UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the quarterly period ended June 27,
2009
OR
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from to
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Commission File number 1-9273
PILGRIM’S PRIDE
CORPORATION
(Exact name of registrant as specified
in its charter)
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Delaware
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75-1285071
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(State or other jurisdiction
of
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(I.R.S.
Employer
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incorporation or
organization)
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Identification
No.)
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4845 US Hwy 271 N, Pittsburg, TX
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75686-0093
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(Address of principal executive
offices)
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(Zip
code)
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Registrant’s telephone number,
including area code: (903)
434-1000
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Not Applicable
(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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “accelerated filer,”
“large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
Accelerated
Filer x
Accelerated
Filer o
Non-accelerated
Filer o (Do not check if a smaller reporting
company)
Smaller reporting
company
o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x
Number of shares outstanding of the
issuer’s common stock, as of July 31, 2009, was 74,055,733.
2
Pilgrim's Pride
Corporation
June 27,
2009
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PILGRIM’S
PRIDE CORPORATION AND SUBSIDIARIES
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PART I. FINANCIAL INFORMATION
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Item
1.
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Financial Statements (Unaudited)
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June
27, 2009 and September 27, 2008
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Three
months and nine months ended June 27, 2009 and June 28,
2008
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Nine
months ended June 27, 2009 and June 28, 2008
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Notes to Consolidated Financial Statements as of June
27, 2009
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Item
2.
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Item
3.
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Item
4.
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PART II. OTHER INFORMATION
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Item
1.
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Item
1A.
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Item
5.
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Item
6.
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PART
I. FINANCIAL INFORMATION
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||||||||
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ITEM
1. FINANCIAL STATEMENTS
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PILGRIM’S
PRIDE CORPORATION
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||||||||
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DEBTOR
AND DEBTOR-IN-POSSESSION
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||||||||
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(Unaudited)
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||||||||
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June
27,
2009
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September
27,
2008
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|||||||
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Assets:
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(In
thousands)
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|||||||
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Cash
and cash equivalents
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$ | 101,179 | $ | 61,553 | ||||
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Restricted
cash and cash equivalents
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6,677 | — | ||||||
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Investment
in available-for-sale securities
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5,902 | 10,439 | ||||||
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Trade
accounts and other receivables, less allowance for doubtful
accounts
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291,207 | 144,156 | ||||||
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Inventories
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798,846 | 1,036,163 | ||||||
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Income
taxes receivable
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23,645 | 21,656 | ||||||
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Current
deferred income taxes
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18,297 | 54,312 | ||||||
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Prepaid
expenses and other current assets
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45,326 | 122,441 | ||||||
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Total
current assets
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1,291,079 | 1,450,720 | ||||||
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Investment
in available-for-sale securities
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60,181 | 55,854 | ||||||
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Other
assets
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88,663 | 51,768 | ||||||
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Identified
intangible assets, net
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59,725 | 67,363 | ||||||
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Property,
plant and equipment, net
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1,531,582 | 1,673,004 | ||||||
| $ | 3,031,230 | $ | 3,298,709 | |||||
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Liabilities
and stockholders’ equity:
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Liabilities
not subject to compromise:
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Accounts
payable
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171,578 | 378,887 | ||||||
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Accrued
expenses
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303,052 | 448,823 | ||||||
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Current
maturities of long-term debt
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— | 1,874,469 | ||||||
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Liabilities
of discontinued business
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1,470 | 10,783 | ||||||
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Total
current liabilities
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476,100 | 2,712,962 | ||||||
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Long-term
debt, less current maturities
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42,133 | 67,514 | ||||||
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Deferred
income taxes
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40,826 | 80,755 | ||||||
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Other
long-term liabilities
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89,952 | 85,737 | ||||||
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Total
liabilities not subject to compromise
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649,011 | 2,946,968 | ||||||
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Liabilities
subject to compromise
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2,264,932 | — | ||||||
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Common
stock
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740 | 740 | ||||||
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Additional
paid-in capital
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646,824 | 646,922 | ||||||
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Accumulated
deficit
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(551,602 | ) | (317,082 | ) | ||||
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Accumulated
other comprehensive income
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21,325 | 21,161 | ||||||
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Total
stockholders’ equity
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117,287 | 351,741 | ||||||
| $ | 3,031,230 | $ | 3,298,709 | |||||
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The accompanying notes are an
integral part of these Consolidated Financial
Statements.
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PILGRIM’S
PRIDE CORPORATION AND SUBSIDIARIES
DEBTOR
AND DEBTOR-IN-POSSESSION
(Unaudited)
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||||||||||||||||
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Three
Months Ended
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Nine
Months Ended
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June
27,
2009
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June
28,
2008
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June
27,
2009
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June
28,
2008
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(In
thousands, except share and per share data)
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||||||||||||||||
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Net
sales
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$ | 1,776,813 | $ | 2,207,476 | $ | 5,351,906 | $ | 6,355,623 | ||||||||
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Cost
of sales
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1,593,399 | 2,154,265 | 5,153,646 | 6,220,688 | ||||||||||||
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Asset
impairment
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— | — | — | 12,022 | ||||||||||||
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Gross
profit
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183,414 | 53,211 | 198,260 | 122,913 | ||||||||||||
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Selling,
general and administrative expenses
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74,818 | 92,291 | 245,611 | 299,283 | ||||||||||||
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Restructuring
items, net
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— | 3,451 | 1,987 | 9,120 | ||||||||||||
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Total
costs and expenses
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1,668,217 | 2,250,007 | 5,401,244 | 6,541,113 | ||||||||||||
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Operating
income (loss)
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108,596 | (42,531 | ) | (49,338 | ) | (185,490 | ) | |||||||||
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Other
expense (income):
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Interest
expense
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38,843 | 35,500 | 124,855 | 99,212 | ||||||||||||
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Interest
income
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(488 | ) | (646 | ) | (3,843 | ) | (1,600 | ) | ||||||||
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Miscellaneous,
net
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(332 | ) | (590 | ) | (4,008 | ) | (4,614 | ) | ||||||||
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Total
other expense, net
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38,023 | 34,264 | 117,004 | 92,998 | ||||||||||||
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Income
(loss) from continuing operations before reorganization items and income
taxes
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70,573 | (76,795 | ) | (166,342 | ) | (278,488 | ) | |||||||||
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Reorganization
items
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16,779 | — | 65,383 | — | ||||||||||||
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Income
(loss) from continuing operations before income taxes
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53,794 | (76,795 | ) | (231,725 | ) | (278,488 | ) | |||||||||
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Income
tax expense (benefit)
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555 | (28,451 | ) | 3,180 | (85,477 | ) | ||||||||||
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Income
(loss) from continuing operations
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53,239 | (48,344 | ) | (234,905 | ) | (193,011 | ) | |||||||||
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Income
(loss) from operation of discontinued business, net of tax
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— | (4,437 | ) | 599 | (4,450 | ) | ||||||||||
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Gain
on sale of discontinued business,
net
of tax
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— | — | — | 903 | ||||||||||||
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Net
income (loss)
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$ | 53,239 | $ | (52,781 | ) | $ | (234,306 | ) | $ | (196,558 | ) | |||||
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Income
(loss) per common share—basic and diluted:
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Continuing
operations
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$ | 0.72 | $ | (0.69 | ) | $ | (3.17 | ) | $ | (2.85 | ) | |||||
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Discontinued
business
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— | (0.06 | ) | 0.01 | (0.05 | ) | ||||||||||
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Net
income (loss)
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$ | 0.72 | $ | (0.75 | ) | $ | (3.16 | ) | $ | (2.90 | ) | |||||
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Dividends
declared per common share
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$ | — | $ | 0.0225 | $ | — | $ | 0.0675 | ||||||||
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Weighted
average shares outstanding
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74,055,733 | 70,182,107 | 74,055,733 | 67,764,524 | ||||||||||||
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The accompanying notes are an
integral part of these Consolidated Financial
Statements.
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PILGRIM’S
PRIDE CORPORATION AND SUBSIDIARIES
DEBTOR
AND DEBTOR-IN-POSSESSION
(Unaudited)
|
||||||||
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Nine
Months Ended
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||||||||
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June
27,
2009
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June
28,
2008
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(In
thousands)
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||||||||
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Cash
flows from operating activities:
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Net
loss
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$ | (234,306 | ) | $ | (196,558 | ) | ||
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Adjustments
to reconcile net loss to cash provided by operating
activities:
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Depreciation
and amortization
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177,832 | 176,802 | ||||||
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Asset
impairment
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5,409 | 12,022 | ||||||
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Gain
on property disposals
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(20,893 | ) | (4,141 | ) | ||||
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Deferred
income tax benefit
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— | (87,489 | ) | |||||
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Changes
in operating assets and liabilities:
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||||||||
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Accounts
and other receivables
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(121,375 | ) | 12,106 | |||||
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Inventories
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250,905 | (175,458 | ) | |||||
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Prepaid
expenses and other current assets
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24,131 | (30,196 | ) | |||||
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Accounts
payable and accrued expenses
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(133,721 | ) | (37,661 | ) | ||||
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Income
taxes receivable, net
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898 | (5,089 | ) | |||||
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Other
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(1,889 | ) | (16,337 | ) | ||||
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Cash
used in operating activities
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(53,009 | ) | (351,999 | ) | ||||
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Cash
flows for investing activities:
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||||||||
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Acquisitions
of property, plant and equipment
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(65,605 | ) | (97,641 | ) | ||||
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Purchases
of investment securities
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(16,088 | ) | (25,491 | ) | ||||
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Proceeds
from sale or maturity of investment securities
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12,244 | 18,770 | ||||||
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Change
in restricted cash and cash equivalents
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(12,931 | ) | — | |||||
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Proceeds
from property disposals
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78,225 | 19,217 | ||||||
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Cash
used in investing activities
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(4,155 | ) | (85,145 | ) | ||||
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Cash
flows from financing activities:
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||||||||
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Proceeds
from short-term notes payable
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430,817 | — | ||||||
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Payments
on short-term notes payable
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(430,817 | ) | — | |||||
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Proceeds
from long-term debt
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831,250 | 1,217,020 | ||||||
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Payments
on long-term debt
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(719,740 | ) | (1,016,983 | ) | ||||
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Proceeds
from sale of common stock
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— | 177,220 | ||||||
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Change
in outstanding cash management obligations
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(11,172 | ) | 57,678 | |||||
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Cash
dividends paid
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— | (4,661 | ) | |||||
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Other
|
(808 | ) | (5,457 | ) | ||||
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Cash
provided by financing activities
|
99,530 | 424,817 | ||||||
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Effect
of exchange rate changes on cash and cash equivalents
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(2,740 | ) | 230 | |||||
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Increase
(decrease) in cash and cash equivalents
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39,626 | (12,097 | ) | |||||
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Cash
and cash equivalents, beginning of period
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61,553 | 66,168 | ||||||
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Cash
and cash equivalents, end of period
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$ | 101,179 | $ | 54,071 | ||||
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The accompanying notes are an
integral part of these Consolidated Financial
Statements.
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||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A—CHAPTER 11
PROCEEDINGS
Chapter
11 Bankruptcy Filings
On
December 1, 2008 (the "Petition Date"), Pilgrim’s Pride Corporation and certain
of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for
relief under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Northern
District of Texas, Fort Worth Division (the "Bankruptcy Court"). The cases are
being jointly administered under Case No. 08-45664. The Company’s operations in
Mexico and certain operations in the United States (“US”) were not included in
the filing (the “Non-filing Subsidiaries”) and will continue to operate outside
of the Chapter 11 process.
