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  • 1. Building a world-class food company PILGRIM’S PRIDE CORPORATION 2007 ANNUAL REPORT
  • 2. Corporate and Corporate Office Shareholder Information 4845 U.S. Hwy. 271 North P.O. Box 93 ANNUAL MEETING Pittsburg, Texas 75686 The Annual Meeting of Shareholders of Pilgrim’s Pride (903) 434-1000 Corporation will be held January 30, 2008, at (903) 856-7505 (fax) 11:00 a.m., CST at the company’s headquarters building, 4845 U.S. Hwy. 271 North, Pittsburg, Texas. National Sales Office FORM 10-K AND CEO/CFO CERTIFICATIONS Upon written request, we will provide without charge 2777 Stemmons Freeway a copy of our Form 10-K for the fiscal year ended Suite 850 September 29, 2007. Requests should be directed to: Dallas, Texas 75207-2268 (214) 920-2200 Shareholder Relations Officer (800) 824-1159 4845 U.S. Hwy. 271 North (214) 920-2396 (fax) P.O. Box 93 Pittsburg, Texas 75686 Web Site Our Form 10-K also is available on our Web site at www.pilgrimspride.com www.pilgrimspride.com. The most recent certifications by our Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to our Form 10-K. We have also filed with the New York Stock Exchange the most recent Annual CEO Certification as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual. Stock Exchange and Shareholders of Record STOCK EXCHANGE SYMBOLS New York Stock Exchange: NYSE Common Stock Ticker Symbol: PPC SHAREHOLDERS OF RECORD Approximately 35,000 holders of record (including individual participants in security position listings) as of November 19, 2007. Independent Auditors Ernst & Young LLP 2121 San Jacinto Street Dallas, Texas 75201 TRANSFER AGENT AND REGISTRAR Questions regarding stock holdings, certificate replacements/transfer, dividends, and address changes should be directed to: Computershare Investor Services, LLC 2 North LaSalle Street Chicago, Illinois 60602 by telephone: (312) 360-5463 by email: www.computershare.com/contactus web page: www.computershare.com DUPLICATE MAILINGS If you receive duplicate mailings because you have more than one account listing, you may wish to save Pilgrim’s Pride Corporation money by consolidating your accounts. Please phone or write to the agent at the above address.
  • 3. Pilgrim’s Pride Facility Locations Chicken Processing - Fresh Feed Mills Aibonito, Puerto Rico Ambrose, Georgia Crossville, Alabama Athens, Alabama Arcadia, Louisiana Cullman, Alabama Athens, Georgia (2) Athens, Georgia De Queen, Arkansas Batesville, Arkansas Atkins, Arkansas Douglas, Georgia P Franconia Boaz, Alabama Batesville, Arkansas El Dorado, Arkansas New Oxford T Broadway, Virginia Bonlee, North Carolina Enterprise, Alabama Oskaloosa D Salt Lake City D Canton, Georgia Calhoun, Georgia Farmerville, Louisiana Moorefield PC Carrollton, Georgia Canton, Georgia Ft. Payne, Alabama Broadway C Cincinnati D Chattanooga, Tennessee Chattanooga, Tennessee Gainesville, Georgia Clinton, Arkansas Colón, Mexico Jasper, Alabama Dallas, Texas Commerce, Georgia Live Oak, Florida C Siler City Dalton, Georgia El Dorado, Arkansas Mayfield, Kentucky (2) Mayfield C Sanford C De Queen, Arkansas Enterprise, Alabama Moorefield, West Virginia Chicken Processing - Fresh D Nashville C C Marshville P C Chattanooga C Batesville Douglas, Georgia Falkville, Alabama Moulton, Alabama Prepared Foods P C Dalton C Clinton C Athens C Ellijay P C Sumter El Dorado, Arkansas Gainesville, Georgia Nacogdoches, Texas Turkey Processing - Fresh C Guntersville C Gainesville T C Russellville C Canton P Elberton Ellijay, Georgia Guntersville, Alabama Nashville, Arkansas Distribution Center P C Boaz C Athens D C De Queen C Carrollton Enterprise, Alabama Harrisonburg, Virginia Natchitoches, Louisiana Phoenix D C El Dorado World Headquarters D P C Mt. Pleasant Farmerville, Louisiana Hope, Arkansas Pittsburg, Texas (3) Pittsburg P C Farmerville C Douglas D Arlington Gainesville, Georgia Las Piedras, Puerto Rico Querétaro, Mexico (5) P Bossier City D Jackson P C Dallas C Natchitoches El Paso C Enterprise D Guntersville, Alabama Live Oak, Florida Ranburne, Alabama P C Nacogdoches P Waco C Live Oak C Lufkin Live Oak, Florida Many, Louisiana Russellville, Alabama Los Cues, Mexico Mayfield, Kentucky Saltillo, Mexico Houston D Lufkin, Texas Moorefield, West Virginia San Luis Potosí, Mexico San Antonio D Plant City D Marshville, North Carolina Mt. Pleasant, Texas Siler City, North Carolina Pompano Beach D Mayfield, Kentucky Nacogdoches, Texas Staley, North Carolina Moorefield, West Virginia Nashville, Arkansas Sumter, South Carolina Mt. Pleasant, Texas (2) Pittsburg, Texas Talking Rock, Georgia Nacogdoches, Texas Querétaro, Mexico Talmo, Georgia Reynosa D Natchitoches, Louisiana Saltillo, Mexico Monterrey Torreón D D Russellville, Alabama San Luis Potosí, Mexico Distribution Centers San Luis Potosí, Mexico Staley, North Carolina Aguascalientes, Mexico Aibonito Ciudad Victoria DC D Sanford, North Carolina Sumter, South Carolina Aibonito, Puerto Rico Siler City, North Carolina Teneha, Texas D C San Luis Potosí Arlington, Texas Aguascalientes D Tampico D Sumter, South Carolina Tuscumbia, Alabama Salt Lake City, Utah Cincinnati, Ohio Tepeji del Rio, Mexico Waco, Georgia D Guadalajara D Querétaro San Antonio, Texas Ciudad Victoria, Mexico Puerto Vallarta C Los Cues D D Poza Rica Wingate, North Carolina San Luis Potosí, Mexico (2) D C Tepeji del Rio Coatzacoalcos, Mexico Tampico, Mexico Morelia D Veracruz D Prepared Foods Processing El Paso, Texas D Tlalnepantla Tepeji del Rio, Mexico Hatcheries Boaz, Alabama Guadalajara, Mexico Coatzacoalcos Tlalnepantla, Mexico (2) D Bossier City, Louisiana Aibonito, Puerto Rico Houston, Texas Torreón, Mexico Chattanooga, Tennessee Albertville, Alabama Jackson, Mississippi Veracruz, Mexico Dallas, Texas Athens, Georgia Monterrey, Mexico Elberton, Georgia Atkins, Arkansas Morelia, Mexico Farmerville, Louisiana Batesville, Arkansas Mt. Pleasant, Texas Administration and Sales Franconia, Pennsylvania Bowdon, Georgia Nashville, Tennessee Aibonito, Puerto Rico Moorefield, West Virginia Broadway, Virginia Oskaloosa, Iowa Atlanta, Georgia Mt. Pleasant, Texas Calhoun, Georgia Phoenix, Arizona Bentonville, Arkansas Nacogdoches, Texas Canton, Georgia Plant City, Florida Dallas, Texas Sumter, South Carolina Center, Texas Pompano Beach, Florida Mexico City, Mexico Waco, Texas Choudrant, Louisiana Poza Rica, Mexico Pittsburg, Texas Cohutta, Georgia Puerto Vallarta, Mexico Querétaro, Mexico Commerce, Georgia Querétaro, Mexico Rockwall, Texas Turkey Processing - Fresh Concord, North Carolina Reynosa, Mexico Timberville, Virginia New Oxford, Pennsylvania
  • 4. Dear Fellow Shareholders: Fscal 2007 proved to be a year of sgnfcant change for Plgrm’s Prde Corporaton as we completed the largest acquston n our 61-year hstory and returned to proftablty on the strength of hgher market prcng, strong export demand, cost savngs and growth n our consumer retal busness. Our $1.2 bllon purchase of Gold Kst Inc. n December 2006 created the world’s largest chcken company. Whle the ntegraton of Gold Kst has commanded a great deal of tme, attenton and resources over the past year, we beleve the acquston has postoned us for stronger growth n the years ahead by broadenng our geographc reach, expandng our customer base and strengthenng our product lne. By all accounts, the process of combnng Plgrm’s Prde and Gold Kst nto one organzaton wth a common culture and focus on the customer has been an overwhelmng success. Thanks to the hard work and commtment of our 55,000 employees n the Unted States, Puerto Rco and Mexco, we trpled our orgnal synergy target and delvered $150 mllon n annualzed cost savngs three months ahead of schedule. Whle we stll have a lot of work head of us, our employees deserve a lot of credt for achevng so much so quckly. Those cost savngs wll be mportant n the year ahead, as hgher feed-ngredent and fuel costs pose a sgnfcant challenge to our busness n 2008. Our costs for corn, soybean meal and other feed ngredents rose more than $600 mllon n fscal 2007, and current projectons for 2008 call for further ncreases. Growng demand for corn-based ethanol s fuelng much of these. Fortunately, we were able to overcome much of those cost ncreases n 2007 through hgher market prcng brought about by producton cutbacks by Plgrm’s Prde and several other poultry companes. Those cutbacks helped ncrease market prcng last wnter and nto the sprng, a tme when demand s seasonally low and prces are typcally weak. That strong prcng held nto the summer months, helpng Plgrm’s Prde return to proftablty n the second half of the year and, for the full 2007 fscal year, earn $47.0 mllon, or $0.71 a share, on record sales of $7.6 bllon. There were several notable achevements n fscal 2007: Our consumer retal segment contnued to post good growth as a result of ncreased penetraton of  supermarket meat and del cases and our growng role as a category management partner. For example, we have seen strong demand for a number of our wng products, ncludng our consumer-preferred Wng Dngs and Wng Zngs products, and we’re ganng busness wth customers as a result. Plgrm’s Prde’s foodservce busness turned n another good year as a result of growth n our  Top 10 accounts and contnued progress n school foodservce accounts, health care, mltary and other markets. We were successful n makng mprovements to the acqured Gold Kst product mx, upgradng  some of the commodty-type meat nto hgher-margn, value-added products. Ths s a key part of our growth strategy and an area n whch we have enjoyed good success over the years. We realgned the reportng structure wthn the operatons group so that we can delver mproved  servce to our customers and operate more effcently. 
  • 5. In addton, our export busness contnues to grow, accountng for approxmately 10% of our U.S. chcken sales. Chna emerged as an aggressve buyer of U.S. chcken and a number of smaller countres, ncludng Cuba, ncreased ther purchases. Plgrm’s Prde has a large and growng presence n many of these markets. And n 2007, our Mexco operatons returned to proftablty as a result of mproved prcng. We also faced our share of challenges over the past year. Despte favorable ndustry fundamentals and our return to proftablty n 2007, our net earnngs for the year came n below our own expectatons. Ths was mostly ted to operatonal neffcences, labor shortages and hgher fuel costs whch resulted n hgher producton and freght costs. Automaton wll be a key focus of our captal nvestment program n fscal 2008. We beleve ths nvestment, whch ncludes labor-reducng technology, wll enable us to move more products through our plants effcently and help allevate some of the challenges we faced n 2007 from a tght labor market and hgher nput costs. One thng s clear: we smply must fnd ways to operate more effcently, as nearly all of our costs are rsng. At Plgrm’s Prde, we are always huntng for ways to run our busness more cost-effectvely. In addton to our company-wde focus on process mprovement teams snce 1992, we have cross-organzatonal and synergy teams scourng every ste for new ways to take costs out of our busness. These teams have drlled down nto every aspect of our operatons, from sales and logstcs to processng and renderng. There s no queston that we are facng a tough – and volatle – operatng envronment. Lookng ahead, we beleve that managng our busness n ths envronment of expected volatlty s the greatest challenge facng us today, but one that we thnk s certanly achevable. It wll requre several actons. Frst, we must be very cautous n expandng the chcken supply. At Plgrm’s Prde, we have to be prudent n our decsons to ensure that we are able to manage our nput costs. Second, we must take advantage of every opportunty to effectvely manage our nput costs aganst our longer-term contracts. Thrd, we must keep open the lnes of communcaton wth our customers so they understand the challenges we face n such a volatle envronment and the mportance of workng together to address these ssues. And fnally, we must stay focused on drvng out costs and fndng ways to serve our customers better so that we can poston our company for sustaned, proftable growth n the future and create new value for our shareholders. We apprecate your contnued support and commtment as we work toward achevng our vson of beng a “world-class food company…better than the best” and n fulfllng our msson of provdng “outstandng customer satsfacton…every day!” Sncerely, Lonne “Bo” Plgrm Lonne Ken Plgrm Senor Charman Charman 
  • 6. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934 For the fiscal year ended September 29, 2007 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commsson Fle number 1-9273 PILGRIM’S PRIDE CORPORATION (Exact name of regstrant as specfed n ts charter) Delaware 75-1285071 (State or other jursdcton of (I.R.S. Employer Identfcaton No.) ncorporaton or organzaton) 4845 US Hwy 271 North Pttsburg, Texas 75686-0093 (Address of prncpal executve offces) (Zp code) Regstrant’s telephone number, ncludng area code: (903) 434-1000 Securtes regstered pursuant to Secton 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, Par Value $0.01 New York Stock Exchange Securtes regstered pursuant to Secton 12(g) of the Act: None
  • 7. PILGRIM’S PRIDE CORPORATION September 29, 2007 Indcate by check mark f the regstrant s a well-known seasoned ssuer, as defned n Rule 405 of the Securtes Act. Yes  No  Indcate by check mark f the regstrant s not requred to fle reports pursuant to Secton 13 or Secton 15(d) of the Exchange Act. Yes  No  Indcate by check mark whether the Regstrant (1) has fled all reports requred to be fled by Secton 13 or 15(d) of the Securtes Exchange Act of 1934 durng the precedng 12 months (or for such shorter perod that the Regstrant was requred to fle such reports), and (2) has been subject to such flng requrements for the past 90 days. Yes  No  Indcate by check mark f dsclosure of delnquent flers pursuant to Item 405 of Regulaton S-K s not contaned heren, and wll not be contaned, to the best of Regstrant’s knowledge, n defntve proxy or nformaton statements ncorporated by reference n Part III of ths Form 10-K or any amendment to ths Form 10-K.  Indcate by check mark whether the regstrant s a large accelerated fler, an accelerated fler, or a non- accelerated fler. See defnton of “accelerated fler” and “large accelerated fler” n Rule 12B-2 of the Exchange Act. Large Accelerated Fler  Accelerated Fler  Non-accelerated Fler  Indcate by check mark whether the regstrant s a shell company (as defned n Rule 12b-2 of the Exchange Act). Yes  No  The aggregate market value of the Regstrant’s Common Stock, $0.01 par value, held by non-afflates of the Regstrant as of March 31, 2007, was $1,340,874,524. For purposes of the foregong calculaton only, all drectors, executve offcers and 5% benefcal owners have been deemed afflates. Number of shares of the Regstrant’s Common Stock outstandng as of November 13, 2007, was 66,555,733. DOCUMENTS INCORPORATED BY REFERENCE Portons of the Regstrant’s proxy statement for the annual meetng of stockholders to be held January 30, 2008 are ncorporated by reference nto Part III. 2
  • 8. PILGRIM’S PRIDE CORPORATION September 29, 2007 PILGRIM’S PRIDE CORPORATION FORM 10-K TABLE OF CONTENTS PART I Page Item 1. Busness 4 Item 1A. Rsk Factors 21 Item 1B. Unresolved Staff Comments 30 Item 2. Propertes 30 Item 3. Legal Proceedngs 32 Item 4. Submsson of Matters to a Vote of Securty Holders 34 PART II Item 5. Market for Regstrant’s Common Equty, Related Stockholder Matters and Issuer Purchases of Equty Securtes 35 Item 6. Selected Fnancal Data 40 Item 7. Management’s Dscusson and Analyss of Fnancal Condton and Results of Operatons 43 Item 7A. Quanttatve and Qualtatve Dsclosures about Market Rsk 62 Item 8. Fnancal Statements and Supplementary Data (see Index to Fnancal Statements and Schedules below) 63 Item 9. Changes n and Dsagreements wth Accountants on Accountng and Fnancal Dsclosure 63 Item 9A. Controls and Procedures 63 Item 9B. Other Informaton 68 PART III Item 10. Drectors and Executve Offcers and Corporate Governance 68 Item 11. Executve Compensaton 68 Item 12. Securty Ownershp of Certan Benefcal Owners and Management and Related Stockholder Matters 68 Item 13. Certan Relatonshps and Related Transactons, and Drector Independence 68 Item 14. Prncpal Accountng Fees and Servces 69 PART IV Item 15. Exhbts and Fnancal Statement Schedules 69 Sgnatures 76 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Regstered Publc Accountng Frm 79 Consoldated Balance Sheets as of September 29, 2007 and September 30, 2006 80 Consoldated Statements of Operatons for each of the three years ended September 29, 2007 81 Consoldated Statements of Stockholders’ Equty for each of the three years ended September 29, 2007 82 Consoldated Statements of Cash Flows for each of the three years ended September 29, 2007 83 Notes to Consoldated Fnancal Statements 84 Schedule II - Valuaton and Qualfyng Accounts for each of the three years ended September 29, 2007 110 3
