SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended MARCH 28, 1998 Commission file number 1-9273 PILGRIM'S PRIDE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-1285071 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 110 SOUTH TEXAS, PITTSBURG, TX 75686-0093 (Address of principal executive offices) (Zip code) (903) 855-1000 (Telephone number of principle executive offices) Not Applicable Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. COMMON STOCK $.01 PAR VALUE--- 27,589,250 SHARES AS OF MAY 11, 1998 INDEX PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited): Condensed consolidated balance sheets: March 28, 1998 and September 27, 1997 Consolidated statements of income (loss): Three months and six months ended March 28, 1998 and March 29, 1997 Consolidated statements of cash flows: Six months ended March 28, 1998 and March 29, 1997 Notes to condensed consolidated financial statements-March 28, 1998 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ITEM 1: FINANCIAL STATEMENTS : <S> <C> <C> <C> <C> March 28, September 27, 1998 1997 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 7,256 $ 20,338 Trade accounts and other receivables, less allowance for doubtful accounts 73,894 77,967 Inventories 150,365 146,180 Deferred income taxes 3,279 3,998 Prepaid expenses 2,114 2,353 Other current assets 311 311 Total Current Assets 237,219 251,147 Other Assets 17,703 18,094 Property, Plant and Equipment 535,440 510,661 Less accumulated depreciation 215,557 200,778 319,883 309,883 $ 574,805 $ 579,124 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable to banks $ - $ - Accounts payable 61,057 71,225 Accrued expenses 32,055 34,784 Current maturities of long-term debt 11,589 11,596 Total Current Liabilities 104,701 117,605 Long-Term Debt, less current maturities 219,394 224,743 Deferred Income Taxes 50,295 53,418 Minority Interest in Subsidiary 842 842 Stockholders' Equity: Common stock; $.01 par value 276 276 Additional paid-in capital 79,763 79,763 Retained earnings 119,534 102,477 Total Stockholders' Equity 199,573 182,516 $ 574,805 $ 579,124 </TABLE> See notes to condensed consolidated financial statements. PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES March 28 1998 <TABLE> <CAPTION> PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> THREE MONTHS ENDED SIX MONTHS ENDED MARCH 28, MARCH 29, MARCH 28, MARCH 29, 1998 1997 1998 1997 (in thousands, except share and per share data) <S> <C> <C> <C> <C> Net Sales $324,446 $303,401 $662,333 $601,207 Costs and Expenses: Cost of sales 297,585 280,316 606,092 547,855 Selling, general and administrative 15,463 13,425 29,472 27,378 313,048 293,741 635,564 575,233 Operating income 11,398 9,660 26,769 25,974 Other Expense (Income): Interest expense, net 5,093 5,284 10,129 10,733 Foreign exchange loss 574 99 1,102 536 Miscellaneous, net (488) (397) (951) (2,906) 5,179 4,986 10,280 8,363 Income before income taxes 6,219 4,674 16,489 17,611 Income tax (benefit) expense (549) (280) (1,396) 2,552 Net income $ 6,768 $ 4,954 $ 17,885 $ 15,059 Net income per common share $ .25 $ .18 $ .65 $ .55 Dividends per common share $ .015 $ .015 $ .03 $ .03 Weighted average shares outstanding 27,589,250 27,589,250 27,589,250 27,589,250 </TABLE> See Notes to condensed consolidated financial statements. PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES March 28 1998 <TABLE> <CAPTION> PILGRIM'S PRIDE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <S> <C> <C> <C> <C> MARCH 28, 1998 MARCH 29, 1997 Cash Flows From Operating Activities: Net income $17,885 $15,059 Adjustments to reconcile net income to cash Provided by operating activities: Depreciation and amortization 16,066 14,229 (Gain) loss on property disposals (37) 46 Provision for doubtful accounts 921 (779) Deferred income taxes (2,404) 1,689 Changes in operating assets and liabilities: Accounts and other receivable 3,151 (5,783) Inventories (4,185) (1,061) Prepaid expenses 234 703 Accounts payable and accrued expenses (12,897) (14,269) Other 11 (162) Cash Flows Provided by Operating Activities 18,745 9,672 Investing Activities: Acquisitions of property, plant and equipment (25,801) (12,162) Proceeds from property disposals 512 330 Other, net (98) (258) Net Cash Used In Investing Activities (25,387) (12,090) Financing Activities: Proceeds from notes payable to bank 21,000 31,500 Re-payment of notes payable to banks (21,000) (34,500) Proceeds from long-term debt 21,126 - Payments on long-term debt (26,556) (4,068) Cash dividends paid (828) (828) Cash Used In Financing Activities (6,258) (7,896) Effect of exchange rate changes on cash and cash equivalents (183) (9) Decrease in cash and cash equivalents (13,083) (10,323) Cash and cash equivalents at beginning of year 20,339 18,040 Cash and cash equivalents at end of period $7,256 $7,717 Supplemental disclosure information: Cash paid during the period for Interest (net of amount capitalized) $10,547 $10,961 Income Taxes $480 $1,807 </TABLE> See notes to condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended March 28, 1998 are not necessarily indicative of the results that may be expected for the year ended September 26, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in Pilgrim's annual report on Form 10-K for the year ended September 27, 1997. The consolidated financial statements include the accounts of Pilgrim's and its wholly and majority owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. The assets and liabilities of the foreign subsidiaries are translated at end-of-period exchange rates, except for and non-monetary assets which are translated at equivalent dollar costs at dates of acquisition using historical rates. Operations of foreign subsidiaries are translated at average exchange rates in effect during the period. NOTE B--NET INCOME PER COMMON SHARE Earnings per share for the periods ended March 28, 1998 and March 29, 1997 are based on the weighted average shares outstanding for the periods. NOTE C--INVENTORIES The following table presents certain information regarding the Company's U.S. and Mexican operations. Inventories consist of the following:MARCH 28, 1998 SEPTEMBER 27, 1997 (in thousands) Live chickens and hens $ 65,669 $ 68,034 Feed, eggs and other 46,429 43,878 Finished chicken products 38,267 34,268 $ 150,365 $ 146,180 PILGRIM'S PRIDE CORPORATION AND SUBSIDIARIES March 28 1998 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Profitability in the chicken industry can be materially affected by the commodity prices of feed grains and the commodity prices of chicken and chicken parts, each of which are determined largely by supply and demand. As a result, the chicken industry as a whole has been characterized by cyclical earnings. Cyclical fluctuations in earnings of individual chicken companies can be mitigated somewhat by: (i) business strategy, (ii) product mix, (iii) sales and marketing plans, and (iv) operating efficiencies. In an effort to reduce price volatility and to generate higher, more consistent profit margins, the Company has concentrated on the production and marketing of prepared food products, which generally have higher margins than the Company's other products. Additionally, the production and sale in the U.S. of prepared foods products reduces the impact of feed grain costs on the Company's profitability. As further processing is performed, feed grain costs become a decreasing percentage of a product's total production costs. The following table presents certain information regarding the Company's U.S and Mexican operations. <TABLE> <CAPTION> Net Sales Net Sales Three Months Ended Six Months Ended March 28, March 29, March 28, March 29, 1998 1997 1998 1997 (In Thousands) <S> <C> <C> <C> <C> Sales to unaffiliated customers: United States $254,342 $242,223 $513,918 $473,761 Mexico 70,104 61,178 148,415 127,446 Operating Income: United States $ 3,104 $ 4,031 $ 5,577 $14,400 Mexico 8,294 5,629 21,192 11,574 </TABLE> The following table presents certain items as a percentage of net sales for the periods indicated. <TABLE> <CAPTION> Percentage of Net Sales Percentage of Net Sales Three Months Ended Six Months Ended March 28, March 29, March 28, March 29, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 91.7% 92.4% 91.5% 91.1% Gross Profit 8.3% 7.6% 8.5% 8.9% Selling, General and Administravite 4.8% 4.4% 4.5% 4.6% Operating Income 3.5% 3.2% 4.0% 4.3% Interest Expense 1.6% 1.7% 1.5% 1.8% Income before Income Taxes 1.9% 1.5% 2.5% 2.9% Net Income (Loss) 2.1% 1.6% 2.7% 2.5% </TABLE> SECOND QUARTER 1998, COMPARED TO SECOND QUARTER 1997 NET SALES. Consolidated net sales were $324.4 