SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 26, 1998 Commission File number 1-9273
PILGRIM'S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1285071
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 SOUTH TEXAS, PITTSBURG, TX 75686-0093
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (903) 855-1000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
TITLE OF EACH CLASS WHICH REGISTERED
Class A Common Stock, Par Value $0.01 New York Stock Exchange
Class B Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Class B Common Stock, $0.01
par value, held by non-affiliates of the Registrant as of December 8, 1998,
was $236,108,468. For purposes of the foregoing calculation only, all
directors, executive officers, and 5% beneficial owners have been deemed
affiliates.
27,589,250 shares of the Registrant's Class B Common Stock, $.01 par value,
were outstanding as of December 10, 1998.
No Class A Common Stock was outstanding as of December 10, 1998; Registrant
issued 13,794,529 shares of the Registrant's Class A Common Stock pursuant
to a stock dividend on July 30, 1999, for which this amended 10-K is being
filed.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the annual meeting of
stockholders to be held February 3, 1999 are incorporated by reference into
Part III.
PILGRIM'S PRIDE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business 4
Item 2. Properties 18
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders. 20
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition 23
Item 8. Financial Statements and Supplementary Data (see Index to Financial
Statements and Schedules below). 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. 30
PART III
Item 10. Directors and Executive Officers of Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 31
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
Signatures. 38
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Ernst & Young LLP--Independent Auditors 41
Consolidated Balance Sheets as of September 26, 1998 and
September 27, 1997 42
Consolidated Statements of Income (Loss) for the years ended
September 26, 1998, September 27, 1997 and September 28, 1996 43
Consolidated Statements of Stockholders' Equity for the years ended
September 26, 1998, September 27, 1997 and September 28, 1996 44
Consolidated Statements of Cash Flows for the years ended
September 26, 1998, September 27, 1997 and September 28,1996 45
Notes to Consolidated Financial Statements 46
Schedule II - Valuation and Qualifying Accounts for the years ended
September 26, 1998, September 27, 1997 and September 28, 1996 51
PART I
ITEM 1. BUSINESS
GENERAL
Pilgrim's Pride Corporation (the "Company"), which was incorporated in
Texas in 1968 and reincorporated in Delaware in 1986, is the successor to a
partnership founded in 1946 as a retail feed store. Over the years, the
Company grew through both internal growth and various acquisitions of
farming operations and chicken processors. In addition to domestic growth,
the Company initially expanded into Mexico through the acquisition of
several smaller chicken producers in 1988.
Pilgrim's Pride Corporation is one of the largest producers of
prepared and fresh chicken products in North America and has one of the
best known brand names in the chicken industry. The Company is the fourth
largest producer of chicken in the United States and one of the two largest
in Mexico. Through vertical integration, the Company controls the
breeding, hatching and growing of chickens and the processing, preparation,
packaging and sale of its product lines. In fiscal 1998, approximately 79%
of the Company's net sales were from its U.S. operations, including U.S.
produced chicken products sold for export to Canada, Eastern Europe, the
Far East and other world markets, with the remaining approximately 21%
arising from the Company's Mexico operations.
The Company's objectives are to increase sales, profit margins and
earnings and outpace the growth of the chicken industry: (i) by focusing on
growth in the prepared food products market, (ii) by focusing on growth in
the Mexico market, and (iii) through greater utilization of the Company's
existing assets. Key elements of the Company's strategy to achieve these
objectives are to:
FOCUS U.S. GROWTH ON PREPARED FOODS. In recent years the Company has
focused its sales of prepared foods to the foodservice market,
particularly to chain restaurants and frozen entre producers. The
market for prepared foods has experienced greater growth and higher
margins than fresh chicken products, and the Company's sales of
prepared foods products to the foodservice market have grown from
$206.4 million in fiscal 1994 to $420.4 million in fiscal 1998, a
compounded annual growth rate of 19.5%. Additionally, the production
and sale of prepared foods reduces the impact of feed ingredient costs
on the Company's profitability. As further processing is performed,
feed ingredient costs become a decreasing percentage of a product's
total production cost. The Company is now the largest supplier of
chicken to Wendy's and Jack-in-the-Box chain restaurants and to
Stouffer's frozen entre operation. Other major prepared foods
customers include KFC and Taco Bell. Prepared foods constituted 51.1%
of the Company's U.S. chicken sales in fiscal 1998.
FOCUS ON CUSTOMER DRIVEN RESEARCH AND TECHNOLOGY. Much of the
Company's growth in prepared foods has been the result of customer-
driven research & development focused on designing new products to
meet customers' changing needs. The Company's research & development
personnel often work directly with institutional customers in
developing proprietary products. Approximately $188.1 million of the
Company's sales to foodservice customers in fiscal 1998 consisted of
new products, which were not sold by the Company in fiscal 1994. The
Company is also a leader in utilizing advanced processing technology,
which enables the Company to better meet its customers' needs for
product innovation, consistent quality and cost efficiency.
ENHANCE THE U.S. FRESH CHICKEN PRODUCT MIX THROUGH VALUE-ADDED,
BRANDED PRODUCTS. The Company's fresh chicken business is an important
component of its sales and has grown from sales of $280.9 million in
fiscal 1994 to $307.6 million in fiscal 1998. In addition to
maintaining its sales of mature, traditional fresh chicken products,
the Company's strategy is to shift the mix of its U.S. fresh chicken
products by continuing to increase sales of higher margin, faster
growing products, such as marinated chicken and chicken parts.
MAINTAIN OPERATING EFFICIENCIES AND INCREASE CAPACITY ON A COST-
EFFECTIVE BASIS. As production and sales have grown, the Company has
maintained operating efficiencies by investing in state-of-the-art
technology, processes and training and by making cost-effective
acquisitions both in the U.S. and Mexico. As a result, according to
industry data, since 1993 the Company has consistently been one of the
lowest cost producers of chicken.
CAPITALIZE ON INTERNATIONAL DEMAND FOR U.S. CHICKEN. Due to U.S.
consumers' preference for chicken breast meat, the Company has
targeted international markets to generate sales of leg quarters. The
Company has also begun selling prepared food products for export to
the international divisions of its U.S. chain restaurant customers. As
a result of these efforts, sales for these markets have grown from
less than 2% of the Company's total U.S. chicken sales in fiscal 1994
to more than 6% in fiscal 1998. Management believes that: (i) U.S.
chicken exports will continue to grow as worldwide demand for high
grade, low costs protein sources increases, and (ii) worldwide demand
for higher margin prepared food products will increase over the next
five years; and accordingly, the Company is well positioned to
capitalize on such growth.
CAPITALIZE ON INVESTMENTS AND EXPERTISE IN MEXICO. The Company's
strategy in Mexico is focused on: (i) being one of the most cost-
efficient producers and processors of chicken in Mexico by applying
technology and expertise utilized in the U.S. and (ii) increasing
distribution of its higher margin, value added products to national
retail stores and restaurants. This strategy has resulted in the
Company obtaining a market leadership position, with its estimated
market share in Mexico increasing from 11.6% in 1994 to 15.8% in 1998.
The Company's chicken products consist primarily of: (i) prepared
foods, which include portion-controlled breast fillets, tenderloins and
strips, formed nuggets and patties and bone-in chicken parts, which are
sold frozen and may be either fully cooked or raw, (ii) fresh chicken,
which includes refrigerated (non-frozen), whole or cut-up chicken sold to
the foodservice industry either pre-marinated or non-marinated and
prepackaged chicken, which includes various combinations of freshly
refrigerated, whole chickens and chicken parts in trays, bags or other
consumer packs labeled and priced ready for the retail grocers' fresh meat
counter, and (iii) export and other, which includes parts and whole
chicken, either refrigerated or frozen for U.S. export or domestic use.
The Company's Mexico products consist of live, uneviscerated and
eviscerated chicken.
The following table sets forth, for the periods since fiscal 1994, net
sales attributable to each of the Company's primary product lines and
markets served with such products. The table is based on the Company's
internal sales reports and its classification of product types and
customers.
FISCAL YEAR ENDED
Sept. 26, Sept. 27, Sept. 28, Sept. 30, Oct. 1,
1998 1997 1996 1995 1994
(in thousands)
U.S. Chicken Sales:
Prepared Foods:
FOOD SERVICE $ 420,396 $ 348,961 $ 305,250 $ 241,594 $ 206,396
Retail 46,400 42,289 43,442 39,071 61,553
Total Prepared Foods 466,796 391,250 348,692 280,665 267,949
Fresh Chicken:
Food Service 145,297 174,103 145,377 140,433 155,368
Retail 162,283 154,554 141,876 138,950 125,539
Total Fresh Chicken 307,580 327,657 287,253 279,383 280,907
Export and Other 139,976 142,030 140,614 113,414 88,437
Total U.S. Chicken 914,352 860,937 776,559 673,462 637,293
Mexico 278,087 274,997 228,129 159,491 188,744
Total Chicken Sales 1,192,439 1,135,934 1,004,688 832,953 826,037
Sales of Other
U.S. Products 139,106 141,715 134,622 98,853 96,572
Total Net Sales $1,331,545 $1,277,649 $1,139,310 $931,806 $922,609
UNITED STATES
The following table sets forth, since fiscal 1994, the percentage of
net U.S. chicken sales attributable to each of the Company's primary
product lines and markets serviced with such products. The table and
related discussion are based on the Company's internal sales reports and
its classification of product types and customers.
FISCAL YEAR ENDED
Sept. 26, Sept. 27, Sept. 28, Sept. 30, Oct. 1,
1998 1997 1996 1995 1994
U.S. Chicken Sales:
Prepared Foods:
Foodservice 46.0 % 40.5 % 39.3 % 35.9 % 32.4 %
Retail 5.1 4.9 5.6 5.8 9.6
Total Prepared Foods 51.1 45.4 44.9 41.7 42.0
Fresh Chicken:
Foodservice 15.9 20.2 18.7 20.9 24.4
Retail 17.7 17.9 18.3 20.6 19.7
Total Fresh 33.6 38.1 37.0 41.5 44.1
Chicken
15.3 16.5 18.1 16.8 13.9
TOTAL U.S. CHICKEN
SALES MIX 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
PRODUCT TYPES
U.S. PREPARED FOODS OVERVIEW. During fiscal 1998, $466.8 million of
the Company's net U.S. chicken sales were in prepared foods products to
foodservice and retail, as compared to $268.0 million in fiscal 1994, which
reflects the strategic focus for growth of the Company. The market for
prepared food products has experienced, and management believes that this
market will continue to experience, greater growth and higher margins than
fresh chicken products. Additionally, the production and sale of prepared
foods reduces the impact of feed ingredient costs on the Company's
profitability. As further processing is performed, feed ingredient costs
becomes a decreasing percentage of a product's total production costs.
The Company establishes prices for its prepared food products based
primarily upon perceived value to the customer, production costs and prices
of competing products. The majority of these products are sold pursuant to
agreements with varying terms that either set a fixed price for the
products or set a price according to formulas based on an underlying
commodity market, subject in many cases to minimum and maximum prices.
U.S. Fresh Chicken Overview. The Company's fresh chicken business is
an important component of its sales and has grown from sales of $280.9
million in fiscal 1994 to $307.6 million in fiscal 1998. In addition to
maintaining its sales of mature, traditional fresh chicken products, the
Company's strategy is to shift the mix of its U.S. fresh chicken products
by continuing to increase sales of higher margin, faster growing products,
such as marinated chicken and chicken parts.
Most fresh chicken products are sold to established customers based
upon certain weekly or monthly market prices reported by the USDA and other
public price reporting services, plus a markup, which is dependent upon the
customer's location, volume, product specifications and other factors. The
Company believes its practices with respect to sales of its fresh chicken
are generally consistent with those of its competitors. Prices of these
products are negotiated daily or weekly and are generally related to market
prices quoted by the USDA or other public reporting services.
EXPORT AND OTHER OVERVIEW. The Company's export and other products
consist of whole chickens and chicken parts sold primarily in bulk, non-
branded form either refrigerated to distributors in the U.S. or frozen for
distribution to export markets. Sales growth in the "Export and Other"
category between fiscal 1994 and fiscal 1998 primarily reflects increased
exports of chicken products. In fiscal 1998, approximately $55.6 million
of the Company's sales were attributable to exports of U.S. chicken. These
exports and other products have historically been characterized by lower
prices and greater price volatility than the Company's more value-added
product lines.
MARKETS
U.S. FOODSERVICE. The majority of the Company's U.S. chicken sales
are derived from products sold to the foodservice market which principally
consists of chain restaurants, frozen entre producers, institutions and
distributors, located throughout the continental United States. The Company
supplies chicken products ranging from portion-controlled refrigerated
chicken parts to fully cooked and frozen, breaded or non-breaded chicken
parts or formed products.
