PILGRIMS PRIDE CORP - Annual Report: 2006 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-K
____________________
(Mark
One)
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended September
30, 2006
OR
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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||||
For
the transition period from
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to
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Commission
File number 1-9273
![](https://www.sec.gov/Archives/edgar/data/0000802481/000114036106016745/seclogo.jpg)
PILGRIM’S
PRIDE CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
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75-1285071
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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4845
US Hwy 271 North
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Pittsburg,
Texas
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75686-0093
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(Address
of principal executive offices)
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(Zip
code)
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Registrant’s
telephone number, including area code: (903)
434-1000
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|
Securities
registered pursuant to Section 12(b) of the Act:
|
|
Title
of each class
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Name
of each exchange on which registered
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Common
Stock, Par Value $0.01
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
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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.
2
Pilgrim's
Pride Corporation
September
30, 2006
PILGRIM’S PRIDE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
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Page
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Item 1.
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Business
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4
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Item 1A.
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Risk Factors
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24
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Item 1B.
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Unresolved Staff Comments
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32
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Item 2.
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Properties
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32
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Item 3.
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Legal Proceedings
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33
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Item 4.
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Submission of Matters to a Vote of Security
Holders
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35
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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36
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Item 6.
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Selected Financial Data
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37
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Item 7.
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Management’s Discussion and Analysis of Financial
Condition and Results
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of Operations
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40
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Item 7A.
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Quantitative and Qualitative Disclosures about
Market
Risk
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58
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Item 8.
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Financial Statements and Supplementary Data (see
Index to
Financial Statements and
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Schedules below)
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59
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Item 9.
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Changes in and Disagreements with Accountants
on
Accounting and Financial
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Disclosure
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60
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Item 9A.
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Controls and Procedures
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60
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Item 9B.
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Other Information
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64
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PART III
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Item 10.
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Directors and Executive Officers of the
Registrant
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64
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Item 11.
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Executive Compensation
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64
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Item 12.
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Security Ownership of Certain Beneficial Owners
and
Management and Related
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Stockholder Matters
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64
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Item 13.
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Certain Relationships and Related Transactions
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64
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Item 14.
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Principal Accountant Fees and Services
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65
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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65
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Signatures
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73
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INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
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Report of Independent Registered Public Accounting
Firm
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76
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Consolidated Balance Sheets as of September 30,
2006 and
October 1, 2005
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77
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Consolidated Statements of Income (Loss) for each
of the
three years ended September 30, 2006
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78
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Consolidated Statements of Stockholders’ Equity for each
of the three years ended September 30, 2006
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79
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Consolidated Statements of Cash Flows for each
of the
three years ended September 30, 2006
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80
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Notes to Consolidated Financial Statements
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81
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Schedule II - Valuation and Qualifying Accounts
for each
of the three years ended September 30, 2006
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102
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3
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
4
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
5
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,
6
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.
8
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.
9
Pilgrim's
Pride Corporation
September
30, 2006
- 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.
10
(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.
11
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.
14
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.
15
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.
16
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.
17
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.
18
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.
23
Pilgrim's
Pride Corporation
September
30, 2006
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.
24
Pilgrim's
Pride Corporation
September
30, 2006
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.
25
Pilgrim's
Pride Corporation
September
30, 2006
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.
26
Pilgrim's
Pride Corporation
September
30, 2006
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.
27
Pilgrim's
Pride Corporation
September
30, 2006
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.
28
Pilgrim's
Pride Corporation
September
30, 2006
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.
29
Pilgrim's
Pride Corporation
September
30, 2006
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.
30
Pilgrim's
Pride Corporation
September
30, 2006
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.
31
Pilgrim's
Pride Corporation
September
30, 2006
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.
32
Pilgrim's
Pride Corporation
September
30, 2006
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.
33
Pilgrim's
Pride Corporation
September
30, 2006
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.
34
Pilgrim's
Pride Corporation
September
30, 2006
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.
35
Pilgrim's
Pride Corporation
September
30, 2006
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
|
|||||||||||||||||||||
D 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
|
$
|
3,002
|
$
|
435,812
|
$
|
265,314
|
||||
Depreciation
and Amortization:(c)
|
||||||||||
Chicken:
|
||||||||||
United
States
|
$
|
109,346
|
$
|
114,131
|
$
|
89,767
|
||||
Mexico
|
11,305
|
12,085
|
12,217
|
|||||||
Sub-total
|
120,651
|
126,216
|
101,984
|
|||||||
Turkey
|
6,593
|
3,343
|
6,887
|
|||||||
Other
Products:
|
||||||||||
United
States
|
7,743
|
5,196
|
4,773
|
|||||||
Mexico
|
146
|
189
|
144
|
|||||||
Sub-total
|
7,889
|
5,385
|
4,917
|
|||||||
Total
|
$
|
135,133
|
$
|
134,944
|
$
|
113,788
|
||||
Total
Assets:
|
||||||||||
Chicken:
|
||||||||||
United
States
|
$
|
1,897,763
|
$
|
2,059,579
|
$
|
1,830,051
|
||||
Mexico
|
361,887
|
287,414
|
212,492
|
|||||||
Sub-total
|
2,259,650
|
2,346,993
|
2,042,543
|
|||||||
Turkey
|
76,908
|
77,319
|
122,163
|
|||||||
Other
Products:
|
||||||||||
United
States
|
88,650
|
85,581
|
78,754
|
|||||||
Mexico
|
1,660
|
2,010
|
2,529
|
|||||||
Sub-total
|
90,310
|
87,591
|
81,283
|
|||||||
Total
|
$
|
2,426,868
|
$
|
2,511,903
|
$
|
2,245,989
|
||||
Capital
Expenditures:
|
||||||||||
Chicken:
|
||||||||||
United
States
|
$
|
133,106
|
$
|
102,470
|
$
|
54,433
|
||||
Mexico
|
6,536
|
4,924
|
8,640
|
|||||||
Sub-total
|
139,642
|
107,394
|
63,073
|
|||||||
Turkey
|
257
|
3,604
|
8,151
|
|||||||
Other
Products:
|
||||||||||
United
States
|
3,567
|
5,448
|
8,395
|
|||||||
Mexico
|
416
|
142
|
23
|
|||||||
Sub-total
|
3,983
|
5,590
|
8,418
|
|||||||
Total
|
$
|
143,882
|
$
|
116,588
|
$
|
79,642
|
44
Pilgrim's
Pride Corporation
September
30, 2006
(a)
|
The
Company acquired the ConAgra chicken division on November 23,
2003 for
$635.2 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)
|
Included
in fiscal 2004 are restructuring charges totaling $72.1 million
offset
somewhat by the non-recurring recovery of $23.8 million representing
the
gain recognized on the insurance proceeds received in connection
with the
October 2002 recall. In addition, the Company estimates its losses
related
to the October 2002 recall (excluding the insurance recovery
described
above) negatively affected gross profit and operating income
by $20.0
million in fiscal 2004 and $65.0 million in fiscal
2003.
|
(c)
|
Includes
amortization of capitalized financing costs of approximately
$2.6 million,
$2.3 million and $2.0 million in fiscal years 2006, 2005 and
2004,
respectively.
|
The
following table presents certain items as a percentage of net sales for
the
periods indicated:
Fiscal
Year Ended
September
30,
2006
|
October
1,
2005
|
October
2,
2004
|
||||||||
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
Cost
and Expenses
|
||||||||||
Cost
of sales
|
94.3
|
86.8
|
89.4
|
|||||||
Cost
of sales-restructuring
|
--
|
--
|
1.2
|
|||||||
Non-recurring
recoveries
|
--
|
--
|
(0.4
|
)
|
||||||
Gross
profit
|
5.7
|
13.2
|
9.9
|
|||||||
Selling,
general and administrative expense
|
5.6
|
5.5
|
4.8
|
|||||||
Other
restructuring charges
|
--
|
--
|
0.1
|
|||||||
Operating
income
|
0.1
|
7.7
|
4.9
|
|||||||
Interest
expense, net
|
0.8
|
0.7
|
1.0
|
|||||||
Income
(loss) before income taxes
|
(0.7
|
)
|
7.1
|
3.9
|
||||||
Net
income (loss)
|
(0.7
|
)
|
4.7
|
2.4
|
||||||
45
Pilgrim's
Pride Corporation
September
30, 2006
Results
of Operations
Our
results of operations for fiscal 2006 when compared to fiscal 2005 were
impacted
by the following significant items.
Fiscal
2006 Compared to Fiscal 2005
Net
Sales. Net
sales for fiscal 2006 decreased $430.7 million, or 7.6%, over fiscal 2005.
The
following table provides additional information regarding net sales (in
millions):
Fiscal
Year Ended
|
||||||||||||||||
September
30,
|
Change
from
|
Percentage
|
||||||||||||||
Source
|
2006
|
Fiscal
2005
|
Change
|
|||||||||||||
Chicken:
|
||||||||||||||||
United
States
|
$
|
4,098.4
|
$
|
(312.8
|
)
|
(7.1
|
)%
|
(a
|
)
|
|||||||
Mexico
|
418.7
|
15.3
|
3.8
|
%
|
(b
|
)
|
||||||||||
$
|
4,517.1
|
$
|
(297.5
|
)
|
(6.2
|
)%
|
||||||||||
Turkey
|
$
|
130.9
|
$
|
(73.9
|
)
|
(36.1
|
)%
|
(c
|
)
|
|||||||
Other
products:
|
||||||||||||||||
United
States
|
$
|
570.6
|
$
|
(55.5
|
)
|
(8.9
|
)%
|
(d
|
)
|
|||||||
Mexico
|
17.0
|
(3.8
|
)
|
(18.3
|
)%
|
(e
|
)
|
|||||||||
$
|
587.6
|
$
|
(59.3
|
)
|
(9.2
|
)%
|
||||||||||
Net
Sales
|
$
|
5,235.6
|
$
|
(430.7
|
)
|
(7.6
|
)%
|
(a)
|
U.S.
chicken sales declined primarily due to 15.8% lower breast meat
prices and
19.7% lower leg quarter prices and 2.3% reduction in
volume.
|
(b)
|
Mexico
chicken sales increased compared to fiscal year 2005, due primarily
to
increases in production, partially offset by a 9.1% decrease
in pricing
per pound sold.
|
(c)
|
Turkey
sales declined due to our decision in the first quarter of fiscal
2006 to
cease production of certain products at our Franconia, Pennsylvania
turkey
cooking operations.
|
(d)
|
U.S.
sales of other products decreased primarily due to the divesture
of
certain distribution centers whose sales included a large volume
of
non-poultry products.
|
(e)
|
Mexico
other products sales decreased due to reduced sales volumes of
commercial
feed.
|
46
Pilgrim's
Pride Corporation
September
30, 2006
Gross
Profit.
Gross profit for fiscal 2006 decreased $447.6 million, or 60.1%, over fiscal
2005. The following table provides gross profit information (in
millions):
Fiscal
Year Ended
|
Percentage
|
Percentage
|
||||||||||||||||||||
September
30,
|
Change
from
|
Percentage
|
of
Net Sales
|
of
Net Sales
|
||||||||||||||||||
Components
|
2006
|
Fiscal
2005
|
Change
|
Fiscal
2006
|
Fiscal
2005
|
|||||||||||||||||
Net
sales
|
$
|
5,235.6
|
$
|
(430.7
|
)
|
(7.6
|
)%
|
100.0
|
%
|
100.0
|
%
|
|||||||||||
Cost
of sales
|
4,938.0
|
16.9
|
0.3
|
%
|
94.3
|
%
|
86.8
|
%
|
(a
|
)
|
||||||||||||
Gross
profit
|
$
|
297.6
|
$
|
(447.6
|
)
|
(60.1
|
)%
|
5.7
|
%
|
13.2
|
%
|
(a)
|
Cost
of sales in the U.S. chicken operations increased $71.8 million
due
primarily to increased energy, and packaging costs. Cost of sales
in our
turkey operations decreased significantly because of the restructuring
of
this division in fiscal 2004 and first quarter of fiscal 2006.
Cost of
sales in our Mexico chicken operations increased $71.6 million
primarily
due to a 9.7% increase in production volumes.
|
47
Pilgrim's
Pride Corporation
September
30, 2006
Operating
Income.
Operating income for fiscal 2006 compared to fiscal 2005 decreased $432.8
million, or 99.3%, as described in the following table (in millions):
Fiscal
Year Ended
|
|||||||||||||
September
30,
|
Change
from
|
Percentage
|
|||||||||||
Source
|
2006
|
Fiscal
2005
|
Change
|
||||||||||
Chicken:
|
|||||||||||||
United
States
|
$
|
28.6
|
$
|
(377.1
|
)
|
(93.0
|
)%
|
||||||
Mexico
|
(17.9
|
)
|
(57.7
|
)
|
(145.0
|
)%
|
|||||||
$
|
10.7
|
$
|
(434.8
|
)
|
(97.6
|
)%
|
|||||||
Turkey
|
$
|
(15.5
|
)
|
$
|
7.0
|
31.1
|
%
|
||||||
Other
Products:
|
|||||||||||||
United
States
|
$
|
6.2
|
$
|
(2.0
|
)
|
(24.4
|
)%
|
||||||
Mexico
|
1.6
|
(3.0
|
)
|
(65.2
|
)%
|
||||||||
$
|
7.8
|
$
|
(5.0
|
)
|
(39.1
|
)%
|
|||||||
Non-recurring
recoveries
|
--
|
--
|
--
|
||||||||||
Operating
Income
|
$
|
3.0
|
$
|
(432.8
|
)
|
(99.3
|
)%
|
Fiscal
Year Ended
|
Percentage
|
Percentage
|
||||||||||||||||||||
September
30,
|
Change
from
|
Percentage
|
of
Net Sales
|
of
Net Sales
|
||||||||||||||||||
Components
|
2006
|
Fiscal
2005
|
Change
|
Fiscal
2006
|
Fiscal
2005
|
|||||||||||||||||
Gross
profit
|
$
|
297.6
|
$
|
(447.6
|
)
|
(60.1
|
)%
|
5.7
|
%
|
13.2
|
%
|
|||||||||||
Selling,
general and administrative expense
|
294.6
|
(14.8
|
)
|
(4.8
|
)%
|
5.6
|
%
|
5.5
|
%
|
(a
|
)
|
|||||||||||
Operating
income
|
$
|
3.0
|
$
|
(432.8
|
)
|
(99.3
|
)%
|
0.1
|
%
|
7.7
|
%
|
(b
|
)
|
(a)
|
Selling,
general and administrative expense decreased due primarily to
a decrease
in costs associated with our profit-based retirement and compensation
plans.
|
(b)
|
The
decrease in operating income when compared to fiscal 2005 is
due primarily
to lower market pricing for chicken products, as well as increased
costs
for energy and packaging.
|
Interest
Expense.
Consolidated interest expense increased 2.0% to $50.6 million in fiscal
2006,
when compared to $49.6 million for fiscal 2005, due primarily to higher
average
outstanding debt balances experienced in the fiscal year.
Interest
Income.
Interest income increased 75.4% to $10.0 million in fiscal 2006, compared
to
$5.7 million in fiscal 2005, due to higher average investment balances
and
slightly higher rates.
Income
Tax Expense.
Consolidated income tax benefit in fiscal 2006 was $2.1 million, compared
to tax
expense of $138.5 million in fiscal 2005. The decrease in consolidated
income
tax expense is the result of the pretax loss in fiscal 2006 versus significant
earnings in the U.S. and Mexico in 2005. In addition, fiscal 2006 included
income tax expense of $25.8 million for the restructuring of the Mexico
operations and subsequent repatriation of earnings from Mexico under the
American Jobs Creation Act of 2004, and a $10.6 million benefit from a
change in
an estimate, both of which are described in Note A to the Consolidated
Financial
Statements.
48
Pilgrim's
Pride Corporation
September
30, 2006
Fiscal
2005 Compared to Fiscal 2004
Net
Sales. Net
sales for fiscal 2005 increased $302.6 million, or 5.6%, over fiscal 2004.
