Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **x**  | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                          |
|   | **For the quarterly period ended****January 2,  2010**                                                                                                                                                                   |
|   |                                                                                                                                                                                                                          |
|   | **or**                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                          |
| **o**  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                       |
|   |                                                                                                                                                                                                                          |
|   | **For the transition period from                   to                ** |

 

**COMMISSION FILE NUMBER:   1-7138**

 

**CAGLE’S, INC.**

(ExactName 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’stelephone 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).   x Yes    o No

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange 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 |   | 4,615,233 shares as of February 15, 2010. |
|----------------------------------------------|--------|------------------------------------------------|

 

 

 

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Table ofContents

 

**FORM 10-Q**

** **

**Cagle’s, Inc.**

**January 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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Table of Contents

 

**CAGLE’S,INC. AND SUBSIDIARY**

**Condensed Consolidated Balance Sheets**

**(In Thousands, Except Par Values)**

 

**Part I. FINANCIALINFORMATION**

**Item 1. FinancialStatements**

 
| ** **                                                                                                                                                                         | ** ** | **(Unaudited)**          | ** ** | ** **              | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **January 2, 2010** | ** ** | **March 28, 2009** | ** ** |
| Assets                                                                                                                                                                             |       |                     |       |                    |       |
| Current assets                                                                                                                                                                     |       |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                                                          |       | $                        | 1,294      |                    | $          | 1,246 |   |
| Trade accounts receivable, less allowance for  doubtful accounts of $182 and $186 at January 2010 and March 2009                                                         |       | 13,875                   |       | 14,170                  |       |
| Inventories                                                                                                                                                                        |       | 24,228                   |       | 27,181                  |       |
| Other current assets                                                                                                                                                               |       | 421                      |       | 201                     |       |
| Total current assets                                                                                                                                                               |       | 39,818                   |       | 42,798                  |       |
| Property, plant and equipment, at cost                                                                                                                                             |       |                     |       |                    |       |
| Land                                                                                                                                                                               |       | 1,976                    |       | 1,976                   |       |
| Buildings and improvements                                                                                                                                                         |       | 59,698                   |       | 59,686                  |       |
| Machinery, furniture and equipment                                                                                                                                                 |       | 42,166                   |       | 41,034                  |       |
| Vehicles                                                                                                                                                                           |       | 5,156                    |       | 4,691                   |       |
| Construction in progress                                                                                                                                                           |       | 459                      |       | 645                     |       |
|                                                                                                                                                                               |       | 109,455                  |       | 108,032                 |       |
| Less accumulated depreciation                                                                                                                                                      |       | 74,414                   |       | 71,249                  |       |
| Property, plant and equipment, net                                                                                                                                                 |       | 35,041                   |       | 36,783                  |       |
| Other assets                                                                                                                                                                       |       |                     |       |                    |       |
| Deferred financing costs, net                                                                                                                                                      |       | 88                       |       | 103                     |       |
| Deferred income taxes                                                                                                                                                              |       | 8,373                    |       | 9,775                   |       |
| Other assets                                                                                                                                                                       |       | 1,498                    |       | 1,693                   |       |
| Total other assets                                                                                                                                                                 |       | 9,959                    |       | 11,571                  |       |
| Total assets                                                                                                                                                                       |       | $                        | 84,818     |                    | $          | 91,152 |   |
|                                                                                                                                                                               |       |                     |       |                    |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                         |       |                     |       |                    |       |
| Current liabilities                                                                                                                                                                |       |                     |       |                    |       |
| Current maturities of long-term debt                                                                                                                                               |       | $                        | 2,643      |                    | $          | 2,488 |   |
| Accounts payable                                                                                                                                                                   |       | 15,735                   |       | 19,989                  |       |
| Accrued expenses                                                                                                                                                                   |       | 4,286                    |       | 4,462                   |       |
| Deferred income taxes                                                                                                                                                              |       | 3,180                    |       | 3,180                   |       |
| Total current liabilities                                                                                                                                                          |       | 25,844                   |       | 30,119                  |       |
| Long-term debt, less current maturities                                                                                                                                            |       | 24,547                   |       | 29,049                  |       |
| Stockholders’ equity                                                                                                                                                          |       |                     |       |                    |       |
| Preferred stock, $1 par value; 1,000 shares  authorized, none issued                                                                                                               |       | —                   |       | —                  |       |
| Common stock, $1 par value; 9,000 shares  authorized, 4,616 and 4,638 shares issued and 4,615 and 4,637 shares  outstanding at January 2010 and March 2009, respectively |       | 4,615                    |       | 4,637                   |       |
| Treasury stock, at cost                                                                                                                                                            |       | (80                      | )          | (80                     | )          |
| Additional paid-in capital                                                                                                                                                         |       | 3,601                    |       | 3,627                   |       |
| Retained earnings                                                                                                                                                                  |       | 26,291                   |       | 24,662                  |       |
| Accumulated other comprehensive (loss)                                                                                                                                             |       | —                   |       | (862                    | )          |
| Total stockholders’ equity                                                                                                                                                    |       | 34,427                   |       | 31,984                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                    |       | $                        | 84,818     |                    | $          | 91,152 |   |

 

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

 

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**CAGLE’S,INC. AND SUBSIDIARY**

**Condensed Consolidated Statements of Operations**

**(In Thousands, Except Per Share Data)**

**(Unaudited)**

 
| ** **                                 | ** ** | **13 Weeks Ended**       | ** ** | **14 Weeks Ended**       | ** ** | **40 Weeks Ended**       | ** ** | **40 Weeks Ended**       | ** ** |
|--------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Net sales                                  |       | $                        | 70,411     |                     | $          | 73,526                   |       | $                        | 235,996    |   | $ | 226,078 |   |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Costs and expenses                         |       |                     |       |                     |       |                     |       |                     |       |
| Cost of sales                              |       | 66,943                   |       | 72,905                   |       | 220,470                  |       | 230,184                  |       |
| Selling and delivery                       |       | 2,124                    |       | 2,138                    |       | 6,596                    |       | 6,825                    |       |
| General and administrative                 |       | 1,498                    |       | 1,737                    |       | 5,148                    |       | 4,460                    |       |
| Total costs and expenses                   |       | 70,565                   |       | 76,780                   |       | 232,214                  |       | 241,469                  |       |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Operating income (loss)                    |       | (154                     | )          | (3,254                   | )          | 3,782                    |       | (15,391                  | )          |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Other income (expense)                     |       |                     |       |                     |       |                     |       |                     |       |
| Interest expense                           |       | (393                     | )          | (593                     | )          | (1,250                   | )          | (1,688                   | )          |
| Other income (expense), net                |       | 9                        |       | (2                       | )          | 14                       |       | (18                      | )          |
| Total other income (expense), net          |       | (384                     | )          | (595                     | )          | (1,236                   | )          | (1,706                   | )          |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Income (loss) before income taxes          |       | (538                     | )          | (3,849                   | )          | 2,546                    |       | (17,097                  | )          |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Income tax expense (benefit)               |       | (193                     | )          | (1,329                   | )          | 917                      |       | (6,098                   | )          |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Net income (loss)                          |       | $                        | (345       | )                        | $          | (2,520                   | )          | $                        | 1,629      |   | $ | (10,999 | ) |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Weighted-average common shares outstanding |       |                     |       |                     |       |                     |       |                     |       |
| Basic                                      |       | 4,615                    |       | 4,658                    |       | 4,616                    |       | 4,658                    |       |
| Diluted                                    |       | 4,615                    |       | 4,658                    |       | 4,616                    |       | 4,658                    |       |
|                                       |       |                     |       |                     |       |                     |       |                     |       |
| Per common share                           |       |                     |       |                     |       |                     |       |                     |       |
| Net income (loss)                          |       |                     |       |                     |       |                     |       |                     |       |
| Basic                                      |       | $                        | (0.08      | )                        | $          | (0.54                    | )          | $                        | 0.35       |   | $ | (2.36 | ) |
| Diluted                                    |       | $                        | (0.08      | )                        | $          | (0.54                    | )          | $                        | 0.35       |   | $ | (2.36 | ) |
| Dividends per common share                 |       | $                        | —     |                     | $          | —                   |       | $                        | —     |   | $ | — |   |

