Pilgrim's Pride Corporation FY 2005 10-K
UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
____________________

FORM 10-K
____________________

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 1, 2005
OR
¨
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 1-9273

Pilgrim's Pride Corporation Logo

PILGRIM’S PRIDE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
75-1285071
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
   
4845 US Hwy 271 North
 
Pittsburg, Texas
75686-0093
(Address of principal executive offices)
(Zip code)
   
Registrant’s telephone number, including area code: (903) 434-1000
   

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, Par Value $0.01
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨  No x

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 1934 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. Yes  x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

The aggregate market value of the Registrant’s Common Stock, $0.01 par value, held by non-affiliates of the Registrant as of April 1, 2005, was $549,466,992. For purposes of the foregoing calculation only, all directors, executive officers and 5% beneficial owners have been deemed affiliates.

Number of shares of the Registrant’s Common Stock outstanding as of November 18, 2005, was 66,555,733.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s proxy statement for the annual meeting of stockholders to be held January 25, 2006 are incorporated by reference into Part III.
 
2


PILGRIM’S PRIDE CORPORATION
FORM 10-K
TABLE OF CONTENTS


PART I
 
   
Page
Business
4
Risk Factors
24
Unresolved Staff Comments
31
Properties
31
Legal Proceedings
32
Submission of Matters to a Vote of Security Holders
33
     
PART II
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
34
Selected Financial Data
36
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Quantitative and Qualitative Disclosures about Market Risk
61
Financial Statements and Supplementary Data (see Index to Financial Statements and Schedules below)
62
Changes in and Disagreements with Accountants on Accounting and Financial
62
 
Disclosure
62
Controls and Procedures
62
Other Information
65
     
PART III
 
Directors and Executive Officers of the Registrant
65
Executive Compensation
65
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
65
Certain Relationships and Related Transactions
65
Principal Accountant Fees and Services
66
     
PART IV
 
Exhibits and Financial Statement Schedules
66
 
73
     
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
 
75
76
77
78
82
79
101
   
 
 
3


PART I
 

Item 1. Business
 
(a) General Development of Business

Overview

The Company, which was incorporated in Texas in 1968 and reincorporated in Delaware in 1986, is the successor to a partnership founded in 1946 as a retail feed store. Over the years, the Company grew through both internal growth and various acquisitions of farming operations and poultry processors including the significant acquisition discussed below. We are the second largest producer of poultry in both the United States (“U.S.”) and Mexico, the largest in Puerto Rico, and have one of the best known brand names in the poultry industry. In the U.S., we produce both prepared and fresh chicken and turkey; while in Mexico and Puerto Rico, we exclusively produce fresh chicken. Through vertical integration, we control the breeding, hatching and growing of chickens. We also control the processing, preparation, packaging and sale of our product lines, which we believe has made us one of the highest quality, lowest-cost producers of poultry in North America. We have consistently applied a long-term business strategy of focusing our growth efforts on the higher-value, higher-margin prepared foods products and have become a recognized industry leader in this market segment. Accordingly, our sales efforts have traditionally been targeted to the foodservice industry, principally chain restaurants and food processors. We have continually made investments to ensure our prepared foods capabilities remain state-of-the-art and have complemented these investments with a substantial and successful research and development effort. In fiscal 2005, we sold 5.7 billion pounds of dressed chicken and 212.7 million pounds of dressed turkey and generated net sales of $5.7 billion. In fiscal 2005, our U.S. operations including Puerto Rico accounted for 92.5% of our net sales, with the remaining 7.5% arising from our Mexico operations.

Recent Business Acquisition

On November 23, 2003, we completed the purchase of all the outstanding stock of the corporations represented as the ConAgra Foods, Inc. chicken division (“ConAgra chicken division”). We sometimes refer to this acquisition as the “fiscal 2004 acquisition.” The acquired business has been included in our results of operations since the date of the acquisition. The acquisition provided us with additional lines of specialty prepared chicken products, well-known brands, well-established distributor relationships and Southeastern U.S. processing facilities. The acquisition also included the largest distributor of chicken products in Puerto Rico. This allows us to provide customers at every point in the distribution chain with the broadest range of quality value-added chicken products and services available in the market today. See Note B-Business Acquisition of the notes to consolidated financial statements included elsewhere herein.
4

Strategy 

Our objectives are (1) to increase sales, profit margins and earnings and (2) to outpace the growth of, and maintain our leadership position in, the poultry industry. To achieve these goals, we plan to continue pursuing the following strategies:

- Capitalize on significant scale with leading industry position and brand recognition. We are the second largest producer of chicken products in the U.S. We estimate that our U.S. market share, based on the total annual chicken production in the U.S., is approximately 15.4%, which is approximately 74% higher than the third largest competitor in the chicken industry. The complementary fit of markets, distributor relationships and geographic locations are a few of the many benefits we realized from our fiscal 2004 acquisition discussed above. We believe the acquired business’ established relationships with broad-line national distributors have enabled us to expand our customer base and provide nationwide distribution capabilities for all of our product lines. As a result, we believe we are one of only two U.S. chicken producers that can supply the growing demand for a broad range of price competitive standard and specialized products with well-known brand names on a nationwide basis from a single source supplier.

- Capitalize on attractive U.S. prepared foods market. We focus our U.S. growth initiatives on sales of prepared foods to the foodservice market because it continues to be one of the fastest growing and most profitable segments in the poultry industry. Products sold to this market segment require further processing, which enables us to charge a premium for our products, reducing the impact of feed ingredient costs on our profitability and improving and stabilizing our profit margins. Feed ingredient costs typically decrease from approximately 31%-49% of total production cost for fresh chicken products to approximately 16%-25% for prepared chicken products. Due to increased demand from our customers and our fiscal 2004 acquisition, our sales of prepared chicken products grew from $754.2 million in fiscal 2001 to $1,965.8 million in fiscal 2005, a compounded annual growth rate of 27.1%. Prepared foods sales represented 44.6% of our total U.S. chicken revenues in fiscal year 2005, which we believe provides us with a significant competitive advantage and reduces our exposure to feed price fluctuations. The addition of well-known brands, including Pierce®and Easy-Entre®, from our fiscal 2004 acquisition significantly expanded Pilgrim’s Pride’s already sizeable prepared foods chicken offerings. Similarly, our acquisition of highly customized cooked chicken products, including breaded cutlets, sizzle strips and Wing-Dings®, for restaurants and specialty foodservice customers from this acquisition complemented our existing lines of pre-cooked breast fillets, tenderloins, burgers, nuggets, salads and other prepared products for institutional foodservice, fast-food and retail customers.

- Emphasize customer-driven research and technology. We have a long-standing reputation for customer-driven research and development in designing new products and implementing advanced processing technology. This enables us to better meet our customers’ changing needs for product innovation, consistent quality and cost efficiency. In particular, customer-driven research and development is integral to our growth strategy for the prepared foods market in which customers continue to place greater importance on value-added services. Our research and development personnel often work directly with customers in developing products for them, which we believe helps promote long-term relationships.
5

- Enhance U.S. fresh chicken profitability through value-added, branded products. Our U.S. fresh chicken sales accounted for $2,121.3 million, or 48.1%, of our U.S. chicken sales for fiscal 2005. In addition to maintaining the sales of traditional fresh chicken products, our strategy is to shift the mix of our U.S. fresh chicken products by continuing to increase sales of higher margin, faster growing products, such as fixed weight packaged products and marinated chicken and chicken parts, and to continually shift portions of this product mix into the higher value and margin prepared chicken products. Much of our fresh chicken products are sold under the Pilgrim’s Pride® and Country Pride® brand names, which are two well-known brands in the chicken industry.

- Improve operating efficiencies and increase capacity on a cost-effective basis. As production and sales grow, we continue to focus on improving operating efficiencies by investing in state-of-the-art technology and processes, training and our total quality management program. Specific initiatives include:

- standardizing lowest-cost production processes across our various facilities;

- centralizing purchasing and other shared services; and

- upgrading technology where appropriate.

In addition, we have a proven history of increasing capacity while improving operating efficiencies at acquired properties both in the U.S. and Mexico. As a result, according to industry data, since 1993 we have consistently been one of the lowest cost producers of chicken in the U.S., and we also believe we are one of the lowest cost producers of chicken in Mexico.

- Continue to seek strategic acquisitions. We have pursued opportunities to expand through acquisitions in the past. We expect to continue to pursue acquisition opportunities in the future that would either compliment our existing businesses, broaden our production capabilities and/or improve our operating efficiencies.

- Continue to penetrate the growing Mexican market. We seek to leverage our leading market position and reputation for freshness and quality in Mexico by focusing on the following objectives:

- to be one of the most cost-efficient producers and processors of chicken in Mexico by applying
technology and expertise utilized in the U.S.;

- to continually increase our distribution of higher margin, more value-added products to national
retail stores and restaurants; and

- to continue to build and emphasize brand awareness and capitalize on Mexican consumers’
preference for branded products and their insistence on freshness and quality.

-  
Capitalize on export opportunities. We intend to continue to focus on international opportunities to complement our U.S. chicken operations and capitalize on attractive export markets. Although according to the USDA, the export of U.S. chicken products decreased 3.1% from 2000 through 2004, we believe U.S. chicken exports will grow as worldwide demand increases for high-grade, low-cost protein sources. According to USDA data, the export market for chicken is expected to grow at a compounded annual growth rate of 2.7% from 2004 to 2009 and 15.7% from 2004 to 2005 alone. Historically, we have targeted international markets to generate additional demand for our chicken dark meat, which is a natural by-product of our U.S. operations given our concentration on prepared foods products and the U.S. customers’ general preference for white meat. As part of this initiative, we have created a significant international distribution network into several markets, including Mexico, which we now utilize not only for dark meat distribution, but also for various higher margin prepared foods and other poultry products. We employ both a direct international sales force and export brokers. Our key international markets include Eastern Europe, including Russia, the Far East and Mexico. We believe that we have substantial opportunities to expand our sales to these markets by capitalizing on direct international distribution channels supplemented by our existing export broker relationships. Our export sales accounted for approximately 8.2% of our U.S. Chicken sales for fiscal 2005.
 
6

 
(b)  Financial Information About Segments
 
We operate in three reportable business segments as (1) a producer and seller of chicken products, (2) a producer and seller of turkey products and (3) other products. See a discussion of our business segments in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(c) Narrative Description of Business
 

Products and Markets 

Our chicken products consist primarily of:

(1) Prepared chicken products, which are products such as portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties and bone-in chicken parts. These products are sold either refrigerated or frozen and may be fully cooked, partially cooked or raw. In addition, these products are breaded or non-breaded and either pre-marinated or non-marinated.

(2) Fresh chicken, which is refrigerated (non-frozen) whole or cut-up chicken sold to the foodservice industry either pre-marinated or non-marinated. Fresh chicken also includes prepackaged case-ready chicken, which includes various combinations of freshly refrigerated, whole chickens and chicken parts in trays, bags or other consumer packs labeled and priced ready for the retail grocer's fresh meat counter.

