SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 28, 2002
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No _____
The aggregate market value of the Registrant's Class B Common Stock, $0.01 par
value, and Class A Common Stock, $0.01 par value, held by non-affiliates of
the Registrant as of December 2, 2002, was $85,088,774 and $28,502,342,
respectively. 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 2, 2002.
13,523,429 shares of the Registrant's Class A Common Stock, $.01 par value,
were outstanding as of December 2, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the annual meeting of
stockholders to be held January 29, 2003 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.......................................................24
Item 3. Legal Proceedings................................................29
Item 4. Submission of Matters to a Vote of Security Holders..............31
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters......................................32
Item 6. Selected Financial Data..........................................33
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition..............................................35
Item 7a.Quantitative and Qualitative Disclosures About Market Risk.......45
Forward Looking Statements and Risk Factors......................47
Item 8. Financial Statements and Supplementary Data (see Index to Financial
Statements and Schedules below)..................................55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................55
PART III
Item 10.Directors and Executive Officers of Registrant...................56
Item 11.Executive Compensation...........................................56
Item 12.Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters......................................56
Item 13.Certain Relationships and Related Transactions...................56
Item 14.Controls and Procedures..........................................56
PART IV
Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K..57
Signatures...............................................................63
Certifications...........................................................65
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Ernst & Young LLP, Independent Auditors........................71
Consolidated Balance Sheets as of September 28, 2002 and
September 29,2001....................................................72
Consolidated Statements of Income for the years ended September 28, 2002,
September 29, 2001 and September 30, 2000............................73
Consolidated Statements of Stockholders' Equity for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000........74
Consolidated Statements of Cash Flows for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000........75
Notes to Consolidated Financial Statements...............................76
Schedule II - Valuation and Qualifying Accounts for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000........92
PART I
ITEM 1. BUSINESS
GENERAL
Overview and Recent Developments.
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. We are the
second largest producer of poultry in both the United States and Mexico and
have one of the best known brand names in the poultry industry. In the United
States, we produce both prepared and fresh chicken and turkey, while in Mexico,
we exclusively produce fresh chicken. Through vertical integration, we control
the breeding, hatching and growing of chickens and turkeys and the processing,
preparation, packaging and sale of our product lines, which we believe has made
us one of the highest quality, lowest-cost producers of poultry in North
America. We have consistently applied a long-term business strategy of focusing
our growth efforts on the higher-value, higher-margin prepared foods products
and have become a recognized industry leader in this market segment.
Accordingly, our sales efforts have traditionally been targeted to the
foodservice industry, principally chain restaurants and food processors. We
have continually made investments to ensure that our prepared foods
capabilities remain state-of-the-art and have complemented these investments
with a substantial and successful research and development effort. In fiscal
2002, we sold 2.7 billion pounds of dressed chicken and 374.3 million pounds of
dressed turkey and generated net sales of $2.5 billion and Earnings Before
Interest, Taxes, Depreciation and Amortization, ("EBITDA") of $103.5 million.
In fiscal 2002, our U.S. operations accounted for 86.5% of our net sales, with
the remaining 13.5% arising from our Mexico operations.
On January 27, 2001, we acquired WLR Foods, Inc. (formerly Nasdaq: WLRF),
(which is referred to herein as, our Eastern Division) for approximately $239.5
million and the assumption of approximately $45.5 million of indebtedness. The
acquisition was accounted for under the purchase method of accounting and the
purchase price was allocated based on the estimated fair value of assets and
liabilities. WLR Foods' operations have been included in our financial results
since the acquisition on January 27, 2001. WLR Foods was the seventh largest
poultry company in the United States with $836.9 million of revenue in calendar
year 2000. The WLR Foods acquisition provided us with (1) chicken processing
facilities in the eastern United States, where we previously had no facilities,
enabling us to deliver poultry products within one day to markets accounting
for approximately 40% of the U.S. population; (2) significant opportunities to
realize synergies between WLR Foods and our pre-existing chicken operations;
and (3) diversification of our revenue stream into the $8 billion turkey
industry, where we can capitalize on our prepared foods processing expertise.
Currently, our Eastern Division's chicken sales mix consists mostly of lower
margin fresh chicken products. However, we intend to convert more of our
Eastern Division chicken sales into higher margin, fresh and prepared chicken
products in the years to come. By consistent and continued application of our
long-term business strategy to both our recently acquired Eastern Division and
our existing fresh chicken mix, we believe that our overall product mix will
return to the levels existing prior to the WLR Foods acquisition in subsequent
years.
Since the acquisition of WLR Foods, our Eastern Division, which consists of
the former WLR Foods' operations, has been affected by two significant
unexpected challenges. First, on March 12, 2002 an outbreak of low-pathogenic
avian influenza, a disease contagious to turkey, chicken and other birds, was
discovered in Virginia. During fiscal 2002, we estimate that our operating
income was negatively impacted by approximately $26.0 million due to the
negative impact of the avian influenza. As of September 28, 2002, poultry
growers and producers have destroyed approximately 4.7 million head of poultry
affected as a result of the virus. Turkeys represent approximately 70.0% of
the destroyed poultry, with chickens representing approximately 30.0%.
Approximately one-half of the turkeys and approximately three-quarters of the
chickens destroyed by the poultry industry in Virginia belonged to the Company.
No new flocks have tested positive for the presence of avian influenza in
Virginia since July 2, 2002. We currently estimate that production in our
turkey operation will be significantly reduced over the next six months due to
the effects of this viral outbreak. As a result of this lower production
output in our turkey operation, we anticipate that operating income from our
turkey operation will decrease for the first six months of fiscal 2003 by
approximately $8.0 to $14.0 million, when compared to the first six months of
fiscal 2002, assuming the outbreak of avian influenza has been contained. On
June 19, 2002, U.S. Secretary of Agriculture Ann Veneman proposed to the Office
of Management and Budget that the U.S. Department of Agriculture (USDA) cover
one-half of the total estimated economic loss suffered by the poultry industry
and independent growers in Virginia due to the avian influenza outbreak.
Secretary Veneman also recommended that the government of Virginia cover the
remaining portion. It is our understanding that, as part of her proposal,
Secretary Veneman is suggesting that independent chicken and turkey growers are
to be fully compensated for their losses first and that the remainder is to be
allocated to other poultry producers (including us) whose flocks were destroyed
by the virus. On November 4, 2002 the Department of Agriculture made public
their estimate of total federal compensation at $51 million, with growers being
compensated $13.9 million and owners being compensated $37.1 million. No
assurance can be given as to the amount of federal compensation that we may
receive or that any state agencies will in fact provide further economic
assistance to the poultry growers and producers affected by the avian influenza
outbreak in Virginia. No anticipated recoveries have been recorded by us as
our portion of the compensation has not yet been determined. In the event that
state agencies do decide to grant economic assistance to the affected poultry
growers and producers, it is impossible at this time to estimate how the state
agencies would allocate any such assistance between affected poultry growers
and producers whose flocks were destroyed by the virus.
The second challenge faced by our Eastern Division was the voluntary
nationwide recall of certain cooked deli products produced at our Franconia,
Pennsylvania facility. A turkey pastrami product sample - one sample from one
lot from one day's production, taken on August 14, 2002-- tested positive for
Listeria, prompting us to voluntarily recall 295,000 pounds of product on
October 9, 2002. According to the Food Safety and Inspection Service, (FSIS),
testing indicated that the particular strain of Listeria found in this single
product sample was not the same as that involved in a Northeastern outbreak of
illnesses and deaths resulting from listeriosis. However, we later received
information from the USDA suggesting that environmental samples (not product
samples) taken at the facility on October 3 and 4, 2002 had tested positive for
both the strain of Listeria which prompted the August 14, 2002 recall and a
strain having characteristics similar to those of the strain identified in a
Northeastern outbreak. We immediately, and voluntarily, expanded the recall to
extend to cooked deli products produced from May 1, 2002 through October 11,
2002. As an additional precautionary measure, we immediately suspended
operations at our Franconia facility to redouble our food safety and sanitation
efforts. No illnesses associated with the Listeria strain in a Northeastern
outbreak have been linked to any of our products, and our Franconia facility
has been reviewed and inspected by the USDA and was reopened on November 13,
2002. The amount of product covered by the recall was approximately 7% of our
annual turkey production and less than 1% of our total poultry production. We
carry insurance designed to cover the direct recall related expenses and
certain aspects of the related business interruption caused by the recall, and
subject to the insurer's reservation of rights, we have received a $4 million
advance payment from our insurer with respect to the product recall claim. The
Company believes that the recall and its direct effects will not have a
material impact on our financial position and results of operations after
considering available insurance coverage. However, there will be differences
between the accounting periods in which certain recall effects are realized and
when insurance recoveries are received and there can be no assurances as to the
Company's ability to re-establish the products and sales affected by the
recall.