Subject
to certain exceptions under the Bankruptcy Code, the Debtors’ Chapter 11 filing
automatically enjoined, or stayed, the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to the Petition
Date. Thus, for example, most creditor actions to obtain possession of property
from the Debtors, or to create, perfect or enforce any lien against the property
of the Debtors, or to collect on monies owed or otherwise exercise rights or
remedies with respect to a pre-petition claim are enjoined unless and until the
Bankruptcy Court lifts the automatic stay.
The
filing of the Chapter 11 petitions constituted an event of default under
certain of our debt obligations, and those debt obligations became automatically
and immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law. As a result, the accompanying Consolidated Balance
Sheet as of September 27, 2008 includes reclassifications of
$1,872.1 million to reflect as current certain long-term debt under the
Company’s credit facilities that, absent the stay, would have become
automatically and immediately due and payable. Because of the bankruptcy
petition, most of the Company’s pre-petition long-term debt is included in
liabilities subject to compromise at June 27, 2009. The Company classifies
pre-petition liabilities subject to compromise as a long-term liability because
management does not believe the Company will use existing current assets or
create additional current liabilities to fund these obligations.
Chapter
11 Process
The
Debtors are currently operating as "debtors-in-possession"
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
In general, as debtors-in-possession, we are authorized under Chapter 11 to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the prior approval of the
Bankruptcy Court.
On
December 2, 2008, the Bankruptcy
Court granted interim approval authorizing the Company and certain of its
subsidiaries consisting of PPC Transportation Company, PFS Distribution
Company, PPC Marketing, Ltd., and Pilgrim's Pride Corporation of West Virginia,
Inc. (collectively, the "US Subsidiaries"), and To-Ricos, Ltd. and To-Ricos
Distribution, Ltd. (collectively with the US Subsidiaries, the "Subsidiaries")
to enter into a Post-Petition Credit Agreement (the
"Initial DIP Credit Agreement") among the Company, as borrower, the US
Subsidiaries, as guarantors, Bank of Montreal, as agent (the "DIP Agent"), and
the lenders party thereto. On December 2, 2008, the Company, the US Subsidiaries
and the other parties entered into the Initial DIP Credit Agreement, subject to
final approval of the Bankruptcy Court. On December 30, 2008, the Bankruptcy Court granted
final approval authorizing the Company and the Subsidiaries to enter into an
Amended and Restated Post-Petition Credit Agreement dated December 31, 2008, as amended
(the "DIP Credit
Agreement"), among the Company, as borrower, the
Subsidiaries, as guarantors, the DIP Agent, and the lenders party
thereto.
The DIP Credit Agreement provides for an
aggregate commitment of up to $450 million, which permits borrowings on a
revolving basis. The commitment includes a $25 million sub-limit for swingline
loans and a $20 million sub-limit for standby letters of credit.
Outstanding borrowings under the DIP Credit Agreement will bear interest
at a per annum rate equal to 8.0% plus the greatest of (i) the prime rate as
established by the DIP Agent from time to time, (ii) the average federal
funds rate plus 0.5%, or (iii) the LIBOR rate plus 1.0%, payable
monthly. The weighted
average interest rates for the three and nine months ended June 27, 2009 were
11.25% and 11.33%, respectively. The loans under the Initial DIP Credit
Agreement were used to repurchase all receivables sold under the Company's
Amended and Restated Receivables Purchase Agreement dated September 26,
2008, as amended (the
“RPA”). Loans under the DIP
Credit Agreement may be used to fund the working capital requirements of the Company and
its subsidiaries according
to a budget as approved by the required lenders under the DIP Credit Agreement.
For additional information on the RPA, see Note G—Trade Accounts and Other
Receivables.
Actual borrowings by the Company under
the DIP Credit Agreement are subject to a borrowing base, which is a formula
based on certain eligible inventory and eligible receivables. The borrowing base
formula is reduced by (i) pre-petition obligations under the Fourth Amended and
Restated Secured Credit Agreement dated as of February 8, 2007, among the
Company and certain of its subsidiaries, Bank of Montreal, as administrative
agent, and the lenders parties thereto, as amended, (ii) administrative and
professional expenses incurred in connection with the bankruptcy proceedings,
and (iii) the amount owed by the Company and the Subsidiaries to any person on
account of the purchase price of agricultural products or services (including
poultry and livestock) if that person is entitled to any grower's or producer's
lien or other security arrangement. The borrowing base is also limited to 2.22
times the formula amount of total eligible receivables. The DIP Credit Agreement
provides that the Company may not incur capital expenditures in excess of $150
million. The Company must also meet minimum monthly levels of EBITDAR. Under the
DIP Credit Agreement, "EBITDAR" means, generally, net income before interest,
taxes, depreciation, amortization, writedowns of goodwill and other intangibles,
asset impairment charges,
certain closure costs and
other specified costs,
charges, losses and gains.
The DIP Credit Agreement also provides for certain other covenants, various
representations and warranties, and events of default that are customary for
transactions of this nature. As of June 27, 2009, the applicable borrowing base
and the amount available
for borrowings under the
DIP Credit Agreement were both $348.6 million as there were no outstanding borrowings
under the Credit Agreement.
The principal amount of outstanding
loans under the DIP Credit Agreement, together with accrued and unpaid interest
thereon, are payable in full at maturity on December 1, 2009, subject to
extension for an additional six months with the approval of all lenders
thereunder. All obligations under the DIP Credit Agreement are unconditionally
guaranteed by the Subsidiaries and are secured by a first priority priming lien
on substantially all of the assets of the Company and the Subsidiaries, subject
to specified permitted liens in the DIP Credit
Agreement.
The DIP Credit Agreement allows the Company to provide additional advances to the Non-filing Subsidiaries of up to
approximately $25 million. Management believes that all of the Non-filing
Subsidiaries, including
the Company’s Mexican subsidiaries, will be able to operate within this
limitation.
On July
15, 2009, the Company entered into a Third Amendment (the "Amendment") to the DIP
Credit Agreement. The Amendment is subject to the approval
of the Bankruptcy Court. The Amendment amends the DIP
Credit Agreement to allow the Company to invest in certain interest bearing
accounts and government securities, subject to certain conditions. In connection
with the Amendment, the Company also agreed to reduce the total available
commitments under the DIP Credit Agreement from $450 million to $350 million.
The Amendment also allows the Company to enter into certain ordinary course
hedging contracts relating to feed ingredients used by the Company and its
subsidiaries in their businesses. The Company may only enter into hedging
contracts which satisfy the following conditions, among other restrictions: (a)
the contract is traded on a recognized commodity exchange; (b) the contract
expiration date is no later than March 21, 2010, or a later date if agreed to by
the DIP Agent; (c) the Company and its subsidiaries do not have open forward,
futures or options positions in the subject commodity, other than commodity
hedging arrangements entered into at the request or direction of a customer, in
excess of 50% of the Company's other expected usage of such commodity for a
specified period; (d) the contract is not entered into for speculative purposes;
and (e) the Company will not have more than $100 million in margin requirements
with respect to all such non-customer hedging contracts.
For additional information on the DIP
Credit Agreement, see Note
K—Short-Term Notes Payable and Long-Term Debt.
The Bankruptcy Court has approved
payment of certain of the Debtors’ pre-petition obligations, including, among
other things, employee wages, salaries and benefits, and the Bankruptcy Court
has approved the Company's payment of vendors and other providers in the
ordinary course for goods and services ordered pre-petition but received from and after the Petition
Date and other business-related payments necessary to maintain the operation of
our businesses. The Debtors have retained, subject to Bankruptcy Court approval, legal and
financial professionals to advise the Debtors on the bankruptcy proceedings and
certain other "ordinary course" professionals. From time to time, the Debtors
may seek Bankruptcy Court approval for the retention of additional
professionals.
Shortly
after the Petition Date, the Debtors began notifying all known current or
potential creditors of the Chapter 11 filing. Subject to certain exceptions
under the Bankruptcy Code, the Debtors’ Chapter 11 filing automatically
enjoined, or stayed, the continuation of any judicial or administrative
proceedings or other actions against the Debtors or their property to recover
on, collect or secure a claim arising prior to the Petition Date. Thus, for
example, most creditor actions to obtain possession of property from the
Debtors, or to create, perfect or enforce any lien against the property of the
Debtors, or to collect on monies owed or otherwise exercise rights or remedies
with respect to a pre-petition claim are enjoined unless and until the
Bankruptcy Court lifts the automatic stay. Vendors are being paid for goods
furnished and services provided after the Petition Date in the ordinary course
of business.
As
required by the Bankruptcy Code, the United States Trustee for the Northern
District of Texas (the "US Trustee") appointed an official committee of
unsecured creditors (the "Creditors’ Committee"). The Creditors’ Committee and
its legal representatives have a right to be heard on all matters that come
before the Bankruptcy Court with respect to the Debtors. In addition, on
April 30, 2009, the Bankruptcy Court ordered the US Trustee to appoint an
official committee of equity holders (the "Equity Committee") to represent the
interests of Pilgrim's Pride's equity holders in the Debtors' bankruptcy cases.
There can be no assurance that the Creditors’ Committee or the Equity Committee
will support the Debtors’ positions on matters to be presented to the Bankruptcy
Court in the future or on any plan of reorganization, once proposed.
Disagreements between the Debtors and the Creditors’ Committee or the Equity
Committee could protract the Chapter 11 proceedings, negatively impact the
Debtors’ ability to operate and delay the Debtors’ emergence from the Chapter 11
proceedings.
Under
Section 365 and other relevant sections of the Bankruptcy Code, we may assume,
assume and assign, or reject certain executory contracts and unexpired leases,
including, without limitation, leases of real property and equipment, subject to
the approval of the Bankruptcy Court and certain other conditions. Any
description of an executory contract or unexpired lease in this report,
including where applicable our express termination rights or a quantification of
our obligations, must be read in conjunction with, and is qualified by, any
overriding rejection rights we have under Section 365 of the Bankruptcy
Code.
In order
to successfully exit Chapter 11, the Debtors will need to propose and obtain
confirmation by the Bankruptcy Court of a plan of reorganization that satisfies
the requirements of the Bankruptcy Code. A plan of reorganization would, among
other things, resolve the Debtors’ pre-petition obligations, set forth the
revised capital structure of the newly reorganized entity and provide for
corporate governance subsequent to exit from bankruptcy.
On March
26, 2009, the Bankruptcy Court issued an order extending the period during which
the Debtors have the exclusive right to file a plan of reorganization. Pursuant
to this order, the Debtors have the exclusive right, through September 30, 2009,
to file a plan for reorganization, and if we file a plan by that date, we will
have until November 30, 2009 to obtain the necessary acceptances of our plan. We
may file one or more motions to request further extensions of these time
periods. If the Debtors’ exclusivity period lapses, any party in interest would
be able to file a plan of reorganization for any of the Debtors. In addition to
being voted on by holders of impaired claims and equity interests, a plan of
reorganization must satisfy certain requirements of the Bankruptcy Code and must
be approved, or confirmed, by the Bankruptcy Court in order to become
effective.
The
timing of filing a plan of reorganization by us will depend on the timing and
outcome of numerous other ongoing matters in the Chapter 11 proceedings. There
can be no assurance at this time that a plan of reorganization will be confirmed
by the Bankruptcy Court or that any such plan will be implemented
successfully.