 

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

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Condensed Consolidated Statements of Cash Flows**

**(In Thousands)**

**(Unaudited)**

 
| ** **                                                                                                               | ** ** | **40 Weeks Ended**       | ** ** | **40 Weeks Ended**       | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                                               | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** |
| Cash  flows from operating activities                                                                                    |       |                     |       |                     |       |
| Net  income (loss)                                                                                                       |       | $                        | 1,629      |                     | $          | (10,999 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities                      |       |                     |       |                     |       |
| Depreciation                                                                                                             |       | 3,238                    |       | 3,094                    |       |
| Amortization                                                                                                             |       | 63                       |       | 56                       |       |
| Gain  on sale of property, plant and equipment                                                                           |       | (3                       | )          | —                   |       |
| Deferred  income tax expense (benefit)                                                                                   |       | 917                      |       | (6,745                   | )          |
| Changes  in operating assets and liabilities                                                                             |       |                     |       |                     |       |
| Trade  accounts receivable, net                                                                                          |       | 295                      |       | 573                      |       |
| Inventories                                                                                                              |       | 2,953                    |       | 3,256                    |       |
| Other  current assets                                                                                                    |       | (220                     | )          | (1,707                   | )          |
| Accounts  payable                                                                                                        |       | (5,209                   | )          | 2,883                    |       |
| Accrued  expenses                                                                                                        |       | 1,171                    |       | (325                     | )          |
| Other  assets                                                                                                            |       | 15                       |       | 296                      |       |
| Net  cash provided by (used in) operating activities                                                                     |       | 4,849                    |       | (9,618                   | )          |
| Cash  flows from investing activities                                                                                    |       |                     |       |                     |       |
| Purchases  of property, plant and equipment                                                                              |       | (1,400                   | )          | (1,267                   | )          |
| Proceeds  from sale of property, plant and equipment                                                                     |       | 3                        |       | —                   |       |
| Proceeds  from redemption of life insurance                                                                              |       | 180                      |       | 1,241                    |       |
| Net  cash used in investing activities                                                                                   |       | (1,217                   | )          | (26                      | )          |
| Cash  flows from financing activities                                                                                    |       |                     |       |                     |       |
| Proceeds  on revolving line of credit                                                                                    |       | 66,450                   |       | 67,876                   |       |
| Payments  on revolving line of credit                                                                                    |       | (69,025                  | )          | (57,425                  | )          |
| Payments  of long-term debt                                                                                              |       | (1,868                   | )          | (1,638                   | )          |
| Payments  of deferred financing costs                                                                                    |       | (48                      | )          | (128                     | )          |
| Increase  in negative book cash balances                                                                                 |       | 955                      |       | 1,351                    |       |
| Repurchase  of stock                                                                                                     |       | (48                      | )          | (22                      | )          |
| Net  cash provided by (used in) financing activities                                                                     |       | (3,584                   | )          | 10,014                   |       |
| Net  increase in cash and cash equivalents                                                                               |       | 48                       |       | 370                      |       |
| Cash  and cash equivalents - beginning of period                                                                         |       | 1,246                    |       | 1,279                    |       |
| Cash  and cash equivalents - end of period                                                                               |       | $                        | 1,294      |                     | $          | 1,649 |   |
| Supplementary  disclosures of cash flow information                                                                      |       |                     |       |                     |       |
| Cash  paid (received) during the period for:                                                                             |       |                     |       |                     |       |
| Interest                                                                                                                 |       | $                        | 1,246      |                     | $          | 1,610 |   |
| Income  taxes, net                                                                                                       |       | —                   |       | (108                     | )          |
| Supplementary  disclosures of noncash transactions                                                                       |       |                     |       |                     |       |
| Net  unrealized gain (loss) on hedging activities, net of income tax expense  (benefit) of $485 and $(647), respectively |       | $                        | 862        |                     | $          | (1,546 | ) |
| Assets  acquired pursuant to capital lease obligations                                                                   |       | 96                       |       | 74                       |       |

 

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

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 2, 2010**

**(In Thousands)**

**(Unaudited)**

 

1.**    ****Basisof Presentation**

** **

In the opinion of management, the accompanying unaudited consolidatedfinancial statements contain all adjustments which are of a normal andrecurring nature necessary to present fairly the consolidated financialposition of Cagle’s, Inc. and its wholly owned subsidiary Cagle Farms, Inc.(collectively, the “Company”) as of January 2, 2010 and the results oftheir operations for the 13 and 40 weeks ended January 2, 2010 and the 14and 40 weeks ended January 3, 2009. The accompanying unaudited consolidated financial statements have beenprepared in accordance with U.S. generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q andRegulation S-X.  Results of operationsfor the 13 and 40 weeks ended January 2, 2010 are not necessarilyindicative of results to be expected for the full fiscal year ending April 3,2010.

 

The consolidated balance sheet at March 28, 2009 has been derivedfrom the audited consolidated financial statements at that date but does notinclude all of the information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. For furtherinformation, reference is made to the consolidated financial statements andnotes thereto included in the Company’s annual report on Form 10-K for theyear ended March 28, 2009.

 

2**.    ****SignificantAccounting Policies**

** **

Refer to the Company’s 2009 annual report on Form 10-K, Note 1 toConsolidated Financial Statements, for a description of significant accountingpolicies.  There have been no materialchanges to these accounting policies.

 

3**.    ****Cashand Cash Equivalents**

** **

The Company considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents.  The Company’s cash management system allowsthe Company to fund outstanding checks when presented to the financialinstitution for payment resulting in book overdrafts.  Book overdrafts are recorded in accountspayable in the consolidated balance sheets and changes are reflected as a financingactivity in the consolidated statements of cash flows.  As of January 2, 2010 and March 28,2009, the Company had book overdrafts of $5,917 and $4,962, respectively.

