N:\LOTUS\COMMON\gk10q305edgar.doc
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 April 2, 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 - 51,503,109 shares outstanding as
of May 17, 2005.
GOLD KIST INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets -
October 2, 2004 and April 2, 2005 1
Consolidated Statements of Operations -
Three Months and Six Months Ended
March 27, 2004 and April 2, 2005 2
Consolidated Statements of Cash Flows -
Six Months Ended March 27, 2004
and April 2, 2005 3
Notes to Consolidated Financial
Statements 4 - 20
Item 2. Management's Discussion and Analysis of
Consolidated Results of Operations and
Financial Condition 21 - 35
Item 3. Quantitative and Qualitative Disclosure About
Market Risks 36
Item 4. Controls and Procedures 37
Part II. Other Information
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, April 2,
2004 2005
ASSETS
Current assets:
Cash and cash equivalents $175,289 169,334
Receivables, net 115,015 116,552
Inventories 238,892 215,579
Deferred income taxes 15,732 17,675
Other current assets 38,577 32,388
Total current assets 583,505 551,528
Investments 13,072 13,008
Property, plant and equipment, net 247,398 268,551
Deferred income taxes 13,215 17,519
Other assets 65,652 58,719
$922,842 909,325
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current maturities of
long-term debt $ 20,875 10,472
Accounts payable 84,121 78,133
Accrued compensation and related expenses 42,556 34,933
Income taxes payable 8,583 33,574
Other current liabilities 79,466 67,330
Total current liabilities 235,601 224,442
Long-term debt, less current maturities 281,408 201,884
Accrued pension costs 37,387 32,681
Accrued postretirement benefit costs 6,760 5,027
Other liabilities 44,138 46,803
Total liabilities 605,294 510,837
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 April 2, 2005; issued
and outstanding 2,449 shares as of
October 2, 2004 and 51,528,082 and
51,503,109 shares as of April 2, 2005,
respectively 2 515
Additional paid-in capital - 397,546
Patronage reserves 232,569 -
Accumulated other comprehensive loss (42,318) (42,160)
Retained earnings 127,295 42,862
Common stock held in treasury, 24,973 shares - (275)
Total patrons' and other equity/stockholders'
equity 317,548 398,488
$922,842 909,325
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 Six Months Ended
Mar. 27, Apr. 2, Mar. 27, Apr. 2,
2004 2005 2004 2005
Net sales $575,589 570,809 1,112,516 1,122,767
Cost of sales 480,128 477,554 948,845 981,676
Gross profit 95,461 93,255 163,671 141,091
Distribution, administrative
and general expenses (including
$7.1 million and $7.8 million
of share-based compensation
expense for the three and six
months ended April 2, 2005,
respectively) 27,200 33,076 56,223 58,042
Pension plan settlement expense 9,908 - 9,908 -
Conversion expenses - - - 1,418
Net operating income 58,353 60,179 97,540 81,631
Other income (expenses):
Interest and dividend income 744 1,890 888 2,715
Interest expense (6,975) (6,213) (13,757) (13,303)
Senior debt prepayment
interest and write-off of
related fees and discount (6,341) - (6,341) (10,016)
Unrealized loss on investment - - (18,486) -
Miscellaneous, net 886 1,284 1,177 2,986
Total other expenses, net (11,686) (3,039) (36,519) (17,618)
Income before income taxes 46,667 57,140 61,021 64,013
Income tax expense 16,805 18,471 27,754 21,151
Net income $ 29,862 38,669 33,267 42,862
Net income per common share:
Basic - $.77 - $.86
Diluted - $.76 - $.85
Weighted average common shares
outstanding:
Basic - 49,972 - 49,972
Diluted - 50,749 - 50,470
See Accompanying Notes to Consolidated Financial Statements.
Page 3
GOLD KIST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
Mar. 27, 2004 Apr. 2, 2005
Cash flows from operating activities:
Net income $ 33,267 42,862
Non-cash items included in income from
operations:
Depreciation and amortization 19,574 21,091
Amortization of share-based compensation - 7,790
Unrealized loss on investment 18,486 -
Postretirement benefit plans expense in
excess of (less than) funding 11,718 (6,093)
Deferred income tax expense (benefit) 4,444 (6,342)
Other (1,840) 691
Changes in operating assets and liabilities:
Receivables (4,428) (1,537)
Inventories (14,802) 23,313
Other current assets (956) 5,885
Accounts payable, accrued and other expenses 38,041 2,530
Net cash provided by operating activities 103,504 90,190
Cash flows from investing activities:
Acquisitions of property, plant and equipment (15,818) (41,612)
Dispositions of investments 1 2,304
Proceeds from termination of cooperative equity
holder life insurance policies - 2,790
Other 2,534 1,961
Net cash used in investing activities (13,283) (34,557)
Cash flows from financing activities:
Proceeds from long-term debt 196,940 -
Principal repayments of long-term debt (200,076) (91,044)
Payments of deferred financing costs (5,925) -
Patronage refunds and other equity paid in cash (1,509) (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 - (275)
Net cash used in financing activities (10,570) (61,588)
Net change in cash and cash equivalents 79,651 (5,955)
Cash and cash equivalents at beginning of period 13,875 175,289
Cash and cash equivalents at end of period $ 93,526 169,334
Supplemental disclosure of cash flow information:
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 25,236 20,068
Income taxes, net $ 1,436 2,502
See Accompanying Notes to Consolidated Financial Statements.