We have
incurred and will continue to incur significant costs associated with our
reorganization. The amount of these costs, which are being expensed as incurred
commencing in November 2008, are expected to significantly affect our results of
operations.
Under the
priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, pre-petition liabilities and post-petition liabilities must generally
be satisfied in full before stockholders are entitled to receive any
distribution or retain any property under a plan of reorganization. The ultimate
recovery to creditors and/or stockholders, if any, will not be determined until
confirmation of a plan or plans of reorganization. No assurance can be given as
to what values, if any, will be ascribed in the Chapter 11 cases to each of
these constituencies or what types or amounts of distributions, if any, they
would receive. A plan of reorganization could result in holders of our
liabilities and/or securities, including our common stock, receiving no
distribution on account of their interests and cancellation of their holdings.
Because of such possibilities, the value of our liabilities and securities,
including our common stock, is highly speculative. Appropriate caution should be
exercised with respect to existing and future investments in any of the
liabilities and/or securities of the Debtors. At this time there is no assurance
we will be able to restructure as a going concern or successfully propose or
implement a plan of reorganization.
On
February 11, 2009, the Bankruptcy Court issued an order granting the Company's
motion to impose certain restrictions on trading in shares of the Company's
common stock in order to preserve valuable tax attributes. This order
established notification procedures and certain restrictions on transfers of
common stock or options to purchase the common stock of the Company. The trading
restrictions apply retroactively to January 17, 2009, the date the motion was
filed, to investors beneficially owning at least 4.75% of the outstanding shares
of common stock of the Company. For these purposes, beneficial ownership of
stock is determined in accordance with special US tax rules that, among other
things, apply constructive ownership concepts and treat holders acting together
as a single holder. In addition, in the future, the Company may request that the
Bankruptcy Court impose certain trading restrictions on certain debt of, and
claims against, the Company.
Going
Concern Matters
The
accompanying Consolidated Financial Statements have been prepared assuming that
the Company will continue as a going concern. However, there is substantial
doubt about the Company’s ability to continue as a going concern based on the
factors previously discussed. The Consolidated Financial Statements do not
include any adjustments related to the recoverability and classification of
recorded assets or the amounts and classification of liabilities or any other
adjustments that might be necessary should the Company be unable to continue as
a going concern. The Company’s ability to continue as a going concern is
dependent upon, among other things, the ability of the Company to return to
historic levels of profitability and, in the near term, restructure its
obligations in a manner that allows it to obtain confirmation of a plan of
reorganization by the Bankruptcy Court.
Management
is addressing the Company’s ability to return to profitability by conducting
profitability reviews at certain facilities in an effort to reduce
inefficiencies and manufacturing costs. During the first nine months of 2009,
the Company closed seven processing complexes, closed two distribution centers
and reduced or consolidated production at various other facilities throughout
the US. These actions will ultimately result in a reduction of approximately
6,390 production positions and 440 non-production positions.
On
November 7, 2008, the Board of
Directors appointed a Chief Restructuring Officer
(“CRO”) for the Company. The appointment of a CRO was a
requirement included in the waivers received from the Company’s lenders on
October 27, 2008. The CRO assists the Company with cost
reduction initiatives, restructuring plans development and long-term liquidity
improvement. The CRO reports to the Board of Directors of the
Company.
In order
to emerge from bankruptcy, the Company will need to obtain alternative financing
to replace the DIP Credit Agreement and to satisfy the secured claims of its
pre-bankruptcy creditors.
Condensed
Combined Financial Information of Debtors
The
following unaudited condensed combined financial information is presented for
the Debtors as of June 27, 2009 or for the nine months then ended (in
thousands):
|
Balance
Sheet Information:
|
||||
|
Current
assets
|
$ | 1,323,810 | ||
|
Identified
intangible assets
|
59,725 | |||
|
Investment
in subsidiaries
|
325,856 | |||
|
Property,
plant and equipment, net
|
1,405,151 | |||
|
Other
assets
|
94,223 | |||
|
Total
assets
|
$ | 3,208,765 | ||
|
Current
liabilities
|
$ | 360,630 | ||
|
Long-term
liabilities
|
292,294 | |||
|
Liabilities
not subject to compromise
|
652,924 | |||
|
Liabilities
subject to compromise
|
2,264,932 | |||
|
Total
liabilities
|
2,917,856 | |||
|
Stockholders’
equity
|
290,909 | |||
|
Total
liabilities and stockholders’ equity
|
$ | 3,208,765 | ||
|
Statement
of Operations Information:
|
||||
|
Net
sales
|
$ | 4,864,864 | ||
|
Gross
profit
|
147,710 | |||
|
Operating
loss
|
(80,238 | ) | ||
|
Reorganization
items
|
62,441 | |||
|
Income
from equity affiliates
|
20,320 | |||
|
Net
loss
|
(234,306 | ) | ||
|
Statement
of Cash Flows Information:
|
||||
|
Cash
used in operating activities
|
$ | (101,943 | ) | |
|
Cash
used in investing activities
|
(19,320 | ) | ||
|
Cash
provided by financing activities
|
145,745 | |||
NOTE
B—BASIS OF PRESENTATION
Consolidated
Financial Statements
The
accompanying unaudited consolidated financial statements of Pilgrim’s Pride
Corporation (referred to herein as “Pilgrim’s,” “the Company,” “we,” “us,” “our”
or similar terms) have been prepared in accordance with accounting principles
generally accepted in the US for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the US Securities
and Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the US for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal and recurring adjustments unless otherwise disclosed)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended June 27, 2009 are not necessarily
indicative of the results that may be expected for the year ending September 26,
2009. For further information, refer to the consolidated financial statements
and footnotes thereto included in Pilgrim’s Annual Report on Form 10-K for the
year ended September 27, 2008.
The
Company operates on the basis of a 52/53-week fiscal year that ends on the
Saturday closest to September 30. The reader should assume any reference we make
to a particular year (for example, 2009) in this report applies to our fiscal
year and not the calendar year.
As a
result of sustained losses and our Chapter 11 proceedings, the realization of
assets and satisfaction of liabilities, without substantial adjustments and/or
changes in ownership, are subject to uncertainty. Given this uncertainty, there
is substantial doubt about our ability to continue as a going
concern.
The accompanying Consolidated Financial
Statements do not purport to reflect or provide for the consequences of our
Chapter 11 proceedings. In particular, the financial statements do not
purport to show (i) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities;
(ii) as to pre-petition liabilities,
the amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (iii) as to shareowners’ equity
accounts, the effect of any changes that may be made in our capitalization; or
(iv) as to operations, the effect of
any changes that may be made to our business.
In accordance with accounting principles generally accepted
in the United
States (“GAAP”), we have applied American Institute of
Certified Public Accountants’ Statement of Position (“SOP”) 90-7, Financial Reporting
by Entities in Reorganization under the Bankruptcy Code, in preparing the Consolidated
Financial Statements. SOP 90-7 requires that the financial statements, for
periods subsequent to the Chapter 11 filing, distinguish transactions and
events that are directly associated with the reorganization from the ongoing
operations of the business. Accordingly, certain expenses (including
professional fees), realized gains and losses and provisions for losses that are
realized or incurred in the bankruptcy proceedings are recorded in
reorganization items on the accompanying Consolidated Statements of Operations.
In addition, pre-petition obligations that may be impacted by the bankruptcy
reorganization process have been classified on the Consolidated Balance Sheet at
June 27, 2009 in Liabilities
subject to
compromise. These liabilities are reported at the
amounts expected to be allowed by the Bankruptcy Court, even if they may be
settled for lesser amounts. For information on the bankruptcy reorganization
process, see Note A—Chapter 11 Proceedings. For
information on the pre-petition obligations that may be impacted by the
bankruptcy reorganization process, see Note L—Liabilities Subject to
Compromise.
While operating as debtors-in-possession
under Chapter 11 of the Bankruptcy Code, the Debtors may sell or otherwise
dispose of or liquidate assets or settle liabilities, subject to the approval of
the Bankruptcy Court or otherwise as permitted in the ordinary course of
business, in amounts other than those reflected in the Consolidated Financial
Statements. Moreover, a plan of reorganization could materially change the
amounts and classifications in the historical Consolidated Financial
Statements.
The
consolidated financial statements include the accounts of Pilgrim’s Pride
Corporation and its majority owned subsidiaries. We eliminate all significant affiliate
accounts and transactions upon consolidation.
The
Company re-measures the financial statements of its Mexican subsidiaries as if
the US dollar were the functional currency. Accordingly, we translate assets and
liabilities, other than non-monetary assets, of the Mexican subsidiaries at
current exchange rates. We translate non-monetary assets using the historical
exchange rate in effect on the date of each asset’s acquisition. We translate
income and expenses at average exchange rates in effect during the period.
Currency exchange gains or losses are included in the line item Other expenses (income) in
the Consolidated Statements of Operations.
The
Company has evaluated subsequent events through the issuance of these financial
statements, which occurred on July 31, 2009.
Recently
Adopted Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 applies under
other accounting pronouncements that require or permit fair value measurements
and was effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS157-2, Effective Date of FASB Statement No.
157, which delayed the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, to fiscal years beginning after November 15, 2008. On September 28,
2008, the Company adopted the portion of SFAS No. 157 that was not delayed,
and since the Company’s existing fair value measurements are consistent with the
guidance of SFAS No. 157, the partial adoption of SFAS No. 157 did not have a
material impact on the Company’s consolidated financial statements. The adoption
of the deferred portion of SFAS No. 157 on September 27, 2009 is not expected to
have a material impact on the Company’s consolidated financial
statements.
In
October 2008, the FASB issued FSP FAS157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
clarified the application of SFAS No. 157 when the market for a
financial asset was not active. FSP FAS157-3 was effective upon issuance,
including reporting for prior periods for which financial statements had not
been issued. The adoption of FSP FAS157-3 for the Company’s interim reporting
period ending on December 27, 2008 did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued three separate Staff Positions in response to the current
economic downturn in the United States. FSP FAS157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, provides
additional guidance for estimating fair value in accordance with SFAS No. 157,
Fair Value
Measurements, when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FSP
FAS115-2 and FAS124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, amends the other-than-temporary
impairment guidance in US GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. FSP FAS107-1 and APB28-1, Interim Disclosures about Fair Value
of Financial Instruments, amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. The adoption of the Staff Positions
for the Company’s interim reporting period ending on June 27, 2009 did not have
a material impact on the Company’s consolidated financial
statements.
See Note
F—Investments and Fair Value Measurements for expanded disclosures about the
Company’s investments and the fair value measurements used for the Company’s
financial instruments.
In May
2009, the FASB issued SFAS No. 165, Subsequent Events, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The adoption of SFAS No. 165 for the Company’s
interim reporting period ending on June 27, 2009 did not have a material impact
on the Company’s consolidated financial statements.
Accounting
Pronouncements Issued But Not Yet Adopted
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This
Statement improves the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects by establishing
principles and requirements for how the acquirer (i) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. The Company must apply prospectively SFAS No.
141(R) to business combinations for which the acquisition date occurs during or
subsequent to the first quarter of 2010. The impact that adoption of SFAS No.