(3) Export and other chicken products, which are primarily parts and whole chicken, either refrigerated or frozen for U.S. export or domestic use, and chicken prepared foods products for U.S. export.
 
7

Our turkey products consist primarily of:

(1) Prepared turkey products, which are products such as turkey sausages, ground turkey, turkey hams and roasts, ground turkey breast products, salads and flavored turkey burgers. We also have an array of cooked, further processed deli products.

(2) Fresh turkey, which includes turkey burgers, and fresh and frozen whole birds, as well as semi-boneless whole turkey, which has all bones except the drumsticks removed.

Our chicken and turkey products are sold primarily to:

(1) Foodservice customers, which are customers such as chain restaurants, food processors, foodservice distributors and certain other institutions. We sell products to our foodservice customers ranging from portion-controlled refrigerated poultry parts to fully-cooked and frozen, breaded or non-breaded poultry parts or formed products.

(2) Retail customers, which are customers such as grocery store chains, wholesale clubs and other retail distributors. We sell to our retail customers branded, pre-packaged, cut-up and whole poultry, and fresh refrigerated or frozen whole poultry and poultry parts in trays, bags or other consumer packs.

Our other products consist of:
 
(1) Other types of meat along with various other staples purchased and sold by our distribution centers as a convenience to our poultry customers who purchase through the distribution centers.

(2) The production and sale of table eggs, commercial feeds and related items and proteins.

The following table sets forth, for the periods beginning with fiscal 2001, net sales attributable to each of our primary product lines and markets served with those products. Consistent with our long-term strategy, we emphasized our U.S. growth initiatives on sales of prepared foods products, primarily to the foodservice market. This product and market segment has experienced, and we believe will continue to experience, greater growth than fresh chicken products. We based the table on our internal sales reports and their classification of product types and customers.
8


       
Fiscal Year Ended
 
       
Oct. 1, 2005
 
Oct. 2, 2004(a)
 
Sept. 27, 2003
 
Sept. 28, 2002
 
Sept. 29, 2001(b)
 
       
(52 weeks)
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
 
(52 weeks)
 
U.S. Chicken Sales:
 
(in thousands)
Prepared Foods:
                                     
Foodservice
       
$
1,622,901
 
$
1,647,904
 
$
731,331
 
$
659,856
 
$
632,075
 
Retail
         
283,392
   
213,775
   
163,018
   
158,299
   
103,202
 
Total Prepared Foods
         
1,906,293
   
1,861,679
   
894,349
   
818,155
   
735,277
 
                                       
Fresh Chicken:
                                     
Foodservice
         
1,509,189
   
1,328,883
   
474,251
   
448,376
   
387,624
 
Retail
         
612,081
   
653,798
   
257,911
   
258,424
   
224,693
 
Total Fresh Chicken
         
2,121,270
   
1,982,681
   
732,162
   
706,800
   
612,317
 
                                       
Export and Other:
                                     
Export:
                                     
Prepared Foods
         
59,473
   
34,735
   
26,714
   
30,528
   
18,912
 
Chicken
         
303,150
   
212,611
   
85,087
   
93,575
   
105,834
 
Total Export(C)
         
362,623
   
247,346
   
111,801
   
124,103
   
124,746
 
Other Chicken By Products
         
21,083
   
(c
)
 
(c
)
 
(c
)
 
(c
)
Total Export and Other
         
383,706
   
247,346
   
111,801
   
124,103
   
124,746
 
Total U.S. Chicken
         
4,411,269
   
4,091,706
   
1,738,312
   
1,649,058
   
1,472,340
 
                                       
Mexico Chicken Sales:
         
403,353
   
362,442
   
349,305
   
323,769
   
303,433
 
Total Chicken Sales
         
4,814,622
   
4,454,148
   
2,087,617
   
1,972,827
   
1,775,773
 
                                       
U.S. Turkey Sales:
                                     
Prepared Foods:
                                     
Foodservice
         
61,209
   
80,927
   
89,957
   
134,651
   
88,012
 
Retail
         
37,653
   
37,384
   
29,141
   
54,638
   
48,681
 
Total Prepared Foods
         
98,862
   
118,311
   
119,098
   
189,289
   
136,693
 
                                       
Fresh Turkey:
                                     
Foodservice
         
12,699
   
39,749
   
48,448
   
36,119
   
18,618
 
Retail
         
88,088
   
116,905
   
125,411
   
107,582
   
71,647
 
Total Fresh Turkey
         
100,787
   
156,654
   
173,859
   
143,701
   
90,265
 
                                       
Export and Other:
                                     
Export:
                                     
Prepared Foods
         
981
   
1,949
   
2,128
   
2,858
   
2,434
 
Turkey
         
3,307
   
9,338
   
10,593
   
12,270
   
9,443
 
Total Export(C)
         
4,288
   
11,287
   
12,721
   
15,128
   
11,877
 
Other Turkey By Products
         
901
   
(c
)
 
(c
)
 
(c
)
 
(c
)
Total Export and Other
         
5,189
   
11,287
   
12,721
   
15,128
   
11,877
 
Total U.S. Turkey Sales
         
204,838
   
286,252
   
305,678
   
348,118
   
238,835
 
                                       
Other Products:
                                     
United States
         
626,056
   
600,091
   
207,284
   
193,691
   
179,859
 
Mexico
         
20,759
   
23,232
   
18,766
   
19,082
   
20,245
 
Total Other Products
         
646,815
   
623,323
   
226,050
   
212,773
   
200,104
 
                                       
Total Net Sales
       
$
5,666,275
 
$
5,363,723
 
$
2,619,345
 
$
2,533,718
 
$
2,214,712
 
                                       
Total Chicken Prepared Foods
       
$
1,965,766
 
$
1,896,414
 
$
921,063
 
$
848,683
 
$
754,189
 
Total Turkey Prepared Foods
         
99,843
   
120,260
   
121,226
   
192,147
   
139,127
 
 
9


(a) The acquisition of the ConAgra chicken division on November 23, 2003 has been accounted for as a purchase, and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date.
 
(b) The acquisition of WLR Foods on January 27, 2001 has been accounted for as a purchase, and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date.

(c) The Export and Other category has historically included the sales of certain chicken and turkey by products sold in international markets as well as the export of chicken and turkey products.  Prior to fiscal 2005, by product sales were not specifically identifiable from the Export and Other category.  Accordingly, a detail breakout is not available prior to such time, however, the Company believes that the relative split between these categories as shown in fiscal 2005 would not be dissimilar in the prior fiscal periods. Export items include certain poultry parts that have greater value in some overseas markets than in the U.S.

The following table sets forth, beginning with fiscal 2001, the percentage of net U.S. chicken and turkey sales attributable to each of our primary product lines and the markets serviced with those products. We based the table and related discussion on our internal sales reports and their classification of product types and customers.
10

 
 
   
Fiscal Year Ended
 
   
 
Oct. 1, 2005
 
 
Oct 2, 2004(a)
 
 
Sept. 27, 2003
 
 
Sept. 28, 2002
 
Sept. 29, 2001(b)
 
U.S. Chicken Sales:
                               
Prepared Foods:
                               
Foodservice
   
36.8
   
40.3
   
42.1
   
39.9
   
42.9
 
Retail
   
6.4
   
5.2
   
9.4
   
9.6
   
7.0
 
Total Prepared Foods
   
43.2
%
 
45.5
%
 
51.5
%
 
49.5
%
 
49.9
%
                                 
Fresh Chicken:
                               
Foodservice
   
34.2
   
32.5
   
27.3
   
27.2
   
26.3
 
Retail
   
13.9
   
16.0
   
14.8
   
15.7
   
15.3
 
Total Fresh Chicken
   
48.1
%
 
48.5
%
 
42.1
%
 
42.9
%
 
41.6
%
                                 
Export and Other:
                               
Export:
                               
Prepared Foods
   
1.3
   
0.8
   
1.5
   
1.9
   
1.3
 
Chicken
   
6.9
   
5.2
   
4.9
   
5.7
   
7.2
 
Total Export(c)
 
   
8.2
   
6.0
   
6.4
   
7.6
   
8.5
 
Other Chicken By Products
 
   
0.5
   
(c
)
 
(c
)
 
(c
)
 
(c
)
Total Export and Other
 
   
8.7
%
 
6.0
%
 
6.4
%
 
7.6
%
 
8.5
%
Total U.S. Chicken
   
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
                                 
Total Chicken Prepared Foods as a percentage of U.S. Chicken
 
   
44.5
%
 
46.3
%
 
53.0
%
 
51.4
%
 
51.2
%
                                 
U.S. Turkey Sales:
                               
Prepared Foods:
                               
Foodservice
   
29.8
   
28.2
   
29.5
   
38.7
   
36.8
 
Retail
   
18.4
   
13.1
   
9.5
   
15.7
   
20.4
 
Total Prepared Foods
   
48.2
%
 
41.3
%
 
39.0
%
 
54.4
%
 
57.2
%
                                 
Fresh Turkey:
                               
Foodservice
   
6.2
   
13.9
   
15.8
   
10.4
   
7.8
 
Retail
   
43.0
   
40.8
   
41.0
   
30.9
   
30.0
 
Total Fresh Turkey
   
49.2
%
 
54.7
%
 
56.8
%
 
41.3
%
 
37.8
%
                                 
Export and Other:
                               
Export:
                               
Prepared Foods
   
0.5
   
0.7
   
0.7
   
0.8
   
1.0
 
Turkey
   
1.6
   
3.3
   
3.5
   
3.5
   
4.0
 
Total Export(c)
   
2.1
   
4.0
   
4.2
   
4.3
   
5.0
 
Other Turkey By Products
   
0.5
   
(c
)
 
(c
)
 
(c
)
 
(c
)
Total Export and Other
   
2.6
%
 
4.0
%
 
4.2
%
 
4.3
%
 
5.0
%
Total U.S. Turkey
   
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
                                 
Total Turkey Prepared Foods as a percentage of U.S. Turkey
   
48.7
%
 
42.0
%
 
39.7
%
 
55.2
%
 
58.2
%
                                 
 
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(a) The acquisition of the ConAgra chicken division on November 23, 2003 has been accounted for as a purchase, and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date.
 
(b) The acquisition of WLR Foods on January 27, 2001 has been accounted for as a purchase, and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date.

(c) The Export and Other category has historicaly included the sales of certain chicken and turkey by products sold in international markets as well as the export of chicken and turkey products.  Prior to fiscal 2005, by product sales were not specifically identifiable from the Export and Other category.  Accordingly, a detail breakout is not available prior to such time, however, the Company believes that the relative split between these categories as shown in fiscal 2005 would not be dissimilar in the prior fiscal periods. Export items include certain poultry parts that have greater value in some overseas markets than in the U.S.
 
