Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended October 2, 2010**

 

**or**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from                 to                **

 

**COMMISSION FILE NUMBER: 001-07138**

 

**CAGLE’S, INC.**

(Exact Name Of Registrant As Specified In Its Charter)

 

| **GEORGIA**              | ** ** | **58-0625713**                       |
|--------------------------|------------|--------------------------------------|
| (State Of Incorporation) |       | (I.R.S. Employer Identification No.) |

 

| **1385 COLLIER ROAD NW, ATLANTA, GA**    | ** ** | **30318**  |
|------------------------------------------|------------|------------|
| (Address of Principal Executive Offices) |       | (Zip Code) |

 

Registrant’s telephone number, including area code: **(404) 355-2820**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act ofl934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  x Yes  o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulations S-T (section229.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files).  o Yes  o No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.  See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer o         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

Indicateby check mark if the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  o Yes  x No

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.

 

| Class A Common Stock at $1.00 par value |   | 4,616,208 shares as of November 12, 2010. |
|----------------------------------------------|--------|------------------------------------------------|

 

 

 

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Table of Contents

 

**FORM 10-Q**

** **

**Cagle’s, Inc.**

**October 2, 2010**

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                  | **Page**   |
|-------------------|---------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                                  | ** ** |
| ** **        | **PART I  FINANCIAL INFORMATION**                                                      | ** ** |
|              |                                                                                        |       |
| Item 1.           | Financial Statements                                                                        | 3          |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12         |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                 | 17         |
| Item 4.           | Controls and  Procedures                                                                    | 18         |
|              |                                                                                        |       |
| ** **        | **PART II  OTHER INFORMATION**                                                         |       |
|              |                                                                                        |       |
| Item 1.           | Legal Proceedings                                                                           | 19         |
| Item 1.A.         | Risk Factors                                                                                | 19         |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 21         |
| Item 3.           | Defaults upon  Senior Securities                                                            | 21         |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                        | 21         |
| Item 5.           | Other Information                                                                           | 21         |
| Item 6.           | Exhibits                                                                                    | 22         |
|              |                                                                                        |       |
| Signatures        |                                                                                        |
|              |                                                                                        |
| Exhibit 31.1 |                                                                                        |
| Exhibit 31.2 |                                                                                        |
| Exhibit 32.1 |                                                                                        |
| Exhibit 32.2 |                                                                                        |

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Condensed ConsolidatedBalance Sheets**

**(In Thousands, Except ParValues)**

 

**Part I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 
| ** **                                                                                                                                       | ** ** | **October 2, 2010** | ** ** | **April 3, 2010** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(Unaudited)**               | ** ** | ** **                  | ** ** |
| Assets                                                                                                                                           |       |                          |       |                        |       |
| Current  assets                                                                                                                                  |       |                          |       |                        |       |
| Cash                                                                                                                                             |       | $                             | 1,833      |                        | $          | 1,872 |   |
| Trade  accounts receivable, less allowance for doubtful accounts of $174 at  October 2010 and April 2010                               |       | 16,615                        |       | 15,769                      |       |
| Inventories                                                                                                                                      |       | 30,314                        |       | 26,065                      |       |
| Other  current assets                                                                                                                            |       | 655                           |       | 305                         |       |
| Total  current assets                                                                                                                            |       | 49,417                        |       | 44,011                      |       |
| Property,  plant and equipment, at cost                                                                                                          |       |                          |       |                        |       |
| Land                                                                                                                                             |       | 1,976                         |       | 1,976                       |       |
| Buildings  and improvements                                                                                                                      |       | 59,803                        |       | 59,698                      |       |
| Machinery,  furniture and equipment                                                                                                              |       | 45,225                        |       | 42,213                      |       |
| Vehicles                                                                                                                                         |       | 5,597                         |       | 5,249                       |       |
| Construction  in progress                                                                                                                        |       | 354                           |       | 932                         |       |
|                                                                                                                                             |       | 112,955                       |       | 110,068                     |       |
| Accumulated  depreciation                                                                                                                        |       | (77,589                       | )          | (75,199                     | )          |
| Property,  plant and equipment, net                                                                                                              |       | 35,366                        |       | 34,869                      |       |
| Other  assets                                                                                                                                    |       |                          |       |                        |       |
| Deferred  financing costs, net                                                                                                                   |       | 116                           |       | 83                          |       |
| Deferred  income taxes                                                                                                                           |       | 3,446                         |       | 7,141                       |       |
| Other  assets                                                                                                                                    |       | 1,365                         |       | 1,515                       |       |
| Total  other assets                                                                                                                              |       | 4,927                         |       | 8,739                       |       |
| Total  assets                                                                                                                                    |       | $                             | 89,710     |                        | $          | 87,619 |   |
|                                                                                                                                             |       |                          |       |                        |       |
| Liabilities and Stockholders’ Equity                                                                                                        |       |                          |       |                        |       |
| Current  liabilities                                                                                                                             |       |                          |       |                        |       |
| Current  maturities of long-term debt                                                                                                            |       | $                             | 2,793      |                        | $          | 2,685 |   |
| Accounts  payable                                                                                                                                |       | 18,293                        |       | 16,142                      |       |
| Accrued  expenses and compensation                                                                                                               |       | 6,149                         |       | 5,685                       |       |
| Deferred  income taxes                                                                                                                           |       | 2,739                         |       | 2,739                       |       |
| Total  current liabilities                                                                                                                       |       | 29,974                        |       | 27,251                      |       |
| Long-term  debt, less current maturities                                                                                                         |       | 17,833                        |       | 25,033                      |       |
| Stockholders’  equity                                                                                                                       |       |                          |       |                        |       |
| Preferred  stock, $1 par value; 1,000 shares authorized, none issued                                                                             |       | —                        |       | —                      |       |
| Common  stock, $1 par value; 9,000 shares authorized, 4,617 shares issued and 4,616  shares outstanding at October 2010 and April 2010 |       | 4,616                         |       | 4,616                       |       |
| Treasury  stock, at cost                                                                                                                         |       | (80                           | )          | (80                         | )          |
| Additional  paid-in capital                                                                                                                      |       | 3,600                         |       | 3,600                       |       |
| Retained  earnings                                                                                                                               |       | 33,767                        |       | 27,199                      |       |
| Total  stockholders’ equity                                                                                                                 |       | 41,903                        |       | 35,335                      |       |
| Total  liabilities and stockholders’ equity                                                                                                 |       | $                             | 89,710     |                        | $          | 87,619 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Condensed ConsolidatedStatements of Operations**