Page 4
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 April 2, 2005 and for the three and six months
ended April 2, 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
previously filed Annual Report on Form 10-K for the fiscal year
ended June 26, 2004 of the Company's predecessor.
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 and six-month periods ended April
2, 2005 and the three-month and six-month periods ended March 27,
2004 each consisted of thirteen weeks and twenty-six weeks,
respectively.
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.
In December 2004, Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" (SFAS No. 123(r)) was issued.
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. SFAS No. 123(r) 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
Page 5
2005, the Company early adopted the provisions of SFAS 123(r). See
Note 9 of Notes to Consolidated Financial Statements.
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.
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 charge 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 six month period ended April 2, 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 April 2, 2005, respectively.
Page 6
4. Comprehensive Income
Comprehensive income was $29,862 and $38,827 for the three months
ended March 27, 2004 and April 2, 2005, respectively, and $33,267 and
$43,020 for the six months ended March 27, 2004 and April 2, 2005,
respectively. Comprehensive income consists of net income and
pension liability adjustments, net of tax.
5. Inventories
Inventories consist of the following:
Oct. 2, 2004 Apr. 2, 2005
Live poultry and hogs $102,936 94,981
Marketable products 87,562 71,690
Raw materials and supplies 48,394 48,908
$238,892 215,579
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 7
6. Property, Plant and Equipment
Property, plant and equipment is summarized as follows:
Oct. 2, Apr. 2,
2004 2005
Land and land improvements $ 32,161 34,936
Buildings 214,368 227,616
Machinery and equipment 433,633 447,700
Construction in progress 33,959 37,582
714,121 747,834
Less accumulated depreciation 466,723 479,283
$247,398 268,551
Depreciation and amortization included in cost of sales in the
accompanying consolidated statements of operations were $16.5
million and $18.5 million for the six months ended March 27, 2004
and April 2, 2005, respectively.
Page 8
7. Long-Term Debt
Long-term debt is summarized as follows:
Oct. 2, Apr. 2,
2004 2005
Senior notes, due 2014 $197,092 128,209
Series B senior exchange notes, due in annual
installments of $2,727 and a final
installment of $5,455 due May 30, 2010 with
interest payable quarterly (interest rate
of 8.75% at April 2, 2005) 21,818 19,091
Series C senior exchange notes, due in annual
installments of $2,273 and a final
installment of $6,818 due May 30, 2010 with
interest payable quarterly (interest rate
of 9.00% at April 2, 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 April 2, 2005) 30,365 28,580
Term loan agreement with agricultural credit
bank repaid on February 28, 2005 7,800 -
Subordinated capital certificates of interest
with original fixed maturities ranging from
seven to fifteen years, unsecured (weighted
average interest rate of 8.14% at April 2,
2005) 17,147 16,112
Tax exempt industrial revenue bond with
variable interest rate repaid on
April 1, 2005 7,500 -
Mortgage loans, due in monthly installments to
January 2010, secured by an office building
(weighted average interest rate of 5.06% at
April 2, 2005) 2,379 2,182
302,283 212,356
Less current maturities 20,875 10,472
$281,408 201,884
In March 2004, the Company issued the senior notes due 2014 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 sheets. 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 9
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 and $1.8 million of deferred
financing costs were written off and recognized in the consolidated
statement of operations for the six months ended April 2, 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 April 2, 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, 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 April 2, 2005, the Company was 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 April 2, 2005, the Company had a minimum
pension liability of $42.3 million and $42.2 million, respectively,
net of the deferred tax benefit of $25.2 million and $25.1 million,
respectively. 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 10
The Company recognized $9.9 million of pension settlement expense in
the quarter ended March 27, 2004. The settlement expense resulted
from lump sum distribution payments from the plan to electing
retiring employees exceeding service and interest cost components of
pension expense in the plan year.