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UNITED STATES

Product Types

Chicken Products

Prepared Foods Overview. During fiscal 2005, $1,906.3 million, or 43.2%, of our U.S. chicken sales were in prepared foods products to foodservice customers and retail distributors, as compared to $735.3 million in fiscal 2001. These numbers reflect the strategic focus for our growth and our fiscal 2004 acquisition. The market for prepared chicken products has experienced, and we believe will continue to experience, greater growth, higher average sales prices and higher margins than fresh chicken products. Also, the production and sale in the U.S. of prepared foods products reduce the impact of the costs of feed ingredients on our profitability. Feed ingredient costs are the single largest component of our total U.S. cost of sales, representing approximately 29% of our U.S. cost of sales for the fiscal year ended October 1, 2005. The production of feed ingredients is positively or negatively affected primarily by weather patterns throughout the world, the global level of supply inventories, demand for feed ingredients, and the agricultural policies of the U.S. and foreign governments. As further processing is performed, feed ingredient costs become a decreasing percentage of a product’s total production cost, thereby reducing their impact on our profitability. Products sold in this form enable us to charge a premium, reduce the impact of feed ingredient costs on our profitability and improve and stabilize our profit margins.

We establish prices for our prepared chicken products based primarily upon perceived value to the customer, production costs and prices of competing products. The majority of these products are sold pursuant to agreements with varying terms that either set a fixed price for the products or set a price according to formulas based on an underlying commodity market, subject in many cases to minimum and maximum prices.

Fresh Chicken Overview. Our fresh chicken business is an important component of our sales and accounted for $2,121.3 million, or 48.1%, of our total U.S. chicken sales for fiscal 2005. In addition to maintaining sales of mature, traditional fresh chicken products, our strategy is to shift the mix of our U.S. fresh chicken products by continuing to increase sales of higher margin, faster growing products, such as marinated chicken and chicken parts, and to continually shift portions of this product mix into the higher value and margin prepared foods category.

Most fresh chicken products are sold to established customers, based upon certain weekly or monthly market prices reported by the USDA and other public price reporting services, plus a markup, which is dependent upon the customer’s location, volume, product specifications and other factors. We believe our practices with respect to sales of fresh chicken are generally consistent with those of our competitors. The majority of these products are sold pursuant to agreements with varying terms that either set a fixed price for the products or set a price according to formulas based on an underlying commodity market, subject in many cases to minimum and maximum prices.

Export and Other Chicken Products Overview. Our export and other products consist of whole chickens and chicken parts sold primarily in bulk, non-branded form, either refrigerated to distributors in the U.S. or frozen for distribution to export markets, and branded and non-branded prepared foods products for distribution to export markets. In fiscal 2005, approximately $383.7 million, or 8.7%, of our total U.S. chicken sales were attributable to U.S. chicken export and other products. These exports and other products, other than the prepared foods products, have historically been characterized by lower prices and greater price volatility than our more value-added product lines.
 
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   Turkey Products

Prepared Foods Overview. During fiscal 2005, $98.9 million, or 48.2%, of our total U.S turkey sales were prepared turkey products sold to foodservice customers and retail distributors. Like the U.S. chicken markets, the market for prepared turkey products has experienced greater growth and higher margins than fresh turkey products.

We establish prices for our prepared turkey products based primarily upon perceived value to the customer, production costs and prices of competing products. The majority of these products are sold pursuant to agreements with varying terms that either set a fixed price or are subject to a market driven formula.

Fresh Turkey Overview. Our fresh turkey business accounted for $100.8 million, or 49.2%, of our total U.S. turkey sales in fiscal 2005. As is typical for the industry, a significant portion of the sales of fresh and frozen whole turkeys is seasonal in nature, with the height of sales occurring during the Thanksgiving and Christmas holidays. In addition to maintaining sales of mature, traditional fresh turkey products, our strategy is to shift the mix of our fresh turkey products by increasing sales of higher margin, faster growing value-added prepared turkey products, such as deli meats, ground turkey, turkey burgers and sausage, roasted turkey and salads.

In the fourth quarter of fiscal 2004, we sold our turkey processing operations in Hinton, Virginia. The production from this facility, in addition to supplying product to our further processing operations, provided products that were sold primarily as commodity products. Our remaining processing facility is focused on producing a premium line of fresh and frozen whole turkeys. We estimate that the restructuring of our turkey operations decreased our fiscal 2005 commodity turkey sales by approximately $55 million.

Most fresh turkey products are sold to established customers pursuant to agreements with varying terms that either set a fixed price or are subject to a market driven formula with some agreements based upon market prices reported by the USDA and other public price reporting services, plus a markup, subject in many cases to minimum and maximum prices, which is dependent upon the customer’s location, volume, product specifications and other factors. We believe our practices with respect to sales of fresh turkey are generally consistent with those of our competitors with similar programs.

Export and Other Turkey Products Overview. Prior to the restructuring of our turkey operations, our export and other turkey products consisted primarily of turkey parts sold in bulk, non-branded form, frozen for distribution to export markets. In fiscal 2005, approximately $5.2 million, or 2.6%, of our total U.S. turkey sales were attributable to export and other sales, with $4.3 million, or 2.1%, specifically related to export sales. These exports and other products have historically been characterized by lower prices and greater price volatility than our value-added product lines. Since the restructuring of our turkey operations, exports of turkey products have been nominal.
 
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Markets for Chicken Products

Foodservice. The majority of our U.S. chicken sales are derived from products sold to the foodservice market. This market principally consists of chain restaurants, food processors, broad-line distributors and certain other institutions located throughout the continental U.S. We supply chicken products ranging from portion-controlled refrigerated chicken parts to fully cooked and frozen, breaded or non-breaded chicken parts or formed products.

We believe Pilgrim’s Pride is well-positioned to be the primary or secondary supplier to many national and international chain restaurants who require multiple suppliers of chicken products. Additionally, we believe we are well suited to be the sole supplier for many regional chain restaurants. Regional chain restaurants often offer better margin opportunities and a growing base of business.

We believe we have significant competitive strengths in terms of full-line product capabilities, high-volume production capacities, research and development expertise and extensive distribution and marketing experience relative to smaller and non-vertically integrated producers. While the overall chicken market has grown consistently, we believe the majority of this growth in recent years has been in the foodservice market. According to the National Chicken Council, from 2000 through 2004, sales of chicken products to the foodservice market grew at a compounded annual growth rate of approximately 7.5%, versus 6.6% growth for the chicken industry overall. Foodservice growth is anticipated to continue as food-away-from-home expenditures continue to outpace overall industry rates. According to the National Restaurant Association, food-away-from-home expenditures grew at a compounded annual growth rate of approximately 7.4% from 2000 through 2004 and are projected to grow at a 4.1% compounded annual growth rate from 2004 through 2010. As a result, the food-away-from-home category is projected by the National Restaurant Association to account for 53% of total food expenditures by 2010, as compared with the current amount of 46.7%. Due to internal growth and our fiscal 2004 acquisition, our sales to the foodservice market from fiscal 2001 through fiscal 2005 grew at a compounded annual growth rate of 32.4% and represented 71.0% of the net sales of our U.S. chicken operations in fiscal 2005.

Foodservice - Prepared Foods. The majority of our sales to the foodservice market consist of prepared foods products. Our prepared chicken products sales to the foodservice market were $1,622.9 million in fiscal 2005 compared to $632.1 million in fiscal 2001, a compounded annual growth rate of approximately 26.6%. In addition to the significant increase in sales created by the fiscal 2004 acquisition, we attribute this growth in sales of prepared chicken products to the foodservice market to a number of factors:

First, there has been significant growth in the number of foodservice operators offering chicken on their menus and in the number of chicken items offered.

Second, foodservice operators are increasingly purchasing prepared chicken products, which allow them to reduce labor costs while providing greater product consistency, quality and variety across all restaurant locations.

Third, there is a strong need among larger foodservice companies for an alternative or additional supplier to our principal competitor in the prepared chicken products market. A viable alternative supplier must be able to ensure supply, demonstrate innovation and new product development and provide competitive pricing. We have been successful in our objective of becoming the alternative supplier of choice by being the primary or secondary prepared chicken products supplier to many large foodservice companies because:
 
15


- We are vertically integrated, giving us control over our supply of chicken and chicken parts;

- Our further processing facilities with a wide range of capabilities are particularly well suited to the high-volume production as well as low-volume custom production runs necessary to meet both the capacity and quality requirements of the foodservice market; and

- We have established a reputation for dependable quality, highly responsive service and  excellent technical support.
  
        Fourth, as a result of the experience and reputation developed with larger customers, we have increasingly become the principal supplier to mid-sized foodservice organizations.

Fifth, our in-house product development group follows a customer-driven research and development focus designed to develop new products to meet customers’ changing needs. Our research and development personnel often work directly with institutional customers in developing products for these customers.

Sixth, we are a leader in utilizing advanced processing technology, which enables us to better meet our customers’ needs for product innovation, consistent quality and cost efficiency.

Foodservice - Fresh Chicken. We produce and market fresh, refrigerated chicken for sale to U.S. quick-service restaurant chains, delicatessens and other customers. These chickens have the giblets removed, are usually of specific weight ranges, and are usually pre-cut to customer specifications. They are often marinated to enhance value and product differentiation. By growing and processing to customers’ specifications, we are able to assist quick-service restaurant chains in controlling costs and maintaining quality and size consistency of chicken pieces sold to the consumer.

Retail. The retail market consists primarily of grocery store chains, wholesale clubs and other retail distributors. We concentrate our efforts in this market on sales of branded, prepackaged cut-up and whole chicken to grocery store chains and retail distributors in the midwestern, southwestern, western and eastern regions of the U.S. For a number of years, we have invested in both trade and retail marketing designed to establish high levels of brand name awareness and consumer preferences.

We utilize numerous marketing techniques, including advertising, to develop and strengthen trade and consumer awareness and increase brand loyalty for consumer products marketed under the Pilgrim’s Pride® brand. Our founder, Lonnie “Bo” Pilgrim, is the featured spokesman in our television, radio and print advertising, and a trademark cameo of a person wearing a Pilgrim’s hat serves as the logo on all of our primary branded products. As a result of this marketing strategy, Pilgrim’s Pride® is a well-known brand name in a number of markets. We believe our efforts to achieve and maintain brand awareness and loyalty help to provide more secure distribution for our products. We also believe our efforts at brand awareness generate greater price premiums than would otherwise be the case in certain southwestern markets. We also maintain an active program to identify consumer preferences. The program primarily consists of discovering and validating new product ideas, packaging designs and methods through sophisticated qualitative and quantitative consumer research techniques in key geographic markets.
 
16

Retail - Prepared Foods. We sell retail-oriented prepared chicken products primarily to grocery store chains located in the midwestern, southwestern, western and eastern regions of the U.S. Our prepared chicken products sales to the retail market were $283.4 million in fiscal 2005 compared to $103.2 million in fiscal 2001, a compounded annual growth rate of approximately 28.7%. We believe that our growth in this market segment will continue as retailers concentrate on satisfying consumer demand for more products which are quick, easy and convenient to prepare at home.

Retail - Fresh Chicken. Our prepackaged retail products include various combinations of freshly refrigerated, whole chickens and chicken parts in trays, bags or other consumer packs labeled and priced ready for the retail grocer’s fresh meat counter. Our fresh chicken sales to the retail market were $612.1 million in fiscal 2005 compared to $224.7 million in fiscal 2001, a compounded annual growth rate of approximately 28.5%. We believe the retail prepackaged fresh chicken business will continue to be a large and relatively stable market, providing opportunities for product differentiation and regional brand loyalty.