The
following table provides additional information regarding net sales (in
millions):
Fiscal
Year Ended
|
|||||||||||||
October
1,
|
Change
from
|
Percentage
|
|||||||||||
Source
|
2005
|
Fiscal
2004
|
Change
|
||||||||||
Chicken:
|
|||||||||||||
United
States
|
$
|
4,411.2
|
$
|
319.5
|
7.8
|
%
|
(a
|
)
|
|||||
Mexico
|
403.4
|
41.0
|
11.3
|
%
|
(b
|
)
|
|||||||
$
|
4,814.6
|
$
|
360.5
|
8.1
|
%
|
||||||||
Turkey
|
$
|
204.8
|
$
|
(81.5
|
)
|
(28.5
|
)%
|
(c
|
)
|
||||
Other
Products:
|
|||||||||||||
United
States
|
$
|
626.1
|
$
|
26.0
|
4.3
|
%
|
(d
|
)
|
|||||
Mexico
|
20.8
|
(2.4
|
)
|
(10.3
|
)%
|
(e
|
)
|
||||||
$
|
646.9
|
$
|
23.6
|
3.8
|
%
|
||||||||
Net
Sales
|
$
|
5,666.3
|
$
|
302.6
|
5.6
|
%
|
(a)
|
U.S.
chicken sales increased primarily due to the inclusion of the
fiscal 2004
acquisition for 52 weeks in fiscal 2005 versus 45 weeks in fiscal
2004.
|
(b)
|
Mexico
chicken sales after adjusting for a 52-week year in 2004 increased
primarily due to a 14.8% increase in total revenue per pound
produced,
partially offset by a 1.3% decline in dressed pounds
produced.
|
(c)
|
The
decrease in turkey sales was due primarily to our fiscal 2004
restructuring of our turkey operations. See “Note B - Restructuring
Charges and Non-Recurring Recoveries” of the notes to Consolidated
Financial Statements included elsewhere herein. We estimate that
commodity
sales in our turkey division decreased by approximately $55 million
in
fiscal 2005 as a result of this restructuring.
|
(d)
|
U.S.
sales of other products increased primarily due to the inclusion
of the
distribution centers of the fiscal 2004 acquisition for 52 weeks
in fiscal
2005 versus 45 weeks in fiscal 2004. Also affecting the U.S.
sales of
other products was a decline in pricing for products at our commercial
egg
operations and our rendering plants.
|
(e)
|
Mexico
other products sales decreased due to reduced sales volumes of
our
commercial feed.
|
49
Pilgrim's
Pride Corporation
September
30, 2006
Gross
Profit. Gross
profit for fiscal 2005 increased $216.2 million, or 40.9%, over fiscal
2004. The
following table provides gross profit information (in millions):
Fiscal
Year Ended
|
Change
|
Percentage
|
Percentage
|
|||||||||||||||||||
October
1,
|
from
|
Percentage
|
of
Net Sales
|
of
Net Sales
|
||||||||||||||||||
Components
|
2005
|
Fiscal
2004
|
Change
|
Fiscal
2005
|
Fiscal
2004
|
|||||||||||||||||
Net
sales
|
$
|
5,666.3
|
$
|
302.6
|
5.6
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||||||
Cost
of sales
|
4,921.1
|
126.7
|
2.6
|
%
|
86.8
|
%
|
89.4
|
%
|
(a
|
)
|
||||||||||||
Cost
of sales-restructuring
|
--
|
(64.2
|
)
|
--
|
--
|
%
|
1.2
|
%
|
(b
|
)
|
||||||||||||
Non-recurring
recoveries
|
--
|
23.9
|
--
|
--
|
%
|
(0.4
|
)%
|
(c
|
)
|
|||||||||||||
Gross
profit
|
$
|
745.2
|
$
|
216.2
|
40.9
|
%
|
13.2
|
%
|
9.9
|
%
|
||||||||||||
(a)
|
Cost
of sales in the U.S. chicken operations increased $180.0 million
due
primarily to the fiscal 2004 acquisition, offset partially by
the cost of
feed ingredient purchases averaging 17% lower in cost in fiscal
2005
compared to the prior year. Cost of sales in our turkey operations
decreased significantly because of the restructuring of this
division in
fiscal 2004. Cost of sales in our Mexico operations decreased
$13.2
million primarily due to a 3.2% decline in production volumes
after
adjusting for a 52-week year in 2004, and a 17.5% decrease in
average cost
of feed ingredient purchases.
|
(b)
|
On
April 26, 2004, we announced a plan to restructure our turkey
business to
significantly reduce our production of commodity turkey meat
and
strengthen our focus on value-added turkey products. As part
of our
restructuring effort, we sold our Hinton, Virginia turkey commodity
meat
operations. In fiscal 2004, we recorded, as cost of sales-restructuring,
approximately $64.2 million of asset impairment charges and inventory
losses on discontinued products and, as other restructuring charges,
$7.9
million, primarily related to exit and severance costs.
|
(c)
|
Non-recurring
recoveries in fiscal year 2004 consisted mainly of a $23.8 million
gain
from insurance proceeds related to our 2002 product recall.
|
50
Pilgrim's
Pride Corporation
September
30, 2006
Operating
Income.
Operating income for fiscal 2005 compared to fiscal 2004 increased $170.5
million, or 64.3%, as described in the following table (in
millions):
Fiscal
Year Ended
|
|||||||||||||
October
1,
|
Change
from
|
Percentage
|
|||||||||||
Source
|
2005
|
Fiscal
2004
|
Change
|
||||||||||
Chicken
|
|||||||||||||
United
States
|
$
|
405.7
|
$
|
76.0
|
23.1
|
%
|
|||||||
Mexico
|
39.8
|
47.4
|
623.7
|
%
|
|||||||||
$
|
445.5
|
$
|
123.4
|
38.3
|
%
|
||||||||
Turkey
|
$
|
(22.5
|
)
|
$
|
74.3
|
76.8
|
%
|
||||||
Other
Products
|
|||||||||||||
United
States
|
$
|
8.2
|
$
|
(27.7
|
)
|
(77.2
|
)%
|
||||||
Mexico
|
4.6
|
0.6
|
15.0
|
%
|
|||||||||
$
|
12.8
|
$
|
(27.1
|
)
|
(67.9
|
)%
|
|||||||
Non-recurring
recoveries
|
$
|
--
|
$
|
(0.1
|
)
|
--
|
%
|
||||||
Operating
Income
|
$
|
435.8
|
$
|
170.5
|
64.3
|
%
|
Fiscal
Year Ended
|
Percentage
|
Percentage
|
||||||||||||||||||||
October
1,
|
Change
from
|
Percentage
|
of
Net Sales
|
of
Net Sales
|
||||||||||||||||||
Components
|
2005
|
Fiscal
2004
|
Change
|
Fiscal
2005
|
Fiscal
2004
|
|||||||||||||||||
Gross
profit
|
$
|
745.2
|
$
|
216.2
|
40.9
|
%
|
13.2
|
%
|
9.9
|
%
|
||||||||||||
Selling,
general and administrative expense
|
309.4
|
53.6
|
21.0
|
%
|
5.5
|
%
|
4.8
|
%
|
(a
|
)
|
||||||||||||
Other
restructuring charges
|
--
|
(7.9
|
)
|
--
|
--
|
0.1
|
(b
|
)
|
||||||||||||||
Operating
income
|
$
|
435.8
|
$
|
170.5
|
64.3
|
%
|
7.7
|
%
|
4.9
|
%
|
(c
|
)
|
(a)
|
Selling,
general and administrative expense increased due to costs associated
with
increased sales of prepared foods because of the fiscal 2004
acquisition
and due to increases in costs associated with our profit-based
retirement
and compensation plans.
|
(b)
|
On
April 26, 2004, we announced a plan to restructure our turkey
division,
including the sale or closure of some facilities in Virginia.
Approximately $7.9 million related to exit and severance costs
in
connection with the restructuring were charged to other restructuring
charges.
|
(c)
|
The
increase in operating income over fiscal 2004 is due primarily
to lower
feed ingredient pricing, the $72.1 million in turkey restructuring
and
other related restructuring charges sustained in fiscal 2004
and the other
items described above.
|
Interest
Expense.
Consolidated interest expense decreased 8.8% to $49.6 million in fiscal
2005,
when compared to $54.4 million for fiscal 2004, due primarily to lower
average
outstanding debt balances experienced in the fiscal year.
51
Pilgrim's
Pride Corporation
September
30, 2006
Interest
Income.
Interest income increased 147.8% to $5.7 million compared to $2.3 million
in
fiscal 2004. This increase was due to the increase in funds available to
invest
created by the increase in net income.
Income
Tax Expense. Consolidated
income tax expense in fiscal 2005 was $138.5 million, compared to $80.2
million
in fiscal 2004. This increase in consolidated income tax expense is the
result
of higher pretax earnings in fiscal 2005. The effective tax rate for fiscal
2005
was 34.3% versus 38.5% for fiscal 2004. This decrease is due primarily
to the
increase in net income before tax in our Mexico operations which is taxed
at a
lower rate than our U.S. operations. Offsetting this is a $2.4 million
provision
for anticipated repatriations from Mexico under the American Jobs Creation
Act
of 2004.
Liquidity
and Capital Resources
The
following table presents our available sources of liquidity as of September
30,
2006 (in millions).
Facility
|
Amount
|
||||||||||||
Source
of Liquidity
|
Amount
|
Outstanding
|
Available
|
||||||||||
(in
millions)
|
|||||||||||||
Cash
and cash equivalents
|
$
|
--
|
$
|
--
|
$
|
156.4
|
|||||||
Investments
in available for sale securities
|
--
|
--
|
136.6
|
||||||||||
Debt
Facilities:
|
|||||||||||||
Revolving
credit facilities
|
225.0
|
75.0
|
126.6
|
(a
|
)
|
||||||||
Revolving/term
facility
|
795.0
|
--
|
(b
|
)
|
|||||||||
Term
loan
|
430.0
|
--
|
(b
|
)
|
|||||||||
Bridge
loan
|
450.0
|
--
|
(c
|
)
|
|||||||||
Receivables
purchase
|
|||||||||||||
agreement
|
125.0
|
--
|
125.0
|
||||||||||
(a)
|
At
September 30, 2006, the Company had $23.4 million in letters
of credit
outstanding relating to normal business transactions.
|
(b)
|
The
amount available at September 30, 2006 under these facilities
was $535.3
million. If our tender offers are successful, the amount of
borrowings available will increase by up to $486 million and,
with the
pledging of additional identified collateral to secure this
facility; the
full amount of the commitment under this facility will be
available.
|
(c)
|
Reflects
a commitment letter obtained by the Company from certain investment
banks,
pursuant to which, subject to specified conditions, the investment
banks
have agreed to make available to the Company a $450 million
senior
unsecured bridge loan facility for the purchase of shares of
common stock
of Gold Kist.
|
On
September
29, 2006, the Company commenced a tender offer to purchase all of the
outstanding shares of Gold Kist Inc. (“Gold Kist”) common stock for $20 per
share. In addition, the Company commenced a tender offer to purchase all
of Gold
Kist’s outstanding 101/4%
senior notes due March 15, 2014. As of October 13, 2006, holders of
approximately 99% of the senior notes had tendered their notes. On October
16,
2006 the Company 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 (“HSR”) in connection with this offer. As of October 27, 2006, the
expiration date for the tender offers, holders of approximately 33% of
Gold
Kist’s common stock had tendered their shares. On October 30, 2006, the Company
extended the tender offer to November 29, 2006.
52
Pilgrim's
Pride Corporation
September
30, 2006
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 arrangements through a combination
of an amendment and restatement to its existing credit facility and a commitment
letter for an additional credit facility. In September 2006, the Company
entered
into an amended and restated 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 Company has also
obtained a commitment letter in which certain investment bankers have agreed
to
make available to the Company a $450 million senior unsecured bridge loan
facility. The Company’s lenders have issued consents as necessary to allow the
consummation and financing of the tender offer. All borrowings under the
amended
and restated credit agreement are subject to the availability of eligible
collateral and no material adverse change provisions. The commitment to
provide
the bridge loan facility is also subject to specified conditions, including
no
material adverse change provisions. Additional information regarding the
financial arrangements is in “Note E - Notes Payable and Long Term Debt”
included in the Company’s Consolidated Financial Statements.
The
$150.0 million domestic revolving credit facilities provide for interest
rates
ranging from LIBOR plus seven-eighths percent to LIBOR plus two and five-eighths
percent depending upon our total debt to capitalization ratio. The $150.0
million domestic revolving credit facilities, $126.6 million of which was
available for borrowings at September 30, 2006, are secured by domestic
chicken
inventories. Borrowings against these facilities are subject to the availability
of eligible collateral and no material adverse change provisions.
On
September 25, 2006, a subsidiary of the Company, Avícola Pilgrim’s Pride de
México, S. de R.L. de C.V. (the “Borrower”), entered into a secured revolving
credit agreement of up to $75 million. Obligations under this agreement
are
secured by a security interest in and lien upon all capital stock and other
equity interests of the Company’s Mexico subsidiaries. All the obligations of
the Borrower are supported by an unconditional guaranty by the Company.
All
available funds had been borrowed at September 30, 2006.
We
also maintain operating leases for various types of equipment, some of
which
contain residual value guarantees for the market value of assets at the
end of
the term of the lease. The terms of the lease maturities range from one
to seven
years. We estimate the maximum potential amount of the residual value guarantees
is approximately $17.4 million; however, the actual amount would be offset
by
any recoverable amount based on the fair market value of the underlying
leased
assets. No liability has been recorded related to this contingency as the
likelihood of payments under these guarantees is not considered to be probable
and the fair value of the guarantees is immaterial. We historically have
not
experienced significant payments under similar residual guarantees.
At
September 30, 2006, our working capital increased to $528.8 million and
our
current ratio increased to 1.92 to 1, compared with working capital of
$404.6
million and a current ratio of 1.68 to 1 at October 1, 2005, primarily
due to
higher cash balances, investments held for sale, and income tax receivable
and
lower income tax payables.
53
Pilgrim's
Pride Corporation
September
30, 2006
Trade
accounts and other receivables were $263.1 million at September 30, 2006,
compared to $288.5 million at October 1, 2005. The $25.4 million, or 8.8%,
decrease in trade accounts and other receivables was primarily due to changes
in
sales mix and increased collection activity.
Inventories
were $585.9 million at September 30, 2006, compared to $527.3 million at
October
1, 2005. The $58.6 million, or 11.1%, increase in inventories was primarily
due
to increased product costs in finished chicken products and live inventories
as
a result of higher feed ingredient costs.
Accounts
payable increased $11.8 million to $293.7 million at September 30, 2006,
compared to $281.9 million at October 1, 2005. The increase was primarily
due to
higher feed ingredient costs and timing of payments.
Accrued
liabilities decreased $15.3 million or 5.3% to $272.8 million compared
to $288.1
million at October 1, 2005. This decrease is due primarily to decreases
in our
profit-based retirement and compensation plans.
Income
taxes payable decreased $55.3 million to a $39.2 million receivable due
to the
net loss in fiscal 2006 which will result in the refund of previous tax
payments.
Cash
flows provided by operating activities were $30.4 million and $493.1 million
for
fiscal years 2006 and 2005, respectively. The decrease in cash flows provided
by
operating activities for fiscal 2006 when compared to fiscal 2005 was primarily
due to decreases in our net income in fiscal 2006 and higher
inventories.
Cash
flows provided by (used in) investing activities were ($32.3) million and
($417.6) million for the fiscal years 2006 and 2005, respectively. Capital
expenditures (excluding business acquisitions) of $143.8 million and $116.6
million for fiscal years 2006 and 2005, respectively, were primarily incurred
to
acquire and expand certain facilities, improve efficiencies, reduce costs
and
for the routine replacement of equipment. Cash was used to purchase investment
securities of $318.3 million in fiscal 2006 and $305.5 million in fiscal
2005.
Cash proceeds in fiscal 2006 from the sale or maturity of investment securities
was $490.8 million. We anticipate spending approximately $140 million to
$160
million in fiscal 2007 to improve efficiencies and for the routine replacement
of equipment at our current operations. We expect to finance such expenditures
with available cash and operating cash flows and existing revolving/term
and
revolving credit facilities.
Cash
flows provided by (used in) financing activities were $(38.8) million and
$18.9
million for the fiscal years 2006 and 2005, respectively. The decrease
in cash
provided by financing activities for fiscal year 2006, when compared to
fiscal
year 2005, was attributable to the $1 per share special cash dividend given
shareholders in the second quarter of fiscal year 2006.
We
are a party to many routine contracts in which we provide general indemnities
in
the normal course of business to third parties for various risks. Among
other
considerations, we have not recorded a liability for any of these indemnities
as
based upon the likelihood of payment; the fair value of such indemnities
is
immaterial.
54
Pilgrim's
Pride Corporation
September
30, 2006
Our
loan agreements generally obligate us to reimburse the applicable lender
for
incremental increased costs due to a change in law that imposes (i) any
reserve
or special deposit requirement against assets of, deposits with or credit
extended by such lender related to the loan, (ii) any tax, duty or other
charge
with respect to the loan (except standard income tax) or (iii) capital
adequacy
requirements. In addition, some of our loan agreements contain a withholding
tax
provision that requires us to pay additional amounts to the applicable
lender or
other financing party, generally if withholding taxes are imposed on such
lender
or other financing party as a result of a change in the applicable tax
law.
These increased cost and withholding tax provisions continue for the entire
term
of the applicable transaction, and there is no limitation on the maximum
additional amounts we could be obligated to pay under such provisions.
Any
failure to pay amounts due under such provisions generally would trigger
an
event of default, and, in a secured financing transaction, would entitle
the
lender to foreclose upon the collateral to realize the amount due.
Off-Balance
Sheet Arrangements
On
June 29, 1999, the Camp County Industrial Development Corporation issued
$25.0
million of variable-rate environmental facilities revenue bonds supported
by
letters of credit obtained by us. We may draw from these proceeds over
the
construction period for new sewage and solid waste disposal facilities
at a
poultry by-products plant to be built in Camp County, Texas. We are not
required
to borrow the full amount of the proceeds from these revenue bonds. All
amounts
borrowed from these funds will be due in 2029. The revenue bonds are supported
by letters of credit obtained by us under our revolving credit facilities
which
are secured by our domestic chicken inventories. The bonds will be recorded
as
debt of the Company if and when they are spent to fund
construction.
We
maintain a Receivables Purchase Agreement under which we can sell on a
revolving
basis up to $125.0 million of certain trade receivables (the “Pooled
Receivables”) to a special purpose corporation wholly-owned by us, which in turn
sells a percentage ownership interest to third parties. This facility matures
on
June 26, 2008. At September 30, 2006 and at October 1, 2005 there were
no Pooled
Receivables sold. As of September 30, 2006, the full amount of the facility
was
available.
55
Pilgrim's
Pride Corporation
September
30, 2006
Contractual
Obligations and Guarantees.
Obligations
under long-term debt and non-cancelable operating leases at September 30,
2006
were as follows (in millions):
|
Payments
Due By Period
|
|||||||||||||||
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years(b)
|
|
||||||||||
Long-term
debt(a)
|
$
|
565.2
|
$
|
10.3
|
$
|
20.4
|
$
|
378.6
|
$
|
155.9
|
||||||
Guarantee
fees
|
9.5
|
1.5
|
2.7
|
2.4
|
2.9
|
|||||||||||
Operating
leases
|
93.9
|
30.0
|
43.0
|
20.3
|
0.6
|
|||||||||||
Purchase
obligations
|
28.1
|
28.1
|
--
|
--
|
--
|
|||||||||||
Total
|
$
|
696.7
|
$
|
69.9
|
$
|
66.1
|
$
|
401.3
|
$
|
159.4
|
(a) |
Excludes
$23.4 million in letters of credit outstanding related to normal
business
transactions.
|
(b)
To the extent the Company borrows under the credit facilities described
in “Note
E - Notes Payable and Long Term Debt” of the Company’s Consolidated Financial
Statements there will be additional contractual obligations of more than
5
years.
Critical
Accounting Policies and Estimates
General.
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the U.S. The preparation
of
these financial statements requires us to make estimates and judgments
that
affect the reported amounts of assets, liabilities, revenues and expenses.
On an
ongoing basis, we evaluate our estimates, including those related to revenue
recognition, customer programs and incentives, allowance for doubtful accounts,
inventories, income taxes and product recall accounting. We base our estimates
on historical experience and on various other assumptions that are believed
to
be reasonable under the circumstances, the results of which form the basis
for
making judgments about the carrying values of assets and liabilities that
are
not readily apparent from other sources. Actual results may differ from
these
estimates under different assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial
statements.
