Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended****October 3, 2009******

** **

**or**

 

**o****        ****TRANSITION REPORT PURSUANT TOSECTION 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**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of l934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. x Yes o No

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulations S-T (section 229.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required tosubmit 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 |

 

Indicate by check mark if the registrant is a shellcompany (as defined in Rule 12b-2 of 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 November 16, 2009. |
|-----------------------------------------------|--------|-------------------------------------------------|

 

 

 

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Table ofContents

 

**FORM 10-Q**

 

**Cagle’s, Inc.**

**October 3, 2009**

 

**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 ofContents

 

**CAGLE’S,INC. AND SUBSIDIARY**

**Condensed Consolidated Balance Sheets**

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

 

**Part I. FINANCIALINFORMATION**

**Item 1. FinancialStatements**

 
| ** **                                                                                                                                                                         | ** ** | **October 3, 2009** | ** ** | **March 28, 2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                                                                                                                                               |       | **(Unaudited)**          |       |                    |       |
| Assets                                                                                                                                                                             |       |                     |       |                    |       |
| Current assets                                                                                                                                                                     |       |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                                                          |       | $                        | 1,256      |                    | $          | 1,246 |   |
| Trade accounts receivable, less allowance for  doubtful accounts of $186 and $186 at October 2009 and March 2009                                                         |       | 14,838                   |       | 14,170                  |       |
| Inventories                                                                                                                                                                        |       | 26,550                   |       | 27,181                  |       |
| Other current assets                                                                                                                                                               |       | 1,660                    |       | 201                     |       |
| Total current assets                                                                                                                                                               |       | 44,304                   |       | 42,798                  |       |
| Property, plant and equipment, at cost                                                                                                                                             |       |                     |       |                    |       |
| Land                                                                                                                                                                               |       | 1,976                    |       | 1,976                   |       |
| Buildings and improvements                                                                                                                                                         |       | 59,686                   |       | 59,686                  |       |
| Machinery, furniture and equipment                                                                                                                                                 |       | 41,928                   |       | 41,034                  |       |
| Vehicles                                                                                                                                                                           |       | 4,979                    |       | 4,691                   |       |
| Construction in progress                                                                                                                                                           |       | 293                      |       | 645                     |       |
|                                                                                                                                                                               |       | 108,862                  |       | 108,032                 |       |
| Less accumulated depreciation                                                                                                                                                      |       | 73,447                   |       | 71,249                  |       |
| Property, plant and equipment, net                                                                                                                                                 |       | 35,415                   |       | 36,783                  |       |
| Other assets                                                                                                                                                                       |       |                     |       |                    |       |
| Deferred financing costs, net                                                                                                                                                      |       | 59                       |       | 103                     |       |
| Deferred income taxes                                                                                                                                                              |       | 8,342                    |       | 9,775                   |       |
| Other assets                                                                                                                                                                       |       | 1,497                    |       | 1,693                   |       |
| Total other assets                                                                                                                                                                 |       | 9,898                    |       | 11,571                  |       |
| Total assets                                                                                                                                                                       |       | $                        | 89,617     |                    | $          | 91,152 |   |
|                                                                                                                                                                               |       |                     |       |                    |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                         |       |                     |       |                    |       |
| Current liabilities                                                                                                                                                                |       |                     |       |                    |       |
| Current maturities of long-term debt                                                                                                                                               |       | $                        | 2,601      |                    | $          | 2,488 |   |
| Accounts payable                                                                                                                                                                   |       | 18,745                   |       | 19,989                  |       |
| Accrued expenses                                                                                                                                                                   |       | 4,757                    |       | 4,462                   |       |
| Deferred income taxes                                                                                                                                                              |       | 3,180                    |       | 3,180                   |       |
| Total current liabilities                                                                                                                                                          |       | 29,283                   |       | 30,119                  |       |
| Long-term debt, less current maturities                                                                                                                                            |       | 25,850                   |       | 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 October 2009 and March 2009, respectively |       | 4,615                    |       | 4,637                   |       |
| Treasury stock, at cost                                                                                                                                                            |       | (80                      | )          | (80                     | )          |
| Additional paid-in capital                                                                                                                                                         |       | 3,601                    |       | 3,627                   |       |
| Retained earnings                                                                                                                                                                  |       | 26,636                   |       | 24,662                  |       |
| Accumulated other comprehensive income (loss)                                                                                                                                      |       | (288                     | )          | (862                    | )          |
| Total stockholders’ equity                                                                                                                                                    |       | 34,484                   |       | 31,984                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                    |       | $                        | 89,617     |                    | $          | 91,152 |   |