**(In Thousands, Except PerShare Data)**

**(Unaudited)**

** **
| ** **                                  | ** ** | **13 Weeks Ended**  | ** ** | **14 Weeks Ended**  | ** ** | **26 Weeks Ended**  | ** ** | **27 Weeks Ended**  | ** ** |
|---------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Net  sales                                  |       | $                             | 83,177     |                          | $          | 87,570                        |       | $                             | 161,748    |   | $ | 165,585 |   |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Costs  and expenses                         |       |                          |       |                          |       |                          |       |                          |       |
| Cost  of sales                              |       | 73,533                        |       | 81,819                        |       | 141,748                       |       | 153,527                       |       |
| Selling  and delivery                       |       | 2,655                         |       | 2,275                         |       | 5,102                         |       | 4,472                         |       |
| General  and administrative                 |       | 1,856                         |       | 1,985                         |       | 3,954                         |       | 3,650                         |       |
| Total  costs and expenses                   |       | 78,044                        |       | 86,079                        |       | 150,804                       |       | 161,649                       |       |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Operating  income                           |       | 5,133                         |       | 1,491                         |       | 10,944                        |       | 3,936                         |       |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Other  income (expense)                     |       |                          |       |                          |       |                          |       |                          |       |
| Interest  expense                           |       | (338                          | )          | (415                          | )          | (719                          | )          | (857                          | )          |
| Other  income (expense), net                |       | 34                            |       | 3                             |       | 38                            |       | 5                             |       |
| Total  other income (expense), net          |       | (304                          | )          | (412                          | )          | (681                          | )          | (852                          | )          |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Income  before income taxes                 |       | 4,829                         |       | 1,079                         |       | 10,263                        |       | 3,084                         |       |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Income  tax expense                         |       | 1,739                         |       | 388                           |       | 3,695                         |       | 1,110                         |       |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Net  income                                 |       | $                             | 3,090      |                          | $          | 691                           |       | $                             | 6,568      |   | $ | 1,974 |   |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Weighted-average  common shares outstanding |       |                          |       |                          |       |                          |       |                          |       |
| Basic                                       |       | 4,616                         |       | 4,616                         |       | 4,616                         |       | 4,617                         |       |
| Diluted                                     |       | 4,616                         |       | 4,616                         |       | 4,616                         |       | 4,617                         |       |
|                                        |       |                          |       |                          |       |                          |       |                          |       |
| Per  common share                           |       |                          |       |                          |       |                          |       |                          |       |
| Net  income                                 |       |                          |       |                          |       |                          |       |                          |       |
| Basic                                       |       | $                             | 0.67       |                          | $          | 0.15                          |       | $                             | 1.42       |   | $ | 0.43 |   |
| Diluted                                     |       | $                             | 0.67       |                          | $          | 0.15                          |       | $                             | 1.42       |   | $ | 0.43 |   |
| Dividends                                   |       | $                             | —     |                          | $          | —                        |       | $                             | —     |   | $ | — |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Condensed ConsolidatedStatements of Cash Flows**

**(In Thousands)**

**(Unaudited)**

** **
| ** **                                                                        | ** ** | **26 Weeks Ended**  | ** ** | **27 Weeks Ended**  | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                                        | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
| Cash  flows from operating activities                                             |       |                          |       |                          |       |
| Net  income                                                                       |       | $                             | 6,568      |                          | $          | 1,974 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities |       |                          |       |                          |       |
| Depreciation                                                                      |       | 2,482                         |       | 2,198                         |       |
| Amortization                                                                      |       | 31                            |       | 44                            |       |
| Gain  on sale of property, plant and equipment                                    |       | (20                           | )          | (4                            | )          |
| Deferred  income tax expense                                                      |       | 3,695                         |       | 1,110                         |       |
| Changes  in operating assets and liabilities                                      |       |                          |       |                          |       |
| Trade  accounts receivable, net                                                   |       | (846                          | )          | (668                          | )          |
| Inventories                                                                       |       | (4,249                        | )          | 631                           |       |
| Other  current assets                                                             |       | (350                          | )          | (1,459                        | )          |
| Other  assets                                                                     |       | 150                           |       | 16                            |       |
| Accounts  payable                                                                 |       | (1,071                        | )          | (1,906                        | )          |
| Accrued  expenses and compensation                                                |       | 464                           |       | 1,192                         |       |
| Net  cash provided by operating activities                                        |       | 6,854                         |       | 3,128                         |       |
| Cash  flows from investing activities                                             |       |                          |       |                          |       |
| Purchases  of property, plant and equipment                                       |       | (2,979                        | )          | (734                          | )          |
| Proceeds  from sale of property, plant and equipment                              |       | 20                            |       | 4                             |       |
| Proceeds  from redemption of life insurance cash values                           |       | —                        |       | 180                           |       |
| Net  cash used in investing activities                                            |       | (2,959                        | )          | (550                          | )          |
| Cash  flows from financing activities                                             |       |                          |       |                          |       |
| Proceeds  on revolving line of credit                                             |       | 32,825                        |       | 46,850                        |       |
| Payments  on revolving line of credit                                             |       | (38,600                       | )          | (48,800                       | )          |
| Payments  of long-term debt                                                       |       | (1,317                        | )          | (1,232                        | )          |
| Increase  in negative book cash balances                                          |       | 3,222                         |       | 662                           |       |
| Payments  of deferred financing costs                                             |       | (64                           | )          | —                        |       |
| Repurchase  of stock                                                              |       | —                        |       | (48                           | )          |
| Net  cash used in financing activities                                            |       | (3,934                        | )          | (2,568                        | )          |
| Net  increase (decrease) in cash                                                  |       | (39                           | )          | 10                            |       |
| Cash  - beginning of period                                                       |       | 1,872                         |       | 1,246                         |       |
| Cash  - end of period                                                             |       | $                             | 1,833      |                          | $          | 1,256 |   |
| Supplementary  disclosures of cash flow information                               |       |                          |       |                          |       |
| Cash  paid during the period for:                                                 |       |                          |       |                          |       |
| Interest                                                                          |       | $                             | 720        |                          | $          | 842 |   |
| Supplementary  disclosures of noncash transactions                                |       |                          |       |                          |       |
| Net  unrealized gain on hedging activities, net of income tax expense of $323     |       | $                             | —     |                          | $          | 574 |   |
| Assets  acquired pursuant to capital lease obligations                            |       | —                        |       | 96                            |       |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Notes to CondensedConsolidated Financial Statements**

**October 2, 2010**

**(In Thousands)**

**(Unaudited)**

 

**1.****             ****Basis of Presentation**

 

Inthe opinion of management, the accompanying unaudited consolidated financial statementscontain all adjustments which are of a normal and recurring nature necessary topresent fairly the consolidated financial position of Cagle’s, Inc. andits wholly owned subsidiary Cagle Farms, Inc. (collectively, the “Company”)as of October 2, 2010 and the results of their operations for the 13 and26 weeks ended October 2, 2010 and the 14 and 27 weeks ended October 3,2009.  The accompanying unauditedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Regulation S-X.  Results of operations for the 13 and 26 weeksended October 2, 2010 are not necessarily indicative of results to beexpected for the full fiscal year ending April 2, 2011.

 

Theconsolidated balance sheet at April 3, 2010 has been derived from theaudited consolidated financial statements at that date but does not include allof the information and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. For further information,reference is made to the consolidated financial statements and notes theretoincluded in the Company’s annual report on Form 10-K for the year ended April 3,2010.

 

**2.****             ****Significant Accounting Policies**

 

Referto the Company’s 2010 annual report on Form 10-K, Note 1 to ConsolidatedFinancial Statements, for a description of significant accountingpolicies.  There have been no materialchanges to these accounting policies.

 

**3.****             ****Cash and Cash Equivalents**

 

TheCompany considers all highly liquid investments with original maturities ofthree months or less to be cash equivalents. The Company’s cash management system allows the Company to fundoutstanding checks when presented to the financial institution for paymentresulting in book overdrafts.  Bookoverdrafts are recorded in accounts payable in the consolidated balance sheetsand changes are reflected as a financing activity in the consolidatedstatements of cash flows.  As of October 2,2010 and April 3, 2010, the Company had book overdrafts of $7,330 and$4,108, respectively.

