10-Q 1 gk10q903edg.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 27, 2003 Commission File Number 2-62681 GOLD KIST INC. (Exact name of registrant as specified in its charter) GEORGIA 58-0255560 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 244 Perimeter Center Parkway, N.E., Atlanta, Georgia 30346 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code(770) 393-5000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X GOLD KIST INC. INDEX Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - September 27, 2003 and June 28, 2003 1 Consolidated Statements of Operations Three Months Ended September 27, 2003 and September 28, 2002 2 Consolidated Statements of Cash Flows - Three Months Ended September 27, 2003 and September 28, 2002 3 Notes to Consolidated Financial Statements 4 - 5 Item 2. Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition 6 - 10 Item 3. Quantitative and Qualitative Disclosure About Market Risks 11 Item 4. Controls and Procedures 11 Part II. Other Information Item 6. Exhibits and reports on Form 8-K 12 Page 1 Item 1. Financial GOLD KIST INC. Statements CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) (Unaudited)

Page 2 GOLD KIST INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands) (Unaudited)

Page 3 GOLD KIST INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)

Page 4 GOLD KIST INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands) (Unaudited) 1. The accompanying unaudited consolidated financial statements reflect the accounts of Gold Kist Inc. and its subsidiaries as of and for the three months ended September 27, 2003 ("Gold Kist" or the "Association"). These consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition and the Notes to Consolidated Financial Statements on pages 9 through 16 and pages 25 through 37, respectively, of Gold Kist's Annual Report in the previously filed Form 10-K for the year ended June 28, 2003. The Association employs a 52/53 week fiscal year. Fiscal 2004 will be a 52-week year and fiscal 2003 was also a 52-week year with each quarter in both periods consisting of 13 weeks. 2. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, the results of operations, and the cash flows. All significant intercompany balances and transactions have been eliminated in consolidation. Results of operations for interim periods are not necessarily indicative of results for the entire year. 3. Inventories consist of the following:

4. At June 28, 2003, the Association had a minimum pension liability of $43.4 million, net of the deferred tax benefit of $25.9 million. The minimum pension liability, net of deferred taxes, has been included as a component of patrons' and other equity in accumulated other comprehensive loss. At September 27, 2003, the cumulative minimum pension liability included in accumulated other comprehensive loss was $42.5 million, net of the deferred tax benefit of $25.3 million. 5. In October 1998, the Association completed the sale of assets of the Agri-Services segment to Southern States Cooperative, Inc. (SSC). In order to complete the transaction, the Association committed to purchase from SSC, subject to certain terms and conditions, up to $60 million principal amount of capital trust securities and $40 million principal amount of cumulative preferred securities if SSC was unable to market the securities to other purchasers. In October 1999, the Company purchased for $98.6 million the $100 million principal amount of the securities under the commitment. The securities, with interest/dividends payable quarterly, carried a combined weighted Page 5 average interest/dividend rate of 8.55% at September 27, 2003. No dividends from the cumulative preferred securities have been received since the quarterly payment received in January 2002. In October 2002, SSC notified the Association that, pursuant to the provisions of the indenture under which the Association purchased the capital trust securities, SSC would defer the capital trust certificates quarterly interest payment due on October 5, 2002. Quarterly interest payments for subsequent quarters through October 5, 2003 have also been deferred. The terms of the capital trust securities allow for the deferral of quarterly interest payments for up to 20 quarters with any deferred payments bearing interest at 10.75%. As a result of the deferral of the interest payments, the Association reduced the carrying value of the capital trust securities by $24.1 million with a corresponding charge against margins from continuing operations before income taxes for the three months ended September 28, 2002. The carrying value of the SSC securities was $57.3 million at June 28 and September 27, 2003. As interest rates and market conditions change, the carrying value of the securities could be further reduced. Also, the proceeds from any future sale of the SSC securities could differ from these estimates. If these events were to occur, they could have a material impact on results of operations and financial position of the Association. Gold Kist is permitted to sell the SSC securities pursuant to applicable securities regulations. The SSC securities are classified as noncurrent assets - investments in the accompanying consolidated balance sheets at September 27 and June 28, 2003. 6. On September 27, 2002, the Company refinanced and extended the Senior Secured Credit Facility to include a $110 million Revolving Credit Facility maturing November 2004 and a $95 million Term Loan maturing November 2005. The interest rates on the facility ranged from 1.50% to 2.25% over the London Interbank Offered Rate (LIBOR), adjusted quarterly based on the Association's financial condition. Other terms and conditions were essentially unchanged. The terms and conditions on the $45 million five-year term loan due November 2005 were also unchanged. In February 2003, the Company amended its Senior Secured Credit Facility and arranged a Temporary Revolving Credit Facility to provide up to $35 million of incremental liquidity. The Temporary Revolving Credit Facility matured on September 30, 2003. There was no outstanding balance under the Temporary Facility at September 27 or June 28, 2003. At September 27, 2003, the Association was in compliance with or had obtained waivers for all applicable loan covenants. 