 

4**.    ****Inventories**

** **

Inventories consist of the following at January 2, 2010 and March 28, 2009:

 
| ** **                    | ** ** | **January 2010** | ** ** | **March 2009** | ** ** |
|-------------------------------|------------|-----------------------|------------|---------------------|------------|
|                          |       |                  |       |                |       |
| Finished  products            |       | $                     | 3,400      |                | $          | 5,692 |   |
| Field  inventory and breeders |       | 15,022                |       | 15,509              |       |
| Feed,  eggs and medication    |       | 4,389                 |       | 4,659               |       |
| Supplies                      |       | 1,417                 |       | 1,321               |       |
|                          |       |                  |       |                |       |
|                          |       | $                     | 24,228     |                | $          | 27,181 |   |

 

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** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 2, 2010**

**(In Thousands)**

**(Unaudited)**

** **

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

** **

Long-term debt consists ofthe following at January 2, 2010 and March 28, 2009:

 
| ** **                                                                                                                                                                                                                                                       | ** ** | **January 2010** | ** ** | **March 2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Long-term revolving line of credit, maturing March 31,  2012, interest payable monthly, variable interest rate of LIBOR plus 3.50%; secured  by accounts receivable, inventories and the Atlanta and Pine Mountain Valley  facilities.                      |       | $                     | 14,725     |                | $          | 17,300 |   |
|                                                                                                                                                                                                                                                             |       |                  |       |                |       |
| Term note payable; fixed interest rate of 7.86%, principal  and interest payable monthly of $290 through March 1, 2011 with a maturity  payable of $9,382 on April 1, 2011; secured by the Collinsville plant,  Dalton hatchery and Rockmart feedmill. |       | 12,377                |       | 14,199              |       |
|                                                                                                                                                                                                                                                             |       |                  |       |                |       |
| Capital leases payable, fixed interest ranges from  6.4% to 7.9%, principal and interest payable monthly of $6, through maturity  ranges of March 2010 to August 2012; secured by the leased  equipment.                                               |       | 88                    |       | 38                  |       |
|                                                                                                                                                                                                                                                             |       | 27,190                |       | 31,537              |       |
| Less current maturities                                                                                                                                                                                                                                          |       | 2,643                 |       | 2,488               |       |
|                                                                                                                                                                                                                                                             |       |                  |       |                |       |
| Long-term debt, less current maturities                                                                                                                                                                                                                          |       | $                     | 24,547     |                | $          | 29,049 |   |

 

On January 29, 2009, the Company enteredinto an amended long-term revolving line of credit agreement, effective as ofthat date.  There were eight primarychanges to the existing Agreement between the parties: (1) An increase inthe capacity of the revolving credit facility to $25,150.  (2) The creation of a supplementalrevolving master note in the principal amount of $4,150 and maturing on October 31,2009.  (3) The addition of the rightto obtain letters of credit issued by lender in favor of third persons in faceprincipal amounts not exceeding $1,000 at any time outstanding.  (4) The limiting of borrowers’ rights toobtain letters of credit issued by lender only pursuant to such supplementalrevolving master note and only when borrowers have available revolving credit(which will be determined by including in the definition thereof both theunpaid principal amount of all unpaid revolving loans and also the aggregateface principal amount of all outstanding letters of credit).  (5) Additions of the limitations of theborrowers’ rights to obtain revolving loans pursuant to the supplementalrevolving master note only when lender has fully advanced the entire $21,000principal amount of the primary revolving master note and borrowers also stillhave available revolving credit.  (6) Theaddition of the collateral consisting of Cagle’s processing plant located inPine Mountain Valley, Georgia.  (7) Theadvance rate with respect to eligible inventories is being increased from 40%to 60% and the advance rate with respect to eligible receivables is beingincreased from 70% to 80%.  (8) Theinterest rates were modified by the following provisions: (a) Interestwill accrue on the unpaid principal balance of the revolving loans,

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 2, 2010**

**(In Thousands)**

**(Unaudited)**

 

from time to time outstanding,evidenced by the primary revolving master note at the LIBOR variable rate plus3.50% (350 basis points), (b) Interest will accrue on the unpaid principalbalance of the revolving loans, from time to time outstanding, evidenced by thesupplemental revolving master note at the LIBOR variable rate plus 5.00% (500basis points).

 

On November 23, 2009, the Companyentered into Amendment Number 4 to the long-term revolving line of creditagreement, effective as of October 31, 2009.  There were four primary changes to theexisting Agreement between the parties: (1) The maturity date of the$21,000 portion of the revolving credit facility is being extended to March 31,2012.  (2) The maturity date of the$4,150 portion of the revolving credit facility is being extended to November 23,2010.  (3) The minimum tangible networth covenant remains at $30,000 until July 3, 2010; commencing as of July 4,2010 and ending on January 3, 2011, the minimum tangible net worth mustnot 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 be lessthan $40,000 at any time.  (4) Thefacility advance rate with respect to eligible inventories is restored to 40%from 60% and the advance rate with respect to eligible receivables ismaintained at 80%.  As of January 2,2010, the Company is in compliance with the revolving line of credit agreement’scovenants.

 

As of January 2, 2010,and in accordance with the amended long-term revolving line of creditagreement, the lender has issued a $1,000 letter of credit in favor of a thirdparty related to the Company’s self-insurance workers’ compensationliabilities.

 

The Company’s inventory and accounts receivable levels supportcollateralized borrowing of up to $19,863 of the $21,000 primary revolvingmaster note in the long-term revolving line of credit agreement.  The Company’s $14,725 principal balance and$1,000 letter of credit results in $4,138 of available borrowings on thelong-term revolving line of credit as of January 2, 2010.

 

In addition to the covenants,described above, on the long-term revolving line of credit agreement, theCompany must also comply with certain restrictive covenants associated with theterm note payable.  These covenantsrequire the Company to maintain (1) a maximum leverage ratio (2) minimumfixed charge coverage ratio (3) minimum adjusted earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”)and (4) capital expenditures not to exceed certain limits.  The Company is not in compliance with theterm note payable debt covenants, but has waivers through April 5,2010.  The Company is currentlynegotiating an extension of the waivers, revisions to the covenants, and anextension of the payment period.

 

Aggregate maturities oflong-term debt during the next twelve months and subsequent annual periods areas follows:

 
| January 3, 2010 - January 1, 2011   |   | $      | 2,643  |   |
|-----------------------------------------------|--------|--------|--------|--------|
| January 2, 2011 - December 31, 2011 |   | 9,808  |   |
| January 1, 2012 - December 29, 2012 |   | 14,739 |   |
| Long-term debt                                |   | $      | 27,190 |   |

 

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** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 2, 2010**

**(In Thousands)**

**(Unaudited)**

** **

6**.    ****Stockholders’Equity**

** **

The Board of Directors (the “Board”) has authorized the purchase of upto $15,000 of the Company’s stock on the open market.  The Company did not purchase any of theCompany’s stock during the 13 weeks ended January 2, 2010.  The Company did purchase 22 shares for $48during the 40 weeks ended January 2, 2010. Through January 2, 2010, 819 shares had been purchased by theCompany at a total cost of $10,207.  TheCompany has accounted for these shares using the retirement method.