  • 9. PILGRIM’S PRIDE CORPORATION September 29, 2007 PART I Item 1. Business (a) General Development of Business Overview The Company, whch was ncorporated n Texas n 1968 and rencorporated n Delaware n 1986, s the successor to a partnershp founded n 1946 as a retal feed store. Over the years, the Company grew through both nternal growth and varous acqustons of farmng operatons and poultry processors ncludng the sgnfcant acqustons n fscal 2004 and 2007 dscussed below. We are the world’s largest chcken company and have one of the best known brand names n the chcken ndustry. In the U.S., we produce both prepared and fresh chcken and fresh turkey; whle n Mexco and Puerto Rco, we exclusvely produce fresh chcken. Through vertcal ntegraton, we control the breedng, hatchng and growng of chckens. We also control the processng, preparaton, packagng and sale of our product lnes, whch we beleve has made us one of the hghest-qualty, lowest-cost producers of chcken n North Amerca. We have consstently appled a long-term busness strategy of focusng our growth efforts on the hgher-value, hgher-margn prepared foods products and have become a recognzed ndustry leader n ths market segment. Accordngly, our sales efforts have tradtonally been targeted to the foodservce ndustry, prncpally chan restaurants and food processors, and have more recently been targeted to retalers seekng value-added products. We have contnually made nvestments to ensure our prepared foods capabltes reman state-of-the-art and have complemented these nvestments wth a substantal and successful research and development effort. In fscal 2007, we sold 7.7 bllon pounds of dressed chcken and 151.7 mllon pounds of dressed turkey and generated net sales of $7.6 bllon. In fscal 2007, our U.S. operatons, ncludng Puerto Rco, accounted for 93.3% of our net sales, wth the remanng 6.7% arsng from our Mexco operatons. Recent Business Acquisition Activities On December 27, 2006, we acqured a majorty of the outstandng common stock of Gold Kst Inc. (“Gold Kst”) through a tender offer. We subsequently acqured all remanng Gold Kst shares and, on January 9, 2007, Gold Kst became our wholly owned subsdary. We sometmes refer to ths acquston as the “fscal 2007 acquston.” For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of Gold Kst n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of Gold Kst from December 27, 2006 through December 30, 2006 were not materal. Gold Kst operated a fully-ntegrated chcken producton busness that ncluded lve producton, processng, marketng and dstrbuton. Ths acquston has postoned us as the world’s leadng chcken producer, and that poston has provded us wth enhanced abltes to compete more effcently and provde even better customer servce, expand our geographc reach and customer base, further pursue value-added and prepared foods opportuntes, and offer long-term growth opportuntes for our stockholders, employees and growers. We are also better postoned to compete n the ndustry both nternatonally and n the U.S. as consoldatons occur. 4
  • 10. PILGRIM’S PRIDE CORPORATION September 29, 2007 On November 23, 2003, we completed the purchase of all the outstandng stock of the corporatons represented as the ConAgra Foods, Inc. chcken dvson (“ConAgra chcken dvson”). We sometmes refer to ths acquston as the “fscal 2004 acquston.” The acqured busness has been ncluded n our results of operatons snce the date of the acquston. The acquston provded us wth addtonal lnes of specalty prepared chcken products, well-known brands, well-establshed dstrbutor relatonshps and Southeastern U.S. processng facltes. The acquston also ncluded the largest dstrbutor of chcken products n Puerto Rco. Strategy Our objectves are (1) to ncrease sales, proft margns and earnngs and (2) to outpace the growth of, and mantan our leadershp poston n, the chcken ndustry. To acheve these goals, we plan to contnue pursung the followng strateges: Capitalize on significant scale with leading industry position and brand recognition. We are - the largest producer of chcken products n the U.S. We estmate that our U.S. market share, based on the total annual chcken producton n the U.S., s approxmately 25%, whch s approxmately 20% hgher than the second largest compettor n the chcken ndustry. The complementary ft of markets, dstrbutor relatonshps and geographc locatons are a few of the many benefts we realzed from our fscal 2004 and 2007 acqustons prevously dscussed. We beleve the acqured busnesses’ establshed relatonshps wth broad-lne natonal dstrbutors and retalers have enabled us to expand our customer base and provde natonwde dstrbuton capabltes for all of our product lnes. As a result, we beleve we are one of only two U.S. chcken producers that can supply the growng demand for a broad range of prce compettve standard and specalzed products wth well-known brand names on a natonwde bass from a sngle source suppler. Capitalize on attractive U.S. prepared foods market. We focus our U.S. growth ntatves on - sales of prepared foods to the foodservce and value-added retal markets because they contnue to be two of the fastest growng and most proftable segments n the poultry ndustry. Products sold to these market segments requre further processng, whch enables us to charge a premum for our products, reducng the mpact of feed ngredent costs on our proftablty and mprovng and stablzng our proft margns. Feed ngredent costs typcally decrease from approxmately 33%- 49% of total producton cost for fresh chcken products to approxmately 17%-24% for prepared chcken products. Due to ncreased demand from our customers and our fscal 2004 and 2007 acqustons, our sales of prepared chcken products grew from $921.1 mllon n fscal 2003 to $2,492.4 mllon n fscal 2007, a compounded annual growth rate of 28.3%. Prepared foods sales represented 39.5% of our total U.S. chcken revenues n fscal 2007, whch we beleve provdes us wth a sgnfcant compettve advantage and reduces our exposure to feed prce fluctuatons. The addton of well-known brands, ncludng Perce® and Easy-Entree®, from our fscal 2004  acquston sgnfcantly expanded our already szeable prepared foods chcken offerngs. Smlarly, our acquston of hghly customzed cooked chcken products, ncludng breaded cutlets, szzle strps and Wng-Dngs®, for restaurants and specalty foodservce customers from ths acquston complemented our exstng lnes of pre-cooked breast fllets, tenderlons, burgers, nuggets, salads and other prepared products for nsttutonal foodservce, fast-food and retal customers. 5
  • 11. PILGRIM’S PRIDE CORPORATION September 29, 2007 Emphasize customer-driven research and technology. We have a long-standng reputaton for - customer-drven research and development n desgnng new products and mplementng advanced processng technology. Ths enables us to better meet our customers’ changng needs for product nnovaton, consstent qualty and cost effcency. In partcular, customer-drven research and development s ntegral to our growth strategy for the prepared foods market n whch customers contnue to place greater mportance on value-added servces. Our research and development personnel often work drectly wth customers n developng products for them, whch we beleve helps promote long-term relatonshps. Enhance U.S. fresh chicken profitability through value-added, branded products. Our U.S. - fresh chcken sales accounted for $3,255.7 mllon, or 51.4%, of our U.S. chcken sales for fscal 2007. In addton to mantanng the sales of tradtonal fresh chcken products, our strategy s to shft the mx of our U.S. fresh chcken products by contnung to ncrease sales of hgher margn, faster growng products, such as fxed weght packaged products and marnated chcken and chcken parts, and to contnually shft portons of ths product mx nto the hgher value and margn prepared chcken products. Much of our fresh chcken products are sold under the Plgrm’s Prde® brand name, whch s a well-known brand n the chcken ndustry. Improve operating efficiencies and increase capacity on a cost-effective basis. As producton - and sales grow, we contnue to focus on mprovng operatng effcences by nvestng n state-of- the-art technology and processes, tranng and our total qualty management program. Specfc ntatves nclude: - standardzng lowest-cost producton processes across our varous facltes; - centralzng purchasng and other shared servces; and - standardzng and upgradng technology where approprate. In addton, we have a proven hstory of ncreasng capacty whle mprovng operatng effcences at acqured propertes n both the U.S. and Mexco. As a result, accordng to ndustry data, snce 1993 we have consstently been one of the lower-cost producers of chcken. Continue to seek strategic acquisitions. We have pursued opportuntes to expand through - acqustons n the past. We expect to contnue to pursue acquston opportuntes n the future that would complement our exstng busnesses, broaden our producton capabltes and/or mprove our operatng effcences. Capitalize on export opportunities. We ntend to contnue to focus on nternatonal opportuntes - to complement our U.S. chcken operatons and captalze on attractve export markets. Accordng to the USDA, the export of U.S. chcken products ncreased 9.7% from 2002 through 2006. We beleve U.S. chcken exports wll contnue to grow as worldwde demand ncreases for hgh-grade, low-cost meat proten sources. Accordng to USDA data, the export market for chcken s expected to grow at a compounded annual growth rate of 1.8% from 2006 to 2011. Hstorcally, we have targeted nternatonal markets to generate addtonal demand for our dark chcken meat, whch s a 6
  • 12. PILGRIM’S PRIDE CORPORATION September 29, 2007 natural by-product of our U.S. operatons gven our concentraton on prepared foods products and the U.S. customers’ general preference for whte chcken meat. As part of ths ntatve, we have created a sgnfcant nternatonal dstrbuton network nto several markets, ncludng Mexco, whch we now utlze not only for dark chcken meat dstrbuton, but also for varous hgher margn prepared foods and other poultry products. We employ both a drect nternatonal sales force and export brokers. Our key nternatonal markets nclude Eastern Europe, ncludng Russa; the Far East, ncludng Chna; and Mexco. We beleve that we have substantal opportuntes to expand our sales to these markets by captalzng on drect nternatonal dstrbuton channels supplemented by our exstng export broker relatonshps. Our export sales accounted for approxmately 10.1% and 21.1% of our U.S. chcken sales and pounds, respectvely, for fscal 2007. (b) Financial Information About Segments We operate n three reportable busness segments as (1) a producer and seller of chcken products, (2) a producer and seller of turkey products and (3) a seller of other products. See a dscusson of our busness segments n Item 7. “Management’s Dscusson and Analyss of Fnancal Condton and Results of Operatons.” (c) Narrative Description of Business Products and Markets Our chcken products consst prmarly of: (1) Prepared chcken products, whch are products such as porton-controlled breast fllets, tenderlons and strps, delcatessen products, salads, formed nuggets and pattes and bone-n chcken parts. These products are sold ether refrgerated or frozen and may be fully cooked, partally cooked or raw. In addton, these products are breaded or non-breaded and ether pre- marnated or non-marnated. (2) Fresh chcken, whch s refrgerated (non-frozen) whole or cut-up chcken sold to the foodservce ndustry ether pre-marnated or non-marnated. Fresh chcken also ncludes prepackaged case- ready chcken, whch ncludes varous combnatons of freshly refrgerated, whole chckens and chcken parts n trays, bags or other consumer packs labeled and prced ready for the retal grocer’s fresh meat counter. (3) Export and other chcken products, whch are prmarly parts and whole chcken, ether refrgerated or frozen for U.S. export or domestc use, and chcken prepared foods products for U.S. export. Our turkey products consst prmarly of fresh and frozen whole turkeys. 7
  • 13. PILGRIM’S PRIDE CORPORATION September 29, 2007 Our chcken and turkey products are sold prmarly to: (1) Foodservce customers, whch are customers such as chan restaurants, food processors, foodservce dstrbutors and certan other nsttutons. We sell products to our foodservce customers rangng from porton-controlled refrgerated poultry parts to fully-cooked and frozen, breaded or non-breaded poultry parts or formed products. (2) Retal customers, whch are customers such as grocery store chans, wholesale clubs and other retal dstrbutors. We sell to our retal customers branded, pre-packaged, cut-up and whole poultry, and fresh refrgerated or frozen whole poultry and poultry parts n trays, bags or other consumer packs. (3) Export and other product customers, who purchase chcken products for export to Eastern Europe, ncludng Russa; the Far East, ncludng Chna; Mexco; and other world markets. Our export and other chcken products, wth the excepton of our exported prepared foods products, consst of whole chckens and chcken parts sold prmarly n bulk, non-branded form, ether refrgerated to dstrbutors n the U.S. or frozen for dstrbuton to export markets. Our other products consst of: (1) Other types of meat along wth varous other staples purchased and sold by our dstrbuton centers as a convenence to our chcken customers who purchase through the dstrbuton centers. (2) The producton and sale of table eggs, commercal feeds and related tems, lve hogs and protens. The followng table sets forth, for the perods begnnng wth fscal 2003, net sales attrbutable to each of our prmary product lnes and markets served wth those products. Consstent wth our long-term strategy, we emphaszed our U.S. growth ntatves on sales of prepared foods products, prmarly to the foodservce market. Ths product and market segment has experenced, and we beleve wll contnue to experence, greater growth than fresh chcken products. We based the table on our nternal sales reports and ther classfcaton of product types and customers. 8
  • 14. PILGRIM’S PRIDE CORPORATION September 29, 2007 Fiscal Year Ended (a) Oct. 2, 2004(a) Sept. 29, 2007 Sept. 30, 2006 Oct. 1, 2005 Sept. 27, 2003 (52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) U.S. Chicken Sales: (In thousands) Prepared Foods: Foodservce $ 1,897,643 $ 1,567,297 $ 1,622,901 $ 1,647,904 $ 731,331 Retal 511,470 308,486 283,392 213,775 163,018 Total Prepared Foods 2,409,113 1,875,783 1,906,293 1,861,679 894,349 Fresh Chcken: Foodservce 2,280,057 1,388,451 1,509,189 1,328,883 474,251 Retal 975,659 496,560 612,081 653,798 257,911 Total Fresh Chcken 3,255,716 1,885,011 2,121,270 1,982,681 732,162 Export and Other: Export: Prepared Foods 83,317 64,338 59,473 34,735 26,714 Chcken 559,429 257,823 303,150 212,611 85,087 Total Export(b) 642,746 322,161 362,623 247,346 111,801 Other Chcken By-Products 20,779 15,448 21,083 (b) (b) Total Export and Other 663,525 337,609 383,706 247,346 111,801 Total U.S. Chcken 6,328,354 4,098,403 4,411,269 4,091,706 1,738,312 Mexico Chicken Sales: 488,466 418,745 403,353 362,442 349,305 Total Chcken Sales 6,816,820 4,517,148 4,814,622 4,454,148 2,087,617 U.S. Turkey Sales: Foodservce 14,025 30,269 73,908 120,676 138,405 Retal 104,239 96,968 125,741 154,289 154,552 118,264 127,237 199,649 274,965 292,957 Export and Other(b) 4,100 3,664 5,189 11,287 12,721 Total U.S. Turkey Sales 122,364 130,901 204,838 286,252 305,678 Other Products: Unted States 638,738 570,510 626,056 600,091 207,284 Mexco 20,677 17,006 20,759 23,232 18,766 Total Other Products 659,415 587,516 646,815 623,323 226,050 Total Net Sales $ 7,598,599 $ 5,235,565 $ 5,666,275 $ 5,363,723 $ 2,619,345 Total Chcken Prepared Foods $ 2,492,430 $ 1,940,121 $ 1,965,766 $ 1,896,414 $ 921,063 (a) The fscal 2007 acquston on December 27, 2006 and fscal 2004 acquston on November 23, 2003 have been accounted for as purchases. For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of the fscal 2007 acquston n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of the fscal 2007 acquston from December 27, 2006 through December 30, 2006 were not materal. The results of operatons for the fscal 2004 acquston have been ncluded n our consoldated results of operatons snce the acquston date. 9