 

**4.****             ****Inventories**

 

Inventoriesconsist of the following at October 2, 2010 and April 3, 2010:

 
| ** **                    | ** ** | **October 2010** | ** ** | **April 2010** | ** ** |
|-------------------------------|------------|-----------------------|------------|---------------------|------------|
|                          |       |                  |       |                |       |
| Finished  products            |       | $                     | 6,987      |                | $          | 4,277 |   |
| Field  inventory and breeders |       | 16,006                |       | 15,667              |       |
| Feed,  eggs and medication    |       | 6,155                 |       | 4,779               |       |
| Supplies                      |       | 1,166                 |       | 1,342               |       |
|                          |       |                  |       |                |       |
|                          |       | $                     | 30,314     |                | $          | 26,065 |   |

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Notes to CondensedConsolidated Financial Statements**

**October 2, 2010**

**(In Thousands)**

**(Unaudited)**

 

**5.****    ****Long-TermDebt**

 

Long-termdebt consists of the following at October 2, 2010 and April 3, 2010:

 
| ** **                                                                                                                                                                                                                                                                        | ** ** | **October 2010** | ** ** | **April 2010** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Long-term  revolving line of credit; maturing March 31, 2013, interest payable  monthly, variable interest rate of London InterBank Offered Rate (“LIBOR”)  plus 3.50% (currently 3.75%); secured by accounts receivable, inventories and  the Atlanta facilities. |       | $                     | 10,125     |                | $          | 15,900 |   |
|                                                                                                                                                                                                                                                                              |       |                  |       |                |       |
| Term  note payable; fixed interest rate of 7.86%, principal and interest payable  monthly of $290 through March 1, 2012 with a maturity payable of $6,513  on April 1, 2012; secured by the Collinsville plant, Dalton hatchery and  Rockmart feedmill.                 |       | 10,445                |       | 11,746              |       |
|                                                                                                                                                                                                                                                                              |       |                  |       |                |       |
| Capital  leases payable, imputed interest at 7.86%, principal and interest payable  monthly of $3, through maturity ranges of March 2012 to  August 2012; secured by the leased equipment.                                                                              |       | 56                    |       | 72                  |       |
|                                                                                                                                                                                                                                                                              |       | 20,626                |       | 27,718              |       |
| Less  current maturities                                                                                                                                                                                                                                                          |       | 2,793                 |       | 2,685               |       |
|                                                                                                                                                                                                                                                                              |       |                  |       |                |       |
| Long-term  debt, less current maturities                                                                                                                                                                                                                                          |       | $                     | 17,833     |                | $          | 25,033 |   |

 

On September 29, 2010, theCompany entered into Amendment Number 5 to the long-term revolving line ofcredit agreement.  There were fourprimary changes to the existing Agreement between the parties: (1) Thematurity date of the $21,000 portion of the revolving credit facility wasextended to March 31, 2013.  (2) The$4,150 supplemental portion of the revolving credit facility was cancelled atthe Company’s request and was fully satisfied by the Company.  (3) The capital expenditures covenant asdefined in Section 10.10 of the Agreement was increased to $5,500 from$4,000 for the fiscal year ending April 2, 2011 and reverts to $4,000thereafter.  (4) The release of theLender’s collateral interest in the Company’s land, building and equipmentcomprising the Pine Mountain Valley Plant in Harris County, Georgia.  As of October 2, 2010, the Company is incompliance with the long-term revolving line of credit agreement’s covenants.

 

On November 23, 2009, theCompany had entered into Amendment Number 4 to the long-term revolving line ofcredit agreement, effective as of October 31, 2009.  Two of the primary changes to the existingAgreement between the parties remain in effect: (1) The minimum tangiblenet worth covenant remained at $30,000 until July 3, 2010; commencing asof July 4, 2010 and ending on January 3, 2011, the minimum tangiblenet worth must not be less than $35,000 at any time; and commencing as of January 4,2011, and at all times thereafter, the minimum tangible net worth must not beless than $40,000 at any time.  (2) Thefacility advance rate with respect to eligible inventories was restored to 40%from 60% and the advance rate with respect to eligible receivables is 

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Notes to CondensedConsolidated Financial Statements**

**October 2, 2010**

**(In Thousands)**

**(Unaudited)**

 

maintainedat 80%.  As of October 2, 2010, theCompany is in compliance with the long-term revolving line of credit agreement’scovenants.

 

Asof October 2, 2010, and inaccordance with the amended long-term revolving line of credit agreement, thelender has issued a $1,000 letter of credit in favor of a third party relatedto the Company’s self-insurance workers’ compensation liabilities.

 

TheCompany’s inventory and accounts receivable levels support collateralizedborrowing of the entire $21,000 primary revolving master note in the long-termrevolving line of credit agreement.  TheCompany’s $10,125 principal balance and $1,000 letter of credit results in$9,875 of available borrowings on the long-term revolving line of credit as of October 2,2010.

 

In addition to the covenants with thelong-term revolving line of credit agreement, the Company must also comply withcertain restrictive covenants associated with the term note payable.  On March 30, 2010, the Company enteredinto an extension of and covenant revisions to the loan agreement governing theterm note payable.  Monthly principal andinterest payments of $290 continue through March 1, 2012 with a maturitypayment of $6,513 due on April 1, 2012. The previous maturity payment was due on April 1, 2011.  The covenants require the Company to maintain(1) a maximum leverage ratio, (2) operating lease expense below certainlevels, (3) a minimum current ratio, (4) a minimum fixed chargecoverage ratio, (5) a minimum tangible net worth and (6) capitalexpenditures not to exceed certain limits. As of October 2, 2010, the Company is in compliance with the termnote payable debt covenants.

 

Aggregatematurities of long-term debt during the next twelve months and subsequentannual periods are as follows:

 
| October 3, 2010 - October 1, 2011             |   | $      | 2,793  |   |
|----------------------------------------------------|--------|--------|--------|--------|
| October 2,  2011 - September 29, 2012    |   | 7,708  |   |
| September 30,  2012 - September 28, 2013 |   | 10,125 |   |
| Long-term  debt                                    |   | $      | 20,626 |   |

 

**6.****    ****Fair Valueof Long-Term Debt**

 

Fairvalues of debt are based on current market interest rate evaluations of theCompany’s long-term revolving line of credit and term note payable.  The fair value of the long-term revolvingline of credit approximates its carrying value. The fair value and carrying value of the term note payable are asfollows:

 
| ** **         | ** ** | **October 2010** | ** ** | **April 2010**     | ** ** |
|--------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **         | ** ** | **Fair Value**   | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** |
|               |       |                  |       |                    |       |   |   |   |   |
| Term  note payable |       | $                     | 10,672     |                    | $          | 10,445 |   | $ | 11,746 |   | $ | 11,746 |   |
|                    |            |                       |            |                         |            |  |  |  |  |  |  |  |  |

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Notes to CondensedConsolidated Financial Statements**

**October 2, 2010**

**(In Thousands)**

**(Unaudited)**

 

**7.****    ****Stockholders’Equity**

 

TheBoard of Directors (the “Board”) has authorized the purchase of up to $15,000of the Company’s stock on the open market. The Company did not purchase any of the Company’s stock during the 13and 26 weeks ended October 2, 2010. The Company did purchase 22 shares for $48 during the fiscal year ended April 3,2010.  Through October 2, 2010, theCompany has cumulatively purchased 819 shares at a total cost of $10,207.  The Company has accounted for these sharesusing the retirement method.