 

7**.    ****RelatedParties**

** **

Members of the Cagle’s family beneficially own, in the aggregate,64.56% of our outstanding common stock, giving them control of approximately65% of the total voting power of our outstanding voting stock.  In addition, three members of the Cagle’sfamily serve on our Board of Directors. As a result, members of the Cagle’s family have the ability to exertsubstantial influence or actual control over our management and affairs andover substantially all matters requiring action by our stockholders, includingamendments to our certificate of incorporation and by-laws, the election andremoval of directors, any proposed merger, consolidation or sale of all orsubstantially all of our assets, and other corporate transactions.  This concentration of ownership may alsodelay or prevent a change in control otherwise favored by our otherstockholders and could depress our stock price.

 

Included in other assets at January 2, 2010 and March 28,2009 is a receivable of $1,242 due to the Company from two related party lifeinsurance irrevocable trusts.

 

8**.    ****FinancialInstruments**

** **

The Company is a purchaser of certain commodities, such as corn andsoybean meal in the course of normal operations.  The Company has used derivative financialinstruments to reduce its exposure to various market risks.  Generally, contract terms of a hedgeinstrument closely mirror those of the hedged item, providing a high degree ofrisk reduction and correlation. Contracts that are designated and highly effective at meeting the riskreduction and correlation criteria are recorded using hedge accounting, asdefined by ASC 815-10, “Accounting for Derivative Instruments and HedgingActivities.”  If a derivative instrumentis a hedge, as defined by ASC 815-10, depending on the nature of the hedge,changes in the fair value of the instrument will either be offset against thechange in fair value of the hedged assets, liabilities or firm commitmentsthrough earnings, or recognized in other comprehensive income (loss) until thehedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will beimmediately recognized in earnings as a component of cost of sales.  Instruments the Company holds as part of itsrisk management activities that do not meet the criteria for hedge accounting,as defined by ASC 815-10, are marked to fair value with unrealized gains orlosses reported currently in earnings.

 

9**.    ****ComprehensiveIncome**

** **

Comprehensive income includes net earnings and all other changes inequity during a period except those resulting from investments by ordistributions to stockholders.  Othercomprehensive income for all periods presented consists of fair valueadjustments associated with cash flow hedges pursuant to ASC 815-10, “Accountingfor Derivative Instruments and Hedging Activities.”

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 2, 2010**

**(In Thousands)**

**(Unaudited)**

** **
| ** **                         | ** ** | **13 Weeks Ended**       | ** ** | **14 Weeks Ended**       | ** ** | **40 Weeks Ended**       | ** ** | **40 Weeks Ended**       | ** ** |
|------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** |
|                               |       |                     |       |                     |       |                     |       |                     |       |
| Net  income (loss)                 |       | $                        | (345       | )                        | $          | (2,520                   | )          | $                        | 1,629      |   | $ | (10,999 | ) |
| Cash  flow hedges                  |       | —                   |       | (397                     | )          | —                   |       | (2,866                   | )          |
| Reclassification  to net earnings  |       | 449                      |       | (396                     | )          | 1,347                    |       | 673                      |       |
| Tax  (expense) benefit             |       | (162                     | )          | 143                      |       | (485                     | )          | 647                      |       |
|                               |       |                     |       |                     |       |                     |       |                     |       |
| Total  comprehensive income (loss) |       | $                        | (58        | )                        | $          | (3,170                   | )          | $                        | 2,491      |   | $ | (12,545 | ) |

 

Prior to the end of the second quarter of the fiscal year ended March 28,2009, the Company held commodity futures contracts which were designated ascash flow hedges, whereby the contracts were recorded at fair value on theconsolidated balance sheets as either an asset or liability with any changes infair value recorded 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.

 

For the 40 week period ended January 2, 2010, the Companyrecognized $1,347 of expense in cost of sales related to our cash flow hedgewhich was determined to be fully effective.

 

As a result, the Company voluntarily discontinued hedge accounting inthe second quarter of the fiscal year ended March 28, 2009 byde-designating the previously defined hedge relationship.  The de-designation of the cash flow hedge wasdone in accordance with Derivatives Implementation Group (“DIG”) Issue Nos. G3,G17, G18 and G20, which generally require that the net derivative gain or lossrelated to the discontinued cash flow hedge should continue to be reported inaccumulated other comprehensive income (loss), unless it is probable that theforecasted transaction will not occur by the end of the originally specifiedtime period or 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 quarterended January 2, 2010.  The Companygenerally has no hedge cash flows related to commodities beyond 12 months.

 

10.**  ****Reclassifications**

** **

Certain reclassifications have been made to the January 3, 2009Consolidated Statements of Cash Flows in order for it to conform to the currentpresentation.  There was no impact onearnings.

 

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** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 2, 2010**

**(In Thousands)**

**(Unaudited)**

** **

11.**  ****New Accounting Pronouncements**

** **

In June 2009, the Financial Accounting Standards Board (“FASB”)issued FASB Accounting Standards Codification (“ASC”) 105, Generally AcceptedAccounting Principles, which established the FASB Accounting StandardsCodification as the sole source of authoritative generally accepted accountingprinciples.  Pursuant to the provisionsof FASB ASC 105, the Company has updated references to GAAP in its financialstatements issued for the period ended October 3, 2009.  The adoption of FASB ASC 105 did not impactthe Company’s financial position or results of operations.

 

Determinationof the Useful Life of Intangible Assets. In April 2008, the FASB issuednew U.S. GAAP guidance related to the determination of the useful life ofintangible assets that requires entities to consider their own historicalexperience in renewing or extending similar arrangements when developingassumptions regarding the useful lives of intangible assets and also mandatescertain related disclosure requirements. The guidance is effective for fiscalyears beginning after December 15, 2008, with early adoption prohibited.The adoption of this guidance did not have an effect on the Company’sconsolidated financial statements.

 

InterimDisclosures About Fair Value of Financial Instruments. In April 2009, theFASB issued new U.S. GAAP guidance that requires disclosures about fair valueof financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements. This guidance alsorequires those disclosures in summarized financial information at interimreporting periods and is effective for interim and annual reporting periodsending after June 15, 2009. The adoption of this guidance did not have aneffect on the Company’s consolidated financial statements.

 

MeasuringLiabilities at Fair Value. In August 2009, the FASB issued new U.S. GAAPguidance clarifying the measurement of liabilities at fair value. Among otherthings, the guidance clarifies how the price of a traded debt security (anasset value) should be considered in estimating the fair value of the issuer’sliability and is effective for the first reporting period beginning after itsissuance. The Company does not expect the adoption of this guidance tohave a material impact on its consolidated financial statements.

