Markets for Chicken Products
Foodservice. The majority of our U.S. chicken sales are derived from products sold to the foodservice market. This market principally consists of chain restaurants, food processors and certain other institutions located throughout the continental U.S. We supply chicken products ranging from portion-controlled refrigerated chicken parts to fully cooked and frozen, breaded or non-breaded chicken parts or formed products.
We believe Pilgrims Pride 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, we believe we are well suited to be the sole supplier for many regional chain restaurants. Regional chain restaurants often offer better margin opportunities and a growing base of business.
With the integration of the ConAgra chicken division we are now a significant supplier to the broadline distributor segment which rounds out our foodservice offerings to allow us to service the entire foodservice industry.
We believe we have significant competitive strengths in terms of full-line product capabilities, high-volume production capacities, research and development expertise and extensive distribution and marketing experience relative to smaller and non-vertically integrated producers. While the overall chicken market has grown consistently, we believe the majority of this growth in recent years has been in the foodservice market. According to the National Chicken Council, from 1999 through 2003, sales of chicken products to the foodservice market grew at a compounded annual growth rate of approximately 4.7%, versus 4.3% growth for the chicken industry overall. Foodservice growth is anticipated to continue as food-away-from-home expenditures continue to outpace overall industry rates. According to the National Restaur
ant Association, food-away-from-home expenditures grew at a compounded annual growth rate of approximately 4.1% from 1999 through 2003 and are projected to grow at a 4.6% compounded annual growth rate from 2003 through 2010. As a result, the food-away-from-home category is projected by the National Restaurant Association to account for 53% of total food expenditures by 2010, as compared with the current amount of 46.1%. Due to internal growth and our fiscal 2004 acquisition, our sales to the foodservice market from fiscal 2000 through fiscal 2004 grew at a compounded annual growth rate of 39.2% and represented 72.8% of the net sales of our U.S. chicken operations in fiscal 2004.
Foodservice - Prepared Foods. The majority of our sales to the foodservice market consist of prepared foods products. Our prepared chicken products sales to the foodservice market were $1,647.9 million in fiscal 2004 compared to $589.4 million in fiscal 2000, a compounded annual growth rate of approximately 29.2%. In addition to the significant increase in sales created by the fiscal 2004 acquisition, we attribute this growth in sales of prepared chicken products 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 in the number of chicken items offered.
Second, foodservice operators are increasingly purchasing prepared chicken products, which allow them to reduce labor costs 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 our principal competitor in the prepared chicken products market. A viable alternative supplier must be able to ensure supply, demonstrate innovation and new product development and provide competitive pricing. We have been successful in our objective of becoming the alternative supplier of choice by being the primary or secondary prepared chicken products supplier to many large foodservice companies because:
- We are vertically integrated, giving us control over our supply of chicken and chicken parts;
- Our further processing facilities with a wide range of capabilities are particularly well suited to the high-volume production as well as low-volume custom production runs necessary to meet both the capacity and quality requirements of the foodservice market; and
- We have 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, we have increasingly become the principal supplier to mid-sized foodservice organizations.
Fifth, our in-house product development group follows a customer-driven research and development focus designed to develop new products to meet customers changing needs. Our research and development personnel often work directly with institutional customers in developing products for these customers.
Sixth, we are a leader in utilizing advanced processing technology, which enables us to better meet our customers needs for product innovation, consistent quality and cost efficiency.
Foodservice - Fresh Chicken. We produce and market 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, and are usually pre-cut to customer specifications. They are often marinated to enhance value and product differentiation. By growing and processing to customers specifications, we are able to assist quick-service restaurant chains in controlling costs and maintaining quality and size consistency of chicken pieces sold to the consumer.
Retail. The retail market consists primarily of grocery store chains, wholesale clubs and other retail distributors. We concentrate our efforts in this market on sales of branded, prepackaged cut-up and whole chicken to grocery store chains and retail distributors in the midwestern, southwestern, western and eastern regions of the U.S. This regional marketing focus enables us to develop consumer brand franchises and capitalize on proximity to the trade customer in terms of lower transportation costs, more timely and responsive service, and enhanced product freshness. For a number of years, we have invested in both trade and retail marketing designed to establish high levels of brand name awarenes
s and consumer preferences.
We utilize numerous marketing techniques, including advertising, to develop and strengthen trade and consumer awareness and increase brand loyalty for consumer products marketed under the Pilgrims Pride® brand. Our founder, Lonnie "Bo" Pilgrim, is the featured spokesman in our television, radio and print advertising, and a trademark cameo of a person wearing a Pilgrims hat serves as the logo on all of our primary branded products. As a result of this marketing strategy, Pilgrims Pride® is a well-known brand name in a number of markets. We believe our efforts to achieve and maintain brand awareness and loyalty help
to provide more secure distribution for our products. We also believe our efforts at brand awareness generate greater price premiums than would otherwise be the case in certain southwestern markets. We also maintain an active program to identify consumer preferences. The program primarily consists of discovering and validating new product ideas, packaging designs and methods through sophisticated qualitative and quantitative consumer research techniques in key geographic markets.
Retail - Prepared Foods. We sell retail-oriented prepared chicken products primarily to grocery store chains located in the midwestern, southwestern, western and eastern regions of the U.S. Our prepared chicken products sales to the retail market were $213.8 million in fiscal 2004 compared to $47.7 million in fiscal 2000, a compounded annual growth rate of approximately 45.5%. We believe that our growth in this market segment will continue as retailers concentrate on satisfying consumer demand for more products which are quick, easy and convenient to prepare at home.
Retail - Fresh Chicken. Our 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 retail grocers fresh meat counter. We believe 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.
Export and Other Chicken Products. Our export and other chicken products, other than the prepared foods 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 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. We also sell U.S.-produced chicken products for export to Eastern Europe, including Russia, the Far East, Mexico and other world markets. On March 10, 2002, Russia announced it was imposing a ban on the importing of U.S. poultry products.
Russia accounted for approximately 31% of all U.S. chicken exports in 2002, or approximately 5% of the total U.S. chicken production. On April 10, 2002, Russia announced the lifting of the import ban. On September 15, 2002, new sanitary guidelines were established by Russia that require veterinary specialists from the Agriculture Ministry of Russia to inspect and certify plants of U.S. poultry producers interested in exporting to Russia. As of November 24, 2004, six of our locations had been certified by the Agriculture Ministry for export into Russia and three additional locations have been re-inspected and we are waiting on notice of their certification by the Agriculture Ministry. We currently may export from three of our six certified locations and we may begin exporting to Russia from our other three certified locations after Russia lifts the current Avian Influenza ban on December 23, 2004. U.S. markets continue to be affected as Russia continues to restrict the import of U.S. poultry products below 20
02 levels.
Historically, we have targeted international markets to generate additional demand for our chicken dark meat, which is a natural by-product of our U.S. operations given our concentration on prepared foods products and the U.S. customers general preference for white meat. We have also begun selling prepared chicken products for export to the international divisions of our U.S. chain restaurant customers. We believe that U.S. chicken exports will continue to grow as worldwide demand increases for high-grade, low-cost protein sources. We also believe that worldwide demand for higher margin prepared foods products will increase over the next several years. Accordingly, we believe we are well positioned to capitalize on such growth. Also included in these categories are chicken by-products, which are converted into protein products and sold primarily to manufacturers of pet foods.
Markets for Turkey Products
Foodservice. A portion of our turkey sales are derived from products sold to the foodservice market. This market principally consists of chain restaurants, food processors, foodservice distributors and certain other institutions located throughout the continental U.S. After completion of the restructuring of our turkey operations described above, our turkey products include ready-to-cook turkey, fully cooked formed products, delicatessen products such as deli meats and sausage, salads, ground turkey and turkey burgers and other foodservice products.
We believe Pilgrims Pride is well-positioned to be the primary or secondary supplier to many chain restaurants that require multiple suppliers of turkey products. Additionally, we believe we are well suited to be the sole supplier for many regional chain restaurants.
We believe we have significant competitive strengths in terms of full-line product capabilities, high-volume production capacities, research and development expertise and extensive distribution and marketing experience relative to smaller producers.