Components of net periodic benefit cost (income) for the three
months ended March 27, 2004 and April 2, 2005 are as follows:
Postretirement
Pension Benefits Insurance Benefits
3/27/2004 4/2/2005 3/27/2004 4/2/2005
Service cost $ 1,674 1,169 - -
Interest cost 2,673 2,499 78 54
Estimated return on plan
assets (3,398) (2,872) - -
Amortization of transition
asset (60) - - -
Amortization of prior service
cost 456 119 (2,587) (2,587)
Amortization of net loss 569 1,023 2,088 1,759
Net periodic benefit cost
(income) 1,914 1,938 (421) (774)
Settlement loss 9,908 - - -
Net periodic benefit cost
(income) after settlement
loss $11,822 1,938 (421) (774)
Components of net periodic benefit cost (income) for the six months
ended March 27, 2004 and April 2, 2005 are as follows:
Postretirement
Pension Benefits Insurance Benefits
3/27/2004 4/2/2005 3/27/2004 4/2/2005
Service cost $ 3,348 2,344 - -
Interest cost 5,345 5,002 156 109
Estimated return on plan
assets (6,796) (5,745) - -
Amortization of transition
asset (120) - - -
Amortization of prior service
cost 911 239 (5,174) (5,174)
Amortization of net loss 1,139 2,046 4,177 3,518
Net periodic benefit cost
(income) 3,827 3,886 (841) (1,547)
Settlement loss 9,908 - - -
Net periodic benefit cost
(income) after settlement
loss $ 13,735 3,886 (841) (1,547)
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.
Page 11
9. Long Term Incentive Plan
Effective January 2, 2005, the Company adopted SFAS No. 123(r) and
has utilized the modified prospective method of adoption. Prior to
January 2, 2005, the Company accounted for its stock compensation
grants in accordance with the SFAS 123 exception, which allowed it
to utilize APB No. 25 to account for its stock-based compensation
grants and required certain supplemental disclosures. There was no
cumulative effect upon adoption of SFAS 123(r).
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 (LTIP).
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, nonvested or
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 LTIP.
A grant of nonvested stock to employees was authorized by the Board
of Directors and effective as of the closing of the initial public
offering (IPO) on October 13, 2004 (IPO stock grants). In addition,
on October 20, 2004, the Board of Directors authorized the issuance
of the stock portion of their fiscal 2005 annual retainers in
nonvested shares. Total grants of 705,197 and 24,456 shares were
issued to employees and directors, respectively. The nonvested
stock issued to employees will vest on the third anniversary of the
date of grant with the nonvested stock issued to directors vesting
in July 2005. However, the shares will vest immediately upon (i)
the employee's termination of employment by reason of death,
disability or retirement, or (ii) the occurrence of a change in
control. Retirement is defined under the LTIP as voluntarily
leaving employment after attaining any normal or early retirement
age specified in the Company's benefit plans.
Prior to the adoption of SFAS No. 123(r), the Company's policy for
recognizing compensation expense was to amortize the fair value of
stock compensation grants over the stated vesting period, even
though that stated vesting period may not be substantive. As a
result, during the three months ended January 1, 2005, the Company
recognized compensation expense of $0.7 million for IPO stock grants
made during the period. Had the Company applied SFAS No. 123(r) to
the IPO stock grants, and as a result recognized the fair value of
the grants over the requisite service period as opposed to the
stated vesting period of three years, the amount expensed for the
grants would have totaled approximately $5.3 million in the three
months ended January 1, 2005. The Company will continue to
recognize the compensation expense for the IPO stock grants by
amortizing the fair value over the stated three-year vesting period.
The compensation expense recorded in the quarter ended April 2, 2005
that would not have been recognized had SFAS 123(r) been applied for
the three months ended January 1, 2005 was approximately $0.8
million.
Page 12
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 (CIC)
agreements with ten other officers.
Equity grants to the Company's officers under the Company's LTIP,
consisting of 355,722 shares of nonvested stock (CIC stock grants),
stock-settled stock appreciation rights with respect to 173,860
shares (stock-settled SARS) and 96,558 performance share awards
(performance shares), were also approved and awarded in January
2005.
The CIC stock grants awarded in January 2005 vest as to 25% of the
shares on each anniversary of the date of grant, beginning January
24, 2006, provided, however, that the shares will vest 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-settled SARS vest in two equal annual installments,
beginning on January 24, 2008; provided, however, that the stock-
settled SARS 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 shares 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. The performance condition is based
upon the Company's profitability in relation to a defined peer group
within the broiler industry as measured by an independent
benchmarking company.