141(R) will have on the Company’s financial condition, results of operations and
cash flows is dependent upon many factors. Such factors would include, among
others, the fair values of the assets acquired and the liabilities assumed in
any applicable business combination, the amount of any costs the Company would
incur to effect any applicable business combination, and the amount of any
restructuring costs the Company expected but was not obligated to incur as the
result of any applicable business combination. Upon emergence from bankruptcy,
the Company could qualify for fresh start accounting under SOP 90-7. Fresh start
accounting incorporates many of the concepts of purchase accounting; therefore,
SFAS No. 141(R) could directly affect the Company’s accounting upon emergence.
We cannot accurately predict the effect SFAS No. 141(R) will have on future
acquisitions at this time.
In
December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51. This
Statement improves the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards for how
that reporting entity (i) identifies, labels and presents in its consolidated
statement of financial position the ownership interests in subsidiaries held by
parties other than itself, (ii) identifies and presents on the face of its
consolidated statement of operations the amount of consolidated net income
attributable to itself and to the noncontrolling interest, (iii) accounts
for changes in its ownership interest while it retains a controlling financial
interest in a subsidiary, (iv) initially measures any retained noncontrolling
equity investment in a subsidiary that is deconsolidated, and (v) discloses
other information about its interests and the interests of the noncontrolling
owners. The Company must apply prospectively the accounting requirements
of SFAS No. 160 in the first quarter of 2010. The
Company should also apply retroactively the presentation and
disclosure
requirements of the Statement for all periods presented at that time. The
Company does not expect the adoption of SFAS No. 160 will have a material
impact on its financial position, financial performance or cash
flows.
In
April 2008, the FASB issued FSP FAS142-3, Determination of the Useful Life of
Intangible Assets. FSP FAS142-3 amends the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible
Assets. FSP FAS142-3 must be applied prospectively to intangible assets
acquired after the effective date. The Company will apply the guidance of this
FSP to intangible assets acquired after September 26, 2009.
In
December 2008, the FASB issued FSP FAS132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets. FSP FAS132(R)-1 amends SFAS No.
132(R), Employers’ Disclosures
about Pensions and Other Postretirement Benefits, to provide guidance on
an employer’s disclosures about plan assets of a defined benefit pension or
other postretirement plan, including disclosures about investment policies and
strategies, categories of plan assets, fair value measurements of plan assets
and significant concentrations of risk. The Company will apply the guidance of
this FSP to its postretirement benefit plan assets effective September 27,
2009.
NOTE
C—REORGANIZATION ITEMS
SOP 90-7
requires separate disclosure of reorganization items such as realized gains and
losses from the settlement of pre-petition liabilities, provisions for losses
resulting from the reorganization and restructuring of the business, as well as
professional fees directly related to the process of reorganizing the Debtors
under Chapter 11. The Debtors’ reorganization items for the three and nine
months ended June 27, 2009 consist of the following:
|
Three
Months Ended
June
27, 2009
|
Nine
Months Ended
June
27, 2009
|
|||||||
|
(In
thousands)
|
||||||||
|
Professional
fees directly related to reorganization (a)
|
$ | 15,118 | $ | 35,238 | ||||
|
DIP
Credit Agreement related expenses
|
— | 11,375 | ||||||
|
Net
gain on asset disposals(b)
|
(12,233 | ) | (12,233 | ) | ||||
|
Other
(c)
|
13,894 | 31,003 | ||||||
|
Reorganization
items, net
|
$ | 16,779 | $ | 65,383 | ||||
|
(a)
|
Professional
fees directly related to the reorganization include post-petition fees
associated with advisors to the Debtors, the statutory committee of
unsecured creditors and certain secured creditors. Professional fees are
estimated by the Debtors and will be reconciled to actual invoices when
received.
|
|||||||
|
(b)
|
Net
gain on asset disposals includes (1) gain on the sale of the Farmerville,
LA processing facility and (2) loss on the sale of the Company’s interest
in a hog farming joint venture.
|
|||||||
|
(c)
|
Other
expenses includes (1) severance, grower pay, live flock impairment,
inventory disposal costs, equipment relocation costs and other shutdown
costs related to the closed processing facilities in Douglas, Georgia; El
Dorado, Arkansas; Farmerville, Louisiana; Franconia, Pennsylvania and
Dalton, Georgia, (2) severance costs related to the closed
distribution center in Houston, Texas, the February 2009 Operations
management reduction-in-force (“RIF”) action, the April 2009
non-production employee RIF action, and reduced or consolidated production
at various facilities throughout the US, (3) asset impairment costs
related to the closed processing facility in Dalton, Georgia, and (4) fees
associated with the termination of the RPA on December 3,
2008.
|
|||||||
In May
2009, the Company sold its closed processing complex and certain inventories in
Farmerville, Louisiana for $72.3 million. The Company recognized a gain of
$15.0 million on this transaction that is included in Reorganization items, net on
its Consolidated Statement of Operations. In June 2009, the Company disposed of
its interest in a hog farming joint venture and wrote off outstanding
receivables due from that joint venture. The Company recognized a loss on these
transactions of $2.8 million that is included in Reorganization items, net on
its Consolidated Statement of Operations.
Net cash
paid for reorganization items for the three and nine months ended June 27, 2009
totaled $19.3 million and $38.6 million, respectively. For the three months
ended June 27, 2009, this represented payment of professional fees directly
related to reorganization totaling $9.9 million, severance payments totaling
$4.0 million and payment of facility closure costs totaling $5.4 million.
For the nine months ended June 27, 2009, this represented payment of
professional fees directly related to the reorganization totaling $16.6 million,
payment of DIP Credit Agreement related expenses totaling $11.4 million,
severance payments of $4.5 million, payment of facility closure costs totaling
$5.4 million and payment of fees associated with the termination of the RPA
totaling $0.7 million.
For additional information on costs related to (1) the closures of our
facilities in Douglas, Georgia; El Dorado, Arkansas; Farmerville, Louisiana;
Franconia, Pennsylvania and Dalton, Georgia and (2) severance costs related to
the closed distribution center in Houston, Texas, the February 2009 Operations
management RIF action, the April 2009 non-production employee RIF action and
reduced or consolidated production at various facilities throughout the
US, see Note E—Restructuring
Activities.
NOTE
D—DISCONTINUED BUSINESS
The
Company sold certain assets of its turkey business for $18.6 million and recorded a gain of
$1.5 million ($0.9 million, net of tax) during the second quarter of 2008. This business was composed
of substantially our entire former turkey segment. The results of this business
are included in the line item Income from operation of
discontinued business, net of tax in the Consolidated Statements of
Operations for all periods presented.
For a
period of time, we continued to generate operating results and cash flows
associated with our discontinued turkey business. These activities were
transitional in nature. We entered into a short-term co-pack agreement with the
acquirer of the discontinued turkey business under which they processed turkeys
for sale to our customers through the end of 2008. We had no remaining turkey
inventories as of June 27, 2009 and did not recognize additional operating
results related to our discontinued turkey business during the third quarter of
2009. For the period of time until we have collected the remaining outstanding
receivables and settled outstanding liabilities, we will continue to report cash
flows associated with our discontinued turkey business, although at a substantially
reduced level.
Neither
our continued involvement in the distribution and sale of these turkeys or the
co-pack agreement conferred upon us the ability to influence the operating
and/or financial policies of the turkey business under its new
ownership.
No debt was assumed by the acquirer of
the discontinued turkey business or required to be repaid as a result of the
disposal transaction. We elected to allocate to the discontinued turkey
operation other
consolidated interest that was not
directly attributable to or related to other operations of the Company based on
the ratio of net assets to be sold or discontinued to the sum of the total net
assets of the Company plus consolidated debt. Interest allocated to the
discontinued business in the three and nine months ended June 28, 2008 totaled
$0.5 million and $1.1 million, respectively. We did not allocate
interest to the discontinued business in the three and nine months ended June
27, 2009.
The
following amounts related to our turkey business were segregated from continuing
operations and included in the line item Income from operation of
discontinued business, net of tax in the Consolidated Statements of
Operations:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$ | — | $ | 14,779 | $ | 25,788 | $ | 70,791 | ||||||||
|
Income
(loss) from operation of discontinued business before income
taxes
|
$ | — | $ | (7,127 | ) | $ | 962 | $ | (7,149 | ) | ||||||
|
Income
tax benefit
|
— | (2,690 | ) | (363 | ) | (2,699 | ) | |||||||||
|
Income
(loss) from operation of discontinued business, net of tax
|
$ | — | $ | (4,437 | ) | $ | 599 | $ | (4,450 | ) | ||||||
|
Gain
on sale of discontinued business before income taxes
|
$ | — | $ | — | $ | — | $ | 1,450 | ||||||||
|
Income
tax expense
|
— | — | — | 547 | ||||||||||||
|
Gain
on sale of discontinued business, net of tax
|
$ | — | $ | — | $ | — | $ | 903 | ||||||||
The
following assets and liabilities related to our turkey business have been
segregated and included in Prepaid expenses and other
current assets
and Liabilities of
discontinued business, as appropriate, in the consolidated balance sheets
as of June 27, 2009 and September 27, 2008.
|
June
27,
2009
|
September
27,
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Trade
accounts and other receivables, less allowance
for
doubtful accounts
|
$ | 69 | $ | 5,881 | ||||
|
Inventories
|
— | 27,638 | ||||||
|
Assets
of discontinued business
|
$ | 69 | $ | 33,519 | ||||
|
Accounts
payable
|
$ | — | $ | 7,737 | ||||
|
Accrued
expenses
|
1,470 | 3,046 | ||||||
|
Liabilities
of discontinued business
|
$ | 1,470 | $ | 10,783 | ||||
NOTE
E—RESTRUCTURING ACTIVITIES
Through
the third quarter of 2009 and in 2008, the Company completed the following
restructuring activities:
|
·
|
Closed
processing complexes in Dalton, Georgia; Douglas, Georgia; El Dorado,
Arkansas; Franconia, Pennsylvania; Clinton, Arkansas; Bossier City,
Louisiana and Siler City, North
Carolina,
|
|
·
|
Sold
a closed processing complex in Farmerville,
Louisiana,
|
|
·
|
Sold
closed distribution centers in El Paso, Texas; Pompano Beach, Florida and
Plant City, Florida,
|
|
·
|
Closed
distribution centers in Houston, Texas; Oskaloosa, Iowa; Jackson,
Mississippi; Cincinnati, Ohio and Nashville,
Tennessee,
|
|
·
|
Reduced
its workforce by approximately 440 non-production positions, including the
resignations of the former Chief Executive Officer and former Chief
Operating Officer,
|
|
·
|
Closed
an administrative office building in Duluth, Georgia in June 2008,
and
|
|
·
|
Reduced
or consolidated production at various other facilities throughout the
US.
|
Significant
actions that occurred from the second quarter of 2009 through the third quarter
of 2009 were approved by the Bankruptcy Court, when required under the
Bankruptcy Code, as part of the Company’s reorganization efforts. These actions
began in January 2009 and were completed in June 2009. Significant actions that
occurred from the second quarter of 2008 through the first quarter of 2009 were
approved by the Company’s Board of Directors as part of a plan intended to
curtail losses amid record-high costs for corn, soybean meal and other feed
ingredients and an oversupply of chicken in the US. These actions began in March
2008 and were completed in June 2009. These restructuring activities resulted in
the elimination of approximately 6,390 production positions and 440
non-production positions.