 

Multiple-DeliverableRevenue Arrangements. In October 2009, the FASB issued new U.S. GAAPguidance that requires an entity to allocate revenue arrangement considerationat the inception of an arrangement to all of its deliverables based on theirrelative selling prices (the relative-selling-price method). The guidanceeliminates the use of the residual method of allocation, in which theundelivered element is measured at its estimated selling price and thedelivered element is measured as the residual of the arrangement consideration,and requires the relative-selling-price method in all circumstances in which anentity recognizes revenue for an arrangement with multipledeliverables. The new guidance must be adopted no later than the beginningof the first fiscal year beginning on or after June 15, 2010, with earlyadoption permitted through either prospective application for revenuearrangements entered into, or materially modified, after the effective date orthrough retrospective application to all revenue arrangements for all periodspresented. The Company does not expect the adoption of this guidance tohave an effect on its consolidated financial statements.

 

12.**  ****Subsequent Events**

** **

The Company has performed a review of events subsequent to the balancesheet date of January 2, 2010 through February 15, 2010, the date thefinancial statements were issued.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

The disclosures in this quarterly report arecomplementary to those made in the Company’s 2009 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 pricefor the Company’s finished products and feed grains, both of which mayfluctuate substantially and exhibit cyclical characteristics typicallyassociated with commodity markets.

 

·                  Changes in economic andbusiness conditions, monetary and fiscal policies or the amount of growth,stagnation or recession in the global or U.S. economies, either of which mayaffect the value of inventories, the collectability of accounts receivable orthe financial integrity of customers, and the ability of the end user orconsumer to afford protein.

 

·                  Changes in the political oreconomic climate, trade policies, laws and regulations or the domestic poultryindustry of countries to which the Company or other companies in the poultryindustry ship product, and other changes that might limit the Company’s or theindustry’s access to foreign markets.

 

·                  Changes in laws,regulations, and other activities in government agencies and similarorganizations applicable to the Company and the poultry industry and changes inlaws, regulations and other activities in government agencies and similarorganizations related to food safety.

 

·                  Various inventory risks dueto changes in market conditions.

 

·                  Changes in and effects ofcompetition, which is significant in all markets in which the Company competes,and the effectiveness of marketing and advertising programs. The Companycompetes with regional and national firms, some of which have greater financialand marketing resources than the Company.

 

·                  Changes in accountingpolicies and practices adopted voluntarily by the Company or required to beadopted by accounting principles generally accepted in the United States.

 

·                  Disease outbreaks affectingthe production performance and/or marketability of the Company’s poultryproducts.

 

·                  Changes in the availabilityand cost of labor and growers.

 

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 becontrolled by the Company.  When used inthis quarterly 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 beganbusiness in 1945 and was first incorporated in Georgia in 1953, and its whollyowned subsidiary (Cagle’s Farms, Inc., formerly Strain Poultry 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 ofchickens; 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 locatedin Georgia, Alabama, New York, Arizona and through brokers selected by theCompany.

 

All of the Company’s business activities areconducted on a vertically integrated basis within one industry segment, poultryproducts.  The Company’s various poultryproducts are closely related, have similar purposes and uses, and are similarin terms of profitability and types and degrees of risks.  In addition, the production processes aresimilar to the extent that (a) production facilities are shared or areinterchangeable and (b) the same types of raw materials, labor, andcapital are used.  Markets and marketingmethods are comparable for all products to the extent that they are generallysold to the same types of customers by a common sales force and are sensitiveto changes in economic conditions to the same degree.

 

Results ofOperations

 

*Net Sales*

 

Revenues for the third quarter were $70.4million down 4.2% and pounds sold decreased 2.0% both due to a thirteen weekperiod in 2010 versus a fourteen week period in 2009.  For the nine month period revenues were$236.0 million up 4.4% and sales pounds increased 2.7% when compared to thesame period in the prior year.

 

Quotedmarket prices for products for the third quarter of fiscal 2010 versus the sameperiod last quarter and last year fluctuated as follows:

 
| ** **                  | ** ** | **% Change**       | ** ** | **% Change**       | ** ** | **% Change**     | ** ** |
|-----------------------------|------------|--------------------|------------|--------------------|------------|------------------|------------|
| ** **                  | ** ** | **3rd qtr. 10 vs** | ** ** | **3rd qtr. 10 vs** | ** ** | **9 Mos. 10 vs** | ** ** |
| ** **                  | ** ** | **2nd qtr. 10**    | ** ** | **3rd qtr. 09**    | ** ** | **9 Mos. 09**    | ** ** |
|                        |       |               |       |               |       |             |       |
| Tenders                     |       | (10.2              | )%         | 15.4               | %          | 15.8             | %          |
| Wings                       |       | 9.8                | %          | 36.5               | %          | 41.0             | %          |
| Drums                       |       | (9.3               | )%         | (1.9               | )%         | (8.2             | )%         |
| Boneless  Breast            |       | (11.1              | )%         | 8.8                | %          | 4.9              | %          |
| Boneless  Thigh             |       | (13.8              | )%         | (12.8              | )%         | (10.1            | )%         |
| Leg  Quarters               |       | (15.8              | )%         | (6.2               | )%         | (12.5            | )%         |
| Whole  Bird without Giblets |       | (4.3               | )%         | (12.5              | )%         | (6.0             | )%         |

 

*Cost of sales*

 

Cost ofsales for the third quarter of fiscal 2010 decreased 8.2% as compared with thesame period last year, from $72.9 million to $66.9 million due to the thirteenweek period versus the prior year fourteen week period and a 2.0% decrease inpounds sold coupled with a 7.1% reduction in the cost of feed.  For the first nine months of 2010 cost ofsales was $220.5 million down 4.2% from $230.2 million in fiscal 2009principally due to a reduction in the cost of feed.

 

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*Selling and Delivery*

 

Theseexpenses decreased $14 thousand, or 0.7%, for the 13 weeks ended January 2,2010 versus the 14 weeks ended January 3, 2009.  Selling and delivery expenses decreased $229thousand, or 3.4%, for the nine months ended January 2, 2010 versus thenine months ended January 3, 2009.

 

*General andAdministrative*

 

Theseexpenses decreased $239 thousand, or 13.8%, for the 13 weeks ended January 2,2010 versus the 14 weeks ended January 3, 2009.  General and administrative expenses increased$688 thousand, or 15.4%, for the nine months ended January 2, 2010 versusthe nine months ended January 3, 2009. This three-quarter comparison increase is due to a $416 thousandnonrecurring quarter ended June 28, 2008 recovery of a prior year bad debtreserve, a $120 thousand increase in general insurance expense, a $112 thousandincrease in group medical insurance expense, and a $40 thousand increase invarious expenses, net.  Excluding thefiscal year 2009 $416 nonrecurring event, the three-quarter increase is $272,or 5.6%, due to the aforementioned insurance expense increases.