 

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

 

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**CAGLE’S,INC. AND SUBSIDIARY**

**Condensed Consolidated Statements of Operations**

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

**(Unaudited)**

 
| ** **                                 | ** ** | **14 Weeks Ended**       | ** ** | **13 Weeks Ended**          | ** ** | **27 Weeks Ended**       | ** ** | **26 Weeks Ended**          | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Net sales                                  |       | $                        | 87,570     |                        | $          | 75,632                   |       | $                           | 165,585    |   | $ | 152,553 |   |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Costs and expenses                         |       |                     |       |                        |       |                     |       |                        |       |
| Cost of sales                              |       | 81,819                   |       | 79,702                      |       | 153,527                  |       | 157,279                     |       |
| Selling and delivery                       |       | 2,275                    |       | 2,355                       |       | 4,472                    |       | 4,687                       |       |
| General and administrative                 |       | 1,985                    |       | 1,532                       |       | 3,650                    |       | 2,724                       |       |
| Total costs and expenses                   |       | 86,079                   |       | 83,589                      |       | 161,649                  |       | 164,690                     |       |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Operating income (loss)                    |       | 1,491                    |       | (7,957                      | )          | 3,936                    |       | (12,137                     | )          |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Other income (expense)                     |       |                     |       |                        |       |                     |       |                        |       |
| Interest expense                           |       | (415                     | )          | (606                        | )          | (857                     | )          | (1,095                      | )          |
| Other income (expense), net                |       | 3                        |       | (4                          | )          | 5                        |       | (16                         | )          |
| Total other income (expense), net          |       | (412                     | )          | (610                        | )          | (852                     | )          | (1,111                      | )          |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Income (loss) before income taxes          |       | 1,079                    |       | (8,567                      | )          | 3,084                    |       | (13,248                     | )          |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Income tax expense (benefit)               |       | 388                      |       | (3,084                      | )          | 1,110                    |       | (4,769                      | )          |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Net income (loss)                          |       | $                        | 691        |                        | $          | (5,483                   | )          | $                           | 1,974      |   | $ | (8,479 | ) |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Weighted-average common shares outstanding |       |                     |       |                        |       |                     |       |                        |       |
| Basic                                      |       | 4,615                    |       | 4,662                       |       | 4,617                    |       | 4,662                       |       |
| Diluted                                    |       | 4,615                    |       | 4,662                       |       | 4,617                    |       | 4,662                       |       |
|                                       |       |                     |       |                        |       |                     |       |                        |       |
| Per common share                           |       |                     |       |                        |       |                     |       |                        |       |
| Net income (loss)                          |       |                     |       |                        |       |                     |       |                        |       |
| Basic                                      |       | $                        | 0.15       |                        | $          | (1.18                    | )          | $                           | 0.43       |   | $ | (1.82 | ) |
| Diluted                                    |       | $                        | 0.15       |                        | $          | (1.18                    | )          | $                           | 0.43       |   | $ | (1.82 | ) |
| Dividends per common share                 |       | $                        | —     |                        | $          | —                   |       | $                           | —     |   | $ | — |   |

 

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

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Condensed Consolidated Statementsof Cash Flows**