 

**8.****    ****RelatedParties**

 

Membersof the Cagle’s family beneficially own, in the aggregate, 64.5% of the Company’soutstanding common stock, giving them control of 64.5% of the total voting powerof the Company’s outstanding voting stock. In addition, three members of the Cagle’s family serve on the Company’sBoard.  As a result, members of the Cagle’sfamily have the ability to exert substantial influence or actual control overmanagement and affairs, and over substantially all matters requiring action bythe stockholders, including amendments to the certificate of incorporation andby-laws, the election and removal of directors, any proposed merger,consolidation or sale of all or substantially all of our assets, and othercorporate transactions.  Thisconcentration of ownership may also delay or prevent a change in controlotherwise favored by other stockholders and could depress the stock price.

 

Thefirm of Byrne, Davis & Hicks, P. C., in which G. Bland Byrne, IIIa director of the Company is a principal, receives payments totaling $60 eachquarter from the Company for legal services rendered.  Payments of $120 were made by the Companyduring the 26 weeks ended October 2, 2010 and during the 27 weeks ended October 3,2009.

 

Includedin other assets at October 2, 2010 and April 3, 2010 is a receivableof $1,242 due to the Company from two related party irrevocable life insurancetrusts.

 

**9.****    ****FinancialInstruments**

 

TheCompany is a purchaser of certain commodities, such as corn and soybean meal inthe course of normal operations.  TheCompany has used derivative financial instruments to reduce its exposure tovarious market risks.  Generally,contract terms of a hedge instrument closely mirror those of the hedged item,providing a high degree of risk reduction and correlation.  Contracts that are designated and highlyeffective at meeting the risk reduction and correlation criteria are recordedusing hedge accounting, as defined by ASC 815-10, “Accounting for DerivativeInstruments and Hedging Activities.”  Ifa derivative instrument is a hedge, as defined by ASC 815-10, depending on thenature of the hedge, changes in the fair value of the instrument will either beoffset against the change in fair value of the hedged assets, liabilities orfirm commitments through earnings, or recognized in other comprehensive income(loss) until the hedged item is recognized in earnings.  The ineffective portion of an instrument’schange in fair value will be immediately recognized in earnings as a componentof cost of sales.  Instruments theCompany holds as part of its risk management activities that do not meet thecriteria for hedge accounting, as defined by ASC 815-10, are marked to fairvalue with unrealized gains or losses reported currently in earnings.  The Company currently has no commoditycontracts.

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Notes to CondensedConsolidated Financial Statements**

**October 2, 2010**

**(In Thousands)**

**(Unaudited)**

 

**10.**** ****ComprehensiveIncome**

 

Comprehensiveincome (loss) includes net earnings and all other changes in equity during aperiod except those resulting from investments by or distributions tostockholders.  Other comprehensive income(loss) for all periods presented consists of fair value adjustments associatedwith cash flow hedges pursuant to ASC 815-10, “Accounting for DerivativeInstruments and Hedging Activities.”

 
| ** **                        | ** ** | **13 Weeks Ended**  | ** ** | **14 Weeks Ended**  | ** ** | **26 Weeks Ended**  | ** ** | **27 Weeks Ended**  | ** ** |
|-----------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** | **October 2, 2010** | ** ** | **October 3, 2009** | ** ** |
|                              |       |                          |       |                          |       |                          |       |                          |       |
| Net  income                       |       | $                             | —     |                          | $          | 691                           |       | $                             | —     |   | $ | 1,974 |   |
| Cash  flow hedges                 |       | —                        |       | —                        |       | —                        |       | —                        |       |
| Reclassification  to net earnings |       | —                        |       | 449                           |       | —                        |       | 897                           |       |
| Tax  expense                      |       | —                        |       | (162                          | )          | —                        |       | (323                          | )          |
|                              |       |                          |       |                          |       |                          |       |                          |       |
| Total  comprehensive income       |       | $                             | —     |                          | $          | 978                           |       | $                             | —     |   | $ | 2,548 |   |

 

Priorto the end of the second quarter of the fiscal year ended March 28, 2009,the Company held commodity futures contracts which were designated as cash flowhedges, whereby the contracts were recorded at fair value on the consolidatedbalance sheets as either an asset or liability with any changes in fair valuerecorded in accumulated other comprehensive income (loss).  In a cash flow hedge, a futures contractwould exactly match the pricing date of the relevant anticipated inventorypurchases.  Through the end of the secondquarter of the fiscal year ended March 28, 2009, the Company continued tobe able to match the futures contract with the anticipated inventory purchases,therefore, entering into an effective hedge transaction.  However, due to the volatility of the grainmarkets, the Company concluded it was no longer practical to keep the futures.

 

Asa result, the Company voluntarily discontinued hedge accounting in the secondquarter of the fiscal year ended March 28, 2009 by de-designating thepreviously defined hedge relationship. The de-designation of the cash flow hedge was done in accordance withDerivatives Implementation Group (“DIG”) Issue Nos. G3, G17, G18 and G20, whichgenerally require that the net derivative gain or loss related to thediscontinued cash flow hedge should continue to be reported in accumulatedother comprehensive income (loss), unless it is probable that the forecastedtransaction will not occur by the end of the originally specified time periodor within an additional two-month period of time thereafter.  As such the Company continues to hold inventorypurchase agreements in excess of futures contracts and have no indication thatthe futures commitment on the hedged inventory purchases is in jeopardy ofdiscontinuing.  Therefore, the deferredlosses related to the derivative that were de-designated were not recognizedimmediately and are expected to be reclassified into earnings during thecontractual terms of the inventory purchases. The Company had pretax losses totaling $1,347, recorded as accumulatedother comprehensive income (loss) as of the fiscal year ended March 28,2009 related to cash flow hedges, recognized prorata through the third quarterof the fiscal year ended April 3, 2010. The Company generally has no hedge cash flows related to commoditiesbeyond 12 months.

 

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**CAGLE’S, INC.AND SUBSIDIARY**

**Notes to CondensedConsolidated Financial Statements**

**October 2, 2010**

**(In Thousands)**

**(Unaudited)**

 

Forthe 27 weeks ended October 3, 2009, the Company recognized $897 of expensein cost of sales related to our cash flow hedge which was determined to befully effective.  The Company currentlyhas no commodity contracts.

 

**11.**** ****NewAccounting Pronouncements**

 

Measuring Liabilities at Fair Value. In August 2009, the FASBissued new U.S. GAAP guidance clarifying the measurement of liabilities at fairvalue. Among other things, the guidance clarifies how the price of a tradeddebt security (an asset value) should be considered in estimating the fair valueof the issuer’s liability and is effective for the Company’s reporting periodended October 3, 2009 and thereafter. The adoption of this guidance did not have an effect on the Company’sconsolidated financial statements.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Thedisclosures in this quarterly report are complementary to those made in theCompany’s 2010 annual report on Form 10-K.

 

ThisQuarterly Report, and other periodic reports filed by the Company under theSecurities Exchange Act of 1934, and other written or oral statements made byit or on its behalf, may include forward-looking statements, which are based ona number of assumptions about future events and are subject to various risks,uncertainties and other factors that may cause actual results to differmaterially from the views, beliefs and estimates expressed in suchstatements.  These risks, uncertaintiesand other factors include, but are not limited to the following:

 

·      Changes in the market price for the Company’sfinished products and feed grains, both of which may fluctuate substantiallyand exhibit cyclical characteristics typically associated with commoditymarkets.