Strategy.
Our objectives are (1) to increase sales, profit margins and earnings and
(2) outpace the growth of, and maintain our leadership position in, the poultry
industry. To achieve these goals, we plan to continue to pursue the following
strategies:
- CAPITALIZE ON ATTRACTIVE U.S. PREPARED FOODS MARKET. We focus our U.S.
growth initiatives on sales of prepared foods to the foodservice market
because it continues to be one of the fastest growing and most profitable
segments in the poultry industry. Products sold to this market segment
require further processing, which enables us to charge a premium for our
products, reduces the impact of feed ingredient costs on our
profitability and improves and stabilizes our profit margins. Feed
ingredient costs typically decrease from approximately 30-50% of total
production cost for fresh chicken products to approximately 16-25% for
prepared chicken products. Our sales of prepared chicken products grew
from $466.8 million in fiscal 1998 to $848.7 million in fiscal 2002, a
compounded annual growth rate of 16.1%. However, as a result of the
acquisition of WLR Foods, whose operations were focused primarily on
fresh chicken products, these sales decreased as a percentage of our
total U.S. chicken revenues to 51.4% in fiscal 2002 from 61.1% in fiscal
2000. By consistent and continued application of our long-term business
strategy, we believe that our overall product mix will return to the
levels existing prior to the WLR Foods acquisition in subsequent years.
- EMPHASIZE CUSTOMER-DRIVEN RESEARCH AND TECHNOLOGY. We have a long-
standing reputation for customer-driven research and development in
designing new products and implementing advanced processing technology.
This enables us to better meet our customers' changing needs for product
innovation, consistent quality and cost efficiency. In particular,
customer-driven research and development is integral to our growth
strategy for the prepared foods market in which customers continue to
place greater importance on value-added services. Our research and
development personnel often work directly with institutional customers in
developing products for these customers, which we believe helps promote
long-term relationships. We estimate that approximately $300 million, or
27%, of our chicken sales to foodservice customers in fiscal 2002
consisted of new products, which were not sold by us in fiscal 1998.
- ENHANCE U.S. FRESH CHICKEN PROFITABILITY THROUGH VALUE-ADDED, BRANDED
PRODUCTS. Our U.S. fresh chicken sales accounted for $706.8 million, or
42.9%, of our U.S. chicken sales for fiscal 2002. In addition to
maintaining the sales of mature, traditional fresh chicken products, our
strategy is to shift the mix of our U.S. fresh chicken products by
continuing to increase sales of higher margin, faster growing products,
such as marinated chicken and chicken parts and to continually shift
portions of this product mix into the higher value and margin prepared
chicken products, particularly in our Eastern Division. Much of our fresh
chicken products are sold under the Pilgrim's Pride{reg-trade-mark} brand
name, which is one of the best known brands in the chicken industry.
- IMPROVE OPERATING EFFICIENCIES AND INCREASE CAPACITY ON A COST-EFFECTIVE
BASIS. As production and sales grow, we continue to focus on improving
operating efficiencies by investing in state-of-the-art technology,
processes and training and our total quality management program. Specific
initiatives include:
- standardizing lowest-cost production processes across our various
facilities;
- centralizing purchasing and other shared services; and
- upgrading technology where appropriate.
In addition, we have a proven history of increasing capacity while
improving operating efficiencies at acquired properties both in the U.S.
and Mexico. As a result, according to industry data, since 1993 we have
consistently been one of the lowest cost producers of chicken in the
U.S., and we also believe we are one of the lowest cost producers of
chicken in Mexico.
- CONTINUE TO PENETRATE THE GROWING MEXICAN MARKET. We seek to leverage
our leading market position and reputation for freshness and quality in
Mexico by focusing on the following four objectives:
- to be one of the most cost-efficient producers and processors of
chicken in Mexico by applying technology and expertise utilized in
the U.S.;
- to continually increase our distribution of higher margin, more value-
added products to national retail stores and restaurants;
- to continue to build and emphasize brand awareness and capitalize on
Mexican consumers' preference for branded products and their insistence
on freshness and quality; and
- to ensure that, if Mexican tariffs on imported chicken are eliminated
as scheduled under NAFTA in January 2003, a significant portion of the
chicken imported from the U.S. will be distributed through our
existing and planned distribution facilities. We believe the location
of our U.S. operations in the Southwest gives us a strategic advantage
to capitalize on exports of U.S. chicken to Mexico.
- LEVERAGE OUR RECENTLY ACQUIRED TURKEY OPERATIONS. We seek to take
advantage of our leading market position and reputation as a high
quality, high service provider of chicken products to purchasers of
turkey products by focusing on the following four objectives:
- to cross-sell prepared turkey products to existing chicken customers;
- to develop new and innovative prepared turkey products by capitalizing
on our research and development expertise;
- to improve operating efficiencies in our turkey operations by
applying proven management methodologies and techniques employed
historically in our chicken operations; and
- to capitalize on the unique opportunity to establish, develop and
market turkey products under the Pilgrim's Pride{reg-trade-mark} brand
name.
- CAPITALIZE ON EXPORT OPPORTUNITIES. We intend to continue to focus on
international opportunities to complement our U.S. poultry operations and
capitalize on attractive export markets. According to the USDA, the
export of U.S. poultry products has grown 26.7% for chicken and decreased
19.5% for turkey from 1997 through 2001. We believe that U.S. poultry
exports will grow as worldwide demand increases for high-grade, low-cost
protein sources. According to USDA data, the export market is expected to
grow at 11.1% and 8.9% for chicken and turkey, respectively, from 2001 to
2006. Historically, we have targeted international markets to generate
additional demand for our chicken and turkey 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. As part of this initiative, we have created a significant
international distribution network into several markets, including
Mexico, which we now utilize not only for dark meat distribution, but
also for various higher margin prepared foods and other poultry products.
We utilize both a direct international sales force and export brokers.
Our key international markets include Canada, Mexico, Eastern Europe
including Russia, and the Far East. We believe that we have substantial
opportunities to expand our sales to these markets by capitalizing on
direct international distribution channels supplemented by our existing
export broker relationships. Exports and other chicken and turkey
products accounted for approximately 5.5% of our net sales in fiscal
2002.
Products and Markets.
Our chicken products consist primarily of:
(1) Prepared chicken products, which are products such as portion-
controlled breast fillets, tenderloins and strips, delicatessen products,
salads, formed nuggets and patties and bone-in chicken parts. These products
are sold either refrigerated or frozen and may be fully cooked, partially
cooked or raw. In addition, these products are breaded or non-breaded and
either pre-marinated or non-marinated. Effective November 13, 2002, we are
no longer producing frankfurters although we continue to distribute
frankfurters processed by others.
(2) Fresh chicken, which is refrigerated (non-frozen) whole or cut-up
chicken sold to the foodservice industry either pre-marinated or non-
marinated. Fresh chicken also includes 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 grocer's fresh meat counter.
(3) Export and other chicken products, which are primarily parts and whole
chicken, either refrigerated or frozen for U.S. export or domestic use, and
chicken prepared foods products for U.S. exports.
(4) Mexico products, which consist primarily of lower value-added products
such as eviscerated chicken and chicken parts and basic products such as New
York dressed (whole chicken with only feathers and blood removed) and live
birds.
Our turkey products consist primarily of:
(1) Prepared turkey products, which are products such as turkey sausages,
ground turkey, turkey hams and roasts, ground turkey breast products, salads
and flavored turkey burgers. We also have an array of cooked, further
processed deli products. Effective November 13, 2002, we are no longer
producing frankfurters although we continue to distribute frankfurters
processed by others.
(2) Fresh turkey, which includes fresh traypack products, turkey burgers,
and fresh and frozen whole birds, as well as semi-boneless whole turkey,
which has all bones except the drumsticks removed.
(3) Export and other products, which are parts and whole turkey products,
either refrigerated or frozen, for U.S. export or domestic use, and turkey
prepared foods products for U.S. export or domestic use.
Our chicken and turkey products are sold primarily to:
(1) Foodservice customers, which are customers such as chain restaurants,
food processors, foodservice distributors and certain other institutions. We
sell to our foodservice customers products ranging from portion-controlled
refrigerated poultry parts to fully-cooked and frozen, breaded or non-
breaded poultry parts or formed products.