Export and Other Chicken Products. Our export and other chicken products, with the exception of our exported prepared foods products, consist of whole chickens and chicken parts sold primarily in bulk, non-branded form either refrigerated to distributors in the U.S. or frozen for distribution to export markets. In the U.S., prices of these products are negotiated daily or weekly and are generally related to market prices quoted by the USDA or other public price reporting services. We also sell U.S.-produced chicken products for export to Eastern Europe, including Russia, the Far East, Mexico and other world markets.

Historically, we have targeted international markets to generate additional demand for our chicken dark meat, which is a natural by-product of our U.S. operations given our concentration on prepared foods products and the U.S. customers’ general preference for white meat. We have also begun selling prepared chicken products for export to the international divisions of our U.S. chain restaurant customers. We believe that U.S. chicken exports will continue to grow as worldwide demand increases for high-grade, low-cost protein sources. We also believe that worldwide demand for higher margin prepared foods products will increase over the next several years. Accordingly, we believe we are well positioned to capitalize on such growth. Also included in these categories are chicken by-products, which are converted into protein products and sold primarily to manufacturers of pet foods.

Markets for Turkey Products

Foodservice. A portion of our turkey sales are derived from products sold to the foodservice market. This market principally consists of chain restaurants, food processors, foodservice distributors and certain other institutions located throughout the continental U.S. After completion of the restructuring of our turkey operations described above, our turkey products include ready-to-cook turkey, fully cooked formed products, delicatessen products such as deli meats and sausage, salads, ground turkey and turkey burgers and other foodservice products.
17

We believe Pilgrim’s Pride is well-positioned to be the primary or secondary supplier to many chain restaurants that require multiple suppliers of turkey products. Additionally, we believe we are well suited to be the sole supplier for many regional chain restaurants.

Foodservice - Prepared Foods. The majority of our turkey sales to the foodservice market consist of prepared turkey products. Our prepared turkey sales to the foodservice market were $61.2 million of our sales in fiscal 2005. We believe that future growth in this segment will be attributable to the factors described above relating to the growth of prepared chicken sales to the foodservice market.

Foodservice - Fresh Turkey. We produce and market fresh, refrigerated and frozen turkey for sale to foodservice distributors, restaurant chains and other customers. These turkeys are usually of specific weight ranges and are usually whole birds to meet customer specifications. They are often marinated to enhance value and product differentiation.

Retail. A significant portion of our turkey sales is derived from products sold to the retail market. This market consists primarily of grocery store chains, wholesale clubs and other retail distributors. We concentrate our efforts in this market on sales of branded, prepackaged whole turkey to grocery store chains and retail distributors in the eastern and southwestern regions of the U.S. We believe this regional marketing focus enables us to develop consumer brand franchises and capitalize on proximity to the trade customer in terms of lower transportation costs, more timely and responsive service and enhanced product freshness.

We utilize numerous marketing techniques, including advertising, to develop and strengthen trade and consumer awareness and increase brand loyalty for consumer products marketed generally under the Pilgrim’s Pride® and Pilgrim’s SignatureTM brands. We believe our efforts to achieve and maintain brand awareness and loyalty help to provide more secure distribution for our products. We also believe our efforts at brand awareness generate greater price premiums than would otherwise be the case in certain eastern markets. We also maintain an active program to identify consumer preferences. The program primarily consists of testing new product ideas, packaging designs and methods through sophisticated qualitative and quantitative consumer research techniques in key geographic markets.

Retail - Prepared Foods. We sell retail-oriented prepared turkey products primarily to grocery store chains located in the eastern U.S. We also sell these products to the wholesale club industry.

Retail - Fresh Turkey. Our prepackaged, retail products include various combinations of freshly refrigerated and frozen whole turkey in bags as well as frozen ground turkey and turkey burgers. We believe the retail prepackaged fresh turkey business will continue to be a large and relatively stable market, providing opportunities for product differentiation and regional brand loyalty with large seasonal spikes during the holiday seasons.

Markets for Other Products

We have regional distribution centers located in Arizona, California, Florida, Iowa, Louisiana, Mississippi, North Carolina, Texas, Utah, and Wisconsin that are primarily focused on distributing our own poultry products, however, the distribution centers also distribute certain poultry and non-poultry products purchased from third parties to independent grocers and quick service restaurants. Our non-poultry distribution business is conducted as an accommodation to our customers and to achieve greater economies of scale in distribution logistics. Poultry sales from our regional distribution centers are included in the chicken and turkey sales amounts contained in the above tables, however, all non-poultry sales amounts are contained in the Other Products. We believe the store-door delivery capabilities for our own poultry products provide a strategic service advantage in selling to quick service, national chain restaurants.
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We market fresh eggs under the Pilgrim’s Pride® brand name, as well as under private labels, in various sizes of cartons and flats to U.S. retail grocery and institutional foodservice customers located primarily in Texas. We have a housing capacity for approximately 2.3 million commercial egg laying hens which can produce approximately 44 million dozen eggs annually. U.S. egg prices are determined weekly based upon reported market prices. The U.S. egg industry has been consolidating over the last few years, with the 25 largest producers accounting for more than 63.3% of the total number of egg laying hens in service during 2005. We compete with other U.S. egg producers primarily on the basis of product quality, reliability, price and customer service.

We market a high-nutrient egg called EggsPlus™. This egg contains high levels of Omega-3 and Omega-6 fatty acids along with Vitamin E, making the egg a heart-friendly product. Our marketing of EggsPlus™ has received national recognition for our progress in being an innovator in the “functional foods” category.

In addition, we produce and sell livestock feeds at our feed mill in Mt. Pleasant, Texas and at our farm supply store in Pittsburg, Texas to dairy farmers and livestock producers in northeastern Texas. We engage in similar sales activities at our other U.S. feed mills.
 
19

 
MEXICO

Background

The Mexico market represented approximately 7.5% of our net sales in fiscal 2005. We are the second largest producer of chicken in Mexico. We believe that our facilities are among the most technologically advanced in Mexico and that we are one of the lowest cost producers of chicken in Mexico.

Product Types

While the market for chicken products in Mexico is less developed than in the U.S., with sales attributed to fewer, more basic products, we believe the market for value-added products is increasing. Our strategy is to lead this trend. We have increased our sales of value-added products, primarily through national retail chains and restaurants, and it is our business strategy to continue to do so.

Markets

We sell our Mexico chicken products primarily to large wholesalers and retailers. Our customer base in Mexico covers a broad geographic area from Mexico City, the capital of Mexico with a population estimated to be between 18 and 22 million, to Saltillo, the capital of the State of Coahuila, about 500 miles north of Mexico City, and from Tampico and Veracruz on the Gulf of Mexico to Acapulco on the Pacific, which region includes the cities of San Luis Potosi and Queretaro, capitals of the states of the same name, and Cancun on the Caribbean.

Foreign Operations Risks

Our foreign operations pose special risks to our business and operations. See Item 1A. “Risk Factors” for a discussion of foreign operations risks.
20

GENERAL

Competitive Conditions

The chicken and turkey industries are highly competitive and our largest U.S. competitor has greater financial and marketing resources than we do. In the U.S., Mexico and Puerto Rico we compete principally with other vertically integrated poultry companies. We are the second largest producer of poultry in both the United States and Mexico and the largest in Puerto Rico. The largest producer in the United States is Tyson Foods, Inc. and in Mexico, the largest is Industrias Bachoco SA de CV.

In general, the competitive factors in the U.S. chicken and turkey industries include price, product quality, product development, brand identification, breadth of product line and customer service. Competitive factors vary by major market. In the foodservice market, competition is based on consistent quality, product development, service and price. In the U.S. retail market, we believe that product quality, brand awareness, customer service and price are the primary bases of competition. There is some competition with non-vertically integrated further processors in the U.S. prepared food business. We believe vertical integration generally provides significant, long-term cost and quality advantages over non-vertically integrated further processors.

In Mexico, where product differentiation has traditionally been limited, product quality, service and price have been the most critical competitive factors. The North American Free Trade Agreement, which went into effect on January 1, 1994, required annual reductions in tariffs for chicken and chicken products in order to eliminate those tariffs by January 1, 2003. On November 21, 2002 the Mexican Secretariat of the Economy announced it would initiate an investigation to determine whether a temporary safeguard action was warranted to protect the domestic poultry industry when import tariffs on poultry were eliminated in January 2003. The action stemmed from concerns of the Union Nacional Avicultores (UNA) that duty-free imports of leg quarters would injure the Mexico poultry industry. In July 2003, the U.S. and Mexico entered into a safeguard agreement with regard to imports into Mexico of chicken leg quarters from the U.S. Under this agreement, a tariff rate for chicken leg quarters of 98.8% of the sales price was established. The tariff rate on import duties was reduced on January 1, 2005, to 59.3%, and in each of the following three years the tariff rate is to be reduced in equal increments so that the final tariff rate on January 1, 2008 will be zero. As such tariffs are reduced, we expect greater amounts of chicken to be imported into Mexico from the U.S., which could negatively affect the profitability of Mexican chicken producers and positively affect the profitability of U.S. exporters of chicken to Mexico. Although this could have a negative impact on our Mexican chicken operations, we believe that this will be mitigated by the close proximity of our U.S. operations to the Mexican border. We have the largest U.S. production and distribution capacities near the Mexican border, which gives us a strategic advantage to capitalize on exports of U.S. chicken to Mexico.

While the extent of the impact of the elimination of tariffs is uncertain, we believe we are uniquely positioned to benefit from this elimination for two reasons. First, we have an extensive distribution network in Mexico, which distributes products to 26 of the 32 Mexican states, encompassing approximately 90% of the total population of Mexico. We believe this distribution network will be an important asset in distributing our own, as well as other companies’, U.S. produced chicken into Mexico. Second, we have the largest U.S. production and distribution capacities near the Mexican border, which will provide us with cost advantages in exporting U.S. chicken into Mexico. These facilities include our processing facilities in Mt. Pleasant, Lufkin, Nacogdoches, Dallas and Waco, Texas, and distribution facilities in San Antonio and El Paso, Texas and Phoenix, Arizona.
21

We are not a significant competitor in the distribution business as it relates to products other than poultry. We distribute these products solely as a convenience to our poultry customers. The broad-line distributors do not consider us to be a factor in those markets. The competition related to our other products such as table eggs, feed and protein are much more regionalized and no one competitor is dominant.

Key Customers

Our two largest customers accounted for approximately 18% of our net sales in fiscal 2005, and our largest customer, Wal-Mart Stores, Inc. accounted for 10.1% of our net sales.

Regulation and Environmental Matters

The chicken and turkey industries are subject to government regulation, particularly in the health and environmental areas, including provisions relating to the discharge of materials into the environment, by the Centers for Disease Control, the USDA, the Food and Drug Administration (“FDA”) and the Environmental Protection Agency (“EPA”) in the U.S. and by similar governmental agencies in Mexico. Our chicken processing facilities in the U.S. are subject to on-site examination, inspection and regulation by the USDA. The FDA inspects the production of our feed mills in the U.S. Our Mexican food processing facilities and feed mills are subject to on-site examination, inspection and regulation by a Mexican governmental agency, which performs functions similar to those performed by the USDA and FDA. We believe that we are in substantial compliance with all applicable laws and regulations relating to the operations of our facilities.