 

·      Changes in economic and business conditions,monetary and fiscal policies or the amount of growth, stagnation or recessionin the global or U.S. economies, either of which may affect the value ofinventories, the collectability of accounts receivable or the financialintegrity of customers, and the ability of the end user or consumer to affordprotein.

 

·      Changes in the political or economic climate, tradepolicies, laws and regulations or the domestic poultry industry of countries towhich the Company or other companies in the poultry industry ship product, andother changes that might limit the Company’s or the industry’s access toforeign markets.

 

·      Changes in laws, regulations, and other activitiesin government agencies and similar organizations applicable to the Company andthe poultry industry and changes in laws, regulations and other activities ingovernment agencies and similar organizations related to food safety.

 

·      Various inventory risks due to changes in marketconditions.

 

·      Changes in and effects of competition, which issignificant in all markets in which the Company competes, and the effectivenessof marketing and advertising programs. The Company competes with regional andnational firms, some of which have greater financial and marketing resourcesthan the Company.

 

·      Changes in accounting policies and practices adoptedvoluntarily by the Company or required to be adopted by accounting principlesgenerally accepted in the United States.

 

·      Disease outbreaks affecting the productionperformance and/or marketability of the Company’s poultry products.

 

·      Changes in the availability and cost of labor andgrowers.

 

Readersare cautioned not to place undue reliance on forward-looking statements made byor on behalf of the Company.  Each suchstatement speaks only as of the day it was made.  The Company undertakes no obligation toupdate or to revise any forward-looking statements.  The factors described above cannot be controlledby the Company.  When used in thisquarterly report, the words “believes”, “estimates”, “plans”, “expects”, “should”,“outlook”, and “anticipates” and similar expressions as they relate to theCompany or its management are intended to identify forward-looking statements.

 

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Cagle’s, Inc.(the “Company”), which began business in 1945 and was first incorporated inGeorgia in 1953, and its wholly owned subsidiary Cagle’s Farms, Inc.,produce, market, and distribute a variety of fresh and frozen poultryproducts.  The vertically integratedoperations of the Company consist of breeding, hatching, and growing of chickens;feed milling; processing; further processing; and marketing operations.  The Company’s products are sold to nationaland regional independent and chain supermarkets, food distributors, foodprocessing companies, national fast-food chains, and institutional users, suchas restaurants, schools, and distributors, by the Company’s sales staff andthrough brokers selected by the Company.

 

Allof the Company’s business activities are conducted on a vertically integratedbasis within one industry segment, poultry products.  The Company’s various poultry products areclosely related, have similar purposes and uses, and are similar in terms ofprofitability and types and degrees of risks. In addition, the production processes are similar to the extent that (a) productionfacilities are shared or are interchangeable and (b) the same types of rawmaterials, labor, and capital are used. Markets and marketing methods are comparable for all products to theextent that they are generally sold to the same types of customers by a commonsales force and are sensitive to changes in economic conditions to the samedegree.

 

Results of Operations

 

*Net Sales*

 

Revenuesfor the second quarter were $83.2 million, down 5.0% and pounds sold were down11.8% reflecting a 13 week period as compared to a 14 week period in the priorfiscal year.  Revenues for the six monthperiod were $161.7 million, down 2.3% and pounds sold were down 7.8% reflectinga 26 week period as compared to a 27 week period in the prior fiscal year.  For the 26 weeks ended October 2, 2010as compared to the 27 weeks ended October 3, 2009, the Company experiencedan increase in sales price for poultry of $0.0246 per pound.

 

Quoted market prices for products for thesecond quarter of fiscal 2011 versus the same period last quarter and last yearfluctuated as follows:

 
| ** **                 | ** ** | **% Change**                 | ** ** | **% Change**                 | ** ** | **% Change**                | ** ** |
|----------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2nd qtr. 11 vs** | ** ** | **2nd qtr. 11 vs** | ** ** | **26 Wks. 11 vs** | ** ** |
| ** **                 | ** ** | **1st qtr. 11**         | ** ** | **2nd qtr. 10**         | ** ** | **27 Wks. 10**         | ** ** |
|                       |       |                              |       |                              |       |                             |       |
| Tenders                    |       | 12.1                              | %          | 23.9                              | %          | 15.7                             | %          |
| Wings                      |       | (0.9                              | )%         | (13.0                             | )%         | (12.1                            | )%         |
| Drums                      |       | (5.1                              | )%         | (21.0                             | )%         | (19.2                            | )%         |
| Boneless Breast            |       | 4.8                               | %          | 23.9                              | %          | 16.2                             | %          |
| Boneless Thigh             |       | 4.3                               | %          | (14.8                             | )%         | (21.1                            | )%         |
| Leg Quarters               |       | 4.5                               | %          | (7.5                              | )%         | (13.6                            | )%         |
| Whole Bird without Giblets |       | 0.6                               | %          | 30.7                              | %          | 17.9                             | %          |

 

*Cost of sales*

 

Costof sales for the second quarter were $73.5 million, down 10.1% and poundsproduced were down 2.0% reflecting a 13 week period as compared to a 14 weekperiod in the prior fiscal year.  Cost ofsales for the six month period were $141.7 million, down 7.7% and poundsproduced were up 3.4% reflecting a 26 week period as compared to a 27 weekperiod in the prior fiscal year.  For the26 weeks ended October 2, 2010 as compared to the 27 weeks ended October 3,2009, the Company experienced a decrease in cost of sales for poultry of$0.0208 per pound.

 

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*Selling and Delivery*

 

Selling and delivery expenses of $2.7million increased $380 thousand, or 16.7%, for the 13 weeks ended October 2,2010 as compared to $2.3 million for the 14 weeks ended October 3,2009.  This increase is due to a $442thousand increase in outside storage expenses, from $76 thousand to $518thousand, during these compared second quarters.  Other changes in selling and delivery expenseitems amounted to a net decrease of $62 thousand during the two periods.

 

Selling and delivery expenses of $5.1million increased $630 thousand, or 14.1%, for the 26 weeks ended October 2,2010 as compared to $4.5 million for the 27 weeks ended October 3,2009.  This increase is due to a $682thousand increase in outside storage expenses, from $117 thousand to $799thousand, during these compared six month periods.  Other changes in selling and delivery expenseitems amounted to a net decrease of $52 thousand during the two periods.

 

*General and Administrative*

 

General and administrative expenses of$1.9 million decreased $129 thousand, or 6.5%, for the 13 weeks ended October 2,2010 as compared to $2.0 million for the 14 weeks ended October 3,2009.  This decrease is due to severalreductions; $203 thousand group medical insurance, $175 thousand insurance,legal and accounting, $94 thousand compensation and related, and $77 thousandvarious expenses, coupled with a $420 thousand increase in accrued incentivecompensation during these compared second quarters.

 

General and administrative expenses of$4.0 million increased $304 thousand, or 8.3%, for the 26 weeks ended October 2,2010 as compared to $3.7 million for the 27 weeks ended October 3,2009.  This increase is due to a $892thousand increase in accrued incentive compensation combined with severaldecreases; $128 thousand group medical insurance, $197 thousand insurance,legal and accounting, $139 thousand compensation and related, and $124 thousandvarious expenses during these compared six month periods.

