CGL.A Cagles,

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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 July 3, 2010

or

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

For the transition period from                 to                

COMMISSION FILE NUMBER: 1-7138

CAGLE’S, INC.

(Exact Name Of Registrant As Specified In Its Charter)

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.

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.

Table of Contents

FORM 10-Q

Cagle’s, Inc.

July 3, 2010

TABLE OF CONTENTS

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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

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)

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)

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

July 3, 2010

(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 July 3, 2010 and the results of their operations for the 13 weeks ended July 3, 2010 and June 27, 2009.  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 weeks ended July 3, 2010 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 July 3, 2010 and April 3, 2010, the Company had book overdrafts of $6,105 and $4,108, respectively.

4.                Inventories

Inventories consist of the following at July 3, 2010 and April 3, 2010:

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

July 3, 2010

(In Thousands)

(Unaudited)

5.               Long-Term Debt

Long-term debt consists of the following at July 3, 2010 and April 3, 2010:

On November 23, 2009, the Company entered into Amendment Number 4 to the long-term revolving line of credit agreement, effective as of October 31, 2009.  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, 2012.  (2) The maturity date of the $4,150 portion of the revolving credit facility was extended to November 23, 2010.  (3) The minimum tangible net worth covenant remained at $30,000 until July 3, 2010; commencing as of July 4, 2010 and ending on January 3, 2011, the minimum tangible net worth must not be less than $35,000 at any time; and commencing as of January 4, 2011, and at all times thereafter, the minimum tangible net worth must not be less than $40,000 at any time.  (4) The facility advance rate with respect to eligible inventories was restored to 40% from 60% and the advance rate with respect to eligible receivables is maintained at 80%.  As of July 3, 2010, the Company is in compliance with the revolving line of credit agreement’s covenants.

As of July 3, 2010, 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 and $1,251 of the $4,150 supplemental revolving master note in the long-term revolving line of credit agreement.  The Company’s $11,575 principal

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

July 3, 2010

(In Thousands)

(Unaudited)

balance and $1,000 letter of credit results in $9,676 of available borrowings on the long-term revolving line of credit as of July 3, 2010.

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 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 July 3, 2010, 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:

6.               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 weeks ended July 3, 2010.  The Company did purchase 22 shares for $48 during the fiscal year ended April 3, 2010.  Through July 3, 2010, 819 shares had been purchased by the Company at a total cost of $10,207.  The Company has accounted for these shares using the retirement method.

7.               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 approximately 65% 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, received payments of $60 from the Company for legal services rendered during each of the two quarters ended July 3, 2010 and June 27, 2009.

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

July 3, 2010

(In Thousands)

(Unaudited)

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

8.               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.

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

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,

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

July 3, 2010

(In Thousands)

(Unaudited)

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 continues 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 are expected to be reclassified into earnings during the contractual terms of the inventory purchases.  The Company had pretax losses totaling $1,347, recorded as accumulated other comprehensive income (loss) as of the fiscal year ended March 28, 2009 related to cash flow hedges, recognized prorata through the third quarter of the fiscal year ended April 3, 2010.  The Company generally has no hedge cash flows related to commodities beyond 12 months.

For the 13 week period ended June 27, 2009, the Company recognized $448 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.

10.              Reclassifications

Certain reclassifications have been made to the June 27, 2009 Consolidated Statements of Cash Flows in order for it to conform to the current presentation.  There was no impact on earnings.

11.              New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles, which established the FASB Accounting Standards Codification as the sole source of authoritative generally accepted accounting principles.  Pursuant to the provisions of FASB ASC 105, the Company has updated references to GAAP in its financial statements issued for the period ended October 3, 2009 and thereafter.  The adoption of FASB ASC 105 did not impact the Company’s financial position or results of operations.

Interim Disclosures About Fair Value of Financial Instruments. In April 2009, the FASB issued new U.S. GAAP guidance that requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods and is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have an effect on the Company’s consolidated financial statements.

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

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CAGLE’S, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

July 3, 2010

(In Thousands)

(Unaudited)

fair value of the issuer’s liability and is effective for the Company’s reporting period ended October 3, 2009 and thereafter.  The adoption of this guidance did not have an effect on the Company’s consolidated financial statements.

Multiple-Deliverable Revenue Arrangements. In October 2009, the FASB issued new U.S. GAAP guidance that requires an entity to allocate revenue arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices (the relative-selling-price method). The guidance eliminates the use of the residual method of allocation, in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration, and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. The new guidance must be adopted no later than the beginning of the first fiscal year beginning on or after June 15, 2010, with early adoption permitted through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The Company does not expect the adoption of this guidance to have an effect on its consolidated financial statements.

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

The disclosures in this quarterly report are complementary to those 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 first quarter were $78.6 million, up 0.7% reflecting a decrease in pounds sold of 3.1% and an increase in sales price for poultry of $0.013 per pound as compared to the same period in fiscal 2010.

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

Cost of sales

Cost of sales for the first quarter of fiscal 2011 decreased 4.9% as compared with the same period last year, from $71.7 million to $68.2 million.  Feed ingredient prices for broilers processed in the first quarter of fiscal 2011, which represented 36% of the total cost of sales, decreased 8.5% as compared to the first quarter of fiscal 2010.