Additional equity grants for other management participants,
consisting of stock-settled SARS with respect to 86,954 shares and
88,553 performance 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 equity grants and awards are summarized as follows (share and
dollar amounts in thousands):
Grant Date Shares Fair Value Vesting Period
IPO stock grants October 2004
Employees 705 $7,757 36 months
Directors 24 280 9 months
CIC stock grants January 2005 356 4,863 48 months
Stock-settled SARS January 2005 261 1,795 48 months
Performance shares January 2005 185 2,288 33 months
Total 1,531 $16,983
Page 13
The Company determined that all of the above grants were equity-
classified awards under SFAS NO. 123(r). As a result, the fair
value of the awards has been measured at grant date and is being
recognized as compensation expense over the vesting periods, except
as noted below. The fair value of the IPO stock grants, CIC stock
grants and performance shares was the quoted public market price of
the shares on the date of the grant. The fair value of the stock-
settled SARS was determined under the Black-Scholes valuation method
with a term of 6.75 years, as determined under the simplified
method, a risk free rate of 3.93% and a volatility of 45%, based on
data from a peer group of similar profile companies. The
contractual term of the stock-settled SARS is ten years.
No grants or awards have legally vested or been exercised, converted
or forfeited during the six months ended April 2, 2005. There are
no additional restrictions on awards subsequent to vesting.
The grants previously described, with the exception of the
performance shares, vest fully at retirement, which was defined as
attaining any normal or early retirement age (fifty-five) specified
in the Company's benefit plans. A significant number of grant
recipients were fifty-five or older at the time of the grant and
therefore have the option to retire early under the Company's
benefit plans, at which time the grants would vest. In accordance
with SFAS 123(r), because the employee is eligible to retire at the
grant date, the awards' explicit service condition is nonsubstantive
and the entire amount of compensation cost was recognized at grant
date.
The amount of the share-based compensation expense under the CIC
stock grants issued in January 2005 and the stock-settled SARS
granted in January 2005 related to those recipients aged 55 or over
was $5.3 million for the three months ended April 2, 2005 and
represented 490,642 shares.
Total share-based compensation expense, including the $5.3 million
noted above, was $7.1 million and $7.8 million for the three and six
months ended April 2, 2005, respectively, and is reflected within
distribution, general and administrative expense in the accompanying
consolidated statements of operations. The total income tax benefit
recognized in the consolidated statements of operations related to
the share-based compensation expense was $2.7 million and $3.0
million for the three and six months ended April 2, 2005,
respectively.
At April 2, 2005, the total share-based compensation cost related to
nonvested grants and awards not yet recognized is approximately $9.2
million. The weighted average period over which the remaining share-
based compensation expense is to be recognized is approximately
thirty months.
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
Page 14
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 the plaintiffs' motion for class certification is now
being considered by the Court. The outcome of this case is
uncertain. 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 Plaintiffs' 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 Plaintiffs'
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. The Company believes that this lawsuit will not have a
material adverse effect on our financial condition or results of
operations.
Gold Kist is a party to various other legal, environmental and
administrative proceedings, 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.
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
Page 15
$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 was $38.7 million and $42.9 million for the three and
six months ended April 2, 2005, respectively. Following is a
reconciliation of weighted average shares - basic to weighted
average shares - diluted.
3 Mos. 6 Mos.
Ended Ended
4/2/05 4/2/05
Weighted average shares - basic 49,972 49,972
Deferred share-based compensation grants 777 498
Weighted average shares - diluted 50,749 50,470
13. 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 April 2, 2005, the
supplemental combining condensed statements of operations for the
three and six months ended March 27, 2004 and April 2, 2005 and the
supplemental combining condensed statements of cash flows for the
six months ended March 27, 2004 and April 2, 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 16
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 liabilities574,809 668 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 17
As of April 2, 2005
Balance Sheet: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
ASSETS
Current assets:
Cash and cash
equivalents $166,425 386 2,523 - 169,334
Receivables, net 115,818 12,843 33,417 (45,526) 116,552
Inventories 215,278 301 - - 215,579
Deferred income
taxes and
other current
