Pilgrim's Pride Corporation FY 2006 Annual Report on Form 10K
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 September 30, 2006
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
(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
 
 

PILGRIM’S PRIDE CORPORATION
September 30, 2006

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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12B-2 of the Exchange Act.

Large Accelerated Filer x Accelerated Filer o Non-accelerated Filer o

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 March 31, 2006, was $875,604,262. 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 14, 2006, 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 31, 2007 are incorporated by reference into Part III.
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Pilgrim's Pride Corporation
September 30, 2006
 
PILGRIM’S PRIDE CORPORATION
FORM 10-K
TABLE OF CONTENTS
 
PART I
 
   
Page
Item 1.
Business
4
Item 1A.
Risk Factors
24
Item 1B.
Unresolved Staff Comments
32
Item 2.
Properties
32
Item 3.
Legal Proceedings
33
Item 4.
Submission of Matters to a Vote of Security Holders
35
     
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
36
Item 6.
Selected Financial Data
37
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
 
 
of Operations
40
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
58
Item 8.
Financial Statements and Supplementary Data (see Index to Financial Statements and
 
 
Schedules below)
59
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
 
 
Disclosure
60
Item 9A.
Controls and Procedures
60
Item 9B.
Other Information
64
     
PART III
 
Item 10.
Directors and Executive Officers of the Registrant
64
Item 11.
Executive Compensation
64
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
 
 
Stockholder Matters
64
Item 13.
Certain Relationships and Related Transactions
64
Item 14.
Principal Accountant Fees and Services
65
     
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
65
Signatures
 
73
     
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
 
Report of Independent Registered Public Accounting Firm
76
Consolidated Balance Sheets as of September 30, 2006 and October 1, 2005
77
Consolidated Statements of Income (Loss) for each of the three years ended September 30, 2006
78
Consolidated Statements of Stockholders’ Equity for each of the three years ended September 30, 2006
79
Consolidated Statements of Cash Flows for each of the three years ended September 30, 2006
80
Notes to Consolidated Financial Statements
81
Schedule II - Valuation and Qualifying Accounts for each of the three years ended September 30, 2006
102
   
 
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Pilgrim's Pride Corporation
September 30, 2006
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 in 2004 discussed below. We are the second largest producer of chicken in the United States ("U.S."), the second largest producer and seller of chicken in Mexico, the largest producer of chicken in Puerto Rico, and have one of the best known brand names in the chicken industry. In the U.S., we produce both prepared and fresh chicken and fresh 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 chicken 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 2006, we sold 5.7 billion pounds of dressed chicken and 149.2 million pounds of dressed turkey and generated net sales of $5.2 billion. In fiscal 2006, our U.S. operations including Puerto Rico accounted for 91.7% of our net sales, with the remaining 8.3% arising from our Mexico operations.
 
Recent Business Acquisition Activities
 
On September 29, 2006, Protein Acquisition Corporation, a wholly owned subsidiary of the Company, commenced a tender offer to purchase all of the outstanding shares of the common stock of Gold Kist Inc. ("Gold Kist") for $20 per share, net to the seller, in cash (the "Equity Tender Offer"). As of the initial scheduled expiration date for the Equity Tender Offer on October 27, 2006, holders of approximately 33% of Gold Kist’s common stock had tendered their shares. On October 30, 2006, we extended the expiration date of the Equity Tender Offer to 5:00 p.m., New York City time, on November 29, 2006.
 
On the same day that we commenced the Equity Tender Offer, we commenced a cash tender offer and consent solicitation for all of Gold Kist’s outstanding 101/4% senior notes due March 15, 2014 (the "Debt Tender Offer" and, together with the Equity Tender Offer, the "Tender Offers"). Holders of Gold Kist notes who validly tendered their notes together with consents to proposed amendments to the indenture governing the Gold Kist notes by 5:00 p.m. on October 13, 2006 (the "Consent Date") will be entitled to receive the Tender Offer Consideration described below for each $1,000 principal amount of the notes upon consummation of the Debt Tender Offer, plus a consent payment equal to $30 in cash per $1,000 principal amount of the notes ("Consent Payment’). As of the Consent Date, holders of approximately 99% of the Gold Kist notes had tendered their notes and given consents to the proposed indenture amendments. Holders
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Pilgrim's Pride Corporation
September 30, 2006
 
of Gold Kist notes who tendered their notes and gave consents after the Consent Date are entitled to receive only the Tender Offer Consideration. Tenders of notes and consents are irrevocable. On October 30, 2006, we extended the expiration date of the Debt Tender Offer to 5:00 p.m., New York City time, on November 29, 2006. Due to the extension of the Debt Tender Offer, the Tender Offer Consideration was recalculated on November 13, 2006 in accordance with the terms of the offer to purchase the Gold Kist notes. Based on an assumed payment date of December 2, 2006, holders who validly tendered notes at or prior to 5:00 p.m., New York City time, on the Consent Date, will be eligible to receive $1,123.29 for each $1,000 principal amount of the notes, which amount is the Tender Offer Consideration, plus the Consent Payment.
 
We currently intend, as soon as practicable following consummation of the Tender Offers, to seek to have Gold Kist consummate a merger or other similar business combination with Protein Acquisition Corporation. Upon consummation of such merger, Gold Kist would become a wholly owned subsidiary of the Company. Together, the Company and Gold Kist would be the world’s leading chicken producer in terms of pounds produced and the third largest meat company in the United States, measured by revenues. We believe this combination will create substantial value for our shareholders and each of our respective employees, business partners and other constituencies.
 
The total amount of funds required to consummate the Tender Offers, related merger, and to pay related fees and expenses is estimated to be approximately $1.3 billion. The Company has obtained financing through a combination of an amendment to its existing credit facility and a commitment letter for an additional credit facility. In September 2006, the Company entered into a credit agreement that provides for an aggregate commitment of $1.225 billion consisting of a $795 million revolving/term loan commitment and a $430 million term loan commitment. The term loan commitment is comprised of a $210 million fixed rate term loan commitment and a $220 million floating rate term loan commitment. All borrowings under the credit agreement are subject to the availability of eligible collateral and no material adverse change provisions. The Company has also obtained a commitment letter from certain investment banks pursuant to which, subject to no material adverse change provisions and other specified conditions, the investment banks have agreed to make a $450 million senior unsecured bridge loan facility available to the Company for the purchase of shares of common stock of Gold Kist. The Company’s lenders have issued consents as necessary to allow the consummation and financing of the Tender Offers and the related merger. See Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources."
 