Revenue
Recognition.
Revenue is recognized upon shipment and transfer of ownership of the product
to
the customer and is recorded net of estimated incentive offerings including
special pricing agreements, promotions and other volume-based incentives.
Revisions to these estimates are charged back to net sales in the period
in
which the facts that give rise to the revision become known.
56
Pilgrim's
Pride Corporation
September
30, 2006
Inventory.
Live poultry inventories are stated at the lower of cost or market and
breeder
hens at the lower of cost, less accumulated amortization, or market. The
costs
associated with breeder hens are accumulated up to the production stage
and
amortized over their productive lives using the unit-of-production method.
Finished poultry products, feed, eggs and other inventories are stated
at the
lower of cost (first-in, first-out method) or market. We record valuations
and
adjustments for our inventory and for estimated obsolescence at or equal
to the
difference between the cost of inventory and the estimated market value
based
upon known conditions affecting inventory obsolescence, including significantly
aged products, discontinued product lines, or damaged or obsolete products.
We
allocate meat costs between our various finished poultry products based
on a
by-product costing technique that reduces the cost of the whole bird by
estimated yields and amounts to be recovered for certain by-product parts.
This
primarily includes leg quarters, wings, tenders and offal, which are carried
in
inventory at the estimated recovery amounts, with the remaining amount
being
reflected as our breast meat cost. Generally, the Company performs an evaluation
of whether any lower of cost or market adjustments are required based on
a
number of factors, including: (i) pools of related inventory, (ii) product
continuation or discontinuation, (iii) estimated market selling prices
and (iv)
expected distribution channels. If actual market conditions or other factors
are
less favorable than those projected by management, additional inventory
adjustments may be required.
Property,
Plant and Equipment. In
accordance with Statement of Financial Accounting Standards No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets and for Long-Lived
Assets to
be Disposed Of” (“SFAS
144”), the Company records impairment charges on long-lived assets used in
operations when events and circumstances indicate that the assets may be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. The impairment
charge
is determined based upon the amount the net book value of the assets exceeds
their fair market value. In making these determinations, the Company utilizes
certain assumptions, including, but not limited to: (i) future cash flows
estimates expected to be generated by these assets, which are based on
additional assumptions such as asset utilization, remaining length of service
and estimated salvage values (ii) estimated fair market value of the assets
and
(iii) determinations with respect to the lowest level of cash flows relevant
to
the respective impairment test, generally groupings of related operational
facilities.
Litigation
and Contingent Liabilities. The
Company is subject to lawsuits, investigations and other claims related
to wage
and hour/labor, securities, environmental, product and other matters, and
is
required to assess the likelihood of any adverse judgments or outcomes
to these
matters as well as potential ranges of probable losses. A determination
of the
amount of reserves required, including legal defense costs, if any, for
these
contingencies is made when losses are determined to be probable and reasonably
estimatible and after considerable analysis of each individual issue. These
reserves may change in the future due to favorable or adverse judgments,
changes
in the Company’s assumptions, the effectiveness of strategies or other factors
beyond the Company’s control.
Accrued
Self Insurance.
Insurance expense for casualty claims and employee-related health care
benefits
are estimated using historical experience and actuarial estimates. Stop-loss
coverage is maintained with third party insurers to limit the Company’s total
exposure. Certain categories of claim liabilities are actuarially determined.
The assumptions used to arrive at periodic expenses are reviewed regularly
by
management. However, actual expenses could differ from these estimates
and could
result in adjustments to be recognized.
57
Pilgrim's
Pride Corporation
September
30, 2006
Purchase
Price Accounting.
The Company allocates the total purchase price in connection with acquisitions
to assets and liabilities based upon their estimated fair values. For property,
plant and equipment and intangible assets other than goodwill, for significant
acquisitions, the Company has historically relied upon the use of third
party
valuation experts to assist in the estimation of fair values. Historically,
the
carrying value of acquired accounts receivable, inventory and accounts
payable
have approximated their fair value as of the date of acquisition, though
adjustments are made within purchase price accounting to the extent needed
to
record such assets and liabilities at fair value. With respect to accrued
liabilities, the Company uses all available information to make its best
estimate of the fair value of the acquired liabilities and, when necessary,
may
rely upon the use of third party actuarial experts to assist in the estimation
of fair value for certain liabilities, primarily self-insurance
accruals.
Income
Taxes.
We account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109,
“Accounting for Income Taxes” (“SFAS
109”), which requires that deferred tax assets and liabilities be recognized
for
the effect of temporary differences between the book and tax bases of recorded
assets and liabilities. Taxes are provided for international subsidiaries
based
on the assumption that their earnings are indefinitely reinvested in foreign
subsidiaries and as such deferred taxes are not provided for in U.S. income
taxes that would be required in the event of distribution of these earnings,
except that we provide deferred taxes on the earnings of international
subsidiaries that we intend to repatriate or otherwise deem are not indefinitely
reinvested. SFAS No. 109 also requires that deferred tax assets be reduced
by a
valuation allowance if it is more likely than not that some portion or
all of
the deferred tax asset will not be realized. We review the recoverability
of any
tax assets recorded on the balance sheet, primarily operating loss
carryforwards, based on both historical and anticipated earnings levels
of the
individual operations and provide a valuation allowance when it is more
likely
than not that amounts will not be recovered.
The
Company has reserves for taxes that may become payable in future years
as a
result of audits by tax authorities. Although the Company believes that
the
positions taken on previously filed tax returns are reasonable, it nevertheless
has established tax reserves in recognition that various taxing authorities
may
challenge the positions taken by the Company resulting in additional liabilities
for tax and interest. The tax reserves are reviewed as circumstances warrant
and
adjusted as events occur that affect the Company’s potential liability for
additional taxes, such as lapsing of applicable statutes of limitations,
conclusion of tax audits, additional exposure based on current calculations,
identification of new issues, release of administrative guidance, or rendering
of a court decision affecting a particular tax issue.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
Market
Risk Sensitive Instruments and Positions
The
risk inherent in our market risk sensitive instruments and positions is
the
potential loss arising from adverse changes in the price of feed ingredients,
marketable equity security prices, foreign currency exchange rates and
interest
rates as discussed below. The sensitivity analyses presented do not consider
the
effects that such adverse changes may have on overall economic activity,
nor do
they consider additional actions our management may take to mitigate our
exposure to such changes. Actual results may differ.
Feed
Ingredients. We
purchase certain commodities, primarily corn and soybean meal. As a result,
our
earnings are affected by changes in the price and availability of such
feed
ingredients. As market conditions dictate, we will from time to time lock-in
future feed ingredient prices using various hedging techniques, including
forward purchase agreements with suppliers and futures contracts. We do
not use
such financial instruments for trading purposes and are not a party to
any
leveraged derivatives. Market risk is estimated as a hypothetical 10% increase
in the weighted-average cost of our primary feed ingredients as of September
30,
2006. Based on our feed consumption during fiscal 2006, such an increase
would
have resulted in an increase to cost of sales of approximately $132.0
million.
58
Pilgrim's
Pride Corporation
September
30, 2006
Foreign
Currency.
Our earnings are affected by foreign exchange rate fluctuations related
to the
Mexican peso net monetary position of our Mexico subsidiaries. We manage
this
exposure primarily by attempting to minimize our Mexican peso net monetary
position, but from time to time, we have also considered executing hedges
to
help minimize this exposure. Such instruments, however, have historically
not
been economically feasible. We are also exposed to the effect of potential
exchange rate fluctuations to the extent that amounts are repatriated from
Mexico to the U.S. However, we currently anticipate that the majority of
the
future cash flows of our Mexico subsidiaries will be reinvested in our
Mexico
operations. In addition, the Mexican peso exchange rate can directly and
indirectly impact our results of operations and financial position in several
ways, including potential economic recession in Mexico resulting from a
devalued
peso. The impact on our financial position and results of operations resulting
from a hypothetical change in the exchange rate between the U.S. dollar
and the
Mexican peso cannot be reasonably estimated. Foreign currency exchange
gains and
losses, representing the change in the U.S. dollar value of the net monetary
assets of our Mexico subsidiaries denominated in Mexican pesos, was a loss
of
$0.1 million in fiscal 2006, a gain of $0.5 million in fiscal 2005, and
a loss
of $0.2 million in fiscal 2004. On September 30, 2006, the Mexican peso
closed
at 11.01 to 1 U.S. dollar, compared to 10.77 at October 1, 2005. No assurance
can be given as to how future movements in the peso could affect our future
earnings.
Interest
Rates.
Our earnings are also affected by changes in interest rates due to the
impact
those changes have on our variable-rate debt instruments. We had variable-rate
debt instruments representing approximately 11.3% of our long-term debt
at
September 30, 2006. Holding other variables constant, including levels
of
indebtedness, a 25 basis points increase in interest rates would have increased
our interest expense by $0.1 million for fiscal 2006. These amounts are
determined by considering the impact of the hypothetical interest rates
on our
variable-rate long-term debt at September 30, 2006.
Market
risk for fixed-rate long-term debt is estimated as the potential increase
in
fair value resulting from a hypothetical 25 basis points decrease in interest
rates and amounts to approximately $0.6 million as of September 30, 2006,
using
discounted cash flow analysis.
Impact
of Inflation. Due
to low to moderate inflation in the U.S. and Mexico and our rapid inventory
turnover rate, the results of operations have not been significantly affected
by
inflation during the past three-year period.
Item
8. Financial Statements and Supplementary Data
The
consolidated financial statements together with the report of independent
registered public accounting firm and financial statement schedule are
included
on pages 76 through 102 of this report. Financial statement schedules other
than
those included herein have been omitted because the required information
is
contained in the consolidated financial statements or related notes, or
such
information is not applicable.
59
Pilgrim's
Pride Corporation
September
30, 2006
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
Applicable.
Item
9A. Controls and Procedures
As
of September 30, 2006, an evaluation was performed under the supervision
and
with the participation of the Company’s management, including the Chairman,
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the
design and operation of the Company’s “disclosure controls and procedures” (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of
1934 (the “Exchange Act”)). Based on that evaluation, the Company’s management,
including the Chairman, Chief Executive Officer and Chief Financial Officer,
concluded the Company’s disclosure controls and procedures were effective to
ensure that information required to be disclosed by the Company in reports
that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms, and that information we are required to disclose
in
our reports filed with the Securities and Exchange Commission is
accumulated and communicated to our management, including our Chairman,
Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. There was no change in
the
Company’s internal controls over financial reporting during the Company’s most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
60
Pilgrim's
Pride Corporation
September
30, 2006
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Pilgrim's
Pride Corporation’s (“PPC”) management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such
term is
defined in Exchange act Rules 13a-15(f). PPC’s internal control system is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with
generally accepted accounting principles.
Under
the supervision and with the participation of management, including its
principal executive officer and principal financial officer, PPC’s management
assessed the design and operating effectiveness of internal control over
financial reporting as of September 30, 2006 based on the framework set
forth in
Internal
Control-Integrated Framework issued
by the Committee of Sponsoring Organization of the Treadway
Commission.
Based
on this assessment, management concluded that PPC’s internal control over
financial reporting was effective as of September 30, 2006. Ernst & Young
LLP, an independent registered public accounting firm, has issued an attestation
report on management’s assessment of the Company’s internal control over
financial reporting as of September 30, 2006. That report is included
herein.
/s/
Lonnie “Bo” Pilgrim
Lonnie
“Bo” Pilgrim
Chairman
of the Board of Directors
/s/
O. B. Goolsby, Jr.
O.
B. Goolsby, Jr.
President,
Chief
Executive Officer
Director
/s/
Richard A. Cogdill
Richard
A. Cogdill
Chief
Financial Officer
Secretary
and Treasurer
Director
61
Pilgrim's
Pride Corporation
September
30, 2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The
Board of Directors and Stockholders
Pilgrim’s
Pride Corporation
We
have audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting,
that Pilgrim's Pride Corporation maintained effective internal control
over
financial reporting as of September 30, 2006, based on criteria established
in
Internal
Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Pilgrim's Pride Corporation’s management is responsible for
maintaining effective internal control over financial reporting and for
its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In
our opinion, management’s assessment that Pilgrim's Pride Corporation maintained
effective internal control over financial reporting as of September 30,
2006, is
fairly stated, in all material respects, based on the COSO criteria. Also,
in
our opinion, Pilgrim's Pride Corporation maintained, in all material respects,
effective internal control over financial reporting as of September 30,
2006,
based on the COSO criteria.
62
Pilgrim's
Pride Corporation
September
30, 2006
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets
of
Pilgrim's Pride Corporation as of September 30, 2006 and October 1, 2005,
and
the related consolidated statements of income (loss), stockholders’ equity, and
cash flows for each of the three years in the period ended September 30,
2006,
of Pilgrim's Pride Corporation, and our report dated November 16, 2006,
expressed an unqualified opinion thereon.
Ernst
& Young LLP
Dallas,
Texas
November
16, 2006
63
Pilgrim's
Pride Corporation
September
30, 2006
Item
9B. Other Information
Not
Applicable.
PART
III
Item
10. Directors and Executive Officers of the Registrant
Certain
information regarding our executive officers has been presented under “Executive
Officers” included in Item 1. “Business,” above.
Reference
is made to the section entitled “Election of Directors” of the Company’s Proxy
Statement for its 2007 Annual Meeting of Stockholders, which section is
incorporated herein by reference.
Reference
is made to the section entitled “Section 16(a) Beneficial Ownership Reporting
Compliance” of the Company’s Proxy Statement for its 2007 Annual Meeting of
Stockholders, which section is incorporated herein by reference.
We
have adopted a Code of Business Conduct and Ethics, which applies to all
employees, including our Chief Executive Officer and our Chief Financial
Officer
and Principal Accounting Officer. The full text of our Code of Business
Conduct
and Ethics is published on our website, at www.pilgrimspride.com,
under the “Investors-Corporate Governance” caption. We intend to disclose future
amendments to, or waivers from, certain provisions of this Code on our
website
within four business days following the date of such amendment or
waiver.
Item
11. Executive
Compensation
See
Item 13. “Certain Relationships and Related Transactions.”
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
See
Item 13. “Certain Relationships and Related Transactions.”
As
of September 30, 2006, the Company did not have any compensation plans
(including individual compensation arrangements) under which equity securities
of the Company are authorized for issuance by the Company.
Item
13. Certain
Relationships and Related Transactions
Additional
information responsive to Items 10, 11, 12 and 13 is incorporated by reference
from the sections entitled “Security Ownership,” “Committees of the Board of
Directors,” “Election of Directors,” “Executive Compensation,” “Compensation
Committee Interlocks and Insider Participation” and “Certain Transactions” of
the Company’s Proxy Statement for its 2007 Annual Meeting of
Stockholders.
64
Pilgrim's
Pride Corporation
September
30, 2006
Item
14. Principal Accountant Fees and Services
The
information required by this item is incorporated herein by reference
from the
section entitled “Independent Auditor Fee Information” of the Company’s Proxy
Statement for its 2007 Annual Meeting of Stockholders.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
(a)
|
Financial
Statements
|
|
(1)
|
The
financial statements and schedules listed in the accompanying
index to
financial statements and schedules are filed as part of this
report.
|
|
(2)
|
All
other schedules for which provision is made in the applicable
accounting
regulations of the SEC are not required under the related
instructions or
are not applicable and therefore have been omitted.
|
|
(3)
|
The
financial statements schedule entitled “Valuation and Qualifying Accounts
and Reserves” is filed as part of this report on page
102.
|
|
(b)
|
Exhibits
|
Exhibit
Number
2.1
|
Agreement
and Plan of Reorganization dated September 15, 1986, by and
among
Pilgrim’s Pride Corporation, a Texas corporation; Pilgrim’s Pride
Corporation, a Delaware corporation; and Doris Pilgrim Julian,
Aubrey Hal
Pilgrim, Paulette Pilgrim Rolston, Evanne Pilgrim, Lonnie
“Bo” Pilgrim,
Lonnie Ken Pilgrim, Greta Pilgrim Owens and Patrick Wayne
Pilgrim
(incorporated by reference from Exhibit 2.1 to the Company’s Registration
Statement on Form S-1 (No. 33-8805) effective November 14,
1986).
|
|
2.2
|
Agreement
and Plan of Merger dated September 27, 2000 (incorporated
by reference
from Exhibit 2 of WLR Foods, Inc.’s Current Report on Form 8-K (No.
000-17060) dated September 28, 2000).
|
|
3.1
|
Certificate
of Incorporation of the Company, as amended (incorporated
by reference
from Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the
fiscal year ended October 2, 2004).
|
|
3.2
|
Amended
and Restated Corporate Bylaws of the Company (incorporated
by reference
from Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (No.
333-111929) filed on January 15, 2004).
|
|
4.1
|
Certificate
of Incorporation of the Company, as amended (included as
Exhibit
3.1).
|
|
4.2
|
Amended
and Restated Corporate Bylaws of the Company (included as
Exhibit
3.2).
|
|
4.3
|
Indenture
dated as of August 9, 2001 by and between Pilgrim’s Pride Corporation and
The Chase Manhattan Bank relating to Pilgrim’s Pride’s 9 5/8% Senior Notes
Due 2011 (incorporated by reference from Exhibit 4.1 of the
Company’s
Current Report on Form 8-K (No. 001-09273) dated August 9,
2001).
|
65
Pilgrim's
Pride Corporation
September
30, 2006
4.4
|
First
Supplemental Indenture dated as of August 9, 2001 by and
between Pilgrim’s
Pride Corporation and The Chase Manhattan Bank relating to
Pilgrim’s
Pride’s 9 5/8% Senior Notes Due 2011 (incorporated by reference
from
Exhibit 4.2 to the Company’s Current Report on Form 8-K (No. 001-09273)
dated August 9, 2001).
|
|
4.5
|
Form
of 9 5/8% Senior Note Due 2011 (incorporated by reference
from Exhibit 4.3
of the Company’s Current Report on Form 8-K (No. 001-09273) dated August
9, 2001).
|
|
4.6
|
Indenture,
dated November 21, 2003, between Pilgrim's Pride Corporation
and The Bank
of New York as Trustee relating to Pilgrim’s Pride’s 9 ¼% Senior Notes due
2013 (incorporated by reference from Exhibit 4.1 of the Company's
Registration Statement on Form S-4 (No. 333-111975) filed on January 16,
2004).
|
|
4.7
|
Registration
Rights Agreement, dated as of November 6, 2003, among Pilgrim's
Pride
Corporation and Credit Suisse First Boston LLC relating to
Pilgrim’s
Pride’s 9 ¼% Senior Notes due 2013 (incorporated by reference from Exhibit
4.2 of the Company's Registration Statement on Form S-4 (No.