  • 15. PILGRIM’S PRIDE CORPORATION September 29, 2007 (b) The Export and Other category hstorcally ncluded the sales of certan chcken by-products sold n nternatonal markets, as well as the export of chcken and turkey products. Pror to fscal 2005, by-product sales were not specfcally dentfable from the Export and Other category. Accordngly, a detal breakout s not avalable pror to such tme; however, the Company beleves that the relatve splt between these categores as shown n fscal 2005 would not be dssmlar n the pror fscal perods. Export tems nclude certan poultry parts that have greater value n some overseas markets than n the U.S. The followng table sets forth, begnnng wth fscal 2003, the percentage of net U.S. chcken and turkey sales attrbutable to each of our prmary product lnes and the markets servced wth those products. We based the table and related dscusson on our nternal sales reports and ther classfcaton of product types and customers. Fiscal Year Ended (a) Oct. 2, 2004(a) Sept. 29, 2007 Sept. 30, 2006 Oct. 1, 2005 Sept. 27, 2003 U.S. Chicken Sales: Prepared Foods: Foodservce 30.1 % 38.2 % 36.8 % 40.3 % 42.1 % Retal 8.1 % 7.5 % 6.4 % 5.2 % 9.4 % Total Prepared Foods 38.2 % 45.7 % 43.2 % 45.5 % 51.5 % Fresh Chcken: Foodservce 36.0 % 33.9 % 34.2 % 32.5 % 27.3 % Retal 15.4 % 12.1 % 13.9 % 16.0 % 14.8 % Total Fresh Chcken 51.4 % 46.0 % 48.1 % 48.5 % 42.1 % Export and Other: Export: Prepared Foods 1.3 % 1.6 % 1.3 % 0.8 % 1.5 % Chcken 8.8 % 6.3 % 6.9 % 5.2 % 4.9 % Total Export(b) 10.1 % 7.9 % 8.2 % 6.0 % 6.4 % Other Chcken By-Products 0.3 % 0.4 % 0.5 % (b) % (b) % Total Export and Other 10.4 % 8.3 % 8.7 % 6.0 % 6.4 % Total U.S. Chcken 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Total Chcken Prepared Foods as a percentage of U.S. Chcken 39.5 % 47.3 % 44.5 % 46.3 % 53.0 % U.S. Turkey Sales: Foodservce 11.4 % 23.1 % 36.0 % 42.1 % 45.3 % Retal 85.2 % 74.1 % 61.4 % 53.9 % 50.5 % 96.6 % 97.2 % 97.4 % 96.0 % 95.8 % Export and Other(b) 3.4 % 2.8 % 2.6 % 4.0 % 4.2 % Total U.S. Turkey 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % (a) The fscal 2007 acquston on December 27, 2006 and fscal 2004 acquston on November 23, 2003 have been accounted for as purchases. For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of the fscal 2007 acquston n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of the fscal 2007 acquston from December 27, 2006 through December 30, 2006 were not materal. The results of operatons for the fscal 2004 acquston have been ncluded n our consoldated results of operatons snce the acquston date. 10
  • 16. PILGRIM’S PRIDE CORPORATION September 29, 2007 (b) The Export and Other category hstorcally ncluded the sales of certan chcken by-products sold n nternatonal markets as well as the export of chcken and turkey products. Pror to fscal 2005, by-product sales were not specfcally dentfable from the Export and Other category. Accordngly, a detal breakout s not avalable pror to such tme; however, the Company beleves that the relatve splt between these categores as shown n fscal 2005 would not be dssmlar n the pror fscal perods. Export tems nclude certan poultry parts that have greater value n some overseas markets than n the U.S. UNITED STATES Product Types Chicken Products Prepared Foods Overview. Durng fscal 2007, $2,409.1 mllon of our U.S. chcken sales were n prepared foods products to foodservce customers and retal dstrbutors, as compared to $894.3 mllon n fscal 2003. These numbers reflect the strategc focus for our growth and our fscal 2004 and 2007 acqustons. The market for prepared chcken products has experenced, and we beleve wll contnue to experence, greater growth, hgher average sales prces and hgher margns than fresh chcken products. Also, the producton and sale n the U.S. of prepared foods products reduce the mpact of the costs of feed ngredents on our proftablty. Feed ngredent costs are the sngle largest component of our total U.S. cost of sales, representng approxmately 35.8% of our U.S. cost of sales for fscal 2007. The producton of feed ngredents s postvely or negatvely affected prmarly by weather patterns throughout the world, the global level of supply nventores, demand for feed ngredents and the agrcultural polces of the U.S. and foregn governments. As further processng s performed, feed ngredent costs become a decreasng percentage of a product’s total producton cost, thereby reducng ther mpact on our proftablty. Products sold n ths form enable us to charge a premum, reduce the mpact of feed ngredent costs on our proftablty and mprove and stablze our proft margns. We establsh prces for our prepared chcken products based prmarly upon perceved value to the customer, producton costs and prces of competng products. The majorty of these products are sold pursuant to agreements wth varyng terms that ether set a fxed prce for the products or set a prce accordng to formulas based on an underlyng commodty market, subject n many cases to mnmum and maxmum prces. Fresh Chicken Overview. Our fresh chcken busness s an mportant component of our sales and accounted for $3,255.7 mllon, or 51.4%, of our total U.S. chcken sales for fscal 2007. In addton to mantanng sales of mature, tradtonal fresh chcken products, our strategy s to shft the mx of our U.S. fresh chcken products by contnung to ncrease sales of hgher margn, faster growng products, such as marnated chcken and chcken parts, and to contnually shft portons of ths product mx nto the hgher value and margn prepared foods category. Most fresh chcken products are sold to establshed customers, based upon certan weekly or monthly market prces reported by the USDA and other publc prce reportng servces, plus a markup, whch s dependent upon the customer’s locaton, volume, product specfcatons and other factors. We beleve our practces wth respect to sales of fresh chcken are generally consstent wth those of our 11
  • 17. PILGRIM’S PRIDE CORPORATION September 29, 2007 compettors. The majorty of these products are sold pursuant to agreements wth varyng terms that ether set a fxed prce for the products or set a prce accordng to formulas based on an underlyng commodty market, subject n many cases to mnmum and maxmum prces. Export and Other Chicken Products Overview. Our export and other products consst of whole chckens and chcken parts sold prmarly n bulk, non-branded form, ether refrgerated to dstrbutors n the U.S. or frozen for dstrbuton to export markets, and branded and non-branded prepared foods products for dstrbuton to export markets. In fscal 2007, approxmately $663.5 mllon, or 10.4%, of our total U.S. chcken sales were attrbutable to U.S. chcken export and other products. These exports and other products, other than the prepared foods products, have hstorcally been characterzed by lower prces and greater prce volatlty than our more value-added product lnes. Turkey Products Turkey Overview. Our turkey busness accounted for $122.4 mllon of sales n fscal 2007. As s typcal for the ndustry, a sgnfcant porton of the sales of fresh and frozen whole turkeys s seasonal n nature, wth the heght of sales occurrng durng the Thanksgvng and Chrstmas holdays. Most turkey products are sold to establshed customers pursuant to agreements wth varyng terms that ether set a fxed prce or are subject to a market drven formula wth some agreements based upon market prces reported by the USDA and other publc prce reportng servces, plus a markup, subject n many cases to mnmum and maxmum prces. Ths s dependent upon the customer’s locaton, volume, product specfcatons and other factors. We beleve our practces wth respect to sales of fresh turkey are generally consstent wth those of our compettors wth smlar programs. Markets for Chicken Products Foodservice. The foodservce market prncpally conssts of chan restaurants, food processors, broad-lne dstrbutors and certan other nsttutons located throughout the contnental U.S. We supply chcken products rangng from porton-controlled refrgerated chcken parts to fully cooked and frozen, breaded or non-breaded chcken parts or formed products. We beleve the Company s well-postoned to be the prmary or secondary suppler to many natonal and nternatonal chan restaurants who requre multple supplers of chcken products. Addtonally, we beleve we are well suted to be the sole suppler for many regonal chan restaurants. Regonal chan restaurants often offer better margn opportuntes and a growng base of busness. We beleve we have sgnfcant compettve strengths n terms of full-lne product capabltes, hgh-volume producton capactes, research and development expertse and extensve dstrbuton and marketng experence relatve to smaller and non-vertcally ntegrated producers. Whle the overall chcken market has grown consstently, we beleve the majorty of ths growth n recent years has been n the foodservce market. Accordng to the Natonal Chcken Councl, from 2002 through 2006, sales of chcken products to the foodservce market grew at a compounded annual growth rate of approxmately 7.9%, versus 4.9% growth for the chcken ndustry overall. Foodservce growth s antcpated to contnue as food-away-from-home expendtures contnue to outpace overall ndustry 12
  • 18. PILGRIM’S PRIDE CORPORATION September 29, 2007 rates. Accordng to Technomc Informaton Servces, food-away-from-home expendtures grew at a compounded annual growth rate of approxmately 5.5% from 2002 through 2006 and are projected to grow at a 4.8% compounded annual growth rate from 2007 through 2012. Due to nternal growth and our fscal 2004 and 2007 acqustons, our sales to the foodservce market from fscal 2003 through fscal 2007 grew at a compounded annual growth rate of 36.4% and represented 66.1% of the net sales of our U.S. chcken operatons n fscal 2007. Foodservice – Prepared Foods. Our prepared chcken products sales to the foodservce market were $1,897.6 mllon n fscal 2007 compared to $731.3 mllon n fscal 2003, a compounded annual growth rate of approxmately 26.9%. In addton to the sgnfcant ncrease n sales created by the fscal 2004 and 2007 acqustons, we attrbute ths growth n sales of prepared chcken products to the foodservce market to a number of factors: First, there has been sgnfcant growth n the number of foodservce operators offerng chcken on ther menus and n the number of chcken tems offered. Second, foodservce operators are ncreasngly purchasng prepared chcken products, whch allow them to reduce labor costs whle provdng greater product consstency, qualty and varety across all restaurant locatons. Third, there s a strong need among larger foodservce companes for a sngle-source suppler n the prepared chcken products market. A vable suppler must be able to ensure supply, demonstrate nnovaton and new product development and provde compettve prcng. We have been successful n our objectve of becomng a suppler of choce by beng the prmary or secondary prepared chcken products suppler to many large foodservce companes because: - We are vertcally ntegrated, gvng us control over our supply of chcken and chcken parts; - Our further processng facltes, wth a wde range of capabltes, are partcularly well suted to the hgh-volume producton as well as low-volume custom producton runs necessary to meet both the capacty and qualty requrements of the foodservce market; and - We have establshed a reputaton for dependable qualty, hghly responsve servce and excellent techncal support. Fourth, as a result of the experence and reputaton developed wth larger customers, we have ncreasngly become the prncpal suppler to md-szed foodservce organzatons. Fifth, our n-house product development group follows a customer-drven research and development focus desgned to develop new products to meet customers’ changng needs. Our research and development personnel often work drectly wth nsttutonal customers n developng products for these customers. Sixth, we are a leader n utlzng advanced processng technology, whch enables us to better meet our customers’ needs for product nnovaton, consstent qualty and cost effcency. 13
  • 19. PILGRIM’S PRIDE CORPORATION September 29, 2007 Foodservice – Fresh Chicken. We produce and market fresh, refrgerated chcken for sale to U.S. quck-servce restaurant chans, delcatessens and other customers. These chckens have the gblets removed, are usually of specfc weght ranges and are usually pre-cut to customer specfcatons. They are often marnated to enhance value and product dfferentaton. By growng and processng to customers’ specfcatons, we are able to assst quck-servce restaurant chans n controllng costs and mantanng qualty and sze consstency of chcken peces sold to the consumer. Retail. The retal market conssts prmarly of grocery store chans, wholesale clubs and other retal dstrbutors. We concentrate our efforts n ths market on sales of branded, prepackaged cut-up and whole chcken and chcken parts to grocery store chans and retal dstrbutors. For a number of years, we have nvested n both trade and retal marketng desgned to establsh hgh levels of brand name awareness and consumer preferences. We utlze numerous marketng technques, ncludng advertsng, to develop and strengthen trade and consumer awareness and ncrease brand loyalty for consumer products marketed under the Plgrm’s Prde® brand. Our co-founder, Lonne “Bo” Plgrm, s the featured spokesperson n our televson, rado and prnt advertsng, and a trademark cameo of a person wearng a Plgrm’s hat serves as the logo on all of our prmary branded products. As a result of ths marketng strategy, Plgrm’s Prde® s a well-known brand name n a number of markets. We beleve our efforts to acheve and mantan brand awareness and loyalty help to provde more secure dstrbuton for our products. We also beleve our efforts at brand awareness generate greater prce premums than would otherwse be the case n certan markets. We also mantan an actve program to dentfy consumer preferences. The program prmarly conssts of dscoverng and valdatng new product deas, packagng desgns and methods through sophstcated qualtatve and quanttatve consumer research technques n key geographc markets. Retail – Prepared Foods. We sell retal-orented prepared chcken products prmarly to grocery store chans located throughout the U.S. Our prepared chcken products sales to the retal market were $511.5 mllon n fscal 2007 compared to $163.0 mllon n fscal 2003, a compounded annual growth rate of approxmately 33.1%. We beleve that our growth n ths market segment wll contnue as retalers concentrate on satsfyng consumer demand for more products that are quck, easy and convenent to prepare at home. Retail – Fresh Chicken. Our prepackaged retal products nclude varous combnatons of freshly refrgerated, whole chckens and chcken parts n trays, bags or other consumer packs labeled and prced ready for the retal grocer’s fresh meat counter. Our retal fresh chcken products are sold n the mdwestern, southwestern, southeastern and western regons of the U.S. Our fresh chcken sales to the retal market were $975.7 mllon n fscal 2007 compared to $257.9 mllon n fscal 2003, a compounded annual growth rate of approxmately 39.5% resultng prmarly from our fscal 2004 and 2007 acqustons. We beleve the retal prepackaged fresh chcken busness wll contnue to be a large and relatvely stable market, provdng opportuntes for product dfferentaton and regonal brand loyalty. 14