We are not obligated to purchase any shares in the Equity Tender Offer unless (i) there have been validly tendered and not withdrawn prior to the expiration of the offer at least the number of shares of Gold Kist common stock that, when added to the shares of Gold Kist common stock already owned by the Company or any of its subsidiaries, shall constitute a majority of the then outstanding shares of Gold Kist common stock on a fully diluted basis, (ii) we are satisfied, in our sole discretion, that Gold Kist’s Board of Directors has redeemed the common stock and Series A Junior Participating Preferred Stock purchase rights or that the rights have been invalidated or are otherwise inapplicable to the offer and the merger (the "Rights Condition"), (iii) we are satisfied, in our sole discretion, that nominees of Pilgrim’s Pride or other persons satisfactory to us constitute a majority of the members of the Gold Kist Board of Directors, (iv) we are satisfied, in our sole discretion, that the offer and the merger have been approved by the Board of Directors of Gold Kist for purposes of Section 203 of the Delaware General Corporation Law, as amended, or that the restrictions of Section 203 of the Delaware General Corporation Law will be inapplicable to us (the "DGCL §203 Condition"), (v) pursuant to the Debt Tender Offer, there shall have been validly tendered and not withdrawn Gold Kist notes (and related consents) representing
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Pilgrim's Pride Corporation
September 30, 2006
 
at least a majority in aggregate principal amount of the outstanding Gold Kist notes, (vi) all waiting periods under applicable antitrust laws, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, having expired or been terminated, (vii) the Company having available to it proceeds of the financings contemplated by its new credit facilities and its bridge loan commitment letter and/or such other financings that are sufficient to consummate the Tender Offers and a subsequent proposed merger of Protein Acquisition and Gold Kist and to refinance all debt of Gold Kist (including the Gold Kist notes) and Pilgrim’s Pride that is or could be required to be repurchased or becomes, or could be declared, due and payable as a result of the Equity Tender Offer or the proposed merger or the financing thereof and to pay all related fees and expenses and (viii) Gold Kist not having entered into or effectuated any agreement or transaction with any person or entity having the effect of impairing the Company’s ability to acquire Gold Kist or otherwise diminishing the expected economic value to the Company of the acquisition of Gold Kist.
 
Our obligation to accept for purchase, and to pay for, Gold Kist notes validly tendered pursuant to the Debt Tender Offer is conditioned upon (i) there being validly tendered and not validly withdrawn at least a majority of the aggregate principal amount of the outstanding Gold Kist notes and related consents (ii) execution by the trustee, Gold Kist and its subsidiaries that are guarantors of the Gold Kist notes of a supplemental indenture adopting our amendments to the indenture relating to the Gold Kist notes (iii) consummation of the Equity Tender Offer and (iv) the absence of any threatened or pending action or proceeding before any court or governmental authority that has a reasonable probability of success which would prevent the purchase of the Gold Kist notes pursuant to the Debt Tender Offer or the consummation of any of the transactions contemplated thereby or any lawsuit, legal proceeding or claim pending that would reasonably be expected to succeed, and, if successful, would prevent the performance of the Debt Tender Offer to purchase or the consummation of any of the transactions contemplated thereby, or declare unlawful the transactions contemplated thereby or cause such transactions to be rescinded.
 
On October 16, 2006, we received notice that the Antitrust Division of the Department of Justice had granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with our proposed acquisition of Gold Kist pursuant to the Equity Tender Offer. Also on October 16, 2006, we announced our receipt of the requisite consents related to our Debt Tender Offer.
 
Prior to commencing the Tender Offers, we attempted to negotiate a business combination with Gold Kist, and we may continue to do so. On August 18, 2006, O.B. Goolsby, Jr., the Company’s President and Chief Executive Officer, delivered a Notice of Stockholder Proposals and Director Nominations (the "Notice") to Gold Kist. The proposals contained in the Notice seek to designate Mr. Goolsby as the presiding officer at the Gold Kist’s 2007 annual meeting, to increase the number of directors constituting the entire Board of Directors of Gold Kist to 15, and to fill the newly-created directorships resulting from such increase with the nominees listed by Mr. Goolsby in the Notice. The Notice also contains nominations for directors to fill the three director positions scheduled to expire at Gold Kist’s 2007 annual meeting of stockholders. If we elect not to pursue a negotiated transaction, or if we are unable to agree upon a negotiated transaction with Gold Kist, we intend to file soliciting materials with the Securities and Exchange Commission and to solicit proxies for use at Gold Kist’s 2007 Annual Meeting in support of the proposals contained in the Notice. If these proposals receive the requisite stockholder vote and all our nominees are elected to the Gold Kist board, our nominees will constitute a majority of the Gold Kist Board. The Company believes that, subject to fulfillment of their fiduciary duties as directors of Gold Kist,
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Pilgrim's Pride Corporation
September 30, 2006
 
these directors would consider taking action to remove certain obstacles to Gold Kist stockholders determining whether to consummate the Equity Tender Offer and the merger, including taking action to redeem Gold Kist’s outstanding rights or amend the rights agreement to make the rights inapplicable to the Equity Tender Offer and the merger (which would satisfy the Rights Condition) and to satisfy the DGCL §203 Condition. There can be no assurance, however, that we will be successful in our efforts to acquire Gold Kist.
 
On October 12, 2006, Gold Kist filed a complaint in the United States District Court for the Northern District of Georgia, Atlanta Division, against us and certain of our employees alleging that the election of Mr. Goolsby’s nominees to the Gold Kist Board of Directors would violate prohibitions on interlocking directorates under Section 8 of the Clayton Act and that we violated the proxy and tender offer rules by failing to disclose such alleged violation of the Clayton Act. On October 23, 2006, Gold Kist moved for a preliminary injunction in the pending action. The motion reiterates Gold Kist’s claims in the complaint and requests the Court to enjoin us from pursuing the election of the Nominees to the Gold Kist Board unless and until we first acquire Gold Kist. Gold Kist also seeks an order requiring us to withdraw the Equity Tender Offer "permanently" or, at a minimum, until "corrective disclosure" is made regarding the allegations in the complaint. Gold Kist further asked the Court to grant the other injunctive relief requested in the complaint, which includes a request that we immediately withdraw the Notice of Stockholder Proposals and Director Nominations as of August 18, 2006, the proposals contained with the notice and the proxy materials.
 
On November 10, 2006, we filed motions to dismiss Gold Kist’s federal securities laws claims for failure to state a claim upon which relief can be granted under the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s proxy rules and tender offer rules. In addition to moving to dismiss Gold Kist’s federal securities laws claims, we believe that we have meritorious defenses to Gold Kist’s Clayton Act claims. We intend to file responses to Gold Kist’s motion for injunctive relief on or about December 22, 2006. The Court has scheduled a hearing date for Gold Kist’s preliminary injunction motion on January 16, 2007.
 
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 A-"Business and Summary of Significant Accounting Policies" of the notes to Consolidated Financial Statements included elsewhere herein.
 
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 chicken industry. To achieve these goals, we plan to continue pursuing the following strategies:
7

 
-    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 16%, which is approximately 82% 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 $848.7 million in fiscal 2002 to $1,940.1 million in fiscal 2006, a compounded annual growth rate of 23%. Prepared foods sales represented 47.3% of our total U.S. chicken revenues in fiscal year 2006, 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-Entree®, 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.
 
-    Enhance U.S. fresh chicken profitability through value-added, branded products. OurU.S. fresh chicken sales accounted for $1,885.0 million, or 46.0%, of our U.S. chicken sales for fiscal 2006. 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® brand name, which is a well-known brand in the chicken industry.
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Pilgrim's Pride Corporation
September 30, 2006
 
-    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
 
      - standardizing and upgrading technology where appropriate.
 