Results
of operations for the three and nine months ended June 27, 2009 included
restructuring charges totaling $6.6 million and $23.1 million, respectively,
related to these actions. All of these restructuring charges, with the exception
of certain lease continuation costs, have resulted in cash expenditures or will
result in cash expenditures within one year. Results of operations for the three
and nine months ended June 27, 2009 also included adjustments totaling $2.1
million and $7.4 million, respectively, that reduced the accrued costs. These
adjustments included the elimination of accrued severance costs in excess of
actual severance costs incurred for several of the 2008 restructuring actions
primarily during the first and second quarters of 2009, elimination of accrued
severance costs in excess of actual severance costs incurred for several of the
2009 reorganization actions primarily during the third quarter of 2009, the
assumption of the Duluth, Georgia lease obligation by an outside party during
the second quarter of 2009, the elimination of accrued other restructuring costs
in excess of actual other restructuring costs incurred for several of the 2008
restructuring actions during the second quarter of 2009 and the elimination of
accrued other restructuring costs in excess of actual other restructuring costs
incurred for the Douglas, Georgia reorganization action during the third quarter
of 2009.
The following table sets forth
restructuring activity that occurred during the nine months ended June 27,
2009:
|
Accrued
Lease
Obligation
|
Accrued
Severance and Employee Retention
|
Accrued
Other Restructuring Costs
|
Restructuring-
Related Inventory Reserves
|
Total
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
September
27, 2008
|
$ | 4,466 | $ | 2,694 | $ | 5,651 | $ | 1,212 | $ | 14,023 | ||||||||||
|
Accruals
|
372 | 3,647 | 60 | — | 4,079 | |||||||||||||||
|
Payment
/ Disposal
|
(330 | ) | (4,288 | ) | (705 | ) | (715 | ) | (6,038 | ) | ||||||||||
|
Adjustments
|
— | (1,269 | ) | — | — | (1,269 | ) | |||||||||||||
|
December
27, 2008
|
4,508 | 784 | 5,006 | 497 | 10,795 | |||||||||||||||
|
Accruals
|
— | 7,484 | — | 4,937 | 12,421 | |||||||||||||||
|
Payment
/ Disposal
|
(98 | ) | (129 | ) | (309 | ) | (285 | ) | (821 | ) | ||||||||||
|
Adjustments
|
(2,574 | ) | (446 | ) | (790 | ) | (212 | ) | (4,022 | ) | ||||||||||
|
March
28, 2009
|
$ | 1,836 | $ | 7,693 | $ | 3,907 | $ | 4,937 | $ | 18,373 | ||||||||||
|
Accruals
|
— | 4,538 | 2,000 | 92 | 6,630 | |||||||||||||||
|
Payment
/ Disposal
|
(97 | ) | (4,147 | ) | (1,739 | ) | (3,760 | ) | (9,743 | ) | ||||||||||
|
Adjustments
|
— | (1,604 | ) | (541 | ) | — | (2,145 | ) | ||||||||||||
|
June
27, 2009
|
$ | 1,739 | $ | 6,480 | $ | 3,627 | $ | 1,269 | $ | 13,115 | ||||||||||
Costs
incurred in the second and third quarters of 2009 are primarily classified as
reorganization items. Consistent with the Company's previous practice and
because management believes costs incurred in the first quarter of 2009 are
related to ceasing production at previously announced facilities and not
directly related to the Company's ongoing production, they are classified as a
component of operating income (loss) below gross profit.
The Company recognized impairment
charges totaling $5.4 million during the third quarter of 2009 to reduce the
carrying amounts of certain property, plant and equipment located at a facility
closed in 2009 to their estimated fair values. These costs were
classified as reorganization items. The Company recognized impairment
charges totaling $12.0 million during the second quarter of 2008 to
reduce the carrying amounts of certain property, plant, equipment and other
assets located at or related to facilities closed in 2008 to their estimated
fair values. Consistent with our previous practice and because management
believes the realization of the carrying amounts of the affected assets was
directly related to the Company's production activities, the charges were
reported as a component of gross profit (loss).
We
continue to review and evaluate various restructuring and other alternatives to
streamline our operations, improve efficiencies and reduce costs. Such
initiatives may include selling assets, idling facilities, consolidating
operations and functions, relocating or reducing production and voluntary and
involuntary employee separation programs. Any such actions may require us to
obtain the pre-approval of our lenders under our DIP Credit Agreement and the
Bankruptcy Court. In addition, such actions will subject the Company to
additional short-term costs, which may include facility shutdown costs, asset
impairment charges, lease commitment costs, employee retention and severance
costs and other closing costs.
NOTE
F—FINANCIAL INSTRUMENTS
FSP
FAS107-1 and APB 28-1 Disclosures
Effective
for the quarter ended June 27, 2009, the Company adopted FSP FAS107-1 and
APB28-1, Interim Disclosures
about Fair Value of Financial Instruments, which extends the disclosure
requirements regarding the fair value of financial instruments under SFAS No.
107, Disclosures about Fair
Value of Financial Instruments, to interim financial statements of
publicly traded companies. The asset (liability) amounts recorded in the
Consolidated Balance Sheet (carrying amounts) and the estimated fair values of
financial instruments at June 27, 2009 consisted of the following:
|
Carrying
Amount
|
Fair
Value
|
Reference
|
|||||||
|
(In
thousands)
|
|||||||||
|
Cash
and cash equivalents
|
$ | 101,179 | $ | 101,179 | |||||
|
Current
restricted cash and cash equivalents
|
6,677 | 6,677 | |||||||
|
Trade
accounts and other receivables
|
291,207 | 291,207 |
Note
G
|
||||||
|
Investments
in available-for-sale securities
|
66,083 | 66,083 | |||||||
| Long-term restricted cash and cash equivalents(a) | 6,254 | 6,254 | |||||||
|
Accounts
payable and accrued expenses
|
(474,629 | ) | (474,629 | ) |
Note
J
|
||||
|
Public
debt obligations
|
(656,996 | ) | (553,450 | ) |
Note
K
|
||||
|
Non-public
credit facilities
|
(1,412,017 | ) |
(b
|
) |
Note
K
|
||||
|
(a)
|
Long-term
restricted cash and cash equivalents are included in Other assets on the Consolidated Balance
Sheet.
|
||||||||
| (b) |
Management
also expects that the fair value of our non-public credit facilities has
also decreased, but cannot reliably estimate the fair value at this
time.
|
||||||||
The
carrying amounts of our cash and cash equivalents, restricted cash and cash
equivalents, accounts receivable, accounts payable and certain other liabilities
approximate their fair values due to their relatively short maturities. The
Company adjusts its investments to fair value based on quoted market prices in
active markets for identical investments, quoted market prices in active markets
for similar investments with inputs that are observable for the subject
investment or unobservable inputs such as discounted cash flow models or
valuations.
FSP
FAS115-2 and 124-2 Disclosures
Effective
for the quarter ended June 27, 2009, the Company adopted FSP FAS115-2 and
FAS124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, which extends the
disclosure requirements about debt and equity securities established in SFAS No.
115, Accounting for Certain
Investments in Debt and Equity Securities, as well as provides new
disclosure requirements.
The
following is a summary of our cash equivalents and current and long-term
investments in available-for-sale securities:
|
June
27, 2009
|
September
27, 2008
|
|||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Cash
equivalents:
|
||||||||||||||||
|
Fixed
income securities
|
$ | 2,104 | $ | 2,151 | $ | — | $ | — | ||||||||
|
Other
|
4,471 | 4,471 | — | — | ||||||||||||
|
Total
cash equivalents
|
$ | 6,575 | $ | 6,622 | $ | — | $ | — | ||||||||
|
Current
investments:
|
||||||||||||||||
|
Fixed
income securities
|
$ | 5,781 | $ | 5,902 | $ | 9,798 | $ | 9,835 | ||||||||
|
Other
|
— | — | 604 | 604 | ||||||||||||
|
Total
current investments
|
$ | 5,781 | $ | 5,902 | $ | 10,402 | $ | 10,439 | ||||||||
|
Long-term
investments:
|
||||||||||||||||
|
Fixed
income securities
|
$ | 48,559 | $ | 50,855 | $ | 44,041 | $ | 44,127 | ||||||||
|
Equity
securities
|
8,289 | 8,289 | 9,775 | 9,775 | ||||||||||||
|
Other
|
1,037 | 1,037 | 1,952 | 1,952 | ||||||||||||
|
Total
long-term investments
|
$ | 57,885 | $ | 60,181 | $ | 55,768 | $ | 55,854 | ||||||||
Maturities
for the Company’s investments in fixed income securities as of June 27, 2009
were as follows:
|
Amount
|
Percent
|
|||||||
|
(In
thousands)
|
||||||||
|
Matures
in less than one year
|
$ | 8,053 | 13.7 | % | ||||
|
Matures
between one and two years
|
13,064 | 22.2 | % | |||||
|
Matures
between two and five years
|
34,331 | 58.3 | % | |||||
|
Matures
in excess of five years
|
3,460 | 5.8 | % | |||||
| $ | 58,908 | 100.0 | % | |||||
The cost
of each security sold and the amount reclassified out of accumulated other
comprehensive income into earnings is determined on a specific identification
basis.
The
Company and certain retirement plans that it sponsors invest in a variety of
financial instruments. In response to the continued turbulence in global
financial markets, we have analyzed our portfolios of investments and, to the
best of our knowledge, none of our investments, including money market funds
units, commercial paper and municipal securities, have been downgraded because
of this turbulence, and neither we nor any fund in which we participate hold
significant amounts of structured investment vehicles, auction rate securities,
collateralized debt obligations, credit derivatives, hedge funds investments,
fund of funds investments or perpetual preferred securities. Certain
postretirement funds in which the Company participates hold significant amounts
of mortgage-backed securities. However, none of the mortgages collateralizing
these securities are considered subprime.
Certain
investments are held in trust as compensating balance arrangements for our
insurance liability and are classified as long-term based on a maturity date
greater than one year from the balance sheet date and management’s intention not
to use such assets in the next twelve months.
SFAS
No. 157 Disclosures
Effective
September 28, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. This
standard established a framework for measuring fair value and required enhanced
disclosures about fair value measurements. SFAS No. 157 clarified that fair
value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants. SFAS No. 157 also required disclosure about how fair value
was determined for assets and liabilities and established a hierarchy for which
these assets and liabilities must be grouped, based on significant levels of
inputs as follows:
|
Level
1
|
Quoted
prices in active markets for identical assets or
liabilities;
|
|
Level
2
|
Quoted
prices in active markets for similar assets and liabilities and inputs
that are observable for the asset or liability; or
|
|
Level
3
|
Unobservable
inputs, such as discounted cash flow models or
valuations.
|
The
determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement.