As the second largest full-line supplier of chicken to the foodservice
market, the Company believes it is well-positioned to be the primary or
secondary supplier to many national and international chain restaurants who
require multiple suppliers of chicken products. Additionally, the Company
is well suited to be the sole supplier for many regional chain restaurants
that offer better margin opportunities and a growing base of business. Due
to its comparatively large size in this market, management believes the
Company has significant competitive advantages in terms of product
capability, production capacity, research and development expertise, and
distribution and marketing experience relative to smaller and to non-
vertically integrated producers. As a result of these competitive
advantages, the Company's sales to the foodservice market from fiscal 1994
through fiscal 1998 grew at a compound annual growth rate of approximately
11.8%. Based on industry data, the Company estimates that total industry
dollar sales to the foodservice market during this same period grew at a
compounded annual growth rate of approximately 6.9%. The Company markets
both prepared food and fresh chicken products to the foodservice industry.
FOODSERVICE - PREPARED FOODS: The majority of the Company's sales to
the foodservice market consist of prepared food products. Prepared food
sales to the foodservice market were $420.4 million in fiscal 1998 compared
to $206.4 million in fiscal 1994, a compounded growth rate of approximately
19.5%. The Company's prepared food products include portion-controlled
breast fillets, tenderloins and strips, formed nuggets and patties and
bone-in chicken parts, which are sold frozen and in various states of
preparation, including blanched, battered, breaded and either partially or
fully cooked. The Company attributes this growth in sales of prepared
foods to the foodservice market to a number of factors:
FIRST, there has been significant growth in the number of
foodservice operators offering chicken on their menus and the number
of chicken items offered.
SECOND, foodservice operators are increasingly purchasing
prepared chicken products, which allow them to reduce labor cost while
providing greater product consistency, quality and variety across all
restaurant locations.
THIRD, there is a strong need among larger foodservice companies
for an alternative or additional supplier to the Company's principal
competitor in the prepared foods market. A viable alternative supplier
must be able to ensure supply, demonstrate innovation and new product
development, and provide competitive pricing. The Company has been
successful in its objective of becoming the alternative supplier of
choice by being the primary or secondary prepared chicken supplier to
many large foodservice companies because: (i) it is vertically
integrated, giving the Company control over its supply of chicken and
chicken parts, (ii) its further processing facilities are particularly
well suited to the high volume production runs necessary to meet the
capacity and quality requirements of the U.S. foodservice market, and
(iii) it has established a reputation for dependable quality, highly
responsive service and excellent technical support.
FOURTH, as a result of the experience and reputation developed
with larger customers, the Company has increasingly become the
principal supplier to mid-sized foodservice organizations.
FIFTH, the Company's in-house product development group follows a
customer-driven research & development focus designed to develop new
products to meet customers' changing needs. The Company's research &
development personnel often work directly with institutional customers
in developing proprietary products. Approximately $188.1 million of
the Company's sales to foodservice customers in fiscal 1998 consisted
of new products, which were not sold by the Company in fiscal 1994.
SIXTH, the Company is a leader in utilizing advanced processing
technology, which enables the Company to better meet its customers'
needs for product innovation, consistent quality and cost efficiency.
FOODSERVICE - FRESH CHICKEN: The Company produces and markets fresh,
refrigerated chicken for sale to U.S. quick-service restaurant chains,
delicatessens and other customers. These chickens have the giblets removed,
are usually of specific weight ranges, are usually pre-cut to customer
specifications and are often marinated to enhance value and product
differentiation. By growing and processing to customers' specifications,
the Company is able to assist quick-service restaurant chains in
controlling costs and maintaining quality and size consistency of chicken
pieces sold to the consumer.
U.S. RETAIL. The U.S. retail market consists primarily of grocery
store chains and retail distributors. The Company concentrates its efforts
in this market on sales of branded, prepackaged cut-up and whole chicken to
grocery chains and retail distributors in the mid-western, southwestern and
western regions of the United States. This regional marketing focus
enables the Company to develop consumer brand franchises and capitalize on
proximity to the trade customer in terms of lower transportation costs;
more timely, responsive service; and enhanced product freshness. For a
number of years, the Company has invested in both trade and retail
marketing designed to establish high levels of brand name awareness and
consumer preferences within these markets.
The Company utilizes numerous marketing techniques, including
advertising, to develop and strengthen trade and consumer awareness and
increase brand loyalty for consumer products marketed under the "Pilgrim's
Pride" brand. The Company's founder, Lonnie "Bo" Pilgrim, is the featured
spokesman in the Company's television, radio and print advertising, and a
trademark cameo of a person in a Pilgrim's hat serves as the logo on all of
the Company's primary branded products. As a result of this marketing
strategy, the Company has established a well-known brand name in certain
southwestern markets, including the Dallas/Fort Worth area. Management
believes its efforts to achieve and maintain brand awareness and loyalty
help to provide more secure distribution for its products and generate
greater price premiums than would otherwise be the case in certain
southwestern markets. The Company also maintains an active program to
identify consumer preferences primarily by testing new product ideas,
packaging designs and methods through taste panels and focus groups located
in key geographic markets.
RETAIL - PREPARED FOODS. The Company sells retail oriented prepared
foods primarily to grocery store chains located in the mid-western,
southwestern and western region of the U.S. where it also markets
prepackaged fresh chicken. Being a major, national competitor in retail,
branded frozen foods is not a part of the Company's current business
strategy. The Company no longer serves the wholesale club industry, which
is now dominated by two large national operators, and has redirected this
prepared foods capacity to a more diversified customer base.
RETAIL - FRESH CHICKEN. The Company's prepackaged retail products
include various combinations of freshly refrigerated whole chickens and
chicken parts in trays, bags or other consumer packs, labeled and priced
ready for the grocer's fresh meat counter. Management believes the retail,
prepackaged fresh chicken business will continue to be a large and
relatively stable market, providing opportunities for product
differentiation and regional brand loyalty.
The Company concentrates its sales and marketing efforts for the above
product types to grocery chains and retail distributors in the mid-western,
southwestern and western regions of the United States. This regional
marketing focus enables the Company to develop consumer brand franchises
and capitalize on proximity to the trade customer in terms of lower
transportation costs; more timely, responsive service; and enhanced product
freshness.
EXPORT AND OTHER CHICKEN. The Company's export and other products
consist of whole chickens and chicken parts sold primarily in bulk, non-
branded form either refrigerated to distributors in the U.S., or frozen for
distribution to export markets. In recent years, the Company has de-
emphasized its marketing of bulk-packaged chicken in the U.S. in favor of
more value-added products and export opportunities. In the U.S., prices of
these products are negotiated daily or weekly and are generally related to
market prices quoted by the USDA or other public price reporting services.
The Company also sells U.S. produced chicken products for export to Canada,
Eastern Europe, the Far East and other world markets. Due to U.S.
consumers' preference for chicken breast meat, the Company has targeted
international markets to generate sales of leg quarters. The Company has
also begun selling prepared food products for export to the international
divisions of its U.S. chain restaurant customers. As a result of these
efforts, the Company's sales for export have grown from less than 2% of its
total U.S. chicken sales in fiscal 1994 to more than 6% in fiscal 1998.
Management believes that: (i) U.S. chicken exports will continue to grow
as worldwide demand for high grade low cost protein sources increases, (ii)
worldwide demand for higher margin prepared food products will increase
over the next five years, and accordingly, (iii) the Company is well
positioned to capitalize on such growth.
OTHER U.S. PRODUCTS. The Company markets fresh eggs under the
Pilgrim's Pride brand name as well as private labels in various sizes of
cartons and flats to U.S. retail grocery and institutional foodservice
customers located primarily in Texas. The Company has a housing capacity
for approximately 2.3 million commercial egg laying hens which can produce
approximately 41 million dozen eggs annually. U.S. egg prices are
determined weekly based upon reported market prices. The U.S. egg industry
has been consolidating over the last few years with the 25 largest
producers accounting for more than 58% of the total number of egg laying
hens in service during 1998. The Company competes with other U.S. egg
producers primarily on the basis of product quality, reliability, price and
customer service. According to an industry publication, the Company is the
twenty-eighth largest producer of eggs in the United States.
The Company also converts chicken by-products into protein products
primarily for sale to manufacturers of pet foods. In addition, the Company
produces and sells livestock feeds at its feed mills in Pittsburg and Mt.
Pleasant, Texas and at its farm supply store in Pittsburg, Texas to dairy
farmers and livestock producers in northeastern Texas.
MEXICO
BACKGROUND. The Mexico market represented approximately 20.9% of the
Company's net sales in fiscal 1998. The Company entered the Mexico market
in 1979 when it began seasonally selling eggs to the Mexico government.
Recognizing favorable long-term demographic trends and improving economic
conditions in Mexico, the Company began exploring opportunities to produce
and market chicken in Mexico. In fiscal 1988, the Company acquired four
vertically integrated chicken production operations in Mexico for
approximately $15.1 million. From fiscal 1988 through fiscal 1998, the
Company made acquisitions and capital expenditures in Mexico totaling
$172.7 million to expand and improve such operations. As a result of these
expenditures, the Company has increased weekly production in its Mexico
operations by over 350% since its original investment in fiscal 1988. The
Company is now one of the two largest producers of chicken in Mexico. The
Company believes its facilities are among the most technologically advanced
in Mexico and that it is one of the lowest cost producers of chicken in
Mexico.
PRODUCT TYPES. While the market for chicken products in Mexico is
less developed than in the United States, with sales attributed to fewer,
more basic products, the market for value added products is increasing.
The Company's strategy is to lead this trend. The products currently sold
by the Company in Mexico consist primarily of basic products such as New
York dressed (whole chickens with only feathers and blood removed), live
birds and value added products such as eviscerated chicken and chicken
parts. The Company has increased its sales of value added products,
particularly through national retail chains and restaurants, and plans to
continue to do so. The Company remains opportunistic, however, utilizing
its low cost production to enter markets where profitable opportunities
exist. For example, the Company has significantly increased its sales of
live birds since 1994 as many smaller producers exited this segment of the
business as a result of the recession in Mexico.
MARKETS. The Company sells its Mexico chicken products primarily to
large wholesalers and retailers. The Company's customer base in Mexico
covers a broad geographic area from Mexico City, the capital of Mexico with
a population estimated to be over 20 million, to Saltillo, the capital of
the State of Coahuila, about 500 miles north of Mexico City, and from
Tampico on the Gulf of Mexico to Acapulco on the Pacific, which region
includes the cities of San Luis Potosi and Queretaro, capitals of the
states of the same name.
COMPETITION
The chicken industry is highly competitive and certain of the
Company's competitors have greater financial and marketing resources than
the Company. In the United States and Mexico, the Company competes
principally with other vertically integrated chicken companies.
In general, the competitive factors in the U.S. chicken industry
include price, product quality, brand identification, breadth of product
line and customer service. Competitive factors vary by major market. In
the foodservice market, competition is based on consistent quality, product
development, service and price. In the U.S. retail market, management
believes that product quality, brand awareness and customer service are the
primary bases of competition. There is some competition with non-
vertically integrated further processors in the U.S. prepared food
business. The Company believes it has significant, long-term cost and
quality advantages over non-vertically integrated further processors.
In Mexico, where product differentiation is limited, product quality
and price are the most critical competitive factors. The North American
Free Trade Agreement, which went into effect on January 1, 1994, requires
annual reductions in tariffs for chicken and chicken products in order to
eliminate such tariffs by January 1, 2003. As such tariffs are reduced,
there can be no assurance that increased competition from chicken imported
into Mexico from the U.S. will not have a material adverse effect on the
Mexico chicken industry in general, or the Company's Mexico operations in
particular.
OTHER ACTIVITIES
The Company has regional distribution centers located in Arlington, El
Paso, Mt. Pleasant and San Antonio, Texas; Phoenix, Arizona; and Oklahoma
City, Oklahoma that distribute the Company's own poultry products along
with certain poultry and non-poultry products purchased from third parties
to independent grocers and quick service restaurants. The Company's non-
poultry distribution business is conducted as an accommodation to their
customers and to achieve greater economies of scale in distribution
logistics. The store-door delivery capabilities for the Company's own
poultry products provide a strategic service advantage in selling to quick
service, national chain restaurants.
REGULATION
The chicken industry is subject to government regulation, particularly
in the health and environmental areas. The Company's chicken processing
facilities in the U.S. are subject to on-site examination, inspection and
regulation by the USDA. The FDA inspects the production of the Company's
feed mills in the U.S. The Company's Mexican food processing facilities
and feed mills are subject to on-site examination, inspection and
regulation by a Mexican governmental agency, which performs functions
similar to those performed by the USDA and FDA. Since commencement of
operations by the Company's predecessor in 1946, compliance with applicable
regulations has not had a material adverse effect upon the Company's
earnings or competitive position and such compliance is not anticipated to
have a materially adverse effect in the future. Management believes that
the Company is in substantial compliance with all applicable laws and
regulations relating to the operations of its facilities.
