N:\LOTUS\COMMON\10Q & 10K\gk10q605edgar.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 July 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 - 51,505,459
shares outstanding as of August 16, 2005.
GOLD KIST INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets -
October 2, 2004 and July 2, 2005 1
Consolidated Statements of Operations -
Three Months and Nine Months Ended
June 26, 2004 and July 2, 2005 2
Consolidated Statements of Cash Flows -
Nine Months Ended June 26, 2004
and July 2, 2005 3
Notes to Consolidated Financial
Statements 4 - 21
Item 2. Management's Discussion and Analysis of
Consolidated Results of Operations and
Financial Condition 22 - 36
Item 3. Quantitative and Qualitative Disclosure About
Market Risks 37
Item 4. Controls and Procedures 38
Part II. Other Information
Item 1. Legal Proceedings 38 - 39
Item 6. Exhibits 40
Page 1
Item 1. Financial
Statements
GOLD KIST INC.
CONSOLIDATED BALANCE SHEETS
(Amounts, Except Share Amounts, in Thousands)
(Unaudited)
October 2, July 2,
2004 2005
ASSETS
Current assets:
Cash and cash equivalents $175,289 196,996
Receivables, net 115,015 119,388
Inventories 238,892 229,438
Deferred income taxes, net 15,732 18,472
Other current assets 38,577 29,689
Total current assets 583,505 593,983
Investments 13,072 12,817
Property, plant and equipment, net 247,398 277,803
Deferred income taxes, net 13,215 12,641
Other assets 65,652 50,914
$922,842 948,158
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current maturities of
long-term debt $ 20,875 10,119
Accounts payable 84,121 78,918
Accrued compensation and related expenses 42,556 37,483
Income taxes payable 8,583 38,053
Other current liabilities 79,466 73,339
Total current liabilities 235,601 237,912
Long-term debt, less current maturities 281,408 197,594
Accrued pension costs 37,387 21,867
Accrued postretirement benefit costs 6,760 4,199
Other liabilities 44,138 42,439
Total liabilities 605,294 504,011
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 July 2, 2005; issued
and outstanding 2,449 shares as of
October 2, 2004 and 51,530,432 and
51,505,459 shares as of July 2, 2005,
respectively 2 515
Additional paid-in capital - 398,792
Patronage reserves 232,569 -
Accumulated other comprehensive loss (42,318) (42,160)
Retained earnings 127,295 87,275
Common stock held in treasury, 24,973 shares - (275)
Total patrons' and other equity/
stockholders' equity 317,548 444,147
$922,842 948,158
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 Nine Months Ended
June 26, July 2, June 26, July 2,
2004 2005 2004 2005
Net sales $631,524 598,835 1,744,040 1,721,602
Cost of sales 496,552 497,040 1,445,397 1,478,716
Gross profit 134,972 101,795 298,643 242,886
Distribution, administrative
and general expenses
(including $1.1 million and
$8.9 million of share-based
compensation expense for the
three and nine months ended
July 2, 2005, respectively) 28,278 28,852 84,501 86,894
Pension plan settlement loss 380 - 10,288 -
Conversion expenses - - - 1,418
Net operating income 106,314 72,943 203,854 154,574
Other income (expenses):
Interest and dividend income 489 1,106 1,377 3,821
Interest expense (7,989) (5,063) (21,746) (18,366)
Senior debt prepayment
interest and write-off of
related fees and discount - - (6,341) (10,016)
Loss on investment (38,878) - (57,364) -
Miscellaneous, net (3,477) 1,164 (2,300) 4,150
Total other expenses, net (49,855) (2,793) (86,374) (20,411)
Income before income taxes 56,459 70,150 117,480 134,163
Income tax expense 2,317 25,737 30,071 46,888
Net income $ 54,142 44,413 87,409 87,275
Net income per common share:
Basic - $.89 - $1.75
Diluted - $.87 - $1.72
Weighted average common shares
outstanding:
Basic - 50,012 - 49,985
Diluted - 50,808 - 50,602
See Accompanying Notes to Consolidated Financial Statements.