      In addition, we have a proven history of increasing capacity while improving operating efficiencies at acquired properties in both 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 complement 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 6.3% from 2001 through 2005, we believe U.S. chicken exports will grow as worldwide demand increases for high-grade, low-cost meat protein sources. According to USDA data, the export market for chicken is expected to grow at a compounded annual growth rate of 2.9% from 2005 to 2010 and 5.1% from 2005 to 2006 alone. Historically, we have targeted international markets to generate additional demand for our dark chicken 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 chicken 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 chicken 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 7.9% and 21.2% of our U.S. chicken sales and pounds, respectively, for fiscal 2006.
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Pilgrim's Pride Corporation
September 30, 2006
  1. 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) a seller of 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.
 
Our turkey products consist primarily of fresh and frozen whole turkeys.
 
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.
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(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.
 
(3) Export and other product customers, who purchase chicken products for export to Eastern Europe, including Russia; the Far East; Mexico; and other world markets. 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 market.
 
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 chicken 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 2002, 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.
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Pilgrim's Pride Corporation
September 30, 2006

   
Fiscal Year Ended
 
   
Sept. 30, 2006
 
Oct. 1, 2005
 
Oct. 2, 2004(a)
 
Sept. 27, 2003
 
Sept. 28, 2002
 
   
(52 weeks)
 
(52 weeks)
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
 
U.S. Chicken Sales:
 
(in thousands)
 
Prepared Foods:
                     
Foodservice
 
$
1,567,297
 
$
1,622,901
 
$
1,647,904
 
$
731,331
 
$
659,856
 
Retail
   
308,486
   
283,392
   
213,775
   
163,018
   
158,299
 
Total Prepared Foods
   
1,875,783
   
1,906,293
   
1,861,679
   
894,349
   
818,155
 
                                 
Fresh Chicken:
                               
Foodservice
   
1,388,451
   
1,509,189
   
1,328,883
   
474,251
   
448,376
 
Retail
   
496,560
   
612,081
   
653,798
   
257,911
   
258,424
 
Total Fresh Chicken
   
1,885,011
   
2,121,270
   
1,982,681
   
732,162
   
706,800
 
                                 
Export and Other:
                               
Export:
                               
Prepared Foods
   
64,338
   
59,473
   
34,735
   
26,714
   
30,528
 
Chicken
   
257,823
   
303,150
   
212,611
   
85,087
   
93,575
 
Total Export(b)
   
322,161
   
362,623
   
247,346
   
111,801
   
124,103
 
Other Chicken By-Products
   
15,448
   
21,083
   
(b
)
 
(b
)
 
(b
)
Total Export and Other
   
337,609
   
383,706
   
247,346
   
111,801
   
124,103
 
Total U.S. Chicken
   
4,098,403
   
4,411,269
   
4,091,706
   
1,738,312
   
1,649,058
 
                                 
Mexico Chicken Sales:
   
418,745
   
403,353
   
362,442
   
349,305
   
323,769
 
Total Chicken Sales
   
4,517,148
   
4,814,622
   
4,454,148
   
2,087,617
   
1,972,827
 
                                 
U.S. Turkey Sales:
                               
Foodservice
   
30,269
   
73,908
   
120,676
   
138,405
   
170,770
 
Retail
   
96,968
   
125,741
   
154,289
   
154,552
   
162,220
 
     
127,237
   
199,649
   
274,965
   
292,957
   
332,990
 
Export and Other(b)
   
3,664
   
5,189
   
11,287
   
12,721
   
15,128
 
Total U.S. Turkey Sales
   
130,901
   
204,838
   
286,252
   
305,678
   
348,118
 
                                 
Other Products:
                               
United States
   
570,510
   
626,056
   
600,091
   
207,284
   
193,691
 
Mexico
   
17,006
   
20,759
   
23,232
   
18,766
   
19,082
 
Total Other Products
   
587,516
   
646,815
   
623,323
   
226,050
   
212,773
 
                                 
Total Net Sales
 
$
5,235,565
 
$
5,666,275
 
$
5,363,723
 
$
2,619,345
 
$
2,533,718
 
                                 
Total Chicken Prepared Foods
 
$
1,940,121
 
$
1,965,766
 
$
1,896,414
 
$
921,063
 
$
848,683
 
 
(a) The fiscal 2004 acquisition 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 Export and Other category was 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.
12

Pilgrim's Pride Corporation
September 30, 2006

The following table sets forth, beginning with fiscal 2002, 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.

   
Fiscal Year Ended
 
   
Sept. 30, 2006
 
Oct. 1, 2005
 
Oct. 2, 2004(a)
 
Sept. 27, 2003
 
Sept. 28, 2002
 
U.S. Chicken Sales:
                     
Prepared Foods:
                     
Foodservice
   
38.2
   
36.8
   
40.3
   
42.1
   
39.9
 
Retail
   
7.5
   
6.4
   
5.2
   
9.4
   
9.6
 
Total Prepared Foods
   
45.7
%
 
43.2
%
 
45.5
%
 
51.5
%
 
49.5
%
                                 
Fresh Chicken:
                               
Foodservice
   
33.9
   
34.2
   
32.5
   
27.3
   
27.2
 
Retail
   
12.1
   
13.9
   
16.0
   
14.8
   
15.7
 
Total Fresh Chicken
   
46.0
%
 
48.1
%
 
48.5
%
 
42.1
%
 
42.9
%
                                 
Export and Other:
                               
Export:
                               
Prepared Foods
   
1.6
   
1.3
   
0.8
   
1.5
   
1.9
 
Chicken
   
6.3
   
6.9
   
5.2
   
4.9
   
5.7
 
Total Export(b)
   
7.9
   
8.2
   
6.0
   
6.4
   
7.6
 
Other Chicken By-Products
   
0.4
   
0.5
   
(b
)
 
(b
)
 
(b
)
Total Export and Other
   
8.3
%
 
8.7
%
 
6.0
%
 
6.4
%
 
7.6
%
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
   
47.3
%
 
44.5
%
 
46.3
%
 
53.0
%
 
51.4
%
                                 
U.S. Turkey Sales:
                               
Foodservice
   
23.1
   
36.0
   
42.1
   
45.3
   
49.1
 
Retail
   
74.1
   
61.4
   
53.9
   
50.5
   
46.6
 
     
97.2
%
 
97.4
%
 
96.0
%
 
95.8
%
 
95.7
%
Export and Other(b)
   
2.8
   
2.6
   
4.0
   
4.2
   
4.3
 
Total U.S. Turkey
   
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
                                 

(a) The fiscal 2004 acquisition 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 Export and Other category was 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.
 