(2) Retail customers, which are customers such as grocery store chains,
wholesale clubs and other retail distributors. We sell to our retail
customers branded, pre-packaged, cut-up and whole poultry, and fresh
refrigerated or frozen whole poultry and poultry parts in trays, bags or
other consumer packs.
The following table sets forth, for the periods since fiscal 1998, net sales
attributable to each of our primary product lines and markets served with those
products. Consistent with our long-term strategy, we have emphasized our U.S.
growth initiatives on sales of prepared foods products, primarily to the
foodservice market, because this product and market segment has experienced,
and we believe will continue to experience, greater growth than fresh chicken
products. We based the table on our internal sales reports and their
classification of product types and customers.
Fiscal Year Ended
Sept. 28, Sept. 29, Sept. 30, Oct. 2, Sept. 26,
2002 2001(a) 2000 1999 1998
(52 weeks) (52 weeks) (52 weeks)(53 weeks)(52 weeks)
U.S. CHICKEN SALES: (in thousands)
Prepared Foods:
Foodservice $659,856 $632,075 $589,395 $527,732 $418,160
Retail 158,299 103,202 47,655 28,079 46,335
Total
Prepared Foods(b) 818,155 735,277 637,050 555,811 464,495
Fresh Chicken:
Foodservice 448,376 387,624 202,192 205,968 220,804
Retail 258,424 224,693 148,977 163,387 162,283
Total
Fresh Chicken(b) 706,800 612,317 351,169 369,355 383,087
Export and Other:
Prepared Foods(b) 30,528 18,912 4,595 1,030 2,301
Other Chicken 93,575 105,834 57,573 37,300 64,469
Total Export
and Other 124,103 124,746 62,168 38,330 66,770
Total
U.S. Chicken(b) 1,649,058 1,472,340 1,050,387 963,496 914,352
MEXICO CHICKEN SALES(c): 323,769 303,433 285,605 233,074 249,104
Total Chicken Sales 1,972,827 1,775,773 1,335,992 1,196,570 1,163,456
U.S. TURKEY SALES:
Prepared Foods(d):
Foodservice 134,651 88,012 -- -- --
Retail 54,638 48,681 -- -- --
Total Prepared Foods 189,289 136,693 -- -- --
Fresh Turkey(d):
Foodservice 36,119 18,618 -- -- --
Retail 107,582 71,647 -- -- --
Total Fresh Turkey 143,701 90,265 -- -- --
Export and Other(d):
Prepared Foods 2,858 2,434 -- -- --
Other Turkey 12,270 9,443 -- -- --
Total Export
and Other 15,128 11,877 -- -- --
Total U.S.
Turkey Sales 348,118 238,835 -- -- --
SALES OF OTHER PRODUCTS:
United States 193,691 179,859 141,690 139,407 139,106
Mexico(c) 19,082 20,245 21,757 21,426 28,983
Total Sales of
Other Products 212,773 200,104 163,447 160,833 168,089
Total Net Sales $2,533,718 $2,214,712 $1,499,439$1,357,403$1,331,545
Total Chicken
Prepared Foods 848,683 754,189 641,645 556,841 466,796
Total Turkey
Prepared Foods 192,147 139,127 -- -- --
(a)The acquisition of WLR Foods on January 27, 2001 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)In 2002 the Company identified certain products that were more properly
classified in other categories and as a result, certain items previously
classified under U.S. prepared foods and U.S. fresh chicken were reclassified
into U.S. chicken export and other categories. Amounts by year were:
$18.6 million, $19.1 million, $4.7 million, $1.1 million, and $2.3 million for
the fiscal years 2002 to 1998, respectively.
(c)In order to present additional classifications, items previously classified
as Mexico chicken sales and were reclassified to exportand other products,
Amounts reclassified were: $19.1 million, $20.2 million, $21.8 million,
$21.4 million and $29.0 million for the years 2002 to 1998, respectively.
(d)In 2002 the Company identified certain products that were more properly
classified in other categories and as a result, certain items previously
classified under U.S. turkey prepared foods and U.S. fresh turkey were
reclassified into the U.S. export and other categories. Net amounts
reclassified to U.S. export and other were: $2.1 million in 2002 and $0.4
million in 2001.
The following table sets forth, since fiscal 1998, the percentage of net
U.S. chicken and turkey sales attributable to each of our primary product lines
and the markets serviced with those products. We based the table and related
discussion on our internal sales reports and their classification of product
types and customers.
Fiscal Year Ended
Sept. 28, Sept. 29, Sept. 30, Oct. 2, Sept. 26,
2002 2001 2000 1999 1998
U.S. CHICKEN SALES:
Prepared Foods:
Foodservice 39.9% 42.9% 56.2% 54.7% 45.7%
Retail 9.6 7.0 4.5 2.9 5.1
Total Prepared Foods 49.5 49.9 60.7 57.6 50.8
Fresh Chicken:
Foodservice 27.2 26.3 19.2 21.4 24.1
Retail 15.7 15.3 14.2 17.0 17.7
Total Fresh Chicken 42.9 41.6 33.4 38.4 41.8
Export and Other:
Prepared Foods 1.9 1.3 0.4 0.1 0.3
Other Chicken 5.7 7.2 5.5 3.9 7.1
Total Export and Other 7.6 8.5 5.9 4.0 7.4
Total U.S. Chicken 100.0% 100.0% 100.0% 100.0% 100.0%
Total Chicken Prepared Foods as
a percentage of US Chicken 51.4% 51.2% 61.1% 57.7% 51.1%
U.S. TURKEY SALES:
Prepared Foods:
Foodservice 38.7% 36.8% -- -- --
Retail 15.7 20.4 -- -- --
Total Prepared Foods 54.4 57.2 -- -- --
Fresh Turkey:
Foodservice 10.4 7.8 -- -- --
Retail 30.9 30.0 -- -- --
Total Fresh Turkey 41.3 37.8 -- -- --
Export and Other:
Prepared Foods 0.8 1.0 -- -- --
Other Turkey 3.5 4.0 -- -- --
Total Export and Other 4.3 5.0 -- -- --
Total U.S. Turkey 100.0% 100.0% -- -- --
Total Turkey Prepared Foods as
a percentage of US Turkey 55.2% 58.2% -- -- --
UNITED STATES
PRODUCT TYPES
Chicken Products
PREPARED FOODS OVERVIEW. During fiscal 2002, $848.7 million, or 51.4%, of
our U.S. chicken net sales were in prepared foods products to foodservice
customers and retail distributors, as compared to $466.8 million in fiscal
1998. These numbers reflect the strategic focus for our growth. The market for
prepared chicken products has experienced, and we believe will continue to
experience, greater growth, higher average sales prices and higher margins than
fresh chicken products. Also, the production and sale in the U.S. of prepared
foods products reduce the impact of the costs of feed ingredients on our
profitability. Feed ingredient costs are the single largest component of our
chicken cost of goods sold, representing approximately 30% of our U.S. cost of
goods sold for the year ended September 28, 2002. 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 United States and
foreign governments. As further processing is performed, feed ingredient costs
become a decreasing percentage of a product's 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.
We establish prices for our prepared chicken 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.
FRESH CHICKEN OVERVIEW. Our fresh chicken business is an important
component of our sales and accounted for $706.8 million, or 42.9%, of our total
U.S. chicken net sales for fiscal 2002. In addition to maintaining sales of
mature, traditional fresh chicken products, our strategy is to shift the mix of
our U.S. fresh chicken products by continuing to increase sales of higher
margin, faster growing products, such as marinated chicken and chicken parts
and to continually shift portions of this product mix into the higher value and
margin prepared chicken products, particularly in our Eastern Division.
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. We believe our
practices with respect to sales of fresh chicken are generally consistent with
those of our 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 CHICKEN PRODUCTS OVERVIEW. Our 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 and branded and non-branded prepared foods products for
distribution to export markets. In fiscal 2002, approximately $124.1 million,
or 7.6% of our U.S. chicken net sales were attributable to U.S. chicken export
and other. These exports and other products, other than the prepared foods
products, have historically been characterized by lower prices and greater
price volatility than our more value-added product lines.
Turkey Products
Since March 2002, our sales of turkey products have been negatively impacted
by an outbreak of low-pathogenic avian influenza in Virginia in March 2002,
that resulted in the destruction of a significant number of our turkey flocks.
See further discussion in Item 7 Management's Discussion and Analysis of
Results of Operations and Financial Condition.