The
following items are measured at fair value on a recurring basis at June 27,
2009:
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 98,162 | $ | 3,017 | $ | — | $ | 101,179 | ||||||||
|
Current
restricted cash and cash equivalents
|
6,677 | — | — | 6,677 | ||||||||||||
|
Short-term
investments in available-for-sale securities
|
— | 5,902 | — | 5,902 | ||||||||||||
|
Long-term
investments in available-for-sale securities
|
8,289 | 50,859 | 1,033 | 60,181 | ||||||||||||
|
Long-term
restricted cash and cash equivalents
|
6,254 | — | — | 6,254 | ||||||||||||
The
following table presents the Company’s activity for assets measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) as
defined in SFAS No. 157 for the nine months ended June 27, 2009:
|
Fund
of
Funds
|
Auction
Rate Securities
|
Total
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at September 27, 2008
|
$ | 1,197 | $ | 2,425 | $ | 3,622 | ||||||
|
Included
in other comprehensive income
|
(210 | ) | — | (210 | ) | |||||||
|
Balance
at December 27, 2008
|
$ | 987 | $ | 2,425 | $ | 3,412 | ||||||
|
Sale
of securities
|
— | (2,425 | ) | (2,425 | ) | |||||||
|
Included
in other comprehensive income
|
17 | — | 17 | |||||||||
|
Balance
at March 28, 2009
|
1,004 | — | 1,004 | |||||||||
|
Included
in other comprehensive income
|
29 | — | 29 | |||||||||
|
Balance
at June 27, 2009
|
$ | 1,033 | $ | — | $ | 1,033 | ||||||
NOTE
G—TRADE ACCOUNTS AND OTHER RECEIVABLES
Trade
accounts and other receivables, less allowance for doubtful accounts, consisted
of the following components:
|
June
27,
2009
|
September
27, 2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Trade
accounts receivable
|
$ | 286,701 | $ | 135,003 | ||||
|
Other
receivables
|
9,768 | 13,854 | ||||||
|
Receivables,
gross
|
296,469 | 148,857 | ||||||
|
Allowance
for doubtful accounts
|
(5,262 | ) | (4,701 | ) | ||||
|
Receivables,
net
|
$ | 291,207 | $ | 144,156 | ||||
In
connection with the RPA,
the Company sold, on a revolving basis, certain of its trade receivables to a
special purpose entity (“SPE”) wholly owned by the Company, which in turn sold a
percentage ownership interest to third parties. The SPE was a separate corporate
entity and its assets were available first and foremost to satisfy the claims of
its creditors. The gross proceeds resulting from the sales were included in cash
flows from operating activities in the Consolidated Statements of Cash Flows.
On December 3, 2008, the
RPA was terminated and all receivables thereunder were repurchased with proceeds
of borrowings under the DIP Credit Agreement. The loss recognized on the sold
receivables during the nine months ended June 27, 2009 was not
material.
NOTE
H—INVENTORIES
Inventories
consisted of the following components:
|
June
27,
2009
|
September
27,
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Chicken:
|
||||||||
|
Live
chicken and hens
|
$ | 302,725 | $ | 385,511 | ||||
|
Feed
and eggs
|
200,786 | 265,959 | ||||||
|
Finished
chicken products
|
275,427 | 365,123 | ||||||
|
Total
chicken inventories
|
778,938 | 1,016,593 | ||||||
|
Other
products:
|
||||||||
|
Commercial
feed, table eggs, retail farm store and other
|
$ | 16,676 | $ | 13,358 | ||||
|
Distribution
inventories (other than chicken products)
|
3,232 | 6,212 | ||||||
|
Total
other products inventories
|
19,908 | 19,570 | ||||||
|
Total
inventories
|
$ | 798,846 | $ | 1,036,163 | ||||
Inventories
included a lower-of-cost-or-market allowance of $26.6 million at September 27,
2008. There was no lower-of-cost-or-market allowance recorded at June 27,
2009.
NOTE
I—PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment, net consisted of the following components:
|
June
27,
2009
|
September
27,
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Land
|
$ | 111,086 | $ | 111,567 | ||||
|
Buildings,
machinery and equipment
|
2,464,682 | 2,465,608 | ||||||
|
Autos
and trucks
|
59,603 | 64,272 | ||||||
|
Construction-in-progress
|
64,563 | 74,307 | ||||||
|
Property,
plant and equipment, gross
|
2,699,934 | 2,715,754 | ||||||
|
Accumulated
depreciation
|
(1,168,352 | ) | (1,042,750 | ) | ||||
|
Property,
plant and equipment, net
|
$ | 1,531,582 | $ | 1,673,004 | ||||
We
recognized depreciation expense related to our continuing operations of $52.6
million and $56.4 million during the three months ended June 27, 2009 and June
28, 2008, respectively. We recognized depreciation expense related to our
continuing operations of $164.4 million and $164.6 million during the nine
months ended June 27, 2009 and June 28, 2008, respectively. We also recognized
depreciation charges related to our discontinued turkey business of
$0.3 million and $0.7 million during the three and nine months ended June
28, 2008, respectively. We did not incur depreciation charges related to our
discontinued turkey business in the three and nine months ended June 27,
2009.
In May
2009, the Company sold its closed processing complex and certain inventories in
Farmerville, Louisiana for $72.3 million. The Company recognized a gain of
$15.0 million on this transaction that is included in Reorganization items, net on
its Consolidated Statement of Operations. In June 2009, the Company sold its
closed distribution center in Plant City, Florida for $2.4 million. The Company
recognized a loss of $0.4 million on this transaction that is included in Selling, general and administrative
expenses on its Consolidated Statement of Operations.
The
Company closed its processing complexes in Douglas, Georgia; El Dorado,
Arkansas; Franconia, Pennsylvania and Dalton, Georgia in the third quarter of
2009 and closed its processing complexes in Bossier City, Louisiana and Clinton,
Arkansas in the first quarter of 2009. Although the Company has received bids on
some of these assets, management has not deemed any of the bids submitted to be
acceptable and is not certain whether any bids acceptable to the Company will be
received in the future. Management is also not certain that the Board of
Directors would determine that it would be in the best interest of the
bankruptcy estate to divest of these assets. Management is therefore not certain
that it can or will divest of these assets within one year and, accordingly, has
not classified them as assets held for sale. The Company continues to depreciate
these assets. The Company
recognized impairment charges totaling $5.4 million during the third
quarter of 2009 to reduce the carrying amounts of certain idled assets located
at the closed processing complex in Dalton, Georgia. At June 27, 2009,
the carrying amount of these idled assets was $91.9 million based on depreciable
value of $145.7 million and accumulated depreciation of
$53.8 million.
The
Company currently classifies certain assets related to its closed distribution
center in El Paso, Texas as assets held for sale. At June 27, 2009 and
September 27, 2008, the Company reported assets held for sale totaling $0.5
million and $17.4 million, respectively, in Prepaid expenses and other
current assets
on its Consolidated Balance Sheets.
Management
does not believe that the aggregate carrying amount of the assets held for sale
or the assets in the process of being idled is significantly impaired at the
present time. However, should the carrying amounts of these assets consistently
exceed future purchase offers received, if any, recognition of impairment
charges could become necessary.
At the
present time, the Company’s forecasts indicate that it can recover the carrying
value of its operating assets, including its property, plant and equipment and
identified intangible assets, based on the projected cash flows of the
operations. A key assumption in management’s forecast is that the Company’s
sales volumes will generate historical margins as supply and demand between
commodities and chicken and other animal-based proteins become more balanced.
However, the exact timing of the return to historical margins is not certain,
and if the return to historical margins is delayed, impairment charges could
become necessary in the future.
NOTE
J—ACCRUED EXPENSES
Accrued
expenses not subject to compromise consisted of the following
components:
|
June
27,
2009
|
September
27, 2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Compensation
and benefits
|
$ | 108,219 | $ | 118,803 | ||||
|
Interest
and debt maintenance
|
11,618 | 35,488 | ||||||
|
Self
insurance
|
95,586 | 170,787 | ||||||
|
Other
|
87,629 | 123,745 | ||||||
|
Total
accrued expenses
|
$ | 303,052 | $ | 448,823 | ||||
For information on accrued restructuring costs, see Note E—Restructuring Activities. For
information on accrued expenses subject to compromise, see Note L—Liabilities
Subject to Compromise.
NOTE
K—SHORT-TERM NOTES PAYABLE AND LONG-TERM DEBT
Short-term
notes payable and long-term debt consisted of the following
components:
|
Maturity
|
June
27,
2009
|
September
27,
2008
|
|||||||
|
(In
thousands)
|
|||||||||
|
Short-term
notes payable:
|
|||||||||
|
Post-petition
credit facility with notes payable at 8.00% plus the greatest of the
facility agent's prime rate, the average federal funds rate plus 0.50%, or
LIBOR plus 1.00%
|
2009
|
$ | — | $ | — | ||||
|
Long-term
debt:
|
|||||||||
|
Senior
unsecured notes, at 7 5/8%
|
2015
|
$ | 400,000 | $ | 400,000 | ||||
|
Senior
subordinated unsecured notes, at 8 3/8%
|
2017
|
250,000 | 250,000 | ||||||
|
Secured
revolving credit facility with notes payable at LIBOR plus 1.25% to LIBOR
plus 2.75%
|
2013
|
216,761 | 181,900 | ||||||
|
Secured
revolving credit facility with notes payable at LIBOR plus 1.65% to LIBOR
plus 3.125%
|
2011
|
42,133 | 51,613 | ||||||
|
Secured
revolving/term credit facility with four notes payable at LIBOR plus a
spread, one note payable at 7.34% and one note payable at
7.56%
|
2016
|
1,126,398 | 1,035,250 | ||||||
|
Other
|
Various
|
33,720 | 23,220 | ||||||
|
Long-term
debt
|
2,069,012 | 1,941,983 | |||||||
|
Current
maturities of long-term debt
|
— | (1,874,469 | ) | ||||||
|
Long-term
debt subject to compromise
|
(2,026,879 | ) | — | ||||||
|
Long-term
debt, less current maturities
|
$ | 42,133 | $ | 67,514 | |||||
The
filing of the Chapter 11 petitions constituted an event of default under
certain of our debt obligations, and those debt obligations became automatically
and immediately due and payable, subject to an automatic stay of any action to
collect, assert, or recover a claim against the Company and the application of
applicable bankruptcy law. As a result, the accompanying Consolidated Balance
Sheet as of September 27, 2008 includes reclassifications of
$1,872.1 million to reflect as current certain long-term debt under the
Company’s credit facilities that, absent the stay, would have become
automatically and immediately due and payable. Because of the bankruptcy
petition, most of the Company’s pre-petition long-term debt is included in
liabilities subject to compromise at June 27, 2009. The Company classifies
pre-petition liabilities subject to compromise as a long-term liability because
management does not believe the Company will use existing current assets or
create additional current liabilities to fund these obligations.
On
December 2, 2008, the Bankruptcy Court granted interim approval authorizing the
Company and the US Subsidiaries to enter into the Initial DIP Credit Agreement
with the DIP Agent and the lenders party thereto. On December 2, 2008, the
Company, the US Subsidiaries and the other parties entered into the Initial DIP
Credit Agreement, subject to final approval of the Bankruptcy Court. On December 30, 2008, the Bankruptcy Court granted
final approval authorizing the Company and the Subsidiaries to enter into the
DIP Credit Agreement.
The DIP
Credit Agreement provides for an aggregate commitment of up to $450 million,
which permits borrowings on a revolving basis. The commitment includes a $25
million sub-limit for swingline loans and a $20 million sub-limit for standby
letters of credit. Outstanding borrowings under the DIP Credit Agreement will
bear interest at a per annum rate equal to 8.0% plus the greatest of (i) the
prime rate as established by the DIP Agent from time to time, (ii) the average
federal funds rate plus 0.5%, or (iii) the LIBOR rate plus 1.0%, payable
monthly. The weighted average interest rates for the three and nine months ended
June 27, 2009 were 11.25% and 11.33%, respectively. The loans under the Initial
DIP Credit Agreement were used to repurchase all receivables sold under the
Company's RPA. Loans under the DIP Credit Agreement may be used to fund the
working capital requirements of the Company and its subsidiaries according to a
budget as approved by the required lenders under the DIP Credit Agreement. For
additional information on the RPA, see Note G—Trade Accounts and Other
Receivables.