Page 3
GOLD KIST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
June 26, 2004 July 2,2005
Cash flows from operating activities:
Net income $ 87,409 87,275
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 29,628 31,982
Amortization of share-based compensation - 8,917
Loss on investment 57,364 -
Postretirement benefit plans expense in
excess of (less than) funding 11,600 (17,200)
Deferred income tax expense (benefit) 16,950 (2,261)
Other (3,351) (13)
Changes in operating assets and liabilities:
Receivables (24,926) (4,373)
Inventories (26,424) 9,454
Other current assets (8,822) 9,491
Accounts payable, accrued and other
expenses 38,011 16,063
Net cash provided by operating activities 177,439 139,335
Cash flows from investing activities:
Acquisitions of property, plant and equipment (38,218) (61,417)
Dispositions of investments 153 3,334
Proceeds from termination of cooperative equity
holder life insurance policies - 2,790
Other 1,659 3,945
Net cash used in investing activities (36,406) (51,348)
Cash flows from financing activities:
Proceeds from long-term debt 196,940 -
Principal repayments of long-term debt (205,509) (95,736)
Payments of deferred financing costs (7,965) -
Patronage refunds and other equity paid in cash (1,675) (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 (18,209) (66,280)
Net change in cash and cash equivalents 122,824 21,707
Cash and cash equivalents at beginning of period 13,875 175,289
Cash and cash equivalents at end of period $ 136,699 196,996
Supplemental disclosure of cash flow information:
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 28,918 21,831
Income taxes, net $ 23,161 19,558
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 July 2, 2005 and for the three and
nine months ended July 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 nine-month periods
ended July 2, 2005 and the three-month and nine-month periods ended
June 26, 2004 each consisted of thirteen weeks and thirty-nine
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 No. 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 nine month period ended July 2, 2005.
3. Receivables
Receivables are principally trade and are stated net of an
allowance for doubtful accounts of $1.5 million and $1.0 million
as of October 2, 2004 and July 2, 2005, respectively.
Page 6
4. Comprehensive Income
Comprehensive income was $53,168 and $44,413 for the three months
ended June 26, 2004 and July 2, 2005, respectively, and $85,467 and
$87,433 for the nine months ended June 26, 2004 and July 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 July 2, 2005
Live poultry and hogs $102,936 96,550
Raw materials and supplies 48,394 54,511
Marketable products 87,562 78,377
$238,892 229,438
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 stockbreeders, 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 balance sheets 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.
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.
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.
Page 7
6. Property, Plant and Equipment
Property, plant and equipment is summarized as follows:
Oct. 2, July 2,
2004 2005
Land and land improvements $ 32,161 34,465
Buildings 214,368 232,173
Machinery and equipment 433,633 452,410
Construction in progress 33,959 36,806
714,121 755,854
Less accumulated depreciation 466,723 478,051
$247,398 277,803
Depreciation and amortization included in cost of sales in the
accompanying consolidated statements of operations were $25.2
million and $28.2 million for the nine months ended June 26, 2004
and July 2, 2005, respectively; and $8.8 million and $9.7 million
for the three months ended June 26, 2004 and July 2, 2005,
respectively.
Page 8
7. Long-Term Debt
Long-term debt is summarized as follows:
Oct. 2, July 2,
2004 2005
Senior notes, due 2014 $197,092 128,258
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 July 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 July 2, 2005) 18,182 15,909
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 July 2, 2005) 30,365 26,795
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 8.11% at July 2,
2005) 17,147 15,578
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
July 2, 2005) 2,379 2,082
302,283 207,713
Less current maturities 20,875 10,119
Total long-term debt $281,408 197,594
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 nine months ended July
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 July 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 July 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 July 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 $10.3 million of pension settlement expense
in the nine months ended June 26, 2004. The settlement expense
resulted from lump sum distribution payments from plans 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 June 26, 2004 and July 2, 2005 are as follows:
Postretirement
Pension Benefits Insurance Benefits
6/26/2004 7/2/2005 6/26/2004 7/2/2005
Service cost $ 978 1,167 - -
Interest cost 2,429 2,499 78 54
Estimated return on plan
assets (3,236) (2,872) - -
Amortization of transition
asset (55) - - -
Amortization of prior service
cost (income) 120 120 (2,586) (2,586)
Amortization of net loss 447 1,023 2,088 1,759
Net periodic benefit cost
(income) 683 1,937 (420) (773)
Settlement loss 380 - - -
Net periodic benefit cost
(income) after settlement
loss $ 1,063 1,937 (420) (773)
Components of net periodic benefit cost (income) for the nine
months ended June 26, 2004 and July 2, 2005 are as follows:
Postretirement
Pension Benefits Insurance Benefits
6/26/2004 7/2/2005 6/26/2004 7/2/2005
Service cost $ 4,326 3,511 - -
Interest cost 7,774 7,501 234 163
Estimated return on plan
assets (10,032) (8,617) - -
Amortization of transition
asset (175) - - -
Amortization of prior service
cost (income) 1,031 359 (7,760) (7,760)
Amortization of net loss 1,586 3,069 6,265 5,277
Net periodic benefit cost
(income) 4,510 5,823 (1,261) (2,320)
Settlement loss 10,288 - - -
Net periodic benefit cost
(income) after settlement
loss $ 14,798 5,823 (1,261) (2,320)
The Company made qualified pension plan contributions of $15.0
million in August 2004, $8.0 million in November 2004 and $11.0
million in June 2005.