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Selling and Delivery

These expenses increased $250 thousand, or 11.4%, for the 13 weeks ended July 3, 2010 as compared to the 13 weeks ended June 27, 2009.  $240 thousand of this $250 thousand increase is due to an increase in outside storage expenses.  Outside storage expense was $281 thousand and $41 thousand for the 13 weeks ended July 3, 2010 and June 27, 2009, respectively.

General and Administrative

These expenses increased $433 thousand, or 26.0%, for the 13 weeks ended July 3, 2010 as compared to the 13 weeks ended June 27, 2009.  $472 thousand of this increase is accrued incentive compensation in the 13 weeks ended July 3, 2010 as compared to no accrued incentive compensation in the 13 weeks ended June 27, 2009.

Interest Expense

Interest expense decreased $61 thousand, or 13.8%, for the 13 weeks ended July 3, 2010 versus the 13 weeks ended June 27, 2009.  This is due to average long-term debt decreasing from $30.7 million to $25.2 million during the two periods.

Other Income (Expense)

Other income (expense) was $4 thousand for the 13 weeks ended July 3, 2010 versus $2 thousand for the 13 weeks ended June 27, 2009.

Income Taxes

Income tax expense was $2.0 million, or 36.0% of pre-tax income of $5.4 million for the 13 weeks ended July 3, 2010.  Income tax expense was $722 thousand, or 36.0% of pre-tax income of $2.0 million for the 13 weeks ended June 27, 2009.  The entire income tax expense of both 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.

As of 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 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 at 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.  Tax periods for all years after 2005 remain open to examination by the federal and state taxing jurisdictions to which it is subject.

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Financial Condition and Liquidity

As of July 3, 2010, the Company’s working capital was $16.1 million and its current ratio was 1.56.  The Company’s working capital as of the year ended April 3, 2010 was $16.8 million and its current ratio was 1.62.

The Company decreased long-term debt by $5.0 million during the 13 weeks ended July 3, 2010.  The Company spent $2.3 million on capital projects during the 13 weeks ended July 3, 2010.  As of July 3, 2010, the Company has remaining availability of $9.7 million on its long-term revolving line of credit facility.

On November 23, 2009, the Company entered into Amendment Number 4 to the long-term revolving line of credit agreement, effective as of October 31, 2009.  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, 2012.  (2) The maturity date of the $4.15 million portion of the revolving credit facility was extended to November 23, 2010.  (3) The minimum tangible net worth covenant remained at $30.0 million until July 3, 2010; commencing as of July 4, 2010 and ending on January 3, 2011, the minimum tangible net worth must not be less than $35.0 million at any time; and commencing as of January 4, 2011, and at all times thereafter, the minimum tangible net worth must not be less than $40.0 million at any time.  (4) The facility advance rate with respect to eligible inventories was restored to 40% from 60% and the advance rate with respect to eligible receivables is maintained at 80%.  As of July 3, 2010, the Company is in compliance with the revolving line of credit agreement’s covenants.

As of July 3, 2010, 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 and $1.3 million of the $4.15 million supplemental revolving master note in the long-term revolving line of credit agreement.  The Company’s $11.6 million principal balance and $1.0 million letter of credit results in $9.7 million of available borrowings on the long-term revolving line of credit as of July 3, 2010.

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 July 3, 2010, the Company is in compliance with the term note payable debt covenants.

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.

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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 or a $10 per ton price change in soybean meal impacts our cost of sales $0.75 million dollars 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 our existing indebtedness carries a fixed interest rate.  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 3.5%.

The Company had variable interest rate exposure on the revolving credit facility at July 3, 2010.  The Company’s theoretical interest rate exposure on variable rate borrowings at July 3, 2010, would be, with a one percentage point increase in average interest rates on the Company’s borrowings would increase future interest expense by $9.6 thousand per month and a two percentage point increase would increase future interest expense by $19.3 thousand per month.  The Company determined these amounts based on $11.6 million of variable rate borrowings at July 3, 2010, 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 in interest rates on the Company’s variable rate borrowings would increase interest expense and reduce net income.

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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 investment 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 the Evaluation Date, 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 set backs 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.  One of our largest customers did not renew their sales contract for calendar 2010.  However, the Company has been able to attract new contract-based customers of similar volume that will approximate this former customer’s sales volume.  These new customers should provide a market for our products without a significant deterioration in operating income.  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 approximately 65% 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.

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

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

On July 16, 2010, the Company held its Annual Meeting of Shareholders.  The following items were submitted to a vote of shareholders through the solicitation of proxies:

(1)                To fix the number of members of the Board of Directors at eight (8), and to elect the members thereof

Election of Directors

The following persons were elected to serve as directors on the Company’s Board of Directors until the 2011 Annual Meeting of Shareholders or until their successors have been duly elected and qualified or until the earlier of their resignation or removal.  Voting results were as follows:

(2)                    To ratify the appointment of Frazer Frost, LLP as the independent registered public accounting firm for the fiscal year ending April 2, 2011.

Total voted shares represented in person or by proxy:  4,518,098

Percentage of the outstanding votable shares:  97.87%

Outstanding votable shares:  4,616,208

Item 5.  Other Information

None

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Item 6.  Exhibits

(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)

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