  • 20. PILGRIM’S PRIDE CORPORATION September 29, 2007 Export and Other Chicken Products. Our export and other chcken products, wth the excepton of our exported prepared foods products, consst of whole chckens and chcken parts sold prmarly n bulk, non-branded form ether refrgerated to dstrbutors n the U.S. or frozen for dstrbuton to export markets. In the U.S., prces of these products are negotated daly or weekly and are generally related to market prces quoted by the USDA or other publc prce reportng servces. We sell U.S.- produced chcken products for export to Eastern Europe, ncludng Russa; the Far East, ncludng Chna; Mexco; and other world markets. Hstorcally, we have targeted nternatonal markets to generate addtonal demand for our dark chcken meat, whch s a natural by-product of our U.S. operatons gven our concentraton on prepared foods products and the U.S. customers’ general preference for whte chcken meat. We have also begun sellng prepared chcken products for export to the nternatonal dvsons of our U.S. chan restaurant customers. We beleve that U.S. chcken exports wll contnue to grow as worldwde demand ncreases for hgh-grade, low-cost meat proten sources. We also beleve that worldwde demand for hgher margn prepared foods products wll ncrease over the next several years. Accordngly, we beleve we are well postoned to captalze on such growth. Also ncluded n ths category are chcken by- products, whch are converted nto proten products and sold prmarly to manufacturers of pet foods. Markets for Turkey Products Most of our turkey sales are derved from products sold to the retal market. Ths market conssts prmarly of grocery store chans, wholesale clubs and other retal dstrbutors. We concentrate our efforts n ths market on sales of branded, prepackaged whole turkeys to grocery store chans and retal dstrbutors n the eastern and southwestern regons of the U.S. We beleve ths regonal marketng focus enables us to develop consumer brand franchses and captalze on proxmty to the trade customer n terms of lower transportaton costs, more tmely and responsve servce and enhanced product freshness. We utlze numerous marketng technques, ncludng advertsng, to develop and strengthen trade and consumer awareness and ncrease brand loyalty for consumer products marketed generally under the Plgrm’s Prde® and Plgrm’s Sgnature™ brands. We beleve our efforts to acheve and mantan brand awareness and loyalty help to provde more secure dstrbuton for our products. We also beleve our efforts at brand awareness generate greater prce premums than would otherwse be the case n certan markets n the eastern regons of the U.S. We also mantan an actve program to dentfy consumer preferences. The program prmarly conssts of testng new product deas, packagng desgns and methods through sophstcated qualtatve and quanttatve consumer research technques n key geographc markets. Markets for Other Products We have regonal dstrbuton centers located n Arzona, Florda, Iowa, Msssspp, Oho, Tennessee, Texas and Utah that are prmarly focused on dstrbutng our own chcken products; however, the dstrbuton centers also dstrbute certan poultry and non-poultry products purchased from thrd partes to ndependent grocers and quck servce restaurants. Our non-chcken dstrbuton busness s conducted as an accommodaton to our customers and to acheve greater economes of scale 15
  • 21. PILGRIM’S PRIDE CORPORATION September 29, 2007 n dstrbuton logstcs. Poultry sales from our regonal dstrbuton centers are ncluded n the chcken and turkey sales amounts contaned n the above tables; however, all non-poultry sales amounts are contaned n the Other Products. We beleve the store-door delvery capabltes for our own poultry products provde a strategc servce advantage n sellng to quck servce, natonal chan restaurants. We market fresh eggs under the Plgrm’s Prde® brand name, as well as under prvate labels, n varous szes of cartons and flats to U.S. retal grocery and nsttutonal foodservce customers located prmarly n Texas. We have a housng capacty for approxmately 2.1 mllon commercal egg layng hens whch can produce approxmately 42 mllon dozen eggs annually. U.S. egg prces are determned weekly based upon reported market prces. The U.S. egg ndustry has been consoldatng over the last few years, wth the 25 largest producers accountng for more than 74.3% of the total number of egg layng hens n servce durng 2007. We compete wth other U.S. egg producers prmarly on the bass of product qualty, relablty, prce and customer servce. We market a hgh-nutrent egg called EggsPlus™. Ths egg contans hgh levels of Omega-3 and Omega-6 fatty acds along wth Vtamn E, makng the egg a heart-frendly product. Our marketng of EggsPlus™ has receved natonal recognton for our progress n beng an nnovator n the “functonal foods” category. In addton, we produce and sell lvestock feeds at our feed mll n Mt. Pleasant, Texas and at our farm supply store n Pttsburg, Texas to dary farmers and lvestock producers n northeastern Texas. We engage n smlar sales actvtes at our other U.S. feed mlls. We also have a small pork operaton that we acqured through our 2007 acquston that rases and sells lve hogs to processors. 16
  • 22. PILGRIM’S PRIDE CORPORATION September 29, 2007 MEXICO Background The Mexco market represented approxmately 6.7% of our net sales n fscal 2007. We are the second-largest producer and seller of chcken n Mexco. We beleve that we are one of the lower-cost producers of chcken n Mexco. Product Types Whle the market for chcken products n Mexco s less developed than n the U.S., wth sales attrbuted to fewer, more basc products, we have been successful n dfferentatng our products through hgh qualty clent servce and product mprovements such as dry-ar chlled evscerated products. The supermarket chans consder us the leaders n nnovaton for fresh products. The market for value added products s ncreasng. Our strategy s to captalze on ths trend through our vast U.S. experence n both products and qualty and our well-known servce. Markets We sell our chcken products prmarly to wholesalers, large restaurant chans, fast food accounts, supermarket chans and drect retal dstrbuton n selected markets. We have natonal presence and are currently present n all but two of the 32 Mexcan States, whch n total represent 99% of the Mexcan populaton. Foreign Operations Risks Our foregn operatons pose specal rsks to our busness and operatons. See Item 1A. “Rsk Factors” for a dscusson of foregn operatons rsks. 17
  • 23. PILGRIM’S PRIDE CORPORATION September 29, 2007 GENERAL Competitive Conditions The chcken and turkey ndustres are hghly compettve and our largest U.S. compettor has greater fnancal and marketng resources than we do. In the U.S., Mexco and Puerto Rco, we compete prncpally wth other vertcally ntegrated poultry companes. We are the largest producer of chcken n the U.S. and Puerto Rco, and the second largest producer n Mexco. The second largest producer n the U.S. s Tyson Foods, Inc. The largest producer n Mexco s Industras Bachoco SA de CV. In general, the compettve factors n the U.S. chcken and turkey ndustres nclude prce, product qualty, product development, brand dentfcaton, breadth of product lne and customer servce. Compettve factors vary by major market. In the foodservce market, competton s based on consstent qualty, product development, servce and prce. In the U.S. retal market, we beleve that product qualty, brand awareness, customer servce and prce are the prmary bases of competton. There s some competton wth non-vertcally ntegrated further processors n the U.S. prepared food busness. We beleve vertcal ntegraton generally provdes sgnfcant, long-term cost and qualty advantages over non-vertcally ntegrated further processors. In Mexco, where product dfferentaton has tradtonally been lmted, product qualty, servce and prce have been the most crtcal compettve factors. The North Amercan Free Trade Agreement elmnated tarffs for chcken and chcken products sold to Mexco on January 1, 2003. However, n July 2003, the U.S. and Mexco entered nto a safeguard agreement wth regard to mports nto Mexco of chcken leg quarters from the U.S. Under ths agreement, a tarff rate for chcken leg quarters of 98.8% of the sales prce was establshed. The tarff rate on mport dutes was reduced on January 1, 2007, to 19.8%, and on January 1, 2008 the tarff rate s scheduled to be reduced to zero. As ths tarff s reduced, we expect greater amounts of chcken to be mported nto Mexco from the U.S., whch could negatvely affect the proftablty of Mexcan chcken producers. We are not a sgnfcant compettor n the dstrbuton busness as t relates to products other than chcken. We dstrbute these products solely as a convenence to our chcken customers. The broad-lne dstrbutors do not consder us to be a factor n those markets. The competton related to our other products such as table eggs, feed and proten are much more regonalzed and no one compettor s domnant. Key Customers Our two largest customers accounted for approxmately 18% of our net sales n fscal 2007, and our largest customer, Wal-Mart Stores Inc., accounted for 12% of our net sales. Regulation and Environmental Matters The chcken and turkey ndustres are subject to government regulaton, partcularly n the health and envronmental areas, ncludng provsons relatng to the dscharge of materals nto the envronment, by the Centers for Dsease Control, the USDA, the Food and Drug Admnstraton (“FDA”) and the Envronmental Protecton Agency (“EPA”) n the U.S. and by smlar governmental 18
  • 24. PILGRIM’S PRIDE CORPORATION September 29, 2007 agences n Mexco. Our chcken processng facltes n the U.S. are subject to on-ste examnaton, nspecton and regulaton by the USDA. The FDA nspects the producton of our feed mlls n the U.S. Our Mexcan food processng facltes and feed mlls are subject to on-ste examnaton, nspecton and regulaton by a Mexcan governmental agency, whch performs functons smlar to those performed by the USDA and FDA. We beleve that we are n substantal complance wth all applcable laws and regulatons relatng to the operatons of our facltes. We antcpate ncreased regulaton by the USDA concernng food safety, by the FDA concernng the use of medcatons n feed and by the EPA and varous other state agences concernng dscharges to the envronment. Although we do not antcpate any regulatons havng a materal adverse effect upon us, a materal adverse effect may occur. Employees and Labor Relations As of September 29, 2007, we employed approxmately 49,800 persons n the U.S. and 5,100 persons n Mexco. Approxmately 16,350 employees at varous facltes n the U.S. are members of collectve barganng unts. In Mexco, approxmately 2,950 employees are covered by collectve barganng agreements. We have not experenced any work stoppage at any locaton n over fve years. We beleve our relatons wth our employees are satsfactory. At any gven tme, we wll be n some stage of contract negotaton wth varous collectve barganng unts. Financial Information about Foreign Operations The Company’s foregn operatons are n Mexco. Geographc fnancal nformaton s set forth n Item 7. “Management’s Dscusson and Analyss of Fnancal Condton and Results of Operaton.” Available Information; NYSE CEO Certification The Company’s Internet webste s http://www.plgrmsprde.com. The Company makes avalable, free of charge, through ts Internet webste, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Drectors and Offcers Forms 3, 4 and 5, and amendments to those reports, as soon as reasonably practcable after electroncally flng such materals wth, or furnshng them to, the Securtes and Exchange Commsson. The publc may read and copy any materals that the Company fles wth the Securtes and Exchange Commsson at ts Publc Reference Room at 100 F Street, NE, Washngton, DC 20549 and may obtan nformaton about the operaton of the Publc Informaton Room by callng the Securtes and Exchange Commsson at 1- 800-SEC-0330. In addton, the Company makes avalable, through ts Internet webste, the Company’s Busness Code of Conduct and Ethcs, Corporate Governance Gudelnes and the wrtten charter of the Audt Commttee, each of whch s avalable n prnt to any stockholder who requests t by contactng the Secretary of the Company at 4845 U.S. Hghway 271 North, Pttsburg, Texas 75686-0093. As requred by the rules of the New York Stock Exchange, the Company submtted ts unqualfed Secton 303A.12(a) Co-Prncpal Executve Offcers Certfcaton for the precedng year to the New York Stock Exchange. 19
  • 25. PILGRIM’S PRIDE CORPORATION September 29, 2007 We ncluded the certfcatons of the Co-Prncpal Executve Offcers and the Chef Fnancal Offcer of the Company requred by Secton 302 of the Sarbanes-Oxley Act of 2002 and related rules, relatng to the qualty of the Company’s publc dsclosure, n ths report on Form 10-K as Exhbts 31.1, 31.2 and 31.3. Executive Officers Set forth below s certan nformaton relatng to our current executve offcers: Name Age Positions Lonne “Bo” Plgrm 79 Senor Charman of the Board Lonne Ken Plgrm 49 Charman of the Board Clfford E. Butler 65 Vce Charman of the Board O.B. Goolsby, Jr. 60 Presdent, Chef Executve Offcer, and Drector Rchard A. Cogdll 47 Chef Fnancal Offcer Secretary, Treasurer and Drector J. Clnton Rvers 48 Chef Operatng Offcer Robert A. Wrght 53 Executve Vce Presdent of Sales and Marketng Lonnie “Bo” Pilgrim has served as Senor Charman of the Board snce July 2007. He served as Charman of the Board snce the organzaton of Plgrm’s Prde n July 1968 untl July 2007. He also served as Chef Executve Offcer from July 1968 to June 1998. Pror to the ncorporaton of Plgrm’s Prde, Mr. Plgrm was a partner n ts predecessor partnershp busness founded n 1946. Lonnie Ken Pilgrim has served as Charman of the Board snce July 2007. He served as Executve Vce Presdent, Assstant to Charman from November 2004 untl July 2007, and he served as Senor Vce Presdent, Transportaton from August 1997 to November 2004. Pror to that, he served as Vce Presdent. He has been a member of the Board of Drectors snce March 1985, and he has been employed by Plgrm’s Prde snce 1977. He s a son of Lonne “Bo” Plgrm. Clifford E. Butler serves as Vce Charman of the Board. On October 10, 2007, Clfford E. Butler announced hs retrement from hs poston as Vce Charman of the Board effectve December 31, 2007, and that he wll not stand for re-electon as a drector. Mr. Butler joned us as Controller and drector n 1969, was named Senor Vce Presdent of Fnance n 1973, became Chef Fnancal Offcer and Vce Charman of the Board n July 1983, became Executve Presdent n January 1997 and served n such capacty through July 1998. O.B. Goolsby, Jr. has served as Presdent and Chef Executve Offcer snce September 2004. Mr. Goolsby served as Presdent and Chef Operatng Offcer from November 2002 to September 2004. Pror to beng named as Presdent and Chef Operatng Offcer n November 2002, Mr. Goolsby served as Executve Vce Presdent, Prepared Foods Complexes from June 1998 to November 2002. He was prevously Senor Vce Presdent, Prepared Foods Operatons from August 1992 to June 1998 and Vce Presdent, Prepared Foods Operatons from September 1987 to August 1992 and was employed by the Company n other capactes from November 1969 to January 1981. 20
  • 26. PILGRIM’S PRIDE CORPORATION September 29, 2007 Richard A. Cogdill has served as Chef Fnancal Offcer, Secretary and Treasurer snce January 1997. Mr. Cogdll became a Drector n September 1998. Prevously he served as Senor Vce Presdent, Corporate Controller, from August 1992 through December 1996 and as Vce Presdent, Corporate Controller from October 1991 through August 1992. Pror to October 1991, he was a Senor Manager wth Ernst & Young LLP. Mr. Cogdll s a Certfed Publc Accountant. J. Clinton Rivers has served as Chef Operatng Offcer snce October 2004. He served as Executve Vce Presdent of Prepared Food Operatons from November 2002 to October 2004. Mr. Rvers was the Senor Vce Presdent of Prepared Foods Operatons from 1999 to November 2002, and was the Vce Presdent of Prepared Foods Operatons from 1992 to 1999. From 1989 to 1992, he served as Plant Manager of the Mount Pleasant, Texas Producton Faclty. Mr. Rvers joned Plgrm’s Prde n 1986 as the Qualty Assurance Manager, and also held postons at Perdue Farms and Golden West Foods. Robert A. Wright has served as Executve Vce Presdent of Sales and Marketng snce June 2004. He served as Executve Vce Presdent, Turkey Dvson from October 2003 to June 2004. Pror to October 2003, Mr. Wrght served as Presdent of Butterball Turkey Company for fve years. Item 1A. Risk Factors Forward-Looking Statements Statements of our ntentons, belefs, expectatons or predctons for the future, denoted by the words “antcpate,” “beleve,” “estmate,” “expect,” “plan,” “project,” “mply,” “ntend,” “foresee” and smlar expressons, are forward-lookng statements that reflect our current vews about future events and are subject to rsks, uncertantes and assumptons. Such rsks, uncertantes and assumptons nclude those descrbed under “Rsk Factors” below and elsewhere n ths Annual Report on Form 10-K. Actual results could dffer materally from those projected n these forward-lookng statements as a result of these factors, among others, many of whch are beyond our control. In makng these statements, we are not undertakng, and specfcally declne to undertake, any oblgaton to address or update each or any factor n future flngs or communcatons regardng our busness or results, and we are not undertakng to address how any of these factors may have caused changes n nformaton contaned n prevous flngs or communcatons. The rsks descrbed below are not the only rsks we face, and addtonal rsks and uncertantes may also mpar our busness operatons. The occurrence of any one or more of the followng or other currently unknown factors could materally adversely affect our busness and operatng results. Risk Factors The followng rsk factors should be read carefully n connecton wth evaluatng our busness and the forward-lookng nformaton contaned n ths Annual Report on Form 10-K. Any of the followng rsks could materally adversely affect our busness, operatons, ndustry or fnancal poston or our future fnancal performance. Whle we beleve we have dentfed and dscussed below the key rsk factors affectng our busness, there may be addtonal rsks and uncertantes that are not presently known or that are not currently beleved to be sgnfcant that may adversely affect our busness, operatons, ndustry, fnancal poston and fnancal performance n the future. 21