million for the second quarter of fiscal 1998, an increase of $21.0 million, or 6.9%, over the second quarter of fiscal 1997. The increase in consolidated net sales resulted from a $14.1 million increase in U.S. chicken sales to $218.2 million, a $8.9 million increase in Mexican chicken sales to $70.1 million, offset by a $2.0 million decrease of sales of other U.S. products to $36.1 million. The increase in U.S. chicken sales was primarily due to a 9.8% increase in dressed pounds produced resulting primarily from the Company's expansion of existing facilities and the purchase of poultry producing assets capable of producing 650,000 chickens per week from Green Acre Foods, Inc. on April 15, 1997, offset partially by a 2.6 % decrease in total revenue per dressed pound produced. The increase in Mexican chicken sales was primarily due to a 16.2% increase in total revenue per dressed pound offset partially by a 1.4 % decrease in dressed pound produced. The decrease in sales of other U.S. products was primarily the result of decreased sales of the Company's poultry by-products group. Increased revenues per dressed pound produced in Mexico were primarily the result of higher sales prices as well as generally improved economic conditions in Mexico compared to the prior year. COST OF SALES. Consolidated cost of sales was $297.6 million in the second quarter of fiscal 1998, an increase of $17.3 million, or 6.2%, over the second quarter of fiscal 1997. The increase primarily resulted from a $12.5 million increase in cost of sales of U.S. operations, and a $4.8 million increase in the cost of sales in Mexican operations. The cost of sales increase in U.S. operations of $12.5 million was due to a 9.8% increase in dressed pounds produced and increased production of higher cost and margin products in prepared foods partially offset by a 9.5% decrease in feed ingredient cost per pound when compared to second quarter 1997. The $4.8 million cost of sales increase in the Mexican operations was due primarily to a 10.6% increase in average costs of sales per pound offset partially by a 1.4% decrease in dressed pounds produced. GROSS PROFIT. Gross profit as a percentage of sales increased to 8.3% in the second quarter of fiscal 1998 from 7.6% in the second quarter of fiscal 1997. The increased gross profit resulted from significantly higher margins in Mexico. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general and administrative expenses were $15.5 million in the second quarter of fiscal 1998, and $13.4 million in second quarter of fiscal 1997. Consolidated selling, general and administrative expenses as a percentage of sales increased in the second quarter of fiscal 1998 to 4.8% compared to 4.4% in the second quarter of fiscal 1997. The dollar increases were due to higher selling, general and administration expenses associated with higher sales volumes experienced in both U.S. and Mexican operations. OPERATING INCOME. Consolidated operating income was $11.4 million for the second quarter of fiscal 1998, an increase of $1.7, or 17.5%, million when compared to the second quarter of fiscal 1997, resulting primarily from higher margins experienced in the Mexican operations. INTEREST EXPENSE. Consolidated net interest expense decreased to $5.1 million, or 3.6%, in the second quarter of fiscal 1998, when compared to $5.3 million in the second quarter of fiscal 1997, due to lower outstanding debt level. As a percentage of sales, interest expense decreased to 1.6% in the second quarter of fiscal 1998 compared to 1.7% in the second quarter of fiscal 1997. INCOME TAXES. The increase in consolidated income tax benefit from $.3 million in the second quarter of fiscal 1997 to $.6 million in the second quarter of fiscal 1998 is due to an increase in earnings of the Company's Mexican operations as a percentage of consolidated earnings. Mexican earnings are not currently subject to income taxes. FISCAL FIRST SIX MONTHS 1998 COMPARED TO FISCAL FIRST SIX MONTHS 1997 NET SALES. Consolidated net sales were $662.3 million for the first six months fiscal 1998, an increase of $61.1 million, or 10.2%, over the first six months fiscal 1997. The increase in consolidated net sales resulted from a $39.7 million increase in U.S. chicken sales to $436.9 million, a $21.0 million increase in Mexican