**(In Thousands)**

**(Unaudited)**

 
| ** **                                                                                                               | ** ** | **27 Weeks Ended**       | ** ** | **26 Weeks Ended**          | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                               | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** |
| Cash  flows from operating activities                                                                                    |       |                     |       |                        |       |
| Net  income (loss)                                                                                                       |       | $                        | 1,974      |                        | $          | (8,479 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities                      |       |                     |       |                        |       |
| Depreciation                                                                                                             |       | 2,198                    |       | 1,986                       |       |
| Amortization                                                                                                             |       | 44                       |       | 33                          |       |
| Gain  on sale of property, plant and equipment                                                                           |       | (4                       | )          | —                      |       |
| Deferred  income tax expense (benefit)                                                                                   |       | 1,110                    |       | (5,471                      | )          |
| Changes  in operating assets and liabilities                                                                             |       |                     |       |                        |       |
| Trade  accounts receivable, net                                                                                          |       | (668                     | )          | (1,855                      | )          |
| Inventories                                                                                                              |       | 631                      |       | 1,566                       |       |
| Other  current assets                                                                                                    |       | (1,459                   | )          | (2,038                      | )          |
| Accounts  payable                                                                                                        |       | (1,906                   | )          | 3,426                       |       |
| Accrued  expenses                                                                                                        |       | 1,192                    |       | (357                        | )          |
| Other  assets                                                                                                            |       | 16                       |       | 296                         |       |
| Net  cash provided by (used in) operating activities                                                                     |       | 3,128                    |       | (10,893                     | )          |
| Cash  flows from investing activities                                                                                    |       |                     |       |                        |       |
| Purchases  of property, plant and equipment                                                                              |       | (734                     | )          | (904                        | )          |
| Proceeds  from sale of property, plant and equipment                                                                     |       | 4                        |       | —                      |       |
| Proceeds  from redemption of life insurance                                                                              |       | 180                      |       | —                      |       |
| Net  cash used in investing activities                                                                                   |       | (550                     | )          | (904                        | )          |
| Cash  flows from financing activities                                                                                    |       |                     |       |                        |       |
| Proceeds  on revolving line of credit                                                                                    |       | 46,850                   |       | 47,450                      |       |
| Payments  on revolving line of credit                                                                                    |       | (48,800                  | )          | (35,625                     | )          |
| Payments  of long-term debt                                                                                              |       | (1,232                   | )          | (1,131                      | )          |
| Payments  of deferred financing costs                                                                                    |       | —                   |       | (128                        | )          |
| Increase  in negative book cash balances                                                                                 |       | 662                      |       | 1,564                       |       |
| Repurchase  of stock                                                                                                     |       | (48                      | )          | (12                         | )          |
| Net  cash provided by (used in) financing activities                                                                     |       | (2,568                   | )          | 12,118                      |       |
| Net  increase in cash and cash equivalents                                                                               |       | 10                       |       | 321                         |       |
| Cash  and cash equivalents - beginning of period                                                                         |       | 1,246                    |       | 1,279                       |       |
| Cash  and cash equivalents - end of period                                                                               |       | $                        | 1,256      |                        | $          | 1,600 |   |
| Supplementary  disclosures of cash flow information                                                                      |       |                     |       |                        |       |
| Cash  paid (received) during the period for:                                                                             |       |                     |       |                        |       |
| Interest                                                                                                                 |       | $                        | 842        |                        | $          | 1,026 |   |
| Income  taxes, net                                                                                                       |       | —                   |       | (108                        | )          |
| Supplementary  disclosures of noncash transactions                                                                       |       |                     |       |                        |       |
| Net  unrealized gain (loss) on hedging activities, net of income tax expense  (benefit) of $323 and $(790), respectively |       | $                        | 574        |                        | $          | (1,403 | ) |
| Assets  acquired pursuant to capital lease obligations                                                                   |       | 96                       |       | 74                          |       |

 

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

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**October 3, 2009**

**(In Thousands)**

**(Unaudited)**

 

1.**             ****Basis of 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 October 3, 2009 and the results oftheir operations for the 14 and 27 weeks ended October 3, 2009 and the 13and 26 weeks ended September 27, 2008. 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 14 and 27 weeks ended October 3, 2009 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.**             ****Significant Accounting 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.**             ****Cash and 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 October 3, 2009 and March 28,2009, the Company had book overdrafts of $5,624 and $4,962, respectively.