7. The Company announced the closing of a poultry processing facility on September 3, 2003 and wrote down the carrying value of the related assets by $2.5 million to the expected sales price less costs of disposal. Additional charges of $1 million were also taken in the first quarter of fiscal 2004, primarily related to employee severance amounts. Page 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net Sales Volume Gold Kist's net sales volume for the quarter ended September 27, 2003 increased 12.2% as compared to the quarter ended September 28, 2002. The increase in net sales volume was due primarily to a 9.1% increase in average poultry sales prices, which was partially offset by a 1.9% decrease in ready- to-cook (RTC) broiler meat production. The increase in poultry sales prices was due to stronger domestic and export demand coupled with lower industry- wide production. The Association's export sales of $18.4 million for the September 2003 period were 63.5% higher than the September 2002 period, due to the resumption of shipments to Russia and increased demand from other countries. Negotiations with Russian officials on an import quota system have been held. A general agreement has been reached with the U.S. level of imports comparable to periods prior to the embargo. According to the U.S. Department of Agriculture's (USDA) World Agricultural Outlook Board, the forecast for calendar 2003 broiler meat production is 32.21 billion pounds, ready-to-cook weight, .98% above the 31.89 billion pounds produced in 2002. This is the smallest increase in broiler production for the industry in recent history, which contributed to the improved broiler market prices in the first quarter of fiscal 2004. The estimate for calendar 2004 production is 32.89 billion pounds, 2.1% over the 2003 forecast. Net Operating Margins The Association had net operating margins of $38.4 million for the three months ended September 27, 2003 as compared to $2.3 million in the comparable period last year. The increase in operating margins was due primarily to higher poultry selling prices partially offset by higher feed ingredient costs for the September 2003 quarter as compared to the September 2002 quarter. Corn and soybean prices were 4.5% and 11.7% higher, respectively, during the three-month period ended September 27, 2003 than over the same period a year ago. The increased feed grain costs were due to adverse weather conditions experienced late in the growing season. Cost of sales also included a $3.5 million charge to write down the assets and recognize other expenses, primarily employee severance amounts, related to the closing of a poultry processing facility announced in September 2003. The 18.2% increase in distribution, administrative and general expenses for the three months ended September 27, 2003 was attributable to incentive compensation accruals due to the net margins for the September 2003 quarter as compared to the net loss in the September 2002 quarter. Page 7 Other Income (Deductions) Interest and dividend income were nominal for the periods presented in the consolidated statements of operations. No dividends or interest were paid or accrued on the Southern States capital trust and preferred securities for the quarters ended September 27, 2003 and September 28, 2002, respectively. In October 2002, Southern States Cooperative, Inc. (SSC) notified the Association that, pursuant to the provisions of the indenture under which the Association purchased the capital trust securities, SSC would defer the capital trust certificates quarterly interest payment due on October 5, 2002. Interest payments for subsequent quarters through October 5, 2003 have also been deferred. The terms of the capital trust securities allow for the deferral of quarterly interest payments for up to 20 quarters with the deferred payments bearing interest at 10.75%. As interest rates and market conditions change, the carrying value of the securities could be further reduced. Also, the proceeds from any future sale of the SSC securities could differ from these estimates. If these events were to occur, they could have a material impact on results of operations and financial position of the Association. Interest expense was $7.6 million for the three months ended September 27, 2003 as compared to $6.1 million for the comparable period last year, a 24.6% increase. The increase in interest expense was due to increased long-term debt balances and higher fees, partially offset by lower market interest rates. Miscellaneous, net was $4.2 million for the current quarter as compared to $.3 million in the same quarter last year. Gains from the sale of assets and from the settlement of notes receivable that exceeded their carrying value were the primary items accounting for the increase. For the three months ended September 27, 2003, the Association's combined federal and state effective income tax rate on the tax expense of the margins before income taxes was 33.3%. Combined effective rates on the tax benefit of the loss before income taxes for the three-month period ended September 28, 2002 was 3.8%. The limited tax benefit in the September 2002 quarter was due to the deferred income tax valuation allowance established for the unrealized capital loss resulting from the write down of the SSC investment. Income tax expense (benefit) for the periods presented also reflects income taxes at statutory rates adjusted for available tax credits and deductible nonqualified equity redemptions. In response to the adverse operating conditions in 2003, the Company instituted a cost reduction plan freezing pay levels, reducing staff and overtime, implementing employee benefit plan reductions/eliminations and selling certain non-operating assets. The improvement in broiler sales prices and other factors