The Company anticipates increased regulation by the USDA concerning
food safety, by the FDA concerning the use of medications in feed and by
the TNRCC, the ASVO and the EPA concerning the disposal of chicken by-
products and wastewater discharges. Although the Company does not
anticipate any such regulation having a material adverse effect upon the
Company, no assurances can be given to that effect.
EMPLOYEES AND LABOR RELATIONS
As of December 14, 1998 the Company employed approximately 9,700
persons in the U.S. and 3,300 persons in Mexico. Approximately 2,000
employees at the Company's Lufkin and Nacogdoches, Texas facilities are
members of collective bargaining units represented by the United Food and
Commercial Workers Union (the "UFCW"). None of the Company's other U.S.
employees have union representation. The Company's collective bargaining
agreements with the UFCW expire on August 10, 2001 with respect to the
Company's Lufkin employees and on October 6, 2001 with respect to the
Company's Nacogdoches employees. The Company believes that the terms of
each of these agreements are no more favorable than those provided to its
non-union U.S. employees. In Mexico, most of the Company's hourly
employees are covered by collective bargaining agreements as most employees
are in Mexico. The Company has not experienced any work stoppage since a
two-day work stoppage at the Lufkin facility in May 1993, and management
believes that relations with the Company's employees are satisfactory.
STATEMENTS REGARDING FORWARD LOOKING COMMENTS
Except for historical information contained herein, Management's
Discussion and Analysis of Results of Operations and Financial Condition or
other discussions elsewhere in this Form 10K contains forward-looking
statements that are dependent upon a number of risks and uncertainties that
could cause actual results to differ materially from those in the forward-
looking statement. These risks and uncertainties include changes in
commodity prices of feed grain and chicken, the Company's substantial
indebtedness, risks associated with the Company's foreign operations,
including currency exchange rate fluctuations, trade barriers, exchange
controls, expropriation and changes in laws and practices, the impact of
current and future laws and regulations, and the other risks described in
the Company's SEC filings. The Company does not intend to provide updated
information about the matters referred to in these forward looking
statements, other than in the context of Management's Discussion and
Analysis of Results of Operations and Financial Condition contained herein
and other disclosures in the Company's SEC filings.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information relating to the Current
directors and executive officers of the Company:
EXECUTIVE OFFICERS OF THE COMPANY AGE POSITIONS
Lonnie "Bo" Pilgrim (1) 70 Chairman of the Board
Clifford E. Butler 56 Vice Chairman of the Board
David Van Hoose 56 Chief Executive Officer
President
Chief Operating Officer
Director
Richard A. Cogdill 38 Executive Vice President
Chief Financial Officer
Secretary and Treasurer
Director
O.B. Goolsby, Jr. 51 Executive Vice President
Prepared Foods Complexes
Robert L. Hendrix 62 Executive Vice President
Growout and Processing
Michael J. Murray 40 Executive Vice President
Sales & Marketing and Distribution
Randy P. Stroud Executive Vice President
Mexico Operations
Ray Gameson 49 Senior Vice President
Human Resources
David Hand 42 Senior Vice President
Sales and Marketing
Retail and Fresh Products
Michael D. Martin 44 Senior Vice President
Complex Manager
DeQueen and Nashville
Arkansas Complex
James J. Miner, Ph.D. 70 Senior Vice President
Technical Services
Robert N. Palm 55 Senior Vice President
Lufkin, Nacogdoches and Center
Texas Complex
Lonnie Ken Pilgrim (1) 40 Senior Vice President,
Director of Transportation
Director
Charles L. Black (1) 68 Director
Robert E. Hilgenfeld (1) (2) 73 Director
Vance C. Miller, Sr. (1) (2) 64 Director
James G. Vetter, Jr. (1) (2) 64 Director
Donald L. Wass, Ph.D. (1) (2) 66 Director
_________
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
LONNIE "BO" PILGRIM has served as Chairman of the Board since the
organization of the Company in July 1968. He was previously Chief Executive
Officer from July 1968 to June 1998. Prior to the incorporation of the
Company, Mr. Pilgrim was a partner in the Company's predecessor partnership
business founded in 1946.
CLIFFORD E. BUTLER serves as Vice Chairman of the Board. He joined
the Company as Controller and Director in 1969, was named Senior Vice
President of Finance in 1973, became Chief Financial Officer and Vice
Chairman of the board in July 1983, became Executive President on January
1997 and served in such capacity through July 1998 and continues to serve
as Vice Chairman of the Board.
DAVID VAN HOOSE serves as Chief Executive Officer, President and Chief
Operating Officer of the Company. He was named Chief Executive Officer and
Chief Operating Officer in June 1998 and President in July 1998. He was
previously President of Mexico Operations from April 1993 to June 1998 and
Senior Vice President, Director General, Mexico Operations from August 1990
to April 1993. Mr. Van Hoose was employed by the Company in September 1988
as Senior Vice President, Texas Processing. Prior to that, Mr. Van Hoose
was employed by Cargill, Inc., as General Manager of one of its chicken
operations.
RICHARD A. COGDILL has served as Executive Vice President, Chief
Financial Officer, Secretary and Treasurer since January 1997. He became a
Director in September 1998. Previously he served as Senior Vice President,
Corporate Controller, from August 1992 through December 1996 and as Vice
President, Corporate Controller from October 1991 through August 1992.
Prior to October 1991 he was a Senior Manager with Ernst & Young LLP. He
is a Certified Public Accountant.
O.B. GOOLSBY, JR. has served as Executive Vice President, Prepared
Foods Operations since June 1998. He was previously Senior Vice President,
Prepared Foods Operations from August 1992 to June 1998 and Vice President,
Prepared Foods Operations from April 1986 to August 1992 and was previously
employed by the Company from November 1969 to January 1981.
ROBERT L. HENDRIX has been Executive Vice President, Operations, of
the Company since March 1994. He was a Director of the Company from March
1994 to September 1998. Prior to that he served as Senior Vice President,
NETEX Processing from August 1992 to March 1994 and as President and Chief
of Complex Operations from September 1988 to March 1992. He was on leave
from the Company from March 1992 to August 1992. From July 1983 to March
1992 he served as a Director of the Company. He was President and Chief
Operating Officer of the Company from July 1983 to September 1988. He
joined the Company as Senior Vice President in September 1981 when the
Company acquired Mountaire Corporation of DeQueen, Arkansas, and, prior
thereto, he was Vice President of Mountaire Corporation.
MICHAEL J. MURRAY has been Executive Vice President, Sales & Marketing
and Distribution since June 1998. He previously served as Senior Vice
President, Sales & Marketing, Prepared Foods from October 1994 to June 1998
and as Vice President of Sales and Marketing, Food Service from August 1993
to October 1994. From 1990 to July 1993, he was employed by Cargill, Inc.
Prior to that, from March 1987 to 1990 he was employed by the Company as a
Vice President for sales and marketing and prior thereto, he was employed
by Tyson Foods, Inc.
RANDY P. STROUD has served as Executive Vice President, Mexico
Operations since August 1998. Previously he was Live Production Manager at
the Lufkin, Texas Complex from May 1989 to August 1998 and as Breeder
Department Manager from June 1985 to May 1989. Prior to that he was
employed in various operating management positions by Plus-Tex Poultry,
Inc., a Lufkin, Texas based Company acquired by Pilgrim's Pride in June of
1985.
RAY GAMESON has been Senior Vice President of Human Resources since
October 1994. He previously served as Vice President of Human Resources
since August 1993. From December 1991 to July 1993, he was employed by
Townsends, Inc. and served as Complex Human Resource, Manager. Prior to
that, he was employed by the Company as Complex Human Resource, Manager, at
its Mt. Pleasant, Texas location.
DAVID HAND has served as Senior Vice President of Sales and Marketing,
Retail and Fresh Products since January 1998. Previously he was Vice
President of Commodity and export Sales from November 1996 to June 1998.
Prior to that he was Director of Commodity and Export Sales from October
1992 to November 1996. He joined the Company in June 1990 and was Export
Sales Manager from June 1990 to October 1992. Prior to that he was
President of Plantation Marketing and was with ConAgra from 1979 to 1986.
MICHAEL D. MARTIN has been Senior Vice President, DeQueen, Arkansas
Complex Manager, of the Company since April 1993. He previously served as
Plant Manager at the Company's Lufkin, Texas operations and Vice President,
Processing, at the Company's Mt. Pleasant, Texas, operations up to April
1993. He has served in various other operating management positions in the
Arkansas Complex since September 1981. Prior to that, he was employed by
Mountaire Corporation of DeQueen, Arkansas, until it was acquired by the
Company in September 1981.
JAMES J. MINER, PH.D., has been Senior Vice President, Technical
Services, since April 1994. He has been employed by the Company and its
predecessor partnership since 1966 and served as Senior Vice President
responsible for live production and feed nutrition from 1968 to April 1994.
He was a Director from the incorporation of the Company in 1968 through
September 1998.
ROBERT N. PALM has been Senior Vice President, Lufkin, Texas, Complex
Manager of the Company, since June 1985 and was previously employed in
various operating management positions by Plus-Tex Poultry, Inc., a Lufkin,
Texas based company acquired by Pilgrim's Pride in June 1985.
LONNIE KEN PILGRIM has been employed by the Company since 1977 and has
been Senior Vice President, Transportation since August 1997. Prior to
that he served the Company as its Vice President, Director of
Transportation. He has been a member of the Board of Directors since March
1985. He is a son of Lonnie "Bo" Pilgrim.
CHARLES L. BLACK was Senior Vice President, Branch President of
NationsBank, Mt. Pleasant, Texas, from December 1981 to his retirement in
February 1995. He previously was a Director of the Company from 1968 to
August 1992 and has served as a director since his re-election in February
1995.
ROBERT E. HILGENFELD was elected a Director in September 1986. Mr.
Hilgenfeld was a Senior Vice President-Marketing/Processing for the Company
from 1969 to 1972 and for seventeen years prior to that worked in various
sales and management positions for the Quaker Oat Company. From 1972 until
April 1986, he was employed by Church's Fried Chicken Company ("Church's")
as Vice President-Purchasing Group, Vice President and Senior Vice
President. He was elected a Director of Church's in 1985 and retired from
Church's in April 1986. Since retirement he has served as a consultant to
various companies including the Company.
VANCE C. MILLER, SR. was elected a Director in September 1986. Mr.
Miller has been Chairman of Vance C. Miller Interests, a real estate
development company formed in 1977 and has served as the Chairman of the
Board and Chief Executive Officer of Henry S. Miller Cos., a Dallas, Texas
real estate services firm since 1991. Mr. Miller also serves as a director
of Resurgence Properties, Inc.
JAMES G. VETTER, JR. has practiced law in Dallas, Texas since 1966.
He is a member of the Dallas law firm of Godwin & Carlton, P.C., and has
served as general counsel and a Director since 1981. Mr. Vetter is a Board
Certified-Tax Law Specialist and serves as a lecturer and author in tax
matters.
DONALD L. WASS, Ph.D. was elected a Director of the Company in May
1987. He has been President of the William Oncken Company of Texas, a time
management consulting company, since 1970.
ITEM 2. PROPERTIES
PRODUCTION AND FACILITIES
BREEDING AND HATCHING: The Company supplies all of its chicks in the
U.S. by producing its own hatching eggs from domestic breeder flocks in the
U.S. owned by the Company, approximately 34% of which are maintained on 42
Company-operated breeder farms. In the U.S., the Company currently owns or
contracts for approximately 8.5 million square feet of breeder housing on
approximately 238 breeder farms. In Mexico, all of the Company's breeder
flocks are maintained on Company-owned farms.
The Company owns seven hatcheries in the United States, located in
Nacogdoches, Center and Pittsburg, Texas, and DeQueen and Nashville,
Arkansas, where eggs are incubated and hatched in a process requiring 21
days. Once hatched, the day-old chicks are inspected and vaccinated
against common poultry diseases and transported by Company vehicles to
grow-out farms. The Company's seven hatcheries in the U.S. have an
aggregate production capacity of approximately 9.0 million chicks per week.
In Mexico, the Company owns seven hatcheries, which have an aggregate
production capacity of approximately 3.3 million chicks per week.
GROW-OUT: The Company places its U.S. grown chicks on approximately
1,100 grow-out farms located in Texas and Arkansas. These farms provide
the Company with approximately 58.0 million square feet of growing
facilities. The Company operates 33 grow-out farms in the U.S., which
account for approximately 7.6% of its total annual U.S. chicken capacity.
The Company also places chicks with farms owned by affiliates of the
Company under grow-out contracts. The remaining chicks are placed with
independent farms under grow-out contracts. Under such grow-out contracts,
the farmers provide the facilities, utilities and labor. The Company
supplies the chicks, the feed and all veterinary and technical services.