 

4.**             ****Inventories**

 

Inventories consist of the following at October 3, 2009 and March 28, 2009:

 
| ** **                   | ** ** | **October 2009** | ** ** | **March 2009** | ** ** |
|------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                   | ** ** | ** **            | ** ** | ** **          | ** ** |
| Finished products            |       | $                     | 4,465      |                | $          | 5,692 |   |
| Field inventory and breeders |       | 15,779                |       | 15,509              |       |
| Feed, eggs and medication    |       | 4,930                 |       | 4,659               |       |
| Supplies                     |       | 1,376                 |       | 1,321               |       |
|                         |       |                  |       |                |       |
|                         |       | $                     | 26,550     |                | $          | 27,181 |   |

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**October 3, 2009**

**(In Thousands)**

**(Unaudited)**

 

5.**             ****Long-Term Debt**

** **

Long-term debt consists of the following at October 3, 2009 and March 28, 2009:

 
| ** **                                                                                                                                                                                                                                  | ** ** | **October 2009** | ** ** | **March 2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Long-term revolving line of credit, maturing March 31,  2011, interest payable monthly, variable interest rate of LIBOR plus 3.50%; secured  by accounts receivable, inventories and the Atlanta and Pine Mountain Valley  facilities. |       | $                     | 15,350     |                | $          | 17,300 |   |
|                                                                                                                                                                                                                                        |       |                  |       |                |       |
| Term note payable; fixed interest rate of 7.86%, principal  and interest payable monthly of $290, through maturity on April 1, 2011;  secured by the Collinsville plant, Dalton hatchery and Rockmart feedmill.                        |       | 12,996                |       | 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.                                |       | 105                   |       | 38                  |       |
|                                                                                                                                                                                                                                        |       | 28,451                |       | 31,537              |       |
| Less current maturities                                                                                                                                                                                                                     |       | 2,601                 |       | 2,488               |       |
|                                                                                                                                                                                                                                        |       |                  |       |                |       |
| Long-term debt, less current maturities                                                                                                                                                                                                     |       | $                     | 25,850     |                | $          | 29,049 |   |

 

On April 30, 2008, the Company amended its long-term revolvingline of credit agreement.  The amendedagreement increased the facility to $17,500 and the interest rate to a variablerate equal to 3.50% over the 90-day London InterBank Offered Rate (“LIBOR”).  The collateral for the facility now includesthe Company’s real estate located in Atlanta, Georgia.  In addition, the maturity date of theagreement is now March 31, 2011.

 

The Company completed a newlong-term revolving line of credit agreement on September 5, 2008.  There were three primary changes to theprevious agreement:  (1) An increasein the capacity of the revolving credit facility to $21 million.  (2) The covenant concerning theborrowers’ minimum tangible net worth was reduced from $40 million to $35million.  (3) The advance rate withrespect to eligible receivables was increased from 60% to 70%.  The maturity date of the new agreementremained March 31, 2011.

 

On November 3, 2008, theCompany entered into an amended long-term revolving line of credit agreementretroactive to September 27, 2008, which temporarily lowered the tangiblenet worth requirement from $35 million to $30 million through the first quarterof fiscal 2010 (quarter ending June 27, 2009).  This was extended on June 5, 2009,through January 2, 2010.

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**October 3, 2009**

**(In Thousands)**

**(Unaudited)**

 

On January 29, 2009, the Company enteredinto an amended long-term revolving line of credit agreement, effective as ofthat date.  There are eight primarychanges to the existing Agreement between the parties:  (1) An increase in the capacity of therevolving credit facility to $25,150.  (2) Thecreation of a supplemental revolving master note in the principal amount of$4,150 and maturing on October 31, 2009. (3) The addition of the right to obtain letters of credit issued bylender in favor of third persons in face principal amounts not exceeding $1,000at any time outstanding.  (4) Thelimiting of borrowers’ rights to obtain letters of credit issued by lender onlypursuant to such supplemental revolving master note and only when borrowershave available revolving credit (which will be determined by including in thedefinition thereof both the unpaid principal amount of all unpaid revolvingloans and also the aggregate face principal amount of all outstanding lettersof credit).  (5) Additions of thelimitations of the borrowers’ rights to obtain revolving loans pursuant to thesupplemental revolving master note only when lender has fully advanced theentire $21,000 principal amount of the primary revolving master note andborrowers also still have available revolving credit.  (6) The addition of the collateralconsisting of Cagle’s processing plant located in Pine Mountain Valley,Georgia.  (7) The advance rate withrespect to eligible inventories is being increased from 40% to 60% and theadvance rate with respect to eligible receivables is being increased from 70%to 80%.  (8) The interest rates weremodified by the following provisions: (a) Interest will accrue on theunpaid principal balance of the revolving loans, 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).  As of October 3,2009, the Company is in compliance with the revolving line of credit agreement’scovenants.

