Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended January 1, 2011 or**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from        to      **

 

**COMMISSION FILE NUMBER:  001-07138**

 

**CAGLE’S, INC.**

(Exact Name Of Registrant As Specified In Its Charter)

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (section 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange 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 shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

| Class A Common Stock at $1.00 par value |   | 4,616,208 shares as of February 10, 2011. |   |
|----------------------------------------------|--------|------------------------------------------------|--------|

 

 

 

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Table of Contents

 

**FORM 10-Q**

 

**Cagle’s, Inc.**

**January 1, 2011**

** **

**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 | 13       |
| Item 3.           | Quantitative   and Qualitative Disclosures About Market Risk                                 | 19       |
| Item 4.           | Controls and   Procedures                                                                    | 20       |
|              |                                                                                         |     |
| ** **        | **PART II   OTHER INFORMATION**                                                         |     |
|              |                                                                                         |     |
| Item 1.           | Legal Proceedings                                                                            | 21       |
| Item 1.A.         | Risk Factors                                                                                 | 21       |
| Item 2.           | Unregistered   Sales of Equity Securities and Use of Proceeds                                | 23       |
| Item 3.           | Defaults upon   Senior Securities                                                            | 23       |
| Item 4.           | Submission of   Matters to a Vote of Security Holders                                        | 23       |
| Item 5.           | Other Information                                                                            | 23       |
| Item 6.           | Exhibits                                                                                     | 24       |
|              |                                                                                         |     |
| Signatures        |                                                                                         |     |
|              |                                                                                         |     |
| Exhibit 31.1 |                                                                                         |     |
| Exhibit 31.2 |                                                                                         |     |
| Exhibit 32.1 |                                                                                         |     |
| Exhibit 32.2 |                                                                                         |     |

 

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** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Condensed Consolidated Balance Sheets**

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

 

**Part I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

** **
| ** **                                                                                                                                         | ** ** | **January 1, 2011** | ** ** | **April 3, 2010** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                         | ** ** | **(Unaudited)**               | ** ** | ** **                  | ** ** |
| Assets                                                                                                                                             |       |                          |       |                        |       |
| Current   assets                                                                                                                                   |       |                          |       |                        |       |
| Cash                                                                                                                                               |       | $                             | 1,906      |                        | $          | 1,872 |   |
| Trade   accounts receivable, less allowance for doubtful accounts of $257 and $174 at   January 2011 and April 2010, respectively        |       | 15,001                        |       | 15,769                      |       |
| Inventories                                                                                                                                        |       | 31,926                        |       | 26,065                      |       |
| Other   current assets                                                                                                                             |       | 598                           |       | 305                         |       |
| Total   current assets                                                                                                                             |       | 49,431                        |       | 44,011                      |       |
| Property,   plant and equipment, at cost                                                                                                           |       |                          |       |                        |       |
| Land                                                                                                                                               |       | 1,976                         |       | 1,976                       |       |
| Buildings   and improvements                                                                                                                       |       | 59,896                        |       | 59,698                      |       |
| Machinery,   furniture and equipment                                                                                                               |       | 45,270                        |       | 42,213                      |       |
| Vehicles                                                                                                                                           |       | 5,667                         |       | 5,249                       |       |
| Construction   in progress                                                                                                                         |       | 402                           |       | 932                         |       |
|                                                                                                                                               |       | 113,211                       |       | 110,068                     |       |
| Accumulated   depreciation                                                                                                                         |       | (78,674                       | )          | (75,199                     | )          |
| Property,   plant and equipment, net                                                                                                               |       | 34,537                        |       | 34,869                      |       |
| Other   assets                                                                                                                                     |       |                          |       |                        |       |
| Deferred   financing costs, net                                                                                                                    |       | 99                            |       | 83                          |       |
| Deferred   income taxes                                                                                                                            |       | 4,103                         |       | 7,141                       |       |
| Other   assets                                                                                                                                     |       | 1,364                         |       | 1,515                       |       |
| Total   other assets                                                                                                                               |       | 5,566                         |       | 8,739                       |       |
| Total   assets                                                                                                                                     |       | $                             | 89,534     |                        | $          | 87,619 |   |
|                                                                                                                                               |       |                          |       |                        |       |
| Liabilities and Stockholders’ Equity                                                                                                          |       |                          |       |                        |       |
| Current   liabilities                                                                                                                              |       |                          |       |                        |       |
| Current   maturities of long-term debt                                                                                                             |       | $                             | 2,848      |                        | $          | 2,685 |   |
| Accounts   payable                                                                                                                                 |       | 16,940                        |       | 16,142                      |       |
| Accrued   expenses and compensation                                                                                                                |       | 5,379                         |       | 5,685                       |       |
| Deferred   income taxes                                                                                                                            |       | 2,739                         |       | 2,739                       |       |
| Total   current liabilities                                                                                                                        |       | 27,906                        |       | 27,251                      |       |
| Long-term   debt, less current maturities                                                                                                          |       | 21,875                        |       | 25,033                      |       |
| Stockholders’   equity                                                                                                                        |       |                          |       |                        |       |
| Preferred   stock, $1 par value; 1,000 shares authorized, none issued                                                                              |       | —                        |       | —                      |       |
| Common   stock, $1 par value; 9,000 shares authorized, 4,617 shares issued and 4,616   shares outstanding at January 2011 and April 2010 |       | 4,616                         |       | 4,616                       |       |
| Treasury   stock, at cost                                                                                                                          |       | (80                           | )          | (80                         | )          |
| Additional   paid-in capital                                                                                                                       |       | 3,600                         |       | 3,600                       |       |
| Retained   earnings                                                                                                                                |       | 31,617                        |       | 27,199                      |       |
| Total   stockholders’ equity                                                                                                                  |       | 39,753                        |       | 35,335                      |       |
| Total   liabilities and stockholders’ equity                                                                                                  |       | $                             | 89,534     |                        | $          | 87,619 |   |

 