Actual borrowings by the Company under
the DIP Credit Agreement are subject to a borrowing base, which is a formula
based on certain eligible inventory and eligible receivables. The borrowing base
formula is reduced by (i) pre-petition obligations under the Fourth Amended and
Restated Secured Credit Agreement dated as of February 8, 2007, among the
Company and certain of its subsidiaries, Bank of Montreal, as administrative
agent, and the lenders parties thereto, as amended, (ii) administrative and
professional expenses incurred in connection with the bankruptcy proceedings,
and (iii) the amount owed by the Company and the Subsidiaries to any person on
account of the purchase price of agricultural products or services (including
poultry and livestock) if that person is entitled to any grower's or producer's
lien or other security arrangement. The borrowing base is also limited to 2.22
times the formula amount of total eligible receivables. The DIP Credit Agreement
provides that the Company may not incur capital expenditures in excess of $150
million. The Company must also meet minimum monthly levels of EBITDAR. Under the
DIP Credit Agreement, "EBITDAR" means, generally, net income before interest, taxes, depreciation,
amortization, writedowns of goodwill and other intangibles, asset impairment
charges and other specified costs,
charges, losses and
gains.
The DIP Credit Agreement also provides
for certain other covenants, various representations and warranties, and events
of default that are customary for transactions of this nature. As of
June 27, 2009, the applicable borrowing base
and the amount available
for borrowings under the
DIP Credit Agreement were both $348.6 million as there were no outstanding borrowings
under the Credit Agreement.
The principal amount of outstanding
loans under the DIP Credit Agreement, together with accrued and unpaid interest
thereon, are payable in full at maturity on December 1, 2009, subject to
extension for an additional six months with the approval of all lenders
thereunder. All obligations under the DIP Credit Agreement are unconditionally
guaranteed by the Subsidiaries and are secured by a first priority priming lien
on substantially all of the assets of the Company and the Subsidiaries, subject
to specified permitted liens in the DIP Credit Agreement.
Under the
terms of the DIP Credit Agreement and applicable bankruptcy law, the Company may
not pay dividends on the common stock while it is in bankruptcy. Any payment of
future dividends and the amounts thereof will depend on our emergence from
bankruptcy, our earnings, our financial requirements and other factors deemed
relevant by our Board of Directors at the time.
On July
15, 2009, the Company entered into the Amendment, which is subject to the approval of the
Bankruptcy Court. The Amendment amends the DIP
Credit Agreement to allow the Company to invest in certain interest bearing
accounts and government securities, subject to certain conditions. In connection
with the Amendment, the Company also agreed to reduce the total available
commitments under the DIP Credit Agreement from $450 million to $350 million.
The Amendment also allows the Company to enter into certain ordinary course
hedging contracts relating to feed ingredients used by the Company and its
subsidiaries in their businesses. The Company may only enter into hedging
contracts which satisfy the following conditions, among other restrictions: (a)
the contract is traded on a recognized commodity exchange; (b) the contract
expiration date is no later than March 21, 2010, or a later date if agreed to by
the DIP Agent; (c) the Company and its subsidiaries do not have open forward,
futures or options positions in the subject commodity, other than commodity
hedging arrangements entered into at the request or direction of a customer, in
excess of 50% of the Company's other expected usage of such commodity for a
specified period; (d) the contract is not entered into for speculative purposes;
and (e) the Company will not have more than $100 million in margin requirements
with respect to all such non-customer hedging contracts.
During the first nine months of 2009,
the Company borrowed $616.7 million and repaid $525.6 million under the secured
revolver/term credit agreement expiring in 2016, borrowed $214.6 million and repaid $179.7 million under the secured revolving
credit facility expiring in 2013, borrowed and repaid $430.8 million under the DIP Credit Agreement and
repaid $14.5 million under other
facilities.
On
November 30, 2008, certain non-Debtor Mexico subsidiaries of the Company (the
"Mexico Subsidiaries") entered into a Waiver Agreement and Second Amendment to
Credit Agreement (the "Waiver Agreement") with ING Capital LLC, as agent (the
"Mexico Agent"), and the lenders signatory thereto (the "Mexico Lenders"). Under
the Waiver Agreement, the Mexico Agent and the Mexico Lenders waived any default
or event of default under the Credit Agreement dated as of September 25, 2006,
by and among the Company, the Mexico Subsidiaries, the Mexico Agent and the
Mexico Lenders, the administrative agent, and the lenders parties thereto (the
"ING Credit Agreement"), resulting from the Company's filing of its bankruptcy
petition with the Bankruptcy Court. Pursuant to the Waiver Agreement,
outstanding amounts under the ING Credit Agreement now bear interest at a rate
per annum equal to: the LIBOR Rate, the Base Rate, or the TIIE Rate, as
applicable, plus the Applicable Margin (as those terms are defined in the ING
Credit Agreement). While the Company is operating in Chapter 11, the Waiver
Agreement provides for an Applicable Margin for LIBOR loans, Base Rate loans,
and TIIE loans of 6.0%, 4.0%, and 5.8%, respectively. The Waiver Agreement
further amended the ING Credit Agreement, which expires in 2011, to require the
Company to make a mandatory prepayment of the revolving loans, in an aggregate
amount equal to 100% of the net cash proceeds received by any Mexico Subsidiary,
as applicable, in excess of thresholds specified in the ING Credit Agreement (i)
from the occurrence of certain asset sales by the Mexico Subsidiaries; (ii) from
the occurrence of any casualty or other insured damage to, or any taking under
power of eminent domain or by condemnation or similar proceedings of, any
property or asset of any Mexico Subsidiary; or (iii) from the incurrence of
certain indebtedness by a Mexico Subsidiary. Any such mandatory prepayments will
permanently reduce the amount of the commitment under the ING Credit Agreement.
In connection with the Waiver Agreement, the Mexico Subsidiaries pledged
substantially all of their receivables, inventory, and equipment and certain
fixed assets. The Mexico Subsidiaries are excluded from the US bankruptcy
proceedings.
The filing of the bankruptcy petitions
constituted an event of default under the secured credit agreement expiring in 2013 and the secured
revolver/term credit agreement expiring in 2016 (together, the “Secured Debt”)
as well as the
7 5/8% Senior Notes due 2015, the 8 3/8%
Senior Subordinated Notes due 2017 and the 9 1/4% Senior Subordinated Notes due
2013 (together, the
“Unsecured Debt”). The
aggregate principal amount owed under
these credit agreements and notes was approximately $2,000.2 million as of June 27, 2009. As a result of such event of default,
all obligations under these agreements became automatically and immediately
due and payable, subject to an automatic stay of any action to collect, assert,
or recover a claim against the Company and the application of applicable
bankruptcy law. As a result of the
Company's Chapter 11 filing, after December 1, 2008, the Company accrued
interest incurred on the Secured Debt at the default rate, which is two percent
above the interest rate otherwise applicable under the associated credit
agreements. Although the agreements related to the Unsecured Debt call for the
accrual of interest after December 1, 2008 at a default rate that is two percent
above the interest rate otherwise applicable under the associated note
agreements, the Company has elected to accrue interest incurred on the Unsecured
Debt, for accounting purposes, at the interest rate otherwise applicable under
the associated note agreements until such time, if any, that the Bankruptcy
Court approves the payment of interest or default interest incurred on the
Unsecured Debt. Had the Company accrued interest incurred on the Unsecured Debt
at the default rate, it would
have recognized additional interest expense totaling $3.3 million and $7.7
million in the three and nine months ended June 27, 2009.
In June
1999, the Camp County Industrial Development Corporation issued $25 million of
variable-rate environmental facilities revenue bonds supported by letters of
credit obtained by us under our secured revolving credit facility expiring in
2013. Prior to our bankruptcy filing, the proceeds were available for the
Company to draw from over the construction period in order to construct new
sewage and solid waste disposal facilities at a poultry by-products plant in
Camp County, Texas. The original proceeds from the issuance of the revenue
bonds were held by the trustee of the bonds until we drew on the proceeds for
the construction of the facility. We had not drawn on the proceeds or
commenced construction of the facility prior to our bankruptcy filing. The filing of the bankruptcy petitions
constituted an event of default under these bonds. As a result of the event of
default, the trustee had the right to accelerate all obligations
under the bonds such that they become immediately due and payable, subject to an
automatic stay of any action to collect, assert, or recover a claim against the
Company and the application of applicable bankruptcy law. In December 2008,
the holders of the bonds tendered the bonds for remarketing, which was not successful. As a
result, the trustee,
on behalf of the holders of
the bonds, drew upon the letters of credit
supporting the bonds. The resulting reimbursement obligation was converted
to borrowings under the secured revolving credit facility expiring in 2013
and secured by our domestic chicken inventories. On January 29, 2009, we obtained
approval from the Bankruptcy Court to use the original proceeds of the bond
offering held by the trustee to repay and cancel
the revenue bonds. We received the proceeds of the bond
offering from the trustee in March 2009 and immediately repaid and cancelled the
revenue bonds.
NOTE
L—LIABILITIES SUBJECT TO COMPROMISE
Liabilities
subject to compromise refers to both secured and unsecured obligations that will
be accounted for under a plan of reorganization. Generally, actions to enforce
or otherwise effect payment of pre-Chapter 11 liabilities are stayed. SOP 90-7
requires pre-petition liabilities that are subject to compromise to be reported
at the amounts expected to be allowed, even if they may be settled for lesser
amounts. These liabilities represent the estimated amount expected to be allowed
on known or potential claims to be resolved through the Chapter 11 process, and
remain subject to future adjustments arising from negotiated settlements,
actions of the Bankruptcy Court, rejection of executory contracts and unexpired
leases, the determination as to the value of collateral securing the claims,
proofs of claim, or other events. Liabilities subject to compromise also include
certain items that may be assumed under the plan of reorganization, and as such,
may be subsequently reclassified to liabilities not subject to compromise. The
Company has included secured debt as a liability subject to compromise as
management believes that there remains uncertainty to the terms under a plan of
reorganization since the filing recently occurred. At hearings held in December
2008, the Bankruptcy Court granted final approval of many of the Debtors’ “first
day” motions covering, among other things, human capital obligations, supplier
relations, insurance, customer relations, business operations, certain tax
matters, cash management, utilities, case management and retention of
professionals. Obligations associated with these matters are not classified as
liabilities subject to compromise.
In
accordance with SOP 90-7, debt issuance costs should be viewed as valuations of
the related debt. When the debt has become an allowed claim and the allowed
claim differs from the net carrying amount of the debt, the recorded amount
should be adjusted to the amount of the allowed claim (thereby adjusting
existing debt issuance costs to the extent necessary to report the debt at this
allowed amount). Through May 2, 2009, the Bankruptcy Court had not classified
any of the Debtors’ outstanding debt as allowed claims. Therefore, the Company
has classified the Debtors’ outstanding debt as Liabilities subject to
compromise on the Consolidated Balance Sheet. The Company has not
adjusted debt issuance costs, totaling $20.9 million at June 27, 2009, related
to the Debtors’ outstanding debt. The Company may be required to expense these
amounts or a portion thereof as reorganization items if the Bankruptcy Court
ultimately determines that a portion of the debt is subject to
compromise.