333-111975)
filed on January 16, 2004).
|
|
4.8
|
Form
of 9 ¼% Note due 2013 (incorporated by reference from Exhibit 4.3
of the
Company's Registration Statement on Form S-4 (No. 333-111975)
filed on
January 16, 2004).
|
|
10.1
|
Pilgrim’s
Industries, Inc. Profit Sharing Retirement Plan, restated
as of July 1,
1987 (incorporated by reference from Exhibit 10.1 of the
Company’s Form
8-K filed on July 1, 1992). …
|
|
10.2
|
Senior
Executive Performance Bonus Plan of the Company (incorporated
by reference
from Exhibit A in the Company’s Proxy Statement dated December 13, 1999).
…
|
|
10.3
|
Aircraft
Lease Extension Agreement between B.P. Leasing Co. (L.A.
Pilgrim,
individually) and Pilgrim’s Pride Corporation (formerly Pilgrim’s
Industries, Inc.) effective November 15, 1992 (incorporated
by reference
from Exhibit 10.48 of the Company’s Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
|
|
10.4
|
Broiler
Grower Contract dated May 6, 1997 between Pilgrim’s Pride Corporation and
Lonnie “Bo” Pilgrim (Farm 30) (incorporated by reference from Exhibit
10.49 of the Company’s Quarterly Report on Form 10-Q for the three months
ended March 29, 1997).
|
|
10.5
|
Commercial
Egg Grower Contract dated May 7, 1997 between Pilgrim’s Pride Corporation
and Pilgrim Poultry G.P. (incorporated by reference from
Exhibit 10.50 of
the Company’s Quarterly Report on Form 10-Q for the three months ended
March 29, 1997).
|
|
10.6
|
Agreement
dated October 15, 1996 between Pilgrim’s Pride Corporation and Pilgrim
Poultry G.P. (incorporated by reference from Exhibit 10.23
of the
Company’s Quarterly Report on Form 10-Q for the three months ended
January 2, 1999).
|
66
Pilgrim's
Pride Corporation
September
30, 2006
10.7
|
Heavy
Breeder Contract dated May 7, 1997 between Pilgrim’s Pride Corporation and
Lonnie “Bo” Pilgrim (Farms 44, 45 & 46) (incorporated by reference
from Exhibit 10.51 of the Company’s Quarterly Report on Form 10-Q for the
three months ended March 29, 1997).
|
|
10.8
|
Broiler
Grower Contract dated January 9, 1997 by and between Pilgrim’s Pride and
O.B. Goolsby, Jr. (incorporated by reference from Exhibit
10.25 of the
Company’s Registration Statement on Form S-1 (No. 333-29163) effective
June 27, 1997).
|
|
10.9
|
Broiler
Grower Contract dated January 15, 1997 by and between Pilgrim’s Pride
Corporation and B.J.M. Farms (incorporated by reference from
Exhibit 10.26
of the Company’s Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
|
|
10.10
|
Broiler
Grower Agreement dated January 29, 1997 by and between Pilgrim’s Pride
Corporation and Clifford E. Butler (incorporated by reference
from Exhibit
10.27 of the Company’s Registration Statement on Form S-1 (No. 333-29163)
effective June 27, 1997).
|
|
10.11
|
Receivables
Purchase Agreement between Pilgrim’s Pride Funding Corporation, as Seller,
Pilgrim’s Pride Corporation, as Servicer, Pooled Accounts Receivable
Capital Corporation, as Purchaser, and Nesbitt Burns Securities
Inc., as
Agent (incorporated by reference from Exhibit 10.33 of the
Company’s
Quarterly Report on Form 10-Q for the three months ended
June 27,
1998).
|
|
10.12
|
Purchase
and Contribution Agreement dated as of June 26, 1998 between
Pilgrim’s
Pride Funding Corporation and Pilgrim’s Pride Corporation (incorporated by
reference from Exhibit 10.34 of the Company’s Quarterly Report on Form
10-Q for the three months ended June 27, 1998).
|
|
10.13
|
Guaranty
Fee Agreement between Pilgrim’s Pride Corporation and Pilgrim Interests,
LTD., dated June 11, 1999 (incorporated by reference from
Exhibit 10.24 of
the Company’s Annual Report on Form 10-K for the fiscal year ended October
2, 1999).
|
|
10.14
|
Broiler
Production Agreement between Pilgrim's Pride Corporation
and Lonnie “Bo”
Pilgrim dated November 15, 2005 (incorporated by reference
from Exhibit
99.1 of the Company’s Current Report on Form 8-K dated November 10,
2005).
|
|
10.15
|
Commercial
Property Lease dated December 29, 2000 between Pilgrim’s Pride Corporation
and Pilgrim Poultry G.P. (incorporated by reference from
Exhibit 10.30 of
the Company’s Quarterly Report on Form 10-Q for the three months ended
December 30, 2000).
|
|
10.16
|
Revolving
Credit Agreement, made as of September 7, 2001 by and between
Grupo
Pilgrim’s Pride Funding S. de R.L. de C.V., Comerica Bank and Comerica
Bank Mexico, S.A., Institucion de Banca Multiple (incorporated
by
reference from Exhibit 10.27 of the Company’s Annual Report on Form 10-K
for the fiscal year ended September 29,
2001).
|
67
Pilgrim's
Pride Corporation
September
30, 2006
10.17
|
Amendment
No. 1 dated as of July 12, 2002 to Receivables Purchase Agreement
dated as
of June 26, 1998 among Pilgrim’s Pride Funding Corporation, the Company,
Fairway Finance Corporation (as successor in interest to
Pooled Accounts
Receivable Capital Corporation) and BMO Nesbitt Burns Corp.
(f/k/a Nesbitt
Burns Securities Inc.). (incorporated by reference from Exhibit
10.32 of
the Company’s Annual Report on Form 10-K filed on December 6,
2002).
|
|
10.18
|
Retirement
agreement dated November 11, 2002 between Pilgrim’s Pride Corporation and
David Van Hoose (incorporated by reference from Exhibit 10.34
of the
Company’s Annual Report on Form 10-K filed on December 6,
2002).
|
|
10.19
|
Amendment
No. 3 dated as of July 18, 2003 to Receivables Purchase Agreement
dated as
of June 26, 1998 between Pilgrim’s Pride Funding Corporation (“Seller”),
Pilgrim’s Pride Corporation as initial Servicer, Fairway Finance
Corporation (as successor in interest to Pooled Accounts
Receivable
Capital Corporation) (“Purchaser”) and Harris Nesbitt Corporation as agent
for the purchaser (incorporated by reference from Exhibit
10.1 of the
Company’s Quarterly Report on Form 10-Q filed July 23,
2003).
|
|
10.20
|
Stock
Purchase Agreement dated June 7, 2003 by and between Pilgrim’s Pride
Corporation and ConAgra Foods, Inc. (the “Stock Purchase Agreement”)
(incorporated by reference from Exhibit 99.2 of the Company’s Current
Report on Form 8-K dated June 7, 2003).
|
|
10.21
|
Exhibit
1.1(a) to the Stock Purchase Agreement - Applicable Accounting
Principles
(incorporated by reference from Exhibit 99.3 of the Company’s Current
Report on Form 8-K dated June 7, 2003).
|
|
10.22
|
Exhibit
1.1(b) to the Stock Purchase Agreement - Business Facilities
(incorporated
by reference from Exhibit 99.4 of the Company’s Current Report on Form 8-K
dated June 7, 2003).
|
|
10.23
|
Exhibit
1.1(c) to the Stock Purchase Agreement - ConAgra Supply Agreement
(incorporated by reference from Exhibit 99.5 of the Company’s Current
Report on Form 8-K dated June 7, 2003).
|
|
10.24
|
Exhibit
1.1(d) to the Stock Purchase Agreement - Environmental License
Agreement
(incorporated by reference from Exhibit 99.6 of the Company’s Current
Report on Form 8-K dated June 7, 2003).
|
|
10.25
|
Exhibit
1.1(f) to the Stock Purchase Agreement - Molinos Supply Agreement
(incorporated by reference from Exhibit 99.7 of the Company’s Current
Report on Form 8-K dated June 7, 2003).
|
|
10.26
|
Exhibit
1.1(g) to the Stock Purchase Agreement - Montgomery Supply
Agreement
(incorporated by reference from Exhibit 99.8 of the Company’s Current
Report on Form 8-K dated June 7, 2003).
|
|
10.27
|
Exhibit
1.1(i) to the Stock Purchase Agreement - Registration Rights
Agreements
(incorporated by reference from Exhibit 99.9 of the Company’s Current
Report on Form 8-K dated June 7, 2003).
|
|
10.28
|
Exhibit
1.1(m) to the Stock Purchase Agreement - Transition Trademark
License
Agreement (incorporated by reference from Exhibit 99.11 of
the Company’s
Current Report on Form 8-K dated June 7,
2003).
|
68
Pilgrim's
Pride Corporation
September
30, 2006
10.29
|
Exhibit
9.4.3 to the Stock Purchase Agreement - Retained Assets (incorporated
by
reference from Exhibit 99.14 of the Company’s Current Report on Form 8-K
dated June 7, 2003).
|
|
10.30
|
Amendment
No. 1 to Stock Purchase Agreement dated August 11, 2003,
between ConAgra
Foods, Inc. and Pilgrim’s Pride Corporation (incorporated by reference
from Exhibit 10.1 of the Company’s Current Report on Form 8-K dated August
12, 2003).
|
|
10.31
|
Amendment
No. 2 to Stock Purchase Agreement dated August 20, 2003,
between ConAgra
Foods, Inc. and Pilgrim’s Pride Corporation (incorporated by reference
from Annex F of the Company’s Preliminary Proxy Statement filed October 6,
2003).
|
|
10.32
|
Agricultural
Lease between Pilgrim’s Pride Corporation (Lessor) and Patrick W. Pilgrim
(Tenant) dated May 1, 2003 (incorporated by reference from
Exhibit 10.15
of the Company’s Quarterly Report on Form 10-Q filed July 23,
2003).
|
|
10.33
|
First
Amendment to the Revolving Credit Agreement made as of September
7, 2001
by and between Grupo Pilgrim’s Pride Funding S. de R.L. de C.V., Comerica
Bank Mexico, S.A., Institucion de Banca Multiple dated as
of June 28, 2002
(incorporated by reference from Exhibit 10.1 of the Company’s Quarterly
Report on Form 10-Q/A filed August 12, 2003).
|
|
10.34
|
Second
Amendment to the Revolving Credit Agreement made as of September
7, 2001
by and between Grupo Pilgrim’s Pride Funding S. de R.L. de C.V., Comerica
Bank Mexico, S.A., Institucion de Banca Multiple dated as
of September 10,
2002 (incorporated by reference from Exhibit 10.2 of the
Company’s
Quarterly Report on Form 10-Q/A filed August 12, 2003).
|
|
10.35
|
Third
Amendment to the Revolving Credit Agreement made as of September
7, 2001
by and between Grupo Pilgrim’s Pride Funding S. de R.L. de C.V., Comerica
Bank Mexico, S.A., Institucion de Banca Multiple dated as
of December 13,
2002 (incorporated by reference from Exhibit 10.3 of the
Company’s
Quarterly Report on Form 10-Q/A filed August 12, 2003).
|
|
10.36
|
Fourth
Amendment to the Revolving Credit Agreement made as of September
7, 2001,
by and between Grupo Pilgrim's Pride Funding S. de R.L. de
C.V., Comerica
Bank and Comerica Bank Mexico, S.A., Institucion de Banca
Multiple dated
as of November 18, 2003 (incorporated by reference from Exhibit
10.1 of
the Company's Quarterly Report on Form 10-Q filed February
4, 2004).
|
|
10.37
|
Fourth
Amended and Restated Note Purchase Agreement dated November
18, 2003,
among Pilgrim's Pride Corporation, John Hancock Life Insurance
Company,
ING Capital LLC and the other parties named therein (incorporated
by
reference from Exhibit 10.2 of the Company's Quarterly Report
on Form 10-Q
filed February 4, 2004).
|
|
10.38
|
Amendment
No. 3 to Stock Purchase Agreement, dated November 23, 2003,
between
Pilgrim's Pride Corporation and ConAgra Foods, Inc. (incorporated
by
reference from Exhibit 2.16 of the Company's Current Report
on Form 8-K
(No. 001-09273) dated December 8,
2003).
|
69
Pilgrim's
Pride Corporation
September
30, 2006
10.39
|
Amendment
No. 4 dated as of December 31, 2003 to Receivables Purchase
Agreement
dated as of June 26, 1998, among Pilgrim's Pride Funding
Corporation,
Pilgrim's Pride Corporation as initial Servicer, Fairway
Finance Company,
LLC (as successor to Fairway Finance Corporation) as purchaser
and Harris
Nesbitt Corp. (f/k/a BMO Nesbitt Burns Corp.) as agent for
the purchaser
(incorporated by reference from Exhibit 10.4 of the Company's
Quarterly
Report on Form 10-Q filed February 4, 2004).
|
|
10.40
|
Amendment
No. 1 dated as of December 31, 2003 to Purchase and Contribution
Agreement
dated as of June 26, 1998, between Pilgrim's Pride Funding
Corporation and
Pilgrim's Pride Corporation (incorporated by reference from
Exhibit 10.5
of the Company's Quarterly Report on Form 10-Q filed February
4,
2004).
|
|
10.41
|
Employee
Stock Investment Plan of the Company (incorporated by reference
from
Exhibit 4.1 of the Company's Registration Statement on Form
S-8 (No.
333-111929) filed on January 15, 2004). …
|
|
10.42
|
2004
Amended and Restated Credit Agreement, dated as of April
7, 2004, between
Pilgrim's Pride Corporation and CoBank, ACB, as lead arranger
and book
manager, and as administrative, documentation and collateral
agent and the
lenders from time to time parties thereto as lenders (incorporated
by
reference from Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q
filed May 4, 2004).
|
|
10.43
|
Third
Amended and Restated Secured Credit Agreement, dated April
7, 2004,
between Pilgrim's Pride Corporation and Harris Trust and
Savings Bank,
individually and as agent, and the lenders from time to time
parties
thereto as lenders (incorporated by reference from Exhibit
10.2 of the
Company's Quarterly Report on Form 10-Q filed May 4, 2004).
|
|
10.44
|
Fifth
Amendment to Revolving Credit Agreement made as of September
7, 2001, by
and among Grupo Pilgrim's Pride Funding S. de R.L. de C.V.,
Comerica Bank
and Comerica Bank Mexico, S.A., Institucion de Banca Multiple
dated as of
September 7, 2004 (incorporated by reference from Exhibit
10.1 of the
Company's Current Report on Form 8-K (No. 001-09273) filed
September 10,
2004).
|
|
10.45
|
Purchase
and Amendment Agreement between Pilgrim's Pride Corporation
and ConAgra
Foods, Inc. dated August 3, 2005 (incorporated by reference
from Exhibit
10.1 of the Company’s Current Report on Form 8-K dated August 4,
2005).
|
|
10.46
|
2005
Deferred Compensation Plan of the Company (incorporated by
reference from
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated December
27, 2004). …
|
|
10.47
|
First
Amendment to Third Amended and Restated Credit Agreement
dated November
25, 2005 between Pilgrim's Pride Corporation, Harris N.A.,
and the other
lenders party thereto (incorporated by reference from Exhibit
1.1 of the
Company's Current Report on Form 8-K dated December 5,
2005).
|
70
Pilgrim's
Pride Corporation
September
30, 2006
10.48
|
Second
Amendment to Credit Agreement dated November 28, 2005 between
Pilgrim's
Pride Corporation, CoBank, ACB, and certain syndication parties
thereto
(incorporated by reference from Exhibit 1.2 of the Company's
Current
Report on Form 8-K dated December 5, 2005).
|
|
10.49
|
Vendor
Service Agreement dated effective December 28, 2005 between
Pilgrim's
Pride Corporation and Pat Pilgrim (incorporated by reference
from Exhibit
10.2 of the Company's Current Report on Form 8-K dated January
6,
2006).
|
|
10.50
|
Transportation
Agreement dated effective December 28, 2005 between Pilgrim's
Pride
Corporation and Pat Pilgrim (incorporated by reference from
Exhibit 10.3
of the Company's Current Report on Form 8-K dated January
6,
2006).
|
|
10.51
|
Ground
Lease Agreement dated effective January 4, 2006 between Pilgrim's
Pride
Corporation and Pat Pilgrim (incorporated by reference from
Exhibit 10.4
of the Company's Current Report on Form 8-K dated January
6,
2006).
|
|
10.52
|
Credit
Agreement by and among the Avícola Pilgrim’s Pride de México, S. de R.L.
de C.V. (the "Borrower"), Pilgrim's Pride Corporation, certain
Mexico
subsidiaries of the Borrower, ING Capital LLC, and the lenders
signatory
thereto dated as of September 25, 2006 (incorporated by reference
from
Exhibit 10.1 of the Company's Current Report on Form 8-K
dated September
22, 2006).
|
|
10.53
|
Credit
Agreement by and among CoBank, ACB, Agriland, FCS and the
Company dated as
of September 21, 2006 (incorporated by reference from Exhibit
10.2 of the
Company's Current Report on Form 8-K dated September 22,
2006).
|
|
10.54
|
Pilgrim's
Pride Corporation $450,000,000 Senior Unsecured Increasing
Rate Bridge
Facility Commitment Letter from Lehman Brothers to the Company
dated
September 27, 2006 (incorporated by reference from Exhibit
10.3 of the
Company's Current Report on Form 8-K dated September 22,
2006).
|
|
10.55
|
Consent
of Harris N.A. pursuant to Third Amended and Restated Credit
Agreement
dated April 7, 2004.*
|
|
10.56
|
Consent
of Purchasers pursuant to Fourth Amended and Restated Purchase
Agreement
dated November 18, 2003.*
|
|
12
|
Ratio
of Earnings to Fixed Charges for the years ended September
30, 2006,
October 1, 2005, October 2, 2004, September 27, 2003, and
September 28,
2002.*
|
|
21
|
Subsidiaries
of Registrant.*
|
|
23
|
Consent
of Ernst & Young LLP.*
|
|
31.1
|
Certification
of Co-Principal
Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
Certification
of Co-Principal Executive Officer pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.*
|
|
31.3
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002.*
|
71
Pilgrim's
Pride Corporation
September
30, 2006
32.1
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
32.2
|
Certification
of Co-Principal Executive Officer of Pilgrim's Pride Corporation
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
32.3
|
Certification
of Chief Financial Officer of Pilgrim's Pride Corporation
pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.*
|
*Filed
herewith
…Represents
a management contract or compensation plan arrangement
72
Pilgrim's
Pride Corporation
September
30, 2006
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of
1934, the registrant has duly caused this report to be signed on its
behalf by
the undersigned, thereunto duly authorized on the 17th day of November
2006.
