
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.
GOLD KIST INC.
(Registrant)
Date February 15, 2005
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date February 15, 2005
Stephen O. West
Chief Financial Officer, Vice President
(Principal Financial Officer)
Page 38
Item 6. Exhibits.
Exhibits
Designation of Exhibit
in This Report Description of Exhibit
10.1 Form of Deferred Stock Unit
Award for Directors Under the 2004
Non-Employee Director Compensation
Plan
31 Section 302, Sarbanes-
Oxley Act, Certifications
32 * Section 906, Sarbanes-
Oxley Act, Certifications
* This exhibit is furnished to the Securities and Exchange
Commission and is not deemed to be filed.
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.
GOLD KIST INC.
(Registrant)
Date February 15, 2005 /s/ John Bekkers
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date February 15, 2005 /s/ Stephen O. West
Stephen O. West
Chief Financial Officer, Vice President
(Principal Financial Officer)