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.
Page 12
The compensation expense recorded in the quarter ended July 2,
2005 and six months ended July 2, 2005 that would not have been
recognized had SFAS 123(r) been applied to the IPO stock grants
issued in the first quarter ended January 1, 2005 was
approximately $0.5 million and $1.3 million, respectively.
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 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.
Deferred stock units are issued to directors who elect to receive
their quarterly compensation in stock units in lieu of cash. The
stock units vest in six months or at a later date as elected by
the participating director.
Page 13
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 25 280 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
Director stock units May 2005 2 35 6 months
Total 1,534 $17,018
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.
IPO grants totaling 51,244 shares legally vested due to
retirements during the three and nine months ended July 2, 2005
and therefore were expensed ($0.5 million). There are no
additional restrictions on awards subsequent to vesting. No other
shares have legally vested in the nine months ended July 2, 2005.
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 the 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 at the grant date and represented 490,642
shares.
Page 14
Total share-based compensation expense was $1.1 million and $8.9
million for the three and nine months ended July 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 $.4 million and $3.4 million for the
three and nine months ended July 2, 2005, respectively.
At July 2, 2005, the total share-based compensation cost related
to nonvested grants and awards not yet recognized is approximately
$8.1 million. The weighted average period over which the
remaining share-based compensation expense is to be recognized is
approximately twenty-five 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 Department. One of the employees
continues to be employed by the Company. After its administrative
consideration of the claims, the EEOC issued "Right to Sue"
letters to the four complainants in these claims, meaning that the
EEOC would not sue or participate in a suit against the Company on
behalf of the parties in these actions nor would it pursue a
systemic discrimination charge in this matter. The letter provided
that the individuals could 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. The U.S.
District Court, in an Order entered June 13, 2005, denied the
motion of the plaintiffs to certify the litigation as a class
action. The Court's ruling, for which the plaintiffs did not seek
an interlocutory appeal, means that the litigation will not
proceed as a class action and will be litigated as individual
claims of the four name plaintiffs. The Company intends to defend
the litigation vigorously. The Company believes that this lawsuit
will not have a material adverse effect on our financial condition
or results of operations.
The Company was 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 alleged that the defendants conspired to
prevent competition for production contracts and sought 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. This
action was dismissed in July 2005.
Page 15
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. Potential liability with respect to such
proceedings is either accrued or not expected to be significant.
11. Investments
In October 1998, the Company completed the sale of assets of the
Agri-Services business segment 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 $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
statements of operations for the three and nine months ended June
26, 2004.
12. Earnings Per Share
The net income for both the basic and diluted earnings per share
computations was $44.4 million and $87.3 million for the three and
nine months ended July 2, 2005, respectively. Following is a
reconciliation of weighted average common shares - basic to
weighted average common shares - diluted.
Page 16
3 Mos. 9 Mos.
Ended Ended
July 2, 2005 July 2, 2005
Weighted average common shares - basic 50,012 49,985
Dilutive impact of share-based
compensation grants 796 617
Weighted average common shares - diluted 50,808 50,602
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 July 2, 2005, the
supplemental combining condensed statements of operations for the
three and nine months ended June 26, 2004 and July 2, 2005 and the
supplemental combining condensed statements of cash flows for the
nine months ended June 26, 2004 and July 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 17
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, net 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, net and
other assets 64,144 5,363 9,360 - 78,867
$892,357 18,435 75,803 (63,753) 922,842