 

*Interest Expense*

 

Interest expense of $338 thousand was adecrease of $77 thousand, or 18.6%, for the 13 weeks ended October 2, 2010as compared to $415 thousand for the 14 weeks ended October 3, 2009.  Interest expense of $719 thousand was adecrease of $138 thousand, or 16.1%, for the 26 weeks ended October 2,2010 as compared to $857 thousand for the 27 weeks ended October 3,2009.  This is due to average long-termdebt decreasing during the two six month periods.  Long-term debt went from $31.5 million to$28.5 million during the six months ended October 3, 2009.  Long-term debt went from $27.7 million to$20.6 million during the six months ended October 2, 2010.

 

*Other Income (Expense)*

 

Other income (expense) was $34 thousandfor the 13 weeks ended October 2, 2010 versus $3 thousand for the 14 weeksended October 3, 2009.  Other income(expense) was $38 thousand for the 26 weeks ended October 2, 2010 versus$5 thousand for the 27 weeks ended October 3, 2009.  The $34 thousand in the 13 weeks ended October 2,2010 was due to minor recoverys of written-off receivables and small gains onfixed asset disposals.

 

*Income Taxes*

 

Income tax expense was $1.7 million,or 36.0% of pre-tax income of $4.8 million for the 13 weeks ended October 2,2010 and $3.7 million, or 36.0% of pre-tax income of $10.3 million for the 26weeks ended October 2, 2010.  Incometax expense was $388 thousand, or 36.0% of pre-tax income of $1.1 million forthe 14 weeks ended October 3, 2009 and $1.1 million, or 36.0% of pre-taxincome of $3.1 million for the 27 weeks ended October 3, 2009.  All income tax expense of these periods was 

 

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charged against deferred tax assets, asnone is currently payable due to the Company’s federal and state net operatingloss and tax credit carryforwards.

 

As of the fiscal year ended April 3, 2010, the Company had federalnet operating loss carryforwards of $12.7 million and federal and state taxcredit carryforwards of $9.4 million. The net operating loss and tax credit carryforwards are available toreduce income taxes through 2029. Realization of these future tax benefits is dependent on the Company’sability to generate sufficient taxable income within the carryforwardperiod.  Due to the significant amount ofincome that would be needed to fully utilize the credits available, the Companyhas recorded a valuation allowance for a significant portion of the deferredtax asset associated with the tax credit carryforwards.  The Company expects to fully utilize thefederal and state net operating loss carryforwards and, accordingly, there isno valuation allowance associated with the net operating loss carryforwards.

 

TheCompany uses ASC 740-10, “Accounting for Uncertainty in Income Taxes,” whichclarifies the accounting for income taxes by prescribing the minimum recognitionthreshold a tax position is required to meet before being recognized in theconsolidated financial statements.  ASC740-10 also provides guidance on derecognition, measurement, classification,interest and penalties, accounting in interim periods, disclosure andtransition.  The Company had nosignificant unrecognized tax benefits at the date of adoption or as of thefiscal year ended April 3, 2010. Accordingly, the Company does not have any interest or penalties relatedto uncertain tax positions.  However, ifinterest or penalties were to be incurred related to uncertain tax positions,such amounts would be recognized in income tax expense.  Tax periods for all years after 2006 remainopen to examination by the federal and state taxing jurisdictions to which itis subject.

 

*Financial Condition and Liquidity*

 

As of October 2, 2010, the Company’sworking capital was $19.4 million and its current ratio was 1.65.  The Company’s working capital as of the yearended April 3, 2010 was $16.8 million and its current ratio was 1.62.  As of October 3, 2009, the Company’sworking capital was $15.0 million and its current ratio was 1.51.

 

The Company decreased long-term debt by$2.1 and $7.1 million during the 13 and 26 weeks ended October 2, 2010,respectively.  The Company spent $641thousand and $3.0 million on capital projects during the 13 and 26 weeks ended October 2,2010, respectively.  As of October 2,2010, the Company has remaining availability of $9.9 million on its long-termrevolving line of credit facility.

 

On September 29, 2010, theCompany entered into Amendment Number 5 to the long-term revolving line ofcredit agreement.  There were fourprimary changes to the existing Agreement between the parties: (1) Thematurity date of the $21.0 million portion of the revolving credit facility wasextended to March 31, 2013.  (2) The$4.15 million supplemental portion of the revolving credit facility wascancelled at the Company’s request and was fully satisfied by the Company.  (3) The capital expenditures covenant asdefined in Section 10.10 of the Agreement was increased to $5.5 millionfrom $4.0 million for the fiscal year ending April 2, 2011 and reverts to$4.0 million thereafter.  (4) Therelease of the Lender’s collateral interest in the Company’s land, building andequipment comprising the Pine Mountain Valley Plant in Harris County,Georgia.  As of October 2, 2010, theCompany is in compliance with the long-term revolving line of credit agreement’scovenants.

 

On November 23, 2009, theCompany had entered into Amendment Number 4 to the long-term revolving line ofcredit agreement, effective as of October 31, 2009.  Two of the primary changes to the existingAgreement between the parties remain in effect: (1) The minimum tangiblenet worth covenant remained at $30.0 million until July 3, 2010;commencing as of July 4, 2010 and ending on January 3, 2011, theminimum tangible net worth must not be less than $35.0 million at any time; andcommencing 

 

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as of January 4, 2011, and at alltimes thereafter, the minimum tangible net worth must not be less than $40.0million at any time.  (2) Thefacility advance rate with respect to eligible inventories was restored to 40%from 60% and the advance rate with respect to eligible receivables ismaintained at 80%.  As of October 2,2010, the Company is in compliance with the long-term revolving line of creditagreement’s covenants.

 

Asof October 2, 2010, and inaccordance with the amended long-term revolving line of credit agreement, thelender has issued a $1.0 million letter of credit in favor of a third partyrelated to the Company’s self-insurance workers’ compensation liabilities.

 

TheCompany’s inventory and accounts receivable levels support collateralizedborrowing of the entire $21.0 million primary revolving master note in thelong-term revolving line of credit agreement. The Company’s $10.1 million principal balance and $1.0 million letter ofcredit results in $9.9 million of available borrowings on the long-termrevolving line of credit as of October 2, 2010.

 

In addition to the covenants describedabove, the Company must also comply with certain restrictive covenantsassociated with the term note payable. On March 30, 2010, the Company entered into an extension of andcovenant revisions to the loan agreement governing the term note payable.  Monthly principal and interest payments of$290 thousand continue through March 1, 2012 with a maturity payment of$6.5 million due on April 1, 2012. The previous maturity payment was due on April 1, 2011.  The covenants require the Company to maintain(1) a maximum leverage ratio, (2) operating lease expense belowcertain levels, (3) a minimum current ratio, (4) a minimum fixedcharge coverage ratio, (5) a minimum tangible net worth and (6) capitalexpenditures not to exceed certain limits. As of October 2, 2010, the Company is in compliance with the termnote payable debt covenants.

 

We expect that cash flow from operationsand cash on hand should be sufficient to fund operations, to make all paymentsof principal and interest when due, and to fund capital expenditures for atleast the next twelve months.  We mayelect to finance certain capital expenditure requirements through borrowingsunder our credit facilities or leases.