PREPARED FOODS OVERVIEW. During fiscal 2002, $192.1 million, or 55.2%, of
our U.S. turkey net sales were prepared turkey products sold to foodservice
customers and retail distributors. Like the U.S. chicken markets, the market
for prepared turkey products has experienced greater growth and higher margins
than fresh turkey products and the production and sale of prepared turkey
products reduce the impact of the costs of feed ingredients on our
profitability. Feed ingredient costs are the single largest component of our
turkey division cost of goods sold, representing approximately 30.0% of our
turkey cost of goods sold in fiscal 2002. Similarly with the chicken business,
as further processing is performed, feed ingredient costs become a decreasing
percentage of a product's total production cost, thereby reducing their impact
on our profitability.
We establish prices for our prepared turkey 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 or are subject to a market driven
formula.
FRESH TURKEY OVERVIEW. Our fresh turkey business is an important
component of our sales and accounted for $143.7 million, or 41.3%, of our U.S.
turkey net sales in fiscal 2002. As is typical for the industry, a significant
portion of the sales of fresh and frozen whole turkeys is seasonal in nature,
with the height of sales occurring during the Thanksgiving and Christmas
holidays. In addition to maintaining sales of mature, traditional fresh turkey
products, our strategy is to shift the mix of our fresh turkey products by
continuing to increase sales of higher margin, faster growing value-added
prepared turkey products, such as deli meats, ground turkey, turkey burgers and
sausage, roasted turkey and salads.
Most fresh turkey products are sold to established customers pursuant to
agreements with varying terms that either set a fixed price or are subject to a
market driven formula with some agreements based upon 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. We believe our practices with respect to sales of fresh turkey
are generally consistent with those of our competitors with similar
programs. Prices of these products are generally negotiated daily or weekly.
EXPORT AND OTHER TURKEY PRODUCTS OVERVIEW. Our export and other turkey
products consist primarily of turkey parts sold primarily in bulk, non-branded
form frozen for distribution to export markets and refrigerated and frozen
frankfurters sold in a branded form. In fiscal 2002, approximately $15.1
million, or 4.3%, of our total U.S. turkey sales were attributable to export
and other sales. These exports and other products have historically been
characterized by lower prices and greater price volatility than our more value-
added product lines. Effective November 13, 2002, we are no longer producing
frankfurters, although we continue to distribute frankfurters produced by
others.
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 United States. 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 Pilgrim's 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 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.
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 to 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, during the 1997 through 2001 period, sales of chicken
products to the foodservice market grew at a compounded annual growth rate of
approximately 2.3%, versus 1.2% 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 Restaurant Association, food-away-from-home expenditures grew at a
compounded annual growth rate of approximately 5.0% during the 1997 through
2001 period and are projected to grow at a 4.4% compounded annual growth rate
from 2001 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 46% in 2001. Our sales to the
foodservice market from fiscal 1998 through fiscal 2002 grew at a compounded
annual growth rate of 14.8% and represented 67.2% of the net sales of our U.S.
chicken operations in fiscal 2002.
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 $659.9 million in fiscal 2002
compared to $418.2 million in fiscal 1998, a compounded annual growth rate of
approximately 12.1%. 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 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 are particularly well suited to the
high-volume production
runs necessary to meet 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. Approximately $300 million, or 27%, of our chicken sales to
foodservice customers in fiscal 2002 consisted of new products which were not
sold by us in fiscal 1998.
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 United States. 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, 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 awareness 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 Pilgrim's Pride{reg-trade-mark} 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
Pilgrim's hat serves as the logo on all of our primary branded products. As a
result of this marketing strategy, Pilgrim's Pride{reg-trade-mark} is a well-
known brand name in several southwestern markets, including Dallas/Fort Worth,
Houston and San Antonio, Texas, Oklahoma City, Oklahoma, Denver, Colorado,
Phoenix, Arizona and Los Angeles and San Diego, California. 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 testing new product
ideas, packaging designs and methods through taste panels and focus groups
located 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 $158.3 million in fiscal 2002 compared
to $46.3 million in fiscal 1998, a compounded annual growth rate of
approximately 36.0%. We believe that our growth in this market segment will
continue as retailers concentrate on offering 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
grocer's 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 Canada,
Mexico, Eastern Europe--including Russia, the Far East 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 35% of all U.S.
poultry exports in 2001, or approximately 7% of the total U.S. poultry
production. On April 10, 2002 Russia announced the lifting of the import ban.
However, U.S. markets continue to be affected as Russia continues to restrict
the import of U.S. poultry products. On September 15, 2002 new sanitary
guidelines were established by Russia that requires veterinary specialists from
the Agriculture Ministry of Russia to inspect and certify plants of U.S.
poultry producers interested in exporting to Russia. We expect this
certification process to be completed in calendar 2002 and expect that the
industry will resume exporting these products into Russia shortly thereafter;
however, once exports resume, there is no assurance that they will regain the
levels existing prior to the March 10, 2002 ban. 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 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 United States. We supply turkey
products ranging from portion-controlled refrigerated turkey parts to 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 Pilgrim's Pride is well-positioned to be the primary or
secondary supplier to many national and international chain restaurants that
require multiple suppliers of turkey products. Additionally, 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 and to non-vertically integrated 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 $134.7 million of our sales in fiscal
2002. 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 customer specifications. They are often marinated to enhance
value and product differentiation. Our semi-boneless turkey, unique to
Pilgrim's Pride, is becoming very popular with cruiselines and other customers
where visual presentation of the whole turkey is critical.
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 cut-up and whole turkey
to grocery store chains and retail distributors in the eastern region of the
United States. 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 under the Pilgrim's Pride{reg-trade-mark} and
Wampler{reg-trade-mark} 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 awareness 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 taste panels and focus groups located 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 and turkey parts
in trays, bags or other consumer packs labeled and priced ready for the retail
grocer's fresh meat counter, ground turkey or sausage 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 in the
holiday seasons.
EXPORT AND OTHER TURKEY PRODUCTS. Our export and other turkey products,
other than the prepared foods products, consist of whole turkeys and turkey
parts sold in bulk form, either non-branded or under the
Wampler{reg-trade-mark} and Rockingham{reg-trade-mark} brands. These products
are primarily sold frozen either to distributors in the U.S. or 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
turkey products for export to Canada, Mexico, Eastern Europe---including
Russia, the Far East and other world markets. Historically, we have targeted
international markets to generate additional demand for our turkey dark meat,
and frankfurters made from turkey dark meat, which is a natural by-product of
our U.S. operations given our concentration of prepared foods products and the
U.S. customers' general preference for white meat. We believe that U.S. turkey
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 turkey products will increase over the next several years.
Accordingly, we believe we are well positioned to capitalize on such growth,
especially in Mexico where we have established distribution channels. Also
included in these categories are turkey by-products, which are converted into
protein products sold primarily to manufacturers of pet foods.
MARKETS FOR OTHER U.S. PRODUCTS
We market fresh eggs under the Pilgrim's Pride{reg-trade-mark} 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 2.2 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 58.6% of the total number of egg
laying hens in service during 2001. We compete with other U.S. egg producers
primarily on the basis of product quality, reliability, price and customer
service.
In 1997, we introduced a high-nutrient egg called EggsPlus{trademark}.
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{trademark} 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 13.5% of our net sales in
fiscal 2002. Recognizing favorable long-term demographic trends and improving
economic conditions in Mexico, in the 1980's we began exploring opportunities
to produce and market chicken in Mexico. In fiscal 1988, we acquired four
vertically integrated chicken production operations in Mexico for approximately
$15.1 million. Since this original acquisition, we have made subsequent
acquisitions and capital expenditures in Mexico to modernize our production
technology, improve our distribution network and expand our operations. In
addition, we have transferred experienced management personnel from the U.S.
and developed a strong local management team. As a result of these
expenditures, we have increased weekly production in our Mexican operations by
over 400% since our original investment in fiscal 1988. We are now 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 United States, with sales attributed to fewer, more basic products, the
market for value-added products is increasing. Our strategy is to lead this
trend. The products currently sold by us in Mexico consist primarily of lower
value-added products such as eviscerated chicken and chicken parts and basic
products such as New York dressed (whole chickens with only feathers and blood
removed) and live birds. 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. In addition, we remain opportunistic,
utilizing our low cost production to enter markets where profitable
opportunities exist. Other products sold by us in Mexico include commercial
feed, vaccines and other agricultural products.
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.
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, requires 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 that it would initiate
an investigation to determine whether a temporary safeguard action is warranted
to protect the domestic poultry industry when import tariffs on poultry are
eliminated in January 2003. The action stems from concerns of the Union
Nacional Avicultores (UNA) that duty-free imports of leg quarters would injure
the Mexico poultry industry. A suggested safeguard by the UNA is to establish a
tariff rate for chicken leg quarters at the 2001 tariff level of 98.8% of the
sales price for a period of three to five years.