Foodservice - Prepared Foods. The majority of our turkey sales to the foodservice market consist of prepared turkey products. Our prepared turkey sales to the foodservice market were $80.9 million of our sales in fiscal 2004. We believe that future growth in this segment will be attributable to the factors described above relating to the growth of prepared chicken sales to the foodservice market.
Foodservice - Fresh Turkey. We produce and market fresh, refrigerated and frozen turkey for sale to foodservice distributors, restaurant chains and other customers. These turkeys are usually of specific weight ranges and are usually whole birds to meet customer specifications. They are often marinated to enhance value and product differentiation.
Retail. A significant portion of our turkey sales is derived from products sold to the retail market. This market consists primarily of grocery store chains, wholesale clubs and other retail distributors. We concentrate our efforts in this market on sales of branded, prepackaged whole turkey to grocery store chains and retail distributors in the eastern and southwestern regions of the U.S. We believe this regional marketing focus enables us to develop consumer brand franchises and capitalize on proximity to the trade customer in terms of lower transportation costs, more timely and responsive service and enhanced product freshness.
We utilize numerous marketing techniques, including advertising, to develop and strengthen trade and consumer awareness and increase brand loyalty for consumer products marketed generally under the Pilgrims Pride® and Pilgrims SignatureTM brands. We believe our efforts to achieve and maintain brand awareness and loyalty help to provide more secure distribution for our products. We also believe our efforts at brand awa
reness generate greater price premiums than would otherwise be the case in certain eastern markets. We also maintain an active program to identify consumer preferences. The program primarily consists of testing new product ideas, packaging designs and methods through sophisticated qualititative and quantitative consumer research techniques in key geographic markets.
Retail - Prepared Foods. We sell retail-oriented prepared turkey products primarily to grocery store chains located in the eastern U.S. We also sell these products to the wholesale club industry.
Retail - Fresh Turkey. Our prepackaged, retail products include various combinations of freshly refrigerated and frozen whole turkey in bags as well as frozen ground turkey and turkey burgers. We believe the retail prepackaged fresh turkey business will continue to be a large and relatively stable market, providing opportunities for product differentiation and regional brand loyalty with large seasonal spikes during the holiday seasons.
Markets for Other U.S. Products
We have regional distribution centers located in Arizona, California, Iowa, Louisiana, Mississippi, North Carolina, Texas, Utah and Wisconsin that distribute our own poultry products, along with certain poultry and non-poultry products purchased from third parties, to independent grocers and quick service restaurants. Our non-poultry distribution business is conducted as an accommodation to our customers and to achieve greater economies of scale in distribution logistics. We believe the store-door delivery capabilities for our own poultry products provide a strategic service advantage in selling to quick service, national chain restaurants.
We market fresh eggs under the Pilgrims Pride® brand name, as well as under private labels, in various sizes of cartons and flats to U.S. retail grocery and institutional foodservice customers located primarily in Texas. We have a housing capacity for approximately 2.3 million commercial egg laying hens which can produce approximately 42 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 62.6% of the total number of egg laying hens in serv
ice during 2004. We compete with other U.S. egg producers primarily on the basis of product quality, reliability, price and customer service.
We market a high-nutrient egg called EggsPlus. This egg contains high levels of Omega-3 and Omega-6 fatty acids along with Vitamin E, making the egg a heart-friendly product. Our marketing of EggsPlus has received national recognition for our progress in being an innovator in the "functional foods" category.
In addition, we produce and sell livestock feeds at our feed mill in Mt. Pleasant, Texas and at our farm supply store in Pittsburg, Texas to dairy farmers and livestock producers in northeastern Texas. We engage in similar sales activities at our other U.S. feed mills.
MEXICO
Background
The Mexican market represented approximately 7.2% of our net sales in fiscal 2004. We are the second largest producer of chicken in Mexico. We believe that our facilities are among the most technologically advanced in Mexico and that we are 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 U.S., with sales attributed to fewer, more basic products, we believe the market for value-added products is increasing. Our strategy is to lead this trend. We have increased our sales of value-added products, primarily through national retail chains and restaurants, and it is our business strategy to continue to do so.
Markets
We sell our Mexico chicken products primarily to large wholesalers and retailers. Our customer base in Mexico covers a broad geographic area from Mexico City, the capital of Mexico with a population estimated to be over 22 million, to Saltillo, the capital of the State of Coahuila, about 500 miles north of Mexico City, and from Tampico and Veracruz 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, and Cancun on the Caribbean.
Foreign Operations Risks
Our foreign operations pose special risks to our business and operations. See "Risk Factors" in Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for a discussion of foreign operations risks.
GENERAL
Competition
The chicken and turkey industries are highly competitive and some of our competitors have greater financial and marketing resources than we do. In the U.S. and Mexico, we compete principally with other vertically integrated chicken and turkey companies.
In general, the competitive factors in the U.S. chicken and turkey industries include price, product quality, product development, 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, we believe that product quality, brand awareness, customer service and price are the primary bases of competition. There is some competition with non-vertically integrated further processors in the U.S. prepared food business. We believe vertical integration generally provides significant, long-term cost and quality advantages over non-vertically integrated further processors.
In Mexico, where product differentiation has traditionally been limited, product quality, service and price have been the most critical competitive factors. The North American Free Trade Agreement, which went into effect on January 1, 1994, required annual reductions in tariffs for chicken and chicken products in order to eliminate those tariffs by January 1, 2003. On November 21, 2002 the Mexican Secretariat of the Economy announced it would initiate an investigation to determine whether a temporary safeguard action was warranted to protect the domestic poultry industry when import tariffs on poultry were eliminated in January 2003. The action stemmed from concerns of the Union Nacional Avicultores (UNA) that duty-free imports of leg quarters would injure the Mexico poultry industry. In July 2003, the U.S. and Mexico entered into a safeguard agreement with regard to imports into Mexico of chicken leg quarters from the U.S.
Under this agreement, a tariff rate for chicken leg quarters of 98.8% of the sales price was established. The first reduction to the tariff rate occurred in January 2004, reducing the import duties to 79.4%, and in each of the following four years the tariff rate is to be reduced in equal increments so that the final tariff rate on January 1, 2008 will be zero. As such tariffs are reduced, we expect greater amounts of chicken to be imported into Mexico from the U.S., which could negatively affect the profitability of Mexican chicken producers and positively affect the profitability of U.S. exporters of chicken to Mexico. Although th
is could have a negative impact on our Mexican chicken operations, we believe that this will be mitigated by the close proximity of our U.S. operations to the Mexican border. We have the largest U.S. production and distribution capacities near the Mexican border, which gives us a strategic advantage to capitalize on exports of U.S. chicken to Mexico.
While the extent of the impact of the elimination of tariffs is uncertain, we believe we are uniquely positioned to benefit from this elimination for two reasons. First, we have an extensive distribution network in Mexico, which distributes products to 28 of the 32 Mexican states, encompassing approximately 83% of the total population of Mexico. We believe this distribution network will be an important asset in distributing our own, as well as other companies, U.S. produced chicken into Mexico. Second, we have the largest U.S. production and distribution capacities near the Mexican border, which will provide us with cost advantages in exporting U.S. chicken into Mexico. These facilities include our processing facilities in Mt. Pl
easant, Lufkin, Nacogdoches, Dallas and Waco, Texas, and distribution facilities in San Antonio and El Paso, Texas and Phoenix, Arizona.
Other Activities
We have regional distribution centers located in Arizona, California, Iowa, Louisiana, Mississippi, North Carolina, Texas, Utah and Wisconsin that distribute our own poultry products, along with certain poultry and non-poultry products purchased from third parties, to independent grocers and quick service restaurants. Our non-poultry distribution business is conducted as an accommodation to our customers and to achieve greater economies of scale in distribution logistics. We believe the store-door delivery capabilities for our own poultry products provide a strategic service advantage in selling to quick service, national chain restaurants.
Regulation and Environmental Matters
The chicken and turkey industries are subject to government regulation, particularly in the health and environmental areas, including provisions relating to the discharge of materials into the environment, by the Centers for Disease Control ("CDC"), the USDA, the Food and Drug Administration ("FDA") and the Environmental Protection Agency ("EPA") in the U.S. and by similar governmental agencies in Mexico. Our 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 our feed mills in the U.S. Our 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. We beli
eve that we are in substantial compliance with all applicable laws and regulations relating to the operations of our facilities.