Contract grow-out farmers are paid based on live weight under an incentive
arrangement. In Mexico, the Company owns approximately 38% of its grow-out
farms and contracts with independent farmers for the balance of its
production. Arrangements with independent farmers in Mexico are similar to
the Company's arrangements with contractors in the United States.
FEED MILLS: An important factor in the production of chicken is the
rate at which feed is converted into body weight. The Company purchases
feed ingredients on the open market. The primary feed ingredients include
corn, milo and soybean meal, which historically have been the largest
component of the Company's total production cost. The quality and
composition of the feed is critical to the conversion rate, and
accordingly, the Company formulates and produces its own feed. In the
U.S., the Company operates seven feed mills located in Nacogdoches, Mt.
Pleasant, Center and Pittsburg, Texas and Nashville and Hope, Arkansas.
The Company currently has annual feed requirements of approximately 2.3
million tons and the capacity to produce approximately 2.7 million tons.
The Company owns four feed mills in Mexico, which produce all of the
requirements of its Mexico operations. Mexico's annual feed requirements
are approximately 0.6 million tons with a capacity to produce approximately
0.9 million tons. In fiscal 1998, approximately 26% of Mexico's feed
ingredients used were imported from the United States. However, this
percentage fluctuates based on the availability and cost of local grain
supplies.
Feed grains are commodities subject to volatile price changes caused
by weather, size of harvest, transportation and storage costs and the
agricultural policies of the United States and foreign governments.
Although the Company can and sometimes does purchase grain in forward
markets, it cannot eliminate the potential adverse effect of grain price
changes.
PROCESSING: Once the chickens reach processing weight, they are
transported in the Company's trucks to the Company's processing plants.
These plants utilize modern, highly automated equipment to process and
package the chickens. The Company periodically reviews possible
application of new processing technologies in order to enhance productivity
and reduce costs. The Company's six U.S. processing plants, two of which
are located in Mt. Pleasant, Texas, and the remainder of which are located
in Dallas, Nacogdoches and Lufkin, Texas, and DeQueen, Arkansas, have the
capacity, under present U.S.D.A. inspection procedures, to produce
approximately 1.3 billion pounds of dressed chicken annually. The
Company's three processing plants located in Mexico, which perform fewer
processing functions than the Company's U.S. facilities, have the capacity
to process approximately 485 million pounds of dressed chicken annually.
PREPARED FOODS PLANT: The Company's prepared foods plant in Mt.
Pleasant, Texas, was constructed in 1986 and has expanded significantly
since that time. This facility has deboning lines, marination systems,
batter/breading systems, fryers, ovens, both mechanical and cryogenic
freezers, a variety of packaging systems and cold storage. This plant is
currently operating at the equivalent of two shifts a day for six days a
week. If necessary, the Company could add additional shifts during the
seventh day of the week. The Company completed construction of a new
prepared foods facility at its Dallas, Texas location during fiscal first
quarter 1998. The Dallas, Texas facility is functionally equivalent to the
Mt. Pleasant, Texas facility described above.
EGG PRODUCTION: The Company produces eggs at three farms near
Pittsburg, Texas. One farm is owned by the Company, while two farms are
operated under contract by an entity owned by a major stockholder of the
Company. The eggs are cleaned, sized, graded and packaged for shipment at
processing facilities located on the egg farms. The farms have a housing
capacity for approximately 2.3 million producing hens and are currently
housing approximately 2.0 million hens.
OTHER FACILITIES AND INFORMATION: The Company operates a rendering
plant located in Mt. Pleasant, Texas, that currently processes by-products
from approximately 8.2 million chickens weekly into protein products, which
are used in the manufacture of chicken and livestock feed and pet foods.
The Company operates a feed supply store in Pittsburg, Texas, from which it
sells various bulk and sacked livestock feed products. The Company owns an
office building in Pittsburg, Texas, which houses its executive offices,
and an office building in Mexico City, which houses the Company's Mexican
marketing offices.
Substantially all of the Company's U.S. property, plant and equipment
is pledged as collateral on its secured debt.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is named as a defendant or co-defendant
in lawsuits arising in the course of its business. The Company does not
believe that such pending lawsuits will have a material adverse impact on
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of the shareholders on June 30,
1998. The meeting was held to approve an amendment to the Company's
certificate of incorporation that reclassified the Company's existing
common stock to Class B common stock ("Class B Stock") and created a new
class of common stock designated as Class A common stock ("Class A Stock").
Under the reclassification, each outstanding share of the Company's
existing common stock was reclassified into one share of Class B Stock.
Each share of Class B Stock has substantially the same rights, powers and
limitations as the Company's common stock outstanding immediately prior to
such amendment, except that each share of Class B Stock entitles the holder
thereof to 20 votes per share except as otherwise provided by law. Each
share of the new Class A Stock is substantially identical to the shares of
Class B Stock, except that each share of Class A Common Stock entitles the
holder thereof to one vote per share on any matter submitted for a
stockholder vote.
The number of shares represented and able to vote at the meeting was
23,372,667. The amendment was passed with 19,579,108 voting for the
amendment, 3,770,104 against and 23,454 votes abstaining. The measure
passed and the articles are now amended.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
QUARTERLY STOCK PRICES AND DIVIDENDS
High and low sales prices of and dividends on the Company's Class B
common stock for the periods indicated (as adjusted for the June
30, 1999 stock dividend referred to in Note F of the Consolidated
Financial Statements) were:
Prices Prices
1998 1997 DIVIDENDS
QUARTER HIGH LOW HIGH LOW 1998 1997
First $11 1/16 $ 8 1/2 $ 6 $ 5 3/16 $.01 $.01
Second 10 9/16 7 3/16 8 1/16 5 3/4 .01 .01
Third 13 1/8 9 3/16 8 1/2 6 5/16 .01 .01
Fourth 16 1/16 12 3/16 10 1/4 6 7/8 .01 .01
The Company's Class B common stock (ticker symbol "CHX") is traded
on the New York Stock Exchange and no common stock Class A has been
issued. The Company estimates there were approximately 13,000 holders
(including individual participants in security position listings) of the
Company's Class B common stock as of December 8, 1998. See Note F--
Common Stock, of the Notes to Consolidated Financial Statements for
additional discussion of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
S E L E C T E D F I N A N C I A L D A T A
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA) Ten Years Ended September 26, 1998
1998 1997 1996 1995 1994
1993 1992 1991 1990 1989
INCOME STATEMENT DATA:
Net sales $1,331,545 $1,277,649 $1,139,310 $931,806 $922,609
$887,843 $817,361 $786,651 $720,555 $661,077
Gross margin 136,103 114,467 70,640 74,144 110,827
106,036 32,802 75,567 74,190 83,356
Operating income 77,256 63,894 21,504{(b)} 24,930{(b)} 59,698
56,345 (12,475) 31,039 33,379 47,014
(loss)
Income (loss) before
income taxes and 56,522 43,824 47 2,091 42,448
32,838 (33,712) 12,235 20,463 31,027
extraordinary
charge 6,512 2,788 4,551 10,058 11,390
10,543 (4,048) (59) 4,826 10,745
Income tax expense
(benefit){ (c) 50,010 41,036 (4,504) (7,967) 31,058
22,295 (29,664) 12,294 15,637 20,282
} Income (loss) before
extraordinary
charge -- -- (2,780) -- --
(1,286) -- -- -- --
Extraordinary charge 50,010 41,036 (7,284) (7,967) 31,058
21,009 (29,664) 12,294 15,637 20,282
- -
early repayment of
debt, net of tax
Net income (loss)
PER COMMON SHARE
DATA{(D)}:
Income (loss) before $1.21 $0.99 $(0.11) $(0.19) $0.75
$0.54 $(0.83) $0.36 $0.46 $0.60
extraordinary
charge
Extraordinary charge -- -- (0.07) -- --
(0.03) -- -- -- --
- - 1.21 0.99 (0.18) (0.19) 0.75
0.51 (0.83) 0.36 0.46 0.60
early repayment of 0.04 0.04 0.04 0.04 0.04
0.02 0.04 0.04 0.04 0.04
debt 5.58 4.41 3.46 3.67 3.91
3.20 2.71 3.31 2.99 2.57
Net income (loss)
Cash dividends
Book value{
BALANCE SHEET SUMMARY:
Working capital $147,040 $133,542 $88,455 $88,395 $99,724
$72,688 $11,227 $44,882 $54,161 $60,313
Total assets 601,439 579,124 536,722 497,604 438,683
422,846 434,566 428,090 379,694 291,102
Notes payable and
current maturities
of 5,889 11,596 35,850 18,187 4,493
25,643 86,424 44,756 30,351 9,528
long-term debt
Long-term debt, less 199,784 224,743 198,334 182,988 152,631
159,554 131,534 175,776 154,227 109,412
current maturities
Total stockholders' 230,871 182,516 143,135 152,074 161,696
132,293 112,112 112,353 101,414 87,132
equity
KEY INDICATORS (AS A PERCENTAGE OF NET SALES):
Gross margin 10.2% 9.0% 6.2% 8.0% 12.0%
11.9% 4.0% 9.6% 10.3% 12.6%
Selling, general and
administrative
expenses 4.4% 4.0% 4.3% 5.3% 5.5%
5.6% 5.7% 5.7% 5.7% 5.5%
Operating income 5.8% 5.0% 1.9% 2.7% 6.5%
6.3% (1.6)% 3.9% 4.6% 7.1%
(loss) 1.5% 1.7% 1.9% 1.9% 2.1%
2.9% 2.8% 2.5% 2.3% 2.7%
Interest expense, net 3.8% 3.2% (0.6)% (0.9)% 3.4%
2.4% (3.6)% 1.6% 2.2% 3.1%
Net income (loss)
(a) Fiscal 1993 had 53 weeks
(b) The peso decline and the related economic recession in Mexico
contributed significantly to the operating losses experienced by the
Company's Mexico operations of $8.2 million and $17.0 million
for fiscal years 1996 and 1995, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations".
(c) The Company does not include income or losses from its Mexico operations
in its determination of taxable income for U.S. income tax purposes
based upon its determination that such earnings will be indefinitely
reinvested in Mexico. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note D of the
Consolidated Financial Statements of the Company.
(d) Amounts are based on end-of-period shares of common stock adjusted for
the Class A common stock dividend issued on July 30, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Profitability in the chicken industry can be materially affected by the
commodity prices of chicken and chicken parts, each of which are determined
largely by supply and demand. As a result, the chicken industry as a whole
has been characterized by cyclical earnings. Cyclical fluctuations in
earnings of individual chicken companies can be mitigated somewhat by: (i)
business strategy; (ii) product mix; (iii) sales and marketing plans, and
(iv) operating efficiencies. In an effort to reduce price volatility and to
generate higher, more consistent profit margins, the Company has
concentrated on the production and marketing of prepared food products,
which generally have higher margins than the Company's other products.
Additionally, the production and sale in the U.S. of prepared foods
products reduces the impact of feed grain costs on the Company's
profitability. As further processing is performed, feed grain costs become
a decreasing percentage of a product's total production costs.
The following table presents certain items as a percentage of net sales
for the periods indicated:
1998 1997 1996
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 89.8 91.0 93.8
Gross profit 10.2 9.0 6.2
Selling, general and 4.4 4.0 4.3
administrative expense
Operating income 5.8 5.0 1.9
Interest expense 1.5 1.7 1.9
Income before income taxes and
extraordinary charge 4.2 3.4 0.0
Net income (loss) 3.8 3.2 (0.6)
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997:
NET SALES. Consolidated net sales were $1.3 billion for fiscal 1998, an
increase of $53.9 million, or 4.2% over fiscal 1997. The increase in
consolidated net sales resulted from a $53.4 million increase in U.S. chicken
sales to $914.4 million and a $3.1 million increase in Mexican chicken sales to
$278.1 million offset partially by a $2.6 million decrease of sales of other
U.S. products to $139.1 million. The increase in U.S. chicken sales was due
primarily to a 3.9% increase in dressed pounds produced resulting primarily
from the Company's expansion of existing facilities and the purchase of poultry
assets capable of producing 650,000 chickens per week from Green Acre Foods,
Inc., on April 15, 1997, and by a 2.2% increase in total revenue per dressed
pound produced. The increase in Mexico chicken sales was due primarily to a
6.5% increase in total revenue per dressed pound offset partially by a 5.0%
decrease in dressed pounds produced. Increased revenues per dressed pound
produced in Mexico were primarily the result of higher sales prices as well as
generally improved economic conditions in Mexico compared to the prior year.