While the extent of the impact of the elimination of tariffs is
uncertain, we believe we are uniquely positioned to benefit from this
elimination. We have an extensive distribution network in Mexico, which
distributes products to 26 of the 32 Mexican states, encompassing approximately
85% of the total population of Mexico. Our distribution network is comprised of
eighteen distribution centers utilizing approximately 126 company-owned
vehicles. 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.
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
United States 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 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. We believe we have 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, requires annual reductions in tariffs for chicken and chicken
products in order to eliminate those tariffs by January 1, 2003. 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. On November 21, 2002 the Mexican Secretariat
of the Economy announced that it would initiate an investigation to determine
whether a temporary safeguard action is warranted to protect the domestic
poultry industry when import tariffs on poultry are eliminated in January 2003.
The action stems from concerns of the Union Nacional Avicultores (UNA) that
duty-free imports of leg quarters would injure the Mexico poultry industry. A
suggested safeguard by the UNA is to establish a tariff rate for chicken leg
quarters at the 2001 tariff level of 98.8% of the sales price for a period of
three to five years.
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 26 of the 32 Mexican states, encompassing approximately
85% 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. Pleasant, Pittsburg,
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 Arlington, El Paso, Mt.
Pleasant and San Antonio, Texas, and Phoenix, Arizona 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.
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, the USDA, the Food and Drug Administration (FDA) and the
Environmental Protection Agency in the United States 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 believe 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 the disposal of chicken by-products and
wastewater discharges. Although we do not anticipate any regulations having a
material adverse effect upon us, a material adverse effect may occur. See Item
1. Business-General-Overview and Recent Developments.
EMPLOYEES AND LABOR RELATIONS
As of September 28, 2002, we employed approximately 20,200 persons in the
U.S. and 4,600 persons in Mexico. Approximately 2,850 employees at our Lufkin
and Nacogdoches, Texas facilities are members of collective bargaining units
represented by the United Food and Commercial Workers Union. None of our other
U.S. employees have union representation. Collective bargaining agreements with
the United Food and Commercial Workers Union expired on August 10, 2001 with
respect to our Lufkin employees, where we are currently operating without a
contract, and expire in October 2004 with respect to our Nacogdoches employees.
Our Lufkin employees voted in July 2002 to retain union representation.
However, the election results have not yet been certified; objections are still
pending and are being reviewed by the National Labor Relations Board. We
believe that the terms of the Nacogdoches agreement are no more favorable than
those provided to our non-union U.S. employees. 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 since a two-day
work stoppage, with no significant operation disruption, at our Lufkin facility
in May 1993. We believe our relations with our employees are satisfactory.
EXECUTIVE OFFICERS
Set forth below is certain information relating to our current executive
officers:
NAME AGE POSITIONS
Lonnie "Bo" Pilgrim..........74 Chairman of the Board
Clifford E. Butler...........60 Vice Chairman of the Board
David Van Hoose(1)...........61 Chief Executive Officer and Director
O.B. Goolsby, Jr.............55 President and Chief Operating Officer
Richard A. Cogdill...........42 Executive Vice President,
Chief Financial Officer,
Secretary, Treasurer and Director
________________________________________________________________________
(1) On November 11, 2002, the Company announced the retirement of David Van
Hoose as Chief Executive Officer of the Company, effective March 29,
2003. During the transition and until a replacement Chief Executive
Officer is appointed, certain of Mr. Van Hoose's duties have been assumed
by Lonnie "Bo" Pilgrim, who served as the Company's Chief Executive
Officer until Mr. Van Hoose was promoted to the position in June 1998.
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 and continues to serve as Vice Chairman of the Board.
David Van Hoose serves as Chief Executive Officer of Pilgrim's Pride. He
became a Director in July 1998. 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 us 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. Mr. Van Hoose retired as
President and Chief Operating Officer in November 2002, and he will retire as
Chief Executive Officer of the Company in March 2003.
O.B. Goolsby, Jr. serves as President and Chief Operating Officer of
Pilgrim's Pride. Prior to being named as President and Chief Operating Officer
in 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 Operations from April 1986 to August 1992 and was
previously employed by us from November 1969 to January 1981.
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.
ITEM 2. PROPERTIES
Chicken Operations
Breeding and Hatching
We supply all of our chicks in the U.S. by producing our own hatching eggs
from domestic breeder flocks in the U.S. These flocks are owned by us, and
approximately 13.1% of them are maintained on 42 company-owned breeder farms.
In the U.S., we currently own or contract for approximately 15.0 million square
feet of breeder housing on approximately 429 breeder farms. In Mexico, all of
our breeder flocks are maintained on company-owned farms totaling approximately
4.1 million square feet.
We own eleven chicken hatcheries in the United States. These hatcheries
are located in Nacogdoches, Center and Pittsburg, Texas, DeQueen and Nashville,
Arkansas, Broadway, Virginia, Concord, North Carolina and Moorefield, West
Virginia, 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 our vehicles to grow-out farms. Our eleven
hatcheries in the U.S. have an aggregate production capacity of approximately
15.5 million chicks per week. In Mexico, we own seven hatcheries, which have an
aggregate production capacity of approximately 3.5 million chicks per week.
Grow-out
We place our U.S. grown chicks on approximately 1,560 contract grow-out
farms located in Texas, Arkansas, Virginia, West Virginia, North Carolina and
Oklahoma, some of which are owned by our affiliates. These contract grow-out
farms contain approximately 5,818 chicken houses with approximately 81.0
million square feet of growing facilities. Additionally, we own and operate
grow-out farms containing approximately 390 chicken houses with approximately
4.4 million square feet of growing facilities in the U.S., which account for
approximately 5.2% of our total annual U.S. chicken capacity. On the contracted
grow-out farms, the farmers provide the facilities, utilities and labor. We
supply the chicks, the feed and all veterinary and technical services. Contract
grow-out farmers are paid based on live weight produced under an incentive
arrangement. In Mexico, we place our grown chicks on contract grow-out farms
containing approximately 756 chicken houses with approximately 9.7 million
square feet of growing facilities. Additionally, we own and operate grow-out
farms containing approximately 648 chicken houses with approximately 10.4
million square feet of growing facilities in Mexico, which account for
approximately 52.0% of our total annual Mexican chicken capacity. Arrangements
with independent farmers in Mexico are similar to our arrangements with
contractors in the United States. The average grow-out cycle of our chickens is
six to seven weeks.
Feed Mills
An important factor in the production of chicken is the rate at which feed
is converted into body weight. The quality and composition of the feed is
critical to the conversion rate. Accordingly, we formulate and produce our own
feed. We purchase feed ingredients on the open market. The primary feed
ingredients include corn, milo and soybean meal, which historically have been
the largest component of our total production costs. In the U.S., we operate
nine feed mills located in Nacogdoches, Tenaha and Pittsburg, Texas, Nashville
and Hope, Arkansas, Broadway, Virginia, Wingate, North Carolina and Moorefield,
West Virginia. In the U.S., we currently have annual feed requirements of
approximately 3.4 million tons and the capacity to produce approximately 6.1
million tons. We own four feed mills in Mexico, which produce all of the
requirements of our Mexico operations. Mexico's annual feed requirements are
approximately 0.7 million tons with a capacity to produce approximately 1.0
million tons. In fiscal 2002, approximately 67% of the feed ingredients used by
us in Mexico were imported from the United States, but this percentage
fluctuates based on the availability and cost of local feed ingredient
supplies.
Processing
Once the chickens reach processing weight, they are transported by truck
to our processing plants. These plants utilize modern, highly automated
equipment to process and package the chickens. We periodically review the
possible application of new processing technologies in order to enhance
productivity and reduce costs. We have nine 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, DeQueen, Arkansas, Broadway,
Virginia, Marshville, North Carolina and Moorefield, West Virginia. These
processing plants have the capacity, under present USDA inspection procedures,
to slaughter approximately 12.5 million head of chicken per week, assuming a
five-day work week. The Company's plant in Alma, Virginia, which had been
acquired in the acquisition of WLR Foods, was closed during fiscal 2002, with
the production from the Alma plant being consolidated with the Company's other
processing plants in the area. Our three processing plants located in Mexico
have the capacity to slaughter approximately 3.3 million head of chicken per
week, assuming a six-day work week, which is typical in Mexico.