13

Pilgrim's Pride Corporation
September 30, 2006

UNITED STATES

Product Types

Chicken Products

Prepared Foods Overview. During fiscal 2006, $1,875.8 million, or 45.7%, of our U.S. chicken sales were in prepared foods products to foodservice customers and retail distributors, as compared to $818.2 million in fiscal 2002. 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 26% of our U.S. cost of sales for the fiscal year ended September 30, 2006. 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 $1,885.0 million, or 46.0%, of our total U.S. chicken sales for fiscal 2006. 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 2006, approximately $337.6 million, or 8.3%, 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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Pilgrim's Pride Corporation
September 30, 2006

Turkey Products

Turkey Overview. Our turkey business accounted for $127.2 million of sales in fiscal 2006. 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.

Most 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. This 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.

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 the Company 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 2001 through 2005, sales of chicken products to the foodservice market grew at a compounded annual growth rate of approximately 7.0%, versus 5.5% 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 5.2% from 2001 through 2005 and are projected to grow at a 3.5% compounded annual growth rate from 2005 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 47.5%. Due to internal growth and our fiscal 2004 acquisition, our sales to the foodservice market from fiscal 2002 through fiscal 2006 grew at a compounded annual growth rate of 27.8% and represented 72.1% of the net sales of our U.S. chicken operations in fiscal 2006.
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Pilgrim's Pride Corporation
September 30, 2006

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 $1,567.3 million in fiscal 2006 compared to $659.9 million in fiscal 2002, a compounded annual growth rate of approximately 24.1%. 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:

- 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.
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Pilgrim's Pride Corporation
September 30, 2006

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. 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 spokesperson 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 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.

Retail - Prepared Foods. We sell retail-oriented prepared chicken products primarily to grocery store chains located throughout the U.S. Our prepared chicken products sales to the retail market were $308.5 million in fiscal 2006 compared to $158.3 million in fiscal 2002, a compounded annual growth rate of approximately 18.2%. We believe that our growth in this market segment will continue as retailers concentrate on satisfying consumer demand for more products that 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 retail fresh chicken products are sold in the midwestern, southwestern, southeastern and western regions of the U.S. Our fresh chicken sales to the retail market were $496.6 million in fiscal 2006 compared to $258.4 million in fiscal 2002, a compounded annual growth rate of approximately 17.7% resulting primarily from our fiscal 2004 acquisition. 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 dark chicken 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 chicken 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 meat 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.
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Pilgrim's Pride Corporation
September 30, 2006

Markets for Turkey Products

Retail. Most of our turkey sales are 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 turkeys 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 - Fresh Turkey. Our prepackaged, retail products include various combinations of freshly refrigerated and frozen whole turkeys. 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, Florida, Iowa, Mississippi, North Carolina, Texas and Utah that are primarily focused on distributing our own chicken 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-chicken 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.

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 2.1 million commercial egg laying hens which can produce approximately 42 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 65.1% of the total number of egg laying hens in service during 2006.
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Pilgrim's Pride Corporation
September 30, 2006

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

Pilgrim's Pride Corporation
September 30, 2006

MEXICO

Background

The Mexico market represented approximately 8.3% of our net sales in fiscal 2006. We are the second largest producer and seller of chicken in Mexico. We believe 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 have been successful in differentiating our products through high quality client service and product improvements such as dry-air chilled eviscerated products. The supermarket chains consider us the leaders in innovation for fresh products. The market for value added products is increasing. Our strategy is to capitalize on this trend through our vast U.S. experience in both products and quality and our extended distribution and well known service.

Markets

We sell our chicken products primarily to wholesalers, large restaurant chains, fast food accounts, supermarket chains and direct retail distribution in selected markets. We have national presence from the Texas border to Cancun in the Caribbean. We are currently present in all but three of the 32 Mexican States, which in total represent 94% of the Mexican population.

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

Pilgrim's Pride Corporation
September 30, 2006

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 chicken in the United States, the second largest producer and seller in Mexico and the largest producer 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, 2006, to 39.5%, and in each of the following two 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 29 of the 32 Mexican states, encompassing approximately 94% 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

Pilgrim's Pride Corporation
September 30, 2006

We are not a significant competitor in the distribution business as it relates to products other than chicken. We distribute these products solely as a convenience to our chicken 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 17% of our net sales in fiscal 2006, and our largest customer, Wal-Mart Stores Inc., accounted for 12% 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 September 30, 2006, we employed approximately 34,600 persons in the U.S. and 5,300 persons in Mexico. Approximately 13,300 employees at various facilities in the U.S. are members of collective bargaining units. In Mexico, approximately 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

Pilgrim's Pride Corporation
September 30, 2006

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. The public may read and copy any materials that the Company files with the Securities and Exchange Commission at the Public Reference Room at 100 F Street, NE, Washington, DC 20549 and may obtain information about the operation of the Public Information Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.

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(a) Co-Principal Executive Officers Certification for the preceding year to the New York Stock Exchange.

We included the certifications of the Co-Principal Executive Officers and the Chief Financial Officer of the Company required by Section 302 of the Sarbanes-Oxley Act of 2002 and related rules, relating to the quality of the Company's public disclosure, in this report on Form 10-K as Exhibits 31.1, 31.2 and 31.3.

Executive Officers

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

Name
Age
Positions
Lonnie "Bo" Pilgrim
78
Chairman of the Board
Clifford E. Butler
64
Vice Chairman of the Board
O.B. Goolsby, Jr.
59
President, Chief Executive Officer, and Director
Richard A. Cogdill
46
Chief Financial Officer
   
Secretary, Treasurer and Director
J. Clinton Rivers
47
Chief Operating Officer
Robert A. Wright
52
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.
 
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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.

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.

Item 1A. Risk Factors

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.
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Risk Factors

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, operations, industry or financial position or our future financial performance. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial position and financial performance in the future.

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.

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.

The cost of corn, our primary feed ingredient, increased significantly from August 2006 to the date of this report, and there can be no assurance that the price of corn will not continue to rise as a result of, among other things, increasing demand for corn products around the world and alternative uses of corn, such as ethanol production.

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.
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During the first half of fiscal 2006, there was 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 highly pathogenic 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 outbreaks of both high and low-pathogenic strains of avian influenza is a fairly common occurrence, including this year, which have impacted our operations. Historically, the outbreaks of low pathogenic avian influenza 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 recently associated with the highly pathogenic H5N1 strain. Accordingly, even if the highly pathogenic H5N1 strain does not spread to North or Central America, there can be no assurance that it will not materially adversely affect demand for North or Central American produced poultry internationally and/or domestically, and, if it were to spread to North or Central 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.

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.
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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.

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.
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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, safety 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.

Also, changes in laws or regulations or the application thereof may lead to government enforcement actions and the resulting litigation by private litigants. We are aware of an industry-wide investigation by the Wage and Hour Division of the U.S. Department of Labor to ascertain compliance with various wage and hour issues, including the compensation of employees for the time spent on such activities such as donning and doffing work equipment. We have been named a defendant in several related suits brought by employees. Due, in part, to the government investigation and the recent U.S. Supreme Court decision in IBP, Inc. v. Alvarez, it is possible that we may be subject to additional employee claims.

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.

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, 2006 to 39.5% and is to be reduced in each of the following two 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.
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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 17% of our net sales in fiscal 2006, and our largest customer, Wal-Mart Stores Inc., accounted for 12% 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.