COST OF SALES. Consolidated cost of sales was $1.2 billion in fiscal
1998, an increase of $32.3 million, or 2.8% over fiscal 1997. The increase
resulted primarily from a $37.4 million increase in cost of sales of U.S.
operations, offset partially by a $5.1 million decrease in the cost of sales in
Mexico operations. The cost of sales increase in U.S. operations of $37.4
million was due to a 3.9% increase in dressed pounds produced and increased
production of higher cost and margin products in prepared foods offset
partially by a 16.5% decrease in feed ingredient costs per pound experienced
during the period. The $5.1 million cost of sales decrease in Mexico
operations was due primarily to a 5.0% decrease in dressed pounds produced
partially offset by a 2.9% increase in average costs of sales per dressed pound
produced.
GROSS PROFIT. Gross profit was $136.1 million for fiscal 1998, an
increase of $21.6 million, or 18.9% over the same period last year. Gross
profit as a percentage of sales increased to 10.2% in fiscal 1998 from 9.0% in
fiscal 1997. The increased gross profit resulted from higher margins for
poultry products in the U.S. and Mexico.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $58.8 million in fiscal 1998 and $50.6
million in fiscal 1997. Consolidated selling, general and administrative
expenses as a percentage of sales increased in fiscal 1998 to 4.4% compared to
4.0% in fiscal 1997 due primarily to higher administration costs.
OPERATING INCOME. Consolidated operating income was $77.3 million for
fiscal 1998, an increase of $13.4 million, or 20.9% when compared to fiscal
1997, resulting primarily from higher margins experienced in the U.S. and
Mexico operations.
INTEREST EXPENSE. Consolidated net interest expense decreased to $20.2
million, or 8.7% in fiscal 1998, when compared to $22.1 million for fiscal
1997, due to lower outstanding debt levels.
MISCELLANEOUS, NET. Consolidated miscellaneous, net, a component of Other
Expense (Income), was ($1.7) million in fiscal 1998, a $0.7 million decrease,
or 30.4% when compared to ($2.4) million for fiscal 1997, which included a $2.2
million final settlement of claims resulting from the January 8, 1992, fire at
the Company's prepared foods plant in Mt. Pleasant, Texas.
INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 1998
increased to $6.5 million compared to an expense of $2.8 million in fiscal
1997. This increase resulted from higher U.S. earnings in fiscal 1998 than in
fiscal 1997. While Mexico earnings were also higher in fiscal 1998 than in
fiscal 1997, Mexico earnings are not currently subject to income taxes.
FISCAL 1997 COMPARED TO FISCAL 1996:
NET SALES. Consolidated net sales were $1.3 billion for fiscal 1997, an
increase of $138.3 million, or 12.1% over fiscal 1996. The increase in
consolidated net sales resulted from an $84.3 million increase in U.S. chicken
sales to $860.9 million, a $46.9 million increase in Mexico chicken sales to
$275.0 million and by a $7.1 million increase of sales of other U.S. products
to $141.7 million. The increase in U.S. chicken sales was due primarily to a
14.0% increase in dressed pounds produced resulting primarily from the
Company's expansion of existing facilities and the purchase of poultry
producing assets capable of producing 650,000 chickens per week from Green Acre
Foods, Inc. on April 15, 1997, offset partially by a 2.7% decrease in total
revenue per dressed pound produced. The increase in Mexico chicken sales was
due primarily to a 25.5% increase in total revenue per dressed pound partially
offset by a 3.9% decrease in dressed pounds produced resulting from
management's decision in fiscal 1996 to reduce production due to the recession
in Mexico. Increased revenue per dressed pound produced in Mexico was
primarily the result of higher sales prices as well as generally improved
economic conditions in Mexico compared to the prior year. The increase in
sales of other domestic products was primarily the result of increased sales of
the company's chicken by-products group.
COST OF SALES. Consolidated cost of sales was $1.2 billion in fiscal
1997, an increase of $94.5 million, or 8.8% over fiscal 1996. The increase
primarily resulted from a $91.7 million increase in cost of sales of U.S.
operations, and a $2.8 million increase in the cost of sales in Mexico
operations. The cost of sales increase in U.S. operations of $91.7 million was
due to the 14.0% increase in dressed pounds produced and increased production
of higher cost and margin products in prepared foods, partially offset by a
decrease in feed ingredient cost when compared to fiscal 1996. The $2.8
million cost of sales increase in Mexico operations was primarily due to a 5.4%
increase in average costs of sales per pound partially offset by a 3.9%
decrease in dressed pounds produced. The increase in average costs of sales
per pound was primarily the result of cost adjusting upward due to generally
improved economic conditions in Mexico compared to the prior year offset
partially by lower feed ingredient cost experienced in the period.
GROSS PROFIT. Gross profit as a percentage of sales increased to 9.0% in
fiscal 1997 from 6.2% in fiscal 1996. The increased gross profit resulted
mainly from significantly higher margins in Mexico.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses were $50.6 million in fiscal 1997, and
$49.1 million in fiscal 1996. Consolidated selling, general and administrative
expenses as a percentage of sales decreased in fiscal 1997 to 4.0% compared to
4.3% in fiscal 1996. The decrease in selling, general and administrative
expenses as a percent of sales was due primarily to increased sales, while
selling, general and administrative expenses remained relatively constant.
OPERATING INCOME. Consolidated operating income was $63.9 million for
fiscal 1997, an increase of $42.4 million, or 197.1% when compared to fiscal
1996, resulting primarily from higher margins experienced in the Mexico
operations.
INTEREST EXPENSE. Consolidated net interest expense increased slightly to
$22.1 million, or 2.5% in fiscal 1997, when compared to $21.5 million in fiscal
1996, due to slightly higher levels of outstanding indebtedness in 1997. As a
percentage of sales, however, interest expense decreased to 1.7% in fiscal 1997
compared to 1.9% in fiscal 1996.
MISCELLANEOUS EXPENSE. Consolidated miscellaneous, net, a component of
"Other Expense (Income)", was ($2.4) million in fiscal 1997 and includes a $2.2
million final settlement of claims resulting from the January 8, 1992, fire at
the Company's prepared foods plant in Mt. Pleasant, Texas.
INCOME TAX EXPENSE. Consolidated income tax expense in fiscal 1997
decreased to $2.8 million compared to an expense of $4.6 million in fiscal
1996. The lower consolidated income tax expense in contrast to higher
consolidated income resulted from increased Mexico earnings that are not
currently subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1998, the Company's working capital increased to $147.0
million and its current ratio increased to 2.32 to 1 compared with working
capital of $133.5 million and a current ratio of 2.14 to 1 at September 27,
1997. Strong profits were primarily responsible for the increases in working
capital and current ratio from September 27, 1997, to September 26, 1998.
Trade accounts and other receivables were $81.8 million at September 26,
1998, a $3.8 million increase from September 27, 1997. The 4.9% increase was
due primarily to higher net sales and increased sales of prepared foods
products, which normally have longer credit terms than fresh chicken sales.
Inventories were $141.7 million at September 26, 1998, compared to $146.2
million at September 27, 1997. The $4.5 million, or 3.1% decrease was due
primarily to lower costs in the live chicken and hen inventories resulting from
lower feed costs.
Capital expenditures for the fiscal 1998 were $53.5 million and were
primarily incurred to expand certain facilities, improve efficiencies, reduce
costs and for the routine replacement of equipment. The Company anticipates
that it will spend approximately $95.0 million for capital expenditures in
fiscal year 1999 and expects to finance such expenditures with available
operating cash flows and long-term financing.
Cash flows provided by operating activities were $85.0 million, $49.6
million and $11.4 million in fiscal 1998, 1997 and 1996, respectively. The
significant increase in cash flows provided by operating activities for fiscal
1998 when compared to fiscal 1997 was due primarily to increased net income, a
reduction in inventory levels as discussed above, and a substantially smaller
increase in accounts receivable for fiscal 1998, when compared to fiscal 1997.
The significant increase in cash flows provided by operating activities for
fiscal 1997, when compared to fiscal 1996, was due primarily to net income for
fiscal 1997, compared to a net loss in fiscal 1996.
Cash flows provided by (used in) financing activities were ($32.5)
million, $348,000 and $27.3 million in fiscal 1998, 1997 and 1996,
respectively. The cash provided by (used in) financing activities primarily
reflects the net proceeds (payments) from notes payable and long-term financing
and debt retirements.
At September 26, 1998, the Company's stockholders' equity increased to
$230.9 million from $182.5 million at September 27, 1997. Total debt to
capitalization decreased to 47.1% at September 26, 1998, compared to 56.4% at
September 27, 1997.
The Company maintains $70 million in revolving credit facilities and $45
million in secured term borrowing facilities. The credit facilities provide
for interest at rates ranging from LIBOR plus one and three-eighths percent to
LIBOR plus two percent and are secured by inventory and fixed assets or are
unsecured. As of October 30, 1998, $63.3 million was available under the
revolving credit facilities and $30.8 million was available under the term
borrowing facilities. The Company is required by certain provisions of its
debt agreements to restrict dividends to a maximum of $3.4 million per year.
On June 26, 1998, the Company entered into an asset sale agreement to sell
up to $60 million of accounts receivable. Under this agreement, as the sold
accounts receivable are collected, new qualifying accounts can be substituted
thus maintaining the maximum balance allowed to be outstanding at a rate
approximating .425% over commercial paper. As of September 26, 1998, no
accounts receivable had been sold under this agreement. Any such sales,
however, are expected to be recorded as a sale in accordance with FASB
Statement No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.
The Company's deferred income taxes have resulted primarily from the
Company's use of the cash method of accounting for periods before July 2, 1988.
The "Omnibus Budget Reconciliation Act" of 1987 required certain family-owned
farming businesses to switch to the accrual method of accounting and provided
that such corporations establish a suspense account in lieu of taking the
adjustment into taxable income currently. "The Taxpayer Relief Act of 1997"
requires that this suspense account be taken into income ratably over 20 years
beginning in fiscal 1998, however, any remaining balance in the suspense
account will be accelerated if the Company ceases to be a family-owned
corporation. A "family-owned" corporation is one in which at least 50% of the
total combined voting power of classes of stock of the corporation are owned by
members of the same family. The Company believes that it will remain a family-
owned corporation for the foreseeable future.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in the price of
feed ingredients, foreign currency exchange rates and interest rates as
discussed below. The sensitivity analyses presented do not consider the
effects that such adverse changes may have on overall economic activity nor do
they consider additional actions management may take to mitigate its exposure
to such changes. Actual results may differ.
FEED INGREDIENTS. The Company is a purchaser of certain commodities,
primarily corn and soybean meal. As a result, the Company's earnings are
affected by changes in the price and availability of such feed ingredients. As
market conditions dictate, the Company from time to time will lock-in future
feed ingredient prices, using various hedging techniques including forward
purchase agreements with suppliers and futures contracts. The Company does not
use such financial instruments for trading purposes and is not a party to any
leveraged derivatives. Market risk is estimated as a hypothetical 10% increase
in the weighted-average cost of the Company's primary feed ingredients as of
September 26, 1998. Based on projected 1999 feed consumption, such an increase
would result in an increase to cost of sales of approximately $16.3 million in
1999, after considering the effect of forward purchase commitments and future
contracts outstanding as of September 26, 1998. As of September 26, 1998, the
Company had hedged approximately 45.6% of its 1999 feed requirements.
FOREIGN CURRENCY. The Company's earnings are affected by foreign exchange
rate fluctuations related to the Mexican peso net monetary position of its
Mexico subsidiaries. The company primarily manages this exposure by attempting
to minimize its Mexican peso net monetary position, but has also from time to
time considered executing hedges to help minimize this exposure. However,
such instruments have historically not been economically feasible. The Company
is also exposed to the effect of potential exchange rate fluctuations to the
extent that amounts are repatriated from Mexico to the United States. However,
the company currently anticipates that the cash flows of its Mexico
subsidiaries will continue to be reinvested in its Mexico operations. In
addition, the Mexican peso exchange rate can directly and indirectly impact the
Company's results of operations and financial position in several manners,
including potential economic recession in Mexico resulting from a devalued
peso. The impact on the Company's financial position and results of operations
of a hypothetical change in the exchange rate between the U.S. dollar and the
Mexican peso cannot be reasonably estimated. Foreign currency exchange losses,
representing the decline in the U.S. dollar value of the net monetary assets of
the Company's Mexico subsidiaries, were $2.3 million, $0.4 million and $1.3
million for 1998, 1997 and 1996, respectively. The operating loss of the
company's Mexico subsidiaries of $8.2 million in 1996 was primarily the result
of the peso devaluation and other economic factors at least partially
attributable to the peso devaluation. On December 3, 1998, the Mexican peso
closed at 10.0 to 1 U.S. dollar, a decrease from 10.24 at September 26, 1998.
No assurance can be given as to the future valuation of the Mexican peso and
how further movements in the peso could affect future earnings of the Company.
INTEREST RATES. The Company's earnings are also affected by changes in
interest rates due to the impact those changes have on its variable-rate debt
instruments. The Company has variable-rate debt instruments representing
approximately 22.5% of its total long-term debt at September 26, 1998. If
interest rates average 25 basis points more in 1999, than they did during 1998,
the Company's interest expense would be increased by $0.1 million. These
amounts are determined by considering the impact of the hypothetical interest
rates on the Company's variable-rate long-term debt at September 26, 1998.