Turkey Operations
Breeding and Hatching
We purchase breeder poults, which we place with growers who supply labor
and housing to produce breeder flocks. These breeder flocks are owned by us,
and approximately 16.2% of them are maintained on three company-owned breeder
farms. We currently own or contract for approximately 2.0 million square feet
of turkey breeder housing on approximately 40 breeder farms, which produce eggs
that are taken to the company-owned turkey hatchery. Our breeder flocks provide
approximately 69% of our poult supply for grow-out. We own and operate one
turkey stud farm with approximately 50,000 square feet, which houses 3,600
breeder males and supplies semen for 52% of our breeder production. The
balance of our semen requirements and poults for grow-out are purchased from
third parties.
We own and operate one turkey hatchery, which is located in Harrisonburg,
Virginia, where eggs are incubated and hatched in a process requiring 28 days.
Once hatched, the day-old poults are inspected and vaccinated against common
poultry diseases and transported by our vehicles to grow-out farms. Our turkey
hatchery has an aggregate production capacity of approximately 450,000 poults
per week.
Grow-out
We place our turkey poults on approximately 350 contract grow-out farms
located in Virginia, West Virginia, Pennsylvania, Maryland and North and South
Carolina. These contract grow-out farms contain approximately 1,260 turkey
houses with approximately 23.6 million square feet of growing facilities. In
addition, we own and operate a grow-out farm containing 20 turkey houses with
approximately 251,000 square feet of growing facilities in the U.S., which
accounts for approximately 1.1% of our total annual turkey capacity. On the
contracted grow-out farms, the farmers provide the facilities, utilities and
labor. We supply the poults, the feed and all veterinary and technical
services. Contract grow-out farmers are paid based on live weight produced
under an incentive arrangement. The average grow-out cycle of our turkeys is 20
to 26 weeks.
Feed Mills
An important factor in the production of turkey is the rate at which feed
is converted into body weight. The quality and composition of the feed is
critical to the conversion rate. Accordingly, we formulate and produce the
majority of our own feed. We purchase feed ingredients on the open market. The
primary feed ingredients include corn, milo and soybean meal, which
historically have been the largest component of our total production costs. We
own and operate a turkey feed mill located in Harrisonburg, Virginia. We
currently have the capacity to annually produce approximately 520,000 tons of
turkey feed at this mill. We also produce turkey feed when required at our
other three eastern division mills or purchase it on the open market.
Processing
Once the poults reach processing weight, they are transported by truck to
our processing plants. These plants utilize modern, highly automated equipment
to process and package the turkeys. We periodically review the possible
application of new processing technologies in order to enhance productivity and
reduce costs. Our two turkey processing plants, located in Hinton, Virginia and
New Oxford, Pennsylvania, have the capacity, under present USDA inspection
procedures, to process approximately 450,000 turkeys per week, assuming a five-
day work week. The Company closed its Harrisonburg Plant, which had been
acquired in the acquisition of WLR Foods, at the end of fiscal 2002 and
consolidated all production from this plant to the Company's Hinton facility.
Prepared Foods Operations
We operate five prepared foods plants. Four of these plants process
primarily chicken prepared foods products and are located in Mt. Pleasant,
Waco, Dallas and Nacogdoches, Texas. Substantially all of our turkey prepared
foods products are processed in our plant located in Franconia, Pennsylvania.
In line with our stated business strategy to capitalize on the attractive U.S.
prepared foods market, we have increased our prepared foods production capacity
through expansion and acquisitions. The U.S. prepared foods market continues to
be one of the fastest growing and most profitable segments in the poultry
industry. Further processed prepared foods products include items such as
portion-controlled breast fillets, tenderloins and strips, formed nuggets and
patties, turkey hams and roasts, salads and bone-in chicken parts. Prepared
foods are sold frozen and may be either fully cooked, partially cooked or raw,
breaded or non-breaded, pre-marinated or non-marinated or smoked.
Our largest prepared foods plant is located in Mt. Pleasant, Texas and was
constructed in 1986 and has been expanded significantly since that time. This
facility includes 281,000 square feet and employs approximately 2,300 people.
This facility has de-boning lines, marinating systems, batter/breading systems,
fryers, ovens, both mechanical and cryogenic freezers, a variety of packaging
systems and cold storage including four fully-cooked lines and three ready-to-
cook/par-frying/Individually Quick Frozen ("IQF") lines and one batter-
breaded/IQF line and eight spiral freezers. This facility has capacity to
produce approximately 350 million pounds of further processed product annually
based on current production mix and is currently operating at 80% of capacity.
We measure our operating capacity of our prepared foods plants on the basis of
running two shifts per day, six days per week.
Our Waco, Texas prepared foods plant was purchased in 1999 and expanded in
fiscal 2000 and again in fiscal 2001. It is functionally equivalent to the Mt.
Pleasant plant and includes 150,146 square feet and employs approximately 700
people. This state of the art facility has marinating systems, batter/breading
systems, fryers, ovens, both mechanical and cryogenic freezers, a variety of
packaging systems and cold storage including two fully-cooked lines and two
ready-to-cook lines and four spiral freezers. This facility has capacity to
produce approximately 270 million pounds of further processed product annually
based on current production mix and is currently operating at approximately 60%
of capacity.
Our Franconia, Pennsylvania prepared foods plant was acquired in January
2001 and further processes chicken and turkey products, including grinding,
marinating, spicing and cooking, producing premium delicatessen, foodservice
and retail products, including roast turkey and salads. This facility includes
approximately 170,000 square feet and employs approximately 775 people. Our
Franconia facility employs the batching system of production as opposed to the
line-production system used in our other plants. This plant has approximately
95 million annual pounds of oven capacity and 17 million annual pounds of salad
capacity for a total capacity of approximately 112 million pounds of further
processed product annually based on current product mix and is currently
operating at approximately 80% of capacity. See Item 1. Business-General-
Overview and Recent Developments for a discussion of the recent events at this
facility.
Our Dallas, Texas prepared foods plant was constructed in 1999 and
includes 84,000 square feet and employs approximately 900 people. This facility
has de-boning and portioning capability, marinating systems, batter/breading
and frying systems and IQF capabilities. This plant is currently running one
par-frying line and one IQF production line, each with a spiral freezer. This
facility has the capacity to produce approximately 105 million pounds of
further processed product annually based on current product mix and is
currently operating at approximately 70% of capacity.
Our Nacogdoches, Texas prepared foods plant was constructed in fiscal
2001. It is functionally equivalent to our Dallas, Texas prepared foods plant
and includes 115,465 square feet and employs approximately 1,850 people. This
facility has de-boning and portioning capability, marinating systems,
batter/breading and frying systems and IQF capabilities. This plant is
currently running one par-frying line with a spiral freezer and two IQF lines
each with a spiral freezer with capability of making them par-fry lines as
sales dictate. This facility has capacity to produce approximately 80 million
pounds of further processed product annually based on current product mix and
is currently operating at approximately 90% of capacity.
Egg Production
We produce table eggs at three farms near Pittsburg, Texas. One farm is
owned by us, while two farms are leased from our major stockholder. 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
2.2 million producing hens and are currently housing approximately 1.9 million
hens.
Other Facilities and Information
We operate three rendering plants that convert by-products into protein
products, located in Mt. Pleasant, Texas, Broadway, Virginia and Moorefield,
West Virginia. These rendering plants currently process by-products from
approximately 13.1 million chickens and 0.6 million turkeys weekly into protein
products. These products are used in the manufacture of poultry and livestock
feed and pet foods. In April 2002, we completed 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, which produces various bulk and sacked livestock feed sold to
area dairies, ranches and farms. We also operate a feed supply store in
Pittsburg, Texas, from which we sell various bulk and sacked livestock feed
products, a majority of which is produced in our Mt. Pleasant commercial feed
mill. 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 our Eastern Division sales and marketing, research and
development, and Eastern Division support activities.
Substantially all of our U.S. property, plant and equipment, except those
in our turkey segment, are pledged as collateral on our secured debt.
ITEM 3. LEGAL PROCEEDINGS
On November 4, 2002, an individual who allegedly consumed our meat products
filed a putative class action lawsuit in the Philadelphia County Court of
Common Pleas in the Commonwealth of Pennsylvania. Plaintiff allegedly
contracted Listeriosis. The case is styled "Frank Niemtzow, individually and
on behalf of all others similarly situated, v. Pilgrim's Pride Corporation and
Wampler Foods, Inc" The complaint seeks recovery on behalf of a putative class
of all persons that purchased and/or consumed meat products manufactured by us
between May 1, 2002, and October 11, 2002, bearing establishment code P-1351
and who have suffered an injury. This class represents all individuals who
have suffered Listeriosis and symptoms of Listeriosis and other medical
injuries. Plaintiff also seeks to represent a putative class of all persons
that purchased and/or consumed meat products manufactured by us between May 1,
2002 and October 11, 2002 bearing establishment code P-1351 and who have not
suffered any personal injury. The complaint seeks compensatory and punitive
damages under theories of negligence, alleged violation of the Pennsylvania
Unfair Trade Practices Act and Consumer Protection Law, strict liability in
tort, and unjust enrichment. The time for responding to the complaint has not
yet arrived. We intend to defend vigorously both certification of the case as
a class action and questions concerning ultimate liability and damages, if any.