 

*Interest Expense*

 

Interestexpense decreased $200 thousand, or 33.7%, for the 13 weeks ended January 2,2010 versus the 14 weeks ended January 3, 2009.  Interest expense decreased $438 thousand, or25.9%, for the nine months ended January 2, 2010 versus the nine monthsended January 3, 2009.  Thisreflects the favorable changes in the variable interest rate component on theCompany’s long-term revolving line of credit agreement.

 

*Other Income(Expense)*

 

Other income(expense) was $9 thousand for the 13 weeks ended January 2, 2010 versus $(2) thousandfor the 14 weeks ended January 3, 2009. Other income (expense) was $14 thousand for the nine months ended January 2,2010 versus $(18) thousand for the nine months ended January 3, 2009.

 

*Income Taxes*

 

Incometax expense (benefit) was $(193) thousand, or 36.0% of pre-tax (loss) of $(538)thousand for the 13 weeks ended January 2, 2010.  The income tax (benefit) was $(1.3) million,or 34.5% of pre-tax (loss) of $(3.8) million for the 14 weeks ended January 2,2009.  Income tax expense was $917thousand, or 36.0% of pre-tax income of $2.5 million for the nine months ended January 2,2010.  The income tax (benefit) was$(6.1) million, or 35.7% of pre-tax (loss) of $(17.1) million for the ninemonths ended January 3, 2009.  Theentire $917 thousand of income tax expense for the nine months ended January 2,2010 was charged against deferred tax assets, as none is currently payable dueto the Company’s federal and state net operating loss carryforwards.  The Company has federal andstate net operating loss carryforwards of $24.4 million and $21.7 million,respectively, as of the fiscal year ended March 28, 2009.  The Company also has federal and state taxcredit carryforwards of $10.7 million as of the fiscal year ended March 28,2009.  The net operating loss and taxcredit carryforwards are available to reduce income taxes through 2028.  Realization of these future tax benefits isdependent on the Company’s ability to generate sufficient taxable income withinthe carryforward period.  Due to thesignificant amount of income that would be needed to fully utilize the creditsavailable, the Company has recorded a valuation allowance for a significantportion of the deferred tax asset associated with the tax creditcarryforwards.  The Company expects tofully utilize the federal and state net operating loss carryforwards and,accordingly, there is no valuation allowance associated with the net operatingloss carryforwards.

 

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The Company adopted ASC 740-10, “Accountingfor Uncertainty in Income Taxes,” effective April 1, 2007.  ASC 740-10 clarifies the accounting forincome taxes by prescribing the minimum recognition threshold a tax position isrequired to meet before being recognized in the consolidated financialstatements.  ASC 740-10 also providesguidance on derecognition, measurement, classification, interest and penalties,accounting in interim periods, disclosure and transition.  The Company had no significant unrecognizedtax benefits at the date of adoption or at October 3, 2009.  Accordingly, the Company does not have anyinterest or penalties related to uncertain tax positions.  However, if interest or penalties were to beincurred related to uncertain tax positions, such amounts would be recognizedin income tax expense.  Tax periods forall years after 2005 remain open to examination by the federal and state taxingjurisdictions to which it is subject.

 

*Financial Conditionand Liquidity*

 

As of January 2, 2010, theCompany’s working capital was $14.0 million and its current ratio was1.54.  The Company’s working capital asof the year ended March 28, 2009 was $12.7 million and its current ratiowas 1.42.  The Company’s working capitalas of January 3, 2009 was $15.0 million and its current ratio was 1.54.

 

The Company has decreased long-termdebt by $1.3 and $4.4 million during the three and nine months ended January 2,2010, respectively.  The Company hasspent $666 thousand and $1.4 million on capital projects during the three andnine months ended January 2, 2010, respectively.  The Company has remaining availability of$4.1 million on its revolving credit facility, as of January 2, 2010.

 

On January 29, 2009, theCompany entered into an amended long-term revolving line of credit agreement,effective as of that date.  There wereeight primary changes to the existing Agreement between the parties: (1) Anincrease in the capacity of the revolving credit facility to $25,150.  (2) The creation of a supplementalrevolving master note in the principal amount of $4,150 and maturing on October 31,2009.  (3) The addition of the rightto obtain letters of credit issued by lender in favor of third persons in faceprincipal amounts not exceeding $1,000 at any time outstanding.  (4) The limiting of borrowers’ rights toobtain letters of credit issued by lender only pursuant to such supplementalrevolving master note and only when borrowers have available revolving credit(which will be determined by including in the definition thereof both theunpaid principal amount of all unpaid revolving loans and also the aggregateface principal amount of all outstanding letters of credit).  (5) Additions of the limitations of theborrowers’ rights to obtain revolving loans pursuant to the supplementalrevolving master note only when lender has fully advanced the entire $21,000principal amount of the primary revolving master note and borrowers also stillhave available revolving credit.  (6) Theaddition of the collateral consisting of Cagle’s processing plant located inPine Mountain Valley, Georgia.  (7) Theadvance rate with respect to eligible inventories is being increased from 40%to 60% and the advance rate with respect to eligible receivables is beingincreased from 70% to 80%.  (8) Theinterest rates were modified by the following provisions: (a) Interestwill accrue on the unpaid principal balance of the revolving loans, from timeto time outstanding, evidenced by the primary revolving master note at theLIBOR variable rate plus 3.50% (350 basis points), (b) Interest willaccrue on the unpaid principal balance of the revolving loans, from time totime outstanding, evidenced by the supplemental revolving master note at theLIBOR variable rate plus 5.00% (500 basis points).

 

On November 23, 2009, theCompany entered into Amendment Number 4 to the long-term revolving line ofcredit agreement, effective as of October 31, 2009.  There were four primary changes to theexisting Agreement between the parties: (1) The maturity date of the$21,000 portion of the revolving credit facility is being extended to March 31,2012.  (2) The maturity date of the$4,150 portion of the revolving credit facility is being extended to November 23,2010.  (3) The minimum tangible networth covenant remains at $30,000 until July 3, 2010; commencing as of July 4,2010 and ending on January 3,

 

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2011, theminimum tangible net worth must not be less than $35,000 at any time; andcommencing as of January 4, 2011, and at all times thereafter, the minimumtangible net worth must not be less than $40,000 at any time.  (4) The facility advance rate withrespect to eligible inventories is restored to 40% from 60% and the advancerate with respect to eligible receivables is maintained at 80%.  As of January 2, 2010, the Company is incompliance with the revolving line of credit agreement’s covenants.

 

As of January 2,2010, and in accordance with the amended long-term revolving line ofcredit agreement, the lender has issued a $1,000 letter of credit in favor of athird party related to the Company’s self-insurance workers’ compensationliabilities.

 

The Company’s inventory and accountsreceivable levels support collateralized borrowing of up to $19,863 of the$21,000 primary revolving master note in the long-term revolving line of creditagreement.  The Company’s $14,725principal balance and $1,000 letter of credit results in $4,138 of availableborrowings on the long-term revolving line of credit as of January 2,2010.