The
Debtors have rejected certain pre-petition executory contracts and unexpired
leases with respect to the Debtors’ operations with the approval of the
Bankruptcy Court and may reject additional ones in the future. Damages resulting
from rejection of executory contracts and unexpired leases are generally treated
as general unsecured claims and will be classified as liabilities subject to
compromise. Holders of pre-petition claims were required to file proofs of
claims by the “general bar date” of June 1, 2009. A bar date is the date by
which certain claims against the Debtors must be filed if the claimants wish to
receive any distribution in the Chapter 11 cases. Creditors were notified of the
general bar date and the requirement to file a proof of claim with the
Bankruptcy Court. Differences between liability amounts estimated by the Debtors
and claims filed by creditors are being investigated and, if necessary, the
Bankruptcy Court will make a final determination of the allowable claim.
Currently, the aggregate amount of claims filed by creditors exceeds the
aggregate amount of claims recognized and estimated by the Debtors.
Management believes the aggregate amount of claims presently recognized by
the Debtors will ultimately not materially vary from the aggregate amount
of claims allowed by the Bankruptcy Court. The determination of how liabilities
will ultimately be treated cannot be made until the Bankruptcy Court approves a
Chapter 11 plan of reorganization. Accordingly, the ultimate amount or treatment
of such liabilities is not determinable at this time.
Liabilities
subject to compromise consisted of the following:
|
June
27,
2009
|
||||
|
(In
thousands)
|
||||
|
Accounts
payable
|
$ | 85,617 | ||
|
Accrued
expenses
|
148,479 | |||
|
Secured
long-term debt
|
1,369,883 | |||
|
Unsecured
long-term debt
|
656,996 | |||
|
Other
long-term liabilities
|
3,957 | |||
|
Total
liabilities subject to compromise
|
$ | 2,264,932 | ||
Liabilities
subject to compromise includes trade accounts payable related to pre-petition
purchases, all of which were not paid. As a result, the Company’s cash flows
from operations were favorably affected by the stay of payment related to these
accounts payable.
NOTE
M—INCOME TAXES
The
Company recorded income tax expense of $3.2 million, a (1%) effective tax rate,
for the nine months ended June 27, 2009, compared to an income tax benefit of
$85.5 million, a 31% effective tax rate, for the nine months ended June 28,
2008. The income tax benefit decreased from the prior year as a result of the
Company's decision to record a valuation allowance against net deferred tax
assets, including net operating losses and credit carryforwards, in the US and
Mexico.
The
Company maintains valuation allowances when it is more likely than not that all
or a portion of a deferred tax asset may not be realized. Changes in valuation
allowances from period to period are included in the tax provision in the period
of change. We evaluate the recoverability of our deferred income tax assets by
assessing the need for a valuation allowance on a quarterly basis. If we
determine that it is more likely than not that our deferred income tax assets
will be recovered, the valuation allowance will be reduced. As of June 27, 2009,
the total value of such valuation allowances was $154.1 million.
With few
exceptions, the Company is no longer subject to US federal, state or local
income tax examinations for years prior to 2003 and is no longer subject to
Mexico income tax examination for years prior to 2005. We are currently under
audits by the Internal Revenue Service for tax years 2003 through 2006, and
expect some of the audits to be settled within the next twelve months. While we
expect certain claims made by US federal, state or local taxing authorities will
be allowed, it is not practicable at this time to estimate the amount of
significant payments, if any, to be made within the next twelve
months.
During
the next twelve months, it is reasonably possible that certain tax settlements
and claims by US federal, state or local taxing authorities could
materially change unrecognized tax benefits either because our tax
positions are sustained or because the Company agrees to their
disallowance. An estimate of the reasonably possible range cannot be made
at this time. A material change in unrecognized tax benefits could
materially affect the Company’s effective tax rate.
NOTE
N—COMPREHENSIVE LOSS
Components
of comprehensive loss include:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
income (loss)
|
$ | 53,239 | $ | (52,781 | ) | $ | (234,306 | ) | $ | (196,558 | ) | |||||
|
Unrealized
gain (loss) on securities, net of income tax impact (a)
|
737 | (491 | ) | 1,193 | (1,177 | ) | ||||||||||
|
Amortization
of pension and other postretirement benefits plans periodic costs, net of
income tax impact (b)
|
(1,029 | ) | — | (1,029 | ) | — | ||||||||||
|
Comprehensive
income (loss)
|
$ | 52,947 | $ | (53,272 | ) | $ | (234,142 | ) | $ | (197,735 | ) | |||||
|
(a)
|
The
Company allocated income tax expense (benefit) of approximately $395,
$(267), $640 and $(640) in the third quarter of 2009, the third quarter of
2008, the first nine months of 2009 and the first
nine
months of 2008, respectively, to unrealized gain (loss) on
securities.
|
|||||||||||||||
|
(b)
|
The
Company allocated income tax benefit of approximately $624 in both the
third quarter of 2009 and the first nine months of 2009 to amortization of
pension and other postretirement benefits
plans
periodic costs.
|
|||||||||||||||
NOTE
O—DERIVATIVE FINANCIAL INSTRUMENTS
In
October 2008, the Company suspended the use of derivative financial instruments
in response to its financial condition at that time. We immediately settled all
outstanding derivative financial instruments and recognized losses in the first
quarter of 2009 totaling $21.4 million that were recorded through cost of
sales.
NOTE
P—RELATED PARTY TRANSACTIONS
Lonnie
“Bo” Pilgrim, the Senior Chairman, and certain entities related to Mr. Pilgrim
are, collectively, the major stockholder of the Company (the “major
stockholder”).
Cash
transactions with the major stockholder or related entities are summarized
below.
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
June
27, 2009
|
June
28, 2008
|
June
27, 2009
|
June
28, 2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Loan
guaranty fees
|
$ | — | $ | 1,304 | $ | 1,473 | $ | 3,431 | ||||||||
|
Contract
grower pay
|
$ | 250 | $ | 259 | $ | 733 | $ | 779 | ||||||||
|
Lease
payments on commercial egg property
|
$ | 188 | $ | 188 | $ | 563 | $ | 563 | ||||||||
|
Other
sales to major stockholder
|
$ | 158 | $ | 205 | $ | 499 | $ | 557 | ||||||||
|
Lease
payments and operating expenses on airplane
|
$ | — | $ | 116 | $ | 68 | $ | 351 | ||||||||
Pilgrim
Interests, Ltd., an entity related to Lonnie “Bo” Pilgrim, guarantees a portion
of the Company's debt obligations. In consideration of such guarantees, the
Company has paid Pilgrim Interests, Ltd. a quarterly fee equal to 0.25% of
one-half of the average aggregate outstanding balance of such guaranteed debt.
Pursuant to the terms of the DIP
Credit Agreement, the Company may no longer pay any loan guarantee fees without the consent of
the lenders party thereto.
At June 27, 2009, the Company had classified accrued loan guaranty fees totaling
$5.3 million as Liabilities subject
to compromise.
The
Company previously leased an airplane from its major stockholder under an
operating lease agreement that was renewable annually. On November 18, 2008, we
cancelled this aircraft lease.
NOTE
Q—COMMITMENTS AND CONTINGENCIES
We are a
party to many routine contracts in which we provide general indemnities in the
normal course of business to third parties for various risks. Among other
considerations, we have not recorded a liability for any of these indemnities as
based upon the likelihood of payment, the fair value of such indemnities would
not have a material impact on our financial condition, results of operations and
cash flows.
At June
27, 2009, the Company was party to outstanding standby letters of credit
totaling $68.3 million that affected the amount of funds available for
borrowing under the secured revolving credit facility expiring in 2013. At the
same date, the Company was not a party to any outstanding letters of credit that
would have affected the amount of funds available for borrowing under the DIP
Credit Agreement.
The
Company is subject to various legal proceedings and claims which arise in the
ordinary course of business. In the Company’s opinion, it has made appropriate
and adequate accruals for claims where necessary; however, the ultimate
liability for these matters is uncertain, and if significantly different than
the amounts accrued, the ultimate outcome could have a material effect on the
financial condition or results of operations of the Company.
On
December 1, 2008, the Debtors filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The cases are being
jointly administered under Case No. 08-45664. The Debtors continue to operate
their business as "debtors-in-possession" under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. As of the date of the
Chapter 11 filing, virtually all pending litigation against the Company
(including the actions described below) is stayed as to the Company, and absent
further order of the Bankruptcy Court, no party, subject to certain exceptions,
may take any action, also subject to certain exceptions, to recover on
pre-petition claims against the Debtors. At this time it is not possible to
predict the outcome of the Chapter 11 filings or their effect on our
business. Below is a summary of the most significant claims outstanding against
the Company. The Company believes it has substantial defenses to the claims made
and intends to vigorously defend these cases.
Among the
claims presently pending are two identical claims brought against certain
executive officers and employees of the Company and the Pilgrim’s Pride Compensation
Committee seeking unspecified damages under section 502 of the Employee Retirement
Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132. Each of these actions
was brought by individual participants in the Pilgrim’s Pride Stock
Investment Plan, individually and on behalf of a putative class, alleging that the individual defendants
breached fiduciary duties to plan participants and beneficiaries. Although the Company is not a named
defendant in these actions, our bylaws require us to indemnify our current and
former directors and officers from any liabilities and expenses incurred by them
in connection with actions they took in good faith while serving as an officer
or director. The likelihood of an unfavorable outcome or the amount or
range of any possible loss to the Company cannot be determined at this
time.
Among the
claims presently pending against the Company are two identical claims seeking
unspecified damages, each brought by a stockholder, individually and on behalf
of a putative class, alleging violations of certain antifraud provisions of the
Securities Exchange Act of 1934. The Company intends to defend vigorously
against the merits of these actions. The likelihood of an unfavorable outcome or
the amount or range of any possible loss to the Company cannot be determined at
this time.
Other
claims presently pending against the Company are claims seeking unspecified
damages brought by current and former employees seeking compensation for the
time spent donning and doffing clothing and personal protective equipment. We
are aware of an industry-wide investigation by the Wage and Hour Division of the
US Department of Labor to ascertain compliance with various wage and hour
issues, including the compensation of employees for the time spent on activities
such as donning and doffing clothing and personal protective equipment. Due, in
part, to the government investigation and the recent US Supreme Court decision
in IBP, Inc. v. Alvarez, it is
possible that we may be subject to additional employee claims. We intend to
assert vigorous defenses to the litigation. Nonetheless, there can be no
assurances that other similar claims may not be brought against the
Company.
US
Immigration and Customs Enforcement (“ICE”) recently investigated allegations of
identity theft within our workforce. With our cooperation, ICE arrested
approximately 350 of our employees in 2008 believed to have engaged in identity
theft at five of our facilities. No assurances can be given that further
enforcement efforts by governmental authorities against our employees or the
Company will not disrupt a portion of our workforce or our operations at one or
more of our facilities, thereby negatively impacting our
business.
NOTE
R—BUSINESS SEGMENTS
Subsequent
to the sale of our turkey operations, we operate in two reportable business
segments as (1) a producer and seller of chicken products and (2) a seller of
other products. The following table presents certain information regarding our
segments:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales to customers:
|
||||||||||||||||
|
Chicken:
|
||||||||||||||||
|
United
States
|
$ | 1,516,468 | $ | 1,829,163 | ||||||||||||