LIABILITIES AND
EQUITY
Current liabilities:
Notes payable
and current
maturities of
long-term debt $ 20,875 - - - 20,875
Accounts payable 125,372 322 - (41,573) 84,121
Accrued
compensation and
related expenses 42,540 16 - - 42,556
Other current
liabilities 47,671 5 40,373 - 88,049
Total current
liabilities 236,458 343 40,373 (41,573) 235,601
Long-term debt,
less current
maturities 281,408 - - - 281,408
Accrued pension
costs 37,387 - - - 37,387
Accrued
postretirement
benefit costs 6,760 - - - 6,760
Other liabilities 12,796 325 31,017 - 44,138
Total
liabilities 574,809 668 71,390 (41,573) 605,294
Patrons' and
other equity 317,548 17,767 4,413 (22,180) 317,548
$892,357 18,435 75,803 (63,753) 922,842
Page 18
As of July 2, 2005
Balance Sheet: Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiary Eliminations Consolidated
ASSETS
Current assets:
Cash and cash
equivalents $193,949 508 2,539 - 196,996
Receivables, net 118,841 13,225 32,460 (45,138) 119,388
Inventories 229,293 145 - - 229,438
Deferred income
taxes, net and
other current
assets 20,957 303 26,901 - 48,161
Total current
assets 563,040 14,181 61,900 (45,138) 593,983
Investments 35,977 - - (23,160) 12,817
Property, plant
and equipment,
net 277,546 257 - - 277,803
Deferred income
taxes, net and
other assets 53,631 3,799 6,125 - 63,555
$930,194 18,237 68,025 (68,298) 948,158
LIABILITIES AND
EQUITY
Current liabilities:
Notes payable
and current
maturities of
long-term debt $ 10,119 - - - 10,119
Accounts payable 123,325 213 518 (45,138) 78,918
Accrued
compensation and
related expenses 37,468 15 - - 37,483
Other current
liabilities 78,410 (178) 33,160 - 111,392
Total current
liabilities 249,322 50 33,678 (45,138) 237,912
Long-term debt,
less current
maturities 197,594 - - - 197,594
Accrued pension
costs 21,867 - - - 21,867
Accrued
postretirement
benefit costs 4,199 - - - 4,199
Other liabilities 13,065 325 29,049 - 42,439
Total
liabilities 486,047 375 62,727 (45,138) 504,011
Stockholders'
equity 444,147 17,862 5,298 (23,160) 444,147
$930,194 18,237 68,025 (68,298) 948,158
Page 19
Three Months (13 Weeks) Ended June 26, 2004
Statement of Parent Guarantor Non-Guarantor
Operations: Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $633,680 801 4,199 (7,156) 631,524
Cost of sales 498,803 637 4,268 (7,156) 496,552
Gross profit
(loss) 134,877 164 (69) - 134,972
Distribution,
administrative
and general
expenses 27,648 611 19 - 28,278
Pension plan
settlement loss 380 - - - 380
Net operating
income (loss) 106,849 (447) (88) - 106,314
Interest, income
taxes and other,
net (52,707) 427 261 (153) (52,172)
Net income (loss) $ 54,142 (20) 173 (153) 54,142
Three Months (13 Weeks) Ended July 2, 2005
Statement of Parent Guarantor Non-Guarantor
Operations: Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $598,547 989 3,510 (4,211) 598,835
Cost of sales 496,624 920 3,707 (4,211) 497,040
Gross profit
(loss) 101,923 69 (197) - 101,795
Distribution,
administrative
and general
expenses 28,599 234 19 - 28,852
Net operating
income (loss) 73,324 (165) (216) - 72,943
Interest, income
taxes and other,
net (28,911) 231 450 (300) (28,530)
Net income (loss) $ 44,413 66 234 (300) 44,413
Nine Months (39 Weeks) Ended June 26, 2004
Statement of Parent Guarantor Non-Guarantor
Operations: Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $1,743,141 2,343 11,768 (13,212) 1,744,040
Cost of sales 1,443,449 2,187 12,973 (13,212) 1,445,397
Gross profit
(loss) 299,692 156 (1,205) - 298,643
Distribution,
administrative
and general
expenses 83,394 1,048 59 - 84,501
Pension plan
settlement loss 10,288 - - - 10,288
Net operating
income (loss) 206,010 (892) (1,264) - 203,854
Interest, income
taxes and other,
net (118,601) 778 1,258 120 (116,445)
Net income
(loss)$ 87,409 (114) (6) 120 87,409
Nine Months (39 Weeks) Ended July 2, 2005
Statement of Parent Guarantor Non-Guarantor
Operations: Only Subsidiaries Subsidiary Eliminations Consolidated
Net sales $1,720,702 2,608 10,555 (12,263) 1,721,602
Cost of sales 1,477,612 2,600 10,767 (12,263) 1,478,716
Gross profit
(loss) 243,090 8 (212) - 242,886
Distribution,
administrative
and general
expenses 87,678 573 61 - 88,312
Net operating
income (loss) 155,412 (565) (273) - 154,574
Interest, income
taxes and other,
net (68,137) 660 1,158 (980) (67,299)
Net income (loss)$ 87,275 95 885 (980) 87,275
Page 20
Nine Months (39 Weeks) Ended June 26, 2004
Statement of Parent Guarantor Non-Guarantor
Cash Flows: Only Subsidiaries Subsidiary Eliminations Consolidated
Net cash provided
by (used in)
operating
activities $ 180,335 (2,911) 15 - 177,439
Cash flows from
investing
activities:
Acquisitions of
property, plant
and equipment (38,214) (4) - - (38,218)
Other (965) 2,777 - - 1,812
Net cash provided
by (used in)
investing
activities (39,179) 2,773 - - (36,406)
Cash flows from
financing
activities:
Proceeds from
long-term debt 196,940 - - - 196,940
Principal
repayments of