We anticipate increased regulation by the USDA concerning food safety, by the FDA concerning the use of medications in feed and by the EPA and various other state agencies concerning discharges to the environment. Although, we do not anticipate any regulations having a material adverse effect upon us, a material adverse effect may occur.

Employees and Labor Relations

As of October 1, 2005, we employed approximately 35,400 persons in the U.S. and 5,150 persons in Mexico. Approximately 13,450 employees at various facilities in the U.S. are members of collective bargaining units. In Mexico, 3,000 of our hourly employees are covered by collective bargaining agreements. We have not experienced any work stoppage at any location in over five years. We believe our relations with our employees are satisfactory. At any given time we will be in some stage of contract negotiation with various collective bargaining units.

Financial Information About Foreign Operations

The Company’s foreign operations are in Mexico. Geographic financial information is set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
22

Available Information; NYSE CEO Certification

The Company’s Internet website is http://www.pilgrimspride.com. The Company makes available, free of charge, through its Internet website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Directors and Officers Forms 3, 4 and 5, and amendments to those reports, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the Securities and Exchange Commission.

In addition, the Company makes available, through its Internet website, the Company’s Business Code of Conduct and Ethics, Corporate Governance Guidelines and the written charter of the Audit Committee, all of which are available in print to any stockholder who requests it by contacting the Secretary of the Company at 4845 U.S. Highway 271 North, Pittsburg, Texas 75686-0093.

As required by the rules of the New York Stock Exchange, the Company submitted its unqualified Section 303A.12 CEO Certification for the preceding year to the New York Stock Exchange.

Executive Officers

Set forth below is certain information relating to our current executive officers:

Name
Age
Positions
Lonnie "Bo" Pilgrim
77
Chairman of the Board
Clifford E. Butler
63
Vice Chairman of the Board
O.B. Goolsby, Jr.
58
President, Chief Executive Officer, and Director
Richard A. Cogdill
45
Chief Financial Officer
   
Secretary, Treasurer and Director
J. Clinton Rivers
46
Chief Operating Officer
Robert A. Wright
51
Executive Vice President of
   
Sales and Marketing

Lonnie "Bo" Pilgrim has served as Chairman of the Board since the organization of Pilgrim's Pride in July 1968. Mr. Pilgrim was previously Chief Executive Officer from July 1968 to June 1998. Prior to the incorporation of Pilgrim's Pride, Mr. Pilgrim was a partner in its predecessor partnership business founded in 1946.

Clifford E. Butler serves as Vice Chairman of the Board. Mr. Butler joined us as Controller and Director in 1969, was named Senior Vice President of Finance in 1973, became Chief Financial Officer and Vice Chairman of the Board in July 1983, became Executive President in January 1997 and served in such capacity through July 1998.

O.B. Goolsby, Jr. serves as President and Chief Executive Officer of Pilgrim’s Pride. Prior to being named Chief Executive Officer in September 2004, Mr. Goolsby served as President and Chief Operating Officer since November 2002. Mr. Goolsby served as Executive Vice President, Prepared Foods Complexes from June 1998 to November 2002. Mr. Goolsby was previously Senior Vice President, Prepared Foods Operations from August 1992 to June 1998 and Vice President, Prepared Foods Complexes from September 1987 to August 1992 and was previously employed by us from November 1969 to January 1981.
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Richard A. Cogdill has served as Chief Financial Officer, Secretary and Treasurer since January 1997. Mr. Cogdill became a Director in September 1998. Previously he served as Senior Vice President, Corporate Controller, from August 1992 through December 1996 and as Vice President, Corporate Controller from October 1991 through August 1992. Prior to October 1991, he was a Senior Manager with Ernst & Young LLP. Mr. Cogdill is a Certified Public Accountant.

J. Clinton Rivers serves as Chief Operating Officer. Prior to being named Chief Operating Officer in October 2004, Mr. Rivers served as Executive Vice President of Prepared Food Operations from November 2002 to October 2004. Mr. Rivers was the Senior Vice President of Prepared Foods Operations from 1999 to November 2002, and was the Vice President of Prepared Foods Operations from 1992 to 1999. From 1989 to 1992, he served as Plant Manager of the Mount Pleasant, Texas Production Facility. Mr. Rivers joined Pilgrim’s Pride in 1986 as the Quality Assurance Manager, and also held positions at Perdue Farms and Golden West Foods.

Robert A. Wright serves as Executive Vice President of Sales and Marketing. Prior to being named Executive Vice President of Sales and Marketing in June 2004, Mr. Wright served as Executive Vice President, Turkey Division since October 2003 when he joined Pilgrim’s Pride. Prior to October 2003, Mr. Wright served as President of Butterball Turkey Company for five years.


Forward Looking Statements

Statements of our intentions, beliefs, expectations or predictions for the future, denoted by the words "anticipate," "believe," "estimate," "expect," "project," "imply," "intend," "foresee" and similar expressions, are forward-looking statements that reflect our current views about future events and are subject to risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include those described under "Risk Factors" below and elsewhere in this Annual Report on Form 10-K.

Actual results could differ materially from those projected in these forward-looking statements as a result of these factors, among others, many of which are beyond our control.

In making these statements, we are not undertaking, and specifically decline to undertake, any obligation to address or update each or any factor in future filings or communications regarding our business or results, and we are not undertaking to address how any of these factors may have caused changes in information contained in previous filings or communications. Though we have attempted to list comprehensively these important cautionary risk factors, we wish to caution investors and others that other factors may in the future prove to be important in affecting our business or results of operations.

Risk Factors

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

Profitability in the chicken and turkey industries is materially affected by the commodity prices of feed ingredients, chicken and turkey, which are determined by supply and demand factors. As a result, the chicken and turkey industries are subject to cyclical earnings fluctuations.
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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 turkeys or deliver products.

High feed ingredient prices have had a material adverse effect on our operating results in the past. We periodically seek, in some instances, to enter into advance purchase commitments or financial hedging contracts for the purchase of feed ingredients in an effort to manage our feed ingredient costs. However, we may not hedge feed ingredient cost risk unless requested by a specific customer or it is otherwise deemed prudent and any use of such instruments may not be successful.

Livestock and Poultry Disease, including Avian Influenza. Outbreaks of livestock diseases in general and poultry diseases in particular, including avian influenza, can significantly affect our ability to conduct our operations and demand for our products.

We take 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 outbreaks of disease, either in our own flocks or elsewhere, could significantly affect demand for our products or 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, turkey or other products to or from our suppliers, facilities or customers, or require us to destroy one or more of our flocks. This could also 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.

In recent months there has been substantial publicity regarding a highly pathogenic strain of avian influenza, known as H5N1, which has been affecting Asia since 2002 and which has recently been found in Eastern Europe. It is widely believed that H5N1 is being spread by migratory birds, such as ducks and geese. There have also been some cases where H5N1 is believed to have passed from birds to humans as humans came into contact with live birds that were infected with the disease.

Although H5N1 has not been identified in North America, there have been outbreaks of low pathogenic strains of avian influenza in North America, including in the U.S. in 2002 and 2004 and in Mexico for the past several years, including this year, that have impacted our operations. Further, these low pathogenic outbreaks have not generated the same level of concern, or received the same level of publicity or been accompanied by the same reduction in demand for poultry products in certain countries as that associated with the highly pathogenic H5N1 strain. Accordingly, even if the H5N1 strain does not spread to North America, there can be no assurance that it will not materially adversely affect demand for North American produced poultry internationally and/or domestically, and, if it were to spread to North America, there can be no assurance that it would not significantly affect our ability to conduct our operations and/or demand for our products, in each case in a manner having a material adverse effect on our business, reputation and/or prospects.

Contamination of Products. If our poultry products become contaminated, we may be subject to product liability claims and product recalls.
25

Poultry products may be subject to contamination by disease producing organisms, or pathogens, such as Listeria monocytogenes, Salmonella and generic E.coli. These pathogens are generally found in the environment, and, as a result, there is a risk that they, as a result of food processing, could be present in our processed poultry products. These pathogens can also be introduced as a result of improper handling at the further processing, foodservice or consumer level. These risks may be controlled, although not eliminated, by adherence to good manufacturing practices and finished product testing. We have little, if any, control over proper handling once the product has been shipped. Illness and death may result if the pathogens are not eliminated at the further processing, foodservice or consumer level. Even an inadvertent shipment of contaminated products is a violation of law and may lead to increased risk of exposure to product liability claims, product recalls and increased scrutiny by federal and state regulatory agencies and may have a material adverse effect on our business, reputation and prospects.

In October 2002, one product sample produced in our Franconia, Pennsylvania facility that had not been shipped to customers tested positive for Listeria. We later received information from the USDA suggesting environmental samples taken at the facility had tested positive for both the strain of Listeria identified in the product and a strain having characteristics similar to those of the strain identified in a Northeastern Listeria outbreak. As a result, we voluntarily recalled all cooked deli products produced at the plant from May 1, 2002 through October 11, 2002. We carried insurance designed to cover the direct recall related expenses and certain aspects of the related business interruption caused by the recall. We estimate that the sales in our turkey division were negatively affected by approximately $63 million and $82 million during fiscal 2004 and fiscal 2003, respectively. For those same periods, we estimate that operating margins were negatively affected by approximately $20 to $25 million and $65 to $70 million, respectively. Aggregating the direct recall expense claim with the anticipated business interruption and product re-establishment costs, our total loss was approximately $100 million, although our policy limit was $50 million. We received $4 million of this amount in fiscal 2003 and the remaining $46 million in fiscal 2004 from our insurer.

Product Liability. Product liability claims or product recalls can adversely affect our business reputation and expose us to increased scrutiny by federal and state regulators.

The packaging, marketing and distribution of food products entail an inherent risk of product liability and product recall and the resultant adverse publicity. We may be subject to significant liability if the consumption of any of our products causes injury, illness or death. We could be required to recall certain of our products in the event of contamination or damage to the products. In addition to the risks of product liability or product recall due to deficiencies caused by our production or processing operations, we may encounter the same risks if any third party tampers with our products. We cannot assure you that we will not be required to perform product recalls, or that product liability claims will not be asserted against us, in the future. Any claims that may be made may create adverse publicity that would have a material adverse effect on our ability to market our products successfully or on our business, reputation, prospects, financial condition and results of operations.

As described above under "Contamination of Products,” if our poultry products become contaminated, we may be subject to product liability claims and product recalls. In October 2002, we voluntarily recalled all cooked deli products produced at one of our facilities from May 1, 2002 through October 11, 2002. In connection with this recall, we were named as a defendant in a number of lawsuits brought by individuals alleging injuries resulting from contracting Listeria monocytogenes. See Item 3. “Legal Proceedings.” There can be no assurance that any litigation or reputational injury associated with this or any future product recalls will not have a material adverse effect on our ability to market our products successfully or on our business, reputation, prospects, financial condition and results of operations.
26

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.