PILGRIM’S
PRIDE CORPORATION
By:
|
/s/
Richard A. Cogdill
|
Richard
A. Cogdill
|
|
Chief
Financial and Accounting Officer
|
73
Pilgrim's
Pride Corporation
September
30, 2006
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been
signed below by the following persons on behalf of the Registrant
and in the
capacities and on the date indicated.
Signature
|
Title
|
Date
|
/s/
Lonnie “Bo” Pilgrim
|
Chairman
of the Board
|
11/17/06
|
Lonnie
“Bo” Pilgrim
|
||
/s/
Clifford E. Butler
|
Vice
Chairman of the Board
|
11/17/06
|
Clifford
E. Butler
|
||
|
||
/s/
O.B. Goolsby, Jr.
|
President
|
11/17/06
|
O.B.
Goolsby, Jr.
|
Chief
Executive Officer
|
|
Director
|
||
/s/
Richard A. Cogdill
|
Chief
Financial Officer
|
11/17/06
|
Richard
A. Cogdill
|
Secretary
and Treasurer
|
|
Director
|
||
(Principal
Financial and Accounting Officer)
|
||
/s/
Lonnie Ken Pilgrim
|
Executive
Vice President,
|
11/17/06
|
Lonnie
Ken Pilgrim
|
Assistant
to Chairman
|
|
Director
|
||
/s/
Charles L. Black
|
Director
|
11/17/06
|
Charles
L. Black
|
||
/s/
Linda Chavez
|
Director
|
11/17/06
|
Linda
Chavez
|
||
/s/
S. Key Coker
|
Director
|
11/17/06
|
S.
Key Coker
|
||
/s/
Keith W. Hughes
|
Director
|
11/17/06
|
Keith
W. Hughes
|
||
74
Pilgrim's
Pride Corporation
September
30, 2006
Signature
|
Title
|
Date
|
/s/
Blake D. Lovette
|
Director
|
11/17/06
|
Blake
D. Lovette
|
||
/s/
Vance C. Miller, Sr.
|
Director
|
11/17/06
|
Vance
C. Miller, Sr.
|
||
/s/
James G. Vetter, Jr.
|
Director
|
11/17/06
|
James
G. Vetter, Jr.
|
||
/s/
Donald L. Wass, Ph.D
|
Director
|
11/17/06
|
Donald
L. Wass, Ph.D.
|
||
75
Pilgrim's
Pride Corporation
September
30, 2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders
Pilgrim’s
Pride Corporation
We
have audited the accompanying consolidated balance sheets of Pilgrim’s Pride
Corporation as of September 30, 2006 and October 1, 2005, and the
related
consolidated statements of income (loss), stockholders’ equity, and cash flows
for each of the three years in the period ended September 30, 2006.
Our audits
also included the financial statement schedule listed in the index
at Item
15(a). These financial statements and schedule are the responsibility
of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the
overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly,
in all
material respects, the consolidated financial position of Pilgrim’s Pride
Corporation as of September 30, 2006 and October 1, 2005, and the
consolidated
results of its operations and its cash flows for each of the three
years in the
period ended September 30, 2006, in conformity with U.S. generally
accepted
accounting principles. Also, in our opinion, the related financial
statement
schedule, when considered in relation to the basic financial statements
taken as
a whole, presents fairly in all material respects the information
set forth
therein.
We
have also audited, in accordance with the standards of the Public
Company
Accounting Oversight Board (United States), the effectiveness of
Pilgrim's Pride
Corporation’s internal control over financial reporting as of September 30, 2006
based on criteria established in Internal
Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission,
and our report dated November 16, 2006, expressed an unqualified
opinion
thereon.
Ernst
& Young LLP
Dallas,
Texas
November
16, 2006
76
Pilgrim's
Pride Corporation
September
30, 2006
Consolidated
Balance Sheets
Pilgrim’s
Pride Corporation
(In
thousands, except share and per share data)
|
September
30, 2006
|
October
1, 2005
|
|||||
Assets
|
|||||||
Current
Assets:
|
|||||||
Cash
and cash equivalents
|
$
|
156,404
|
$
|
132,567
|
|||
Investment
in available for sale securities
|
21,246
|
--
|
|||||
Trade
accounts and other receivables, less
allowance
for doubtful accounts
|
263,149
|
288,528
|
|||||
Inventories
|
585,940
|
527,329
|
|||||
Income
taxes receivable
|
39,167
|
--
|
|||||
Current
deferred taxes
|
7,288
|
25,107
|
|||||
Other
current assets
|
32,480
|
25,884
|
|||||
Total
Current Assets
|
1,105,674
|
999,415
|
|||||
Investment
in Available for Sale Securities
|
115,375
|
304,593
|
|||||
Other
Assets
|
50,825
|
53,798
|
|||||
Property,
Plant and Equipment:
|
|||||||
Land
|
52,493
|
51,887
|
|||||
Buildings,
machinery and equipment
|
1,702,949
|
1,612,739
|
|||||
Autos
and trucks
|
57,177
|
55,202
|
|||||
Construction-in-progress
|
63,853
|
58,942
|
|||||
1,876,472
|
1,778,770
|
||||||
Less
accumulated depreciation
|
(721,478
|
)
|
(624,673
|
)
|
|||
1,154,994
|
1,154,097
|
||||||
$
|
2,426,868
|
$
|
2,511,903
|
||||
Liabilities
and Stockholders’ Equity
|
|||||||
Current
Liabilities:
|
|||||||
Accounts
payable
|
$
|
293,685
|
$
|
281,909
|
|||
Accrued
expenses
|
272,830
|
288,106
|
|||||
Income
taxes payable
|
--
|
16,196
|
|||||
Current
maturities of long-term debt
|
10,322
|
8,603
|
|||||
Total
Current Liabilities
|
576,837
|
594,814
|
|||||
Long-Term
Debt, Less Current Maturities
|
554,876
|
518,863
|
|||||
Deferred
Income Taxes
|
175,869
|
173,232
|
|||||
Minority
Interest in Subsidiary
|
1,958
|
1,396
|
|||||
Commitments
and Contingencies
|
|||||||
Stockholders’
Equity:
|
|||||||
Preferred
stock, $.01 par value, 5,000,000 authorized shares; none
issued
|
--
|
--
|
|||||
Common
stock - $.01 par value, 160,000,000 authorized shares;
66,555,733 and
66,826,833 issued and outstanding, respectively
|
665
|
668
|
|||||
Additional
paid-in capital
|
469,779
|
471,344
|
|||||
Retained
earnings
|
646,750
|
753,527
|
|||||
Accumulated
other comprehensive income (loss)
|
134
|
(373
|
)
|
||||
Less
treasury stock, 271,100 shares
|
--
|
(1,568
|
)
|
||||
Total
Stockholders’ Equity
|
1,117,328
|
1,223,598
|
|||||
$
|
2,426,868
|
$
|
2,511,903
|
See
Notes to Consolidated Financial
Statements
|
77
Pilgrim's
Pride Corporation
September
30, 2006
Consolidated
Statements of Income (Loss)
Pilgrim’s
Pride Corporation
(In
thousands, except per share data)
|
Three
Years Ended September 30, 2006
|
|||||||||
2006
|
2005
|
2004
|
||||||||
Net
Sales
|
$
|
5,235,565
|
$
|
5,666,275
|
$
|
5,363,723
|
||||
Cost
and Expenses:
|
||||||||||
Cost
of sales
|
4,937,965
|
4,921,076
|
4,794,415
|
|||||||
Cost
of sales-restructuring
|
--
|
--
|
64,160
|
|||||||
Non-recurring
recoveries
|
--
|
--
|
(23,891
|
)
|
||||||
4,937,965
|
4,921,076
|
4,834,684
|
||||||||
Gross
Profit
|
297,600
|
745,199
|
529,039
|
|||||||
Selling,
general and administrative
|
294,598
|
309,387
|
255,802
|
|||||||
Other
restructuring charges
|
--
|
--
|
7,923
|
|||||||
294,598
|
309,387
|
263,725
|
||||||||
Operating
Income
|
3,002
|
435,812
|
265,314
|
|||||||
Other
Expenses (Income):
|
||||||||||
Interest
expense
|
50,601
|
49,585
|
54,436
|
|||||||
Interest
income
|
(10,048
|
)
|
(5,653
|
)
|
(2,307
|
)
|
||||
Foreign
exchange (gain) loss
|
144
|
(474
|
)
|
205
|
||||||
Miscellaneous,
net
|
(1,378
|
)
|
(11,169
|
)
|
4,445
|
|||||
39,319
|
32,289
|
56,779
|
||||||||
Income
(Loss) Before Income Taxes
|
(36,317
|
)
|
403,523
|
208,535
|
||||||
Income
Tax Expense (Benefit)
|
(2,085
|
)
|
138,544
|
80,195
|
||||||
Net
Income (Loss)
|
$
|
(34,232
|
)
|
$
|
264,979
|
$
|
128,340
|
|||
Net
Income (Loss) per Common Share-Basic and Diluted
|
$
|
(0.51
|
)
|
$
|
3.98
|
$
|
2.05
|
|||
See
Notes to Consolidated Financial Statements
|
78
Pilgrim's
Pride Corporation
September
30, 2006
Consolidated
Statements of Stockholders’ Equity
Pilgrim’s
Pride Corporation
(In
thousands, except share data)
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Shares
of Common Stock
|
Total
|
Additional
|
Other
|
|||||||||||||||||||||||||
Par
|
Paid-In
|
Retained
|
Comprehensive
|
Treasury
|
||||||||||||||||||||||||
PPC
|
Class
A
|
Class
B
|
Value
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Total
|
||||||||||||||||||||
Balance
at September 28, 2003
|
--
|
13,794,529
|
27,589,250
|
$
|
414
|
$
|
79,625
|
$
|
368,195
|
$
|
30
|
($1,568
|
)
|
$
|
446,696
|
|||||||||||||
Reclassification
of Class A and Class B common stock to PPC common stock
|
41,383,779
|
(13,794,529
|
)
|
(27,589,250
|
)
|
|||||||||||||||||||||||
Issuance
of common stock for ConAgra chicken division acquisition
|
25,443,054
|
--
|
--
|
254
|
352,037
|
352,291
|
||||||||||||||||||||||
Net
income for year
|
128,340
|
128,340
|
||||||||||||||||||||||||||
Other
comprehensive income (loss)
|
(378
|
)
|
(378
|
)
|
||||||||||||||||||||||||
Total
comprehensive income (loss)
|
127,962
|
|||||||||||||||||||||||||||
Cash
dividends declared
($.06
per share)
|
(3,993
|
)
|
(3,993
|
)
|
||||||||||||||||||||||||
Balance
at October 2, 2004
|
66,826,833
|
--
|
--
|
$
|
668
|
$
|
431,662
|
$
|
492,542
|
($348
|
)
|
($1,568
|
)
|
$
|
922,956
|
|||||||||||||
Sale
of common stock
|
15,443,054
|
--
|
--
|
154
|
521,774
|
521,928
|
||||||||||||||||||||||
Purchase
and retirement of
common
stock
|
(15,443,054
|
)
|
--
|
--
|
(154
|
)
|
(482,092
|
)
|
(482,246
|
)
|
||||||||||||||||||
Net
income for year
|
264,979
|
264,979
|
||||||||||||||||||||||||||
Other
comprehensive income (loss)
|
(25
|
)
|
(25
|
)
|
||||||||||||||||||||||||
Total
comprehensive income (loss)
|
264,954
|
|||||||||||||||||||||||||||
Cash
dividends declared
($.06
per share)
|
(3,993
|
)
|
(3,993
|
)
|
||||||||||||||||||||||||
Balance
at October 1, 2005
|
66,826,833
|
--
|
--
|
$
|
668
|
$
|
471,344
|
$
|
753,527
|
($373
|
)
|
($1,568
|
)
|
$
|
1,223,598
|
|||||||||||||
Cancellation
of Treasury Stock
|
(271,100
|
)
|
--
|
--
|
(3
|
)
|
(1,565
|
)
|
1,568
|
|||||||||||||||||||
Net
loss for year
|
(34,232
|
)
|
(34,232
|
)
|
||||||||||||||||||||||||
Other
comprehensive income (loss)
|
507
|
507
|
||||||||||||||||||||||||||
Total
comprehensive income (loss)
|
(33,725
|
)
|
||||||||||||||||||||||||||
Cash
dividends declared
($1.09
per share)
|
(72,545
|
)
|
(72,545
|
)
|
||||||||||||||||||||||||
Balance
at September 30, 2006
|
66,555,733
|
--
|
--
|
$
|
665
|
$
|
469,779
|
$
|
646,750
|
$
|
134
|
--
|
$
|
1,117,328
|
||||||||||||||
See
Notes to Consolidated Financial Statements
79
Pilgrim's
Pride Corporation
September
30, 2006
Consolidated
Statements of Cash Flows
Pilgrim’s
Pride Corporation
(In
thousands)
|
Three
Years Ended September 30, 2006
|
||||||||||||
2006
|
2005
|
2004
|
|||||||||||
Cash
Flows From Operating Activities:
|
|||||||||||||
Net
income (loss)
|
$
|
(34,232
|
)
|
$
|
264,979
|
$
|
128,340
|
||||||
Adjustments
to reconcile net income (loss) to cash provided by
operating
activities
|
|||||||||||||
Depreciation
and amortization
|
135,133
|
134,944
|
113,788
|
||||||||||
Loss
on restructuring-asset impairment
|
3,767
|
--
|
45,384
|
||||||||||
Loss
on property disposals
|
1,781
|
4,326
|
5,605
|
||||||||||
Deferred
income taxes
|
20,455
|
2,247
|
3,295
|
||||||||||
Changes
in operating assets and liabilities
|
|||||||||||||
Accounts
and other receivables
|
31,121
|
21,192
|
(70,936
|
)
|
|||||||||
Income
taxes (payable) receivable
|
(55,363
|
)
|
(38,251
|
)
|
33,556
|
||||||||
Inventories
|
(58,612
|
)
|
82,669
|
(73,445
|
)
|
||||||||
Prepaid
expenses and other current assets
|
(6,594
|
)
|
20,800
|
(28,763
|
)
|
||||||||
Accounts
payable, income taxes payable and accrued expenses
|
(3,501
|
)
|
(610
|
)
|
116,684
|
||||||||
Other
|
(3,573
|
)
|
777
|
(1,104
|
)
|
||||||||
Cash
Provided by Operating Activities
|
30,382
|
493,073
|
272,404
|
||||||||||
Investing
Activities:
|
|||||||||||||
Acquisitions
of property, plant and equipment
|
(143,882
|
)
|
(116,588
|
)
|
(79,642
|
)
|
|||||||
Purchase
of investment securities
|
(318,266
|
)
|
(305,458
|
)
|
--
|
||||||||
Proceeds
from sale or maturity of investment securities
|
490,764
|
--
|
--
|
||||||||||
Business
acquisition, net of equity consideration
|
--
|
--
|
(272,097
|
)
|
|||||||||
Proceeds
from property disposals
|
4,148
|
4,963
|
4,583
|
||||||||||
Other,
net
|
(506
|
)
|
(524
|
)
|
(304
|
)
|
|||||||
Cash
Provided by (Used in) Investing Activities
|
32,258
|
(417,607
|
)
|
(347,460
|
)
|
||||||||
Financing
Activities:
|
|||||||||||||
Proceeds
from notes payable to banks
|
270,500
|
--
|
96,000
|
||||||||||
Repayments
on notes payable to banks
|
(270,500
|
)
|
--
|
(96,000
|
)
|
||||||||
Proceeds
from long-term debt
|
74,683
|
--
|
332,516
|
||||||||||
Payments
on long-term debt
|
(36,950
|
)
|
(16,829
|
)
|
(523,634
|
)
|
|||||||
Purchases
for retirement of common stock
|
--
|
(482,246
|
)
|
--
|
|||||||||
Sale
of common stock
|
--
|
521,928
|
--
|
||||||||||
Borrowing
for acquisition
|
--
|
--
|
300,767
|
||||||||||
Equity
and debt issue costs
|
(3,938
|
)
|
--
|
(8,991
|
)
|
||||||||
Cash
dividends paid
|
(72,545
|
)
|
(3,993
|
)
|
(3,993
|
)
|
|||||||
Cash
Provided by (Used in) Financing Activities
|
(38,750
|
)
|
18,860
|
96,665
|
|||||||||
Effect
of exchange rate changes on cash and cash equivalents
|
(53
|
)
|
76
|
(50
|
)
|
||||||||
Increase
in cash and cash equivalents
|
23,837
|
94,402
|
21,559
|
||||||||||
Cash
and cash equivalents at beginning of year
|
132,567
|
38,165
|
16,606
|
||||||||||
Cash
and Cash Equivalents at End of Year
|
$
|
156,404
|
$
|
132,567
|
$
|
38,165
|
|||||||
Supplemental
Disclosure Information:
|
|||||||||||||
Cash
paid during the year for:
|
|||||||||||||
Interest
(net of amount capitalized)
|
$
|
48,590
|
$
|
46,945
|
$
|
49,675
|
|||||||
Income
taxes paid
|
$
|
37,813
|
$
|
172,929
|
$
|
47,128
|
|||||||
Supplemental
Non-cash Disclosure Information:
|
|||||||||||||
Business
acquisition, equity consideration (before cost of
issuance)
|
$
|
--
|
$
|
--
|
357,475
|
||||||||
See
Notes to Consolidated Financial Statements
|
80
Pilgrim's
Pride Corporation
September
30, 2006
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Pilgrim’s
Pride Corporation (referred to herein as “the Company”, “we”, “us”, “our”, or
similar terms) is the second largest producer of poultry in the U.S.
and Mexico
and the largest in Puerto Rico. In the U.S., we produce both prepared
and fresh
chicken and turkey, while in Mexico and Puerto Rico, we produce exclusively
fresh chicken. Through vertical integration, we control the breeding,
hatching
and growing of chickens and the processing and preparation, packaging
and sale
of our product lines.