 

Inaddition to the covenants, described above, on the long-term revolving line ofcredit agreement, the Company must also comply with certain restrictive covenantsassociated with the term note payable. These covenants require the Company to maintain (1) a maximumleverage ratio (2) minimum fixed charge coverage ratio (3) minimumadjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) and (4) capital expenditures not to exceed certainlimits.  The Company is not in compliancewith the term note payable debt covenants, but has waivers through April 5,2010.  The Company is currentlynegotiating an extension of the waivers, revisions to the covenants, and anextension of the payment period.

 

We expectthat cash flow from operations and cash on hand should be sufficient to fundoperations, to make all payments of principal and interest when due, and tofund capital expenditures for at least the next twelve months.  We may elect to finance certain capitalexpenditure requirements through borrowings under our credit facilities orleases.

 

*Critical Accounting Policies and Estimates*

 

The preparation of consolidated financialstatements and related disclosures in conformity with accounting principlesgenerally accepted in the United States of America requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities, and the disclosure of contingent assets and liabilities at thedate of the consolidated financial statements and revenues and expenses duringthe periods reported.  The followingaccounting policies involve “critical accounting estimates” because they areparticularly dependent on estimates and assumptions made by management aboutmatters that are highly uncertain at the time the accounting estimates aremade.  In addition, while we have usedour best estimates based on facts and circumstances available to us at thetime, different estimates reasonably could have been used in the currentperiod, or changes in the accounting estimates we used are reasonably likely tooccur from period to period which may have a material impact on thepresentation of our financial condition and results of operations.  We review these estimates and assumptionsperiodically and reflect the effects of revisions in the period that they aredetermined to be necessary.  We havedisclosed our critical accounting policies in our Annual Report on Form 10-Kfor the year ended March 28, 2009, and that disclosure should be read inconjunction with this Quarterly Report on Form 10-Q.  

 

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**Item 3: Quantitative andQualitative Disclosures about Market Risk**

 

*Risk Factors*

 

Industry cyclicality can affect our earnings,especially due to fluctuations in the commodity prices of feed ingredients andchicken.

 

Profitability in the chicken industry ismaterially affected by the commodity prices of chicken and feed ingredients,which are determined by supply and demand factors, which result in cyclicalearnings fluctuations.  The production offeed ingredients is positively or negatively affected primarily by weatherpatterns throughout the world, the global level of supply inventories anddemand for feed ingredients, and the agricultural policies of the United Statesand foreign governments.  In particular,weather patterns often change agricultural conditions in an unpredictablemanner.  A sudden and significant changein weather patterns could affect supplies of feed ingredients, as well as boththe industry’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 our feedingredient costs.  The use of suchinstruments may not be successful.

 

*Raw Materials*

 

The primary raw materials used by the Companyare corn, soybean meal, and other ingredients; packaging materials; cryogenicmaterials; and breeder chicks.  TheCompany believes the sources of supply for these materials are adequate anddoes not expect significant difficulty in acquiring required supplies.  The major source of supply is the midwesterngrain belt of the United States, although local supplies are utilized whenavailable.  Prices for the feedingredients are sensitive to supply fluctuations worldwide, and weatherconditions, especially drought, can cause significant price volatility.  Since feed is the most significant factor inthe cost of producing a broiler chicken, those fluctuations can havesignificant effects on margins.  TheCompany also purchases poultry products from outside vendors for furtherprocessing requirements.

 

The Company may choose to utilize derivatives asoffered on the Chicago Board of Trade for the purpose of protecting the feedcost for fixed price sales commitments negotiated with our customers.  The Company’s two primary feed ingredientsare corn and soybean meal.  A $0.10 perbushel price change in corn or a $10 per ton price change in soybean mealimpacts our cost of sales $0.75 million dollars per year.

 

*Interest Rates*

 

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 atJanuary 2, 2010.  The Company’s theoreticalinterest rate exposure on variable rate borrowings at January 2, 2010,would be, with a one percentage point increase in average interest rates on theCompany’s borrowings would increase future interest expense by $12.3 thousandper month and a two percentage point increase would increase future interestexpense by $24.5 thousand per month.  TheCompany determined these amounts based on $14.725 million of variable rateborrowings at January 2, 2010, multiplied by 1.0% and 2.0%, respectively,and divided by twelve.  The Company iscurrently not using any interest rate collars, hedges, or other derivativefinancial 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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*Concentration of Credit Risk*

 

The Company deposits its cash with financialinstitutions which have Federal Deposit Insurance Corporation (FDIC) depositoryinsurance, which insures bank balances up to $250 thousand per bank.  At January 2, 2010, the Company’s cashbalances in FDIC insured bank accounts totaled approximately $1.3 million whichexceeds the Federal Deposit Insurance Corporation limit of $250 thousand.

 

The Company is not a party to any other marketrisk sensitive instruments requiring disclosure.

 

**Item 4.  Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*

 

The term “disclosure controls and procedures”(defined in SEC Rule 13a-15(e)) refers to the controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by a company in the reports that it files under the SecuritiesExchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarizedand reported within required time periods. The Company’s management, with theparticipation of the Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the Company’s disclosure controls and proceduresas of the end of the period covered by this quarterly report (the “EvaluationDate”).   Based on that evaluation,management, including the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded that, as of the Evaluation Date, such controls andprocedures were effective.

 

*Changes in internal controls*

 

The term “internal control over financialreporting” (defined in SEC Rule 13a-15(f)) refers to the process of acompany that is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles.  The Company’s management, with theparticipation of the Chief Executive Officer and Chief Financial Officer, haveevaluated any changes in the Company’s internal control over financialreporting that occurred during the period covered by this quarterly report, andthey have concluded that there was an enhancement to the Company’s internalcontrol over financial reporting that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.  This enhancement was theCompany’s approval of a new position and subsequent hiring of a corporateaccountant, first reporting to work at the Company on September 25, 2009.

 

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**Part II.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

The Company is routinely involved in variouslawsuits and legal matters on an ongoing basis as a result of day to dayoperations; however, the Company does not believe that the ultimate resolutionof these matters will have a material adverse effect on the Company or itsbusiness.

 

**Item1.A.  Risk Factors**

 

*Leverage*

 

Our indebtedness could adversely affect ourfinancial condition.  We presently have,and expect to continue to have, an amount of indebtedness.  Our indebtedness could have importantconsequences to stockholders.  Forexample, it could: increase our vulnerability to general adverse economicconditions; require us to dedicate a substantial portion of our cash flow fromoperations to payments on our indebtedness, thereby reducing the availabilityof our cash flow to fund working capital, capital expenditures and for othergeneral corporate purposes; limit our flexibility in planning for, or reactingto, changes in our business and the industry in which we operate; place us at acompetitive disadvantage compared to our competitors that have less debt;limit, along with the financial and other restrictive covenants in our indebtedness,our ability to borrow additional funds, and failing to comply with thosecovenants could result in an event of default or require redemption ofindebtedness.  Either of these eventscould have a material adverse effect on us. Our ability to make payments on and to refinance our indebtedness willdepend on our ability to generate cash in the future, which is dependent onvarious factors.  These factors includethe commodity prices of feed ingredients and chicken and general economic,financial, competitive, legislative, regulatory, and other factors that arebeyond our control.