 

As of November 16, 2009 theCompany is negotiating an amended long-term revolving line of credit, extendingthe $21 million facility maturity date from March 2011 to March 2012and the $4.15 million supplemental facility maturity date to October 2010.  The $4.15 million supplemental facility hasnot been utilized since its inception in January 2009.

 

In addition to the covenantsdescribed above, the Company must also comply with certain restrictivecovenants associated with the term note payable.  These covenants require the Company tomaintain (1) a maximum leverage ratio (2) minimum fixed chargecoverage ratio (3) minimum adjusted earnings before interest,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 has available borrowings of $9,800 on the long-termrevolving line of credit as of October 3, 2009.

 

Aggregate maturities of long-term debt during the next twelve monthsand subsequent annual periods are as follows:

 
| October 4, 2009 - October 2, 2010    |   | $      | 2,601  |   |
|------------------------------------------------|--------|--------|--------|--------|
| October 3, 2010 - October 1, 2011    |   | 25,827 |   |
| October 2, 2011 - September 29, 2012 |   | 23     |   |
| Long-term debt                                 |   | $      | 28,451 |   |

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**October 3, 2009**

**(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 14 weeks ended October 3, 2009.  The Company did purchase 22 shares for $48during the 27 weeks ended October 3, 2009. Through October 3, 2009, 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.**             ****Related Parties**

 

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 and removalof 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 other stockholdersand could depress our stock price.

 

Included in other assets at October 3, 2009 and March 28,2009 is a receivable of $1,242 due to the Company from two related party lifeinsurance irrevocable trusts.

 

8.**             ****Financial Instruments**

 

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.**             ****Comprehensive Income**

 

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**

**October 3, 2009**

**(In Thousands)**

**(Unaudited)**

 
| ** **                        | ** ** | **14 Weeks Ended**       | ** ** | **13 Weeks Ended**          | ** ** | **27 Weeks Ended**       | ** ** | **26 Weeks Ended**          | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** | **October 3, 2009** | ** ** | **September 27, 2008** | ** ** |
|                              |       |                     |       |                        |       |                     |       |                        |       |
| Net income (loss)                 |       | $                        | 691        |                        | $          | (5,483                   | )          | $                           | 1,974      |   | $ | (8,479 | ) |
| Cash flow hedges                  |       | —                   |       | (5,094                      | )          | —                   |       | (3,263                      | )          |
| Reclassification to net earnings  |       | 449                      |       | 640                         |       | 897                      |       | 1,070                       |       |
| Tax (expense) benefit             |       | (162                     | )          | 1,604                       |       | (323                     | )          | 790                         |       |
|                              |       |                     |       |                        |       |                     |       |                        |       |
| Total comprehensive income (loss) |       | $                        | 978        |                        | $          | (8,333                   | )          | $                           | 2,548      |   | $ | (9,882 | ) |

 

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.

 

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 holdinventory purchase agreements in excess of futures contracts and have noindication that the futures commitment on the hedged inventory purchases is injeopardy of discontinuing.  Therefore,the deferred losses related to the derivative that were de-designated were notrecognized immediately and are expected to be reclassified into earnings duringthe contractual terms of the inventory purchases.  The Company expects pretax losses totaling$1,347, recorded as accumulated other comprehensive income (loss) as of thefiscal year ended March 28, 2009 related to cash flow hedges, will berecognized prorata through the third quarter ended January 2, 2010.  The Company generally has no hedge cash flowsrelated to commodities beyond 12 months.