Our
prepared chicken products include 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.
The
Company also sells fresh chicken products to the foodservice and
retail markets.
Our fresh chicken products consist of refrigerated (non-frozen) whole
or cut-up
chicken, either pre-marinated or non-marinated and pre-packaged chicken,
which
includes various combinations of freshly refrigerated, whole chickens
and
chicken parts.
Our
turkey products include fresh and frozen whole birds. In addition,
we have fully
cooked whole turkeys available.
Recent
Business Acquisition Activities
On
September 29, 2006, the Company commenced a cash tender offer to
purchase all of
the outstanding shares of Gold Kist Inc. (“Gold Kist”) common stock for $20 per
share (the “Equity Tender Offer”). In addition, the Company 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”). On October 16, 2006, the Company
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 (“HSR”) in connection with this offer. On
October 30, 2006, the Company extended the Tender Offers to November
29, 2006.
On November 13, 2006, the Company announced the new pricing for the
Debt Tender
Offer, which was required due to the extension of the Tender Offers.
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 and restatement of its existing credit facility and a commitment
letter for an additional unsecured bridge loan facility, as described
in detail
in Note E of the Consolidated Financial Statements.
The
successful completion of the Tender Offers and related activities
is contingent
upon a number of conditions as described under Item 1. “Business”. No assurance
can be provided as to if or when the transaction will be successfully
completed.
81
Pilgrim's
Pride Corporation
September
30, 2006
On
November 23, 2003, we completed the purchase of all the outstanding
stock of the
corporations represented as the ConAgra Foods, Inc. (“ConAgra”) chicken division
(“ConAgra chicken division”). The acquired business has been included in our
results of operations since the date of the acquisition. The purchase
price was
$635.2 million and was paid with a combination of cash, the assumption
of $16
million of debt and issuing to ConAgra 25,443,054 shares of our common
stock
valued at $14.05 per share.
Accounting
Adjustments and Reclassifications
During
the fourth quarter of fiscal 2006, we recorded certain accounting
adjustments
(“Accounting Adjustments”) in our 2006 Consolidated Financial Statements.
These Accounting Adjustments relate to the accounting for the Pilgrim’s
Pride Retirement Plan for Union Employees and certain post-employment
benefit
obligations in Mexico. These Accounting Adjustments resulted in a charge
of $4.6 million, net of tax, in our Consolidated Statement of Income
(Loss) that
related to prior periods.
We
believe these Accounting Adjustments, considered individually and
in the
aggregate, are not material to our Consolidated Financial Statements
for each of
the three years in the period ended September 30, 2006, and as a result
were reflected as an adjustment in the period identified. In making
this
assessment, we considered qualitative and quantitative factors, including
the
significant earnings we reported in each of the fiscal years 2005
and 2004 and
the impact of making these Accounting Adjustments in fiscal 2006,
primarily
based on its significance to other key financial measures and
consideration on the trend of earnings for 2006 versus the prior periods
presented.
Certain
items in prior year financial statements have been reclassified to
the current
year’s presentation.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Pilgrim’s Pride
Corporation and its wholly and majority owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
The
Company reports on the basis of a 52/53-week fiscal year, which ends
on the
Saturday closest to September 30. As a result, fiscal 2006 had 52
weeks, fiscal
2005 had 52 weeks and fiscal 2004 had 53 weeks.
The
financial statements of the Company’s Mexico subsidiaries are re-measured as if
the U.S. dollar were the functional currency. Accordingly, assets
and
liabilities of the Mexico subsidiaries are translated at end-of-period
exchange
rates, except for non-monetary assets, which are translated at equivalent
dollar
costs at dates of acquisition using historical rates. Operations
are translated
at average exchange rates in effect during the period. Foreign exchange
gains or
losses are separately stated as a component of “Other Expenses (Income)” in the
Consolidated Statement of Income.
Revenue
Recognition
Revenue
is recognized upon shipment and transfer of ownership of the product
to the
customer and is recorded net of estimated incentive offerings including
special
pricing agreements, promotions and other volume-based incentives.
Revisions to
these estimates are charged back to net sales in the period in which
the facts
that give rise to the revision become known.
82
Pilgrim's
Pride Corporation
September
30, 2006
Shipping
and Handling Costs
Costs
associated with the products shipped to customers are recognized
in cost of
sales.
Cash
Equivalents
The
Company considers highly liquid investments with a maturity of three
months or
less when purchased to be cash equivalents.
Investment
in Available for Sale Securities
The
Company’s investments at September 30, 2006 are in debt and equity securities
which are classified as available for sale and carried at market
value in
accordance with Statement of Financial Accounting Standards No. 115,
“Accounting
for Certain Investments in Debt and Equity Securities” (“SFAS
115”). Investments are classified based on their underlying contractual
maturity
at date of purchase by the Company. Available for sale investments
with a
remaining maturity date of one year or less from the balance sheet
date are
classified as current assets and those with a maturity date of greater
than one
year are classified as long-term assets based on management’s intention not to
use such assets in the next twelve months. The average maturity period
of the
Company’s investments at September 30, 2006 was 1-3 years. All equity securities
are classified as long-term. Approximately $0.1 million, net of tax,
in
unrealized gains related to these investments at September 30, 2006
were
recorded as accumulated other comprehensive income, a separate component
of
stockholders’ equity.
Fair
Value of Financial Instruments
The
carrying values of cash and cash equivalents, accounts receivable,
and accounts
payable at September 30, 2006 and October 1, 2005 approximated their
fair values
due to the short term nature of these items. Long term investments
are adjusted
to fair value on a monthly basis. The fair values of the Company’s long term
investments in available for sale securities was $115.4 million,
which differed
from historical value by $0.1 million in unrealized gains.
Concentrations
of Credit Risk
The
Company’s financial instruments that are exposed to concentrations of credit
risk consist primarily of cash equivalents, investment securities,
and trade
receivables. The Company’s cash equivalents are in high quality securities
placed with major banks and financial institutions. Concentrations
of credit
risk with respect to receivables are limited due to the large number
of
customers and their dispersion across geographic areas.
With
the exception of one customer that accounts for approximately 16.4%
of accounts
receivable at September 30, 2006, the Company does not believe it
has
significant concentrations of credit risk in its accounts receivable,
which are
generally unsecured. Credit evaluations are performed on all significant
customers and updated as circumstances dictate.
83
Pilgrim's
Pride Corporation
September
30, 2006
Inventories
Live
poultry inventories are stated at the lower of cost or market and
breeder hens
at the lower of cost, less accumulated amortization, or market. The
costs
associated with breeder hens are accumulated up to the production
stage and
amortized over the productive lives using the unit-of-production
method.
Finished poultry products, feed, eggs and other inventories are stated
at the
lower of cost (first-in, first-out method) or market. We record valuations
and
adjustments for our inventory and for estimated obsolescence at or
equal to the
difference between the cost of inventory and the estimated market
value based
upon known conditions affecting the inventory’s obsolescence, including
significantly aged products, discontinued product lines, or damaged
or obsolete
products. We allocate meat costs between our various finished poultry
products
based on a by-product costing technique that reduces the cost of
the whole bird
by estimated yields and amounts to be recovered for certain by-product
parts,
primarily including leg quarters, wings, tenders and offal, which
are carried in
inventory at the estimated recovery amounts, with the remaining amount
being
reflected as our breast meat cost. Generally, the company performs
an evaluation
of whether any lower of cost or market adjustments are required based
on a
number of factors, including: (i) pools of related inventory, (ii)
product age,
condition and continuation or discontinuation, (iii) estimated market
selling
prices and (iv) expected distribution channels. If actual market
conditions or
other factors are less favorable than those projected by management,
additional
inventory adjustments may be required.
In
November 2004, the FASB issued Statement of Financial Accounting
Standards
No. 151, “Inventory
Costs — An Amendment of Accounting Research Bulletin 43,
Chapter 4” (“Statement 151”).
Statement 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material be
recognized as
current-period charges. In addition, Statement 151 requires that
the allocation of fixed production overhead to the costs of conversion
be based
on the normal capacity of the production facilities. Statement 151 is
effective for fiscal years beginning after June 15, 2005. We implemented
the provisions of Statement 151 in fiscal 2006 with no significant
impact on our consolidated financial statements.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost and repair and maintenance
costs are
expensed as incurred. Depreciation is computed using the straight-line
method
over the estimated useful lives of these assets. Depreciation expense
was $130.5
million, $130.6 million and $110.0 million in 2006, 2005 and 2004,
respectively.
Estimated useful lives for building, machinery and equipment are
5 years to 33
years and for automobiles and trucks are 3 years to 10 years.
In
accordance with Statement of Financial Accounting Standards No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets and for Long-Lived
Assets to
be Disposed Of” (“SFAS
144”), the Company records impairment charges on long-lived assets used
in
operations when events and circumstances indicate that the assets
may be
impaired and the undiscounted cash flows estimated to be generated
by those
assets are less than the carrying amount of those assets. The impairment
charge
is determined based upon the amount the net book value of the assets
exceeds
their fair market value. In making these determinations, the Company
utilizes
certain assumptions, including, but not limited to: (i) future cash
flows
estimates expected to be generated by these assets, which are based
on
additional assumptions such as asset utilization, remaining length
of service
and estimated salvage values (ii) estimated fair market value of
the assets and
(iii) determinations with respect to the lowest level of cash flows
relevant to
the respective impairment test, generally groupings of related operational
facilities.
84
Pilgrim's
Pride Corporation
September
30, 2006
Purchase
Price Accounting
The
Company allocates the total purchase price in connection with acquisitions
to
assets and liabilities based upon their estimated fair values. For
property,
plant and equipment and intangible assets other than goodwill, for
significant
acquisitions, the Company has historically relied upon the use of
third party
valuation experts to assist in the estimation of fair values. Historically,
the
carrying value of acquired accounts receivable, inventory and accounts
payable
have approximated their fair value as of the date of acquisition,
though
adjustments are made within purchase price accounting to the extent
needed to
record such assets and liabilities at fair value. With respect to
accrued
liabilities, the Company uses all available information to make its
best
estimate of the fair value of the acquired liabilities and, when
necessary, may
rely upon the use of third party actuarial experts to assist in the
estimation
of fair value for certain liabilities, primarily self-insurance
accruals.
Litigation
and Contingent Liabilities
The
Company is subject to lawsuits, investigations and other claims related
to wage
and hour/labor, securities, environmental, product and other matters,
and is
required to assess the likelihood of any adverse judgments or outcomes
to these
matters as well as potential ranges of probable losses. A determination
of the
amount of reserves required including anticipated cost of defense,
if any, for
these contingencies is made when losses are determined to be probable
and after
considerable analysis of each individual issue. These reserves may
change in the
future due to changes in the Company’s assumptions, the effectiveness of
strategies, or other factors beyond the Company’s control.
Accrued
Self Insurance
Insurance
expense for casualty claims and employee-related health care benefits
are
estimated using historical and current experience and actuarial estimates.
Stop-loss coverage is maintained with third party insurers to limit
certain of
the Company’s total exposure. Certain categories of claim liabilities are
actuarially determined. The assumption used to arrive at periodic
expenses is
reviewed regularly by management. However, actual expenses could
differ from
these estimates and could result in adjustments to be recognized.
Income
Taxes
We
account for income taxes in accordance with SFAS
No. 109, “Accounting for Income Taxes”,
which requires that deferred tax assets and liabilities be recognized
for the
effect of temporary differences between the book and tax bases of
recorded
assets and liabilities. Taxes are provided for international subsidiaries
based
on the assumption that their earnings are indefinitely reinvested
in foreign
subsidiaries and as such deferred taxes are not provided for in U.S.
income
taxes that would be required in the event of distribution of these
earnings,
except that we provide deferred taxes on the earnings of international
subsidiaries that we intend to repatriate or otherwise deem are not
indefinitely
reinvested. SFAS
No. 109
also requires that deferred tax assets be reduced by a valuation
allowance if it
is more likely than not that some portion or all of the deferred
tax asset will
not be realized. We review the recoverability of any tax assets recorded
on the
balance sheet, primarily operating loss carryforwards, based on both
historical
and anticipated earnings levels of the individual operations and
provide a
valuation allowance when it is more likely than not that amounts
will not be
recovered.
85
Pilgrim's
Pride Corporation
September
30, 2006
As
of September 30, 2006, the Company has reserves totaling $16.3 million
for taxes
that may become payable in future years as a result of audits by
tax
authorities. Although the Company believes that the positions taken
on
previously filed tax returns are reasonable, it nevertheless has
established tax
reserves in recognition that various taxing authorities may challenge
the
positions taken by the Company resulting in additional liabilities
for tax and
interest. The tax reserves are reviewed as circumstances warrant
and adjusted as
events occur that affect the Company’s potential liability for additional taxes,
such as lapsing of applicable statutes of limitations, conclusion
of tax audits,
additional exposure based on current calculations, identification
of new issues,
release of administrative guidance, or rendering of a court decision
affecting a
particular tax issue. During the fourth quarter of fiscal year 2006,
the Company
revised certain tax reserve estimates based on new data and recently
completed
tax audits for periods for which certain tax positions were reserved.
The
Company recognized a tax benefit of $10.6 million as a result of
this change in
estimate for income tax liabilities.
During
July 2006, the FASB issued Interpretation Number 48, “Accounting
for Uncertainty in Income Taxes”
(“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing
the
minimum requirements a tax position must meet before being recognized
in the
financial statements. In addition, FIN 48 prohibits the use of SFAS
No. 5,
“Accounting
for Contingencies”,
in evaluating the recognition and measurement of uncertain tax positions.
The
Company will be required to adopt FIN 48 on September 30, 2007, and
has not yet
assessed the impact of the adoption of this standard on the Company’s financial
statements.
The
American Jobs Creation Act was enacted in October 2004 (“Jobs Creation Act”).
The Jobs Creation Act includes a temporary incentive to U.S. multinationals
to
repatriate foreign earnings at an approximate effective 5.25% U.S.
federal tax
rate. During the fourth quarter of fiscal year 2006, the Company
repatriated
$155.0 million in previously unremitted untaxed earnings under the
provisions of
the Job Creation Act. The total income tax affects of repatriations
under the
Job Creation Act was $28.2 million, of which $25.8 million was recorded
fiscal
2006. The key components of the 2006 provision included domestic
income taxes of
$10.1 million to reflect federal and state taxes on the transaction,
a deferred
foreign tax provision of $ 24.1 million to accrue for future taxes
that will
result from certain intra-Mexican dividends undertaken in 2006 to
complete this
transaction, and a benefit of $6 million to reflect the revaluation
of certain
deferred tax assets in Mexico that as a result of the transaction
are expected
to be realized at higher enacted tax rates.
Net
Income (Loss) per Common Share
Net
income (loss) per common share is based on the weighted average number
of shares
of common stock outstanding during the year. The weighted average
number of
shares outstanding (basic and diluted) included herein were 66,555,733
in 2006
and 2005, and 62,646,692 shares in 2004.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally
accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure
of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting
period.
Actual results could differ from those estimates.
86
Pilgrim's
Pride Corporation
September
30, 2006
NOTE
B - RESTRUCTURING CHARGES AND NON-RECURRING RECOVERIES
In
March 2005, the Company, through arbitration, settled litigation
related to a
breach of contract that occurred in a prior year. The settlement
resulted in a
non-recurring gain of $11.7 million being recognized and recorded
in
miscellaneous, net in fiscal 2005.
On
April 26, 2004, the Company announced a plan to restructure its turkey
division.
The Company immediately placed the facility and related property
and equipment
for sale. In accordance with Statement of Financial Accounting Standards
No.
144, “Accounting
for the Impairment or Disposal of Long-Lived Assets and for Long-Lived
Assets to
be Disposed Of” (“SFAS
144”), as of the announcement date, the Company classified these facilities
as
held for sale on its consolidated balance sheet and recorded in cost
of sales -
restructuring charges of approximately $64.2 million including a
non-cash asset
impairment charge of $45.4 million representing the difference between
the net
sales price and the net book value of the facility and related property
and
equipment along with approximately $18.8 million in related charges,
primarily
inventory losses on discontinued products sold in fiscal 2004. The
Company also
recorded exit and severance cost in connection with the restructuring
of $7.9
million, of this amount all but $3.8 million was paid during fiscal
2004 and the
remainder paid during fiscal 2005. The Company sold the facilities
in the fourth
quarter of fiscal 2004.
Non-recurring
recoveries, which is a component of gross profit and operating income,
include
insurance recoveries under the business interruption and product
re-establishment portion of its insurance policy related to the October
2002
recall of $23.8 million, which was recorded in the fourth quarter
of fiscal 2004
when such amounts were collected from the insurance carrier. Non-recurring
recoveries also include reimbursements received from the U.S. federal
government
under a relief plan related to the avian influenza outbreak in the
Commonwealth
of Virginia on March 12, 2002 and proceeds received from litigation
initiated by
the Company in antitrust lawsuits alleging a world-wide conspiracy
to control
production capacity and raise prices of vitamins and methionine.
Proceeds
received by the Company as successor to WLR Foods in connection with
the
lawsuits described above are recorded as Other Expense (Income):
Miscellaneous,
Net.
NOTE
C - ACCOUNTS RECEIVABLE
In
connection with the Asset Sale Agreement dated July 18, 2003, the
Company sells,
on a revolving basis, certain of its trade receivables (the “Pooled
Receivables”) to a special purpose corporation wholly owned by the Company,
which in turn sells a percentage ownership interest to third parties.
At
September 30, 2006 and at October 1, 2005 there were no Pooled Receivables
sold.
Sales of receivables are recorded as sales in accordance with Financial
Accounting Standards Board Statement No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments
of
Liabilities”.
The gross proceeds resulting from the sale are included in cash flows
from
operating activities in the Consolidated Statements of Cash Flows.