 

*Additional Borrowings Available*

 

Despite our indebtedness, we are not prohibitedfrom incurring additional indebtedness in the future.

 

*Contamination of Products*

 

If our products become contaminated, we may besubject to product liability claims and product recalls.

 

*Livestock and Poultry Disease*

 

Outbreaks of livestock diseases, in general, andpoultry disease, in particular, can significantly restrict our ability toconduct our operations.  We take allreasonable precautions to ensure that our flocks are healthy and that ourprocessing plants and other facilities operate in a sanitary andenvironmentally sound manner.  However,events beyond our control, such as the outbreak of disease, could significantlyrestrict our ability to conduct our operations. Furthermore, an outbreak of disease could result in governmentalrestrictions on the import and export of our fresh chicken, to or from oursuppliers, facilities, or customers, or require us to destroy one or more ofour flocks.  This could result in thecancellation of orders by our customers and create adverse publicity that mayhave a material adverse effect on our ability to market our productssuccessfully and on our business, reputation, and prospects.

 

*Insurance*

 

We are exposed to risks relating to productliability, product recall, property damage, and injuries to persons for whichinsurance coverage is expensive, limited, and potentially inadequate.

 

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*Significant Competition*

 

Competition in the chicken industry with othervertically integrated poultry companies could adversely affect our business.

 

*Government Regulation*

 

Regulation, present and future, is a constantfactor affecting our business.  Thechicken industry is subject to federal, state, and local governmentalregulation, including health and environmental areas.  We anticipate increased regulation by variousagencies concerning food safety, the use of medication in feed formulations,and the disposal of poultry by-products and wastewater discharges. Unknownmatters, new laws and regulations, or stricter interpretations of existing lawsor regulations may materially affect our business or operations in the future.

 

*Deterioration of Economic Conditions*

 

Our business may be adversely affected by changes in national or globaleconomic conditions, including inflation, interest rates, availability ofcapital markets, consumer spending rates, energy availability and costs(including fuel surcharges) and the effects of governmental initiatives tomanage economic conditions.  Any suchchanges could adversely affect the demand for our poultry products, or the costand availability of our needed raw materials and packaging materials, therebynegatively affecting our financial results.

 

The recent disruptions in credit and other financial markets anddeterioration of national and global economic conditions, could, among otherthings:

 

·                  make it moredifficult or costly for us to obtain financing for our operations orinvestments or to refinance our debt in the future;

·                  cause ourlenders to depart from prior credit industry practice and make more difficultor expensive the granting of any technical or other waivers under our creditagreements to the extent we may seek them in the future;

·                  impair thefinancial condition of some of our customers and suppliers thereby increasingcustomer bad debts or non-performance by suppliers;

·                  negativelyimpact demand for protein products, which could result in a reduction of sales,operating income and cash flows.

 

*Changes in Consumer Preference*

 

The food industry in general is subject to changing consumer trends,demands, and preferences.  Trends withinthe food industry change often, and failure to identify and react to changes inthese trends could lead to, among other things, reduced demand and pricereductions for our products, and could have an adverse effect on our financialresults.

 

*The Loss of One or More of Our Largest Customers*

 

Our business could suffer significant set backs in sales and operatingincome if our customers’ plans and/or markets should change significantly, orif we lost one or more of our largest customers.   Many of our agreements with our customersare generally short-term, primarily due to the nature of our products, industrypractice, and the fluctuation 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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*Members of the Cagle’s Family can ExerciseSignificant Control*

 

Members of the Cagle’s family beneficially own, in the aggregate,64.56% of our outstanding common stock, giving them control of approximately65% of the total voting power of our outstanding voting stock.  In addition, three members of the Cagle’sfamily serve on our Board of Directors. As a result, members of the Cagle’s family have the ability to exertsubstantial influence or actual control over our management and affairs andover substantially all matters requiring action by our stockholders, includingamendments to our certificate of incorporation and by-laws, the election andremoval of directors, any proposed merger, consolidation or sale of all or substantiallyall of our assets, and other corporate transactions.  This concentration of ownership may alsodelay or prevent a change in control otherwise favored by our otherstockholders and could depress our stock price.

 

**Item****2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

The table belowprovides information regarding the Company’s purchase of its own common stockduring the periods indicated.  Amounts inthousands except Average Price Paid Per Share.

 
| ** **                                 | ** ** | ** **            | ** ** | ** **          | ** ** | **Approximate**              | ** ** |
|--------------------------------------------|------------|-----------------------|------------|---------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | ** **            | ** ** | ** **          | ** ** | **Dollar Value**        | ** ** |
| ** **                                 | ** ** | **Total Number** | ** ** | **Average**         | ** ** | **of Shares that** | ** ** |
| ** **                                 | ** ** | **of Shares**    | ** ** | **Price Paid** | ** ** | **May Yet Be**     | ** ** |
| ** **                                 | ** ** | **Purchased**         | ** ** | **Per Share**  | ** ** | **Purchased (1)**       | ** ** |
|                                       |       |                  |       |                |       |                         |       |
| March 29, 2009 - January 2, 2010 |       | 22                    |       | $                   | 2.20       |                         | $          | 4,793 |   |
| March 30, 2008 - March 28, 2009  |       | 27                    |       | 2.13                |       | 4,841                        |       |
| April 1, 2007 - March 29, 2008   |       | 79                    |       | 7.74                |       | 4,898                        |       |
| April 2, 2006 - March 31, 2007   |       | 55                    |       | 7.92                |       | 5,508                        |       |
|                                            |            |                       |            |                     |            |                              |            |  |  |

 

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

 

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

 

None

 

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

 

None

 

**Item 5.  Other Information**

 

None

 

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**Item 6.  Exhibits**

 
| 3.1  |  Articles  of Incorporation of the Registrant. (2)                                                        |
|------|----------------------------------------------------------------------------------------------------------------|
| 3.2  |  Bylaws  of the Registrant. (3)                                                                           |
| 14.1 |  Code  of Ethics. (4)                                                                                     |
| 31.1 |  Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) and  15d-14(a).  (1) |
| 31.2 |  Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) and  15d-14(a).  (1) |
| 32.1 |  Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. (1)                   |
| 32.2 |  Certification  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**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| Cagle’s, Inc.  (Registrant) |                                                  |
|---------------------------------------|-------------------------------------------------------|
|                                  |                                                  |   |
| BY:                                   | /s/                                                   | J.  Douglas Cagle |   |
|                                  | Chairman,  Chief Executive Officer and President      |   |
|                                  | February 15,  2010                               |   |
|                                  |                                                  |
| BY:                                   | /s/                                                   | Mark  M. Ham IV |   |
|                                  | Executive  Vice President and Chief Financial Officer |   |
|                                  | February 15, 2010                                |   |

 

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