chicken sales to $148.4 million and by a $.4 million increase of sales of other U.S. products to $77.0 million. The increase in U.S. chicken sales was primarily due to a 14.3% increase in dressed pounds produced resulting primarily from the Company's expansion of existing facilities and the purchase of poultry producing assets capable of producing 650,000 chickens per week from Green Acre Foods, Inc. on April 15, 1997, offset partially by a 3.7% decrease in total revenue per dressed pound produced. The increase in Mexican chicken sales was primarily due to a 9.7% increase in total revenue per dressed pound and by a 6.2% increase in dressed pound produced. Increased revenues per dressed pound produced in Mexico were primarily the result of higher sales prices as well as generally improved economic conditions in Mexico compared to the prior year. The increase in sales of other U.S. products was primarily the result of increased sales of the Company's wholesale feed operations and poultry by-products group. COST OF SALES. Consolidated cost of sales was $606.1 million in the first six months fiscal 1998, an increase of $58.2 million, or 10.6%, over the first six months fiscal 1997. The increase primarily resulted from a $49.2 million increase in cost of sales of U.S. operations, and a $9.0 million increase in the cost of sales in Mexican operations. The cost of sales increase in U.S. operations of $49.2 million was due to a 14.3% increase in dressed pounds produced and increased production of higher cost and margin products in prepared foods partially offset by a 6.7% decrease in feed ingredient cost per pound when compared to second quarter 1997. The $9.0 million cost of sales increase in the Mexican operations was due primarily to a 6.2% increase in dressed pounds produced and by a 1.9% increase in average costs of sales per pound. GROSS PROFIT. Gross profit as a percentage of sales decreased to 8.5% in the first six months fiscal 1998 from 8.9% in the first six months fiscal 1997. The decreased gross profit resulted mainly from lower margins in U.S. operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general and administrative expenses were $29.5 million in the first six months fiscal 1998 and $27.4 million in first six months fiscal 1997. Consolidated selling, general and administrative expenses as a percentage of sales decreased slightly in the first six months fiscal 1998 to 4.5% compared to 4.6% in the first six months fiscal 1997. The 7.6% increase in dollar amounts when compared to the same period in 1997 was due to due to higher selling, general and administration expenses associated with higher sales volumes experienced in both U.S. and Mexican operations. OPERATING INCOME. Consolidated operating income was $26.8 million for the first six months fiscal 1998, an increase of $.8 million, or 3.1%, when compared to the first six months fiscal 1997, resulting primarily from higher margins experienced in the Mexican operations. INTEREST EXPENSE. Consolidated net interest expense decreased to $10.1 million, or 5.6%, in the first six months fiscal 1998, when compared to $10.7 million in the first six months fiscal 1997, due to lower outstanding debt levels when compared to the first six months fiscal 1997. As a percentage of sales interest expense decreased to 1.5% in the first six months fiscal 1998 compared to 1.8% in the first six months fiscal 1997. MISCELLANEOUS EXPENSE. Consolidated miscellaneous, net, a component of "Other Expense (Income)", for the first six months of fiscal 1997 includes a $2.2 million final settlement of claims resulting from the January 8, 1992 fire at the Company's prepared foods plant in Mt. Pleasant, Texas. INCOME TAXES. The change in consolidated income tax from an expense of $2.6 million in the first six months of fiscal 1997 to a $1.4 million benefit in the first six months of fiscal 1998 is due to an increase in earnings of the Company's Mexican operations as a percentage of consolidated earnings. Mexican earnings are not currently subject to income taxes. LIQUIDITY AND CAPITAL RESOURCES At March 28, 1998, the Company's working capital was at $132.5 million and its current ratio increased to 2.27 to 1 compared with working capital of $133.5 million and a current ratio of 2.14 to 1 at September 27, 1997. Strong profits