Our business operations entail a number of risks, including risks relating to product liability claims, product recalls, property damage and injuries to persons. We currently maintain insurance with respect to certain of these risks, including product liability insurance, property insurance, workers compensation insurance and general liability insurance, but in many cases such insurance is expensive, difficult to obtain and no assurance can be given that such insurance can be maintained in the future on acceptable terms, or in sufficient amounts to protect us against losses due to any such events, or at all. Moreover, even though our insurance coverage may be designed to protect us from losses attributable to certain events, it may not adequately protect us from liability and expenses we incur in connection with such events. For example, the losses attributable to our October 2002 recall of cooked deli-products produced at one of our facilities significantly exceeded available insurance coverage. Additionally, in the past two of our insurers encountered financial difficulties and were unable to fulfill their obligations under the insurance policies as anticipated and separately two of our other insurers contested coverage with respect to claims covered under policies purchased, forcing us to litigate the issue of coverage before we were able to collect under these policies.

Government Regulation. Regulation, present and future, is a constant factor affecting our business.

The chicken and turkey industries are subject to federal, state and local governmental regulation, including in the 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.

Significant Competition. Competition in the chicken and turkey industries with other vertically integrated poultry companies, especially companies with greater resources, may make us unable to compete successfully in these industries, which could adversely affect our business.

The chicken and turkey industries are highly competitive. Some of our competitors have greater financial and marketing resources than us. In both the U.S. and Mexico, we primarily compete with other vertically integrated poultry companies.

In general, the competitive factors in the U.S. poultry industry include:

 Price;

 Product quality;

 Brand identification;

 Breadth of product line; and

 Customer service.

Competitive factors vary by major market. In the foodservice market, competition is based on consistent quality, product development, service and price. In the U.S. retail market, we believe that competition is based on product quality, brand awareness, customer service and price. Further, there is some competition with non-vertically integrated further processors in the prepared food business.
27

In Mexico, where product differentiation has traditionally been limited, product quality and price have been the most critical competitive factors. Additionally, the North American Free Trade Agreement, which went into effect on January 1, 1994, required annual reductions in tariffs for chicken and chicken products in order to eliminate those tariffs by January 1, 2003. On November 21, 2002, the Mexican Secretariat of the Economy announced that it would initiate an investigation to determine whether a temporary safeguard action was warranted to protect the domestic poultry industry when import tariffs on poultry were eliminated in January 2003. In July 2003, the U.S. and Mexico entered into a safeguard agreement with regard to imports into Mexico of chicken leg quarters from the U.S. Under this agreement, a tariff rate for chicken leg quarters of 98.8% of the sales price was established. This tariff was reduced on January 1, 2005 to 59.3% and is to be reduced in each of the following three years in equal increments so that the final tariff rate at January 1, 2008 will be zero. As those tariffs are reduced, increased competition from chicken imported into Mexico from the U.S. may have a material adverse effect on the Mexican chicken industry in general, and on our Mexican operations in particular.

Loss of Key Customers. The loss of one or more of our largest customers could adversely affect our business.

Our two largest customers accounted for approximately 18% of our net sales in fiscal 2005, and our largest customer, Wal-Mart Stores, Inc. accounted for 10.1% of our net sales. Our business could suffer significant set backs in revenues and operating income if we lost one or more of our largest customers, or if our customers' plans and/or markets should change significantly.

Potential Acquisitions. We intend to pursue opportunities to acquire complementary businesses, which could increase leverage and debt service requirements and could adversely affect our financial situation if we fail to successfully integrate the acquired business.

We intend to pursue selective acquisitions of complementary businesses in the future. Inherent in any future acquisitions are certain risks such as increasing leverage and debt service requirements and combining company cultures and facilities, which could have a material adverse effect on our operating results, particularly during the period immediately following such acquisitions. Additional debt or equity capital may be required to complete future acquisitions, and there can be no assurance that we will be able to raise the required capital. Furthermore, acquisitions involve a number of risks and challenges, including:

 Diversion of management's attention;

 The need to integrate acquired operations;

 Potential loss of key employees and customers of the acquired companies;
 
                        • Lack of experience in operating in the geographical market of the acquired business;

and

 An increase in our expenses and working capital requirements.

Any of these and other factors could adversely affect our ability to achieve anticipated cash flows at acquired operations or realize other anticipated benefits of acquisitions.
28

Assumption of Unknown Liabilities in Acquisitions. Assumption of unknown liabilities in acquisitions may harm our financial condition and operating results.

Acquisitions may be structured in such a manner that would result in the assumption of unknown liabilities not disclosed by the seller or uncovered during pre-acquisition due diligence. For example, our acquisition of the ConAgra chicken division was structured as a stock purchase. In that acquisition we assumed all of the liabilities of the ConAgra chicken division, including liabilities that may be unknown. We negotiated and obtained from ConAgra Foods certain representations and warranties concerning contingent liabilities and other obligations of the entities holding the ConAgra chicken division assets to reduce the risk that we will bear such subsidiaries’ liability for unknown liabilities. ConAgra Foods also agreed to indemnify us for breaches of representations and warranties concerning the pre-closing operations of the ConAgra chicken division and for certain liabilities of the entities holding the ConAgra chicken division assets. ConAgra Foods’ indemnification obligations are generally subject to a $30 million deductible, and there may be circumstances in which ConAgra Foods’ indemnification obligations do not provide us protection from contingent or other obligations of the entities holding the ConAgra chicken division assets, or other pre-closing liabilities of the ConAgra chicken division. These obligations and liabilities could harm our financial condition and operating results.

Leverage. Our indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our debt securities.

Our indebtedness could adversely affect our financial condition which could have important consequences to you. For example, it could:

·  
Increase our vulnerability to general adverse economic conditions;

·  
Limit our ability to obtain necessary financing and to fund future working capital, capital expenditures and other general corporate requirements;

·  
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 our ability to pursue acquisitions and sell assets; and

·  
Limit, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds. 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, chicken and turkey and general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
29

Despite our indebtedness, we are not prohibited from incurring significant additional indebtedness in the future. If additional debt is added to our current debt levels, the related risks that we now face could intensify.

Foreign Operations Risks. Our foreign operations pose special risks to our business and operations.

We have significant operations and assets located in Mexico. Foreign operations are subject to a number of special risks, including among others:

 Currency exchange rate fluctuations;

 Trade barriers;

 Exchange controls;

 Expropriation; and
 
 Changes in laws and policies, including those governing foreign-owned operations.
Currency exchange rate fluctuations have adversely affected us in the past. Exchange rate fluctuations or one or more other risks may have a material adverse effect on our business or operations in the future.

Our operations in Mexico are conducted through subsidiaries organized under the laws of Mexico. We may rely in part on intercompany loans and distributions from our subsidiaries to meet our obligations. Claims of creditors of our subsidiaries, including trade creditors, will generally have priority as to the assets of our subsidiaries over our claims. Additionally, the ability of our Mexican subsidiaries to make payments and distributions to us will be subject to, among other things, Mexican law. In the past, these laws have not had a material adverse effect on the ability of our Mexican subsidiaries to make these payments and distributions. However, laws such as these may have a material adverse effect on the ability of our Mexican subsidiaries to make these payments and distributions in the future.
 
Despite our indebtedness, we are not prohibited from incurring significant additional indebtedness in the future. If additional debt is added to our current debt levels, the related risks that we now face could intensify.

30

Control of Voting Stock. Control over Pilgrim's Pride is maintained by members of the family of Lonnie "Bo" Pilgrim.

As described in more detail in Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," through two limited partnerships and related trusts and voting agreements, Lonnie "Bo" Pilgrim, Patty R. Pilgrim, his wife, and Lonnie Ken Pilgrim, his son, control over 60% of the voting power of our outstanding common stock. Accordingly, they control the outcome of all actions requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of Pilgrim's Pride or its assets. This ensures their ability to control the foreseeable future direction and management of Pilgrim's Pride. In addition, an event of default under certain agreements related to our indebtedness will occur if Lonnie "Bo" Pilgrim and certain members of his family cease to own at least a majority of the voting power of the outstanding common stock.


None.


Operating Facilities

We operate 23 poultry processing plants in the U.S. Of this total, 22 process chicken and are located in Alabama, Arkansas, Georgia, Kentucky, Louisiana, North Carolina, Tennessee, Texas, Virginia, and West Virginia. We have one turkey processing plant in Pennsylvania, one chicken processing plant in Puerto Rico and three chicken processing plants in Mexico. The U.S. chicken processing plants have weekly capacity to process 27.9 million broilers and operated at 93% of capacity in fiscal 2005. Our turkey plant has the weekly capacity to process 0.2 million birds under current inspection and line configurations and operates at 90% of capacity. Our Mexico facilities have the capacity to process 3.2 million broilers per week and operated at 91% of capacity in fiscal 2005. Our Puerto Rico processing plant has the capacity to process 0.3 million birds per week based on one eight-hour shift per day. For segment reporting purposes, we include Puerto Rico with our U.S. operations.

In the U.S., the processing plants are supported by 26 hatcheries, 20 feed mills and 8 rendering plants. The hatcheries, feed mills and rendering plants operated at 92%, 84% and 86% of capacity, respectively, in fiscal 2005. In Puerto Rico the processing plant is supported by one hatchery and one feed mill which operated at 85% and 67% of capacity, respectively, in fiscal 2005. Excluding commercial feed products, the Puerto Rico feed mill is running at 60% of capacity. In Mexico the processing plants are supported by six hatcheries, four feed mills, and two rendering facilities. The Mexico hatcheries, feed mills and rendering facilities operated at 100%, 78% and 87% of capacity, respectively, in fiscal 2005.

We also operate ten prepared foods plants, nine of which process chicken products and one processes turkey products. These plants are located in Georgia, Louisiana, Pennsylvania, Tennessee, Texas and West Virginia. These plants have the capacity to produce approximately 1,133 million pounds of further processed product per year and in fiscal 2005 operated at approximately 85% of capacity based on the current product mix and six-day production at most facilities and 24/7 production at two facilities.
 
Subsequent to our fiscal year end, we acquired a further processing plant in Bossier City, Louisiana from Wayne Farm LLC which has an annual production capacity of 50 million pounds. This was not included in the computation of capacity utilization.
31

Other Facilities and Information

We own a partially automated distribution freezer located outside of Pittsburg, Texas, which includes 125,000 square feet of storage area. We operate a commercial feed mill in Mt. Pleasant, Texas. We own office buildings in Pittsburg, Texas, which house our executive offices, our Logistics and Customer Service offices and our general corporate functions as well as an office building in Mexico City, which houses our Mexican marketing offices, and an office building in Broadway, Virginia, which houses additional sales and marketing, research and development, and support activities. We lease offices in Dallas, Texas and Duluth, Georgia, which house additional sales and marketing and support activities.

We have 16 regional distribution centers located in Arizona, California, Florida, Iowa, Louisiana, Mississippi, North Carolina, Texas, Utah, and Wisconsin, seven of which we own and nine of which we lease.