Market risk for fixed-rate long-term debt is estimated as the potential
increase in fair value resulting from a hypothetical 25 basis points decrease
in interest rates and amounts to approximately $0.7 million, using discounted
cash flow analysis.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), which is required to be adopted in years
beginning after June 15, 1999. SFAS 133 permits early adoption as of the
beginning of any fiscal quarter after its issuance. SFAS 133 will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. The Company is currently
evaluating the impact of SFAS 133; however, it is not expected to have a
material impact on the Company's financial condition or results of operations.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS 131),
effective for years beginning after December 15, 1997. SFAS No. 131 supersedes
SFAS No. 14, Financial Reporting Segments of a Business Enterprise, and
requires that a public Company report annual and interim financial descriptive
information about its reportable operating segments pursuant to criteria that
differ from current accounting practice. Because this statement addresses how
supplemental financial information is disclosed in annual and interim reports,
the adoption will have no impact on the Company's financial statements, but may
affect the disclosure of segment information.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has determined that it will be required to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. To date, the Company
has updated substantially all of its computer systems in the U.S. and is in the
process of updating its systems in Mexico. The Company anticipates completing
the remaining portion of its Year 2000 project by mid-1999. The Company
presently believes that with these modifications and replacements, the Year
2000 Issue will not pose significant operational problems for its computer
systems.
Systems assessments and minor system modifications were completed using
existing internal resources and as a result, incremental costs were minimal.
System replacements, consisting primarily of capital projects, were initiated
for other business purposes while at the same time achieving Year 2000
compliance. System replacement projects were completed primarily using
external resources. The total cost of the Year 2000 project is not expected to
have a material effect on the Company's results of operations.
Additionally, the Company will be initiating communications with all of
its significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 Issues. However, there can be no assurance
that the systems of other parties upon which the Company relies will be
converted on a timely basis. The Company's business, financial condition, or
results of operations could be materially adversely impacted by the failure of
its systems and applications or those operated by others to properly operate or
manage dates beyond 1999.
The Company believes that its initiatives and its existing business
recovery plans are adequate to address reasonably likely Year 2000 Issues. If
unforeseen circumstances arise, the Company will attempt to develop contingency
plans for these situations.
IMPACT OF INFLATION
Due to moderate inflation in the U.S. and the Company's rapid inventory
turnover rate, the results of operations have not been significantly affected
by inflation during the past three-year period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements together with the report of
independent auditors, and financial statement schedules are included on pages
38 through 49 of this document. Financial statement schedules other than those
included herein have been omitted because the required information is contained
in the consolidated financial statements or related notes, or such information
is not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Reference is made to "Election of Directors" on pages 3 through 5 of
Registrant's Proxy Statement for its 1999 Annual Meeting of Stockholders, which
section is incorporated herein by reference.
Reference is made to "Compliance with Section 16(a) of the Exchange Act"
on page 9 of Registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders, which section is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to Items 11, 12 and 13 is incorporated by reference
from sections entitled "Security Ownership", "Election of Directors",
"Executive Compensation", and "Certain Transactions" of the Registrant's Proxy
Statement for its 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements listed in the accompanying index to financial
statements and schedules are filed as part of this report.
(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
required under the related instructions or are applicable and therefore have
been omitted.
(3) The financial statements schedule entitled Valuation and Qualifying
Accounts and Reserves is filed as part of this report on page 52.
(4) On June 30, 1998 the Company filed a current report on Form 8-K related
to the reclassification of its common stock.
(5) Exhibits
Exhibit
NUMBER
2.1 Agreement and Plan of Reorganization dated September 15, 1986, by and
among Pilgrim's Pride Corporation, a Texas corporation; Pilgrim's Pride
Corporation, a Delaware corporation; and Doris Pilgrim Julian, Aubrey Hal
Pilgrim, Paulette Pilgrim Rolston, Evanne Pilgrim, Lonnie "Bo" Pilgrim, Lonnie
Ken Pilgrim, Greta Pilgrim Owens and Patrick Wayne Pilgrim (incorporated by
reference from Exhibit 2.1 to the Company's Registration Statement on Form S-1
(No. 33-8805) effective November 14, 1986).
3.1 Certificate of Incorporation of the Company (incorporated by reference
from Exhibit 3.1 of the Company's Registration Statement on Form S-1 (No. 33-
8805) effective November 14, 1986).
3.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation, a
Delaware Corporation, effective September 30, 1998.
4.1 Certificate of Incorporation of the Company (incorporated by reference
from Exhibit 3.1 of the Company's Registration Statement on Form S-1 (No. 33-
8805) effective November 14, 1986).
4.2 Amended and Restated Corporate Bylaws of Pilgrim's Pride Corporation, a
Delaware Corporation, effective December 4, 1996 (incorporated by reference
from Exhibit 3.3 of the Company's Quarterly Report on Form 10-Q for the three
months ended March 29, 1997).
4.3 Specimen Certificate for shares of Common Stock, par value $.01 per
share, of the Company (incorporated by reference from Exhibit 4.6 of the
Company's Form 8 filed on July 1, 1992).
4.4 Form of Indenture between the Company and Ameritrust Texas National
Association relating to the Company's 10 7/8% Senior Subordinated Notes Due
2003 (incorporated by reference from Exhibit 4.6 of the Company's Registration
Statement on Form S-1 (No. 33-59626) filed on March 16, 1993).
4.5 Form of 10 7/8% Senior Subordinated Note Due 2003 (incorporated by
reference from Exhibit 4.8 of the Company's Registration Statement on Form S-1
(No. 33-61160) filed on June 16, 1993).
10.1 Pilgrim's Industries, Inc. Profit Sharing Retirement Plan, restated as of
July 1, 1987 (incorporated by reference from Exhibit 10.1 of the Company's Form
8 filed on July 1, 1992).
10.2 Bonus Plan of the Company (incorporated by reference from Exhibit 10.2
to the Company's Registration Statement on Form S-1 (No. 33-8805) effective
November 14, 1986).
10.3 Stock Purchase Agreement dated May 12, 1992, between the Company and
Archer Daniels Midland Company (incorporated by reference from Exhibit 10.45 of
the Company's Form 10-K for the year ended September 26, 1992).
10.4 Employee Stock Investment Plan of the Company (incorporated by reference
from Exhibit 10.28 of the Company's Registration Statement on Form S-1 (No. 33-
21057) effective May 2, 1988).
10.5 Promissory Note dated September 20, 1990, by and between the Company and
Hibernia National Bank of Texas (incorporated by reference from Exhibit 10.42
of the Company's Form 8 filed on July 1, 1992).
10.6 Loan Agreement dated October 16, 1990, by and among the Company, Lonnie
"Bo" Pilgrim and North Texas Production Credit Association, with related
Variable Rate Term Promissory Note and Deed of Trust (incorporated by reference
from Exhibit 10.43 of the Company's Form 8 filed on July 1, 1992).
10.7 Secured Credit Agreement dated May 27, 1993, by and among the Company and
Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale
Nederlanden Bank, N.V., Boatmen's First National Bank of Kansas City, and First
Interstate Bank of Texas, N.A. (incorporated by reference from Exhibit 10.31 of
the Company's Registration Statement on Form S-1 (No. 33-61160) filed on June
16, 1993).
10.8 First Amendment to Secured Credit Agreement dated June 30, 1994 to the
Secured Credit Agreement dated May 27, 1993, by and among the Company and
Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale
Nederlanden Bank N.V., Boatmen's First National Bank of Kansas City and First
Interstate Bank of Texas, N.A. (incorporated by reference from Exhibit 10.33 of
the Company's annual report on Form 10-K for the fiscal year ended September
28, 1996).
10.9 Second Amendment to Secured Credit Agreement dated December 6, 1994 to
the Secured Credit Agreement dated May 27, 1993, by and among the Company and
Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale
Nederlanden Bank N.V., Boatmen's First National Bank of Kansas City and First
Interstate Bank of Texas, N.A. (incorporated by reference from Exhibit 10.36 of
the Company's annual report on Form 10-K for the fiscal year ended September
28, 1996).
10.10 Third Amendment to Secured Credit Agreement dated June 30, 1995 to the
Secured Credit Agreement dated May 27, 1993, by and among the Company and
Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale
Nederlanden Bank N.V., (incorporated by reference from Exhibit 10.37 of the
Company's annual report of Form 10-K for the fiscal year ended September 28,
1996).
10.11 Second Amended and Restated Loan and Security Agreement dated July 31,
1995, by and among the Company, the banks party thereto and Creditanstalt-
Bankverein, as agent (incorporated by reference from Exhibit 10.38 of the
Company's annual report on Form 10-K for the fiscal year ended September 28,
1996).
10.12 Revolving Credit Loan Agreement dated March 27, 1995 by and among the
Company and Agricultural Production Credit Association (incorporated by
reference from Exhibit 10.39 of the Company's annual report on Form 10-K for
the fiscal year ended September 28, 1996).
10.13 First Supplement to Revolving Credit Loan Agreement dated July 6, 1995 by
and among the Company and Agricultural Production Credit Association
(incorporated by reference from Exhibit 10.40 of the Company's annual report on
Form 10-K for the fiscal year ended September 28, 1996).
10.14 Credit Agreement dated as of January 31, 1996 is entered into among
Pilgrim's Pride, S.A. de C.V., and Internationale Nederlanden (U.S.) Capital
Corporation, Pilgrim's Pride Corporation, Avicola Pilgrim's Pride de Mexico,
S.A. de C.V., Compania Incubadora Avicola Pilgrim's Pride, S.A. de C.V.,
Productora Y Distribuidora de Alimentos, S.A. de C.V., Immobiliaria Avicola
Pilgrim's Pride, S. De R.L. de C.V. and C.I.A. Incubadora Hidalgo, S.A. de C.V.
(incorporated by reference from Exhibit 10.42 of the Company's annual report on
Form 10-K for the fiscal year ended September 28, 1996).
10.15 Fourth Amendment to Secured Credit Agreement dated June 6, 1996 to the
Secured Credit Agreement dated May 27, 1993, by and among the Company and
Harris Trust and Savings Bank, and FBS AG Credit, Inc., Internationale
Nederlanden Bank N.V., successor to First Interstate Bank of Texas, N.A.
(incorporated by reference from Exhibit 10.43 of the Company's annual report on
Form 10-K for the fiscal year ended September 28, 1996).
10.16 Second Supplement to Revolving Credit Loan Agreement dated June 28, 1996
by and among the Company and Agricultural Production Credit Association
(incorporated by reference from Exhibit 10.44 of the Company's annual report on
Form 10-K for the fiscal year ended September 28, 1996).
10.17 Third Supplement to Revolving Credit Loan Agreement dated August 22, 1996
by and among the Company and Agricultural Production Credit Association
(incorporated by reference from Exhibit 10.45 of the Company's annual report on
Form 10-K for the fiscal year ended September 28, 1996).
10.18 Note Purchase Agreement dated April 14, 1997 by and between John Hancock
Mutual Life Insurance Company and Signature 1A (Cayman), Ltd. and the Company
(incorporated by reference from Exhibit 10.46 of the Company's Quarterly Report
on Form 10-Q for the three months ended March 29, 1997).
10.19 Guaranty Fee Agreement between Pilgrim's Pride Corporation and Certain
Shareholders dated November 28, 1996 (incorporated by reference from Exhibit
10.47 of the Company's Quarterly Report on Form 10-Q for the three months ended
March 29, 1997).
10.20 Aircraft Lease Extension Agreement between B.P. Leasing Co., (L.A.
Pilgrim, Individually) and Pilgrim's Pride Corporation, (formerly Pilgrim's
Industries, Inc.) effective November 15, 1992 (incorporated by reference from
Exhibit 10.48 of the Company's Quarterly Report on Form 10-Q for the three
months ended March 29, 1997).
10.21 Broiler Grower Contract dated May 6, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farm 30) (incorporated by reference from
Exhibit 10.49 of the Company's Quarterly Report on Form 10- for the three
months ended March 29, 1997).
10.22 Commercial Egg Grower Contract dated May 7, 1997 between Pilgrim's Pride
Corporation and Pilgrim Poultry G.P. (incorporated by reference from Exhibit
10.50 of the Company's Quarterly Report on Form 10-Q for the three months ended
March 29, 1997).
10.23 Agreement dated October 15, 1996 between Pilgrim's Pride Corporation and
Pilgrim Poultry G.P. (incorporated by reference from Exhibit 10.51 of the
Company's Quarterly Report on Form 10-Q for the three months ended March 29,
1997).