We anticipate increased regulation by the USDA concerning food safety, by the FDA concerning the use of medications in feed and by the EPA and various other state agencies concerning discharges to the environment. Although, we do not anticipate any regulations having a material adverse effect upon us, a material adverse effect may occur.
Employees and Labor Relations
As of October 2, 2004, we employed approximately 35,500 persons in the U.S. and 4,800 persons in Mexico. Approximately 12,700 employees at various facilities in the U. S. are members of collective bargaining units. In Mexico, most of our hourly employees are covered by collective bargaining agreements, as are most employees in Mexico. We have not experienced any work stoppage at any location in over five years. We believe our relations with our employees are satisfactory. At any given time we will be in some stage of contract negotiation with various collective bargaining units.
Business Segments
We operate in two reportable business segments as (1) a producer of chicken and other products and (2) a producer of turkey products. See a discussion of our business segments in Item 7. "Managements Discussion and Analysis of Financial Condition and Results of Operations."
Executive Officers
Set forth below is certain information relating to our current executive officers:
Name |
Age |
Positions |
Lonnie "Bo" Pilgrim |
76 |
Chairman of the Board |
Clifford E. Butler |
62 |
Vice Chairman of the Board |
O.B. Goolsby, Jr. |
57 |
President, Chief Executive Officer, and Director |
J. Clinton Rivers |
45 |
Chief Operating Officer |
Richard A. Cogdill |
44 |
Executive Vice President, Chief Financial Officer, |
|
|
Secretary, Treasurer and Director |
Robert A. Wright |
50 |
Executive Vice President of |
|
|
Sales and Marketing |
Lonnie "Bo" Pilgrim has served as Chairman of the Board since the organization of Pilgrim's Pride in July 1968. He was previously Chief Executive Officer from July 1968 to June 1998. Prior to the incorporation of Pilgrim's Pride, Mr. Pilgrim was a partner in its predecessor partnership business founded in 1946.
Clifford E. Butler serves as Vice Chairman of the Board. He joined us 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 in January 1997 and served in such capacity through July 1998.
O.B. Goolsby, Jr. serves as President and Chief Executive Officer of Pilgrims Pride. Prior to being named Chief Executive Officer in September 2004, Mr. Goolsby served as President and Chief Operating Officer since November 2002. Mr. Goolsby served as Executive Vice President, Prepared Foods Complexes from June 1998 to November 2002. He was previously Senior Vice President, Prepared Foods Operations from August 1992 to June 1998 and Vice President, Prepared Foods Complexes from September 1987 to August 1992 and was previously employed by us from November 1969 to January 1981.
J. Clinton Rivers serves as Chief Operating Officer. Prior to being named Chief Operating Officer in October 2004, Mr. Rivers served as Executive Vice President of Prepared Food Operations from November 2002 to October 2004. He was the Senior Vice President of Prepared Foods Operations from 1999 to November 2002, and was the Vice President of Prepared Foods Operations from 1992 to 1999. From 1989 to 1992, he served as Plant Manager of the Mount Pleasant, Texas Production Facility. He joined Pilgrims Pride in 1986 as the Quality Assurance Manager, and also held positions at Perdue Farms and Golden West Foods.
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.
Robert A. Wright serves as Executive Vice President of Sales and Marketing. Prior to being named Executive Vice President of Sales and Marketing in June 2004, Mr. Wright served as Executive Vice President, Turkey Division since October 2003 when he joined Pilgrims Pride. Prior to October 2003, Mr. Wright served as President of Butterball Turkey Company for five years.
Item 2. Properties
Operating Facilities
We operate 23 poultry processing plants in the U.S. Of this total, 22 process chicken and are located in Alabama, Arkansas, Georgia, Kentucky, Louisiana, North Carolina, Tennessee, Texas, Virginia, and West Virginia. We have one turkey processing plant in Pennsylvania, one chicken processing plant in Puerto Rico and three chicken processing plants in Mexico. The U.S. chicken processing plants have weekly capacity to process 27.5 million broilers and operated at 96% of capacity in fiscal 2004. Our remaining turkey plant has the weekly capacity to process 0.2 million birds under current inspection and line configurations and operates at 90% of capacity. Our Mexico facilities have the capacity to process 3.3 million broilers per week and operated at 91% of capacity in fiscal 2004. Our Puerto Rico processing plant
has the capacity to process 0.3 million birds per week based on one eight-hour shift per day. For segment reporting purposes, we include Puerto Rico with our U.S. operations.
In the U.S., the processing plants are supported by 26 hatcheries, 20 feedmills and 8 rendering plants. The hatcheries, feedmills and rendering plants operated at 92%, 85% and 90% of capacity, respectively, in fiscal 2004. In Puerto Rico the processing plant is supported by one hatchery and one feedmill which operated at 87% and 85% of capacity, respectively, in fiscal 2004. Excluding commercial feed products, the Puerto Rico feedmill is running at 60% of capacity. In Mexico the processing plants are supported by seven hatcheries, four feedmills, and two rendering facilities. The Mexico hatcheries, feedmills and rendering facilities operated at 98%, 86% and 82% of capacity, respectively, in fiscal 2004.
We also operate nine prepared foods plants, eight of which process chicken products and one processes turkey products. These plants are located in Georgia, Louisiana, Pennsylvania, Tennessee, Texas and West Virginia. These plants have the capacity to produce approximately 992 million pounds of further processed product per year and in fiscal 2004 operated at approximately 86% of capacity based on the current product mix and six-day production at most facilities and 24/7 production at two facilities.
Other Facilities and Information
We own a partially automated distribution freezer located outside of Pittsburg, Texas, which includes 125,000 square feet of storage area. We operate a commercial feed mill in Mt. Pleasant, Texas. We own an office building in Pittsburg, Texas, which houses our executive offices, and an office building outside of Pittsburg, Texas, which houses our Logistics and Customer Service offices, an office building in Mexico City, which houses our Mexican marketing offices, and an office building in Broadway, Virginia, which houses additional sales and marketing, research and development, and support activities. We lease offices in Dallas, Texas and Duluth, Georgia, which house additional sales and marketing and support activities.
We have regional distribution centers located in Arizona, California, Iowa, Louisiana, Mississippi, North Carolina, Texas, Utah and Wisconsin. We have 18 regional distribution centers, nine of which we own and nine of which are leased.
Substantially all of our U.S. property, plant and equipment, except those in our turkey segment, are pledged as collateral on our revolving term loan and our secured term loan.
Item 3. Legal Proceedings
On July 1, 2002, three individuals, on behalf of themselves and a putative class of chicken growers, filed their original class action complaint against us in the United States District Court for the Eastern District of Texas, Texarkana Division, styled "Cody Wheeler, et al. vs. Pilgrims Pride Corporation." The complaint alleges that we violated the Packers and Stockyards Act (7 U.S.C. Section 192) and breached fiduciary duties allegedly owed to the plaintiff growers. The plaintiffs also brought individual actions under the Packers and Stockyards Act alleging common law fraud, negligence, breach of fiduciary duties and breach of contract. The plaintiffs entered into an agreement to stay any certification of the class pending the outcome of the trial of the three plaintiffs, Cody Wheeler, Don Davis and Dave
y Williams. On March 14, 2003, the court entered an order dismissing the plaintiffs claim of breach of fiduciary duty and negligence. The plaintiffs also dropped the charges of fraud prior to the entering of the order by the court. We intend to defend vigorously both certification of the case as a class action should it not prevail in the trial of the three plaintiffs and questions concerning ultimate liability and damages, if any. We do not expect this matter to have a material impact on our financial position, operations or liquidity.