have contributed to strong operating results in the first quarter of fiscal 2004, however the Company is continuing to consider the implementation of further cost reduction measures. Page 8 LIQUIDITY AND CAPITAL RESOURCES The Association's liquidity is dependent upon funds from operations and external sources of financing. On September 27, 2002, the Company refinanced and extended its Senior Secured Credit Facility to include a $110 million Revolving Credit Facility maturing November 2004 and a $95 million Term Loan maturing November 2005. The interest rates on the facility ranged from 1.50% to 2.25% over the London Interbank Offered Rate (LIBOR), adjusted quarterly based on the Association's financial condition. Other terms and conditions were essentially unchanged. The terms and conditions on the $45 million five- year term loan due November 2005 were also unchanged. The Association also has $45.7 million in term loans outstanding with an agricultural credit bank and $45.0 million in senior notes with an insurance company. The Association's senior notes, senior secured credit facilities and term loans are secured by substantially all of the Association's inventories, receivables, and property, plant and equipment. In February 2003, the Company amended its Senior Secured Credit Facility and arranged a Temporary Revolving Credit Facility to provide up to $35 million of incremental liquidity. The Temporary Revolving Credit Facility matured on September 30, 2003. There was no outstanding balance under the Temporary Facility at September 27 or June 28, 2003. At October 31, 2003, the Association had unused loan commitments of $54.9 million. Covenants under the terms of the loan agreements with lenders include conditions that could limit short-term and long-term financing available from various external sources. The terms of debt agreements specify minimum consolidated tangible net worth, current ratio and coverage ratio requirements, as well as a limitation on the total debt to total capital ratio. The debt agreements place a limitation on capital expenditures, equity distributions, cash patronage refunds, commodity hedging contracts and additional loans, advances or investments. At September 27, 2003, the Association was in compliance with or had obtained waivers for all applicable loan covenants. For the first three months of fiscal 2004, cash provided from operating activities was $41.9 million as compared to $.8 million for the first three months of fiscal 2003. The increase was due to the net margins for the quarter as adjusted for non-cash items. Cash used in financing activities was $37.2 million as compared to cash provided by financing activities of $12.1 million for the quarters ended September 2003 and September 2002, respectively. Debt repayments included scheduled long-term debt amounts and payments on the revolving credit facility. Working capital and patrons' and other equity were $211.3 million and $206.1 million, respectively, at September 27, 2003 as compared to $210.2 million and $183.9 million, respectively, at June 28, 2003. The increase in patrons' and other equity reflects the net margins for the September 2003 quarter partially offset by equity redemptions. Page 9 The Association plans capital expenditures of approximately $45 million in 2004 that primarily include expenditures for expansion of further processing capacity and technological advances in poultry production and processing. In addition, planned capital expenditures include other asset improvements and necessary replacements. Management intends to finance planned 2004 capital expenditures and related working capital needs with existing cash balances, cash expected to be provided from operations and additional borrowings, as needed. In August 2003, the Board of Directors of the Association suspended the early cashing of notified equity at the request of the holder, but will continue to pay the full face value to the estates of deceased equity holders subject to a board imposed $4.0 million limitation on total equity cashings in 2004. The redemption of patrons' equity is subject to the discretion of the Board of Directors. In connection with the sale of assets of the Agri-Services segment to Southern States during 1999, Gold Kist discontinued the sale of Subordinated Certificates. The Association believes cash on hand and cash equivalents at September 27, 2003 and cash expected to be provided from operations, in addition to borrowings available under committed credit arrangements, will be sufficient to maintain cash flows adequate for the Association's operational objectives over the next twelve months and to fund the repayment of outstanding Subordinated Certificates as they mature. Important Considerations Related to Forward-Looking Statements It should be noted that this discussion contains forward-looking statements, which are subject to substantial risks and uncertainties which constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For these statements, Gold Kist claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements are based on assumptions, which could prove inaccurate and therefore there can be no assurance that the "forward-looking statements" will prove to be accurate. There are many factors, which could cause actual results to differ materially from those anticipated by statements made herein. In light of these risks and uncertainties, the Association cautions readers not to place undue reliance on any forward-looking statements. The Association undertakes no obligation to publicly update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information or otherwise. Among the factors that may affect the operating results of the Association are the following: (i) fluctuations in the cost and availability of raw materials, such as feed ingredients; (ii) changes in the availability and relative costs of labor and contract growers; (iii) market conditions for finished products, including competitive factors and the supply and pricing of alternative proteins; (iv) effectiveness