 

*CriticalAccounting Policies and Estimates*

 

The preparation of consolidated financial statements and relateddisclosures in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, and the disclosureof contingent assets and liabilities at the date of the consolidated financialstatements and revenues and expenses during the periods reported.  The Company’s accounting policies involve “criticalaccounting estimates” because they are particularly dependent on estimates andassumptions made by management about matters that are highly uncertain at thetime the accounting estimates are made. In addition, while we have used our best estimates based on facts andcircumstances available to us at the time, different estimates reasonably couldhave been used in the current period, or changes in the accounting estimates weused are reasonably likely to occur from period to period which may have amaterial impact on the presentation of our financial condition and results ofoperations.  We review these estimatesand assumptions periodically and reflect the effects of revisions in the periodthat they are determined to be necessary. We have disclosed our critical accounting policies in our Annual Reporton Form 10-K for the year ended April 3, 2010, and that disclosure shouldbe read in conjunction with this Quarterly Report on Form 10-Q.

 

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**Item 3: Quantitative and Qualitative Disclosures about Market Risk**

 

*RiskFactors*

 

Industrycyclicality can affect our earnings, especially due to fluctuations in thecommodity prices of feed ingredients and chicken.

 

Profitabilityin the chicken industry is materially affected by the commodity prices ofchicken and feed ingredients, which are determined by supply and demandfactors, which result in cyclical earnings fluctuations.  The production of feed ingredients ispositively or negatively affected primarily by weather patterns throughout theworld, the global level of supply inventories and demand for feed ingredients,and the agricultural policies of the United States and foreigngovernments.  In particular, weatherpatterns often change agricultural conditions in an unpredictable manner.  A sudden and significant change in weatherpatterns could affect supplies of feed ingredients, as well as both theindustry’s and our ability to obtain feed ingredients, grow chickens, anddeliver products.  High feed ingredientprices have had a material adverse effect on our operating results in the past.We periodically seek, to the extent available, to enter into advance purchasecommitments for the purchase of feed ingredients in an effort to manage ourfeed ingredient costs.  The use of suchinstruments may not be successful.

 

*RawMaterials*

 

Theprimary raw materials used by the Company are corn, soybean meal, and other ingredients;packaging materials; cryogenic materials; and breeder chicks.  The Company believes the sources of supplyfor these materials are adequate and does not expect significant difficulty inacquiring required supplies.  The majorsource of supply is the midwestern grain belt of the United States, althoughlocal supplies are utilized when available. Prices for the feed ingredients are sensitive to supply fluctuationsworldwide, and weather conditions, especially drought, can cause significantprice volatility.  Since feed is the mostsignificant factor in the cost of producing a broiler chicken, thosefluctuations can have significant effects on margins.  The Company also purchases poultry productsfrom outside vendors for further processing requirements.

 

TheCompany may choose to utilize derivatives as offered on the Chicago Board ofTrade for the purpose of protecting the feed cost for fixed price salescommitments negotiated with our customers. The Company’s two primary feed ingredients are corn and soybeanmeal.  A $0.10 per bushel price change incorn or a $10 per ton price change in soybean meal impacts our cost of sales$0.75 million dollars per year.  TheCompany currently has no commodity contracts.

 

*InterestRates*

 

Wecurrently have a term note payable with no exposure to interest ratefluctuations, as our existing indebtedness carries a fixed interest rate.  We have a revolving credit facility whichcarries a variable interest rate equal to the 90-day LIBOR rate published bythe Wall Street Journal, plus 3.5%.

 

TheCompany had variable interest rate exposure on the revolving credit facility atOctober 2, 2010.  The Company’stheoretical interest rate exposure on variable rate borrowings at October 2,2010, would be, with a one percentage point increase in average interest rateson the Company’s borrowings would increase future interest expense by $8.4thousand per month and a two percentage point increase would increase futureinterest expense by $16.9 thousand per month. The Company determined these amounts based on $10.1 million of variablerate borrowings at October 2, 2010, multiplied by 1.0% and 2.0%,respectively, and divided by twelve.  TheCompany is currently not using any interest rate collars, hedges, or otherderivative financial instruments to manage or reduce interest rate risk.  As a result, any increase in interest rateson the Company’s variable rate borrowings would increase interest expense andreduce net income.

 

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*Concentrationof Credit Risk*

 

Financial instruments which potentially subject the Company toconcentrations of credit risk consist primarily of trade receivables or otherfinancial instruments with a variety of customers and cash and cash investmentdeposited with financial institutions.

 

Concentrationsof credit risk, with respect to accounts receivable and other financialinstruments, are limited because a large number of geographically diversecustomers make up the Company’s customer base, thus spreading the trade creditrisk.  The Company controls credit riskthrough credit approvals, credit limits and monitoring procedures.  The Company performs ongoing credit evaluationsof its customers, but generally does not require collateral to support accountsreceivable.

 

**Item 4.  Controls and Procedures**

 

*Evaluationof disclosure controls and procedures*

 

Theterm “disclosure controls and procedures” (defined in SEC Rule 13a-15(e))refers to the controls and other procedures of a company that are designed toensure that information required to be disclosed by a company in the reportsthat it files under the Securities Exchange Act of 1934 (the “Exchange Act”) isrecorded, processed, summarized and reported within required time periods. TheCompany’s management, with the participation of the Chief Executive Officer andChief Financial Officer, has evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisquarterly report (the “Evaluation Date”).  Based on that evaluation, management, including the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theEvaluation Date, such controls and procedures were effective.

 

*Changesin internal controls*

 

Theterm “internal control over financial reporting” (defined in SEC Rule 13a-15(f))refers to the process of a company that is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  TheCompany’s management, with the participation of the Chief Executive Officer andChief Financial Officer, have evaluated any changes in the Company’s internalcontrol over financial reporting that occurred during the period covered bythis quarterly report, and they have concluded that there was no change to theCompany’s internal control over financial reporting that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**Part II.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

TheCompany is routinely involved in various lawsuits and legal matters on anongoing basis as a result of day to day operations; however, the Company doesnot believe that the ultimate resolution of these matters will have a materialadverse effect on the Company or its business.

 

**Item 1.A.  Risk Factors**

 

*Leverage*

 

Ourindebtedness could adversely affect our financial condition.  We presently have, and expect to continue tohave, an amount of indebtedness.  Ourindebtedness could have important consequences to stockholders.  For example, it could: increase ourvulnerability to general adverse economic conditions; require us to dedicate asubstantial portion of our cash flow from operations to payments on ourindebtedness, thereby reducing the availability of our cash flow to fundworking capital, capital expenditures and for other general corporate purposes;limit our flexibility in planning for, or reacting to, changes in our businessand the industry in which we operate; place us at a competitive disadvantagecompared to our competitors that have less debt; limit, along with thefinancial and other restrictive covenants in our indebtedness, our ability toborrow additional funds, and failing to comply with those covenants couldresult in an event of default or require redemption of indebtedness.  Either of these events could have a materialadverse effect on us.  Our ability tomake payments on and to refinance our indebtedness will depend on our abilityto generate cash in the future, which is dependent on various factors.  These factors include the commodity prices offeed ingredients and chicken and general economic, financial, competitive,legislative, regulatory, and other factors that are beyond our control.

 

*AdditionalBorrowings Available*

 

Despiteour indebtedness, we are not prohibited from incurring additional indebtednessin the future.