The accompanying notes are an integral part of 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)**

 
| ** **                                   | ** ** | **13 Weeks Ended**  | ** ** | **13 Weeks Ended**  | ** ** | **39 Weeks Ended**  | ** ** | **40 Weeks Ended**  | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **January 1, 2011** | ** ** | **January 2, 2010** | ** ** | **January 1, 2011** | ** ** | **January 2, 2010** | ** ** |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Net sales                                    |       | $                             | 71,977     |                          | $          | 70,411                        |       | $                             | 233,725    |   | $ | 235,996 |   |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Costs and   expenses                         |       |                          |       |                          |       |                          |       |                          |       |
| Cost of sales                                |       | 71,178                        |       | 66,943                        |       | 212,926                       |       | 220,470                       |       |
| Selling and   delivery                       |       | 2,593                         |       | 2,124                         |       | 7,695                         |       | 6,596                         |       |
| General and   administrative                 |       | 744                           |       | 1,498                         |       | 4,698                         |       | 5,148                         |       |
| Total costs and   expenses                   |       | 74,515                        |       | 70,565                        |       | 225,319                       |       | 232,214                       |       |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Operating income   (loss)                    |       | (2,538                        | )          | (154                          | )          | 8,406                         |       | 3,782                         |       |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Other income   (expense)                     |       |                          |       |                          |       |                          |       |                          |       |
| Interest expense                             |       | (318                          | )          | (393                          | )          | (1,037                        | )          | (1,250                        | )          |
| Other income   (expense), net                |       | 49                            |       | 9                             |       | 87                            |       | 14                            |       |
| Total other   income (expense), net          |       | (269                          | )          | (384                          | )          | (950                          | )          | (1,236                        | )          |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Income (loss)   before income taxes          |       | (2,807                        | )          | (538                          | )          | 7,456                         |       | 2,546                         |       |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Income tax   expense (benefit)               |       | (657                          | )          | (193                          | )          | 3,038                         |       | 917                           |       |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Net income (loss)                            |       | $                             | (2,150     | )                             | $          | (345                          | )          | $                             | 4,418      |   | $ | 1,629 |   |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Weighted-average   common shares outstanding |       |                          |       |                          |       |                          |       |                          |       |
| Basic                                        |       | 4,616                         |       | 4,616                         |       | 4,616                         |       | 4,617                         |       |
| Diluted                                      |       | 4,616                         |       | 4,616                         |       | 4,616                         |       | 4,617                         |       |
|                                         |       |                          |       |                          |       |                          |       |                          |       |
| Per common share                             |       |                          |       |                          |       |                          |       |                          |       |
| Net income                                   |       |                          |       |                          |       |                          |       |                          |       |
| Basic                                        |       | $                             | (0.46      | )                             | $          | (0.08                         | )          | $                             | 0.96       |   | $ | 0.35 |   |
| Diluted                                      |       | $                             | (0.46      | )                             | $          | (0.08                         | )          | $                             | 0.96       |   | $ | 0.35 |   |
| Dividends                                    |       | $                             | —     |                          | $          | —                        |       | $                             | —     |   | $ | — |   |

 

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

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Condensed Consolidated Statements of Cash Flows**

**(In Thousands)**

**(Unaudited)**

** **
| ** **                                                                         | ** ** | **39 Weeks Ended**  | ** ** | **40 Weeks Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **January 1, 2011** | ** ** | **January 2, 2010** | ** ** |
| Cash flows from   operating activities                                             |       |                          |       |                          |       |
| Net income                                                                         |       | $                             | 4,418      |                          | $          | 1,629 |   |
| Adjustments to   reconcile net income to net cash provided by operating activities |       |                          |       |                          |       |
| Depreciation                                                                       |       | 3,734                         |       | 3,238                         |       |
| Amortization                                                                       |       | 48                            |       | 63                            |       |
| Gain on sale of   property, plant and equipment                                    |       | (42                           | )          | (3                            | )          |
| Deferred income taxes                                                              |       | 3,038                         |       | 917                           |       |
| Changes in operating   assets and liabilities                                      |       |                          |       |                          |       |
| Trade accounts   receivable, net                                                   |       | 768                           |       | 295                           |       |
| Inventories                                                                        |       | (5,861                        | )          | 2,953                         |       |
| Other current assets                                                               |       | (293                          | )          | (220                          | )          |
| Other assets                                                                       |       | 151                           |       | 15                            |       |
| Accounts payable                                                                   |       | 113                           |       | (5,209                        | )          |
| Accrued expenses and   compensation                                                |       | (306                          | )          | 1,171                         |       |
| Net cash provided by   operating activities                                        |       | 5,768                         |       | 4,849                         |       |
| Cash flows from   investing activities                                             |       |                          |       |                          |       |
| Purchases of property,   plant and equipment                                       |       | (3,402                        | )          | (1,400                        | )          |
| Proceeds from sale of   property, plant and equipment                              |       | 42                            |       | 3                             |       |
| Proceeds from   redemption of life insurance cash values                           |       | —                        |       | 180                           |       |
| Net cash used in   investing activities                                            |       | (3,360                        | )          | (1,217                        | )          |
| Cash flows from   financing activities                                             |       |                          |       |                          |       |
| Proceeds on revolving   line of credit                                             |       | 56,575                        |       | 66,450                        |       |
| Payments on revolving   line of credit                                             |       | (57,575                       | )          | (69,025                       | )          |
| Payments of long-term   debt                                                       |       | (1,995                        | )          | (1,868                        | )          |
| Increase in negative   book cash balances                                          |       | 685                           |       | 955                           |       |
| Payments of deferred   financing costs                                             |       | (64                           | )          | (48                           | )          |
| Repurchase of stock                                                                |       | —                        |       | (48                           | )          |
| Net cash used in   financing activities                                            |       | (2,374                        | )          | (3,584                        | )          |
| Net increase in cash                                                               |       | 34                            |       | 48                            |       |
| Cash - beginning of   period                                                       |       | 1,872                         |       | 1,246                         |       |
| Cash - end of period                                                               |       | $                             | 1,906      |                          | $          | 1,294 |   |
| Supplementary   disclosures of cash flow information                               |       |                          |       |                          |       |
| Cash paid during the   period for:                                                 |       |                          |       |                          |       |
| Interest                                                                           |       | $                             | 1,035      |                          | $          | 1,246 |   |
| Supplementary   disclosures of noncash transactions                                |       |                          |       |                          |       |
| Net unrealized gain on   hedging activities, net of income tax expense of $485     |       | $                             | —     |                          | $          | 862 |   |
| Assets acquired   pursuant to capital lease obligations                            |       | —                        |       | 96                            |       |