No discovery has been conducted to date. Neither the likelihood of an
unfavorable outcome nor the amount of ultimate liability, if any, with respect
to this case can be determined at this time. We do not expect this matter to
have a material impact on our financial position, operation or liquidity after
considering our available insurance coverage.
In January of 1998, seventeen of our current and/or former employees filed
the case of "Octavius Anderson, et al. v. Pilgrim's Pride Corporation" in the
United States District Court for the Eastern District of Texas, Lufkin Division
claiming Pilgrim's Pride violated requirements of the Fair Labor Standards Act.
The suit alleged Pilgrim's Pride failed to pay employees for all hours worked.
The suit generally alleged that (1) employees should be paid for time spent to
put on, take off, and clean certain personal gear at the beginning and end of
their shifts and breaks and (2) the use of a master time card or production
"line" time fails to pay employees for all time actually worked. Plaintiffs
sought to recover unpaid wages plus liquidated damages and legal fees.
Approximately 1,700 consents to join as plaintiffs were filed with the court by
current and/or former employees. During the week of March 5, 2001, the case was
tried in the Federal Court of the Eastern District of Texas, Lufkin, Texas.
The Company prevailed at the trial with a judgment issued by the judge, which
found no evidence presented to support the plaintiffs' allegations. The
plaintiffs filed an appeal in the Fifth Circuit Court of Appeals to reverse the
judge's decision. The plaintiff's brief was submitted to the court on November
5, 2001. Pilgrim's Pride's response to the plaintiff's brief to the Fifth
Circuit Court of Appeals was submitted on December 5, 2001. The Fifth Circuit
Court of Appeals heard oral arguments in this matter on June 4, 2002. On June
6, 2002 the Fifth Circuit Court of Appeals entered a per curiam opinion
affirming the opinion of the trial court. Appellants did not file any motion
for a rehearing and the deadline for filing of such a motion has passed.
In August of 2000, four of our current and/or former employees filed the
case of "Betty Kennell, et al. v. Wampler Foods, Inc." in the United States
District Court for the Northern District of West Virginia, claiming we violated
requirements of the Fair Labor Standards Act. The suit generally makes the
same allegations as "Anderson v. Pilgrim's Pride" discussed above. Plaintiffs
seek to recover unpaid wages plus liquidated damages and legal fees.
Approximately 150 consents to join as plaintiffs were filed with the court by
current and/or former employees. No trial date has been set. To date, only
limited discovery has been performed. Neither the likelihood of an unfavorable
outcome nor the amount of ultimate liability, if any, with respect to this case
can be determined at this time. We do not expect this matter, individually or
collectively, to have a material impact on our financial position, operations
or liquidity.
On August 20, 1999, the former WLR Foods brought legal action as a
plaintiff in an antitrust lawsuit filed in the U.S. District Court in
Washington D.C. alleging a world-wide conspiracy by approximately 34 named
defendants to control production capacity and raise prices of common vitamins
such as A, B-4, C, and E. The Company, as successor to WLR Foods in this suit,
received $9.5 million in fiscal 2002 in partial settlement of its claims, $4.3
million of which was recorded by the Company as a component of "Other Expense
(Income): Miscellaneous, Net" in fiscal 2002 as the recovery amount received
during the period exceeded the $5.2 million recovery amount recorded at the
time of the acquisition of WLR Foods. The initial estimate of the amount that
would be recovered under the WLR Foods claims was based on the ratio of
recoveries to vitamin purchases that was inherent in similar claims settled by
the Company in fiscal 2001 on substantially similar claims. To date, claims
related to approximately one-third of the WLR Foods affected vitamin purchases
have been settled by or on behalf of the former WLR Foods, which settlements
have resulted in payments to the Company and the former WLR Foods of $11.0
million. No assurances can be made regarding the likelihood or timing of
future settlements or whether or not future recoveries, if any, will be
proportionally less than, equal to or greater than these previous recovery
amounts.
On June 7, 2001, the Company brought legal action as a plaintiff in an
antitrust lawsuit filed in the U.S. District Court in San Francisco alleging a
world-wide conspiracy by defendant suppliers and producers of methionine to
control production capacity and raise prices of methionine. The Company
estimates that it was overcharged by approximately $50 million in connection
with the alleged conspiracy and expects the litigation of this matter to be
resolved during calendar year 2003. No assurances can be made regarding the
likelihood or timing of future awards or settlements.
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. The case is styled "Wheeler vs. Pilgrim's 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. On July 29, 2002, we filed
our Motion to Dismiss under Rules 12(b) (1), 12(b) (6) and 9(b). We also filed
a Motion to Transfer Venue on August 19, 2002, and the plaintiffs have filed a
Motion for Preliminary Injunction to prohibit any alleged retaliation against
the growers. Discovery has not yet been conducted in this case. In addition,
the Court has not ruled upon any of the above-referenced motions. We intend to
defend vigorously both certification of the case as a class action and
questions concerning ultimate liability and damages, if any. Neither the
likelihood of an unfavorable outcome nor the amount of ultimate liability, if
any, with respect to this case can be determined at this time. We do not
expect this matter, to have a material impact on our financial position,
operations or liquidity.
The Company is subject to various other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
QUARTERLY STOCK PRICES AND DIVIDENDS
High and low sales prices of and dividends on the Company's Class B and
Class A common stock for the periods indicated were:
Prices Prices
2002 2001 Dividends
Quarter High Low High Low 2002 2001
Class B Common Stock
First $14.48 $12.24 $ 8.15 $ 6.03 $.015 $.01
Second 14.45 12.05 12.33 7.67 .015 .01
Third 14.80 12.90 12.55 9.43 .015 .01
Fourth 13.92 8.49 15.35 11.90 .015 .01
Class A Common Stock
First 9.94 8.35 5.72 4.46 .015 .01
Second 10.90 8.66 8.42 5.47 .015 .01
Third 11.14 9.79 8.74 6.63 .015 .01
Fourth $10.53 $6.59 $10.98 $7.50 $.015 $.01
The Company's Class B common stock (ticker symbol "CHX") and Class A common
stock (ticker symbol "CHX.A") are traded on the New York Stock Exchange. The
Company estimates there were approximately 13,676 and 26,022 holders (including
individual participants in security position listings) of the Company's Class A
and Class B common stock, respectively, as of November 5, 2002. See Note
F-common stock of the Notes to Consolidated Financial Statements for additional
discussion of the Company's 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
$3.4 million per year. See Note C - Notes Payable and Long-Term Debt of the
Notes to Consolidated Financial Statements for additional discussions of the
Company's credit facilities.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)Ten Years Ended September 28, 2002
2002 2001(a) 2000 1999(b) 1998
INCOME STATEMENT DATA:
Net sales $2,533,718 $2,214,712 $1,499,439 $1,357,403 $1,331,545
Gross margin 165,165 213,950 165,828 185,708 136,103
Operating income (loss) 29,904 94,542 80,488 109,504 77,256
Income (loss) before
income taxes and
extraordinary charge 1,910 63,294 62,786 90,904 56,522
Interest expense, net 32,003 30,775 17,779 17,666 20,148
Income tax expense
(benefit) (c) (12,425) 21,263 10,442 25,651 6,512
Income (loss) before
extraordinary charge 14,335 42,031 52,344 65,253 50,010
Extraordinary charge -
net of tax -- (894) -- -- --
Net income (loss) 14,335 41,137 52,344 65,253 50,010