assets 23,363 501 26,199 - 50,063
Total current
assets 520,884 14,031 62,139 (45,526) 551,528
Investments 35,868 - - (22,860) 13,008
Property, plant
and equipment,
net 268,285 266 - - 268,551
Deferred income
taxes and
other assets 60,707 4,086 11,445 - 76,238
$885,744 18,383 73,584 (68,386) 909,325
LIABILITIES AND
EQUITY
Current liabilities:
Notes payable
and current
maturities of
long-term debt $ 10,472 - - - 10,472
Accounts payable 123,009 243 407 (45,526) 78,133
Accrued
compensation and
related expenses 34,918 15 - - 34,933
Other current
liabilities 66,529 4 34,371 - 100,904
Total current
liabilities 234,928 262 34,778 (45,526) 224,442
Long-term debt,
less current
maturities 201,884 - - - 201,884
Accrued pension
costs 32,681 - - - 32,681
Accrued
postretirement
benefit costs 5,027 - - - 5,027
Other liabilities 12,736 325 33,742 - 46,803
Total
liabilities 487,256 587 68,520 (45,526) 510,837
Stockholders'
equity 398,488 17,796 5,064 (22,860) 398,488
$885,744 18,383 73,584 (68,386) 909,325
Page 18
Statement of Three Months (13 Weeks) Ended March 27, 2004
Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $574,060 810 3,598 (2,879) 575,589
Cost of sales 479,756 812 2,439 (2,879) 480,128
Gross profit
(loss) 94,304 (2) 1,159 - 95,461
Distribution,
administrative
and general
expenses 26,985 196 19 - 27,200
Pension plan
settlement
expense 9,908 - - - 9,908
Net operating
income (loss) 57,411 (198) 1,140 - 58,353
Interest, income
taxes and other,
net (27,549) 117 (89) (970) (28,491)
Net income (loss) $ 29,862 (81) 1,051 (970) 29,862
Statement of Three Months (13 Weeks) Ended April 2, 2005
Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $571,026 824 3,519 (4,560) 570,809
Cost of sales 478,169 850 3,095 (4,560) 477,554
Gross profit
(loss) 92,857 (26) 424 - 93,255
Distribution,
administrative
and general
expenses 32,840 217 19 - 33,076
Net operating
income (loss) 60,017 (243) 405 - 60,179
Interest, income
taxes and other,
net (21,348) 247 219 (628) (21,510)
Net income (loss) $ 38,669 4 624 (628) 38,669
Statement of Six Months (26 Weeks) Ended March 27, 2004
Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $1,109,460 1,542 7,569 (6,055) 1,112,516
Cost of sales 944,645 1,551 8,704 (6,055) 948,845
Gross profit
(loss) 164,815 (9) (1,135) - 163,671
Distribution,
administrative
and general
expenses 55,745 437 41 - 56,223
Pension plan
settlement
expense 9,908 - - - 9,908
Net operating
income (loss) 99,162 (446) (1,176) - 97,540
Interest, income
taxes and other,
net (65,895) 351 998 273 (64,273)
Net income
(loss) $ 33,267 (95) (178) 273 33,267
Statement of Six Months (26 Weeks) Ended April 2, 2005
Operations: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $1,122,155 1,619 7,045 (8,052) 1,122,767
Cost of sales 980,988 1,680 7,060 (8,052) 981,676
Gross profit
(loss) 141,167 (61) (15) - 141,091
Distribution,
administrative
and general
expenses 59,079 339 42 - 59,460
Net operating
income (loss) 82,088 (400) (57) - 81,631
Interest, income
taxes and other,
net (39,226) 429 708 (680) (38,769)
Net income
(loss) $ 42,862 29 651 (680) 42,862
Page 19
Statement of Six Months (26 Weeks) Ended March 27, 2004
Cash Flows: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net cash provided
by (used in)
operating
activities $ 105,553 (2,058) 9 - 103,504
Cash flows from
investing
activities:
Acquisitions of
property,
plant and
equipment (15,814) (4) - - (15,818)
Other 527 2,008 - - 2,535
Net cash provided
by (used in)
investing
activities (15,287) 2,004 - - (13,283)
Cash flows from
financing
activities:
Proceeds from
long-term debt 196,940 - - - 196,940
Principal
repayments of
long-term debt (200,076) - - - (200,076)
Payments of
capitalized
financing costs (5,925) - - - (5,925)
Patronage refunds
and other equity
paid in cash (1,509) - - - (1,509)
Net cash used in
financing
activities (10,570) - - - (10,570)
Net change in cash
and cash
equivalents 79,696 (54) 9 - 79,651
Cash and cash
equivalents,
beginning of
period 11,088 273 2,514 - 13,875
Cash and cash
equivalents,
end of period $ 90,784 219 2,523 - 93,526
Page 20
Statement of Six Months (26 Weeks) Ended April 2, 2005
Cash Flows: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
Net cash provided
by (used in)
operating
activities $ 97,407 (1,194) (6,023) - 90,190
Cash flows from
investing
activities:
Acquisitions of
property, plant
and equipment (41,607) (5) - - (41,612)
Other 5,783 1,272 - - 7,055
Net cash provided
by (used in)
investing
activities (35,824) 1,267 - - (34,557)
Cash flows from
financing
activities:
Principal
repayments of
long-term debt (91,044) - - - (91,044)
Patronage refunds
and other equity
paid in cash (3,165) - - - (3,165)
Proceeds from
initial public
offering, net of
under-writing
and offering
expenses paid 138,859 - - - 138,859
Cash
distributions
to members and
equity holders (105,963) - - - (105,963)
Treasury stock
acquired (275) - - - (275)
Net cash used in
financing
activities (61,588) - - - (61,588)
Net change in
cash and cash
equivalents (5) 73 (6,023) - (5,955)
Cash and cash
equivalents,
beginning of
period 166,430 313 8,546 - 175,289
Cash and cash
equivalents,
end of period $ 166,425 386 2,523 - 169,334
Page 21
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. Gold Kist is the
third largest producer of broilers and related products accounting for
approximately 9% of the industry's production.