In October 2002, a limited number of USDA environmental samples from our Franconia, Pennsylvania plant tested positive for Listeria. As a result, we voluntarily recalled all cooked deli products produced at the plant from May 1, 2002 through October 11, 2002. No illnesses have been linked to any of our recalled products, and none of such products have tested positive for the strain of Listeria associated with an outbreak in the Northeastern U.S. that occurred during the summer of 2002. However, following this recall, a number of demands and cases have been made and filed alleging injuries purportedly arising from the consumption of products produced at this facility. These include: "Lawese Drayton, Individually and as Personal Representative of the Estate of Raymond Drayton, deceased, Plaintiff, v. Pilgrim's Pri
de Corporation, Jack Lambersky Poultry Company, Inc. d/b/a JL Foods Co, Inc., Defendants," which was filed against us in the United States District Court for the Eastern District of Pennsylvania on April 15, 2003; "Laron Harvey, by his mother and natural guardian, Shakandra Hampton, and Shakandra Hampton in her own right v. Pilgrim's Pride Corporation and Jack Lambersky Poultry Company, Inc.," which was filed in the Pennsylvania Court of Common Pleas on May 5, 2003, and has since been removed to the U.S. District Court of the Eastern District of Pennsylvania in Philadelphia; "Ryan and Dana Patterson v. Pilgrim's Pride Corporation and Jack Lambersky Poultry Company, et al" which was filed in the Superior Court of New Jersey, Law Division, Passaic County, on August 12, 2003; "Jamar Clarke, an infant under the age of fourteen (14) years, by his mother and natural guardian, Wanda Multrie Clarke, and Wanda Multrie Clarke, individually v. Pilgrims Pride Corporation d/b/a Wampler Foods, Inc., H. Schrier and C
o., Inc., Board of Education of the City of New York and Public School 251" which was filed in the Supreme Court of the State of New York, County of Queens, on August 1, 2003; "Peter Roselle, as Administrator and Prosequendum for the heirs-at-Law of Louis P. Roselle, deceased; and Executor of the Estate of Louis P. Roselle, deceased, and individually v. Pilgrim's Pride Corporation, Wampler Foods, Inc., Jack Lambersky Poultry Company, Inc., d.b.a. J.L. Foods Co. Inc." which was filed in the Superior Court of New Jersey, Law Division, Union County, on June 14, 2004; "Jody Levonchuk, administratrix of the Estate of Joseph Cusato v. Pilgrim's Pride Corporation and Jack Lambersky Poultry Company." which was filed in the U.S. District Court for the Eastern District of Pennsylvania, on July 28, 2004; "Mary Samudovsky v. Pilgrim's Pride Corp
oration and Jack Lambersky Poultry Company, Inc., et al," which was filed in the Superior Court of New Jersey, Law Division: Camden County, and served on October 26, 2004; Nancy Cirigliano and Scott Fischer v. Pilgrim's Pride Corporation and Jack Lambersky Poultry Company, et al," which was filed in the Superior Court of New Jersey, Union County, on August 10, 2004; "Dennis Wysocki, as the Administrator of the Estate of Matthew Tyler Wysocki, deceased, and Dennis Wysocki and Karen Wysocki, individually v. Pilgrim's Pride Corporation and Jack Lambersky Poultry Company, et al," which was filed in the Supreme Court of the State of New York, County of New York, on July 30, 2004; "Randi Carden v. Pilgrim's Pride Corporation and Jack Lambersky Poultry Company, et al," which was filed in the Superior Court of New Jersey, Camden County, on August 10,
2004; and "Catherine Dillon, individually and as guardian ad litem for her infant son, Brian Dillon, and Joseph Dillon, individually" v. Pilgrim's Pride Corporation and Jack Lambersky Poultry Company, et al," which was filed in the Superior Court of New Jersey, Essex County, on September 10, 2004. There is also a pending claim by the Estate of Frank Niemtzow from the previously filed and voluntarily dismissed class action suit. Neither the likelihood of an unfavorable outcome nor the amount of ultimate liability, if any, with respect to any of these cases can be determined at this time. These cases are in various stages of litigation, and we believe we have meritorious defenses to each of the claims, which we intend to vigorously defend. After considering our available insurance coverage, we do not expect any of these matters to have a material impact on our financial position, operations or liquidity.
On December 31, 2003, we were served with a purported class action complaint styled "Angela Goodwin, Gloria Willis, Johnny Gill, Greg Hamilton, Nathan Robinson, Eddie Gusby, Pat Curry, Persons Similarly Situated v. ConAgra Poultry Company and Pilgrim's Pride, Incorporated" in the United States District Court, Western District of Arkansas, El Dorado Division, alleging racial and age discrimination at one of the facilities we acquired from ConAgra. One of the named plaintiffs, Gloria Willis, was voluntarily dismissed from this action. We believe we have meritorious defenses to the class certification as well as the individual claims and we intend to vigorously oppose class certification and defend these claims. However, the ultimate liability with respect to these claims cannot be determined at this time.
We are subject to various other legal proceedings and claims, which arise in the ordinary course of our business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for the Registrants Common Equity and Related Stockholder Matters
Quarterly Stock Prices and Dividends
High and low prices of and dividends relating to the Companys common stock and the Class B and Class A common stock for the periods indicated were:
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Prices 2004 |
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Prices 2003 |
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Dividends |
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Quarter |
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High |
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Low |
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High |
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Low |
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2004 |
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2003 |
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PPC Common Stock |
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First |
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$ |
18.50 |
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$ |
13.44 |
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$ |
-- |
|
|
|
|
$ |
-- |
|
|
|
|
$ |
.015 |
|
|
|
|
$ |
-- |
|
Second |
|
|
|
|
|
23.10 |
|
|
|
|
|
16.17 |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
|
|
|
|
-- |
|
Third |
|
|
|
|
|
29.88 |
|
|
|
|
|
21.10 |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
|
|
|
|
-- |
|
Fourth |
|
|
|
|
|
32.09 |
|
|
|
|
|
23.02 |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Stock |
|
|
First |
|
|
|
|
$ |
14.39 |
|
|
|
|
$ |
12.50 |
|
|
|
|
$ |
9.60 |
|
|
|
|
$ |
5.28 |
|
|
|
|
$ |
-- |
|
|
|
|
$ |
.015 |
|
Second |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
8.79 |
|
|
|
|
|
7.09 |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
Third |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
9.18 |
|
|
|
|
|
7.98 |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
Fourth |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
13.80 |
|
|
|
|
|
9.52 |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
|
|
|
Class A Common Stock |
|
|
First |
|
|
|
|
$ |
14.55 |
|
|
|
|
$ |
12.53 |
|
|
|
|
$ |
7.15 |
|
|
|
|
$ |
4.01 |
|
|
|
|
$ |
-- |
|
|
|
|
$ |
.015 |
|
Second |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
6.24 |
|
|
|
|
|
4.94 |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
Third |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
7.06 |
|
|
|
|
|
5.52 |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
Fourth |
|
|
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
|
|
13.65 |
|
|
|
|
|
7.18 |
|
|
|
|
|
-- |
|
|
|
|
|
.015 |
|
|
|
|
The Companys common stock (ticker symbol "PPC") is traded on the New York Stock Exchange. The Company estimates there were approximately 38,100 holders (including individual participants in security position listings) of the Companys common stock as of November 10, 2004. Prior to November 22, 2003, the Company had two classes of authorized and issued common stock, Class B common stock (ticker symbol "CHX") and Class A common stock (ticker symbol "CHX A"), both of which were traded on the New York Stock Exchange. See Note H#@*#225;Common Stock of the notes to consolidated financial statements included elsewhere herein for additional discussion of the Companys common stock.
With the exception of two quarters in 1993, the Company's Board of Directors has declared cash dividends of $0.015 per share of common stock (on a split adjusted basis) every fiscal quarter since the Company's initial public offering in 1986. Payment of future dividends will depend upon the Company's financial condition, results of operations and other factors deemed relevant by the Company's Board of Directors, as well as any limitations imposed by lenders under the Company's credit facilities. The Company's revolving credit facility and revolving/term borrowing facility currently limit dividends to a maximum of $6.5 million per year. See Note F - Notes Payable and Long-Term Debt of the notes to consolidated financial statements included elsewhere herein for additional discussions of the Company's credit facil
ities.