 

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

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 1, 2011**

**(In Thousands)**

**(Unaudited)**

 

**1.     Basis of Presentation**

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments which are of a normal and recurring nature necessary to present fairly the consolidated financial position of Cagle’s, Inc. and its wholly owned subsidiary Cagle Farms, Inc. (collectively, the “Company”) as of January 1, 2011 and the results of their operations for the 13 and 39 weeks ended January 1, 2011 and the 13 and 40 weeks ended January 2, 2010.  The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Results of operations for the 13 and 39 weeks ended January 1, 2011 are not necessarily indicative of results to be expected for the full fiscal year ending April 2, 2011.

 

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

 

**2.     Significant Accounting Policies**

 

Refer to the Company’s 2010 annual report on Form 10-K, Note 1 to Consolidated Financial Statements, for a description of significant accounting policies.  There have been no material changes to these accounting policies.

 

**3.     Cash and Cash Equivalents**

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.  The Company’s cash management system allows the Company to fund outstanding checks when presented to the financial institution for payment resulting in book overdrafts.  Book overdrafts are recorded in accounts payable in the consolidated balance sheets and changes are reflected as a financing activity in the consolidated statements of cash flows.  As of January 1, 2011 and April 3, 2010, the Company had book overdrafts of $4,793 and $4,108, respectively.

 

**4.     Inventories**

 

Inventories consist of the following at January 1, 2011 and April 3, 2010:

 
| ** **                     | ** ** | **January 2011** | ** ** | **April 2010** | ** ** |
|--------------------------------|------------|-----------------------|------------|---------------------|------------|
|                           |       |                  |       |                |       |
| Finished   products            |       | $                     | 5,949      |                | $          | 4,277 |   |
| Field   inventory and breeders |       | 17,504                |       | 15,667              |       |
| Feed,   eggs and medication    |       | 7,049                 |       | 4,779               |       |
| Supplies                       |       | 1,424                 |       | 1,342               |       |
|                           |       |                  |       |                |       |
|                           |       | $                     | 31,926     |                | $          | 26,065 |   |

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 1, 2011**

**(In Thousands)**

**(Unaudited)**

 

**5.     Long-Term Debt**

 

Long-term debt consists of the following at January 1, 2011 and April 3, 2010:

 
| ** **                                                                                                                                                                                                                                                                            | ** ** | **January 2011** | ** ** | **April 2010** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Long-term   revolving line of credit; maturing March 31, 2013, interest payable   monthly, variable interest rate of London InterBank Offered Rate (“LIBOR”)   plus 3.50% (currently 3.75%); secured by accounts receivable, inventories and   the Atlanta facilities. |       | $                     | 14,900     |                | $          | 15,900 |   |
|                                                                                                                                                                                                                                                                                  |       |                  |       |                |       |
| Term   note payable; fixed interest rate of 7.86%, principal and interest payable   monthly of $290 through March 1, 2012 with a maturity payable of $6,513   on April 1, 2012; secured by the Collinsville plant, Dalton hatchery and   Rockmart feedmill.                 |       | 9,775                 |       | 11,746              |       |
|                                                                                                                                                                                                                                                                                  |       |                  |       |                |       |
| Capital   leases payable, imputed interest at 7.86%, principal and interest payable   monthly of $3, through maturity ranges of March 2012 to   August 2012; secured by the leased equipment.                                                                               |       | 48                    |       | 72                  |       |
|                                                                                                                                                                                                                                                                                  |       | 24,723                |       | 27,718              |       |
| Less   current maturities                                                                                                                                                                                                                                                             |       | 2,848                 |       | 2,685               |       |
|                                                                                                                                                                                                                                                                                  |       |                  |       |                |       |
| Long-term   debt, less current maturities                                                                                                                                                                                                                                             |       | $                     | 21,875     |                | $          | 25,033 |   |

 

On February 9, 2011, the Company entered into Amendment Number 6 to the long-term revolving line of credit agreement, effective as of January 3, 2011.  There were two primary changes to the existing Agreement between the parties: (1) The Company’s minimum tangible net worth covenant remains $35,000 through December 31, 2011 and commencing as of January 1, 2012 the tangible net worth must not be less than $40,000 at any time.  The step-up to the $40,000 minimum tangible net worth was previously scheduled to commence as of January 4, 2011.  (2) To change the definition of the applicable margin in the interest rate calculation from a fixed margin of 3.50% to a variable margin based upon the Company’s total leverage ratio.  The variable margin has four tiers; 3.25%, 3.50%, 3.75% and 4.50%.  The Company is currently at the 3.50% tier.  As of February 10, 2011, the Company is in compliance with the long-term revolving line of credit agreement’s covenants: tangible net worth, capital expenditures, leverage ratio and current ratio.

 

On September 29, 2010, the Company entered into Amendment Number 5 to the long-term revolving line of credit agreement.  There were four primary changes to the existing Agreement between the parties: (1) The maturity date of the $21,000 portion of the revolving credit facility was extended to March 31, 2013.  (2) The $4,150 supplemental portion of the revolving credit facility was

 

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** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 1, 2011**

**(In Thousands)**

**(Unaudited)**

 

cancelled at the Company’s request and was fully satisfied by the Company.  (3) The capital expenditures covenant was increased to $5,500 from $4,000 for the fiscal year ending April 2, 2011 and reverts to $4,000 thereafter.  (4) The release of the Lender’s collateral interest in the Company’s land, building and equipment comprising the Pine Mountain Valley Plant in Harris County, Georgia.  As of January 1, 2011 and February 10, 2011, the Company is in compliance with the long-term revolving line of credit agreement’s covenants: tangible net worth, capital expenditures, leverage ratio and current ratio.