long-term debt (205,509) - - - (205,509)
Payments of
deferred
financing costs (7,965) - - - (7,965)
Patronage refunds
and other equity
paid in cash (1,675) - - - (1,675)
Net cash used in
financing
activities (18,209) - - - (18,209)
Net change in cash
and cash
equivalents 122,947 (138) 15 - 122,824
Cash and cash
equivalents,
beginning of
period 11,088 273 2,514 - 13,875
Cash and cash
equivalents,
end of period $134,035 135 2,529 - 136,699
Page 21
Nine Months (39 Weeks) Ended July 2, 2005
Statement of Parent Guarantor Non-Guarantor
Cash Flows: Only Subsidiaries Subsidiary Eliminations Consolidated
Net cash
provided
by (used in)
operating
activities $ 146,687 (1,345) (6,007) - 139,335
Cash flows from
investing
activities:
Acquisitions of
property, plant
and equipment (61,412) (5) - - (61,417)
Other 8,524 1,545 - - 10,069
Net cash provided
by (used in)
investing
activities (52,888) 1,540 - - (51,348)
Cash flows from
financing
activities:
Principal
payments of
long-term debt (95,736) - - - (95,736)
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 (66,280) - - - (66,280)
Net change in
cash and cash
equivalents 27,519 195 (6,007) - 21,707
Cash and cash
equivalents,
beginning of
period 166,430 313 8,546 - 175,289
Cash and cash
equivalents,
end of period $ 193,949 508 2,539 - 196,996
Page 22
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 August estimate for calendar 2005 broiler meat
production is 35.16 billion pounds, which is a 4.3% increase from
calendar 2004. This increase is principally due to heavier bird weights
and to a lesser extent, projected increased chick placements.
Our export sales, which we define as sales other than to customers in the
United States or Canada, were $95.8 million for the nine months ended
July 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 poultry 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. Increased worldwide corn and soybean
production favorably impacted feed ingredient costs in fiscal 2005.
Average feed ingredient costs for the Company were significantly lower in
the third quarter of fiscal 2005 as compared to the same quarter in
fiscal 2004, but were higher than the second quarter of fiscal 2005.
Page 23
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 Nine Months Ended Ended
June 26, July 2, June 26, July 2, June 26,
2004 2005 2004 2005 2004
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 78.6 83.0 82.9 85.9 84.0
Gross profit 21.4 17.0 17.1 14.1 16.0
Distribution, administrative
and general expenses 4.5 4.8 4.8 5.0 4.8
Other expenses .1 - .6 .1 .5
Net operating income 16.8 12.2 11.7 9.0 10.7
Interest expense (1.3) (.9) (1.2) (1.1) (1.6)
Other expenses, net
(including income taxes) (6.9) (3.9) (5.5) (2.8) (4.2)
Net income 8.6% 7.4% 5.0% 5.1% 4.9%
Net Sales
Gold Kist's net sales for the quarter ended July 2, 2005 decreased 5.2%
compared to the quarter ended June 26, 2004. For the nine months ended
July 2, 2005, net sales volume decreased 1.3% from $1.74 billion in the
comparable period last year to $1.72 billion in the current year. The
decrease in net sales was due primarily to declines of 13.9% and 7.6% in
average broiler sales prices for the quarter and nine months ended July
2, 2005, partially offset by approximately 9.6% and 6.7% increases in
broiler pounds produced and sold for the quarter and nine months ended
July 2, 2005, respectively. Increased supply was the principal factor
leading to the decline of prices in the three and nine-month periods
ended July 2, 2005 from the comparable periods in 2004. Average broiler
sales prices for the quarter ended July 2, 2005 were 1.8% higher than
prices for the quarter ended April 2, 2005.
Page 24
Our export sales of $38.2 million and $95.8 million for the three and
nine months ended July 2, 2005, respectively, were 34.1% and 18.5% higher
than the fiscal 2004 periods, due to increased shipments to Russia and
strong demand from other countries. Prices for dark meat products have
also strengthened in fiscal 2005. Our export sales to Russia increased
43.0% in pounds shipped and 23.9% in dollar value in the June 2005 year-
to-date period.
Net Operating Income
The Company had net operating income of $72.9 million and $154.6 million
for the three and nine months ended July 2, 2005, respectively, compared
to net operating income of $106.3 million and $203.9 million in the
comparable periods in 2004. The decrease in net operating income in the
June 2005 year-to-date period as compared to the June 2004 period was due
primarily to lower broiler selling prices and higher processing and other
production costs. Processing costs increased in total due to additional
pounds processed and on a per pound basis due to higher freight and
packaging costs. Total feed costs for the nine months ended July 2, 2005
were 9.8% lower than the nine months ended June 26, 2004 due to lower
feed ingredient costs partially offset by the additional pounds produced.