 

10.**      ****Reclassifications**

 

Certain reclassifications have been made to the September 27, 2008Consolidated 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**

**October 3, 2009**

**(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 October 3, 2009 through November 16, 2009, the date thefinancial statements were issued.

 

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of 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 price for the Company’sfinished products and feed grains, both of which may fluctuate substantiallyand exhibit cyclical characteristics typically associated with commoditymarkets.

 

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

 

·                  Changes in the political or economic climate,trade policies, laws and regulations or the domestic poultry industry ofcountries to which the Company or other companies in the poultry industry shipproduct, and other changes that might limit the Company’s or the industry’saccess to foreign markets.

 

·                  Changes in laws, regulations, and otheractivities in government agencies and similar organizations applicable to theCompany and the poultry industry and changes in laws, regulations and otheractivities in government agencies and similar organizations related to foodsafety.

 

·                  Various inventory risks due to changes inmarket conditions.

 

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

 

·                  Changes in accounting policies and practicesadopted voluntarily by the Company or required to be adopted by accountingprinciples generally accepted in the United States.

 

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

 

·                  Changes in the availability and cost of laborand 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 marketingoperations.  The Company’s products aresold to national and regional independent and chain supermarkets, fooddistributors, food processing companies, national fast-food chains, andinstitutional users, such as restaurants, schools, and distributors, by theCompany’s sales staff located in Georgia, Alabama, New York, Arizona andthrough brokers selected by the Company.

 

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 sensitive tochanges in economic conditions to the same degree.

 

Results ofOperations

 

*Net Sales*

Revenues for the second quarter were $87.6million up 15.8% and pounds sold increased 14.7% both influenced by a fourteenweek period in 2010 versus a thirteen week period in 2009.  For the six month period revenues were $165.6million up 8.5% and sales pounds increased 4.9% again influenced by theadditional week in the first two quarters of fiscal 2010 as compared to thesame period in fiscal 2009.

 

Quotedmarket prices for products for the second quarter of fiscal 2010 versus thesame period last quarter and last year fluctuated as follows:

 
| ** **                 | ** ** | **% Change**       | ** ** | **% Change**       | ** ** | **% Change**      | ** ** |
|----------------------------|------------|--------------------|------------|--------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2nd qtr. 10 vs** | ** ** | **2nd qtr. 10 vs** | ** ** | **27 Wks. 10 vs** | ** ** |
| ** **                 | ** ** | **1st qtr. 10**    | ** ** | **2nd qtr. 09**    | ** ** | **26 Wks. 09**    | ** ** |
|                       |       |               |       |               |       |              |       |
| Tenders                    |       | -2.5%              |       | 21.9%              |       | 12.7%             |       |
| Wings                      |       | 1.1%               |       | 48.5%              |       | 23.2%             |       |
| Drums                      |       | -0.9%              |       | -13.5%             |       | -4.0%             |       |
| Boneless Breast            |       | -7.7%              |       | 6.1%               |       | 9.3%              |       |
| Boneless Thigh             |       | -10.3%             |       | -15.0%             |       | -2.9%             |       |
| Leg Quarters               |       | -8.7%              |       | -23.8%             |       | 0.0%              |       |
| Whole Bird without Giblets |       | -17.4%             |       | -6.4%              |       | 1.2%              |       |

 

*Cost of sales*

Cost ofsales for the second quarter of fiscal 2010 increased 2.7% as compared with thesame period last year, from $79.7 million to $81.8 million reflecting theadditional week in the period and a 14.7% increase in pounds sold coupled withan 8.6% reduction in the cost of feed.  Forthe first six months of 2010 cost of sales was $153.5 million down 2.4% fromfiscal 2009.

 

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*Selling and Delivery*

Theseexpenses decreased $80 thousand, or 3.4%, for the 14 weeks ended October 3,2009 versus the 13 weeks ended September 27, 2008.  Selling and delivery expenses decreased $215thousand, or 4.6%, for the 27 weeks ended October 3, 2009 versus the 26 weeksended September 27, 2008.