 

As of January 1, 2011, and in accordance with the amended long-term revolving line of credit agreement, the lender has issued a $1,000 letter of credit in favor of a third party related to the Company’s self-insurance workers’ compensation liabilities.

 

The Company’s inventory and accounts receivable levels support collateralized borrowing of the entire $21,000 primary revolving master note in the long-term revolving line of credit agreement.  The Company’s $14,900 principal balance and $1,000 letter of credit results in $5,100 of available borrowings on the long-term revolving line of credit as of January 1, 2011.

 

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

 

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

 
| January 2, 2011 - December 31, 2011 |   | $      |  2,848 |   |
|-------------------------------------------------------------------|--------|--------|-------------|--------|
| January 1,   2012 - December 29, 2012                   |   | 6,975  |        |
| December 30,   2012 - December 28, 2013                 |   | 14,900 |        |
| Long-term   debt                                                  |   | $      | 24,723      |   |

 

 

**6.     Fair Value of Long-Term Debt**

 

Fair values of debt are based on current market interest rate evaluations of the Company’s long-term revolving line of credit and term note payable.  The fair value of the long-term revolving line of credit approximates its carrying value.  The fair value and carrying value of the term note payable are as follows at January 1, 2011 and April 3, 2010:

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 1, 2011**

**(In Thousands)**

**(Unaudited)**

 
| ** **        | ** ** | **January 2011** | ** ** | **April 2010**     | ** ** |
|-------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **        | ** ** | **Fair Value**   | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** |
|              |       |                  |       |                    |       |   |   |   |   |
| Term note payable |       | $                     | 9,908      |                    | $          | 9,775 |   | $ | 11,746 |   | $ | 11,746 |   |
|                   |            |                       |            |                         |            |  |  |  |  |  |  |  |  |

 

**7.     Income Taxes**

 

The Company uses an effective tax rate of 36% for interim accounting periods.  All income tax expense, or benefit, of the interim fiscal 2010 and fiscal 2011 periods was charged against deferred tax assets, as none is currently payable due to the Company’s federal and state net operating loss and tax credit carryforwards.  During the quarter ended January 1, 2011, the Company recorded an additional $354 income tax expense and a corresponding $354 reduction in deferred tax assets for an ongoing Internal Revenue Service audit of a joint venture that the Company sold its entire 30% interest in August 2006.

 

As of the fiscal year ended April 3, 2010, the Company had federal net operating loss carryforwards of $12,679 and federal and state tax credit carryforwards of $9,430.  The net operating loss and tax credit carryforwards are available to reduce income taxes through 2029.  Realization of these future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period.  Due to the significant amount of income that would be needed to fully utilize the credits available, the Company has recorded a valuation allowance for a significant portion of the deferred tax asset associated with the state tax credit carryforwards.  The Company expects to fully utilize the federal and state net operating loss carryforwards and, accordingly, there is no valuation allowance associated with the net operating loss carryforwards.

 

The Company uses ASC 740-10, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements.  ASC 740-10 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company had no significant unrecognized tax benefits at the date of adoption or as of the fiscal year ended April 3, 2010.  Accordingly, the Company does not have any interest or penalties related to uncertain tax positions.  However, if interest or penalties were to be incurred related to uncertain tax positions, such amounts would be recognized in income tax expense.  The Company’s tax periods for all years after 2007 remain open to examination by the federal and state taxing jurisdictions to which the Company is subject.

 

**8.     Stockholders’ Equity**

 

The Board of Directors (the “Board”) has authorized the purchase of up to $15,000 of the Company’s stock on the open market.  The Company did not purchase any of the Company’s stock during the 13 and 39 weeks ended January 1, 2011.  The Company did purchase 22 shares for $48 during the fiscal year ended April 3, 2010.  Through January 1, 2011, the Company has cumulatively

 

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**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 1, 2011**

**(In Thousands)**

**(Unaudited)**

 

purchased 819 shares at a total cost of $10,207.  The Company has accounted for these shares using the retirement method.

 

**9.     Related Parties**

 

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

 

The firm of Byrne, Davis & Hicks, P. C., in which G. Bland Byrne, III a director of the Company is a principal, receives retainer payments of $60 each quarter from the Company for legal services rendered.  Retainer and other payments of $184 and $202 were made by the Company during the 39 weeks ended January 1, 2011 and the 40 weeks ended January 2, 2010, respectively.

 

Included in other assets at January 1, 2011 and April 3, 2010 is a receivable of $1,242 due to the Company from two related party irrevocable life insurance trusts.

 

**10.  Financial Instruments**

 

The Company is a purchaser of certain commodities, such as corn and soybean meal in the course of normal operations.  The Company has used derivative financial instruments to reduce its exposure to various market risks.  Generally, contract terms of a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation.  Contracts that are designated and highly effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting, as defined by ASC 815-10, “Accounting for Derivative Instruments and Hedging Activities.”  If a derivative instrument is 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 the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings.  The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings as a component of cost of sales.  Instruments the Company holds as part of its risk 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 or losses reported currently in earnings.  The Company currently has no commodity contracts.