10.24 Heavy Breeder Contract dated May 7, 1997 between Pilgrim's Pride
Corporation and Lonnie "Bo" Pilgrim (Farms 44, 45 & 46) (incorporated by
reference from Exhibit 10.51 of the Company's Quarterly Report on Form 10-Q for
the three months ended March 29, 1997).
10.25 Broiler Grower Contract dated January 9, 1997 by and between Pilgrim's
Pride and O.B. Goolsby, Jr. (incorporated by reference from Exhibit 10.25 of
the Company's Registration Statement on Form S-1 (No. 333-29163) effective June
27, 1997).
10.26 Broiler Grower Contract dated January 15, 1997 by and between Pilgrim's
Pride Corporation and B.J.M. Farms. (incorporated by reference from Exhibit
10.26 of the Company's Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
10.27 Broiler Grower Agreement dated January 29, 1997 by and between Pilgrim's
Pride Corporation and Clifford E. Butler (incorporated by reference from
Exhibit 10.27 of the Company's Registration Statement on Form S-1 (No. 333-
29163) effective June 27, 1997).
10.28 Secured Term Credit Agreement dated June 5, 1997 by and among Pilgrim's
Pride Corporation and Harris Trust and Savings Bank, and FBS AG Credit, Inc.,
CoBank, ACB, ING (U.S.) Capital Corporation, Wells Fargo Bank (Texas) and N.A.,
Caisse National de Credit Agricole, Chicago Branch.*
10.29 Amended and Restated Secured Credit Agreement dated August 11, 1997 to
the Secured Credit Agreement dated May 27, 1993 by and among the Company and
Harris Trust and Savings Bank, and FBS AG Credit, Inc., CoBank, ACB, ING (U.S.)
Capital Corporation, Wells Fargo Bank (Texas) and N.A., Caisse National de
Credit Agricole, Chicago Branch.*
10.30 Second Amendment to Second Amended and Restated Loan and Security
Agreement dated September 18, 1997 by and among the Company, the banks party
thereto and Creditanstalt-Bankverein, as agent.*
10.31 Guaranty Fee Agreement between Pilgrim's Pride Corporation and Certain
Shareholders dated July 23, 1997.*
10.32 Revolving Credit Agreement dated March 2, 1998 by and between Pilgrim's
Pride de Mexico, S.A. de C.V., (the borrower); Avicola Pilgrim's Pride de
Mexico, S.A. de C.V. (the Mexican Guarantor), Pilgrim's Pride Corporation (the
U.S. Guarantor), and COAMERICA Bank (the bank), (incorporated by reference from
Exhibit 10.32 of the Company's Quarterly report on form 10-Q for the three
months ended March 28, 1998.
10.33 Receivables Purchase Agreement between Pilgrim's Pride Funding
Corporation, as Seller, Pilgrim's Pride Corporation, as Servicer, Pooled
Accounts Receivable Capital Corporation, as Purchaser, and Nesbitt Burns
Securities Inc., as Agent (incorporated by reference from Exhibit 10.33 of the
Company's Quarterly report on form 10-Q for the three months ended June 27,
1998).
10.34 Purchase and Contribution Agreement Dated as of June 26, 1998 between
Pilgrim's Pride Funding Corporation and Pilgrim's Pride Corporation
(incorporated by reference from Exhibit 10.34 of the Company's Quarterly report
on form 10-Q for the three months ended June 27, 1998).
10.35 Second Amendment to Security Agreement Re: Accounts Receivable, Farm
Products and Inventory between Pilgrim's Pride Corporation and Harris Trust and
Savings Bank (incorporated by reference from Exhibit 10.35 of the Company's
Quarterly report on form 10-Q for the three months ended June 27, 1998).
10.36 First Amendment to Amended and Restated Secured Credit Agreement between
Pilgrim's Pride Corporation and Harris Trust and Savings Bank, U.S. Bancorp Ag
Credit, Inc., CoBank, ACB, ING (U.S.) Capital Corporation ("ING"), Wells Fargo
Bank, N.A. and Credit Agricole Indosuez (incorporated by reference from Exhibit
10.33 of the Company's Quarterly report on form 10-Q for the three months ended
June 27, 1998).
21.1 Subsidiaries of Registrant.*
23.1 Consent of Ernst & Young LLP.*
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the issuer has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 9th day of August 1999.
PILGRIM'S PRIDE CORPORATION
/s/ Richard A. Cogdill
By:
Richard A. Cogdill
Chief Financial Officer
Secretary and Treasurer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Pilgrim's Pride Corporation
Stockholders and Board of Directors
Pilgrim's Pride Corporation
We have audited the accompanying consolidated balance sheets of
Pilgrim's Pride Corporation and subsidiaries at September 26, 1998, and
September 27, 1997, and the related consolidated statements of income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended September 26, 1998. Our audits also included the financial statements
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pilgrim's Pride Corporation as of at September 26, 1998, and September 27,
1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended September 26, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements, taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
November 4, 1998, except for the
last paragraph of Note F as to
which the date is July 30, 1999.
CONSOLIDATED BALANCE SHEETS
Pilgrim's Pride Corporation
(IN THOUSANDS) TWO YEARS ENDED SEPTEMBER 26, 1998
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,125 $ 20,338
Trade accounts and other
receivables, less allowance
for doubtful accounts 81,813 77,967
Inventories 141,684 146,180
Deferred income taxes 7,010 3,998
Prepaid expenses and other
current assets 2,902 2,664
Total Current Assets 258,534 251,147
OTHER ASSETS 11,757 18,094
PROPERTY, PLANT AND EQUIPMENT:
Land 26,404 25,737
Buildings, machinery and
equipment 470,763 436,783
Autos and trucks 35,547 33,278
Construction-in-progress 29,385 14,863
562,099 510,661
Less accumulated depreciation 230,951 200,778
331,148 309,883
$601,439 $579,124
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable $ 70,069 $ 71,225
Accrued expenses 35,536 34,784
Current maturities
of long-term debt 5,889 11,596
Total Current Liabilities 111,494 117,605
Long-Term Debt, less current
maturities 199,784 224,743
Deferred Income Taxes 58,401 53,418
Minority Interest in Subsidiary 889 842
Commitments and Contingencies -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
authorized 5,000,000 -- --
shares; none issued
Common stock - Class A, $.01
par value, authorized -- --
100,000,000 shares;
none issued as of
September 26, 1998
Common stock - Class B, $.01
par value, authorized
60,000,000 shares;
27,589,250 issued and outstanding
in 1998 and 1997 276 276
Additional paid-in capital 79,763 79,763
Retained earnings 150,832 102,477
Total Stockholders' Equity 230,871 182,516
$601,439 $579,124
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE YEARS ENDED SEPTEMBER 26, 1998
1998 1997 1996
NET SALES $1,331,545 $1,277,649 $1,139,310
COST AND EXPENSES:
Cost of sales 1,195,442 1,163,152 1,068,670
Selling, general
and administrative 58,847 50,603 49,136
1,254,289 1,213,755 1,117,806
Operating Income 77,256 63,894 21,504
OTHER EXPENSES (INCOME):
Interest expense, net 20,148 22,075 21,539
Foreign exchange loss 2,284 434 1,275
Miscellaneous, net (1,698) (2,439) (1,357)
20,734 20,070 21,457
Income Before Income Taxes
and Extraordinary Charge 56,522 43,824 47
Income tax expense 6,512 2,788 4,551
NET INCOME (LOSS)
BEFORE EXTRAORDINARY CHARGE 50,010 41,036 (4,504)
Extraordinary charge-early
repayment of debt, net of tax -- -- (2,780)
Net Income (Loss) $ 50,010 $ 41,036 $ (7,284)
Net income (loss) per common share before
extraordinary charge $ 1.21 $ 0.99 $ (0.11)
- basic and diluted
Extraordinary charge per
common share - basic and
diluted -- -- (0.07)
NET INCOME (LOSS)
PER COMMON SHARE
- BASIC AND DILUTED $ 1.21 $ 0.99 $ (0.18)
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Class B
Number Common Additional Retained
of Shares Stock Paid-In Capital Earnings Total
Balance at September 30, 1995
27,589,250 $276 $79,763 $72,035 $152,074
Net loss for year (7,284) (7,284)
Cash dividends declared
($.04 per share) (1,655) (1,655)
Balance at September 28, 1996
27,589,250 276 79,763 63,096 143,135
Net income for year 41,036 41,036
Cash dividends declared
($.04 per share) (1,655) (1,655)
Balance at September 27, 1997
27,589,250 276 79,763 102,477 182,516
Net income for year 50,010 50,010
Cash dividends declared
($.04 per share) (1,655) (1,655)
Balance at September 26, 1998
27,589,250 $ 276 $ 79,763 $150,832 $230,871
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pilgrim's Pride Corporation
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE YEARS ENDED SEPTEMBER 26, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 50,010 $41,036 $ (7,284)
Adjustments to reconcile net income (loss) to cash
Provided by operating activities:
Depreciation and amortization 32,591 29,796 28,024
(Gain) loss on property disposals 132 874 (211)
Provision for doubtful accounts 409 (60) 1,003
Deferred income taxes 571 2,613 (354)
Extraordinary charge -- -- 4,587
Changes in operating assets and liabilities:
Accounts and other receivables (4,255) (15,213) (6,858)
Inventories 4,496 (9,314) (24,830)
Prepaid expenses and
other current assets (246) (999) (674)
Accounts payable and
accrued expenses 996 1,056 18,165
Other 312 (174) (177)
Cash Provided by Operating Activitie 85,016 49,615 11,391
INVESTING ACTIVITIES:
Acquisitions of property,
plant and equipment (53,518) (50,231) (34,314)
Proceeds from property disposals 5,629 3,853 1,468
Other, net 595 (1,291) 312
Cash Used in Investing Activities (47,294) (47,669) (32,534)
FINANCING ACTIVITIES:
Proceeds from notes
payable to banks 35,500 68,500 91,000
Repayments on notes payable
to banks (35,500) (95,500) (77,000)
Proceeds from long-term debt 21,125 39,030 51,028
Payments on long-term debt (51,968) (10,027) (32,140)
Cash dividends paid (1,655) (1,655) (1,655)
Extraordinary charge, cash items -- -- (3,920)
Cash Provided by (Used in)
Financing Activities (32,498) 348 27,313
Effect of exchange rate changes
on cash and cash equivalents (437) 4 (22)
Increase in cash and cash equivalents 4,787 2,298 6,148
Cash and cash equivalents at
beginning of year 20,338 18,040 11,892
CASH AND CASH EQUIVALENTS AT END OF YEAR: $25,125 $20,338 $18,040
Supplemental Disclosure Information:
Cash paid during the year for:
Interest (net of amount capitalized) $20,979 $22,026 $20,310
Income taxes $ 4,543 $ 2,021 $ 4,829
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pilgrim's Pride Corporation
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pilgrim's Pride Corporation ("the Company") is a vertically integrated
producer of chicken products, controlling the breeding, hatching and growing
of chickens and the processing, preparation and packaging of its product
lines. The Company is the fourth largest producer of chicken in the United
States, with production and distribution facilities located in Texas,
Arkansas, Oklahoma and Arizona, and is the second largest producer of chicken
in Mexico, with production and distribution facilities located in
Mahuila, San Louis Potosi, Queretaro and Hidalgo. The Company's chicken
products consist primarily of prepared foods, which include portion-controlled
breast fillets, tenderloins and strips, formed nuggets and patties, bone-in
chicken parts, fresh foodservice chicken, pre-packaged chicken, and bulk
packaged chicken.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Pilgrim's Pride Corporation and its wholly and majority owned
subsidiaries. Significant intercompany accounts and transactions have been
eliminated.
The financial statements of the Company's Mexico subsidiaries are re-measured
as if the U.S. dollar were the functional currency. Accordingly, assets and
liabilities of the Mexico subsidiaries are translated at end-of-period exchange
rates, except for non-monetary assets which are translated at equivalent dollar
costs at dates of acquisition using historical rates. Operations are
translated at average exchange rates in effect during the period. Foreign
exchange (gains) losses are separately stated as components of "Other expenses
(income)" in the Consolidated Statement of Income (Loss).
Cash Equivalents: The Company considers highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE: The Company does not believe it has significant
concentrations of credit risk in its accounts receivable, which are generally
unsecured. Credit evaluations are performed on all significant customers and
updated as circumstances dictate. Allowances for doubtful accounts were $3.7
million and $3.8 million at September 26, 1998 and September 27, 1997,
respectively.
INVENTORIES: Live chicken inventories are stated at the lower of cost or market
and breeder hens at the lower of cost, less accumulated amortization, or market.
The costs associated with breeder hens are accumulated up to the
production stage and amortized over the productive lives using the straight-
line method. Finished chicken products, feed, eggs and other inventories are
stated at the lower of cost (first-in, first-out method) or market.