Approximately fifty percent of our U.S. property, plant and equipment is pledged as collateral on our revolving term loan and our secured term loan.


On July 1, 2002, three individuals, on behalf of themselves and a putative class of chicken growers, filed their original class action complaint against us in the United States District Court for the Eastern District of Texas, Texarkana Division, styled “Cody Wheeler, et al. vs. Pilgrim’s Pride Corporation.” The complaint alleges that we violated the Packers and Stockyards Act (7 U.S.C. Section 192) and breached fiduciary duties allegedly owed to the plaintiff growers. The plaintiffs also brought individual actions under the Packers and Stockyards Act alleging common law fraud, negligence, breach of fiduciary duties and breach of contract. Recently, on September 30, 2005, plaintiffs amended their lawsuit to join Tyson Foods, Inc. as a co-defendant. Two additional former chicken growers were also added as plaintiffs to the lawsuit. This amendment, which occurred 38 months after the lawsuit’s filing also results in a virtual re-writing of the allegations. Now plaintiffs contend that the Company and Tyson are involved in a conspiracy to violate federal antitrust laws. Plaintiffs’ initial allegations, although still contained in the amended lawsuit, are no longer the sole focus of the case. The Company intends to defend vigorously both certification of the case as a class action and plaintiffs’ individual claims. We do not expect this matter to have a material impact on our financial position, operations or liquidity.

In October 2002, a limited number of USDA environmental samples from our Franconia, Pennsylvania plant tested positive for Listeria. As a result, we voluntarily recalled all cooked deli products produced at the plant from May 1, 2002 through October 11, 2002. No illnesses have been linked to any of our recalled products, and none of such products have tested positive for the strain of Listeria associated with an outbreak in the Northeastern U.S. that occurred during the summer of 2002. However, following this recall, a number of demands and cases have been made and filed alleging injuries purportedly arising from the consumption of products produced at this facility. These include: “Lawese Drayton, Individually and as Personal Representative of the Estate of Raymond Drayton, deceased, Plaintiff, v. Pilgrim’s Pride Corporation, Jack Lambersky Poultry Company, Inc. d/b/a JL Foods Co, Inc., Defendants,” which was filed against us in the United States District Court for the Eastern District of Pennsylvania on April 15, 2003; “Laron Harvey, by his mother and natural guardian, Shakandra Hampton, and Shakandra Hampton in her own right v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, Inc.,” which was filed in the Pennsylvania Court of Common Pleas on May 5, 2003, and has since been removed to the U.S. District Court of the Eastern District of Pennsylvania in Philadelphia; “Ryan and Dana Patterson v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, et al” which was filed in the Superior Court of New Jersey, Law Division, Passaic County, on August 12, 2003; “Jamar Clarke, an infant under the age of fourteen (14) years, by his mother and natural guardian, Wanda Multrie Clarke, and Wanda Multrie Clarke, individually v. Pilgrim’s Pride Corporation d/b/a Wampler Foods, Inc., H. Schrier and Co., Inc., Board of Education of the City of New York and Public School 251” which was filed in the Supreme Court of the State of New York, County of Queens, on August 1, 2003; “Peter Roselle, as Administrator and Prosequendum for the Heirs-at-Law of Louis P. Roselle, deceased; and Executor of the Estate of Louis P. Roselle, deceased, and individually v. Pilgrim’s Pride Corporation, Wampler Foods, Inc., Jack Lambersky Poultry Company, Inc., d.b.a. J.L. Foods Co. Inc.” which was filed in the Superior Court of New Jersey, Law Division, Union County, on June 14, 2004; “Jody Levonchuk, administratrix of the Estate of Joseph Cusato v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company” which was filed in the U.S. District Court for the Eastern District of Pennsylvania, on July 28, 2004; “Mary Samudovsky v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, Inc., et al,” which was filed in the Superior Court of New Jersey, Law Division: Camden County, and served on October 26, 2004 (which case was voluntarily dismissed by the plaintiff on May 8, 2005); Nancy Cirigliano and Scott Fischer v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, et al,” which was filed in the Superior Court of New Jersey, Union County, on August 10, 2004; “Dennis Wysocki, as the Administrator of the Estate of Matthew Tyler Wysocki, deceased, and Dennis Wysocki and Karen Wysocki, individually v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, et al,” which was filed in the Supreme Court of the State of New York, County of New York, on July 30, 2004; “Randi Carden v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, et al,” which was filed in the Superior Court of New Jersey, Camden County, on August 10, 2004; “Catherine Dillon, individually and as guardian ad litem for her infant son, Brian Dillon, and Joseph Dillon, individually v. Pilgrim’s Pride Corporation and Jack Lambersky Poultry Company, et al,” which was filed in the Superior Court of New Jersey, Essex County, on September 10, 2004 (which case has recently been settled); and “Roberta Napolitano, as Trustee of the Bankruptcy Estate of Burke Caren Kantrow v. Pilgrim’s Pride Corporation, Wampler Foods, Inc. and Jack Lambersky Poultry Company, d/b/a J. L. Foods, Inc.” which was filed in the Superior Court of Connecticut, New Haven, on June 16, 2005. On August 20, 2004, the Estate of Frank Niemtzow refiled his individual action from the previously filed and voluntarily dismissed class action suit. Neither the likelihood of an unfavorable outcome nor the amount of ultimate liability, if any, with respect to any of these cases can be determined at this time. These cases are in various stages of litigation, and we believe we have meritorious defenses to each of the claims, which we intend to vigorously defend. After considering our available insurance coverage, we do not expect any of these matters to have a material impact on our financial position, operations or liquidity.
32

On December 31, 2003, we were served with a purported class action complaint styled “Angela Goodwin, Gloria Willis, Johnny Gill, Greg Hamilton, Nathan Robinson, Eddie Gusby, Pat Curry, Persons Similarly Situated v. ConAgra Poultry Company and Pilgrim’s Pride, Incorporated” in the United States District Court, Western District of Arkansas, El Dorado Division, alleging racial and age discrimination at one of the facilities we acquired from ConAgra. Two of the named plaintiffs, Greg Hamilton and Gloria Willis, were voluntarily dismissed from this action. We believe we have meritorious defenses to the class certification as well as the individual claims and we intend to vigorously oppose class certification and defend these claims. The ultimate liability with respect to these claims cannot be determined at this time.

We are subject to various other legal proceedings and claims, which arise in the ordinary course of our business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect our financial position or results of operations.


None.
33


PART II
 
Quarterly Stock Prices and Dividends

High and low prices of and dividends relating to the Company’s common stock and the former Class B and Class A common stock for the periods indicated were:

   
Prices 2005
 
Prices 2004
 
Dividends
 
Quarter
   
High
   
Low
   
High
   
Low
   
2005
   
2004
 
                                       
PPC Common Stock
   
First
 
$
35.00
 
$
25.76
 
$
18.50
 
$
13.44
 
$
.015
 
$
.015
 
Second
   
39.85
   
28.84
   
23.10
   
16.17
   
.015
   
.015
 
Third
   
38.61
   
33.32
   
29.88
   
21.10
   
.015
   
.015
 
Fourth
   
40.23
   
30.91
   
32.09
   
23.02
   
.015
   
.015
 
                                       
Class B Common Stock
   
First
 
$
--
 
$
--
 
$
14.39
 
$
12.50
 
$
--
 
$
--
 
Second
   
--
   
--
   
--
   
--
   
--
   
--
 
Third
   
--
   
--
   
--
   
--
   
--
   
--
 
Fourth
   
--
   
--
   
--
   
--
   
--
   
--
 
     
Class A Common Stock
   
First
 
$
--
 
$
--
 
$
14.55
 
$
12.53
 
$
--
 
$
--
 
Second
   
--
   
--
   
--
   
--
   
--
   
--
 
Third
   
--
   
--
   
--
   
--
   
--
   
--
 
Fourth
   
--
   
--
   
--
   
--
   
--
   
--
 
     

The Company’s common stock (ticker symbol “PPC”) is traded on the New York Stock Exchange. The Company estimates there were approximately 53,286 holders (including individual participants in security position listings) of the Company’s common stock as of November 15, 2005. Prior to November 22, 2003, the Company had two classes of authorized and issued common stock, Class B common stock (ticker symbol “CHX”) and Class A common stock (ticker symbol “CHX A”), both of which were traded on the New York Stock Exchange. See Note I—Common Stock of the notes to consolidated financial statements included elsewhere herein for additional discussion of the Company’s common stock.

With the exception of two quarters in 1993, the Company's Board of Directors has declared cash dividends of $0.015 per share of common stock (on a split adjusted basis) every fiscal quarter since the Company's initial public offering in 1986. Payment of future dividends will depend upon the Company's financial condition, results of operations and other factors deemed relevant by the Company's Board of Directors, as well as any limitations imposed by lenders under the Company's credit facilities. The Company's revolving credit facility and revolving/term borrowing facility currently limit dividends to a maximum of $6.5 million per year. See Note F - Notes Payable and Long-Term Debt of the notes to consolidated financial statements included elsewhere herein for additional discussions of the Company's credit facilities.
34

Issuer Purchases of Equity Security

 
 
 
Period
 
 
Total Number of Shares Purchased (1)
 
 
Average Price Paid per Share
 
Total Number of
Shares Purchased as Part of Publicly
Announced Program (2)
 
Number of Shares
Remaining to be Purchased Under the Program (2)
 
July 3 - Aug 3
   
15,443,054
 
$
31.23735
   
15,443,054
   
--
 
Aug 4 - Sept 3
   
--
   
--
   
--
   
--
 
Sept 4 - Oct 1
   
--
   
--
   
--
   
--
 
Total
   
15,443,054
 
$
31.23735
   
15,443,054
   
--
 

(1) Total shares purchased represents those shares purchased by the Company from ConAgra Foods, Inc. in connection with the Company’s simultaneous issuance of the same number of shares in a public offering as described in (2) below.