Item 6. Selected Financial Data
(In thousands, except ratios and per share data) |
|
Eleven Years Ended October 2, 2004 |
|
|
|
2004(a)(b) |
|
2003 |
|
2002 |
|
2001(c) |
|
2000 |
|
1999 |
|
|
|
(53 weeks) |
|
|
|
|
|
|
|
|
|
(53 weeks) |
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
5,363,723 |
|
$ |
2,619,345 |
|
$ |
2,533,718 |
|
$ |
2,214,712 |
|
$ |
1,499,439 |
|
$ |
1,357,403 |
|
Gross profit(d) |
|
|
510,101 |
|
|
200,483 |
|
|
165,165 |
|
|
213,950 |
|
|
165,828 |
|
|
185,708 |
|
Operating income(d) |
|
|
265,314 |
|
|
63,613 |
|
|
29,904 |
|
|
94,542 |
|
|
80,488 |
|
|
109,504 |
|
Interest expense, net |
|
|
52,129 |
|
|
37,981 |
|
|
32,003 |
|
|
30,775 |
|
|
17,779 |
|
|
17,666 |
|
Income (loss) before income taxes(d) |
|
|
208,535 |
|
|
63,235 |
|
|
1,910 |
|
|
61,861 |
|
|
62,786 |
|
|
90,904 |
|
Income tax expense (benefit)(e) |
|
|
80,195 |
|
|
7,199 |
|
|
(12,425 |
) |
|
20,724 |
|
|
10,442 |
|
|
25,651 |
|
Net income (loss) |
|
|
128,340 |
|
|
56,036 |
|
|
14,335 |
|
|
41,137 |
|
|
52,344 |
|
|
65,253 |
|
Ratio of earnings to fixed charges(f) |
|
|
4.01x |
|
|
2.20x |
|
|
(f |
) |
|
2.13x |
|
|
3.04x |
|
|
4.33x |
|
Per Common Share Data:(g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2.05 |
|
$ |
1.36 |
|
$ |
0.35 |
|
$ |
1.00 |
|
$ |
1.27 |
|
$ |
1.58 |
|
Cash dividends |
|
|
0.06 |
|
|
0.06 |
|
|
0.06 |
|
|
0.06 |
|
|
0.06 |
|
|
0.045 |
|
Book value |
|
|
13.87 |
|
|
10.46 |
|
|
9.59 |
|
|
9.27 |
|
|
8.33 |
|
|
7.11 |
|
Balance Sheet Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
383,726 |
|
$ |
211,119 |
|
$ |
179,037 |
|
$ |
203,350 |
|
$ |
124,531 |
|
$ |
154,242 |
|
Total assets |
|
|
2,245,989 |
|
|
1,257,484 |
|
|
1,227,890 |
|
|
1,215,695 |
|
|
705,420 |
|
|
655,762 |
|
Notes payable and
current maturities of
long-term debt |
|
|
8,428 |
|
|
2,680 |
|
|
3,483 |
|
|
5,099 |
|
|
4,657 |
|
|
4,353 |
|
Long-term debt, less
current maturities |
|
|
535,866 |
|
|
415,965 |
|
|
450,161 |
|
|
467,242 |
|
|
165,037 |
|
|
183,753 |
|
Total stockholders equity |
|
|
922,956 |
|
|
446,696 |
|
|
394,324 |
|
|
380,932 |
|
|
342,559 |
|
|
294,259 |
|
Cash Flow Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow |
|
$ |
272,404 |
|
$ |
98,892 |
|
$ |
98,113 |
|
$ |
87,833 |
|
$ |
130,803 |
|
$ |
$81,452 |
|
Depreciation & amortization(h) |
|
|
113,788 |
|
|
74,187 |
|
|
70,973 |
|
|
55,390 |
|
|
36,027 |
|
|
34,536 |
|
Capital expenditures |
|
|
79,642 |
|
|
53,574 |
|
|
80,388 |
|
|
112,632 |
|
|
92,128 |
|
|
69,649 |
|
Business acquisitions, net of equity consideration(a)(c) |
|
|
272,097 |
|
|
4,499 |
|
|
-- |
|
|
239,539 |
|
|
-- |
|
|
-- |
|
Financing activities, net provided by (used in) |
|
|
96,665 |
|
|
(39,767 |
) |
|
(21,793 |
) |
|
246,649 |
|
|
(24,769 |
) |
|
(19,634 |
) |
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(i) |
|
$ |
372,501 |
|
$ |
173,926 |
|
$ |
103,469 |
|
$ |
146,166 |
|
$ |
115,356 |
|
$ |
142,043 |
|
Key Indicators (as a percentage of net sales): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
9.5 |
% |
|
7.7 |
% |
|
6.5 |
% |
|
9.7 |
% |
|
11.1 |
% |
|
13.7 |
% |
Selling, general and
administrative expenses |
|
|
4.4 |
% |
|
5.2 |
% |
|
5.3 |
% |
|
5.4 |
% |
|
5.7 |
% |
|
5.6 |
% |
Operating income (loss) |
|
|
4.9 |
% |
|
2.4 |
% |
|
1.2 |
% |
|
4.3 |
% |
|
5.4 |
% |
|
8.1 |
% |
Interest expense, net |
|
|
1.0 |
% |
|
1.5 |
% |
|
1.3 |
% |
|
1.4 |
% |
|
1.2 |
% |
|
1.3 |
% |
Net income (loss) |
|
|
2.4 |
% |
|
2.1 |
% |
|
0.6 |
% |
|
1.9 |
% |
|
3.5 |
% |
|
4.8 |
% |
(In thousands, except ratios and per share data) |
|
Eleven Years Ended October 2, 2004 |
|
|
|
1998 |
|
1997 |
|
1996 |
|
1995 |
|
1994 |
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,331,545 |
|
$ |
1,277,649 |
|
$ |
1,139,310 |
|
$ |
931,806 |
|
$ |
922,609 |
|
Gross profit(d) |
|
|
136,103 |
|
|
114,467 |
|
|
70,640 |
|
|
74,144 |
|
|
110,827 |
|
Operating income(d) |
|
|
77,256 |
|
|
63,894 |
|
|
21,504 |
|
|
24,930 |
|
|
59,698 |
|
Interest expense, net |
|
|
20,148 |
|
|
22,075 |
|
|
21,539 |
|
|
17,483 |
|
|
19,175 |
|
Income (loss) before income taxes(d) |
|
|
56,522 |
|
|
43,824 |
|
|
(4,533 |
) |
|
2,091 |
|
|
42,448 |
|
Income tax expense (benefit)(e) |
|
|
6,512 |
|
|
2,788 |
|
|
2,751 |
|
|
10,058 |
|
|
11,390 |
|
Net income (loss) |
|
|
50,010 |
|
|
41,036 |
|
|
(7,284 |
) |
|
(7,967 |
) |
|
31,058 |
|
Ratio of earnings to fixed charges(f) |
|
|
2.96x |
|
|
2.57x |
|
|
(f |
) |
|
1.07x |
|
|
2.79x |
|
Per Common Share Data:(g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1.21 |
|
$ |
0.99 |
|
$ |
(0.18 |
) |
$ |
(0.19 |
) |
$ |
0.75 |
|
Cash dividends |
|
|
0.04 |
|
|
0.04 |
|
|
0.04 |
|
|
0.04 |
|
|
0.04 |
|
Book value |
|
|
5.58 |
|
|
4.41 |
|
|
3.46 |
|
|
3.67 |
|
|
3.91 |
|
Balance Sheet Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
147,040 |
|
$ |
133,542 |
|
$ |
88,455 |
|
$ |
88,395 |
|
$ |
99,724 |
|
Total assets |
|
|
601,439 |
|
|
579,124 |
|
|
536,722 |
|
|
497,604 |
|
|
438,683 |
|
Notes payable and current maturities of long-term debt |
|
|
5,889 |
|
|
11,596 |
|
|
35,850 |
|
|
18,187 |
|
|
4,493 |
|
Long-term debt, less current maturities |
|
|
199,784 |
|
|
224.743 |
|
|
198,334 |
|
|
182,988 |
|
|
152,631 |
|
Total stockholders equity |
|
|
230,871 |
|
|
182,516 |
|
|
143,135 |
|
|
152,074 |
|
|
161,696 |
|
Cash Flow Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow |
|
$ |
85,016 |
|
$ |
49,615 |
|
$ |
11,391 |
|
$ |
32,712 |
|
$ |
60,664 |
|
Depreciation & amortization(h) |
|
|
32,591 |
|
|
29,796 |
|
|
28,024 |
|
|
26,127 |
|
|
25,177 |
|
Capital expenditures |
|
|
53,518 |
|
|
50,231 |
|
|
34,314 |
|
|
35,194 |
|
|
25,547 |
|
Business acquisitions, net of equity consideration(a)(c) |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
36,178 |
|
|
-- |
|
Financing activities, net provided by (used in) |
|
|
(32,498 |
) |
|
348 |
|
|
27,313 |
|
|
40,173 |
|
|
(30,291 |
) |
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(i) |
|
|
108,268 |
|
|
94,782 |
|
|
43,269 |
|
|
44,455 |
|
|
85,434 |
|
Key Indicators (as a percentage of net sales): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
10.2 |
% |
|
9.0 |
% |
|
6.2 |
% |
|
8.0 |
% |
|
12.0 |
% |
Selling, general and administrative expenses |
|
|
4.4 |
% |
|
4.0 |