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.
According to the USDA World Agricultural Outlook Board (WAOB), calendar
2004 U.S. broiler meat production was approximately 33.7 billion pounds,
ready-to-cook weight, 4.0% above the 32.4 billion pounds produced in
calendar 2003. The WAOB April estimate for calendar 2005 broiler meat
production is 34.7 billion pounds, which is a 3.2% increase from the
calendar 2004 estimate. This moderate increase is principally due to
heavier bird weights.
Our export sales, which we define as sales other than to customers in the
United States or Canada, were $57.6 million for the six months ended April
2, 2005. The U.S. poultry industry historically has exported 15% to 20% of
domestic production, principally dark meat products to Russia and other
former Soviet Republics, Hong Kong, Mexico and Japan. The Company's export
sales have historically been less than 10% of net sales. However, any
disruption in the export markets can significantly impact domestic broiler
sales prices by creating excess domestic supply.
The cost of feed grains, primarily corn and soybean meal, averages
approximately 55% to 60% of total live broiler production costs or
approximately 30% to 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 weather or other problems, worldwide
soybean and corn production is expected to increase, which may favorably
impact feed ingredient costs in fiscal 2005. Average feed costs for the
Company were lower in the second fiscal quarter as compared to the first
quarter of fiscal 2005 and the same quarter last year.
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 security 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:
Fiscal
Year
Three Months Ended Six Months Ended Ended
Mar. 27, Apr. 2, Mar. 27, Apr. 2, June 26,
2004 2005 2004 2005 2004
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.4 83.7 85.3 87.4 84.0
Gross profit 16.6 16.3 14.7 12.6 16.0
Distribution, administrative,
general and other expenses 6.5 5.8 5.9 5.3 5.3
Net operating income 10.1 10.5 8.8 7.3 10.7
Interest expense (2.3) (1.1) (1.8) (1.2) (1.6)
Other income (expenses)
(including income taxes) (2.6) (2.6) (4.0) (2.3) (4.2)
Net income 5.2% 6.8% 3.0% 3.8% 4.9%
Net Sales
Gold Kist's net sales for the quarter ended April 2, 2005 decreased 0.8%
compared to the quarter ended March 27, 2004. For the six months ended
April 2, 2005, net sales volume increased 0.9% from $1.11 billion in the
comparable period last year to $1.12 billion in the current year. The
change in net sales was due primarily to an approximate 8.4% and 6.9%
increase in broiler pounds produced and sold for the quarter and six months
ended April 2, 2005, respectively, offset by a decline of 9.1% and 6.1% in
average broiler sales prices for the same periods. Increased supply was
the principal factor leading to the decline of prices from the three and
six-month periods ended March 2004. Average broiler sales prices for the
quarter ended April 2, 2005 were 4.9% higher than prices for the quarter
ended January 1, 2005 due to increased demand. The nominal increase in
sales for the six months ended April 2, 2005 was also impacted by a $1.5
million increase in sales of the pork division due to higher prices caused
by stronger demand.
Page 23
Our export sales of $26.9 million and $57.6 million for the three and six
months ended April 2, 2005, respectively, were 22.3% and 10.0% higher than
the fiscal 2004 periods, due to increased shipments to Russia and increased
demand from other countries. Our export sales to Russia increased 44.4% in
pounds shipped and 21.9% in dollar value from $22.1 million in the March
2004 year-to-date period to $26.9 million in the March 2005 year-to-date
period.
Net Operating Income
The Company had net operating income of $60.2 million and $81.6 million for
the three and six months ended April 2, 2005, respectively, compared to net
operating income of $58.4 million and $97.5 million in the comparable
periods in 2004. The decrease in net operating income in the March 2005
year-to-date period as compared to the March 2004 period was due primarily
to lower broiler selling prices and increased processing and other
production costs. Feed costs for the six months ended April 2, 2005 were
4.9% lower than the six months ended March 27, 2004. The higher feed costs
experienced in the first fiscal quarter ending January 1, 2005 were due to
forward contracts that were priced in excess of cash markets. Deliveries
under these contracts were completed in early January, and lower feed
ingredient costs in the quarter ended April 2, 2005 more than offset the
first quarter increase. Year-to-date average prices for corn and soybean
meal for the six months ended April 2, 2005 were 12.4% and 11.8% below the
prior year-to-date period in 2004, respectively.