 

**11.  Comprehensive Income**

 

Comprehensive income (loss) includes net earnings and all other changes in equity during a period except those resulting from investments by or distributions to stockholders.  Other comprehensive income (loss) for all periods presented consists of fair value adjustments associated

 

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** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 1, 2011**

**(In Thousands)**

**(Unaudited)**

 

with cash flow hedges pursuant to ASC 815-10, “Accounting for Derivative Instruments and Hedging Activities.”

 
| ** **                          | ** ** | **13 Weeks Ended**  | ** ** | **13 Weeks Ended**  | ** ** | **39 Weeks Ended**  | ** ** | **40 Weeks Ended**  | ** ** |
|-------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **January 1, 2011** | ** ** | **January 2, 2010** | ** ** | **January 1, 2011** | ** ** | **January 2, 2010** | ** ** |
|                                |       |                          |       |                          |       |                          |       |                          |       |
| Net income (loss)                   |       | $                             | (1,796     | )                             | $          | (345                          | )          | $                             | 4,772      |   | $ | 1,629 |   |
| Reclassification to net   earnings  |       | —                        |       | 449                           |       | —                        |       | 1,347                         |       |
| Tax expense                         |       | —                        |       | (162                          | )          | —                        |       | (485                          | )          |
|                                |       |                          |       |                          |       |                          |       |                          |       |
| Total comprehensive   income (loss) |       | $                             | (1,796     | )                             | $          | (58                           | )          | $                             | 4,772      |   | $ | 2,491 |   |

 

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 as cash flow hedges, whereby the contracts were recorded at fair value on the consolidated balance sheets as either an asset or liability with any changes in fair value recorded in accumulated other comprehensive income (loss).  In a cash flow hedge, a futures contract would exactly match the pricing date of the relevant anticipated inventory purchases.  Through the end of the second quarter of the fiscal year ended March 28, 2009, the Company continued to be 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 grain markets, the Company concluded it was no longer practical to keep the futures.

 

As a result, the Company voluntarily discontinued hedge accounting in the second quarter of the fiscal year ended March 28, 2009 by de-designating the previously defined hedge relationship.  The de-designation of the cash flow hedge was done in accordance with Derivatives Implementation Group (“DIG”) Issue Nos. G3, G17, G18 and G20, which generally require that the net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated other comprehensive income (loss), unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter.  As such the Company continued to hold inventory purchase agreements in excess of futures contracts and have no indication that the futures commitment on the hedged inventory purchases is in jeopardy of discontinuing.  Therefore, the deferred losses related to the derivative that were de-designated were not recognized immediately and were instead reclassified into earnings during the contractual terms of the inventory purchases.

 

For the 40 weeks ended January 2, 2010, the Company recognized $1,347 of expense in cost of sales related to our cash flow hedge which was determined to be fully effective.  The Company currently has no commodity contracts.

 

**12.  New Accounting Pronouncements**

 

Measuring Liabilities at Fair Value. In August 2009, the FASB issued new U.S. GAAP guidance clarifying the measurement of liabilities at fair value. Among other things, the guidance clarifies how the price of a traded debt security (an asset value) should be considered in estimating the fair value of the issuer’s liability and is effective for the Company’s reporting period ended October 

 

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** **

**CAGLE’S, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**January 1, 2011**

**(In Thousands)**

**(Unaudited)**

 

3, 2009 and thereafter.  The adoption of this guidance did not have an effect on the Company’s consolidated financial statements.

 

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** **

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

 

Thedisclosuresinthisquarterlyreportarecomplementarytothose made in the Company’s 2010 annual report on Form 10-K.

 

This Quarterly Report, and other periodic reports filed by the Company under the Securities Exchange Act of 1934, and other written or oral statements made by it or on its behalf, may include forward-looking statements, which are based on a number of assumptions about future events and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and estimates expressed in such statements.  These risks, uncertainties and other factors include, but are not limited to the following:

 

·                  Changes in the market price for the Company’s finished products and feed grains, both of which may fluctuate substantially and exhibit cyclical characteristics typically associated with commodity markets.

 

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

 

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

 

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

 

·                  Various inventory risks due to changes in market conditions.

 

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

 

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

 

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

 

·                  Changes in the availability and cost of labor and growers.

 

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

 

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

 

All of the Company’s business activities are conducted on a vertically integrated basis within one industry segment, poultry products.  The Company’s various poultry products are closely related, have similar purposes and uses, and are similar in terms of profitability and types and degrees of risks.  In addition, the production processes are similar to the extent that (a) production facilities are shared or are interchangeable and (b) the same types of raw materials, labor, and capital are used.  Markets and marketing methods are comparable for all products to the extent that they are generally sold to the same types of customers by a common sales force and are sensitive to changes in economic conditions to the same degree.

 

Results of Operations

 

*Net Sales*

 

Revenues for the third quarter were $72.0 million, up 2.2% from $70.4 million, reflecting an 11.9% increase in pounds sold and a reduction in sales price per pound of 6.9 cents as compared to the third quarter in the prior fiscal year.  Revenues for the nine month period were $233.7 million, down 1.0% from $236.0, reflecting a 1.7% decrease in pounds sold as compared to the nine month period in the prior fiscal year.

 

Quoted market prices for products for the third quarter of fiscal 2011 versus the same period last quarter and last year fluctuated as follows: 

 
| ** **                 | ** ** | **% Change**                 | ** ** | **% Change**                 | ** ** | **% Change**                | ** ** |
|----------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **3rd qtr. 11 vs** | ** ** | **3rd qtr. 11 vs** | ** ** | **39 Wks. 11 vs** | ** ** |
| ** **                 | ** ** | **2nd qtr. 11**         | ** ** | **3rd qtr. 10**         | ** ** | **40 Wks. 10**         | ** ** |
|                       |       |                              |       |                              |       |                             |       |
| Tenders                    |       | (30.8                             | )%         | (4.5                              | )%         | 9.5                              | %          |
| Wings                      |       | 0.0                               | %          | (20.8                             | )%         | (15.2                            | )%         |
| Drums                      |       | (11.4                             | )%         | (22.8                             | )%         | (20.3                            | )%         |
| Boneless Breast            |       | (24.8                             | )%         | 4.8                               | %          | 12.8                             | %          |
| Boneless Thigh             |       | 3.3                               | %          | 2.1                               | %          | (14.4                            | )%         |
| Leg Quarters               |       | (2.0                              | )%         | 7.7                               | %          | (7.5                             | )%         |
| Whole Bird without Giblets |       | (7.6                              | )%         | 26.2                              | %          | 20.4                             | %          |

 

*Cost of sales*

 

Cost of sales for the third quarter were $71.2 million, up 6.3% from $66.9 million, as feed ingredient prices increased 18.6% as compared to the third quarter in the prior fiscal year.  Cost of sales for the nine month period were $212.9 million, down 3.4% from $220.5 million, reflecting a 39 week period in the current year versus a 40 week period in the prior fiscal year.