% |
|
4.3 |
% |
|
5.3 |
% |
|
5.5 |
% |
Operating income (loss) |
|
|
5.8 |
% |
|
5.0 |
% |
|
1.9 |
% |
|
2.7 |
% |
|
6.5 |
% |
Interest expense, net |
|
|
1.5 |
% |
|
1.7 |
% |
|
1.9 |
% |
|
1.9 |
% |
|
2.1 |
% |
Net income (loss) |
|
|
3.8 |
% |
|
3.2 |
% |
|
(0.6 |
)% |
|
(0.9 |
)% |
|
3.4 |
% |
(a) |
The Company acquired the ConAgra chicken division on November 23, 2003 for $635.2 million including the non-cash value of common stock issued of $357.5 million. The acquisition has been accounted for as a purchase and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date. |
|
|
(b) |
On April 26, 2004, the Company announced a plan to restructure its turkey division, including the sale of some facilities in Virginia. The facilities were sold in the fourth quarter of fiscal 2004. In connection with the restructuring, the Company recorded in cost of sales-restructuring charges of approximately $64.2 million and $7.9 million of other restructuring charges. |
(c) |
The Company acquired WLR Foods on January 27, 2001 for $239.5 million and the assumption of $45.5 million of indebtedness. The acquisition has been accounted for as a purchase and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date. |
|
|
(d) |
Gross profit, operating income and other income include the following non-recurring recoveries, restructuring charges and other unusual items for each of the years presented (in millions): |
|
|
2004 |
|
2003 |
|
2002 |
|
Effect on Gross Profit and Operating Income: |
|
|
|
|
|
|
|
Cost of sales-restructuring |
|
$ |
(64.2 |
) |
$ |
-- |
|
$ |
-- |
|
Non-recurring recoveries recall insurance |
|
$ |
23.8 |
|
$ |
-- |
|
$ |
-- |
|
Non-recurring recoveries for avian influenza |
|
$ |
-- |
|
$ |
26.6 |
|
$ |
-- |
|
Non-recurring recoveries for vitamin and methionine litigation |
|
$ |
0.1 |
|
$ |
19.9 |
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Additional effect on Operating Income: |
|
|
|
|
|
|
|
|
|
|
Other restructuring charges |
|
$ |
(7.9 |
) |
$ |
-- |
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Other income for vitamin and methionine litigation |
|
$ |
0.9 |
|
$ |
36.0 |
|
$ |
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company estimates its losses related to the October 2002 recall (excluding the insurance recovery described above) and 2002 avian influenza outbreak negatively affected gross profit and operating income in each of the years presented as follows (in millions): |
|
|
2004 |
|
2003 |
|
2002 |
|
Recall effects (estimated) |
|
$ |
(20.0 |
) |
$ |
(65.0 |
) |
$ |
-- |
|
Losses from avian influenza (estimated) |
|
$ |
-- |
|
$ |
(7.3 |
) |
$ |
(25.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
(e) |
Fiscal 2003 included a non-cash tax benefit of $16.9 million associated with the reversal of a valuation allowance on net operating losses in the Companys Mexico operations. Fiscal 2002 included a tax benefit of $11.9 million from changes in Mexican tax laws. See Note G#@*#225;Income Taxes of the notes to consolidated financial statements included elsewhere herein. |
|
|
(f) |
For purposes of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest (including capitalized interest) on all indebtedness, amortization of capitalized financing costs and that portion of rental expense that we believe to be representative of interest. Earnings were inadequate to cover fixed charges by $4.1 million and $5.8 million in fiscal 2002 and 1996, respectively. |
|
|
(g) |
Historical per share amounts represent both basic and diluted and have been restated to give effect to a stock dividend issued on July 30, 1999. The stock reclassification on November 21, 2004 that resulted in the new common stock traded as PPC did not affect the number of shares outstanding. |
|
|
(h) |
Includes amortization of capitalized financing costs of approximately $2.0 million, $1.5 million, $1.4 million, $1.9 million, $1.2 million, $1.1 million, $1.0 million, $0.9 million, $1.8 million, $1.2 million and $1.4 million in fiscal years 2004, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995 and 1994, respectively. |
|
|
(i) |
"EBITDA" is defined as the sum of net income (loss) before interest, taxes, depreciation and amortization. EBITDA is presented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of Generally Accepted Accounting Principles (GAAP) results, to compare the performance of companies. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with GAAP. |
A reconciliation of net income to EBITDA is as follows (in thousands):
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
1995 |
|
1994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
128,340 |
|
$ |
56,036 |
|
$ |
14,335 |
|
$ |
41,137 |
|
$ |
52,344 |
|
$ |
65,253 |
|
$ |
50,010 |
|
$ |
41,036 |
|
$ |
(7,284 |
) |
$ |
(7,967 |
) |
$ |
31,058 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
52,129 |
|
|
37,981 |
|
|
32,003 |
|
|
30,775 |
|
|
17,779 |
|
|
17,666 |
|
|
20,148 |
|
|
22,075 |
|
|
21,539 |
|
|
17,483 |
|
|
19,175 |
|
Income tax expense (benefit) |
|
|
80,195 |
|
|
7,199 |
|
|
(12,425 |
) |
|
20,724 |
|
|
10,442 |
|
|
25,651 |
|
|
6,512 |
|
|
2,788 |
|
|
2,751 |
|
|
10,058 |
|
|
11,390 |
|
Depreciation and amortization(h) |
|
|
113,788 |
|
|
74,187 |
|
|
70,973 |
|
|
55,390 |
|
|
36,027 |
|
|
34,536 |
|
|
32,591 |
|
|
29,796 |
|
|
28,024 |
|
|
26,127 |
|
|
25,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of capitalized financing costs(h) |
|
|
1,951 |
|
|
1,477 |
|
|
1,417 |
|
|
1,860 |
|
|
1,236 |
|
|
1,063 |
|
|
993 |
|
|
913 |
|
|
1,761 |
|
|
1,246 |
|
|
1,366 |
|
EBITDA |
|
$ |
372,501 |
|
$ |
173,926 |
|
$ |
103,469 |
|
$ |
146,166 |
|
$ |
115,356 |
|
$ |
142,043 |
|
$ |
108,268 |
|
$ |
94,782 |
|
$ |
43,269 |
|
$ |
44,455 |
|
$ |
85,434 |
|
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
Profitability in the poultry industry is materially affected by the commodity prices of feed ingredients, chicken and turkey, which are determined by supply and demand factors. As a result, the chicken and turkey industries are subject to cyclical earnings fluctuations. Cyclical earnings fluctuations can be mitigated somewhat by:
- Business strategy;
- Product mix;
- Sales and marketing plans; and
- Operating efficiencies.