The 3.2% year-to-date increase in distribution, administrative and general
expenses was principally due to the noncash share-based compensation
expense of $7.8 million related to the stock grants and awards issued to
employees in October 2004 and January 2005. Distribution, administrative
and general expenses for the six months ended April 2, 2005 equaled 5.2% of
net sales. Approximately $5.3 million of the share-based compensation
expense was recognized with respect to recipients aged 55 or older and
eligible for early retirement (see Note 9 of Notes to Consolidated
Financial Statements). Excluding the total share-based compensation
expense of $7.8 million for the six months ended April 2, 2005,
distribution, administrative and general expenses decreased by 10.6% and
equaled 4.5% of net sales. The decrease was principally due to lower cash
incentive compensation accruals. We have presented percentages regarding
changes in distribution, administrative and general expenses adjusted to
exclude share-based compensation expenses because we believe that investors
are interested in our results of operations excluding share-based
compensation expense and because our management uses this information to
analyze our results from continuing operations and to view trends and
changes in such results.
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 incurred in the six months ended April 2, 2005.
Other Expenses
Other expenses, including interest and miscellaneous, net totaled $3.0
million and $17.6 million for the three and six months ended April 2, 2005,
respectively, compared to $11.7 million and $36.5 million for the
comparable periods in 2004.
Page 24
Interest expense was $6.2 million and $13.3 million for the three and six
months ended April 2, 2005, compared to $7.0 million and $13.8 million for
the comparable periods in 2004. Lower average balances in the three and six
months ended April 2, 2005 were the principal factor leading to the
decrease in interest expense.
The Company incurred a prepayment interest charge of $5.5 million and wrote
off deferred financing fees of $.8 million with respect to the payoff of a
term loan with an insurance company with part of the proceeds from the
Company's issuance of $200 million in 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 charge. 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.
The $18.5 million loss on investment for the six months ended March 27,
2004 represented an impairment charge taken on the Company's investment in
another cooperative. The $38.8 million remaining balance of the investment
was written off in June 2004.
Miscellaneous, net was income of $1.3 million and $3.0 million for the
three and six months ended April 2, 2005, respectively, compared to $0.9
million and $1.2 million for the comparable periods last year. Income from
a hog production joint venture was $1.9 million for the six months ended
April 2, 2005 as compared to $0.2 million for the six months ended March
27, 2004 due to improved hog market prices brought about by increased
demand. Interest and dividend income was $1.9 million and $2.7 million in
the three and six months ended April 2, 2005, respectively, as compared to
$0.7 million and $0.9 million for the three and six months ended March 27,
2004, respectively, principally due to interest income from cash invested
in short-term interest bearing instruments.
Income Tax Expense
For the three and six months ended April 2, 2005, our combined federal and
state effective income tax rates used for purposes of calculating the tax
expense on income before income taxes were 32.3% and 33.0%, respectively.
Income tax expense for the three and six months ended April 2, 2005
reflects income taxes at statutory rates adjusted principally for available
tax credits and the deductibility of state income taxes for federal tax
purposes. The Company's effective tax rate was favorably impacted by
additional state tax credits from prior years that became available and
were recorded in the three-month period ended April 2, 2005. The Company
expects income tax rates to approximate 38% for the remainder of the fiscal
year.
For the three and six months ended March 27, 2004, the Company's combined
federal and state effective income tax rates were 36.0% and 45.5%,
respectively. The increased effective tax rate over the federal and state
statutory rates for the six months ended March 27, 2004 was due to the
deferred income tax valuation allowance established for the impairment loss
in December 2004 related to an investment in another cooperative.
Page 25
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 due 2014 were issued at a price of 98.47% and are reflected net of
the unamortized discount in the accompanying consolidated balance sheets.
We repaid approximately $70.0 million of these notes, plus $7.2 million in
prepayment interest charges, 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
April 2, 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, 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 April 2, 2005, we were in
compliance with all applicable loan covenants under our senior notes and
credit facilities.
For the first six months ended April 2, 2005, cash provided by operating
activities was $90.2 million compared to cash provided from operating
activities of $103.5 million for the six months ended March 27, 2004. 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 six months ended April 2, 2005.
Cash used in financing activities for the six months ended April 2, 2005
was $61.6 million compared to $10.6 million for the comparable March 2004
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
Page 26
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 and funds from
existing cash balances were 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 to October 12, 2004 and patronage equity cashings
of $.8 million are also reflected in the net cash used in financing
activities for the six months ended April 2, 2005. In addition, the
Company repaid a term loan with an agricultural credit bank and the
Industrial Revenue Bond totaling $14.7 million during the three months
ended April 2, 2005. At April 2, 2005, the Company had cash of $154.8
million invested in short term interest-bearing instruments.
Working capital and patrons' and other equity/stockholders' equity were
$327.1 million and $398.5 million, respectively, at April 2, 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 and the partial repayment of the senior notes, 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 from the net income for the
first six months of fiscal 2005.