 

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* *

*Selling and Delivery*

 

Selling and delivery expenses of $2.6 million increased $469 thousand, or 22.1%, for the 13 weeks ended January 1, 2011 as compared to $2.1 million for the 13 weeks ended January 2, 2010.  This increase is principally due to a $551 thousand increase in outside storage expenses, from $27 thousand to $578 thousand, during these compared quarters.  Other changes in selling and delivery expense items amounted to a net decrease of $82 thousand during the two periods.

 

Selling and delivery expenses of $7.7 million increased $1.1 million, or 16.7%, for the 39 weeks ended January 1, 2011 as compared to $6.6 million for the 40 weeks ended January 2, 2010.  This increase is due to a $1.2 million increase in outside storage expenses, from $143 thousand to $1.4 million, during these compared nine month periods.  Other changes in selling and delivery expense items amounted to a net decrease of $135 thousand during the two periods.

 

*General and Administrative*

 

General and administrative expenses of $744 thousand decreased $754 thousand, or 50.3%, for the 13 weeks ended January 1, 2011 as compared to $1.5 million for the 13 weeks ended January 2, 2010.  The principal decrease is a $592 thousand reduction in accrued incentive compensation, from $892 thousand to $300 thousand, during the 13 weeks ended January 1, 2011.  No incentive compensation was accrued during the 13 weeks ended January 2, 2010.  Other decreases for the 13 weeks ended January 1, 2011 as compared to the 13 weeks ended January 2, 2010 were $314 thousand group medical insurance and $59 thousand insurance, legal and accounting.  Increases for the 13 weeks ended January 1, 2011 as compared to the 13 weeks ended January 2, 2010 were $114 thousand property taxes, $51 thousand compensation and related, and $46 thousand various expenses.

 

General and administrative expenses of $4.7 million decreased $450 thousand, or 8.7%, for the 39 weeks ended January 1, 2011 as compared to $5.1 million for the 40 weeks ended January 2, 2010.  The decreases were $442 thousand group medical insurance, $256 thousand insurance, legal and accounting, $88 thousand compensation and related, and $24 thousand various expenses, while there was an increase of $300 thousand in accrued incentive compensation and $60 thousand property taxes during these compared nine month periods.  No incentive compensation was accrued during the 40 weeks ended January 2, 2010.

 

*Interest Expense*

 

Interest expense of $318 thousand decreased by $75 thousand, or 19.1%, for the 13 weeks ended January 1, 2011 as compared to $393 thousand for the 13 weeks ended January 2, 2010.  This is due to average long-term debt decreasing for the compared 13 week periods.  Long-term debt went from $20.6 million to $24.7 million during the 13 weeks ended January 1, 2011, with a daily average of $21.9 million.  Long-term debt went from $28.5 million to $27.2 million during the 13 weeks ended January 2, 2010, with a daily average of $27.4 million.

 

Interest expense of $1.0 million decreased by $213 thousand, or 17.0%, for the 39 weeks ended January 1, 2011 as compared to $1.2 million for the 40 weeks ended January 2, 2010.  This is due to average long-term debt decreasing for the compared nine month periods.  Long-term debt went from $27.7 million to $24.7 million during the nine months ended January 1, 2011, with a daily average of $23.0 million.  Long-term debt went from $31.5 million to $27.2 million during the nine months ended January 2, 2010, with a daily average of $28.2 million.

 

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*Other Income (Expense)*

 

Other income (expense) was $49 thousand for the 13 weeks ended January 1, 2011 versus $9 thousand for the 13 weeks ended January 2, 2010.  Other income (expense) was $87 thousand for the 39 weeks ended January 1, 2011 versus $14 thousand for the 40 weeks ended January 2, 2010.  The $40 thousand and $73 thousand net increase for the 13 and 39 weeks ended January 1, 2011, respectively, was due to minor recoveries of written-off receivables and small gains on fixed asset disposals.

 

*Income Taxes*

 

Income tax expense (benefit) was $(657) thousand, or 23.4% of pre-tax (loss) of $(2.8) million for the 13 weeks ended January 1, 2011 and $3.0 million, or 40.7% of pre-tax income of $7.5 million for the 39 weeks ended January 1, 2011.  Income tax expense (benefit) was $(193) thousand, or 36.0% of pre-tax (loss) of $(538) thousand for the 13 weeks ended January 2, 2010 and $917 thousand, or 36.0% of pre-tax income of $2.5 million for the 40 weeks ended January 2, 2010.

 

The Company uses an effective tax rate of 36% for interim accounting periods.  All income tax expense, or benefit, of these periods was charged against deferred tax assets, as none is currently payable due to the Company’s federal and state net operating loss and tax credit carryforwards.  During the quarter ended January 1, 2011, the Company recorded an additional $354 thousand income tax expense and a corresponding $354 thousand reduction in deferred tax assets for an ongoing Internal Revenue Service audit of a joint venture that the Company sold its entire 30% interest in August 2006.

 

As of the fiscal year ended April 3, 2010, the Company had federal net operating loss carryforwards of $12.7 million and federal and state tax credit carryforwards of $9.4 million.  The net operating loss and tax credit carryforwards are available to reduce income taxes through 2029.  Realization of these future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period.  Due to the significant amount of income that would be needed to fully utilize the credits available, the Company has recorded a valuation allowance for a significant portion of the deferred tax asset associated with the state tax credit carryforwards.  The Company expects to fully utilize the federal and state net operating loss carryforwards and, accordingly, there is no valuation allowance associated with the net operating loss carryforwards.