 

*General andAdministrative*

Theseexpenses increased $453 thousand, or 29.6%, for the 14 weeks ended October 3,2009 versus the 13 weeks ended September 27, 2008.  Several expense items increased during thesecond quarter year-to-year comparison; $137 thousand group medical, $95thousand legal, accounting, and general insurance, $92 thousand supervision andwages, and $47 thousand transportation. General and administrative expenses increased $926 thousand, or 34.0%,for the 27 weeks ended October 3, 2009 versus the 26 weeks ended September 27,2008.  This two-quarter increase is dueto the aforementioned second quarter increases and a $416 thousand nonrecurringquarter ended June 28, 2008 recovery of a prior year bad debt reserve.

 

*Interest Expense*

Interestexpense decreased $191 thousand, or 31.5%, for the 14 weeks ended October 3,2009 versus the 13 weeks ended September 27, 2008.  Interest expense decreased $238 thousand, or21.7%, for the 27 weeks ended October 3, 2009 versus the 26 weeks ended September 27,2008.  This reflects the favorablechanges in the variable interest rate component on the Company’s long-termrevolving line of credit agreement.

 

*Other Income(Expense)*

Other income(expense) was $3 thousand for the 14 weeks ended October 3, 2009 versus $(4) thousandfor the 13 weeks ended September 27, 2008. Other income (expense) was $5 thousand for the 27 weeks ended October 3,2009 versus $(16) thousand for the 26 weeks ended September 27, 2008.

 

*Income Taxes*

Incometax expense was $388 thousand, or 36.0% of pre-tax income of $1.1 million forthe 14 weeks ended October 3, 2009. The income tax (benefit) was $(3.1) million, or 36.0% of pre-tax (loss)of $(8.6) million for the 13 weeks ended September 27, 2008.  Income tax expense was $1.1 million, or 36.0%of pre-tax income of $3.1 million for the 27 weeks ended October 3,2009.  The income tax (benefit) was$(4.8) million, or 36.0% of pre-tax (loss) of $(13.2) million for the 26 weeksended September 27, 2008.  Theentire $1.1 million of income tax expense for the six months ended October 3,2009 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 credit carryforwards.  The Company expects to fully utilize thefederal and state net operating loss carryforwards and, accordingly, there isno valuation allowance associated with the net operating loss carryforwards.

 

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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 October 3, 2009, theCompany’s working capital was $15.0 million and its current ratio was1.51.  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 September 27, 2008 was $18.6 million and its current ratio was 1.65.

 

The Company has decreased long-termdebt by $1.4 and $3.1 million during the 14 and 27 weeks ended October 3,2009, respectively.  The Company hasspent $429 and $734 thousand on capital projects during the 14 and 27 weeksended October 3, 2009, respectively. The Company has remaining availability of $9.8 million on its revolvingcredit facility, as of October 3, 2009.

 

On April 30, 2008, the Company amendedits long-term revolving line of credit agreement.  The amended agreement increased the facilityto $17,500 and the interest rate to a variable rate equal to 3.50% over the90-day London InterBank Offered Rate (“LIBOR”). The collateral for the facility now includes the Company’s real estatelocated in Atlanta, Georgia.  Inaddition, the maturity date of the agreement is now March 31, 2011.

 

The Company completed a newlong-term revolving line of credit agreement on September 5, 2008.  There were three primary changes to theprevious agreement:  (1) An increasein the capacity of the revolving credit facility to $21 million.  (2) The covenant concerning theborrowers’ minimum tangible net worth was reduced from $40 million to $35million.  (3) The advance rate withrespect to eligible receivables was increased from 60% to 70%.  The maturity date of the new agreementremained March 31, 2011.

 

On November 3, 2008, theCompany entered into an amended long-term revolving line of credit agreementretroactive to September 27, 2008, which temporarily lowered the tangiblenet worth requirement from $35 million to $30 million through the first quarterof fiscal 2010 (quarter ending June 27, 2009).  This was extended on June 5, 2009, throughJanuary 2, 2010.