Losses on
these sales were immaterial. As of September 30, 2006, $125.0 million
of Pooled
Receivables could have been sold pursuant to the Asset Sale Agreement.
87
Pilgrim's
Pride Corporation
September
30, 2006
NOTE
D - INVENTORIES
Inventories
consist of the following:
September
30,
|
October
1,
|
||||||
(In
thousands)
|
2006
|
2005
|
|||||
Chicken:
|
|||||||
Live
chicken and hens
|
$
|
196,284
|
$
|
196,406
|
|||
Feed
and eggs
|
132,309
|
114,091
|
|||||
Finished
chicken products
|
201,516
|
164,412
|
|||||
530,109
|
474,909
|
||||||
Turkey:
|
|||||||
Live
turkey and hens
|
$
|
7,138
|
$
|
7,209
|
|||
Feed
and eggs
|
4,740
|
4,924
|
|||||
Finished
turkey products
|
26,685
|
23,072
|
|||||
38,563
|
35,205
|
||||||
Other
Products:
|
|||||||
Commercial
feed, table eggs, and retail farm store
|
$
|
7,080
|
$
|
4,866
|
|||
Distribution
inventories
(other
than chicken & turkey products)
|
10,188
|
12,349
|
|||||
17,268
|
17,215
|
||||||
Total
Inventories
|
$
|
585,940
|
$
|
527,329
|
NOTE
E - NOTES PAYABLE AND LONG-TERM DEBT
The
following table presents our long-term debt as of September 30, 2006
and October
1, 2005 (in thousands)
Final
Maturity
|
September
30, 2006
|
October
1, 2005
|
||||||||
Senior
unsecured notes, at 9 5/8%
|
2011
|
$
|
299,601
|
$
|
302,588
|
|||||
Senior
subordinated unsecured notes, at 9 1/4%
|
2013
|
82,640
|
100,000
|
|||||||
Secured
revolving credit facility with notes payable at LIBOR
plus 1.25% to LIBOR
plus 2.75%
|
2011
|
74,682
|
--
|
|||||||
Note
payable to an insurance company at 6.68%
|
2012
|
50,115
|
53,103
|
|||||||
Notes
payable to an insurance company at LIBOR plus 2.2075%
|
2013
|
41,333
|
54,667
|
|||||||
Revolving
term/credit facility, with notes payable at LIBOR or
US Treasuries, plus a
spread
|
2016
|
--
|
--
|
|||||||
Other
|
Various
|
16,827
|
17,108
|
|||||||
565,198
|
527,466
|
|||||||||
Less
current maturities
|
(10,322
|
)
|
(8,603
|
)
|
||||||
Total
|
$
|
554,876
|
$
|
518,863
|
||||||
88
Pilgrim's
Pride Corporation
September
30, 2006
In
September 2006,
the Company entered into a revolver/term credit agreement with a
marturity date
of September 21, 2016. This revolver/term agreement provides for an
aggregate commitment of $1.225 billion consisting of i) a $795 million
revolving/term loan commitment which, unless otherwise agreed to
among the
parties, will automatically be reduced to $500 million on September
21, 2007,
and ii) a $430 million term loan commitment which is available to
the Company
until not later than March 21, 2007. The total credit facility is
presently secured by certain fixed assets with a current availability
of $545.3
million. The term loan commitment is comprised of a $210 million fixed
rate term loan commitment and $220 million floating rate term loan
commitment. From time to time, if certain conditions are satisfied, the
Company has the right to increase the revolving/term loan commitment
and term
loan commitment to a total maximum amount of $1.0 billion and $750
million,
respectively. Borrowings under the revolving/term loan commitment are
available on a revolving basis until September 21, 2011 at which
time the
outstanding borrowings will be converted to a term loan maturing
on September
21, 2016. The fixed rate term loans will bear interest based on the annual
yeild of an actual Treasury Note closest to the average life of the
loan, plus
2.25%. The floating rate term loans will bear interest at LIBOR plus
1.50%-1.75% based on the Company's EBITDA. The revolving/term loans
provide for interest rates ranging at LIBOR plus 1.0%-2.0% depending
upon the
Company's total debt to capitalization ratio. Revolving/term loans
converted to term loans on September 21, 2011 will be payable in
equal quarterly
principal payments of 10% per annum of the original principal amount
beginning
the calendar quarter following the conversion date with the remaining
balance
due on the maturity date. Revolving/term loans that are voluntarily
converted prior to September 21, 2011 and term loans must be repaid
in equal
quarterly principal payments of 1% per annum of the original principal
amount
beginning the calendar quarter following the funding date or conversion
date, as
applicable, with the remaining balance due on the maturity date. All
borrowings are subject to the availability of eligible collateral
and no
material adverse change provisions. These credit facilities will be fully
available as identified collateral is pledged. A major shareholder of the
Company also guarantees one-half of the outstanding obligations under
the
revolver/term agreement.
As
of
September 30, 2006, we had $150.0 million domestic revolving credit
facilities
that provide for interest rates ranging from LIBOR plus 0.875%-2.675%
depending
upon our total debt to capitalization ratio. The $150.0 million domestic
revolving credit facilities, $126.6 million of which was available for borrowing
at September 30, 2006, are secured by domestic chicken inventories.
Borrowings
against these facilities are subject to the availability of eligible
collateral
and no material adverse change provisions.
On
September 25, 2006, a subsidiary of the Company, Avícola Pilgrim’s Pride de
México, S. de R.L. de C.V. (the “Borrower”), entered into a secured revolving
credit agreement of up to $75 million with a final maturity date of September
25, 2011. Commencing September 30, 2007, the Borrower is required to
reduce the
lender’s aggregate commitment by $3 million on September 30 of each year.
Additionally, after the end of each fiscal year of Borrower, if the ratio
of
Borrower’s net indebtedness to EBITDA is greater than specific levels, then the
Borrower is required to reduce the lenders’ aggregate commitment by 25% of the
Borrower’s excess cash flow of that fiscal year until the aggregate revolving
commitment is equal to $50 million. Outstanding amounts bear interest
at rates
ranging from the higher of the Prime Rate or Federal Funds Effective
Rate plus
0.5%; LIBOR plus 1.25%-2.75%; or TIIE plus 1.05%-2.55% depending on the
loan
designation. Obligations under this agreement are secured by a security
interest
in and lien upon all capital stock and other equity interests of the
Company’s
Mexico subsidiaries. All the obligations of the Borrower are secured
by
unconditional guaranty by the Company. All available funds have been
borrowed at
September 30, 2006.
89
Pilgrim's
Pride Corporation
September
30, 2006
In
connection with the Tender Offers, the Company has obtained a commitment
letter
pursuant to which, subject to specified conditions, certain investment
banks
have agreed to make available to the Company a $450 million senior unsecured
bridge loan facility for the purchase of shares of common stock of Gold
Kist.
Any loans under the unsecured bridge loan facility will mature on the date
that
is one year following the initial draw down. The loans under the unsecured
bridge loan facility will initially accrue interest at a rate per annum
equal to
LIBOR plus 2.75%. If the loans are not repaid in full within 180 days following
the initial draw down, the rate will increase by 0.75% at the end of that
180-day period and will increase by an additional 0.5% at the end of each
90-day
period thereafter. If the loans are not repaid after 1-year, then the
outstanding balance will convert into term loans maturing on the ninth
anniversary. The interest rate on the term loans will initially be the
same as
the rate on the bridge loan facility plus 0.5% and will increase by 0.5%
every
90 days but will not exceed a rate of 9.75%-10.25% based on the Company’s senior
unsecured rating.
A
substantial portion of our domestic inventories and domestic fixed assets
are
pledged as collateral on our long-term debt and credit facilities.
Annual
maturities of long-term debt for the five years subsequent to September
30, 2006
are: 2007 -- $10.3 million; 2008 -- $10.1 million; 2009 -- $10.3 million;
2010
-- $10.6 million; and 2011 -- $368.0 million.
On
June 29, 1999, the Camp County Industrial Development Corporation issued
$25.0
million of variable-rate environmental facilities revenue bonds supported
by
letters of credit obtained by us. We may draw from these proceeds over
the
construction period for new sewage and solid waste disposal facilities
at a
poultry by-products plant to be built in Camp County, Texas. We are not
required
to borrow the full amount of the proceeds from these revenue bonds. All
amounts
borrowed from these funds will be due in 2029. The revenue bonds are supported
by letters of credit obtained by us under our available revolving credit
facilities. The bonds will be recorded as debt of the Company if and when
they
are spent to fund construction.
The
Company is required, by certain provisions of its debt agreements, to maintain
levels of working capital and net worth, to limit dividends to a maximum
of $13
million per year, and to maintain various fixed charge, leverage, current
and
debt-to-equity ratios. In fiscal 2006, waivers were obtained to permit
a special
$1 per share dividend.
Total
interest expense was $50.6 million, $52.4 million and $56.1 million in
2006,
2005 and 2004, respectively. Interest related to new construction capitalized
in
2006, 2005 and 2004 was $4.3 million, $2.8 million and $1.7 million,
respectively.
The
fair value of long-term debt, at September 30, 2006 and October 1, 2005
and
based upon quoted market prices for the same or similar issues where available
or by using discounted cash flow analysis, was approximately $592.3 million
and
$578.1 million, respectively.
90
Pilgrim's
Pride Corporation
September
30, 2006
NOTE
F - INCOME TAXES
Income
(loss) before income taxes after allocation of certain expenses to foreign
operations for 2006, 2005 and 2004 was ($19.7) million, $361.1 million
and
$218.7 million, respectively, for U.S. operations and ($16.1) million,
$42.4
million and ($10.2) million, respectively, for foreign operations. The
provisions for income taxes are based on pre-tax financial statement income
(loss).
As
previously disclosed, in fiscal 2004 we acquired the stock of the poultry
division of ConAgra Foods, Inc. The purchase was treated as an asset acquisition
for tax purposes under Section 338(h)(10) of the Internal Revenue Code.
Deferred
taxes have been established as part of the purchase accounting for the
fiscal
2004 acquisition.
The
components of income tax expense (benefit) are set forth below:
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
Current:
|
||||||||||
Federal
|
$
|
(23,147
|
)
|
$
|
117,518
|
$
|
71,144
|
|||
Foreign
|
5,130
|
3,880
|
2,092
|
|||||||
State
and other
|
(4,523
|
)
|
14,899
|
3,664
|
||||||
Total
current
|
(22,540
|
)
|
136,297
|
76,900
|
||||||
Deferred
|
||||||||||
Federal
|
9,511
|
(1,594
|
)
|
(2,225
|
)
|
|||||
Foreign
|
10,221
|
4,475
|
5,673
|
|||||||
State
and other
|
723
|
113
|
(153
|
)
|
||||||
Total
deferred
|
20,455
|
2,994
|
3,295
|
|||||||
Change
in valuation allowance
|
--
|
(747
|
)
|
--
|
||||||
$
|
(2,085
|
)
|
$
|
138,544
|
$
|
80,195
|
The
following is a reconciliation between the statutory U.S. federal income
tax rate
and the Company’s effective income tax rate:
2006
|
2005
|
2004
|
||||||||
Federal
income tax rate
|
(35.0
|
)%
|
35.0
|
%
|
35.0
|
%
|
||||
State
tax rate, net
|
(0.7
|
)
|
2.1
|
2.1
|
||||||
Difference
in U.S. statutory tax rate and foreign country effective tax
rate
|
(1.0
|
)
|
(1.3
|
)
|
5.9
|
|||||
Tax
credits
|
(13.1
|
)
|
(1.1
|
)
|
(0.1
|
)
|
||||
Tax
effect of American Jobs Creation Act repatriation
|
68.3
|
0.6
|
--
|
|||||||
Currency
related differences
|
8.4
|
(1.1
|
)
|
(4.2
|
)
|
|||||
Change
in contingency reserves
|
(29.7
|
)
|
--
|
--
|
||||||
Change
in valuation allowance
|
--
|
(0.2
|
)
|
--
|
||||||
Other
|
(3.0
|
)
|
0.3
|
(0.2
|
)
|
|||||
Total
|
(5.8
|
)%
|
34.3
|
%
|
38.5
|
%
|
91
Pilgrim's
Pride Corporation
September
30, 2006
Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes.
Significant
components of the Company’s deferred tax liabilities and assets are as
follows:
(In
thousands)
|
2006
|
2005
|
|||||
|
|||||||
Deferred
tax liabilities:
|
|||||||
Property
and equipment
|
$
|
144,361
|
$
|
137,109
|
|||
Inventories
|
43,627
|
47,206
|
|||||
Prior
use of cash accounting
|
18,457
|
20,135
|
|||||
Acquisition
related items
|
15,600
|
16,518
|
|||||
Deferred
foreign taxes
|
24,127
|
--
|
|||||
Other
|
36,570
|
39,775
|
|||||
Total
deferred tax liabilities
|
282,742
|
260,743
|
|||||
Deferred
tax assets:
|
|||||||
Foreign
net operating losses
|
42,683
|
25,435
|
|||||
Expenses
deductible in different years
|
71,478
|
87,183
|
|||||
Total
deferred tax asset
|
114,161
|
112,618
|
|||||
Net
deferred tax liabilities
|
$
|
168,581
|
$
|
148,125
|
The
Company has not provided any deferred income taxes on the remaining
undistributed earnings of its Mexico subsidiaries based upon its determination
that such earnings will be indefinitely reinvested. As of September 30,
2006,
the cumulative undistributed earnings of these subsidiaries were approximately
$73.5 million. If such earnings were not considered indefinitely reinvested,
certain deferred foreign and U.S. income taxes would have been provided,
after
consideration of estimated foreign tax credits. However, determination
of the
amount of deferred income taxes is not practical.
The
Mexican tax operating loss
carryforwards of approximately $169.8 million will expire in the years
ranging
from 2008 through 2012.
NOTE
G
- COMPREHENSIVE INCOME (LOSS)
For
the period ending September 30, 2006, Comprehensive Loss was ($33.7) million
consisting of net loss of ($34.2) million and unrealized gains related
to our
investments in debt securities of $0.5 million. This compares to the fiscal
year
ended October 1, 2005 in which Comprehensive Income was $265.0 million
primarily
consisting of net income of $265.0 million. Comprehensive Income for fiscal
year
ended October 2, 2004, was $128.0 million, consisting of net income of
$128.3
million and market-to-market adjustments of commodity futures contracts
of
($0.3) million, net of tax benefit of ($.2) million.
NOTE
H - COMMON STOCK
On
August 3, 2005, Pilgrim's Pride Corporation entered into a Purchase and
Amendment Agreement with ConAgra Foods, Inc., providing for the repurchase
by
Pilgrim’s Pride from ConAgra Foods, Inc. of an aggregate of 15,443,054 shares of
Pilgrim’s Pride common stock at a price per share of $31.23735. Under the
ConAgra chicken division acquisition agreement, these shares were restricted
from sale by ConAgra for certain periods through December 2006. The repurchase
was completed on August 9, 2004 and the shares were cancelled. There was
no
decrease in the total number of outstanding shares of common stock after
giving
effect to the repurchase as it occurred concurrent with the issuance of
a like
number of new shares in a public offering at an issue price of $33.86 per
share.
The net proceeds from these two transactions of $39.7 million, after
consideration of $0.8 million in transaction costs, was credited to additional
paid in capital.
92
Pilgrim's
Pride Corporation
September
30, 2006
Prior
to November 23, 2003, the Company had two classes of authorized common
stock,
Class A common stock and Class B common stock. After the New York Stock
Exchange
closed on November 21, 2003, each share of Class A common stock and each
share
of Class B common stock was reclassified into one share of new common stock.
The
new common stock is our only class of authorized common stock. The new
common
stock is listed on the New York Stock Exchange under the symbol “PPC” and
registered under the Securities Exchange Act of 1934.
Following
the reclassification, our certificate of incorporation contains no provisions
for Class A common stock or Class B common stock. In connection with the
elimination of the dual class capital structure, our certificate of
incorporation now authorizes 160 million shares of common stock instead
of 100
million shares of Class A common stock and 60 million shares of Class B
common
stock.
Except
as to voting rights, the rights of the new common stock are substantially
identical to the rights of the Class A common stock and Class B common
stock.
Each share of Class B common stock that was reclassified into our new common
stock is entitled to cast twenty votes on all matters submitted to a vote
of the
stockholders until there is a change in the beneficial ownership of such
share.
The
reclassification had no significant effect on our Consolidated Financial
Statements, as the combination of the Class A and Class B shares into a
new
class of common stock did not affect the overall shares of common stock
outstanding. Prior year balances reflect this reclassification as if it
had
occurred as of the earliest period presented.
As
of September 30, 2006, we estimate that approximately 26 million shares
of our
common stock carry 20 votes per share, of which 25.4 million shares are
beneficially owned by our Chairman, Lonnie “Bo” Pilgrim, or certain related
entities.
NOTE
I - SAVINGS AND PENSION PLANS
The
Company maintains three retirement plans for eligible employees: (1) the
Pilgrim’s Pride Retirement Savings Plan (the “RS Plan”), a Section 401(k) Salary
Deferral Plan; (2) the Pilgrim’s Pride Retirement Plan for Union Employees, a
defined benefit plan; and (3) the To-Rico’s Employee Cash or Deferred
Arrangement Profit Sharing Plan (the “To-Rico’s Plan”), a Section 1165(e) Salary
Deferral Plan. Additionally, the Company is required by the government
of Mexico
to make certain payments to terminated employees in Mexico.
The
RS Plan is maintained for certain eligible U.S. employees. Under the RS
Plan,
eligible employees may voluntarily contribute a percentage of their
compensation; there are various Company matching provisions. The defined
benefit
plan covers certain locations or work groups within the Company. The To-Rico’s
Plan is maintained for certain eligible Puerto Rico employees. Under the
To-Rico’s Plan, eligible employees may voluntarily contribute a percentage of
their compensation; there are various Company matching provisions.
93
Pilgrim's
Pride Corporation
September
30, 2006
The
Company maintains three postretirement plans for eligible Mexico employees
as
required by Mexico law which cover primarily termination benefits. Separate
disclosure of plan obligations is not considered material.
Under
all of our plans, the Company’s expenses were $16.0 million, $22.4 million and
$13.2 million in fiscal 2006, 2005 and 2004, respectively, including the
correction of $6.4 million, pretax, as described in Note A-“Business and Summary
of Significant Accounting Policies - Accounting Adjustments and
Reclassifications”.