In an effort to reduce price volatility and to generate higher, more consistent profit margins, we have concentrated on the production and marketing of prepared foods products. Prepared foods products generally have higher profit margins than our other products. Also, the production and sale in the U.S. of prepared foods products reduces the impact of the costs of feed ingredients on our profitability. Feed ingredient purchases are the single largest component of our cost of goods sold, representing approximately 31% of our consolidated cost of goods sold in fiscal 2004. The production of feed ingredients is positively or negatively affected primarily by weather patterns throughout the world, the global level of supply inventories and demand for feed ingredients, and the agricultural policies of the U.S. and fo
reign governments. As further processing is performed, feed ingredient costs become a decreasing percentage of a products total production cost, thereby reducing their impact on our profitability. Products sold in this form enable us to charge a premium, reduce the impact of feed ingredient costs on our profitability and improve and stabilize our profit margins.
As a significant portion of the U.S. poultry production is exported, the commodity prices of chicken and turkey can be, and in recent periods have been, adversely affected by disruptions in poultry export markets. These disruptions are often caused by restriction on imports of U.S.-produced poultry products
imposed by foreign governments for a variety of reasons, including the protection of their domestic poultry producers and allegations of consumer health issues.
For example, Russia and Japan have restricted the importation of U.S.-produced poultry for both of these reasons in recent periods. In July 2003, the U.S. and Mexico entered into a safeguard agreement with regard to imports into Mexico of chicken leg quarters from the U.S. Under this agreement, a tariff rate for chicken leg quarters of 98.8% of the sales price was established. This tariff rate was reduced on January 1, 2004 to 79.4% and will be reduced in each of the following four years in equal increments so that the final tariff rate at January 1, 2008 will be zero. The tariff was imposed due to concerns that the duty-free importation of such products as provided by the North American Free Trade Agreement would injure Mexicos poultry industry. As such tariffs are reduced, we expect greater amount
s of chicken to be imported into Mexico from the U.S., which could negatively affect the profitability of Mexican chicken producers and positively affect the profitability of U.S. exporters of chicken to Mexico. Although this could have a negative impact on our Mexican chicken operations, we believe that this will be mitigated by the close proximity of our U.S. operations to the Mexico border. We have the largest U.S. production and distribution capacities near the Mexican border, which gives us a strategic advantage to capitalize on exports of U.S. chicken to Mexico. Because these disruptions in poultry export markets are often political, no assurances can be given as to when the existing disruptions will be alleviated or that new ones will not arise.
Business Segments
We operate in two reportable business segments as (1) a producer of chicken and other products and (2) a producer of turkey products.
Our chicken and other products segment primarily includes sales of chicken products and by-products we produce and purchase for resale in the U.S., including Puerto Rico, and Mexico. This segment also includes the sale of table eggs, feed and certain other items. Our chicken and other products segment conducts separate operations in the U.S. and Puerto Rico and in Mexico and is reported as two separate geographical areas. Substantially all of the assets and operations of the recently acquired ConAgra chicken division are included in our U.S. chicken and other products segment since the date of acquisition.
Our turkey segment includes sales of turkey products produced in our turkey operations, which operate exclusively in the U.S.
Inter-area sales and inter-segment sales, which are not material, are accounted for at prices comparable to normal trade customer sales. Corporate expenses are allocated to Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. portions of the segments based on number of employees.
Non-recurring recoveries, which represent settlements for vitamin and methionine litigation covering several periods as well as federal compensation for avian influenza, have not been allocated to any segment because the proper allocation cannot be readily determined.
The following table presents certain information regarding our segments:
|
|
Fiscal Year Ended |
|
|
|
October 2,
2004(a) |
|
September 27,
2003 |
|
September 28,
2002 |
|
|
|
(In thousands) |
|
Net Sales to Customers: |
|
|
|
|
|
|
|
Chicken and Other Products: |
|
|
|
|
|
|
|
United States |
|
$ |
4,691,797 |
|
$ |
1,945,596 |
|
$ |
1,842,749 |
|
Mexico |
|
|
385,674 |
|
|
368,071 |
|
|
342,851 |
|
Sub-total |
|
|
5,077,471 |
|
|
2,313,667 |
|
|
2,185,600 |
|
Turkey |
|
|
286,252 |
|
|
305,678 |
|
|
348,118 |
|
Total |
|
$ |
5,363,723 |
|
$ |
2,619,345 |
|
$ |
2,533,718 |
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
Chicken and Other Products: |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
389,478 |
|
$ |
74,807 |
|
$ |
31,907 |
|
Mexico |
|
|
(3,586 |
) |
|
16,319 |
|
|
17,064 |
|
Sub-total |
|
|
385,892 |
|
|
91,126 |
|
|
48,971 |
|
Turkey(b) |
|
|
(120,654 |
) |
|
(73,992 |
) |
|
(19,823 |
) |
Sub-total |
|
|
265,238 |
|
|
17,134 |
|
|
29,148 |
|
Non-recurring recoveries(c) |
|
|
76 |
|
|
46,479 |
|
|
756 |
|
Total |
|
$ |
265,314 |
|
$ |
63,613 |
|
$ |
29,904 |
|
Depreciation and Amortization:(d) |
|
|
|
|
|
|
|
|
|
|
Chicken and Other Products: |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
94,540 |
|
$ |
54,150 |
|
$ |
47,528 |
|
Mexico |
|
|
12,361 |
|
|
12,116 |
|
|
13,526 |
|
Sub-total |
|
|
106,901 |
|
|
66,266 |
|
|
61,054 |
|
Turkey |
|
|
6,887 |
|
|
7,921 |
|
|
9,919 |
|
Total |
|
$ |
113,788 |
|
$ |
74,187 |
|
$ |
70,973 |
|
Total Assets: |
|
|
|
|
|
|
|
|
|
|
Chicken and Other Products: |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,847,141 |
|
$ |
800,605 |
|
$ |
775,395 |
|
Mexico |
|
|
276,685 |
|
|
263,530 |
|
|
241,919 |
|
Sub-total |
|
|
2,123,826 |
|
|
1,064,135 |
|
|
1,017,314 |
|
Turkey |
|
|
122,163 |
|
|
193,349 |
|
|
210,576 |
|
Total |
|
$ |
2,245,989 |
|
$ |
1,257,484 |
|
$ |
1,227,890 |
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
Chicken and Other Products |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
62,828 |
|
$ |
38,774 |
|
$ |
65,775 |
|
Mexico |
|
|
8,663 |
|
|
9,218 |
|
|
7,934 |
|
Sub-total |
|
|
71,491 |
|
|
47,992 |
|
|
73,709 |
|
Turkey |
|
|
8,151 |
|
|
5,582 |
|
|
6,679 |
|
Total |
|
$ |
79,642 |
|
$ |
53,574 |
|
$ |
80,388 |
|
(a) |
The Company acquired the ConAgra chicken division on November 23, 2003 for $635.2 million. The acquisition has been accounted for as a purchase and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date. |
|
|
(b) |
Included in fiscal 2004 are restructuring charges totaling $72.1 million offset somewhat by the non-recurring recovery of $23.8 million representing the gain recognized on the insurance proceeds received in connection with the October 2002 recall. |
(c) |
Non-recurring recoveries which have not been allocated to the individual segments are as follows (in millions): |
|
|
October 2, 2004 |
|
September 27, 2003 |
|
|
|
September 28, 2002 |
|
Avian influenza |
|
$ |
-- |
|
$ |
26.6 |
|
$ - |
Vitamin |
|
|
0.1 |
|
|
1.6 |
|
0.8 |
Methionine |
|
|
-- |
|
|
18.3 |
|
-- |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.1 |
|
$ |
46.5 |
|
$ 0.8 |
|
|
|
|
|
|
|
|
|
(d) |
Includes amortization of capitalized financing costs of approximately $2.0 million, $1.5 million and $1.4 million in fiscal years 2004, 2003 and 2002, respectively. |
The following table presents certain items as a percentage of net sales for the periods indicated:
Fiscal Year Ended
|
|
October 2,
2004 |
|
September 27,
2003 |
|
September 28,
2002 |
|
Net sales |
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
Cost and Expenses |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
89.7 |
|
|
94.1 |
|
|
93.5 |
|
Cost of sales-restructuring |
|
|
1.2 |
|
|
-- |
|
|
-- |
|
Non-recurring recoveries |
|
|
(0.4 |
) |
|
(1.8 |
) |
|
-- |
|
Gross profit |
|
|
9.5 |
|
|
7.7 |
|
|
6.5 |
|
Selling, general and administrative expense |
|
|
4.4 |
|
|
5.2 |
|
|
5.3 |
|
Other restructuring charges |
|
|
0.1 |
|
|
-- |
|
|
-- |
|
Operating income |
|
|
4.9 |
|
|
2.4 |
|
|
1.2 |
|
Interest expense, net |
|
|
1.0 |
|
|
1.5 |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
3.9 |
|
|
2.4 |
|
|
0.1 |
|
Net income |
|
|
2.4 |
|
|
2.1 |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
The change in our results of operations for fiscal 2004 as compared to fiscal 2003 is impacted by a number of significant items. The following is a brief description of these items and the nature of their effect on each of the periods being presented.