We spent $41.6 million in capital expenditures for the six months ended
April 2, 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 operations. In addition, capital
expenditures included other asset improvements and necessary replacements.
Management plans to fund fiscal 2005 capital expenditures, including an
ongoing $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. In light of the improved operating results and strong operating cash
flow for the quarter ending April 2, 2005, the Company may consider
additional pension plan contributions in fiscal 2005.
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.
Page 27
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 further
processed 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;
- effectiveness of our capital expenditures and other cost-
saving measures;
- 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-
Page 28
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 April 2, 2005 are as follows (in
millions):
Payments Due by Period
Less than After
Total 1 year 1-3 years 4-5 years 5 years
Debt obligations:
Principal payments (a) $212.4 10.5 22.2 22.3 157.4
Interest payments (b) 158.3 20.7 38.8 35.1 63.7
Operating leases (c) 50.9 14.8 20.6 13.5 2.0
Feed ingredient purchase
commitments (d) 90.4 90.4 - - -
Total (e) $512.0 136.4 81.6 70.9 223.1
(a) Excludes $31.3 million in total letters of credit outstanding related
to normal business transactions.
(b) Interest payments include amounts for fixed rate and term debt as
outlined in Note 7 of Notes to Consolidated Financial Statements based
on the expected payment dates.
(c) Operating lease commitments as of June 26, 2004. There have not been
any significant changes in the six months ended April 2, 2005.
(d) 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 April 2, 2005 for
the month of delivery.
(e) 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.
Page 29
Critical Accounting Policies
Share-based compensation. The Company adopted SFAS No. 123(r), "Share-
Based Payment," in January 2005. SFAS No. 123(r) requires the
determination of share-based payments as equity or liability classified and
measurement of the payment at fair value. Assumptions and judgments are
made by management concerning the classification and valuation of the stock
grants and awards, the requisite service periods, the assessment of the
conditions imposed by the payment, employee turnover, volatility, the term
of the awards and other factors used in determining the compensation
expense. The Company expects to make additional share-based payments in
the future and different assumptions and judgments could result in
different costs that could have a material impact on the consolidated
statements of operations. In addition, the resolution of implementation
issues and further interpretations with regard to SFAS 123(r) could impact
the assumptions and judgments used by the Company in earlier or future
periods.
There were no other material changes in the Company's critical accounting
policies during the quarter ended April 2, 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, Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" (SFAS No. 123(r)) was issued. 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.
SFAS No. 123(r) 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 123(r).
See Note 9 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 FASB issued FASB Staff Position 109-1, "Application of
SFAS No. 109,
Page 30
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 the three months ended January 1,
2005.
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, the availability and
cost of transportation, as well as the agricultural policies of the United
States and foreign governments. In particular, weather patterns often
change
Page 31
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 Consolidated Results of Operations
and Financial Condition."
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 33.5% of our net
sales during the quarter ended April 2, 2005 and during such period,
approximately 12.8% 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 purchases 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
Page 32
oversupply and a decrease in the market price of chicken. Russia has
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
Page 33
products as a result of improper handling at the further processing,
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 last
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
Page 34
transportation providers of labor and the capacity of our transportation
sources. Increases in costs of transportation would negatively affect our
profitability.
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.
We have approximately 17,000 employees, approximately 3,000 of which are
covered by collective bargaining agreements and approximately 575 of
which
Page 35
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 36
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 April 2, 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 $90.4 million at April 2, 2005. These
commitments include both priced and unpriced contracts. Unpriced feed
ingredient commitments are valued at market for the month of delivery as of
April 2, 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 $60.0 million to $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 $1.3 million.
Page 37
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 38
PART II: OTHER INFORMATION
Item 6. Exhibits.
Exhibits
Designation of Exhibit
in This Report Description of Exhibit
Exhibit 10.1.6 Seventh Amendment Dated as of
February 28, 2005, to Second
Consolidated, Amended and Restated
Note Agreement with the Gateway
Recovery Trust and the Prudential
Insurance Company of America
Exhibit 10.2.3 Third Amendment Dated as of
March 1, 2005, to Fourth Amended
and Restated Credit Agreement with
various banks and lending
institutions, as lenders and
Cooperatieve Centrale Raiffeisen-
Boarenleenbank B.A., New York
Branch, as Agent
Exhibit 10.24.3 Fifth Amendment Dated as of
March 1, 2005, to First Amended and
Restated Credit Agreement with
CoBank, ACB
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.
Page 39
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 May 17, 2005
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date May 17, 2005
Stephen O. West
Chief Financial Officer, Vice President
(Principal Financial Officer)
Page 39
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 May 17, 2005 /s/ John Bekkers
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date May 17, 2005 /s/ Stephen O. West
Stephen O. West
Chief Financial Officer, Vice President
(Principal Financial Officer)