Ratio of earnings to
fixed charges (d) (d) 2.16x 3.04x 4.33x 2.96x
PER COMMON SHARE DATA(e)
Income (loss) before
extraordinary charge $0.35 $1.02 $1.27 $1.58 $1.21
Extraordinary charge -
early repayment of debt -- (0.02) -- -- --
Net income (loss) 0.35 1.00 1.27 1.58 1.21
Cash dividends 0.06 0.06 0.06 0.045 0.04
Book value 9.59 9.27 8.33 7.11 5.58
BALANCE SHEET SUMMARY:
Working capital $179,038 $203,450 $124,531 $154,242 $147,040
Total assets 1,227,890 1,215,695 705,420 655,762 601,439
Notes payable and
current maturities of
long-term debt 3,483 5,099 4,657 4,353 5,889
Long-term debt, less
current maturities 450,161 467,242 165,037 183,753 199,784
Total stockholders'
equity 394,324 380,932 342,559 294,259 230,871
CASH FLOW SUMMARY:
Operating cash flow $98,113 $87,833 $130,803 $81,452 $85,016
Depreciation &
amortization(f) 70,973 55,390 36,027 34,536 32,591
Capital expenditures 80,388 112,632 92,128 69,649 53,518
Business acquisitions -- 239,539 -- -- --
Financing activities, net (21,163) 254,382 (22,619) (19,634) (32,498)
CASHFLOW RATIOS:
EBITDA(g) 103,469 147,666 115,356 142,043 108,268
EBITDA/interest expense, net 3.23x 4.80x 6.49x 8.04x 5.37x
Senior secured debt/EBITDA 2.45x 1.84x .69x .67x 1.02x
Total debt/EBITDA 4.38x 3.20x 1.47x 1.32x 1.90x
KEY INDICATORS (AS A PERCENTAGE OF NET SALES):
Gross margin 6.5% 9.7% 11.1% 13.7% 10.2%
Selling, general and
administrative expenses 5.3% 5.4% 5.7% 5.6% 4.4%
Operating income (loss) 1.2% 4.3% 5.4% 8.1% 5.8%
Interest expense, net 1.3% 1.4% 1.2% 1.3% 1.5%
Net income (loss) 0.6% 1.9% 3.5% 4.8% 3.8%
(In thousands, except per share data)Ten Years Ended September 28, 2002
1997 1996 1995 1994 1993(b)
INCOME STATEMENT DATA:
Net sales $1,277,649 $1,139,310 $931,806 $922,609 $887,843
Gross margin 114,467 70,640 74,144 110,827 106,036
Operating income (loss) 63,894 21,504 24,930 59,698 56,345
Income (loss) before
income taxes and
extraordinary charge 43,824 47 2,091 42,448 32,838
Interest expense, net 22,075 21,539 17,483 19,175 25,719
Income tax expense
(benefit) (c) 2,788 4,551 10,058 11,390 10,543
Income (loss) before
extraordinary charge 41,036 (4,504) (7,967) 31,058 22,295
Extraordinary charge -
net of tax -- (2,780) -- -- (1,286)
Net income (loss) 41,036 (7,284) (7,967) 31,058 21,009
Ratio of earnings to fixed
charges 2.57x (d) 1.07x 2.79x 2.10x
PER COMMON SHARE DATA:(E)
Income (loss) before
extraordinary charge $ 0.99 $ (0.11) $ (0.19) $ 0.75 $ 0.54
Extraordinary charge -
early repayment of debt -- (0.07) -- -- (0.03)
Net income (loss) 0.99 (0.18) (0.19) 0.75 0.51
Cash dividends 0.04 0.04 0.04 0.04 0.02
Book value 4.41 3.46 3.67 3.91 3.20
BALANCE SHEET SUMMARY:
Working capital $ 133,542 $ 88,455 $ 88,395 $ 99,724 $72,688
Total assets 579,124 536,722 497,604 438,683 422,846
Notes payable and
current maturities of
long-term debt 11,596 35,850 18,187 4,493 25,643
Long-term debt, less
current maturities 224,743 198,334 182,988 152,631 159,554
Total stockholders'
equity 182,516 143,135 152,074 161,696 132,293
CASH FLOW SUMMARY:
Operating cash flow $49,615 $11,391 $32,712 $60,664 $44,970
Depreciation &
amortization(f) 29,796 28,024 26,127 25,177 26,034
Capital expenditures 50,231 34,314 35,194 25,547 15,201
Business acquisitions -- -- 36,178 -- --
Financing activities, net 348 27,313 40,173 (30,291) (40,339)
CASHFLOW RATIOS:
EBITDA(g) 94,782 47,849 49,811 83,658 79,222
EBITDA/interest expense, net 4.29x 2.22x 2.85x 4.36x 3.08x
Senior secured debt/EBITDA 1.45x 2.26x 1.79x .70x .94x
Total debt/EBITDA 2.49x 4.89x 4.04x 1.88x 2.34x
KEY INDICATORS (AS A PERCENTAGE OF NET SALES):
Gross margin 9.0% 6.2% 8.0% 12.0% 11.9%
Selling, general and
administrative expenses 4.0% 4.3% 5.3% 5.5% 5.6%
Operating income (loss) 5.0% 1.9% 2.7% 6.5% 6.3%
Interest expense, net 1.7% 1.9% 1.9% 2.1% 2.9%
Net income (loss) 3.2% (0.6%) (0.9%) 3.4% 2.4%
(a) 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.
(b) Fiscal 1999 and 1993 had 53 weeks.
(c) Fiscal 2002 includes an $11.9 million of tax benefit from changes in
Mexican tax laws. See Note D-Income Taxes of the Notes to the Consolidated
Financial Statements of the Company.)
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary items 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 $1.2 million in fiscal 2002 and
1996, respectively.
(e) 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.
(f) Includes amortization of capitalized financing costs of approximately $1.4
million, $0.9 million, $1.2 million, $1.1 million, $1.0 million, $0.9
million, $1.8 million, $1.1 million, $1.3 million and $1.6 million in
fiscal years 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994 and 1993,
respectively.
(g) "EBITDA" is defined as the sum of net income (loss) before extraordinary
charges, interest, taxes, depreciation and amortization. EBITDA is
presented because we believe it is frequently used by securities analysts,
investors and other interested parties in the evaluation of companies.
EBITDA is not a measurement of financial performance under generally
accepted accounting principles 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 generally accepted accounting principles.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 reduce 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 30% of
our consolidated cost of goods sold in fiscal 2002. 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 United States and
foreign governments. As further processing is performed, feed ingredient costs
become a decreasing percentage of a product's 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.
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 we produce and purchase for resale in the United States and Mexico,
but also includes the sale of table eggs, feed and other items. Our chicken
and other products segment conducts separate operations in the United States
and Mexico and is reported as two separate geographical areas. Our turkey
segment includes sales of turkey products produced in our turkey operation,
which operate exclusively in the United States.
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 included with chicken and other products.
The following table presents certain information regarding our segments:
FISCAL YEAR ENDED
SEPTEMBER 28,SEPTEMBER 29,SEPTEMBER 30,
2002 2001(A) 2000
(IN THOUSANDS)
NET SALES TO CUSTOMERS:
Chicken and Other Products:
United States $1,842,749 $1,652,199 $1,192,077
Mexico 342,851 323,678 307,362
Sub-total 2,185,600 1,975,877 1,499,439
Turkey 348,118 238,835 --
Total $2,533,718 $2,214,712 $1,499,439
OPERATING INCOME:
Chicken and Other Products:
United States $ 32,663 $ 78,096 $ 45,928
Mexico 17,064 12,157 34,560
Sub-total 49,727 90,253 80,488
Turkey (19,823) 4,289 --
Total $ 29,904 $ 94,542 $ 80,488
DEPRECIATION AND AMORTIZATION:(B)
Chicken and Other Products:
United States $ 47,528 $ 38,155 $ 24,444
Mexico 13,526 11,962 11,583
Sub-total 61,054 50,117 36,027
Turkey 9,919 5,273 --
Total $ 70,973 $ 55,390 $ 36,027
(a) The acquisition of WLR Foods 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 January 27, 2001 the
acquisition date.
(b) Includes amortization of capitalized financing costs of approximately
$1.4 million, $0.9 million and $1.2 million in fiscal years 2002,
2001, and 2000, respectively.
The following table presents certain items as a percentage of net sales for the
periods indicated:
2002 2001 2000
Net sales 100.0% 100.0% 100.0%
Cost of sales 93.5 90.3 88.9
Gross profit 6.5 9.7 11.1
Selling, general and
administrative expense 5.3 5.4 5.7
Operating income 1.2 4.3 5.4
Interest expense, net 1.3 1.4 1.2
Income before income taxes 0.1 2.9 4.2
Net income 0.6 1.9 3.5
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
On January 27, 2001, we completed the acquisition of WLR Foods (now the
Company's Eastern Division), a vertically integrated producer of chicken and
turkey products located in the eastern United States, for approximately $239.5
million and the assumption of approximately $45.5 million of indebtedness. The
acquisition was accounted for under the purchase method of accounting and the
purchase price was allocated based on the estimated fair value of assets and
liabilities.