Year-to-date average prices for corn and soybean meal for the nine months
ended July 2, 2005 were 16.0% and 15.5% below the prior year-to-date
period in 2004, respectively. Total feed costs for the quarter ended
July 2, 2005 were 8.9% higher than the quarter ended April 2, 2005 due to
the additional pounds produced and increased soybean meal prices.
The 2.8% year-to-date increase in distribution, administrative and
general expenses was principally due to the noncash share-based
compensation expense of $8.9 million related to the stock grants and
awards issued to employees in October 2004 and January 2005.
Distribution, administrative and general expenses for the nine months
ended July 2, 2005 equaled 5.0% 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 $8.9 million for the nine months
ended July 2, 2005, distribution, administrative and general expenses
decreased by 7.7% 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 nine months ended July 2,
2005 with pension settlement expense of $10.3 million recognized in the
nine months ended June 26, 2004.
Page 25
Other Income (Expenses)
Other expenses, net totaled $2.8 million and $20.4 million for the three
and nine months ended July 2, 2005, respectively, compared to $49.9
million and $86.4 million of expense for the comparable periods in 2004.
Interest expense was $5.1 million and $18.4 million for the three and
nine months ended July 2, 2005, compared to $8.0 million and $21.7
million for the comparable periods in 2004, a decrease of 36.6% and
15.5%, respectively. Significantly lower average balances in the three
and nine months ended July 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 $57.4 million loss on investment for the nine months ended June 26,
2004 represented the write off of the Company's investment in Southern
States Cooperative, Inc.
Miscellaneous, net was income of $1.2 million and $4.2 million for the
three and nine months ended July 2, 2005, respectively, compared to a
loss of $(3.5) million and $(2.3) million for the comparable periods last
year. Income from a hog production joint venture was $2.7 million for
the nine months ended July 2, 2005 as compared to $0.9 million for the
nine months ended June 26, 2004 due to improved hog market prices brought
about by increased demand. Interest and dividend income was $1.1 million
and $3.8 million in the three and nine months ended July 2, 2005,
respectively, as compared to $0.5 million and $1.4 million for the three
and nine months ended June 26, 2004, respectively, principally due to
interest income from cash invested in short-term interest bearing
instruments.
Income Tax Expense
For the three and nine months ended July 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 36.7% and 34.9%,
respectively. Income tax expense for the three and nine months ended
July 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 nine-month period ended
July 2, 2005.
For the three and nine months ended June 26, 2004, the Company's combined
federal and state effective income tax rates were 4.1% and 25.6%,
respectively. The Company's effective tax rate is lower than the
federal
Page 26
and state statutory rates for the three and nine months ended June 26,
2004 due primarily to the recognition of an ordinary deduction for tax
purposes resulting from the abandonment of the SSC investment in June
2004. Previously, we had recorded an income tax valuation allowance for
the majority of the unrealized losses resulting from the write-downs of
the SSC investment.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is dependent upon cash flow from operations and external
sources of financing.
In March 2004, the Company issued $200.0 million aggregate principal
amount of senior notes. The interest rate on the senior notes is 10.25%,
with interest payable semi-annually on March 15 and September 15. The
senior notes 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 July 2, 2005, we had approximately $93.7
million available for borrowing under this facility. As of July 2, 2005,
approximately $31.3 million of letters of credit were 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 July 2, 2005, we were in
compliance with all applicable loan covenants under our senior notes and
credit facilities.
For the first nine months ended July 2, 2005, cash provided by operating
activities was $139.3 million compared to cash provided from operating
activities of $177.4 million for the nine months ended June 26, 2004.
The lower 2005 operating cash flow was due principally to decreased
operating income and the pension plan contributions in excess of benefit
plan expenses in 2005, partially offset by net cash used in 2004 and net
cash provided in 2005 by changes in operating assets and liabilities.
Page 27
The change in net cash used in investing activities was due principally
to the $61.4 million in capital expenditures for the nine months ended
July 2, 2005 as compared to $38.2 million for the same period in 2004.
We expect to spend a total of approximately $80.0 million in the fiscal
year ending October 1, 2005. This includes expenditures for expansion of
further processing capacity, technological advances in our poultry
production and processing operations and expanded chill pack capacity. 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.
Cash used in financing activities for the nine months ended July 2, 2005
was $66.3 million compared to $18.2 million for the comparable June 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
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 nine months ended July 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 July 2, 2005, the Company had cash
of $182.7 million invested in short term interest-bearing instruments.
Working capital and patrons' and other equity/stockholders' equity were
$356.1 million and $444.1 million, respectively, at July 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 was more
than offset by cash provided by operations resulting in the higher
working capital level at July 2, 2005. 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 year-to-date net income for fiscal
2005.