  • 27. PILGRIM’S PRIDE CORPORATION September 29, 2007 Cyclicality and Commodity Prices. Industry cyclicality can affect our earnings, especially due to fluctuations in commodity prices of feed ingredients, chicken and turkey. Proftablty n the chcken and turkey ndustres s materally affected by the commodty prces of feed ngredents, chcken and turkey, whch are determned by supply and demand factors. As a result, the chcken and turkey ndustres are subject to cyclcal earnngs fluctuatons. The producton of feed ngredents s postvely or negatvely affected prmarly by weather patterns throughout the world, the global level of supply nventores and demand for feed ngredents and the agrcultural polces of the Unted States and foregn governments. In partcular, weather patterns often change agrcultural condtons n an unpredctable manner. A sgnfcant change n weather patterns could affect supples of feed ngredents, as well as both the ndustry’s and our ablty to obtan feed ngredents, grow chckens and turkeys or delver products. The cost of corn and soybean meal, our prmary feed ngredents, ncreased sgnfcantly from August 2006 to the date of ths report and there can be no assurance that the prce of corn or soybean meal wll not contnue to rse as a result of, among other thngs, ncreasng demand for these products around the world and alternatve uses of these products, such as ethanol and bodesel producton. Hgh feed ngredent prces have had a materal adverse effect on our operatng results. We perodcally seek, to the extent avalable, to enter nto advance purchase commtments or fnancal hedgng contracts for the purchase of feed ngredents n an effort to manage our feed ngredent costs. The use of such nstruments 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 precautons desgned to ensure that our flocks are healthy and that our processng plants and other facltes operate n a santary and envronmentally-sound manner. However, events beyond our control, such as the outbreaks of dsease, ether n our own flocks or elsewhere, could sgnfcantly affect demand for our products or our ablty to conduct our operatons. Furthermore, an outbreak of dsease could result n governmental restrctons on the mport and export of our fresh chcken, turkey or other products to or from our supplers, facltes or customers, or requre us to destroy one or more of our flocks. Ths could also result n the cancellaton of orders by our customers and create adverse publcty that may have a materal adverse effect on our ablty to market our products successfully and on our busness, reputaton and prospects. Durng the frst half of fscal 2006, there was substantal publcty regardng a hghly pathogenc stran of avan nfluenza, known as H5N1, whch has been affectng Asa snce 2002 and whch has also been found n Europe and Afrca. It s wdely beleved that H5N1 s beng spread by mgratory brds, such as ducks and geese. There have also been some cases where H5N1 s beleved to have passed from brds to humans as humans came nto contact wth lve brds that were nfected wth the dsease. Although hghly pathogenc H5N1 has not been dentfed n North Amerca, there have been outbreaks of low pathogenc strans of avan nfluenza n North Amerca, and n Mexco outbreaks of both hgh and low-pathogenc strans of avan nfluenza are a farly common occurrence. Hstorcally, 22
  • 28. PILGRIM’S PRIDE CORPORATION September 29, 2007 the outbreaks of low pathogenc avan nfluenza have not generated the same level of concern, or receved the same level of publcty or been accompaned by the same reducton n demand for poultry products n certan countres as that assocated wth the hghly pathogenc H5N1 stran. Accordngly, even f the hghly pathogenc H5N1 stran does not spread to North or Central Amerca, there can be no assurance that t wll not materally adversely affect demand for North or Central Amercan produced poultry nternatonally and/or domestcally, and, f t were to spread to North or Central Amerca, there can be no assurance that t would not sgnfcantly affect our ablty to conduct our operatons and/or demand for our products, n each case n a manner havng a materal adverse effect on our busness, reputaton 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 contamnaton by dsease-producng organsms, or pathogens, such as Listeria monocytogenes, Salmonella and generc E.coli. These pathogens are generally found n the envronment, and, as a result, there s a rsk that they, as a result of food processng, could be present n our processed poultry products. These pathogens can also be ntroduced as a result of mproper handlng at the further processng, foodservce or consumer level. These rsks may be controlled, although not elmnated, by adherence to good manufacturng practces and fnshed product testng. We have lttle, f any, control over proper handlng once the product has been shpped. Illness and death may result f the pathogens are not elmnated at the further processng, foodservce or consumer level. Even an nadvertent shpment of contamnated products s a volaton of law and may lead to ncreased rsk of exposure to product lablty clams, product recalls and ncreased scrutny by federal and state regulatory agences and may have a materal adverse effect on our busness, reputaton and prospects. In October 2002, one product sample produced n our Francona, Pennsylvana faclty that had not been shpped to customers tested postve for Lstera. We later receved nformaton from the USDA suggestng envronmental samples taken at the faclty had tested postve for both the stran of Lstera dentfed n the product and a stran havng characterstcs smlar to those of the stran dentfed n a Northeastern Lstera outbreak. As a result, we voluntarly recalled all cooked del products produced at the plant from May 1, 2002 through October 11, 2002. We carred nsurance desgned to cover the drect recall related expenses and certan aspects of the related busness nterrupton caused by the recall. 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 packagng, marketng and dstrbuton of food products ental an nherent rsk of product lablty and product recall and the resultant adverse publcty. We may be subject to sgnfcant lablty f the consumpton of any of our products causes njury, llness or death. We could be requred to recall certan of our products n the event of contamnaton or damage to the products. In addton to the rsks of product lablty or product recall due to defcences caused by our producton or processng operatons, we may encounter the same rsks f any thrd party tampers wth our products. We cannot assure you that we wll not be requred to perform product recalls, or that product lablty clams wll 23
  • 29. PILGRIM’S PRIDE CORPORATION September 29, 2007 not be asserted aganst us, n the future. Any clams that may be made may create adverse publcty that would have a materal adverse effect on our ablty to market our products successfully or on our busness, reputaton, prospects, fnancal condton and results of operatons. If our poultry products become contamnated, we may be subject to product lablty clams and product recalls. There can be no assurance that any ltgaton or reputatonal njury assocated wth product recalls wll not have a materal adverse effect on our ablty to market our products successfully or on our busness, reputaton, prospects, fnancal condton and results of operatons. Substantial Leverage. Our substantial indebtedness could adversely affect our financial condition. Our acquston of Gold Kst ncreased our ndebtedness sgnfcantly. We currently have a substantal amount of ndebtedness, whch could adversely affect our fnancal condton and could have mportant consequences to you. For example, t could: • Make t more dffcult for us to satsfy our oblgatons under our debt securtes; • Increase our vulnerablty to general adverse economc condtons; • Lmt our ablty to obtan necessary fnancng and to fund future workng captal, captal expendtures and other general corporate requrements; • Requre us to dedcate a substantal porton of our cash flow from operatons to payments on our ndebtedness, thereby reducng the avalablty of our cash flow to fund workng captal, captal expendtures and for other general corporate purposes; • Lmt our flexblty n plannng for, or reactng to, changes n our busness and the ndustry n whch we operate; • Place us at a compettve dsadvantage compared to our compettors that have less debt; • Lmt our ablty to pursue acqustons and sell assets; and • Lmt, along wth the fnancal and other restrctve covenants n our ndebtedness, our ablty to borrow addtonal funds. Falng to comply wth those covenants could result n an event of default or requre redempton of ndebtedness. Ether of these events could have a materal adverse effect on us. Our ablty to make payments on and to refnance our ndebtedness wll depend on our ablty to generate cash n the future, whch s dependent on varous factors. These factors nclude the commodty prces of feed ngredents, chcken and turkey and general economc, fnancal, compettve, legslatve, regulatory and other factors that are beyond our control. 24
  • 30. PILGRIM’S PRIDE CORPORATION September 29, 2007 Additional Borrowings Available. Despite our substantial indebtedness, we may still be able to incur significantly more debt; this could intensify the risks described above. Despte our sgnfcant ndebtedness, we are not prohbted from ncurrng sgnfcant addtonal ndebtedness n the future. If addtonal debt s added to our current substantal debt levels, the related rsks that we now face could ntensfy. 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 busness operatons ental a number of rsks, ncludng rsks relatng to product lablty clams, product recalls, property damage and njures to persons. We currently mantan nsurance wth respect to certan of these rsks, ncludng product lablty nsurance, property nsurance, workers compensaton nsurance and general lablty nsurance, but n many cases such nsurance s expensve, dffcult to obtan and no assurance can be gven that such nsurance can be mantaned n the future on acceptable terms, or n suffcent amounts to protect us aganst losses due to any such events, or at all. Moreover, even though our nsurance coverage may be desgned to protect us from losses attrbutable to certan events, t may not adequately protect us from lablty and expenses we ncur n connecton wth such events. For example, the losses attrbutable to our October 2002 recall of cooked del products produced at one of our facltes sgnfcantly exceeded avalable nsurance coverage. Addtonally, n the past, two of our nsurers encountered fnancal dffcultes and were unable to fulfll ther oblgatons under the nsurance polces as antcpated and, separately, two of our other nsurers contested coverage wth respect to clams covered under polces purchased, forcng us to ltgate the ssue of coverage before we were able to collect under these polces. Significant Competition. Competition in the chicken and turkey industries with other vertically integrated poultry companies may make us unable to compete successfully in these industries, which could adversely affect our business. The chcken and turkey ndustres are hghly compettve. In both the U.S. and Mexco, we prmarly compete wth other vertcally ntegrated poultry companes. In general, the compettve factors n the U.S. poultry ndustry nclude: • Prce; • Product qualty; • Product development; • Brand dentfcaton; • Breadth of product lne; and • Customer servce. 25
  • 31. PILGRIM’S PRIDE CORPORATION September 29, 2007 Compettve factors vary by major market. In the foodservce market, competton s based on consstent qualty, product development, servce and prce. In the U.S. retal market, we beleve that competton s based on product qualty, brand awareness, customer servce and prce. Further, there s some competton wth non-vertcally ntegrated further processors n the prepared food busness. In Mexco, where product dfferentaton has tradtonally been lmted, product qualty and prce have been the most crtcal compettve factors. The North Amercan Free Trade Agreement elmnated tarffs for chcken and chcken products sold to Mexco on January 1, 2003. However, n July 2003, the U.S. and Mexco entered nto a safeguard agreement wth regard to mports nto Mexco of chcken leg quarters from the U.S. Under ths agreement, a tarff rate for chcken leg quarters of 98.8% of the sales prce was establshed. Ths tarff was reduced on January 1, 2006 to 39.5%, and was further reduced to 19.8% on January 1, 2007. On January 1, 2008, the tarff s scheduled to be reduced to zero. In connecton wth the reducton of the tarffs n Mexco, ncreased competton from chcken mported nto Mexco from the U.S. may have a materal adverse effect on the Mexcan chcken ndustry n general, and on our Mexcan operatons n partcular. 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 approxmately 18% of our net sales n fscal 2007, and our largest customer, Wal-Mart Stores Inc., accounted for 12% of our net sales. Our busness could suffer sgnfcant setbacks n revenues and operatng ncome f we lost one or more of our largest customers, or f our customers’ plans and/or markets should change sgnfcantly. Integration of Gold Kist. There can be no assurance that Gold Kist can be combined successfully with our business. In evaluatng the terms of our acquston of Gold Kst, we analyzed the respectve busnesses of the Company and Gold Kst and made certan assumptons concernng ther respectve future operatons. A prncpal assumpton was that the acquston wll produce operatng results better than those hstorcally experenced or expected to be experenced n the future by us n the absence of the acquston. There can be no assurance, however, that ths assumpton s correct or that the busnesses of the Company and Gold Kst wll be successfully ntegrated n a tmely manner. Synergies of Gold Kist. There can be no assurance that we will achieve anticipated synergies from our acquisition of Gold Kist. We consummated the Gold Kst acquston wth the expectaton that t wll result n benefcal synerges, such as cost savngs and enhanced growth. Success n realzng these benefts and the tmng of ths realzaton depend upon the successful ntegraton of the operatons of Gold Kst nto the Company, and upon general and ndustry-specfc economc factors. The ntegraton of two ndependent companes s a complex, costly and tme-consumng process. The dffcultes of combnng the operatons of the companes nclude, among others: - Transtonng and preservng Gold Kst’s customer, contractor, suppler and other mportant thrd-party relatonshps; 26
  • 32. PILGRIM’S PRIDE CORPORATION September 29, 2007 - Integratng corporate and admnstratve nfrastructures; - Coordnatng sales and marketng functons; - Mnmzng the dverson of management’s attenton from ongong busness concerns; - Coordnatng geographcally separate organzatons; and - Retanng key employees. Even f we are able to effectvely ntegrate the operatons of Gold Kst nto our exstng operatons and economc condtons reman stable, there can be no assurance that the antcpated synerges wll be acheved. Assumption of Unknown Liabilities in Acquisitions. Assumption of unknown liabilities in acquisitions may harm our financial condition and operating results. Acqustons may be structured n such a manner that would result n the assumpton of unknown labltes not dsclosed by the seller or uncovered durng pre-acquston due dlgence. For example, our acquston of Gold Kst was structured as a stock purchase. In that acquston we assumed all of the labltes of Gold Kst, ncludng labltes that may be unknown. These oblgatons and labltes could harm our fnancal condton and operatng results. 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 ntend to pursue selectve acqustons of complementary busnesses n the future. Inherent n any future acqustons are certan rsks such as ncreasng leverage and debt servce requrements and combnng company cultures and facltes, whch could have a materal adverse effect on our operatng results, partcularly durng the perod mmedately followng such acqustons. Addtonal debt or equty captal may be requred to complete future acqustons, and there can be no assurance that we wll be able to rase the requred captal. Furthermore, acqustons nvolve a number of rsks and challenges, ncludng: • Dverson of management’s attenton; • The need to ntegrate acqured operatons; • Potental loss of key employees and customers of the acqured companes; • Lack of experence n operatng n the geographcal market of the acqured busness; and • An ncrease n our expenses and workng captal requrements. Any of these and other factors could adversely affect our ablty to acheve antcpated cash flows at acqured operatons or realze other antcpated benefts of acqustons. 27