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. Similarly, the acquisition of Gold Kist would likely expose us to unknown liabilities. These obligations and liabilities could harm our financial condition and operating results.
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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.

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. The completion of our proposed acquisition of Gold Kist would increase our indebtedness substantially.

Proposed Acquisition of Gold Kist. A number of risks are associated with our proposed acquisition of Gold Kist, and the consummation of an acquisition would increase certain risks we now face.
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The Gold Kist Board has rejected our offer to purchase Gold Kist and commenced litigation that is intended to prevent the acquisition. Gold Kist has not made available to us materials for due diligence. Accordingly, we may not be able to complete the proposed acquisition of Gold Kist or obtain detailed due diligence materials. Further, if we acquire Gold Kist, there are no assurances that we can effectively integrate Gold Kist's business or realize the associated cost savings and operating synergies currently anticipated. Additionally, the acquisition of Gold Kist would increase our indebtedness substantially.

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

We have significant operations and assets located in Mexico and may participate in or acquire operations and assets in other foreign countries in the future. 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.

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 62.225% 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.
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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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 28.2 million broilers and operated at 97.7% of capacity in fiscal 2006. On October 29, 2006, we announced a reduction of weekly chicken processing beginning January 1, 2007 which will increase available production capacity.

Our turkey plant has the weekly capacity to process 0.2 million birds under current inspection and line configurations and operates at 94% of capacity. Our Mexico facilities have the capacity to process 3.2 million broilers per week and operated at 89% of capacity in fiscal 2006. 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 91%, 86% and 82% of capacity, respectively, in fiscal 2006. In Puerto Rico, the processing plant is supported by one hatchery and one feed mill which operated at 86% and 50% of capacity, respectively, in fiscal 2006. Excluding commercial feed products, the Puerto Rico feed mill is running at 50% 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 98%, 80% and 79% of capacity, respectively, in fiscal 2006.

We also operate ten prepared foods plants. These plants are located in Georgia, Louisiana, Pennsylvania, Tennessee, Texas and West Virginia. These plants have the capacity to produce approximately 1,168 million pounds of further processed product per year and in fiscal 2006 operated at approximately 87% of capacity based on the current product mix and six-day production at most facilities and 24/7 production at two facilities.

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.
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We have 13 regional distribution centers located in Arizona, Florida, Iowa, Mississippi, North Carolina, Texas, and Utah, six of which we own and seven of which we lease.

A significant portion of our domestic property, plant and equipment are pledged as collateral on our revolving term loan and our secured term loan. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Item 3. Legal Proceedings

On July 1, 2002, three individuals, on behalf of themselves and a putative class of chicken growers, filed their original class action complaint against the Company in the United States District Court for the Eastern District of Texas, Texarkana Division, styled “Cody Wheeler, et al. vs. Pilgrim’s Pride Corporation.” In their lawsuit, plaintiffs initially alleged that the Company 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, among other things, breach of fiduciary duties and breach of contract. 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 initial filing, virtually re-wrote most of the allegations. Now the plaintiffs contend that the Company and Tyson are involved in a conspiracy to violate federal antitrust laws. The plaintiffs’ initial allegations, although still contained in the amended lawsuit, are no longer the sole focus of the case. On January 3, 2006, the Court entered an Order severing the plaintiffs’ Packers and Stockyards Act and antitrust claims. The Court ordered that the plaintiffs may proceed with their Packers and Stockyards Act claims as set forth in Plaintiffs’ Third Amended Complaint. The Court also ordered that the plaintiffs may proceed with their respective antitrust claims asserted against the Company and Tyson in a separate cause of action styled “Cody Wheeler, et al vs. Pilgrim’s Pride Corporation, et al”. On March 6, 2006, the plaintiffs filed their motion for class certification in the original lawsuit. Pilgrim’s Pride attacked the plaintiffs’ class certification brief on several grounds, and ultimately the plaintiffs voluntarily withdrew their Motion for Class Certification on May 26, 2006. As a result, the Court canceled the class certification hearing and on June 2, 2006 the Court entered an Order withdrawing Plaintiffs’ Motion for Class Certification and prohibiting the plaintiffs from filing any additional class-action claims against Pilgrim’s Pride in this lawsuit. Additionally, the two former growers who joined the lawsuit on September 30, 2005 withdrew from the case. The lawsuit is currently proceeding with individual claims by the three original individual plaintiffs against Pilgrim’s Pride. The Company intends to defend vigorously against the plaintiffs’ individual claims. The Company does not expect this matter to have a material impact on its financial position, operations or liquidity.

On January 3, 2006, an action styled "Cody Wheeler, et al. vs. Pilgrim's Pride Corporation, et al.", arising out of the original Wheeler litigation described above, was filed in the United States District Court for the Eastern District of Texas, Texarkana Division. The lawsuit was filed by the three original plaintiffs and a former grower, both in their individual capacities and on behalf of a putative class of chicken growers. In the lawsuit, the four plaintiffs allege that the Company and Tyson are involved in a conspiracy to violate federal antitrust laws. A Docket Control Order has been entered by the Court and a class certification hearing is currently scheduled for January 24, 2007. The proceedings are currently in the early stages of discovery. The Company intends to defend vigorously both the certification of the case as a class action and the merits of the four plaintiffs’ individual claims. The Company does not expect this matter to have a material impact on its financial position, operations or liquidity.
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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. As of this date, all of these cases have been resolved and dismissed other than “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; 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 we do not expect to have a material impact on our financial position, operations or liquidity.

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 intend to vigorously oppose class certification and defend these claims. The ultimate liability with respect to these claims cannot be determined at this time; however, we do not expect this matter to have a material impact on our financial position, operations or liquidity.

As described above under “Item 1. Business-General Development of Business-Recent Business Acquisition Activities” on October 12, 2006, a complaint styled “Gold Kist Inc. v. Pilgrim’s Pride Corporation, Protein Acquisition Corporation, et al” was filed in the United States District Court for the Northern District of Georgia, Atlanta Division, alleging that the election of our President’s and Chief Executive Officer’s nominees to the Gold Kist Board of Directors would violate Section 8 of the Clayton Act and seeking to enjoin our solicitation of the Gold Kist stockholders to elect such persons to the Gold Kist Board. The complaint also alleges that we violated the proxy and tender offer rules by failing to disclose such alleged violation of the Clayton Act.