First, as discussed below and in Note B-Business Acquisition of the notes to consolidated financial statements included elsewhere herein, on November 23, 2003 we completed the purchase of the ConAgra chicken division. This acquisition has resulted in significant increases in net sales and related costs, as well as assets, liabilities, interest and outstanding debt. The acquired business has been included in our results of operations for 45 of the 53 weeks in fiscal 2004.
Second, the increase in U.S. chicken sales reflects an 18.9% increase in total revenue per dressed pound produced, primarily due to significantly higher chicken selling prices during the year. Chicken component market prices reached their highest level in the U.S. since 1999 during our fiscal 2004 third quarter. Since that time, the reference chicken component market prices have declined significantly. However, partially offsetting this decline in component market chicken prices are recent declines in market prices for corn and soybean meal, which are a significant component of our consolidated cost of sales. Additionally, barring widespread weather or other problems in grain producing areas, worldwide corn and soybean meal productivity is expected to increase, which should further favorably impact feed ingredie
nt costs in fiscal 2005 and should partially offset the decline in U.S. component market chicken prices.
Third, fiscal 2004 included 53 weeks versus fiscal 2003, which included 52 weeks, resulting in an increase in each of the categories discussed in our results of operations by approximately 1.9% as compared to the corresponding period in the preceding year. As this change impacted all the income statement categories in a reasonably consistent manner, no separate discussion of this factor is included in our results of operations discussion, unless the impact of the applicable category varied from the increase described above.
Fourth, as discussed above under "Restructuring of Turkey Operations" and in Note C-Restructuring Charges and Non-Recurring Recoveries of the notes to consolidated financial statements included elsewhere herein, on April 26, 2004 we announced a plan to restructure our turkey business and recorded, as cost of sales-restructuring, $64.2 million, primarily due to asset impairments and inventory losses on discontinued products, and, as other restructuring charges, $7.9 million, primarily related to exit and severance costs. We expect that commodity sales in our turkey division will decrease by approximately $70 million in fiscal 2005 as a result of this restructuring.
Finally, in October 2002, one product sample produced in our Franconia, Pennsylvania facility that had not been shipped to customers tested positive for Listeria. We later received information from the USDA suggesting environmental samples taken at the facility had tested positive for both the strain of Listeria identified in the product and a strain having characteristics similar to those of the strain identified in a Northeastern Listeria outbreak. As a result, we voluntarily recalled all cooked deli products produced at the plant from May 1, 2002 through October 11, 2002. We estimate that gross profit and operating income were negatively affected by this product recall by approximately $20 million in fiscal 2004 and $65.0 million in fiscal 2003 prior to the insurance recovery discussed below. We carry insuran
ce designed to cover the direct recall related expenses and certain aspects of the related business interruption caused by a recall. As a result of this recall, the Companys insurance claim for business interruption and certain product re-establishment costs amounted to approximately $74 million for the period from the date of the recall through October 11, 2003, the one year anniversary of the recall and the insurance policy time limitation period for business interruption loss recovery. Aggregating the direct recall expense claim with the anticipated business interruption and product re-establishment costs, our total loss was approximately $100 million, although our policy limit was $50 million. We received $4 million of this amount in fiscal 2003 and the remaining $46 million in fiscal 2004 from our insurer. In connection with the receipt of the insurance proceeds, we recognized $23.8 million as a component of non-recurring recoveries in our consolidated statement of income for fiscal 2004.
DIV>
After considering the fiscal 2004 losses related to the 2002 recall and the restructuring of the turkey division in fiscal 2004, we believe we will significantly reduce our losses in the turkey division in fiscal 2005.
Fiscal 2004 Compared to Fiscal 2003
Net Sales. Net Sales for fiscal 2004 increased $2.7 billion, or 104.8%, over fiscal 2003. The following table provides additional information regarding net sales (in millions):
|
|
Fiscal Year Ended |
|
|
|
|
|
|
|
|
|
|
|
October 2, |
|
Change from |
|
Percentage |
|
|
|
Source |
|
|
|
2004 |
|
Fiscal 2003 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicken and other products: |
|
|
|
|
|
|
|
|
|
|
|
United States- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicken |
|
|
|
|
$ |
4,091.7 |
|
$ |
2,353.4 |
|
|
135.4 |
% |
|
(a |
) |
Other products |
|
|
|
|
|
600.1 |
|
|
392.8 |
|
|
189.5 |
% |
|
(b |
) |
|
|
|
|
|
$ |
4,691.8 |
|
$ |
2,746.2 |
|
|
144.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicken |
|
|
|
|
$ |
362.4 |
|
$ |
13.1 |
|
|
3.8 |
% |
|
|
|
Other products |
|
|
|
|
|
23.2 |
|
|
4.5 |
|
|
24.1 |
% |
|
|
|
|
|
|
|
|
$ |
385.6 |
|
$ |
17.6 |
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turkey |
|
|
|
|
$ |
286.3 |
|
$ |
(19.4 |
) |
|
(6.3 |
)% |
|
(c |
) |
|
|
|
|
|
$ |
5,363.7 |
|
$ |
2,744.4 |
|
|
104.8 |
% |
|
|
|
(a) |
U.S. chicken sales increased primarily due to the acquisition of the ConAgra chicken division, which contributed $1,878.2 million since the acquisition. Also affecting the U.S. chicken sales was an increase of 15.9% in total revenue per dressed pound produced, primarily due to significantly higher component market chicken prices during the year. As described below under "Gross Profit" component market chicken prices have declined in recent months. |
|
|
(b) |
The ConAgra chicken division acquisition contributed $362.4 million to sales of other products primarily due to non-chicken products sold by the acquired distribution business. |
|
|
(c) |
The decrease in turkey sales was due to a decrease in turkey production created by a 15% reduction in turkey flocks beginning in July 2003, offset by an 8.9% increase in revenue per pound produced. As described above in "Restructuring of Turkey Operations" and in Note C - Restructuring Charges and Non-Recurring Recoveries of the notes to consolidated financial statements included elsewhere herein, as a result of our fiscal 2004 restructuring of our turkey operations, we expect that commodity sales in our turkey division will decrease by approximately $70 million in fiscal 2005. |
Gross Profit. Gross profit for fiscal 2004 increased $309.6 million, or 154.4%, over fiscal 2003. The following table provides gross profit information (in millions):
|
|
|
|
Fiscal Year Ended |
|
|
|
|
|
Percentage |
|
Percentage |
|
|
|
|
|
|
|
October 2, |
|
Change from |
|
Percentage |
|
of Net Sales |
|
of Net Sales |
|
|
|
Components |
|
|
|
2004 |
|
Fiscal 2003 |
|
Change |
|
Fiscal 2004 |
|
Fiscal 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
|
$ |
5,363.7 |
|
$ |
2,744.4 |
|
|
104.8 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
|
|
Cost of sales |
|
|
|
|
|
4,813.3 |
|
|
2,348.0 |
|
|
95.2 |
% |
|
89.7 |
|
|
94.1 |
|
|
(a |
) |
Cost of sales-restructuring |
|
|
|
|
|
64.2 |
|
|
64.2 |
|
|
-- |
|
|
1.2 |
|
|
-- |
|
|
(b |
) |
Non-recurring recoveries |
|
|
|
|
|
(23.9 |
) |
|
22.6 |
|
|
(48.6 |
)% |
|
0.4 |
|
|
(1.8 |
) |
|
(c |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
$ |
510.1 |
|
$ |
309.6 |
|
|
|