  • 33. PILGRIM’S PRIDE CORPORATION September 29, 2007 Foreign Operations Risks. Our foreign operations pose special risks to our business and operations. We have sgnfcant operatons and assets located n Mexco and may partcpate n or acqure operatons and assets n other foregn countres n the future. Foregn operatons are subject to a number of specal rsks, ncludng among others: • Currency exchange rate fluctuatons; • Trade barrers; • Exchange controls; • Expropraton; and • Changes n laws and polces, ncludng those governng foregn-owned operatons. Currency exchange rate fluctuatons have adversely affected us n the past. Exchange rate fluctuatons or one or more other rsks may have a materal adverse effect on our busness or operatons n the future. Our operatons n Mexco are conducted through subsdares organzed under the laws of Mexco. We may rely n part on ntercompany loans and dstrbutons from our subsdares to meet our oblgatons. Clams of credtors of our subsdares, ncludng trade credtors, wll generally have prorty as to the assets of our subsdares over our clams. Addtonally, the ablty of our Mexcan subsdares to make payments and dstrbutons to us wll be subject to, among other thngs, Mexcan law. In the past, these laws have not had a materal adverse effect on the ablty of our Mexcan subsdares to make these payments and dstrbutons. However, laws such as these may have a materal adverse effect on the ablty of our Mexcan subsdares to make these payments and dstrbutons n the future. In October 2007, Mexco’s legslatve bodes enacted La Ley del Impuesto Empresaral a Tasa Únca (“IETU”), a new mnmum corporaton tax, whch wll be assessed on companes dong busness n Mexco begnnng January 1, 2008. We are currently evaluatng the antcpated mpact that IETU wll have on our busness and operatng results. Because of IETU, there can be no assurance that we wll be able to utlze the net operatng loss carryovers and other deferred tax benefts generated n Mexco. There can also be no assurance that IETU wll not have a materal adverse effect on our fnancal results. Disruptions in International Markets and Distribution Channels. Disruptions in international markets and distribution channels could adversely affect our business. Hstorcally, we have targeted nternatonal markets to generate addtonal demand for our chcken dark meat, specfcally leg quarters, whch are a natural by-product of our U.S. operatons, gven our concentraton on prepared foods products and the U.S. customers’ general preference for whte meat. As part of ths ntatve, we have created a sgnfcant nternatonal dstrbuton network nto several markets, ncludng Eastern Europe, ncludng Russa; the Far East, ncludng Chna; and Mexco. Our success n these markets could be, and n recent perods has been, adversely affected by dsruptons n poultry export markets. These dsruptons are often caused by restrctons on mports of U.S.-produced 28
  • 34. PILGRIM’S PRIDE CORPORATION September 29, 2007 poultry products mposed by foregn governments for a varety of reasons, ncludng the protecton of ther domestc poultry producers and allegatons of consumer health ssues, and may also be caused by outbreaks of dsease such as avan nfluenza, ether n our own flocks or elsewhere n the world, and resultng changes n consumer preferences. There can be no assurance that one or more of these or other dsruptons n our nternatonal markets and dstrbuton channels wll not adversely affect our busness. Extreme Weather and Natural Disasters. Extreme weather or natural disasters could negatively impact our business. Extreme weather or natural dsasters, ncludng droughts, floods, excessve cold or heat, hurrcanes or other storms, could mpar the health or growth of our flocks or nterfere wth our operatons due to power outages, fuel shortages, damage to our producton and processng facltes or dsrupton of transportaton channels, among other thngs. Any of these factors could have an adverse effect on our fnancal results. Government Regulation. Regulation, present and future, is a constant factor affecting our business. Our operatons are subject to federal, state and local governmental regulaton, ncludng n the health, safety and envronmental areas. We antcpate ncreased regulaton by varous agences concernng food safety, the use of medcaton n feed formulatons and the dsposal of poultry by- products and wastewater dscharges. Also, changes n laws or regulatons or the applcaton thereof may lead to government enforcement actons and the resultng ltgaton by prvate ltgants. We are aware of an ndustry-wde nvestgaton by the Wage and Hour Dvson of the U.S. Department of Labor to ascertan complance wth varous wage and hour ssues, ncludng the compensaton of employees for the tme spent on such actvtes such as donnng and doffng work equpment. We have been named a defendant n a number of related suts brought by employees. Due, n part, to the government nvestgaton and the recent U.S. Supreme Court decson n IBP, Inc. v. Alvarez, t s possble that we may be subject to addtonal employee clams. Unknown matters, new laws and regulatons, or strcter nterpretatons of exstng laws or regulatons may materally affect our busness or operatons n the future. 29
  • 35. PILGRIM’S PRIDE CORPORATION September 29, 2007 Immigration Legislation and Enforcement. New immigration legislation or increased enforcement efforts in connection with existing immigration legislation could cause our costs of doing business to increase, cause us to change the way in which we do business or otherwise disrupt our operations. Immgraton reform contnues to attract sgnfcant attenton n the publc arena and the Unted States Congress. If new federal mmgraton legslaton s enacted or f states n whch we do busness enact mmgraton laws, such laws may contan provsons that could make t more dffcult or costly for us to hre Unted States ctzens and/or legal mmgrant workers. In such case, we may ncur addtonal costs to run our busness or may have to change the way we conduct our operatons, ether of whch could have a materal adverse effect on our busness, operatng results and fnancal condton. Also, despte our past and contnung efforts to hre only Unted States ctzens and/or persons legally authorzed to work n the Unted States, ncreased enforcement efforts wth respect to exstng mmgraton laws by governmental authortes may dsrupt a porton of our workforce or our operatons at one or more of our facltes, thereby negatvely mpactng our busness. Control of Voting Stock. Control over the Company is maintained by members of the family of Lonnie “Bo” Pilgrim. As descrbed n more detal n Item 12. “Securty Ownershp of Certan Benefcal Owners and Management and Related Stockholder Matters,” through two lmted partnershps and related trusts and votng agreements, Lonne “Bo” Plgrm, Patrca R. Plgrm, hs wfe, and Lonne Ken Plgrm, hs son, control 62.225% of the votng power of our outstandng common stock. Accordngly, they control the outcome of all actons requrng stockholder approval, ncludng the electon of drectors and sgnfcant corporate transactons, such as a merger or other sale of the Company or ts assets. Ths ensures ther ablty to control the foreseeable future drecton and management of the Company. In addton, an event of default under certan agreements related to our ndebtedness wll occur f Lonne “Bo” Plgrm and certan members of hs famly cease to own at least a majorty of the votng power of the outstandng common stock. Item 1B. Unresolved Staff Comments None. Item 2. Properties Operating Facilities We operate 34 poultry processng plants n the U.S. Of ths total, 33 process chcken and are located n Alabama, Arkansas, Florda, Georga, Kentucky, Lousana, North Carolna, South Carolna, Tennessee, Texas, Vrgna, and West Vrgna. We have one turkey processng plant n Pennsylvana, one chcken processng plant n Puerto Rco and three chcken processng plants n Mexco. The U.S. chcken processng plants have weekly capacty to process 42.5 mllon brolers and operated at 92.8% of capacty n fscal 2007. 30
  • 36. PILGRIM’S PRIDE CORPORATION September 29, 2007 Our turkey plant has the weekly capacty to process 0.2 mllon brds under current nspecton and lne confguratons and operates at 94% of capacty. Our Mexco facltes have the capacty to process 3.2 mllon brolers per week and operated at 89% of capacty n fscal 2007. Our Puerto Rco processng plant has the capacty to process 0.3 mllon brds per week based on one eght-hour shft per day. For segment reportng purposes, we nclude Puerto Rco wth our U.S. operatons. In the U.S., the processng plants are supported by 42 hatcheres, 31 feed mlls and 12 renderng plants. The hatcheres, feed mlls and renderng plants operated at 85%, 84% and 76% of capacty, respectvely, n fscal 2007. In Puerto Rco, the processng plant s supported by one hatchery and one feed mll whch operated at 82% and 50% of capacty, respectvely, n fscal 2007. In Mexco, the processng plants are supported by sx hatcheres, four feed mlls and two renderng facltes. The Mexco hatcheres, feed mlls and renderng facltes operated at 97%, 80% and 70% of capacty, respectvely, n fscal 2007. We also operate twelve prepared foods plants. These plants are located n Alabama, Georga, Lousana, Pennsylvana, South Carolna, Tennessee, Texas and West Vrgna. These plants have the capacty to produce approxmately 1,545 mllon pounds of further processed product per year and n fscal 2007 operated at approxmately 87% of capacty based on the current product mx and sx-day producton at most facltes and 24/7 producton at two facltes. Other Facilities and Information We own a partally automated dstrbuton freezer located outsde of Pttsburg, Texas, whch ncludes 125,000 square feet of storage area. We operate a commercal egg operaton and farm store n Pttsburg, Texas, a commercal feed mll n Mt. Pleasant, Texas and a pork grow-out operaton n Jefferson, Georga. We own offce buldngs n Pttsburg, Texas and Atlanta, Georga, whch house our executve offces, our Logstcs and Customer Servce offces and our general corporate functons as well as an offce buldng n Mexco Cty, whch houses our Mexcan marketng offces, and an offce buldng n Broadway, Vrgna, whch houses addtonal sales and marketng, research and development, and support actvtes. We lease offces n Dallas, Texas and Duluth, Georga, whch house addtonal sales and marketng and support actvtes. We have 13 regonal dstrbuton centers located n Arzona, Florda, Iowa, Msssspp, Oho, Tennessee, Texas, and Utah, fve of whch we own and eght of whch we lease. Most of our domestc property, plant and equpment s pledged as collateral on our long-term debt and credt facltes. See Item 7. “Management’s Dscusson and Analyss of Fnancal Condton and Results of Operaton.” 31
  • 37. PILGRIM’S PRIDE CORPORATION September 29, 2007 Item 3. Legal Proceedings On July 1, 2002, three ndvduals, on behalf of themselves and a putatve class of chcken growers, fled ther orgnal class acton complant aganst the Company n the Unted States Dstrct Court for the Eastern Dstrct of Texas, Texarkana Dvson, styled “Cody Wheeler, et al. vs. Plgrm’s Prde Corporaton.” In ther lawsut, plantffs ntally alleged that the Company volated the Packers and Stockyards Act (7 U.S.C. Secton 192) (the “PSA”) and breached fducary dutes allegedly owed to the plantff growers. The plantffs also brought ndvdual actons under the Packers and Stockyards Act allegng, among other thngs, breach of fducary dutes and breach of contract. On September 30, 2005, plantffs amended ther lawsut to jon Tyson Foods, Inc. as a co-defendant. Two addtonal former chcken growers were also added as plantffs to the lawsut. Ths amendment, whch occurred 38 months after the lawsut’s ntal flng, vrtually re-wrote most of the allegatons. Now the plantffs contend that the Company and Tyson are nvolved n a conspracy to volate federal anttrust laws. The plantffs’ ntal allegatons, although stll contaned n the amended lawsut, are no longer the sole focus of the case. On January 3, 2006, the Court entered an Order severng the plantffs’ Packers and Stockyards Act and anttrust clams. The Court ordered that the plantffs may proceed wth ther Packers and Stockyards Act clams as set forth n Plantffs’ Thrd Amended Complant. The Court also ordered that the plantffs may proceed wth ther respectve anttrust clams asserted aganst the Company and Tyson n a separate cause of acton styled “Cody Wheeler, et al vs. Plgrm’s Prde Corporaton, et al.” On March 6, 2006, the plantffs fled ther moton for class certfcaton n the orgnal lawsut. Plgrm’s Prde attacked the plantffs’ class certfcaton bref on several grounds, and ultmately the plantffs voluntarly wthdrew ther Moton for Class Certfcaton on May 26, 2006. As a result, the Court canceled the class certfcaton hearng and on June 2, 2006 the Court entered an Order wthdrawng Plantffs’ Moton for Class Certfcaton and prohbtng the plantffs from flng any addtonal class-acton clams aganst Plgrm’s Prde n ths lawsut. Addtonally, the two former growers who joned the lawsut on September 30, 2005 wthdrew from the case. On March 30, 2007, the Court ssued an order grantng n part and denyng n part the Company’s pendng moton for summary judgment. In the order, the Court ruled that plantffs do not have to demonstrate an adverse effect on competton n order to preval under the PSA. Ths rulng s nconsstent wth many other jursdctons’ nterpretaton of the PSA. The Court ssued an order stayng the lawsut untl the ssue s decded by the Ffth Crcut. On June 29, 2007, the Ffth Crcut accepted the appeal. The matter s currently beng brefed by the partes. The Company ntends to defend vgorously aganst the plantffs’ ndvdual clams. The Company does not expect ths matter to have a materal mpact on ts fnancal poston, operatons or lqudty. On January 3, 2006, an acton styled “Cody Wheeler, et al. vs. Plgrm’s Prde Corporaton, et al.,” arsng out of the orgnal Wheeler ltgaton descrbed above, was fled n the Unted States Dstrct Court for the Eastern Dstrct of Texas, Texarkana Dvson. The lawsut was fled by the three orgnal plantffs and a former grower, both n ther ndvdual capactes and on behalf of a putatve class of chcken growers. In the lawsut, the four plantffs allege that the Company and Tyson are nvolved n a conspracy to volate federal anttrust laws. On September 28, 2007, the court ssued an order denyng plantffs’ request to certfy a class acton. Plantffs fled the Petton for Permsson to Appeal the Dstrct Court’s Order on October 15, 2007 wth the U.S. Court of Appeals for the Ffth Crcut. The Company ntends to defend vgorously any attempts by the Plantffs to reverse the Dstrct Court’s Order denyng certfcaton to the matter as a class acton and the merts of the four plantffs’ ndvdual clams. The Company does not expect ths matter to have a materal mpact on ts fnancal poston, operatons or lqudty. 32