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 qualified pension plan contributions of
$15.0 million in August 2004, $8.0 million in November 2004 and $11.0
million in June 2005.
Page 28
We believe cash on hand, cash equivalents and cash expected to be
provided from operations, in addition to borrowings available under our
amended senior credit facility, will be sufficient to maintain cash flows
adequate for our operational objectives during fiscal 2005.
Important Considerations Related to Forward-Looking Statements
The statements contained in this report regarding our future financial
and operating performance and results, business strategy, market prices,
future commodity price risk management activities, plans and forecasts
and other statements that are not historical facts are forward-looking
statements, as defined in Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current assumptions, expectations
and projections about future events.
We use the words "may," "will," "expect," "anticipate," "estimate,"
"believe," "continue," "intend," "should," "would," "could," "plan,"
"budget" and other similar words to identify forward-looking statements.
You should read statements that contain these words carefully because
they discuss future expectations, contain projections of results of
operations or of our financial condition and/or state other "forward-
looking" information. These statements may also involve risks and
uncertainties that could cause our actual results of operations or
financial condition to materially differ from our expectations,
including, but not limited to:
- fluctuations in the cost and availability of raw materials, such as
feed ingredients;
- changes in the availability and relative costs of labor and contract
growers;
- market conditions for finished products (including 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.
Page 29
Any forward-looking statements in this report are based on certain
assumptions and analysis made by us in light of our experience and
perception of historical trends, current conditions, expected future
developments and other factors that we believe are appropriate under the
current circumstances. However, events may occur in the future that we
are unable to accurately predict, or over which we have no control.
Forward-looking statements are not a guarantee of future performance and
actual results or developments may differ materially from expectations.
You are therefore cautioned not to place undue reliance on such forward-
looking statements. We do not intend to update any forward-looking
statements contained in this document. When considering our forward-
looking statements, also keep in mind the risk factors and other
cautionary statements in this report and in other reports that we file
with the Securities and Exchange Commission.
Contractual Obligations
Obligations under long-term debt, non-cancelable operating leases, feed
ingredient purchase commitments and construction contracts at July 2,
2005 are as follows (in millions):
Payments Due by Period
Less than After
Total 1 year 1-3 years 3-5 years 5 years
Debt obligations:
Principal payments (a) $207.7 10.1 22.8 21.8 153.0
Interest payments (b) 153.1 20.5 56.3 31.7 44.6
Operating leases (c) 50.9 14.8 20.6 13.5 2.0
Feed ingredient purchase
commitments (d) 90.1 90.1 - - -
Construction contracts (e) 41.4 41.4 - - -
Total (F) $543.2 176.9 99.7 67.0 199.6
(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 nine months ended July 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 July 2, 2005
for the month of delivery.
(e) Represents unexpended amounts on construction and related contracts.
(f) 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, the
contracts contemplate 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
Page 30
determined by relative performance and other factors. Grower payments
have not been included in the contractual obligations table due to the
inherent uncertainty of the future amounts.
Critical Accounting Policies
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 nine months ended July 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
Statement clarifies how to account for abnormal amounts of idle facility
expense, freight, handling costs and spoilage. Companies will no longer
be allowed to capitalize such "abnormal amounts" in inventory. In
addition, fixed overhead allocated to inventories should be based on
"normal capacity." 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.
Page 31
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, 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.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3." This Statement applies to all voluntary changes in accounting
principle and requires retrospective application to previously issued
financial statements as if that principle had always been used, unless it
is impracticable to do so. The requirements are effective for accounting
changes made in fiscal years beginning after December 15, 2005.
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 nine months ended July 2, 2005.
Fluctuations in commodity prices of feed ingredients materially affect
our earnings.
Page 32
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
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 38% of our net
sales during the quarter ended July 2, 2005 and during such period,
approximately 12% 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
Page 33
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 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
Page 34
agreements related to our disposition of certain properties require that
we indemnify the buyer of such properties with regard to any associated
environmental liabilities. We could incur material costs or liabilities
in connection with claims related to any of the foregoing. The discovery
of presently unknown environmental conditions, changes in environmental,
health, safety and other laws and regulations, enforcement of existing or
new laws and regulations and other unanticipated events could give rise
to expenditures and liabilities, including fines or penalties, that could
have a material adverse effect on our business, operating results and
financial condition.
If our products become contaminated, we may be subject to product
liability claims and product recalls.
Our products may be subject to contamination by disease producing
organisms, or pathogens, such as Listeria monocytogenes, Salmonella and
generic E. coli. These pathogens are found generally in the environment
and, therefore, there is a risk that they, as a result of food
processing, could be present in our processed products. These pathogens
can also be introduced to our products as a result of improper handling
at the further processing, 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.