of sales and marketing programs; (v) risks associated with leverage, including cost increases due to rising interest rates; (vi) changes in regulations and laws, including changes in accounting standards, environmental laws and occupational, health and safety laws; (vii) disease outbreaks affecting broiler production and/or marketability of the Association's products; (viii) contamination of Page 10 products, which can lead to product liability and product recalls; (ix) access to foreign markets together with foreign economic conditions; and (x) changes in general economic conditions. Effects of Inflation The major factor affecting the Association's net sales volume and cost of sales is the change in commodity market prices for broilers, hogs and feed grains. The prices of these commodities are affected by world market conditions and are volatile in response to supply and demand, as well as political and economic events. The price fluctuations of these commodities do not necessarily correlate with the general inflation rate. Inflation has, however, affected operating costs such as labor, energy and material costs. Future Accounting Requirements In February 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity," which is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 establishes standards for the classification of liabilities in financial statements that have characteristics of both liabilities and equity. Any redemption of the Company's patrons' equity is subject to the discretion of the Board of Directors and is not mandatorily redeemable. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. Generally, the provisions of the Interpretation are effective for the first interim or annual period ending after December 15, 2003. The Company is currently evaluating the impact of this interpretation. In May 2003, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on Issue 01-08, "Determining Whether an Arrangement Contains a Lease." If an arrangement contains a lease in accordance with the EITF guidance, the timing of the expense and recognition in the balance sheet (if a capital lease) and disclosures could be affected. The EITF is effective for all arrangements agreed to or modified in fiscal periods after May 28, 2003. The Company is still evaluating the impact of this EITF. The effect of this EITF is not material to the Company for those arrangements entered into for the quarter ended September 27, 2003. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement does not have a material impact on the Company's consolidated financial statements. Page 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Market Risk The principal market risks affecting the Association are exposure to changes in broiler and commodity prices and interest rates on borrowings. Although the Company has international sales and related accounts receivable from foreign customers, there is no foreign currency exchange risk as all sales are denominated in United States dollars. Commodities Risk The Association is a purchaser of certain agricultural commodities used for the manufacture of poultry feeds. The Association uses commodity futures and options for economic hedging purposes to reduce the effect of changing commodity prices and to ensure supply of a portion of its commodity inventories and related purchase and sale contracts. Feed ingredients futures and option contracts, primarily corn and soybean meal, are accounted for at fair value. Changes in fair value on these commodity futures and options are recorded as a component of product cost in the consolidated statements of operations. Terms of the Association's secured credit facility limit the use of forward purchase contracts and commodities futures and options transactions. At September 27, 2003, the notional amounts and fair value of the Association's outstanding commodity futures and options positions were not material. Interest Rate Risk The Association has exposure to changes in interest rates on certain debt obligations. The interest rates on the Senior Secured Credit facilities fluctuate based on the London Interbank Offered Rate (LIBOR). A 1% change in LIBOR would increase annual interest expense by approximately $2.0 million. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Company's management, including the President and Chief Executive Officer ("CEO"), and the Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and the CFO, concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report, were effective in timely bringing to their attention material information related to the Company required to be included in the Company's periodic Securities and Exchange Commission filings. There has not been any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Page 12 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Designation of Exhibit in this Report Description of Exhibit B-31 Section 302, Sarbanes- Oxley Act, Certifications B-32 Section 906, Sarbanes- Oxley Act, Certifications (b)Reports on Form 8-K. Gold Kist has not filed any reports on Form 8-K during the three months ended September 27, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GOLD KIST INC. (Registrant) Date November 11, 2003 John Bekkers Chief Executive Officer (Principal Executive Officer) Date November 11, 2003 Stephen O. West Treasurer and Chief Financial Officer (Principal Financial Officer) Page 12 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Designation of Exhibit in this Report Description of Exhibit B-31 Section 302, Sarbanes- Oxley Act, Certifications B-32 Section 906, Sarbanes- Oxley Act, Certifications (b)Reports on Form 8-K. Gold Kist has not filed any reports on Form 8-K during the three months ended September 27, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GOLD KIST INC. (Registrant) Date November 11, 2003 /s/ John Bekkers John Bekkers Chief Executive Officer (Principal Executive Officer) Date November 11, 2003 /s/ Stephen O. West Stephen O. West Treasurer and Chief Financial Officer (Principal Financial Officer)

GOLD KIST INC 10-Q