  • 38. PILGRIM’S PRIDE CORPORATION September 29, 2007 On December 31, 2003, we were served wth a purported class acton complant styled “Angela Goodwn, Glora Wlls, Johnny Gll, Greg Hamlton, Nathan Robnson, Edde Gusby, Pat Curry, Persons Smlarly Stuated v. ConAgra Poultry Company and Plgrm’s Prde, Incorporated” n the Unted States Dstrct Court, Western Dstrct of Arkansas, El Dorado Dvson, allegng racal and age dscrmnaton at one of the facltes we acqured from ConAgra. Two of the named plantffs, Greg Hamlton and Glora Wlls, were voluntarly dsmssed from ths acton. The Company deposed all of the remanng plantffs and fled ndvdual motons for summary judgment aganst each of them. On March 28, 2006, the Court ssued Orders concernng the motons for summary judgment. It granted the Company’s moton aganst Plantff Robert Nelson and dsmssed all of hs clams n ther entrety based on the theory of judcal estoppel. The Court heard oral argument on the Plantffs’ Class Certfcaton Moton on August 11, 2006, and the Court took the matter under advsement. On May 15, 2007, the Court ssued ts order denyng Plantffs’ Moton for Class Certfcaton n ts entrety. The plantffs subsequently wthdrew ther petton to appeal to the Eght Crcut Court of Appeals. Thus, the Court’s order denyng plantffs’ class certfcaton moton stands as a fnal, bndng judgment. On July 18, 2007, the Court ordered the remanng sx ndvdual Plantffs to fle ther own ndvdual lawsuts wthout any class acton allegatons. In contraventon of the Court’s nstructons, Plantffs’ counsel added new and/or dsmssed allegatons to each new Complant. On October 1, 2007, Plgrm’s moved to strke those allegatons and fled ts Answers subject to same. The Court entered an Order strkng the errant allegatons, and the Plantffs are n the process of redraftng ther ndvdual Complants. The Company ntends to re-fle ts already completed motons for summary judgment after the ndvdual Complants are re-fled. The Company ntends to defend vgorously aganst the Plantffs’ ndvdual clams. The Company beleves t has mertorous defenses to these ndvdual clams and ntends to vgorously defend these clams. The ultmate lablty wth respect to these clams cannot be determned at ths tme; however, the Company does not expect ths matter to have a materal mpact on ts fnancal poston, operatons or lqudty. The Wage and Hour Dvson of the U.S. Department of Labor conducted an ndustry wde nvestgaton to ascertan complance wth varous wage and hour ssues, ncludng the compensaton of employees for the tme spent on such actvtes such as donnng and doffng work equpment. Due, n part, to the government nvestgaton and the recent U.S. Supreme Court decson n IBP, Inc. v. Alvarez, employees have brought clams aganst the Company. The clams fled aganst the Company as of the date of ths Annual Report nclude: “Juan Garca, et al. v. Plgrm’s Prde Corporaton, a/k/a Wampler Foods, Inc.”, fled n Pennsylvana state court on January 27, 2006 and subsequently removed to the U.S. Dstrct Court for the Eastern Dstrct of Pennsylvana; “Esperanza Moya, et al. v. Plgrm’s Prde Corporaton and Max Staff, LLC”, fled March 23, 2006 n the Eastern Dstrct of Pennsylvana; “Barry Antee, et al. v. Plgrm’s Prde Corporaton” fled Aprl 20, 2006 n the Eastern Dstrct of Texas; “Stephana Aaron, et al. v. Plgrm’s Prde Corporaton” fled August 22, 2006 n the Western Dstrct of Arkansas; “Salvador Agular, et al. v. Plgrm’s Prde Corporaton” fled August 23, 2006 n the Northern Dstrct of Alabama; “Benford v. Plgrm’s Prde Corporaton” fled November 2, 2006 n the Northern Dstrct of Alabama; and “Porter v. Plgrm’s Prde Corporaton” fled December 7, 2006 n the Eastern Dstrct of Tennessee; “Freda Brown, et al v. Plgrm’s Prde Corporaton” fled March 14, 2007 n the Mddle Dstrct of Georga, Athens Dvson; “Roy Menser, et al v. Plgrm’s Prde Corporaton” fled February 28, 2007 n the Western Dstrct of Paducah, Kentucky; “Vctor Manuel Hernandez v. Plgrm’s Prde Corporaton” fled January 30, 2007 n the Northern Dstrct of Georga, Rome Dvson; “Angela Allen et al v. Plgrm’s Prde Corporaton” fled March 27, 2007 n Unted States Dstrct Court, Mddle 33
  • 39. PILGRIM’S PRIDE CORPORATION September 29, 2007 Dstrct of Georga, Athens Dvson; Dasy Hammond and Felca Pope v. Plgrm’s Prde Corporaton, n the Ganesvlle Dvson, Northern Dstrct of Georga, fled on June 6, 2007; Gary Prce v. Plgrm’s Prde Corporaton, n the U.S. Dstrct Court for the Northern Dstrct of Georga, Atlanta Dvson, fled on May 21, 2007; and Krstn Roebuck et al v. Plgrm’s Prde Corporaton, n the U.S. Dstrct Court, Athens, Georga, Mddle Dstrct, fled on May 23, 2007. The plantffs generally purport to brng a collectve acton for unpad wages, unpad overtme wages, lqudated damages, costs, attorneys’ fees, and declaratory and/or njunctve relef and generally allege that they are not pad for the tme t takes to ether clear securty, walk to ther respectve workstatons, don and doff protectve clothng, and/or santze clothng and equpment. The presdng judge n the consoldated acton n El Dorado ssued an ntal Case Management order on July 9, 2007. Plantffs’ counsel fled a Consoldated Amended Complant and the partes fled a Jont Rule 26(f) Report. A complete schedulng order has not been ssued, and dscovery has not yet commenced. Plantffs have fled a consoldated moton for condtonal certfcaton n the consoldated case. On October 12, 2007, Plgrm’s fled ts response n opposton to that moton. As of the date of ths Annual Report, the followng suts have been fled aganst Gold Kst, now merged nto Plgrm’s Prde Corporaton, whch make one or more of the allegatons referenced above: Merrell v. Gold Kst, Inc., n the U.S. Dstrct Court for the Northern Dstrct of Georga, Ganesvlle Dvson, fled on December 21, 2006; Harrs v. Gold Kst, Inc., n the U.S. Dstrct Court for the Northern Dstrct of Georga, Newnan Dvson, fled on December 21, 2006; Blanke v. Gold Kst, Inc., n the U.S. Dstrct Court for the Southern Dstrct of Georga, Waycross Dvson, fled on December 21, 2006; Clarke v. Gold Kst, Inc., n the U.S. Dstrct Court for the Mddle Dstrct of Georga, Athens Dvson, fled on December 21, 2006; Atchson v. Gold Kst, Inc., n the U.S. Dstrct Court for the Northern Dstrct of Alabama, Mddle Dvson, fled on October 3, 2006; Carlsle v. Gold Kst, Inc., n the U.S. Dstrct Court for the Northern Dstrct of Alabama, Mddle Dvson, fled on October 2, 2006; Benbow v. Gold Kst, Inc., n the U.S. Dstrct Court for the Dstrct of South Carolna, Columba Dvson, fled on October 2, 2006; Bonds v. Gold Kst, Inc., n the U.S. Dstrct Court for the Northern Dstrct of Alabama, Northwestern Dvson, fled on October 2, 2006. On Aprl 23, 2007, Plgrm’s fled a Moton to Transfer and Consoldate wth the Judcal Panel on Multdstrct Ltgaton (“JPML”) requestng that all of the pendng Gold Kst cases be consoldated nto one case. Plgrm’s wthdrew ts Moton subject to the Plantffs’ counsel’s agreement to consoldate the seven separate actons nto the pendng Benbow case by dsmssng those lawsuts and reflng/consoldatng them nto the Benbow acton. Motons to Dsmss have been fled n all of the pendng seven cases, and all of these cases have been formally dsmssed. Pursuant to the Court’s Aprl 16, 2007 Order, the partes reached agreement on the terms of class notce and the Court granted condtonal class certfcaton. Dscovery has recently been ntated. The Company ntends to assert a vgorous defense to the ltgaton. The amount of ultmate lablty wth respect to any of these cases cannot be determned at ths tme. We are subject to varous other legal proceedngs and clams, whch arse n the ordnary course of our busness. In the opnon of management, the amount of ultmate lablty wth respect to these actons wll not materally affect our fnancal poston or results of operatons. See Note J “Commtments and Contngences” of Item 8 “Fnancal Statements and Supplementary Data”, whch s ncorporated heren by reference. Item 4. Submission of Matters to a Vote of Security Holders None. 34
  • 40. PILGRIM’S PRIDE CORPORATION September 29, 2007 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 Hgh and low prces of and dvdends relatng to the Company’s common stock (tcker symbol “PPC”) for the perods ndcated were: Fscal 2007 Prces Fscal 2006 Prces Dvdends Fscal Quarter Hgh Low Hgh Low 2007 2006 Frst $ 29.54 $ 23.64 $ 37.75 $ 30.11 $ .0225 $ 1.0225 Second $ 33.19 $ 28.59 $ 27.00 $ 20.95 $ .0225 $ .0225 Thrd $ 38.17 $ 32.77 $ 28.09 $ 20.85 $ .0225 $ .0225 Fourth $ 40.59 $ 32.29 $ 29.00 $ 23.11 $ .0225 $ .0225 Holders The Company’s common stock s traded on the New York Stock Exchange. The Company estmates there were approxmately 35,000 holders (ncludng ndvdual partcpants n securty poston lstngs) of the Company’s common stock as of November 9, 2007. Dividends Startng n the frst quarter of fscal 2006, the Company’s Board of Drectors has declared quarterly cash dvdends of $0.0225 per share of common stock. Addtonally, n the frst quarter of fscal 2006, the Company’s Board of Drectors declared a specal $1.00 dvdend per share of common stock. Pror to fscal 2006 and wth the excepton of two quarters n 1993, the Company’s Board of Drectors declared cash dvdends of $0.015 per share of common stock (on a splt adjusted bass) every fscal quarter snce the Company’s ntal publc offerng n 1986. Payment of future dvdends wll depend upon the Company’s fnancal condton, results of operatons and other factors deemed relevant by the Company’s Board of Drectors, as well as any lmtatons mposed by lenders under the Company’s credt facltes. The Company’s revolvng credt faclty and revolvng/term borrowng faclty currently lmt dvdends to a maxmum of $26 mllon per year. See Note E of the notes to Consoldated Fnancal Statements ncluded n Item 15 for addtonal dscussons of the Company’s credt facltes. Issuer Purchases of Equity Security in Fiscal 2007 The Company dd not repurchase any of ts equty securtes n fscal 2007. 35
  • 41. PILGRIM’S PRIDE CORPORATION September 29, 2007 Total Return on Registrant’s Common Equity The followng graphs compare the performance of the Company wth that of the Russell 2000 composte ndex and a peer group of companes wth the nvestment weghted on market captalzaton. The total cumulatve return on nvestment (change n the year-end stock prce plus renvested dvdends) for each of the perods for the Company, the Russell 2000 composte ndex and the peer group s based on the stock prce or composte ndex at the begnnng of the applcable perod. Companes n the peer group ndex nclude Cagle’s, Inc., Sanderson Farms Inc., Hormel Foods Corp., Smthfeld Foods Inc. and Tyson Foods Inc. The frst graph covers the perod from November 21, 2003 through September 29, 2007 and shows the performance of the Company’s sngle class of common stock. On November 21, 2003, each share of the Company’s then outstandng Class A common stock and Class B common stock was reclassfed nto one share of new common stock, whch s now the only authorzed class of the Company’s common stock. The second graph covers the fve fscal year perod endng September 29, 2007 and shows the performance of the Company’s Class A and Class B shares after gvng effect to the reclassfcaton nto the Company’s sngle class of common stock on November 21, 2003 based on a one to one exchange rato. The thrd graph covers the perod from September 29, 2002 through November 20, 2003, the last date on whch the Company’s Class A and Class B shares traded on the New York Stock Exchange pror to reclassfcaton nto a sngle new class of shares of common stock. The stock prce performance represented by these graphs s not necessarly ndcatve of future stock performance. 36
  • 42. PILGRIM’S PRIDE CORPORATION September 29, 2007 11/21/03 10/2/04 10/1/05 9/30/06 9/29/07 Plgrm’s Prde Corporaton 100.00 190.89 254.14 197.18 251.08 Russell 2000 100.00 113.10 129.73 142.61 160.21 Peer Group 100.00 112.59 131.40 127.35 140.41 37
  • 43. PILGRIM’S PRIDE CORPORATION September 29, 2007 9/28/02 9/27/03 11/20/03 10/2/04 10/1/05 9/30/06 9/29/07 Plgrm’s Prde Corporaton Class A(1) 100.00 180.96 195.33 383.25 510.23 395.88 504.10 Plgrm’s Prde Corporaton Class B(1) 100.00 140.92 150.72 298.92 397.96 308.77 393.18 Russell 2000 100.00 136.01 146.80 166.94 191.49 210.50 236.47 Peer Group 100.00 119.32 132.39 147.39 172.02 166.72 183.81 (1) On November 21, 2003, each share of the Company’s then outstandng Class A common stock and Class B common stock was reclassfed nto one share of new common stock, whch s now the only authorzed class of the Company’s common stock. 38
  • 44. PILGRIM’S PRIDE CORPORATION September 29, 2007 9/28/02 9/27/03 11/20/03 Plgrm’s Prde Corporaton Class A(1) 100.00 180.96 195.33 Plgrm’s Prde Corporaton Class B(1) 100.00 140.92 150.72 Russell 2000 100.00 136.01 146.80 Peer Group 100.00 119.32 132.39 (1) On November 21, 2003, each share of the Company’s then outstandng Class A common stock and Class B common stock was reclassfed nto one share of new common stock, whch s now the only authorzed class of the Company’s common stock. 39
  • 45. PILGRIM’S PRIDE CORPORATION September 29, 2007 Item 6. Selected Financial Data Eleven Years Ended September 29, 2007 (In thousands, except ratios and per share data) 2007(a) 2006 2005 2004(b)(c) (53 weeks) Income Statement Data: Net sales $ 7,598,599 $ 5,235,565 $ 5,666,275 $ 5,363,723 Gross proft(e) 591,538 297,600 745,199 529,039 Operatng ncome(e) 232,537 3,002 435,812 265,314 Interest expense, net 125,757 40,553 43,932 52,129 Loss on early extngushment of debt 26,463 -- -- -- Income (loss) before ncome taxes(e) 91,607 (36,317) 403,523 208,535 Income tax expense (beneft)(f) 44,590 (2,085) 138,544 80,195 Net ncome (loss)(e) 47,017 (34,232) 264,979 128,340 Rato of earnngs to fxed charges(g) 1.57x (f) 7.19x 4.08x Per Common Share Data:(h) Net ncome (loss) $ 0.71 $ (0.51) $ 3.98 $ 2.05 Cash dvdends 0.09 1.09 0.06 0.06 Book value 17.61 16.79 18.38 13.87 Balance Sheet Summary: Workng captal $ 379,132 $ 528,836 $ 404,601 $ 383,726 Total assets 3,774,236 2,426,868 2,511,903 2,245,989 Notes payable and current maturtes of long-term debt 2,872 10,322 8,603 8,428 Long-term debt, less current maturtes 1,318,558 554,876 518,863 535,866 Total stockholders’ equty 1,172,221 1,117,327 1,223,598 922,956 Cash Flow Summary: Operatng cash flow $ 463,964 $ 30,382 $ 493,073 $ 272,404 Deprecaton & amortzaton() 204,903 135,133 134,944 113,788 Purchases of nvestment securtes 125,045 318,266 305,458 -- Proceeds from sale or maturty of nvestment securtes 208,676 490,764 -- -- Captal expendtures 172,323 143,882 116,588 79,642 Busness acqustons, net of equty consderaton(a)(b)(d) 1,102,069 -- -- 272,097 Fnancng actvtes, net provded by (used n) 630,229 (38,750) 18,860 96,665 Other Data: EBITDA(j) $ 411,073 $ 136,763 $ 580,078 $ 372,501 Key Indicators (as a percentage of net sales): Gross proft(e) 7.8 % 5.7 % 13.2 % 9.9 % Sellng, general and admnstratve expenses 4.7 % 5.6 % 5.5 % 4.8 % Operatng ncome (e) 3.1 % 0.8 % 7.7 % 4.9 % Interest expense, net 1.6 % 1.0 % 0.9 % 1.0 % Net ncome (loss)(e) 0.6 % (0.7 )% 4.7 % 2.4 % 40
  • 46. PILGRIM’S PRIDE CORPORATION September 29, 2007 Eleven Years Ended September 29, 2007 2003 2002 2001(d) 2000 1999 1998 1997 (53 weeks) $ 2,619,345 $ 2,533,718 $ 2,214,712 $ 1,499,439 $ 1,357,403 $ 1,331,545 $ 1,277,649 200,483 165,165 213,950 165,828 185,708 136,103 114,467 63,613 29,904 94,542 80,488 109,504 77,256 63,894 37,981 32,003 29,342 17,779 17,666 20,148 22,075 -- -- 1,433 -- -- -- -- 63,235 1,910 61,861 62,786 90,904 56,522 43,824 7,199 (12,425) 20,724 10,442 25,651 6,512 2,788 56,036 14,335 41,137 52,344 65,253 50,010 41,036 2.24x (g) 2.13x 3.04x 4.33x 2.96x 2.57x $ 1.36 $ 0.35 $ 1.00 $ 1.27 $ 1.58 $ 1.21 $ 0.99 0.06 0.06 0.06 0.06 0.045 0.04 0.04 10.46 9.59 9.27 8.33 7.11 5.58 4.41 $ 211,119 $ 179,037 $ 203,350 $ 124,531 $ 154,242 $ 147,040 $ 133,542 1,257,484 1,227,890 1,215,695 705,420 655,762 601,439 579,124 2,680 3,483 5,099 4,657 4,353 5,889 11,596 415,965 450,161 467,242 165,037 183,753 199,784 224,743 446,696 394,324 380,932 342,559 294,259 230,871 182,516 $ 98,892 $ 98,113 $ 87,833 $ 130,803 $ 81,452 $ 85,016 $ 49,615 74,187 70,973 55,390 36,027 34,536 32,591 29,796 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 53,574 80,388 112,632 92,128 69,649 53,518 50,231 4,499 -- 239,539 -- -- -- -- (39,767) (21,793) 246,649 (24,769) (19,634) (32,498) 348 $ 173,926 $ 103,469 $ 146,166 $ 115,356 $ 142,043 $ 108,268 $ 94,782 7.7 % 6.5 % 9.7 % 11.1 % 13.7 % 10.2 % 9.0 % 5.2 % 5.3 % 5.4 % 5.7 % 5.6 % 4.4 % 4.0 % 2.4 % 1.2 % 4.3 % 5.4 % 8.1 % 5.8 % 5.0 % 1.5 % 1.3 % 1.3 % 1.2 % 1.3 % 1.5 % 1.7 % 2.1 % 0.6 % 1.9 % 3.5 % 4.8 % 3.8 % 3.2 % (a) The Company acqured Gold Kst Inc. on December 27, 2006 for $1.139 bllon. For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of Gold Kst n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of Gold Kst from December 27, 2006 through December 30, 2006 were not materal. (b) The Company acqured the ConAgra chcken dvson on November 23, 2003 for $635.2 mllon ncludng the non- cash value of common stock ssued of $357.5 mllon. The acquston has been accounted for as a purchase and the results of operatons for ths acquston have been ncluded n our consoldated results of operatons snce the acquston date. 41