(2) As reported on August 4, 2005, in the Company’s Current Report on Form 8-K, on August 3, 2005, the Company entered into a Purchase and Amendment Agreement with ConAgra Foods, Inc., providing for the repurchase by the Company from ConAgra Foods, Inc. of an aggregate of 15,443,054 shares of the Company’s common stock at a price per share of $31.23735. The repurchase was completed on August 9, 2005 and the shares were cancelled. There was no decrease in the total number of outstanding shares of common stock after giving effect to the repurchase as it occurred concurrent with the issuance of a like number of new shares in a public offering.
35


(In thousands, except ratios and per share data)
 
Eleven Years Ended October 1, 2005
 
   
2005
 
2004(a)(b)
 
2003
 
2002
 
       
(53 weeks)
         
Income Statement Data:
                         
Net sales
 
$
5,666,275
 
$
5,363,723
 
$
2,619,345
 
$
2,533,718
 
Gross profit(d)
   
745,199
   
529,039
   
200,483
   
165,165
 
Operating income(d)
   
435,812
   
265,314
   
63,613
   
29,904
 
Interest expense, net
   
43,932
   
52,129
   
37,981
   
32,003
 
Income (loss) before income taxes(d)
   
403,523
   
208,535
   
63,235
   
1,910
 
Income tax expense (benefit)(e)
   
138,544
   
80,195
   
7,199
   
(12,425
)
Net income (loss)(d)
   
264,979
   
128,340
   
56,036
   
14,335
 
Ratio of earnings to fixed charges(f)
   
7.19x
   
4.08x
   
2.24x
   
(f
)
Per Common Share Data:(g)
                         
Net income (loss)
 
$
3.98
 
$
2.05
 
$
1.36
 
$
0.35
 
Cash dividends
   
0.06
   
0.06
   
0.06
   
0.06
 
Book value
   
18.31
   
13.87
   
10.46
   
9.59
 
Balance Sheet Summary:
                         
Working capital
 
$
404,601
 
$
383,726
 
$
211,119
 
$
179,037
 
Total assets
   
2,511,903
   
2,245,989
   
1,257,484
   
1,227,890
 
Notes payable and current maturities of long-term debt
   
8,603
   
8,428
   
2,680
   
3,483
 
Long-term debt, less current maturities
   
518,863
   
535,866
   
415,965
   
450,161
 
Total stockholders’ equity
   
1,223,598
   
922,956
   
446,696
   
394,324
 
Cash Flow Summary:
                         
Operating cash flow
 
$
493,073
 
$
272,404
 
$
98,892
 
$
98,113
 
Depreciation & amortization(h)
   
134,944
   
113,788
   
74,187
   
70,973
 
Purchases of investment securities
   
305,458
   
--
   
--
   
--
 
Capital expenditures
   
116,588
   
79,642
   
53,574
   
80,388
 
Business acquisitions, net of equity consideration(a)(c)
   
--
   
272,097
   
4,499
   
--
 
Financing activities, net provided by (used in)
   
18,860
   
96,665
   
(39,767
)
 
(21,793
)
Other Data:
                         
EBITDA(i)
 
$
580,078
 
$
372,501
 
$
173,926
 
$
103,469
 
Key Indicators (as a percentage of net sales):
                         
Gross profit(d)
   
13.2
%
 
9.9
%
 
7.7
%
 
6.5
%
Selling, general and
administrative expenses
   
5.5
%
 
4.8
%
 
5.2
%
 
5.3
%
Operating income (loss)(d)
   
7.7
%
 
4.9
%
 
2.4
%
 
1.2
%
Interest expense, net
   
0.9
%
 
1.0
%
 
1.5
%
 
1.3
%
Net income (loss)(d)
   
4.7
%
 
2.4
%
 
2.1
%
 
0.6
%

 
 
36


Eleven Years Ended October 2, 2004
 
2001(c)
 
2000
 
1999
 
1998
 
1997
 
1996
 
1995
 
         
(53 weeks)
                 
                             
$
2,214,712
$
1,499,439
$
1,357,403
$
1,331,545
$
1,277,649
$
1,139,310
$
931,806
 
 
213,950
 
165,828
 
185,708
 
136,103
 
114,467
 
70,640
 
74,144
 
 
94,542
 
80,488
 
109,504
 
77,256
 
63,894
 
21,504
 
24,930
 
 
30,775
 
17,779
 
17,666
 
20,148
 
22,075
 
21,539
 
17,483
 
 
61,861
 
62,786
 
90,904
 
56,522
 
43,824
 
(4,533)
 
2,091
 
 
20,724
 
10,442
 
25,651
 
6,512
 
2,788
 
2,751
 
10,058
 
 
41,137
 
52,344
 
65,253
 
50,010
 
41,036
 
(7,284)
 
(7,967)
 
 
2.13x
 
3.04x
 
4.33x
 
2.96x
 
2.57x
 
(f)
 
1.07x
 
                             
$
1.00
$
1.27
$
1.58
$
1.21
$
0.99
$
(0.18)
$
(0.19)
 
 
0.06
 
0.06
 
0.045
 
0.04
 
0.04
 
0.04
 
0.04
 
 
9.27
 
8.33
 
7.11
 
5.58
 
4.41
 
3.46
 
3.67
 
                             
$
203,350
$
124,531
$
154,242
$
147,040
$
133,542
$
88,455
$
88,395
 
 
1,215,695
 
705,420
 
655,762
 
601,439
 
579,124
 
536,722
 
497,604
 
 
5,099
 
4,657
 
4,353
 
5,889
 
11,596
 
35,850
 
18,187
 
 
467,242
 
165,037
 
183,753
 
199,784
 
224.743
 
198,334
 
182,988
 
 
380,932
 
342,559
 
294,259
 
230,871
 
182,516
 
143,135
 
152,074
 
                             
$
87,833
$
130,803
$
$81,452
$
85,016
$
49,615
$
11,391
$
32,712
 
 
55,390
 
36,027
 
34,536
 
32,591
 
29,796
 
28,024
 
26,127
 
 
--
 
--
 
--
 
--
 
--
 
--
 
--
 
 
112,632
 
92,128
 
69,649
 
53,518
 
50,231
 
34,314
 
35,194
 
 
239,539
 
--
 
--
 
--
 
--
 
--
 
36,178
 
 
246,649
 
(24,769)
 
(19,634)
 
(32,498)
 
348
 
27,313
 
40,173
 
                             
$
146,166
$
115,356
$
142,043
$
108,268
$
94,782
$
43,269
$
44,455
 
                             
 
9.7
%
11.1
%
13.7
%
10.2
%
9.0
%
6.2
%
8.0
%
 
5.4
%
5.7
%
5.6
%
4.4
%
4.0
%
4.3
%
5.3
%
 
4.3
%
5.4
%
8.1
%
5.8
%
5.0
%
1.9
%
2.7
%
 
1.4
%
1.2
%
1.3
%
1.5
%
1.7
%
1.9
%
1.9
%
 
1.9
%
3.5
%
4.8
%
3.8
%
3.2
%
(0.6)
%
(0.9)
%
37


(a)
The Company acquired the ConAgra chicken division on November 23, 2003 for $635.2 million including the non-cash value of common stock issued of $357.5 million. The acquisition has been accounted for as a purchase and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date.
 
 
(b)
On April 26, 2004, the Company announced a plan to restructure its turkey division, including the sale of some facilities in Virginia. The facilities were sold in the fourth quarter of fiscal 2004. In connection with the restructuring, the Company recorded in cost of sales-restructuring charges of approximately $64.2 million and $7.9 million of other restructuring charges.
   
(c)
The Company acquired WLR Foods on January 27, 2001 for $239.5 million and the assumption of $45.5 million of indebtedness. The acquisition has been accounted for as a purchase and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date.
   
(d)
Gross profit, operating income and other income include the following non-recurring recoveries, restructuring charges and other unusual items for each of the years presented (in millions):

   
2005
 
2004
 
2003
 
2002
 
Effect on Gross Profit and Operating Income:
                         
Cost of sales-restructuring
 
$
--
 
$
(64.2
)
$
--
 
$
--
 
Non-recurring recoveries recall insurance
 
$
--
 
$
23.8
 
$
--
 
$
--
 
Non-recurring recoveries for avian influenza
 
$
--
 
$
--
 
$
26.6
 
$
--
 
Non-recurring recoveries for vitamin and methionine litigation
 
$
--
 
$
0.1
 
$
19.9
 
$
0.8
 
                           
Additional effect on Operating Income:
                         
Other restructuring charges
 
$
--
 
$
(7.9
)
$
--
 
$
--
 
                           
Other income for litigation settlement
 
$
11.7
   
--
   
--
   
--
 
Other income for vitamin and methionine litigation
 
$
--
 
$
0.9
 
$
36.0
 
$
4.3
 

In addition, the Company estimates its losses related to the October 2002 recall (excluding the insurance recovery described above) and 2002 avian influenza outbreak negatively affected gross profit and operating income in each of the years presented as follows (in millions):

     
2004
   
2003
   
2002
 
Recall effects (estimated)
 
$
(20.0
)
$
(65.0
)
$
--
 
Losses from avian influenza (estimated)
 
$
--
 
$
(7.3
)
$
(25.6
)

(e)
Fiscal 2003 included a non-cash tax benefit of $16.9 million associated with the reversal of a valuation allowance on net operating losses in the Company’s Mexico operations. Fiscal 2002 included a tax benefit of $11.9 million from changes in Mexican tax laws.
   
(f)
For purposes of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest (including capitalized interest) on all indebtedness, amortization of capitalized financing costs and that portion of rental expense that we believe to be representative of interest. Earnings were inadequate to cover fixed charges by $4.1 million and $5.8 million in fiscal 2002 and 1996, respectively.
 
 
(g)
Historical per share amounts represent both basic and diluted and have been restated to give effect to a stock dividend issued on July 30, 1999. The stock reclassification on November 21, 2003 that resulted in the new common stock traded as PPC did not affect the number of shares outstanding.
 
 
(h)
Includes amortization of capitalized financing costs of approximately $2.3 million, $2.0 million, $1.5 million, $1.4 million, $1.9 million, $1.2 million, $1.1 million, $1.0 million, $0.9 million, $1.8 million and $1.2 million in fiscal years 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996 and 1995, respectively.
 
 
(i)
“EBITDA” is defined as the sum of net income (loss) before interest, taxes, depreciation and amortization. EBITDA is presented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of Generally Accepted Accounting Principles (GAAP) results, to compare the performance of companies. EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with GAAP.

38

A reconciliation of net income to EBITDA is as follows (in thousands):

   
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
                         
Net Income (loss)
 
$264,979
$128,340
$ 56,036
$ 14,335
$ 41,137
$ 52,344
$ 65,253
$ 50,010
$ 41,036
$ (7,284)
$ (7,967)
Add:
                       
Interest expense, net
 
43,932
52,129
37,981
32,003
30,775
17,779
17,666
20,148
22,075
21,539
17,483
Income tax expense (benefit)
 
138,544
80,195
7,199
(12,425)
20,724
10,442
25,651
6,512
2,788
2,751
10,058
Depreciation and amortization(h)
 
134,944
113,788
74,187
70,973
55,390
36,027
34,536
32,591
29,796
28,024
26,127
                         
Minus:
                       
Amortization of capitalized financing costs(h)
 
2,321
1,951
1,477
1,417
1,860
1,236
1,063
993
913
1,761
1,246
EBITDA
 
$580,078
$372,501
$173,926
$103,469
$146,166
$115,356
$142,043
$108,268
$ 94,782
$ 43,269
$ 44,455


§  Description of the Company

The Company is the second largest producer of poultry in the United States and Mexico, the largest in Puerto Rico and has one of the best known brand names in the poultry industry. In the U.S., we produce both prepared and fresh chicken and turkey while in Mexico and Puerto Rico, we exclusively produce fresh chicken. Through vertical integration we control the breeding, hatching and growing of chickens. We operate in three business segments and two geographical areas.
 
§  Executive Summary

The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows:
39

Consolidated Operating Results. The changes in the Company’s net income and net income per common share-basic and diluted for the fiscal year ended October 1, 2005 from the fiscal year ended October 2, 2004 were due primarily to the following (in millions except per share data):