In addition to moving to dismiss Gold Kist’s federal securities laws claims, we believe that we have meritorious defenses to Gold Kist’s Clayton Act claims. We intend to file responses to Gold Kist’s motion for injunctive relief on or about December 22, 2006. The Court has scheduled a hearing date for Gold Kist’s preliminary injunction motion on January 16, 2007.
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    The Wage and Hour Division of the U.S. Department of Labor conducted an industry wide investigation to ascertain compliance with various wage and hour issues, including the compensation of employees for the time spent on such activities such as donning and doffing work equipment. Due, in part, to the government investigation and the recent U.S. Supreme Court decision in IBP, Inc. b. Alvarez, employees have brought claims against the Company. The claims filed against us as of the date of this report include: “Juan Garcia, et al. v. Pilgrim’s Pride Corporation, a/k/a Wampler Foods, Inc.”, filed in Pennsylvania state court on January 27, 2006 and subsequently removed to the U.S. District Court for the Eastern District of Pennsylvania; “Esperanza Moya, et al. v. Pilgrim’s Pride Corporation and Maxi Staff, LLC”, filed March 23, 2006 in the Eastern District of Pennsylvania; “Barry Antee, et al. v. Pilgrim’s Pride Corporation “ filed April 20, 2006 in the Eastern District of Texas; “Stephania Aaron, et al. v. Pilgrim’s Pride Corporation” filed August 22, 2006 in the Western District of Arkansas; “Salvador Aguilar, et al. v. Pilgrim’s Pride Corporation” filed August 23, 2006 in the Northern District of Alabama; and “Benford v. Pilgrim’s Pride Corporation” filed November 2, 2006 in the Northern District of Alabama. 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 which we intend to vigorously defend.

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.

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

None.
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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Quarterly Stock Prices and Dividends

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

   
Prices 2006
 
Prices 2005
 
Dividends
 
Quarter
 
High
 
Low
 
High
 
Low
 
2006
 
2005
 
                           
PPC Common Stock
   
First
 
$
37.75
 
$
30.11
 
$
35.00
 
$
25.76
 
$
1.0225
 
$
.015
 
Second
   
27.00
   
20.95
   
39.85
   
28.84
   
.0225
   
.015
 
Third
   
28.09
   
20.85
   
38.61
   
33.32
   
.0225
   
.015
 
Fourth
   
29.00
   
23.11
   
40.23
   
30.91
   
.0225
   
.015
 
     

Holders

The Company’s common stock (ticker symbol “PPC”) is traded on the New York Stock Exchange. The Company estimates there were approximately 29,300 holders (including individual participants in security position listings) of the Company’s common stock as of November 10, 2006.

Dividends

Starting in the first quarter of fiscal 2006, the Company’s Board of Directors has declared cash dividends of $0.0225 per share of common stock. Additionally, in the first quarter of fiscal 2006, the Company’s Board of Directors declared a special $1.00 dividend per share of common stock. Prior to fiscal 2006 and with the exception of two quarters in 1993, the Company's Board of Directors 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 $13 million per year. See “Note E - Notes Payable and Long-Term Debt” of the notes to Consolidated Financial Statements included in Item 15 for additional discussions of the Company's credit facilities.

Issuer Purchases of Equity Security in fiscal 2006

    The Company did not repurchase any of its equity securities in fiscal 2006.
36

Pilgrim's Pride Corporation
September 30, 2006

Item 6. Selected Financial Data

(In thousands, except ratios and per share data)
 
Eleven Years Ended September 30, 2006
 
   
2006
 
2005
 
2004(a)(b)
 
2003
 
           
(53 weeks)
     
Income Statement Data:
                 
Net sales
 
$
5,235,565
 
$
5,666,275
 
$
5,363,723
 
$
2,619,345
 
Gross profit(d)
   
297,600
   
745,199
   
529,039
   
200,483
 
Operating income(d)
   
3,002
   
435,812
   
265,314
   
63,613
 
Interest expense, net
   
40,553
   
43,932
   
52,129
   
37,981
 
Income (loss) before income taxes(d)
   
(36,317
)
 
403,523
   
208,535
   
63,235
 
Income tax expense (benefit)(e)
   
(2,085
)
 
138,544
   
80,195
   
7,199
 
Net income (loss)(d)
   
(34,232
)
 
264,979
   
128,340
   
56,036
 
Ratio of earnings to fixed charges(f)
   
(f
)
 
7.19x
   
4.08x
   
2.24x
 
Per Common Share Data:(g)
                         
Net income (loss)
 
$
(0.51
)
$
3.98
 
$
2.05
 
$
1.36
 
Cash dividends
   
1.090
   
0.06
   
0.06
   
0.06
 
Book value
   
16.79
   
18.38
   
13.87
   
10.46
 
Balance Sheet Summary:
                         
Working capital
 
$
528,836
 
$
404,601
 
$
383,726
 
$
211,119
 
Total assets
   
2,426,868
   
2,511,903
   
2,245,989
   
1,257,484
 
Notes payable and current maturities of long-term debt
   
10,322
   
8,603
   
8,428
   
2,680
 
Long-term debt, less current maturities
   
554,876
   
518,863
   
535,866
   
415,965
 
Total stockholders’ equity
   
1,117,327
   
1,223,598
   
922,956
   
446,696
 
Cash Flow Summary:
                         
Operating cash flow
 
$
30,382
 
$
493,073
 
$
272,404
 
$
98,892
 
Depreciation & amortization(h)
   
135,133
   
134,944
   
113,788
   
74,187
 
Purchases of investment securities
   
318,266
   
305,458
   
--
   
--
 
Proceeds from sale or maturity of investment securities
   
490,764
   
--
   
--
   
--
 
Capital expenditures
   
143,882
   
116,588
   
79,642
   
53,574
 
Business acquisitions, net of equity consideration(a)(c)
   
--
   
--
   
272,097
   
4,499
 
Financing activities, net provided by (used in)
   
(38,750
)
 
18,860
   
96,665
   
(39,767
)
Other Data:
                         
EBITDA(i)
 
$
136,763
 
$
580,078
 
$
372,501
 
$
173,926
 
Key Indicators (as a percentage of net sales):
                         
Gross profit(d)
   
5.7
%
 
13.2
%
 
9.9
%
 
7.7
%
Selling, general and
administrative expenses
   
5.6
%
 
5.5
%
 
4.8
%
 
5.2
%
Operating income (d)
   
0.8
%
 
7.7
%
 
4.9
%
 
2.4
%
Interest expense, net
   
1.0
%
 
0.9
%
 
1.0
%
 
1.5
%
Net income (loss)(d)
   
(0.7
)%
 
4.7
%
 
2.4
%
 
2.1
%
 
37

Pilgrim's Pride Corporation
September 30, 2006



Eleven Years Ended September 30, 2006
 
   
2002
 
2001(c)
 
2000
 
1999
 
1998
 
1997
 
1996
 
               
(53 weeks)
             
                               
   
$
2,533,718
 
$
2,214,712
 
$
1,499,439
 
$
1,357,403
 
$
1,331,545
 
$
1,277,649
 
$
1,139,310
 
     
165,165
   
213,950
   
165,828
   
185,708
   
136,103
   
114,467
   
70,640
 
     
29,904
   
94,542
   
80,488
   
109,504
   
77,256
   
63,894
   
21,504
 
     
32,003
   
30,775
   
17,779
   
17,666
   
20,148
   
22,075
   
21,539
 
     
1,910
   
61,861
   
62,786
   
90,904
   
56,522
   
43,824
   
(4,533
)
     
(12,425
)
 
20,724
   
10,442
   
25,651
   
6,512
   
2,788
   
2,751
 
     
14,335
   
41,137
   
52,344
   
65,253
   
50,010
   
41,036
   
(7,284
)
 