Occasionally, the Company hedges a portion of its purchases of major feed
ingredients using futures contracts to minimize the risk of adverse price
fluctuations. The changes in market value of such agreements have a high
correlation to the price changes of the feed ingredients being hedged. Gains
and losses on the hedge transactions are deferred and recognized as a component
of cost and sales when products are sold. Gains and losses on the futures
contracts would be recognized immediately were the changes in the market value
of the agreements to cease to have a high correlation to the price changes of
the feed ingredients being hedged.
Property, Plant and Equipment: Property, plant an equipment is stated at cost.
For financial reporting purposes, depreciation is computed using the straight-
line method over the estimated useful lives of these assets. Depreciation
expense was $31.5 million, $28.7 million and $26.8 million in 1998, 1997 and
1996, respectively.
Net Income (Loss) Per Common Share: Net income (loss) per share is based on the
weighted average number of shares of common stock outstanding during the year.
The weighted average number of shares outstanding (basic and diluted) was
41,383,779 in all periods, as adjusted for the stock dividend referred to in
Note F.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128), which the Company was required to adopt in the first quarter of 1998.
The adoption of SFAS 128c had no impact on the reporting of earnings per share.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE--B INVENTORIES:
Inventories consist of the following:
1998 1997
Live chicken and hens $ 61,295 $ 68,034
Feed, eggs and other 46,199 43,878
Finished chicken products 34,190 34,268
$141,684 $146,180
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
The Company maintains $70 million in revolving credit facilities and $45
million in secured term borrowing facilities. The credit facilities provide for
interest at rates ranging from LIBOR plus one and three-eighths percent to
LIBOR plus two percent and are secured by inventory and fixed assets. At
September 26, 1998, $63.3 million was available under the revolving credit
facilities and $30.8 million was available under the term borrowing facilities.
Annual maturities of long-term debt for the five years subsequent to September
26, 1998 are: 1999 - $5.7 million; 2000 - $10.0 million; 2001 - $10.2 million;
2002 - $10.4 million and 2003 - $126.3 million. During 1996, the Company
retired certain debt prior to its scheduled maturity. These repayments
resulted in an extraordinary charge of $2.8 million, net of $1.8 million tax
benefit.
The Company is required, by certain provisions of its debt agreements, to
maintain levels of working capital and net worth, to limit dividends to a
maximum of $1.7 million per year, to maintain various fixed charge, leverage,
current and debt-to-equity ratios, and to limit annual capital expenditures.
Substantially all of the Company's domestic property, plant and equipment is
pledged as collateral on its long-term debt and credit facilities.
Total interest was $21.6 million in 1998 and $23.4 million in 1997 and
1996. Interest related to new construction capitalized in 1998, 1997 and 1996
was $1.7 million, $.5 million and $1.3 million, respectively.
The fair value of long-term debt, at September 26, 1998 and September 27, 1997,
based upon quoted market prices for the same or similar issues where available
or by using discounted cash flow analysis, was approximately $206.7 million and
$241.4 million, respectively.
Long-term debt consist of the following:
(IN THOUSANDS)
NOTE D - INCOME TAXES
Income (loss) before income taxes and extraordinary charge after
allocation of certain expenses to foreign operations for 1998, 1997 and 1996
was $23.7 million, $15.8 million and $16.3 million, respectively, for U.S.
operations, and $32.8 million, $28 million and ($16.3) million, respectively,
for foreign operations. The provisions for income taxes are based on pre-tax
financial statement income.
The components of income tax expense (benefit) are set forth below:
(IN THOUSANDS)
1998 1997 1996
Current:
Federal $4,985 $1,113 $3,005
Foreign 948 245 817
State and 8 (1,183) 1,083
other 5,941 175 4,905
Deferred 571 2,613 (354)
$6,512 $ 2,788 $ 4,551
The following is a reconciliation between the statutory U.S. federal
income tax rate and the Company's effective income tax rate:
(IN THOUSANDS)
1998 1997 1996
Federal income tax rate 35.0% 35.0% 35.0%
State tax rate, net (0.4) (0.8) 1,674.1
Effect of Mexico loss
Being non-deductible
In U.S. - - 6,252.3
Difference in U.S.
Statutory tax rate
and
Mexico effective (23.1) (27.8) 1,649.3
Tax rate - 0.2
Other, net -
11.5% 6.4% 9,610.9%
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets are as follows:
(IN THOUSANDS)
1998 1997
Deferred tax liabilities:
Tax over book depreciation $25,304 $24,584
Prior use of cash accounting 32,905 34,223
Other 1,059 823
Total deferred tax 59,268 59,630
liabilities
Deferred tax assets:
AMT credit carryforward 234 3,518
Expense deductible in
different years 7,643 6,692
Total deferred tax asset 7,877 10,210
Net deferred tax liabilities $51,391 $49,420
The Company has not provided any U.S. deferred income taxes on the
undistributed earnings of its Mexico subsidiaries based upon its determination
that such earnings will be indefinitely reinvested. As of September 26, 1998,
the cumulative undistributed earnings of these subsidiaries were approximately
$94.4 million. If such earnings were not considered indefinitely reinvested,
deferred U.S. and foreign income taxes would have been provided, after
consideration of estimated foreign tax credits. However, determination of the
amount of deferred federal and foreign income taxes is not practical.
NOTE E - ACCOUNTS RECEIVABLE
On June 26, 1998, the Company entered into an asset sale agreement to
sell up to $60 million of accounts receivable. Under this agreement, as the
sold accounts receivable are collected, new qualifying accounts can be
substituted thus maintaining the maximum balance allowed to be outstanding at a
rate approximating .425% over commercial paper. As of September 26, 1998, no
accounts receivable had been sold under this agreement. Any such sales,
however, are expected to be recorded as a sale in accordance with FASB
Statement No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.
NOTE F - COMMON STOCK
On June 30, 1998, the Company's shareholders approved an amendment to the
Company's certificate of incorporation that reclassified the Company's existing
common stock to Class B common stock ("Class B Stock") and created a new class
of common stock designated as Class A common stock ("Class A Stock"). Under
the reclassification, each outstanding share of the Company's existing common
stock was reclassified into one share of Class B Stock. Each share of Class B
Stock has substantially the same rights, powers and limitations as the
Company's common stock outstanding immediately prior to such amendment, except
that each share of Class B Stock entitles the holder thereof to 20 votes per
share except as otherwise provided by law. Each share of the new Class A Stock
is substantially identical to the shares of Class B Stock, except that each
share of Class A Common Stock entitles the holder thereof to one vote per share
on any matter submitted for a stockholder vote.
On July 2, 1999, the Company's board of directors declared a stock
dividend of the Company's Class A common stock. Stockholders of record on July
20, 1999 received one share of the Company's Class A common stock for every two
shares of the Company's Class B common stock held as of that date. The
additional shares were issued on July 30, 1999. Historical per share and
weighted average shares outstanding amounts have been restated to give effect
to the stock dividend.
NOTE G - SAVINGS PLAN
The Company maintains a Section 401 (k) Salary Deferral Plan (the
"Plan"). Under the Plan, eligible U.S. employees may voluntarily contribute a
percentage of their compensation. The Plan provides for a contribution of up
to four percent of compensation subject to an overall Company contribution
limit of five percent of the U.S. operation's income before taxes. Under this
plan, the Company's expenses were $1.7 million, $1.2 million and $1.0 million
in 1998, 1997 and 1996, respectively.
NOTE H-RELATED PARTY TRANSACTIONS
The major stockholder of the Company owns an egg laying and a chicken
growing operation. Transactions with related entities are summarized as
follows:
(IN THOUSANDS)
1998 1997 1996
Contract egg grower
fees to major
Stockholder $ 4,989 $ 4,926 $ 4,697
Chick, feed and other
sales to major
stockholder 21,396 20,116 18,057
Live chicken purchases
from major
stockholder 21,883 20,442 18,112
The Company leases an airplane from its major stockholder under an
operating lease agreement. The terms of the lease agreement require monthly
payments of $33,000 plus operating expenses. Lease expense was $396,000 for
each of the years 1998, 1997 and 1996. Operating expenses were $52,950,
$107,000 and $88,000 in 1998, 1997 and 1996, respectively.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Consolidated Statements of Income (Loss) include rental expense for
operating leases of approximately $14.3 million, $11.3 million and $10.1
million in 1998, 1997 and 1996, respectively. The Company's future minimum
lease commitments under non-cancelable operating leases are as follows: 1999 -
$12.7 million; 2000 - $11.6 million; 2001 - $9.6 million; 2002 - $6.5 million;
2003 - $5.4 million and thereafter $7.3 million.
At September 26, 1998, the Company had $6.7 million in letters of credit
outstanding relating to normal business transactions.
The Company is subject to various legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management,
the amount of ultimate liability with respect to these actions will not
materially affect the financial position or results of operations of the
Company.
NOTE J - BUSINESS SEGMENTS
The Company operates in a single business segment as a producer of agricultural
products and conducts separate operations in the United States and Mexico.
Inter-area sales, which are not material, are accounted for at prices
comparable to normal trade customer sales. Identifiable assets by geographic
area are those assets which are used in the Company's operations in each area.
Information about the Company's operations in these geographic areas is as
follows:
(IN THOUSANDS)
1998 1997 1996
Sales to
unaffiliated
Customers:
United States $1,053,458 $1,002,652 $911,181
Mexico 278,087 274,997 228,129
$1,331,545 $1,277,649 $1,139,310
Operating income
(loss):
United States $36,279 $29,321 $29,705
Mexico 40,977 34,573 (8,201)
$77,256 63,894 $21,504
Identifiable assets:
United States $424,591 $404,213 $363,543
Mexico 176,848 174,911 173,179
$601,439 $579,124 $536,722
The operating loss in Mexico in 1996 was primarily the result of currency
devaluation and other economic factors. As of September 26, 1998 the Company
had net assets in Mexico of $150 million.
NOTE K - QUARTERLY RESULTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED SEPTEMBER 26, 1998
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
Net Sales $337,887 $324,446 $328,500 $340,712 $1,331,545
Gross Profit 29,380 26,861 32,736 47,126 136,103
Operating income
15,371 11,398 19,043 31,444 77,256
Net income 11,117 6,768 11,835 20,290 50,010
Per Share(b):
Net income 0.27 0.16 0.29 0.49 1.21
Cash dividends 0.01 0.01 0.01 0.01 0.04
Market price:
High 11 1/16 10 9/16 13 1/8 16 1/16 16 1/16
Low 8 1/2 7 3/16 9 3/16 12 3/16 7 3/16
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED SEPTEMBER 27, 1997
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
Net sales $297,806 $303,401 $335,168 $341,274 $1,277,649
Gross profit 30,267 23,085 27,285 33,860 114,497
Operating
income 16,314 9,660 12,627 25,293 63,894
Net income 10,105 (a) 4,954 7,286 18,691 41,036(a)
Per Share(b):
Net income 0.24 (a) 0.12 0.18 0.45 0.99(a)
Cash
dividends 0.01 0.01 0.01 0.01 0.04
Market price:
High 6 8 1/16 8 1/2 10 1/4 10 1/4
Low 5 3/16 5 3/4 6 5/16 6 7/8 5 3/16
(a) Includes $2.2 million ($1.3 million net of taxes) of other income arising
from the final settlement of claims arising from a January 1992 fire at the
Company's prepared foods plant.
(b) The per share data has been adjusted to reflect the July 30, 1999 stock
dividend referred to in Note F.
PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES
SCHEUDLE II-VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
CHARGED CHARGED BALANCE AT END
BALANCE AT TO COSTS TO OTHER DEDUCTINS OF PERIOD
DESCRIPTION BEGINNING AND EXPENSES ACCOUNTS DESCRIBE
-DESCRIBE
EXHIBIT 22- SUBSIDIARIES OF REGISTRANT
(1) AVICOLA PILGRIM'S PRIDE DE MEXICO, S.A. DE C.V.
(2) CIA. INCUBADORA HIDALGO, S.A. DE C.V.
(3) INMOBILIARIA AVICOLA PILGRIM'S PRIDE, S. DE R.L. DE C.V.
(4) PILGRIM'S PRIDE, S.A. DE C.V.
(5) PRODUCTORA Y DISTRIBUIDORA DE ALIMENTOS, S.A. DE C.V.
(6) GALLINA PESADA S.A. DE C.V.
(7) PILGRIM'S PRIDE FUNDING CORPORATION
(8) PILGRIM'S PRIDE INTERNATIONAL, INC.
(9) PPC OF DELAWARE BUSINESS TRUST
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 3-12043) of Pilgrim's Pride Corporation of our report dated
November 4, 1998, except for the last paragraph of Note F, as to which the
date is July 30, 1999, with respect to the consolidated financial
statements of Pilgrim's Pride Corporation included in this Annual Report
(Form 10-K/A) for the year ended September 26, 1998.
Ernst & Young LLP
Dallas, Texas
August 9, 1999