The
Company uses a calendar year measurement date for its defined benefits
plans,
while its postretirement benefit plans use a fiscal year end of September
30,
2006. Certain disclosures are listed below; other disclosures are not material
to the financial statements.
Benefit
obligations and funded status
At
September 30, 2006 and at October 1, 2005, U.S. pension obligations exceeded
the
accumulated benefit obligation as follows (in thousands):
Pension
Benefits
|
|||||||
2006
|
2005
|
||||||
Comparison
of obligations to plan assets
|
|||||||
Projected
benefit obligation
|
$
|
9,882
|
$
|
8,778
|
|||
Accumulated
benefit obligation
|
9,310
|
7,694
|
|||||
Fair
value of plan assets at measurement date
|
6,252
|
5,405
|
Assumptions
Key
assumptions used are as follows:
Pension
Benefits
|
|||||||
2006
|
2005
|
||||||
Assumptions
|
|||||||
Discount
rate to determine net periodic benefit cost
|
5.25
|
%
|
5.50
|
%
|
|||
Discount
rate to determine benefit obligations
|
5.75
|
%
|
5.25
|
%
|
|||
Rate
of compensation increase
|
3.00
|
%
|
3.00
|
%
|
|||
Expected
return on plan assets
|
7.75
|
%
|
7.75
|
%
|
94
Pilgrim's
Pride Corporation
September
30, 2006
Plan
Assets
The
fair value of plan assets for the Company’s domestic union pension benefit plan
was $6.3 million and $5.4 million as of September 30, 2006 and October
1, 2005
respectively. The following table shows asset allocations by
category:
2006
|
2005
|
||||||
Plan
assets by category
|
|||||||
Equity
securities
|
66
|
%
|
63
|
%
|
|||
Debt
securities
|
34
|
%
|
37
|
%
|
|||
Total
assets
|
100
|
%
|
100
|
%
|
|||
NOTE
J - RELATED PARTY TRANSACTIONS
Lonnie
“Bo” Pilgrim, the Chairman and, through certain related entities, the major
stockholder of the Company (collectively, the “major stockholder”) owns an egg
laying and a chicken growing operation. In addition, at certain times during
the
year the major stockholder purchases from the Company live chickens and
hens and
certain feed inventories during the grow-out process and then contracts
with the
Company to resell the birds at maturity, determined on a market based formula
price subject to a ceiling price calculated at his cost plus 2%. During
the
years ended September 30, 2006, October 1, 2005 and October 2, 2004, the
formula
resulted in a net operating profit to the major stockholder of $4,500,
$1,017,000 and $1,050,000, respectively on gross amounts paid by the Company
to
the major stockholder as described below under “Live chicken purchases and other
payments to the major stockholder.”
Transactions
with the major stockholders or related entities are summarized as
follows:
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
Lease
payments on commercial egg property
|
$
|
750
|
$
|
750
|
$
|
750
|
||||
Chick,
feed and other sales to major stockholder
|
$
|
747
|
$
|
51,258
|
$
|
53,481
|
||||
Live
chicken purchases and other payments to major stockholder
|
$
|
1,208
|
$
|
54,318
|
$
|
54,180
|
||||
Loan
guaranty fees
|
$
|
1,615
|
$
|
1,775
|
$
|
2,634
|
||||
Lease
payments and operating expenses on airplane
|
$
|
492
|
$
|
536
|
$
|
587
|
The
Company leases a commercial egg property including all of the ongoing costs
of
the operation from the Company’s major stockholder. The lease term runs for ten
years with a monthly lease payment of $62,500.
Much
of the Company's debt obligations have been guaranteed by the Company's
major
stockholders. In consideration of such guarantees, the Company has paid
such
stockholders a quarterly fee equal to .25% of the average aggregate outstanding
balance of such guaranteed debt. During fiscal 2006, we paid $1.6 million
to
Pilgrim Interests, Ltd., an affiliate of Lonnie “Bo” Pilgrim.
95
Pilgrim's
Pride Corporation
September
30, 2006
The
Company leases an airplane from its major stockholder under an operating
lease
agreement that is renewable annually. The terms of the lease agreement
require
monthly payments of $33,000 plus operating expenses. Lease expense was
$396,000
for each of the years 2006, 2005 and 2004. Operating expenses were $96,480,
$140,090 and $190,560 in 2006, 2005 and 2004, respectively.
The
Company maintains depository accounts with a financial institution in
which the
Company’s major stockholder is also a major stockholder. Fees paid to this bank
in 2006, 2005 and 2004 are insignificant, and as of September 30, 2006,
the
Company had bank balances at this financial institution of approximately
$1.7
million.
The
major stockholder has deposited $0.3 million with the Company as an advance
on
miscellaneous expenditures.
A
son of the major stockholder sold commodity feed products and a limited
amount
of other services to the Company aggregating approximately $0.4 million
in
fiscal 2006. He also leases an insignificant amount of land from the
Company.
The
Company has entered into chicken grower contracts involving farms owned
by
certain of its officers and directors, providing the placement of Company-owned
flocks on their farms during the grow-out phase of production. These
contracts
are on terms substantially the same as contracts entered into by the
Company
with unaffiliated parties and can be terminated by either party upon
completion
of the grow-out of each flock. The aggregate amounts paid by the Company
to
these officers and directors under these grower contracts during each
of the
fiscal years 2006, 2005 and 2004 were less than $1 million in
total.
NOTE
K- COMMITMENTS and CONTINGENCIES
The
Consolidated Statements of Income (Loss) include rental expense for operating
leases of approximately $35.1 million, $35.4 million and $33.1 million
in 2006,
2005 and 2004, respectively. The Company’s future minimum lease commitments
under non-cancelable operating leases are as follows: 2007 -- $30.0 million;
2008 -- $24.0 million; 2009 -- $19.1 million; 2010 -- $12.6 million;
2011 --
$7.7 million and thereafter $0.5 million.
At
September 30, 2006, the Company had $23.4 million in letters of credit
outstanding relating to normal business transactions.
Among
the claims presently pending against the Company are claims brought by
current
and former employees seeking compensation for the time spent donning
and doffing
work equipment. 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.
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.
We intend
to assert vigorous defenses to the litigation. Nonetheless, there can
be no
assurances that other similar claims may not be brought against the Company.
Currently we do not expect these cases to have a material impact on our
financial position or results of operations.
96
Pilgrim's
Pride Corporation
September
30, 2006
On
December 31, 2003, we were served with a purported class action complaint
styled
“Angela Goodwin, Gloria Willis, Johnny Gill, Greg Hamilton, Nathan Robinson,
Eddie Gusby, Pat Curry, Persons Similarly Situated v. ConAgra Poultry
Company
and Pilgrim’s Pride, Incorporated” in the United States District Court, Western
District of Arkansas, El Dorado Division, alleging racial and age discrimination
at one of the facilities we acquired from ConAgra. Two of the named plaintiffs,
Greg Hamilton and Gloria Willis, were voluntarily dismissed from this
action. We
believe we have meritorious defenses to the class certification as well
as the
individual claims and we intend to vigorously oppose class certification
and
defend these claims. After considering our available resources, we do
not expect
these cases to have a material impact on our financial position or results
of
operations.
The
Company is subject to various other legal proceedings and claims which
arise in
the ordinary course of its business. In the opinion of management, the
amount of
ultimate liability with respect to these actions will not materially
affect the
financial position or results of operations of the Company.
We
are a party to many routine contracts in which we provide general indemnities
in
the normal course of business to third parties for various risks. Among
other
considerations, we have not recorded a liability for any of these indemnities
as
based upon the likelihood of payment; the fair value of such indemnities
is
immaterial.
The
Company’s loan agreements generally obligate the Company to reimburse the
applicable lender for incremental increased costs due to a change in
law that
imposes (i) any reserve or special deposit requirement against assets
of,
deposits with or credit extended by such lender related to the loan,
(ii) any
tax, duty or other charge with respect to the loan (except standard income
tax)
or (iii) capital adequacy requirements. In addition, some of the Company’s loan
agreements contain a withholding tax provision that requires the Company
to pay
additional amounts to the applicable lender or other financing party,
generally
if withholding taxes are imposed on such lender or other financing party
as a
result of a change in the applicable tax law. These increased cost and
withholding tax provisions continue for the entire term of the applicable
transaction, and there is no limitation on the maximum additional amounts
the
Company could be obligated to pay under such provisions. Any failure
to pay
amounts due under such provisions generally would trigger an event of
default,
and, in a secured financing transaction, would entitle the lender to
foreclose
upon the collateral to realize the amount due.
The
Company also maintains operating leases for various types of equipment,
some of
which contain residual value guarantees for the market value of assets
at the
end of the term of the lease. The terms of the lease maturities range
from one
to seven years. The maximum potential amount of the residual value
guarantees is estimated to be approximately $17.4 million; however, the
actual
amount would be offset by any recoverable amount based on the fair market
value
of the underlying leased assets. No liability has been recorded related
to this
contingency as the likelihood of payments under these guarantees is not
considered to be probable and the fair value of such guarantees is immaterial.
The Company historically has not experienced significant payments under
similar
residual guarantees.
NOTE
L - 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.
97
Pilgrim's
Pride Corporation
September
30, 2006
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. and Puerto Rico and in 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, operating 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, included 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 chicken 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.
98
Pilgrim's
Pride Corporation
September
30, 2006
The
following table presents certain information regarding our
segments:
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
|
$
|
3,002
|
$
|
435,812
|
$
|
265,314
|
||||
Depreciation
and Amortization:(c)
|
||||||||||
Chicken:
|
||||||||||
United
States
|
$
|
109,346
|
$
|
114,131
|
$
|
89,767
|
||||
Mexico
|
11,305
|
12,085
|
12,217
|
|||||||
Sub-total
|
120,651
|
126,216
|
101,984
|
|||||||
Turkey
|
6,593
|
3,343
|
6,887
|
|||||||
her
Products:
|
||||||||||
United
States
|
7,743
|
5,196
|
4,773
|
|||||||
Mexico
|
146
|
189
|
144
|
|||||||
Sub-total
|
7,889
|
5,385
|
4,917
|
|||||||
Total
|
$
|
135,133
|
$
|
134,944
|
$
|
113,788
|
||||
Total
Assets:
|
||||||||||
Chicken:
|
||||||||||
United
States
|
$
|
1,897,763
|
$
|
2,059,579
|
$
|
1,830,051
|
||||
Mexico
|
361,887
|
287,414
|
212,492
|
|||||||
Sub-total
|
2,259,650
|
2,346,993
|
2,042,543
|
|||||||
Turkey
|
76,908
|
77,319
|
122,163
|
|||||||
Other
Products:
|
||||||||||
United
States
|
88,650
|
85,581
|
78,754
|
|||||||
Mexico
|
1,660
|
2,010
|
2,529
|
|||||||
Sub-total
|
90,310
|
87,591
|
81,283
|
|||||||
Total
|
$
|
2,426,868
|
$
|
2,511,903
|
$
|
2,245,989
|
||||
Capital
Expenditures:
|
||||||||||
Chicken:
|
||||||||||
United
States
|
$
|
133,106
|
$
|
102,470
|
$
|
54,433
|
||||
Mexico
|
6,536
|
4,924
|
8,640
|
|||||||
Sub-total
|
139,642
|
107,394
|
63,073
|
|||||||
Turkey
|
257
|
3,604
|
8,151
|
|||||||
Other
Products:
|
||||||||||
United
States
|
3,567
|
5,448
|
8,395
|
|||||||
Mexico
|
416
|
142
|
23
|
|||||||
Sub-total
|
3,983
|
5,590
|
8,418
|
|||||||
Total
|
$
|
143,882
|
$
|
116,588
|
$
|
79,642
|
99
Pilgrim's
Pride Corporation
September
30, 2006
(a)
|
The
Company acquired the ConAgra chicken division on November 23,
2003 for
$635.2 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)
|
Included
in fiscal 2004 are restructuring charges totaling $72.1 million
offset
somewhat by the non-recurring recovery of $23.8 million representing
the
gain recognized on the insurance proceeds received in connection
with the
October 2002 recall. In addition, the Company estimates its losses
related
to the October 2002 recall (excluding the insurance recovery
described
above) negatively affected gross profit and operating income
by $20.0
million in fiscal 2004 and $65.0 million in fiscal
2003.
|
(c)
|
Includes
amortization of capitalized financing costs of approximately
$2.3 million,
$2.0 million and $1.5 million in fiscal years 2005, 2004 and
2003,
respectively.
|
The
Company had one customer that represented 10% or more of net sales in fiscal
year 2005 and none in fiscal years 2004 and 2003.
As
of each of the three years ended September 30, 2006, 2005 and 2004, Mexico
has
net long lived assets of $116.9 million, $122.1 million and $129.8 million,
respectively.
100
Pilgrim's
Pride Corporation
September
30, 2006
NOTE
M - QUARTERLY RESULTS (UNAUDITED)
(In
thousands, except per share data)
|
Year
ended September 30, 2006
|
||||||||||||||||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
Fiscal
|
||||||||||||||||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
(a)
|
Year
|
|||||||||||||||||||||||||||
Net
sales
|
$
|
1,343,812
|
$
|
1,265,709
|
$
|
1,287,646
|
$
|
1,338,398
|
$
|
5,235,565
|
|||||||||||||||||||||
Gross
profit
|
118,400
|
37,201
|
42,696
|
99,303
|
297,600
|
||||||||||||||||||||||||||
Operating
income (loss)
|
46,198
|
(37,936)
|
(26,737)
|
21,477
|
3,002
|
||||||||||||||||||||||||||
Net
income (loss)
|
25,678
|
(31,954)
|
(20,473)
|
(7,483)
|
(34,232)
|
||||||||||||||||||||||||||
Per
Share:
|
|||||||||||||||||||||||||||||||
Net
income (loss)
|
0.39
|
(0.48)
|
(0.31)
|
(0.11)
|
(0.51)
|
||||||||||||||||||||||||||
Cash
dividends
|
1.0225
|
0.0225
|
0.0225
|
0.0225
|
1.090
|
(In
thousands, except per share data)
|
Year
ended October 1, 2005
|
||||||||||||||||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
Fiscal
|
|||||||||||||||||||||||||||
Quarter
|
Quarter(b)
|
Quarter
|
Quarter
|
Year
|
|||||||||||||||||||||||||||
Net
sales
|
$
|
1,368,247
|
$
|
1,375,321
|
$
|
1,440,039
|
$
|
1,482,668
|
$
|
5,666,275
|
|||||||||||||||||||||
Gross
profit
|
161,118
|
164,055
|
219,221
|
200,805
|
745,199
|
||||||||||||||||||||||||||
Operating
income
|
91,015
|
88,955
|
135,993
|
119,849
|
435,812
|
||||||||||||||||||||||||||
Net
income
|
48,509
|
56,389
|
85,353
|
74,728
|
264,979
|
||||||||||||||||||||||||||
Per
Share:
|
|||||||||||||||||||||||||||||||
Net
income
|
0.73
|
0.85
|
1.28
|
1.12
|
3.98
|
||||||||||||||||||||||||||
Cash
dividends
|
0.015
|
0.015
|
0.015
|
0.015
|
0.06
|
||||||||||||||||||||||||||
(a)
|
Included
in gross profit in the fourth quarter of fiscal 2006 are charges
for
accounting adjustments of $6.4 million, pretax, related to certain
benefit
plans. Included in net income in the fourth quarter of fiscal
2006 is a
$25.8 million tax provision for the American Jobs Creation Act
of 2004 and
a $10.6 million tax benefit for a change in estimate of contingency
reserves as described in Note A-“Business and Summary of Significant
Accounting Policies - Income Taxes”.
|
(b)
|
Included
in net income in the second quarter of fiscal 2005 is a $7.5
million after
tax gain from a litigation
settlement.
|
101
Pilgrim's
Pride Corporation
September
30, 2006
PILGRIM'S
PRIDE CORPORATION
|
|||||||||||||||||||||||||||||||
SCHEDULE
II-VALUATION AND QUALIFYING ACCOUNTS
|
|||||||||||||||||||||||||||||||
Col.
A
|
Col.
B
|
Col.
C
|
Col.
D
|
Col.
E
|
|||||||||||||||||||||||||||
ADDITIONS
|
|||||||||||||||||||||||||||||||
Charged
to
|
|||||||||||||||||||||||||||||||
Balance
at
|
Charged
to
|
Other
|
Balance
at
|
||||||||||||||||||||||||||||
DESCRIPTION
|
Beginning
|
Costs
|
Accounts-
|
Deductions
|
end
|
||||||||||||||||||||||||||
of
Period
|
and
Expenses
|
Describe(1)
|
Describe(2)
|
of
Period
|
|||||||||||||||||||||||||||
Year
ended September 30, 2006:
|
|||||||||||||||||||||||||||||||
Reserves
and allowances deducted
|
|||||||||||||||||||||||||||||||
from
asset accounts:
|
|||||||||||||||||||||||||||||||
Allowance
for doubtful accounts
|
$
|
4,663,155
|
$
|
(100,676
|
)
|
$
|
--
|
$
|
2,478,070
|
$
|
2,084,409
|
||||||||||||||||||||
Year
ended October 1, 2005:
|
|||||||||||||||||||||||||||||||
Reserves
and allowances deducted
|
|||||||||||||||||||||||||||||||
from
asset accounts:
|
|||||||||||||||||||||||||||||||
Allowance
for doubtful accounts
|
$
|
4,244,644
|
$
|
767,923
|
$
|
--
|
$
|
349,412
|
$
|
4,663,155
|
|||||||||||||||||||||
Year
ended October 2, 2004:
|
|||||||||||||||||||||||||||||||
Reserves
and allowances deducted
|
|||||||||||||||||||||||||||||||
from
asset accounts:
|
|||||||||||||||||||||||||||||||
Allowance
for doubtful accounts
|
$
|
1,184,199
|
$
|
1,124,878
|
$
|
5,228,623
|
$
|
3,293,056
|
$
|
4,244,644
|
|||||||||||||||||||||
(1)
Balance of allowance for doubtful accounts established for accounts
receivable acquired from ConAgra.
|
|||||||||||||||||||||||||||||||
(2)
Uncollectible accounts written off, net of
recoveries.
|
102