   
                    (f) 
   
2.13x
   
3.04x
   
4.33x
   
2.96x
   
2.57x
   
(f
)
                                             
   
$
0.35
 
$
1.00
 
$
1.27
 
$
1.58
 
$
1.21
 
$
0.99
 
$
(0.18
)
     
0.06
   
0.06
   
0.06
   
0.045
   
0.04
   
0.04
   
0.04
 
     
9.59
   
9.27
   
8.33
   
7.11
   
5.58
   
4.41
   
3.46
 
                                             
   
$
179,037
 
$
203,350
 
$
124,531
 
$
154,242
 
$
147,040
 
$
133,542
 
$
88,455
 
     
1,227,890
   
1,215,695
   
705,420
   
655,762
   
601,439
   
579,124
   
536,722
 
     
3,483
   
5,099
   
4,657
   
4,353
   
5,889
   
11,596
   
35,850
 
     
450,161
   
467,242
   
165,037
   
183,753
   
199,784
   
224,743
   
198,334
 
     
394,324
   
380,932
   
342,559
   
294,259
   
230,871
   
182,516
   
143,135
 
                                             
   
$
98,113
 
$
87,833
 
$
130,803
 
$
$81,452
 
$
85,016
 
$
49,615
 
$
11,391
 
     
70,973
   
55,390
   
36,027
   
34,536
   
32,591
   
29,796
   
28,024
 
 
   
 -- 
   
--
   
--
   
--
   
--
   
--
   
--
 
 
   
-- 
   
--
   
--
   
--
   
--
   
--
   
--
 
     
80,388
   
112,632
   
92,128
   
69,649
   
53,518
   
50,231
   
34,314
 
 
   
-- 
   
239,539
   
--
   
--
   
--
   
--
   
--
 
     
(21,793
)
 
246,649
   
(24,769
)
 
(19,634
)
 
(32,498
)
 
348
   
27,313
 
                                             
   
$
103,469
 
$
146,166
 
$
115,356
 
$
142,043
 
$
108,268
 
$
94,782
 
$
43,269
 
                                             
     
6.5
%
 
9.7
%
 
11.1
%
 
13.7
%
 
10.2
%
 
9.0
%
 
6.2
%
     
5.3
%
 
5.4
%
 
5.7
%
 
5.6
%
 
4.4
%
 
4.0
%
 
4.3
%
     
1.2
%
 
4.3
%
 
5.4
%
 
8.1
%
 
5.8
%
 
5.0
%
 
1.9
%
     
1.3
%
 
1.4
%
 
1.2
%
 
1.3
%
 
1.5
%
 
1.7
%
 
1.9
%
     
0.6
%
 
1.9
%
 
3.5
%
 
4.8
%
 
3.8
%
 
3.2
%
 
(0.6
)%


38

Pilgrim's Pride Corporation
September 30, 2006


(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
 
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
 
                     
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
 

In addition, the Company estimates its losses related to the October 2002 recall (excluding the insurance recovery described above) and the 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 2006 included income tax expense of $25.8 million associated with the restructuring of the Mexico operations and subsequent repatriation of foreign earnings under American Jobs Creation Act of 2004. 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 $40.6 million, $4.1 million and $5.8 million in fiscal 2006, 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 $2.6 million, $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 and $1.8 million in fiscal years 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998, 1997 and 1996, 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.

39

Pilgrim's Pride Corporation
September 30, 2006

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

   
2006
 
2005
 
2004
 
2003
 
2002
 
2001
 
2000
 
1999
 
1998
 
1997
 
1996
 
                                               
Net Income (loss)
   $
(34,232
)
$
264,979
 
$
128,340
 
$
56,036
 
$
14,335
 
$
41,137
 
$
52,344
 
$
65,253
 
$
50,010
 
$
41,036
 
$
(7,284
)
Add:
                                                                   
Interest expense, net
   
40,553
   
43,932
   
52,129
   
37,981
   
32,003
   
30,775
   
17,779
   
17,666
   
20,148
   
22,075
   
21,539
 
In Income tax expense (benefit)
   
(2,085
)
 
138,544
   
80,195
   
7,199
   
(12,425
)
 
20,724
   
10,442
   
25,651
   
6,512
   
2,788
   
2,751
     
Depreciation and amortization(h)
   
135,133
   
134,944
   
113,788
   
74,187
   
70,973
   
55,390
   
36,027
   
34,536
   
32,591
   
29,796
   
28,024
 
                                                                     
Minus:
                                                                   
A  Amortization of capitalized financing costs(h)
   
2,606
   
2,321
   
1,951
   
1,477
   
1,417
   
1,860
   
1,236
   
1,063
   
993
   
913
   
1,761
 
EBITDA
 
$
136,763
 
$
580,078
 
$
372,501
 
$
173,926
 
$
103,469
 
$
146,166
 
$
115,356
 
$
142,043
 
$
108,268
 
$
94,782
 
$
43,269
 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

§  Description of the Company

The Company is the second largest producer of chicken in the United States, the second largest producer and seller of chicken in Mexico, the largest producer of chicken in Puerto Rico and has one of the best known brand names in the chicken industry. In the U.S., we produce both prepared and fresh chicken and fresh 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

Overview. Focus and concern abroad over avian influenza significantly reduced international demand for chicken products during fiscal 2006 when compared to the prior year, leading at times to higher inventory levels and contributing to lower overall market pricing. At the same time, industry production levels continued to increase, creating an oversupply situation and further weakening prices. Industry-wide inventories of leg quarters reached extremely high levels during the first nine months of fiscal 2006 due to reduced purchasing in foreign markets. Leg quarter inventory levels began falling at the beginning of our third fiscal quarter and by the end of such quarter had reached levels comparable to the end of the third quarter of fiscal 2005 and remained at comparable levels as of September 30, 2006. Additionally, the oversupply of leg quarters put significant pressure on the U.S. white meat markets which contributed to historically low breast meat prices. While leg quarter pricing improved substantially throughout most of fiscal 2006, breast meat pricing after attempting to recover earlier in the year began declining in the fourth quarter and, as of the date of this report, reached near all-time lows and was substantially lower than the prior year. During fiscal 2006, the average market pricing for chicken leg quarters and breast meat declined approximately 19.7% and 15.8%, respectively, from the prior year. Additionally, our U.S. chicken sales volume for fiscal 2006 was 2.3% less than last year due primarily to the effects of avian influenza concerns in the international markets. This change in pricing and demand adversely affected our results for fiscal 2006.  Additionally, some U.S. customers have renegotiated their contracts with us to reflect the current pricing environment for chicken. 
40

Pilgrim's Pride Corporation
September 30, 2006

In addition, the cost of corn, our primary feed ingredient, increased significantly from August 2006 to the date of this report. There can be no assurance that the price of corn will not continue to rise as a result of, among other things, increasing demand for corn products around the world and alternative uses of corn, such as ethanol production. We will attempt to pass through the expected higher feed costs through contract negotiations with our customers. However, there can be no assurance that these increased costs can be recovered.