 

The Company uses ASC 740-10, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements.  ASC 740-10 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company had no significant unrecognized tax benefits at the date of adoption or as of the fiscal year ended April 3, 2010.  Accordingly, the Company does not have any interest or penalties related to uncertain tax positions.  However, if interest or penalties were to be incurred related to uncertain tax positions, such amounts would be recognized in income tax expense.  The Company’s tax periods for all years after 2007 remain open to examination by the federal and state taxing jurisdictions to which the Company is subject.

 

*Financial Condition and Liquidity*

 

As of January 1, 2011, the Company’s working capital was $21.5 million and its current ratio was 1.77.  The Company’s working capital as of the year ended April 3, 2010 was $16.8 million and its current ratio was 1.62.  As of January 2, 2010, the Company’s working capital was $14.0 million and its current ratio was 1.54.

 

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The Company increased long-term debt by $4.1 during the 13 weeks ended January 1, 2011, but has decreased long-term debt by $3.0 million during the 39 weeks ended January 1, 2011.  The Company spent $423 thousand and $3.4 million on capital projects during the 13 and 39 weeks ended January 1, 2011, respectively.  As of January 1, 2011, the Company has remaining availability of $5.1 million on its long-term revolving line of credit facility.

 

On February 9, 2011, the Company entered into Amendment Number 6 to the long-term revolving line of credit agreement, effective as of January 3, 2011.  There were two primary changes to the existing Agreement between the parties: (1) The Company’s minimum tangible net worth covenant remains $35.0 million through December 31, 2011 and commencing as of January 1, 2012 the tangible net worth must not be less than $40.0 million at any time.  The step-up to the $40.0 million minimum tangible net worth was previously scheduled to commence as of January 4, 2011.  (2) To change the definition of the applicable margin in the interest rate calculation from a fixed margin of 3.50% to a variable margin based upon the Company’s total leverage ratio.  The variable margin has four tiers; 3.25%, 3.50%, 3.75% and 4.50%.  The Company is currently at the 3.50% tier.  As of February 10, 2011, the Company is in compliance with the long-term revolving line of credit agreement’s covenants: tangible net worth, capital expenditures, leverage ratio and current ratio.

 

On September 29, 2010, the Company entered into Amendment Number 5 to the long-term revolving line of credit agreement.  There were four primary changes to the existing Agreement between the parties: (1) The maturity date of the $21.0 million portion of the revolving credit facility was extended to March 31, 2013.  (2) The $4.15 million supplemental portion of the revolving credit facility was cancelled at the Company’s request and was fully satisfied by the Company.  (3) The capital expenditures covenant was increased to $5.5 million from $4.0 million for the fiscal year ending April 2, 2011 and reverts to $4.0 million thereafter.  (4) The release of the Lender’s collateral interest in the Company’s land, building and equipment comprising the Pine Mountain Valley Plant in Harris County, Georgia.  As of January 1, 2011 and February 10, 2011, the Company is in compliance with the long-term revolving line of credit agreement’s covenants: tangible net worth, capital expenditures, leverage ratio and current ratio.

 

As of January 1, 2011, and in accordance with the amended long-term revolving line of credit agreement, the lender has issued a $1.0 million letter of credit in favor of a third party related to the Company’s self-insurance workers’ compensation liabilities.

 

The Company’s inventory and accounts receivable levels support collateralized borrowing of the entire $21.0 million primary revolving master note in the long-term revolving line of credit agreement.  The Company’s $14.9 million principal balance and $1.0 million letter of credit results in $5.1 million of available borrowings on the long-term revolving line of credit as of January 1, 2011.

 

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

 

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We expect that cash flow from operations and cash on hand should be sufficient to fund operations, to make all payments of principal and interest when due, and to fund capital expenditures for at least the next twelve months.  We may elect to finance certain capital expenditure requirements through borrowings under our credit facilities or leases.

 

*Critical Accounting Policies and Estimates*

 

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

 

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

 

*Risk Factors*

 

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

 

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

 

*Raw Materials*

 

The primary raw materials used by the Company are corn, soybean meal, and other ingredients; packaging materials; cryogenic materials; and breeder chicks.  The Company believes the sources of supply for these materials are adequate and does not expect significant difficulty in acquiring required supplies.  The major source of supply is the midwestern grain belt of the United States, although local supplies are utilized when available.  Prices for the feed ingredients are sensitive to supply fluctuations worldwide, and weather conditions, especially drought, can cause significant price volatility.  Since feed is the most significant factor in the cost of producing a broiler chicken, those fluctuations can have significant effects on margins.  The Company also purchases poultry products from outside vendors for further processing requirements.

 

The Company may choose to utilize derivatives as offered on the Chicago Board of Trade for the purpose of protecting the feed cost for fixed price sales commitments negotiated with our customers.  The Company’s two primary feed ingredients are corn and soybean meal.  A $0.10 per bushel price change in corn impacts our cost of sales by $836 thousand per year.  A $10 per ton price change in soybean meal impacts our cost of sales by $867 thousand per year.  The Company currently has no commodity contracts.

 

*Interest Rates*

 

We currently have a term note payable with no exposure to interest rate fluctuations, as the existing indebtedness carries a fixed interest rate of 7.86%.  We have a revolving credit facility which carries a variable interest rate, equal to the 90-day LIBOR rate published by the Wall Street Journal, plus a tiered applicable margin interest rate.  The current rate on the revolving credit facility is 3.75%.

 

The Company had variable interest rate exposure on the revolving credit facility at January 1, 2011.  The Company’s theoretical interest rate exposure on variable rate borrowings at January 1, 2011, with a one percentage point increase in average interest rates on the Company’s borrowings, would increase future interest expense by $12.4 thousand per month and a two percentage point increase would increase future interest expense by $24.8 thousand per month.  The Company determined these amounts based on $14.9 million of variable rate borrowings at January 1, 2011, multiplied by 1.0% and 2.0%, respectively, and divided by twelve.  The Company is currently not using any interest rate collars, hedges, or other derivative financial instruments to manage or reduce interest rate risk.  As a result, any increase

 

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in interest rates on the Company’s variable rate borrowings would increase interest expense and reduce net income.