Page 35
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 could substantially harm our business and results of
operations.
Increased costs of transportation would negatively affect our
profitability.
Our transportation costs are a material portion of the cost of our
products. We primarily ship our products and receive our inputs via truck
and rail and rely on third party transportation companies for the
delivery of most of our products and inputs. The costs associated with
the transportation of our products and inputs fluctuate with the price of
fuel, the costs to our transportation providers of labor and the capacity
of our transportation sources. Increases in costs of transportation would
negatively affect our profitability.
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.
Page 36
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 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.
The Public Health Security and Bioterrorism Preparedness and Response Act
of 2002 could increase our costs of doing business.
The Public Health Security and Bioterrorism Preparedness and Response Act
of 2002, which we refer to as the Bioterrorism Act, includes a number of
provisions designed to help guard against the threat of bioterrorism,
including new authority for the Secretary of Health and Human Services to
take action to protect the nation's food supply against intentional
contamination. The U.S. Food and Drug Administration, or FDA, is
responsible for developing and implementing these food safety measures.
The FDA has been in the process of issuing new rules, and it is difficult
for us to predict what impact they might have on our business.
Compliance with these rules may increase our costs of doing business by
increasing the amounts that we spend on plant security and product
safety. If we are unable to pass these higher costs on to our customers,
our results of operations and financial condition may be adversely
affected.
Page 37
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 July 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 $90.1 million at July 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 July 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 $50.0 million to $60.0 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 38
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
are effective in providing reasonable assurance 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.
We do not expect that our disclosure controls and procedures will prevent
all errors and all fraud. A system of controls and procedures, no matter
how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the system are met. Because of
the limitations in all such systems, no evaluation can provide absolute
assurance that all control issues and instances of fraud, if any, within
the Company have been detected. Furthermore, the design of any system of
controls and procedures is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential
future conditions, regardless of how unlikely. Because of these inherent
limitations in a cost-effective system of controls and procedures,
misstatements or omissions due to error or fraud may occur and not be
detected.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Legal Proceedings terminated:
Ronald Hughes Gaston v. Gold Kist Inc. On February 18, 2004, the
Plaintiff, who was terminated by Gold Kist as a hatching egg producer,
filed a purported class action lawsuit against us in the U.S. District
Court for the Northern District of Alabama (Case number CV-04-J-0326-NW).
Plaintiff also named four additional chicken-processing firms as
defendants. The Plaintiff asserted that the defendants conspired to
prevent competition for production contracts and sought to represent a
putative class of all contract farmers and sellers of hatching eggs and
live broilers who produced hatching eggs or
Page 39
live broilers in the United States since February 23, 1998. The
plaintiff dismissed the action in July 2005.
Significant developments in Legal Proceedings:
Cody, et al v. Gold Kist et al. Four female employees of the Company's
Corporate Office Information Services Department filed a sex
discrimination suit against Gold Kist in the United States District Court
for the Northern District of Georgia asserting gender based claims about
employment and promotion decisions in the Corporate I/S Department. The
four complainants sought class certification for their claims of gender
discrimination, unspecified monetary damages and injunctive relief. The
U.S. District Court, in an Order entered June 13, 2005, denied the motion
of the plaintiffs to certify the litigation as a class action. The
Court's ruling, for which the plaintiffs did not seek an interlocutory
appeal, means that the litigation will not proceed as a class action and
will be litigated as individual claims of the four named plaintiffs. We
continue to intend to defend the litigation vigorously.
Page 40
Item 6. Exhibits.
Exhibits
Designation of Exhibit
in This Report Description of Exhibit
10.1.7 Eighth Amendment Dated as of
June 15, 2005, to Second
Consolidated, Amended and
Restated Note Agreement with
the Gateway Recovery Trust and
the Prudential Insurance
Company of America
10.2.4 Fourth Amendment Dated as of
June 15, 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
10.24.4 Sixth Amendment Dated as of
June 15, 2005, to First Amended
and Restated Credit Agreement
with CoBank, ACB
10.26 Amendment No. 1 to Gold Kist Inc.
Non-Employee Directors Executive
Compensation Plan
10.27 Summary of Named Executive
Officer Compensation Arrangements
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 41
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 August 16, 2005
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date August 16, 2005
Stephen O. West
Chief Financial Officer, Vice President
(Principal Financial Officer)
Page 41
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 August 16, 2005 /s/ John Bekkers
John Bekkers
Chief Executive Officer
(Principal Executive Officer)
Date August 16, 2005 /s/ Stephen O. West
Stephen O. West
Chief Financial Officer, Vice President
(Principal Financial Officer)