In response to this challenging operating environment, we have executed a multi-point plan designed to improve our competitive position:
 
·  
First, we have delayed one-half of our planned expansion in the Fresh Food Service Division of our Mayfield, Kentucky plant from early July until mid-September of this year, and the other half of this expansion from early July 2006 until June 2007.
 
 
·  
Second, beginning on July 1, 2006, we reduced our weekly slaughter rate by approximately 3%, which is equivalent to approximately 830,000 head per week. In addition, we recently announced a further reduced weekly slaughter to achieve a 5% year-over-year decline, which is equivalent to approximately 1.3 million head per week, beginning in January 2007. We currently intend to keep this reduction in slaughter in effect until we believe that the average industry profit margins have returned to a more normalized level.
 
 
·  
Third, we reduced our capital investments for fiscal 2006 to $144 million.  Our original capital investment projection for the year had been in the range of $180-$200 million.  Our estimated range for fiscal 2007 is $140-$160 million. We are focusing only on those projects we deem critically necessary to our business or those in which our immediate investment is judged by us to be in our best long-term interests. 
 
 
·  
Fourth, we have sharpened our focus on reducing costs and operating more efficiently.
 

We intend to continue to monitor market conditions for purposes of determining when we believe further changes in our business are prudent.

Results. The net loss for fiscal 2006 of $34.2 million is down $299.2 million from net income of $265.0 million for fiscal 2005. This decrease is primarily due to:

·  
Reduced selling prices for chicken primarily created by market disruptions caused by the avian influenza scares in other parts of the world. Reduced selling prices for our Mexico produced chicken partially offset by an increase in pounds sold in Mexico.

·  
Increased cost of sales due to higher energy and packaging costs.

·  
Tax expense of $25.8 million related to the restructuring of our Mexico operations and subsequent repatriation of foreign earnings under the American Jobs Creation Act of 2004.

§  Business Environment

Profitability in the poultry industry 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, which can be mitigated somewhat by:
41

Pilgrim's Pride Corporation
September 30, 2006

- Business strategy;

- Product mix;

- Sales and marketing plans; and

- Operating efficiencies.

In an effort to reduce price volatility and to generate higher, more consistent profit margins, we have concentrated on the production and marketing of prepared foods products. Prepared foods products generally have higher profit margins than our other products. Also, the production and sale in the U.S. of prepared foods products reduces the impact of the costs of feed ingredients on our profitability. Feed ingredient purchases are the single largest component of our cost of sales, representing approximately 27% of our consolidated cost of sales in fiscal 2006. 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 U.S. and foreign governments. The cost of corn, our primary feed ingredient, increased significantly from August 2006 until the date of this report, and there can be no assurance that the price of corn will not continue to rise as a result of, among other things, increasing demand for corn products around the world and alternative uses of corn, such as ethanol production. 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.

As a significant portion of the U.S. poultry production is exported, the commodity prices of chicken and turkey can be, and in recent periods have been, adversely affected by disruptions in poultry export markets. These disruptions are often caused by restrictions on imports of U.S.-produced poultry products imposed by foreign governments for a variety of reasons, including the protection of their domestic poultry producers and allegations of consumer health issues. For example, Russia and Japan have restricted the importation of U.S.-produced poultry for both of these reasons in recent periods. 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 rate was reduced on January 1, 2006 to 39.5% and is scheduled to be reduced in each of the following two years in equal increments so that the final tariff rate at January 1, 2008 will be zero. The tariff was imposed due to concerns that the duty-free importation of such products as provided by the North American Free Trade Agreement would injure Mexico’s poultry industry. 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 Mexico 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. Because these disruptions in poultry export markets are often political, no assurances can be given as to when the existing disruptions will be alleviated or that new ones will not arise.
42

Pilgrim's Pride Corporation
September 30, 2006

Business 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) a seller of other products. In previous years, our presented segments included chicken and other and turkey. After fully integrating the fiscal 2004 acquisition into our operations during fiscal 2004 and early fiscal 2005, we changed our segment presentation to separate our non-chicken and non-turkey operations into a separate category consistent with management’s evaluation of operating results and decisions with respect to the allocation of resources.

Our chicken segment includes sales of chicken products we produce and purchase for resale in the U.S., including Puerto Rico, and Mexico. Our chicken segment conducts separate operations in the U.S., Puerto Rico and Mexico and is reported as two separate geographical areas. Substantially all of the assets and operations of the fiscal 2004 acquisition are included in our U.S. chicken segment since the date of acquisition.

Our turkey segment includes sales of turkey products we produce and purchase for resale in our turkey and distribution operations in the U.S.

Our other products segment includes distribution of non-poultry products that are purchased from third parties and sold to independent grocers and quick service restaurants. Also included in this category are sales of table eggs, feed, protein products and other items, some of which are produced by the Company.

Inter-area sales and inter-segment sales, which are not material, are accounted for at prices comparable to normal trade customer sales. Corporate expenses are allocated to Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the U.S. portions of the segments based on number of employees.

Assets associated with our corporate functions, including cash and cash equivalents and investments in available for sale securities, are included in our chicken segment.

Selling, general and administrative expenses related to our distribution centers are allocated based on the proportion of net sales to the particular segment to which the product sales relate.

Depreciation and amortization, total assets and capital expenditures of our distribution centers are included in our chicken segment based on the primary focus of the centers.

Non-recurring recoveries, which represent settlements for vitamin and methionine litigation covering several periods as well as federal compensation for avian influenza, have not been allocated to any segment because the proper allocation cannot be readily determined.

The following table presents certain information regarding our segments:
43

Pilgrim's Pride Corporation
September 30, 2006


   
 Fiscal Year Ended
 
   
 September 30, 2006
 
October 1, 2005
 
October 2, 2004(a)
 
        
(In thousands)
     
Net Sales to Customers:
                
Chicken:
                
United States
 
$
4,098,403
 
$
4,411,269
 
$
4,091,706
 
Mexico
   
418,745
   
403,353
   
362,442
 
Sub-total
   
4,517,148
   
4,814,622
   
4,454,148
 
Turkey
   
130,901
   
204,838
   
286,252
 
Other Products:
                   
United States
   
570,510
   
626,056
   
600,091
 
Mexico
   
17,006
   
20,759
   
23,232
 
Sub-total
   
587,516
   
646,815
   
623,323
 
Total
 
$
5,235,565
 
$
5,666,275
 
$
5,363,723
 
Operating Income (Loss):
                   
Chicken:
                   
United States
 
$
28,619
 
$
405,662
 
$
329,694
 
Mexico
   
(17,960
)
 
39,809
   
(7,619
)
Sub-total
   
10,659
   
445,471
   
322,075
 
Turkey(b)
   
(15,511
)
 
(22,539
)
 
(96,839
)
Other Products:
                   
United States
   
6,216
   
8,250
   
35,969
 
Mexico
   
1,638
   
4,630
   
4,033
 
Sub-total
   
7,854
   
12,880
   
40,002
 
Non-recurring recoveries
   
--
   
--
   
76
 
Total
 
$