 

*Concentration of Credit Risk*

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables or other financial instruments with a variety of customers and cash and cash investments deposited with financial institutions.

 

Concentrations of credit risk, with respect to accounts receivable and other financial instruments, are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk.  The Company controls credit risk through credit approvals, credit limits and monitoring procedures.  The Company performs ongoing credit evaluations of its customers, but generally does not require collateral to support accounts receivable.

 

**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 other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”).   Based on that evaluation, management, including the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of January 1, 2011, such controls and procedures were effective.

 

*Changes in internal controls*

 

The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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**Part II.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

The Company is routinely involved in various lawsuits and legal matters on an ongoing basis as a result of day to day operations; however, the Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company or its business.

 

**Item 1.A.  Risk Factors**

 

*Leverage*

 

Our indebtedness could adversely affect our financial condition.  We presently have, and expect to continue to have, an amount of indebtedness.  Our indebtedness could have important consequences to stockholders.  For example, it could: increase our vulnerability to general adverse economic conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and for other general corporate purposes; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive 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 those covenants could result in an event of default or require redemption of indebtedness.  Either of these events could have a material adverse effect on us.  Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future, which is dependent on various factors.  These factors include the commodity prices of feed ingredients and chicken and general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control.

 

*Additional Borrowings Available*

 

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

 

*Contamination of Products*

 

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

 

*Livestock and Poultry Disease*

 

Outbreaks of livestock diseases, in general, and poultry disease, in particular, can significantly restrict our ability to conduct our operations.  We take all reasonable precautions to ensure that our flocks are healthy and that our processing plants and other facilities operate in a sanitary and environmentally sound manner.  However, events beyond our control, such as the outbreak of disease, could significantly restrict our ability to conduct our operations.  Furthermore, an outbreak of disease could result in governmental restrictions on the import and export of our fresh chicken, to or from our suppliers, facilities, or customers, or require us to destroy one or more of our flocks.  This could result in the cancellation of orders by our customers and create adverse publicity that may have a material adverse effect on our ability to market our products successfully and on our business, reputation, and prospects.

 

*Insurance*

 

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

 

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*Significant Competition*

 

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

 

*Government Regulation*

 

Regulation, present and future, is a constant factor affecting our business.  The chicken industry is subject to federal, state, and local governmental regulation, including health and environmental areas.  We anticipate increased regulation by various agencies concerning food safety, the use of medication in feed formulations, and the disposal of poultry by-products and wastewater discharges. Unknown matters, new laws and regulations, or stricter interpretations of existing laws or 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 global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects of governmental initiatives to manage economic conditions.  Any such changes could adversely affect the demand for our poultry products, or the cost and availability of our needed raw materials and packaging materials, thereby negatively affecting our financial results.

 

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

 

·      make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future;

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

·      impair the financial condition of some of our customers and suppliers thereby increasing customer bad debts or non-performance by suppliers;

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

 

*Changes in Consumer Preference*

 

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

 

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

 

Our business could suffer significant setbacks in sales and operating income if our customers’ plans and/or markets should change significantly, or if we lost one or more of our largest customers.   Many of our agreements with our customers are generally short-term, primarily due to the nature of our products, industry practice, and the fluctuation in demand and price for our products.  At the end of calendar 2009, one of our largest customers did not renew their sales contract for calendar 2010.  However, the Company was able to attract new contract-based customers of similar volume that approximated this former customer’s sales volume.  These new customers provided a market for our products without a significant deterioration in operating income.  At the end of calendar 2010, the 2009 former customer did renew their sales contract for calendar 2011.  We continually monitor our production output and will adjust accordingly.

 

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*Members of the Cagle’s Family can Exercise Significant Control*

 

Members of the Cagle’s family beneficially own, in the aggregate, 64.5% of the Company’s outstanding common stock, giving them control of 64.5% of the total voting power of the Company’s outstanding voting stock.  In addition, three members of the Cagle’s family serve on the Company’s Board of Directors.  As a result, members of the Cagle’s family have the ability to exert substantial influence or actual control over the Company’s management and affairs and over substantially all matters requiring action by our stockholders, including amendments to our certificate of incorporation and by-laws, the election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets, and other corporate transactions.  This concentration of ownership may also delay or prevent a change in control otherwise favored by our other stockholders and could depress the Company’s stock price.

 

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

 

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

 

Amounts in thousands 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**                | ** ** |
|                              |       |                  |       |                |       |                         |       |
| April 4, 2010 -   January 1, 2011 |       | —                |       | $                   | —     |                         | $          | 4,793 |   |
| March 29, 2009 -   April 3, 2010  |       | 22                    |       | 2.20                |       | 4,793                        |       |
| March 30, 2008 -   March 28, 2009 |       | 26                    |       | 2.13                |       | 4,841                        |       |
| April 1, 2007 -   March 29, 2008  |       | 79                    |       | 7.74                |       | 4,898                        |       |
|                                   |            |                       |            |                     |            |                              |            |  |  |

 

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

 

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

 

None

 

**Item****4.  Submission of Matters to a Vote 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) Filed herewith.

(2) Previously filed and incorporated by reference herein from the Registrant’s Form 10-K for the year ended April 2, 2005.

(3) Previously filed and incorporated by reference herein from the Registrant’s Form 10-Q for the quarter ended October 2, 2004.

(4) Previously filed and incorporated by reference herein from the Registrant’s Form 10-K for the year ended April 3, 2004.

 

**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
| Cagle’s, Inc.   (Registrant) |                                                   |
|----------------------------------------|--------------------------------------------------------|
|                                   |                                                   |
| BY:                                    | /s/   J. Douglas Cagle                                 |   |
|                                   | Chairman,   Chief Executive Officer and President      |   |
|                                   | February 10,   2011                               |   |
|                                   |                                                   |   |
| BY:                                    | /s/   Mark M. Ham IV                                   |   |
|                                   | Executive   Vice President and Chief Financial Officer |   |
|                                   | February 10,   2011                               |   |

 

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