 

On January 29,2009, the Company entered into an amended long-term revolving line of creditagreement, effective as of that date. There are eight primary changes to the existing Agreement between theparties:  (1) An increase in thecapacity of the revolving credit facility to $25.15 million.  (2) The creation of a supplementalrevolving master note in the principal amount of $4.15 million 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 $1.0 million 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).

 

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(5) Additionsof the limitations of the borrowers’ rights to obtain revolving loans pursuantto the supplemental revolving master note only when lender has fully advancedthe entire $21.0 million principal amount of the primary revolving master noteand borrowers also still have available revolving credit.  (6) The addition of the collateralconsisting of Cagle’s processing plant located in Pine Mountain Valley,Georgia.  (7) The advance rate withrespect to eligible inventories is being increased from 40% to 60% and theadvance rate with respect to eligible receivables is being increased from 70%to 80%.  (8) The interest rates weremodified by the following provisions: (a) Interest will accrue on theunpaid principal balance of the revolving loans, 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).  As of October 3,2009, the Company is in compliance with the revolving line of credit agreement’scovenants.

 

As of November 16,2009 the Company is negotiating an amended long-term revolving line of credit,extending the $21 million facility maturity date from March 2011 to March 2012and the $4.15 million supplemental facility maturity date to October 2010.  The $4.15 million supplemental facility hasnot been utilized since its inception in January 2009.

 

Inaddition to the covenants described above, the Company must also comply withcertain restrictive covenants associated with the term note payable.  These covenants require the Company tomaintain (1) a maximum leverage ratio (2) minimum fixed chargecoverage ratio (3) minimum adjusted earnings before interest,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 has available borrowings of $9.8million on the long-term revolving line of credit as of October 3, 2009.

 

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 oroperating leases.

 

*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 management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, 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 the presentationof 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 ourfeed ingredient 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 product outside for further processing 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 atOctober 3, 2009.  The Company’stheoretical interest rate exposure on variable rate borrowings at October 3,2009, would be, with a one percentage point increase in average interest rateson the Company’s borrowings would increase future interest expense by $12.8thousand per month and a two percentage point increase would increase futureinterest expense by $25.6 thousand per month. The Company determined these amounts based on $15.35 million of variablerate borrowings at October 3, 2009, multiplied by 1.0% and 2.0%,respectively, and divided by twelve.  TheCompany is currently not using any interest rate collars, hedges, or otherderivative financial instruments to manage or reduce interest rate risk.  As a result, any increase in interest rateson the Company’s variable rate borrowings would increase interest expense andreduce net income.

 

*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 October 3, 2009, the Company’s cashbalances in FDIC insured bank accounts totaled approximately $1.2 million whichexceeds the Federal Deposit Insurance Corporation limit of $250 thousand.

 

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**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 accountingprinciples.  The Company’s management,with the participation of the Chief Executive Officer and Chief FinancialOfficer, have evaluated any changes in the Company’s internal control overfinancial reporting that occurred during the period covered by this quarterlyreport, and they have concluded that there was no change to the Company’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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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 more difficult orcostly for us to obtain financing for our operations or investments or torefinance our debt in the future;

·                  cause our lenders to departfrom prior credit industry practice and make more difficult or expensive thegranting of any technical or other waivers under our credit agreements to theextent we may seek them in the future;

·                  impair the financialcondition of some of our customers and suppliers thereby increasing customerbad debts or non-performance by suppliers;

·                  negatively impact demand forprotein products, which could result in a reduction of sales, operating incomeand 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, in this fiscal year, the Company has been able to attract newcontract-based customers of similar volume that will approximate this formercustomer’s sales volume.  These newcustomers should provide a market for our products without a significantdeterioration in operating income.

 

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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 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.

 

**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 - October 3, 2009 |       | 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      |   |
|   |  November 16,  2009                               |   |
|   |                                                        |   |
| BY:    | /s/  Mark M. Ham IV                                         |   |
|   |  Executive  Vice President and Chief Financial Officer |   |
|   |  November 16, 2009                                |   |

 

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