improved financial ratios in the fiscal first six months of 1998. Trade accounts and other receivables were $73.9 million at March 28, 1998, a $4.1 million decrease from September 27, 1997. The 5.2% decrease was due primarily to generally faster collections of receivables in the Company's Mexican operations during the period. Inventories were $150.4 million at March 28, 1998,compared to $146.2 million at September 27, 1997. The $4.2 million increase between September 27, 1997 and March 28, 1998 was due primarily to higher finished poultry products inventories. Accounts payable were $61.1 million at March 28, 1998, a 14.2% decrease from September 27, 1997, due primarily to lower feed ingredient costs experienced during the period. Accrued expenses were $32.1 million at March 28, 1998, a $2.7 million decrease from September 27, 1997. The 7.8 % decrease was primarily due to normal seasonal variations in expense accruals. Capital expenditures for the six months ended March 28, 1998 were $25.8 million and were incurred primarily to acquire or expand production capacities in the U.S., improve efficiencies, reduce costs and for the routine replacement of equipment. The Company anticipates that it will spend approximately $55 million for capital expenditures in fiscal year 1998 and expects to finance such expenditures with available operating cash flows and long-term financing. At March 28, 1998, the company's stockholder's equity increased to $199.6 million from $182.5 million at September 27, 1997. Total debt to capitalization decreased to 53.6% at March 28, 1998 compared to 56.4% at September 27, 1997. On March 2, 1998, the Company secured $20 million in unsecured revolving borrowing capacity for its Mexican operation from a new lender at interest rates of 1.5% and 1.75% over LIBOR. The Company maintains $120 million in revolving credit facilities and $45 million in secured term borrowing facilities. The credit facilities provide for interest at rates ranging from LIBOR plus one and three-eighths percent to LIBOR plus two percent and are secured by inventory, trade accounts receivable and fixed assets or are unsecured. As of May 11, 1998, $97.4 million was available under the revolving credit facilities and $15 million was available under the term borrowing facilities. IMPACT OF MEXICO PESO EXCHANGE RATE. In December 1994, the Mexican government changed its policy of defending the peso against the U.S. dollar and allowed it to float freely on the currency markets. These events resulted in the Mexican peso exchange rate declining from 3.39 to 1 U.S. dollar at October 3, 1994 to a low of 8.68 to 1 U.S. dollar at March 11, 1998. The decline in the Mexican peso exchange rate affected the Company's operations directly and indirectly as a result of the related economic recession in Mexico in fiscal 1995. Similarly, the Company's results of operations were adversely affected by: (i) the continuation of the economic recession in Mexico in fiscal 1996, as well as, (ii) significantly higher feed grain costs in fiscal 1996 (which included record high corn prices).In fiscal 1997 and the first six months of fiscal 1998, however, the Company benefited substantially from: (i) a rebounding economy in Mexico when compared to fiscal 1996 and 1995, and, (ii) the adjustment in the supply of poultry products in Mexico to the levels of demand existing after the economic recession. On May 8, 1998 the Mexican peso closed at 8.48 to 1 U.S. dollar. No assurance can be given as to the future valuation of the Mexican peso and how further movement in the Mexican peso could affect future earnings positively or negatively. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS 10.32 Revolving Credit Agreement dated March 2, 1998 by and between Pilgrim's Pride de Mexico, S.A. de C.V., (the borrower); Avicola Pilgrim's Pride de Mexico, S.A. de C.V. (the Mexican Guarantor), Pilgrim's Pride Corporation (the U.S. Guarantor), and COAMERICA Bank (the bank). The Company did not file any reports on Form 8-K during the three months ended March 28, 1998. 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. PILGRIM'S PRIDE CORPORATION /s/ Richard A. Cogdill Date 5/11/98 Richard A. Cogdill Executive Vice President and Chief Financial Officer and Secretary and Treasurer in his respective capacity as such