 

*Contaminationof Products*

 

Ifour products become contaminated, we may be subject to product liability claimsand product recalls.

 

*Livestockand Poultry Disease*

 

Outbreaksof livestock diseases, in general, and poultry disease, in particular, cansignificantly restrict our ability to conduct our operations.  We take all reasonable precautions to ensurethat our flocks are healthy and that our processing plants and other facilitiesoperate in a sanitary and environmentally sound manner.  However, events beyond our control, such asthe outbreak of disease, could significantly restrict our ability to conductour operations.  Furthermore, an outbreakof disease could result in governmental restrictions on the import and exportof our fresh chicken, to or from our suppliers, facilities, or customers, orrequire us to destroy one or more of our flocks.  This could result in the cancellation oforders by our customers and create adverse publicity that may have a materialadverse effect on our ability to market our products successfully and on our business,reputation, and prospects.

 

*Insurance*

 

Weare exposed to risks relating to product liability, product recall, propertydamage, and injuries to persons for which insurance coverage is expensive,limited, and potentially inadequate.

 

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*SignificantCompetition*

 

Competitionin the chicken industry with other vertically integrated poultry companiescould adversely affect our business.

 

*GovernmentRegulation*

 

Regulation,present and future, is a constant factor affecting our business.  The chicken industry is subject to federal,state, and local governmental regulation, including health and environmentalareas.  We anticipate increasedregulation by various agencies concerning food safety, the use of medication infeed formulations, and the disposal of poultry by-products and wastewaterdischarges. Unknown matters, new laws and regulations, or stricterinterpretations of existing laws or regulations may materially affect ourbusiness or operations in the future.

 

*Deteriorationof Economic Conditions*

 

Ourbusiness may be adversely affected by changes in national or global economicconditions, including inflation, interest rates, availability of capital markets,consumer spending rates, energy availability and costs (including fuelsurcharges) and the effects of governmental initiatives to manage economicconditions.  Any such changes couldadversely affect the demand for our poultry products, or the cost andavailability of our needed raw materials and packaging materials, therebynegatively affecting our financial results.

 

Therecent disruptions in credit and other financial markets and deterioration ofnational and global economic conditions, could, among other things:

 
|   | · | make  it more difficult or costly for us to obtain financing for our operations or  investments or to refinance our debt in the future;                                                                                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | cause  our lenders to depart from prior credit industry practice and make more  difficult or expensive the granting of any technical or other waivers under  our credit agreements to the extent we may seek them in the future; |
|   | · | impair  the financial condition of some of our customers and suppliers thereby  increasing customer bad debts or non-performance by suppliers;                                                                                   |
|   | · | negatively  impact demand for protein products, which could result in a reduction of  sales, operating income and cash flows.                                                                                                    |

 

*Changesin Consumer Preference*

 

Thefood industry in general is subject to changing consumer trends, demands, and preferences.  Trends within the food industry change often,and failure to identify and react to changes in these trends could lead to,among other things, reduced demand and price reductions for our products, andcould have an adverse effect on our financial results.

 

*TheLoss of One or More of Our Largest Customers*

 

Ourbusiness could suffer significant set backs in sales and operating income ifour customers’ plans and/or markets should change significantly, or if we lostone or more of our largest customers.  Many of our agreements with our customers are generally short-term,primarily due to the nature of our products, industry practice, and thefluctuation in demand and price for our products.  One of our largest customers did not renewtheir sales contract for calendar 2010. However, the Company has been able to attract new contract-basedcustomers of similar volume that will approximate this former customer’s salesvolume.  These new customers shouldprovide a market for our products without a significant deterioration inoperating income.  We continually monitorour production output and will adjust accordingly.

 

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*Membersof the Cagle’s Family can Exercise Significant Control*

 

Membersof the Cagle’s family beneficially own, in the aggregate, 64.5% of the Company’soutstanding common stock, giving them control of 64.5% of the total votingpower of the Company’s outstanding voting stock.  In addition, three members of the Cagle’sfamily serve on the Company’s Board of Directors.  As a result, members of the Cagle’s familyhave the ability to exert substantial influence or actual control over theCompany’s management and affairs and over substantially all matters requiringaction by our stockholders, including amendments to our certificate ofincorporation and by-laws, the election and removal of directors, any proposedmerger, consolidation or sale of all or substantially all of our assets, andother corporate transactions.  Thisconcentration of ownership may also delay or prevent a change in controlotherwise favored by our other stockholders and could depress the Company’sstock price.

 

**Item****2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

The table below provides information regarding theCompany’s purchase of its own common stock during the periods indicated.

 

Amounts in thousands except Average Price Paid PerShare.

** **
| ** **                                 | ** ** | ** **            | ** ** | ** **          | ** ** | **Approximate**              | ** ** |
|--------------------------------------------|------------|-----------------------|------------|---------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | ** **            | ** ** | ** **          | ** ** | **Dollar Value**        | ** ** |
| ** **                                 | ** ** | **Total Number** | ** ** | **Average**         | ** ** | **of Shares that** | ** ** |
| ** **                                 | ** ** | **of Shares**    | ** ** | **Price Paid** | ** ** | **May Yet Be**     | ** ** |
| ** **                                 | ** ** | **Purchased**         | ** ** | **Per Share**  | ** ** | **Purchased**                | ** ** |
|                                       |       |                  |       |                |       |                         |       |
| April 4,  2010 - October 2, 2010 |       | —                |       | $                   | —     |                         | $          | 4,793 |   |
| March 29,  2009 - April 3, 2010  |       | 22                    |       | 2.20                |       | 4,793                        |       |
| March 30,  2008 - March 28, 2009 |       | 26                    |       | 2.13                |       | 4,841                        |       |
| April 1,  2007 - March 29, 2008  |       | 79                    |       | 7.74                |       | 4,898                        |       |
|                                            |            |                       |            |                     |            |                              |            |  |  |

 

The Board of Directors (the “Board”)has authorized the purchase of up to $15,000 of the Company’s stock.

 

**Item****3.  Defaults upon Senior Securities**

 

None

 

**Item****4.  Submission of Matters to a Vote ofSecurity Holders**

 

None

 

**Item 5.  Other Information**

 

None

 

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**Item 6.  Exhibits**

 

3.1Articles of Incorporation of the Registrant. (2)

3.2Bylaws of the Registrant.  (3)

14.1Code of Ethics.  (4)

31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and15d-14(a).  (1)

31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and15d-14(a).  (1)

32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.  (1)

32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.  (1)

 

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(1) Filedherewith.

(2) Previouslyfiled and incorporated by reference herein from the Registrant’s Form 10-Kfor the year ended April 2, 2005.

(3) Previouslyfiled and incorporated by reference herein from the Registrant’s Form 10-Qfor the quarter ended October 2, 2004.

(4) Previouslyfiled and incorporated by reference herein from the Registrant’s Form 10-Kfor the year ended April 3, 2004.

 

**Signatures**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

Cagle’s, Inc.  (Registrant)

 
| BY:    | /s/  J. Douglas Cagle                            |   |
|--------|--------------------------------------------------|--------|
|   | Chairman,  Chief Executive Officer and President |   |
|   | November 12,  2010                          |   |

 
| BY:    | /s/  Mark M. Ham IV                                   |   |
|--------|-------------------------------------------------------|--------|
|   | Executive  Vice President and Chief Financial Officer |   |
|   | November 12,  2010                               |   |

 

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