  • 47. PILGRIM’S PRIDE CORPORATION September 29, 2007 (c) On Aprl 26, 2004, the Company announced a plan to restructure ts turkey dvson, ncludng the sale of some facltes n Vrgna. The facltes were sold n the fourth quarter of fscal 2004. In connecton wth the restructurng, the Company recorded n cost of sales-restructurng charges of approxmately $64.2 mllon and $7.9 mllon of other restructurng charges. (d) The Company acqured WLR Foods on January 27, 2001 for $239.5 mllon and the assumpton of $45.5 mllon of ndebtedness. The acquston has been accounted for as a purchase and the results of operatons for ths acquston have been ncluded n our consoldated results of operatons snce the acquston date. (e) Gross proft, operatng ncome and net ncome nclude the followng non-recurrng recoveres, restructurng charges and other unusual tems for each of the years presented (n mllons): 2005 2004 2003 Effect on Gross Proft and Operatng Income: Cost of sales-restructurng $ -- $ (64.2) $ -- Non-recurrng recoveres recall nsurance $ -- $ 23.8 $ -- Non-recurrng recoveres for avan nfluenza $ -- $ -- $ 26.6 Non-recurrng recoveres for vtamn and methonne ltgaton $ -- $ 0.1 $ 19.9 Addtonal effect on Operatng Income: Other restructurng charges $ -- $ (7.9) $ -- Other ncome for ltgaton settlement 11.7 -- -- Other ncome for vtamn and methonne ltgaton $ -- $ 0.9 $ 36.0 In addton, the Company estmates ts losses related to the October 2002 recall (excludng nsurance recoveres) and the 2002 avan nfluenza outbreak negatvely affected gross proft and operatng ncome n each of the years presented as follows (n mllons): 2004 2003 2002 Recall effects (estmated) $ (20.0) $ (65.0) $ -- Losses from avan nfluenza (estmated) $ -- $ (7.3) $ (25.6) (f) Fscal 2006 ncluded ncome tax expense of $25.8 mllon assocated wth the restructurng of the Mexco operatons and subsequent repatraton of foregn earnngs under the Amercan Jobs Creaton Act of 2004. Fscal 2003 ncluded a non-cash tax beneft of $16.9 mllon assocated wth the reversal of a valuaton allowance on net operatng losses n the Company’s Mexco operatons. Fscal 2002 ncluded a tax beneft of $11.9 mllon from changes n Mexcan tax laws. (g) For purposes of computng the rato of earnngs to fxed charges, earnngs consst of ncome before ncome taxes plus fxed charges (excludng captalzed nterest). Fxed charges consst of nterest (ncludng captalzed nterest) on all ndebtedness, amortzaton of captalzed fnancng costs and that porton of rental expense that we beleve to be representatve of nterest. Earnngs were nadequate to cover fxed charges by $40.6 mllon and $4.1 mllon n fscal 2006 and 2002 respectvely. (h) Hstorcal per share amounts represent both basc and dluted and have been restated to gve effect to a stock dvdend ssued on July 30, 1999. The stock reclassfcaton on November 21, 2003 that resulted n the new common stock traded as PPC dd not affect the number of shares outstandng. () Includes amortzaton of captalzed fnancng costs of approxmately $6.6 mllon, $2.6 mllon, $2.3 mllon, $2.0 mllon, $1.5 mllon, $1.4 mllon, $1.9 mllon, $1.2 mllon, $1.1 mllon, $1.0 mllon and $0.9 mllon n fscal years 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998 and 1997, respectvely. 42
  • 48. PILGRIM’S PRIDE CORPORATION September 29, 2007 (j) “EBITDA” s defned as the sum of net ncome (loss) plus nterest, taxes, deprecaton and amortzaton. EBITDA s presented because t s used by us and we beleve t s frequently used by securtes analysts, nvestors and other nterested partes, n addton to and not n leu of Generally Accepted Accountng Prncples (GAAP) results, to compare the performance of companes. EBITDA s not a measurement of fnancal performance under GAAP and should not be consdered as an alternatve to cash flow from operatng actvtes or as a measure of lqudty or an alternatve to net ncome as ndcators of our operatng performance or any other measures of performance derved n accordance wth GAAP. A reconclaton of net ncome to EBITDA s as follows (n thousands): 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Net ncome (loss) $ 47,017 ($34,232) $ 264,979 $ 128,340 $ 56,036 $ 14,335 $ 41,137 $ 52,344 $ 65,253 $ 50,010 $41,036 Add: Interest expense, net 121,117 40,553 43,932 52,129 37,981 32,003 29,342 17,779 17,666 20,148 22,075 Income tax expense (beneft) 44,590 (2,085) 138,544 80,195 7,199 (12,425) 20,724 10,442 25,651 6,512 2,788 Deprecaton and amortzaton() 204,903 135,133 134,944 113,788 74,187 70,973 55,390 36,027 34,536 32,591 29,796 Mnus: Amortzaton of captalzed fnancng costs() 6,554 2,606 2,321 1,951 1,477 1,417 1,860 1,236 1,063 993 913 EBITDA 411,073 136,763 580,078 372,501 173,926 103,469 144,733 115,356 142,043 108,268 94,782 Add: Loss on early extngushment of debt 26,463 1,433 Adjusted EBITDA $ 437,536 $ 146,166 Note: We have ncluded EBITDA adjusted to exclude losses on early extngushment of debt n fscal 2007, as we beleve nvestors may be nterested n our EBITDA excludng ths tem as ths s how our management analyzes EBITDA from contnung operatons. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Description of the Company  The Company s the world’s largest chcken company and has one of the best known brand names n the chcken ndustry. In the U.S., we produce both prepared and fresh chcken and fresh turkey. In Mexco and Puerto Rco, we exclusvely produce fresh chcken. Through vertcal ntegraton we control the breedng, hatchng and growng of chckens. Our products are sold to foodservce, retal and frozen entrée customers prmarly through foodservce dstrbutors, retalers and restaurants throughout the U.S. and Puerto Rco and n the northern and central regons of Mexco. We operate n three busness segments and two geographcal areas. 43
  • 49. PILGRIM’S PRIDE CORPORATION September 29, 2007 Recent Business Acquisition  On December 27, 2006, we acqured 88.9% of all outstandng common shares of Atlanta-based Gold Kst Inc. (“Gold Kst”). Gold Kst was the thrd-largest chcken company n the U.S., accountng for approxmately 9% of all chcken produced domestcally n recent years. On January 9, 2007, we acqured the remanng Gold Kst common shares, makng Gold Kst a wholly owned subsdary of Plgrm’s Prde Corporaton. For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of Gold Kst n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of Gold Kst from December 27, 2006 through December 30, 2006 were not materal. We are n the process of fully ntegratng the operatons of Gold Kst nto the Company. We ntend to do ths as rapdly as possble wthout nterruptng the busness. We expect the acquston and ts ntegraton wll result n sgnfcant cost-savng opportuntes and enhanced growth. We are currently mplementng an optmzaton plan for all producton and dstrbuton facltes and determnng and mplementng a “best practce” approach across all operatons.  Executive Summary Overview. Focus and concern abroad over avan nfluenza sgnfcantly reduced nternatonal demand for chcken products durng fscal 2006 when compared to fscal 2005, leadng at tmes to hgher nventory levels and contrbutng to lower overall market prcng. At the same tme, ndustry producton levels contnued to ncrease, creatng an oversupply stuaton and further weakenng prces. Durng fscal 2006, the average market prcng for chcken leg quarters and breast meat declned approxmately 19.7% and 15.8%, respectvely, from fscal 2005. Addtonally, our U.S. chcken sales volume for fscal 2006 was 2.3% less than fscal 2005 because of avan nfluenza concerns n the nternatonal markets. The cost of corn, our prmary feed ngredent, ncreased sgnfcantly from August 2006 to the date of ths report. In response to ths challengng operatng envronment, we executed a mult-pont plan desgned to mprove our compettve poston: • Frst, we delayed one-half of our planned expanson n the Fresh Food Servce Dvson of our Mayfeld, Kentucky plant from July 2006 untl September 2006, and the other half of ths expanson from July 2006 untl June 2007. • Second, begnnng on July 1, 2006, we reduced our weekly slaughter rate by approxmately 3%, whch s equvalent to approxmately 830,000 head per week. Begnnng on January 1, 2007, we further reduced weekly slaughter to acheve a 5% year-over-year declne, whch s equvalent to approxmately 1.3 mllon head per week. 44
  • 50. PILGRIM’S PRIDE CORPORATION September 29, 2007 • Thrd, we reduced our captal nvestments for fscal 2006 to $144 mllon. Our orgnal captal nvestment projecton for the year had been n the range of $180-$200 mllon. We focused only on those projects we deemed crtcally necessary to our busness or those n whch our mmedate nvestment was judged by us to be n our best long-term nterests. • Fourth, we sharpened our focus on reducng costs and operatng more effcently. Industry-wde producton cutbacks mplemented early n 2007 along wth strong demand for our products created an mproved prcng envronment for our products n the last half of fscal 2007 when compared to the same pror year perod. Ths allowed the Company to return to proftablty n spte of further ncreases n the cost of feed ngredents durng fscal 2007. Durng fscal 2007, the average market prcng for chcken ncreased from the pror fscal year. Addtonally, our U.S. chcken sales volume n fscal 2007 was 41.1% hgher than fscal 2006 due prmarly to the Gold Kst acquston. We also experenced ncreased producton and freght cost related to operatonal neffcences, labor shortages at several facltes and hgher fuel costs. We beleve the labor shortages are attrbutable n part to heghtened publcty of governmental mmgraton enforcement efforts, ongong Company complance efforts and contnued changes n the Company’s employment practces n lght of recently publshed governmental best practces and the pendng new labor hrng regulatons. Results. Net ncome for fscal 2007 of $47.0 mllon s up $81.2 mllon from net loss of $34.2 mllon for fscal 2006. Ths ncrease s prmarly due to a 7.8% ncrease n our sellng prces and an mprovement n our product mx on top of a 34.7% ncrease n volume because of the Gold Kst acquston, offset by the ncreased cost of sales, net nterest charges and other costs descrbed below. Offsettng the prce and volume mprovements were the followng: • In addton to the effects of the Gold Kst acquston, cost of sales ncreased from fscal 2006 to fscal 2007 due n part to hgher feed ngredent and fuel costs between the two perods, operatonal neffcences and labor shortages. Feed ngredents costs rose 38.2% and 31.3% n the U.S. and Mexco chcken dvsons, respectvely, due prmarly to corn and soybean meal prces. • Net nterest expense ncreased $80.6 mllon n fscal 2007, when compared to fscal 2006, due prmarly to the fnancng of the Gold Kst acquston. • We recognzed $14.5 mllon and $12.0 mllon of losses on the early extngushments of debt durng the second and fourth quarters of fscal 2007, respectvely.  Business Environment Proftablty n the poultry ndustry s materally affected by the commodty prces of feed ngredents, chcken and turkey, whch are determned by supply and demand factors. As a result, the chcken and turkey ndustres are subject to cyclcal earnngs fluctuatons, whch can be mtgated somewhat by: - Busness strategy; - Product mx; 45
  • 51. PILGRIM’S PRIDE CORPORATION September 29, 2007 - Sales and marketng plans; and - Operatng effcences. In an effort to reduce prce volatlty and to generate hgher, more consstent proft margns, we have concentrated on the producton and marketng of prepared foods products. Prepared foods products generally have hgher proft margns than our other products. Also, the producton and sale n the U.S. of prepared foods products reduces the mpact of the costs of feed ngredents on our proftablty. Feed ngredent purchases are the sngle largest component of our cost of sales, representng approxmately 35.8% of our consoldated cost of sales n fscal 2007. The producton of feed ngredents s postvely or negatvely affected prmarly by weather patterns throughout the world, the global level of supply nventores and demand for feed ngredents, and the agrcultural polces of the U.S. and foregn governments. The cost of corn and soybean meal, our prmary feed ngredents, ncreased sgnfcantly from August 2006 untl the date of ths report, and there can be no assurance that the prce of corn or soybean meal wll not contnue to rse as a result of, among other thngs, ncreasng demand for these products around the world and alternatve uses of these products, such as ethanol and bodesel producton. As further processng s performed, feed ngredent costs become a decreasng percentage of a product’s total producton cost, thereby reducng ther mpact on our proftablty. Products sold n ths form enable us to charge a premum, reduce the mpact of feed ngredent costs on our proftablty and mprove and stablze our proft margns. As a sgnfcant porton of the U.S. poultry producton s exported, the commodty prces of chcken and turkey can be, and n recent perods have been, adversely affected by dsruptons n poultry export markets. These dsruptons are often caused by restrctons on mports of U.S.-produced poultry products mposed by foregn governments for a varety of reasons, ncludng the protecton of ther domestc poultry producers and allegatons of consumer health ssues. For example, Russa, Chna and Japan have restrcted the mportaton of U.S.-produced poultry for both of these reasons n recent perods. In addton, as descrbed above, n fscal 2006, focus and concern abroad over avan nfluenza sgnfcantly reduced nternatonal demand for chcken products. In July 2003, the U.S. and Mexco entered nto a safeguard agreement wth regard to mports nto Mexco of chcken leg quarters from the U.S. Under ths agreement, a tarff rate for chcken leg quarters of 98.8% of the sales prce was establshed. Ths tarff rate was reduced on January 1, 2007 to 19.8% and s scheduled to be reduced so that the fnal tarff rate at January 1, 2008 wll be zero. The tarff was mposed due to concerns that the duty-free mportaton of such products as provded by the North Amercan Free Trade Agreement would njure Mexco’s poultry ndustry. As such tarffs are reduced, we expect greater amounts of chcken to be mported nto Mexco from the U.S., whch could negatvely affect the proftablty of Mexcan chcken producers, ncludng our Mexco operatons. Because these dsruptons n poultry export markets are often poltcal, no assurances can be gven as to when the exstng dsruptons wll be allevated or that new ones wll not arse. In October 2007, Mexco’s legslatve bodes enacted La Ley del Impuesto Empresaral a Tasa Únca (“IETU”), a new mnmum corporaton tax, whch wll be assessed on companes dong busness n Mexco begnnng January 1, 2008. We are currently evaluatng the antcpated mpact that IETU wll have on our busness and operatng results and there can be no assurance that IETU wll not have a materal adverse effect on our fnancal results. 46
  • 52. PILGRIM’S PRIDE CORPORATION September 29, 2007 Business Segments  We operate n three reportable busness segments as (1) a producer and seller of chcken products, (2) a producer and seller of turkey products and (3) a seller of other products. Our chcken segment ncludes sales of chcken products we produce and purchase for resale n the U.S., ncludng Puerto Rco, and Mexco. Our chcken segment conducts separate operatons n the U.S., Puerto Rco and Mexco and s reported as two separate geographcal areas. Substantally all of the assets and operatons of the fscal 2007 acquston are ncluded n our U.S. chcken segment snce the date of acquston. Our turkey segment ncludes sales of turkey products we produce and purchase for resale n our turkey and dstrbuton operatons n the U.S. Our other products segment ncludes dstrbuton of non-poultry products that are purchased from thrd partes and sold to ndependent grocers and quck servce restaurants. Also ncluded n ths category are sales of table eggs, feed, proten products, lve hogs and other tems, some of whch are produced or rased by the Company. Inter-area sales and nter-segment sales, whch are not materal, are accounted for at prces comparable to normal trade customer sales. Corporate expenses are allocated to Mexco based upon varous apportonment methods for specfc expendtures ncurred related thereto wth the remanng amounts allocated to the U.S. portons of the segments based on number of employees. Assets assocated wth our corporate functons, ncludng cash and cash equvalents and nvestments n avalable for sale securtes, are ncluded n our chcken segment. Sellng, general and admnstratve expenses related to our dstrbuton centers are allocated based on the proporton of net sales to the partcular segment to whch the product sales relate. Deprecaton and amortzaton, total assets and captal expendtures of our dstrbuton centers are ncluded n our chcken segment based on the prmary focus of the centers. 47
  • 53. PILGRIM’S PRIDE CORPORATION September 29, 2007 The followng table presents certan nformaton regardng our segments: Fiscal Year Ended September 29, 2007(a) September 30, 2006 October 1, 2005 (In thousands) Net Sales to Customers: Chcken: Unted States $ 6,328,354 $ 4,098,403 $ 4,411,269 Mexco 488,466 418,745 403,353 Sub-total 6,816,820 4,517,148 4,814,622 Turkey 122,364 130,901 204,838 Other Products: Unted States 638,738 570,510 626,056 Mexco 20,677 17,006 20,759 Sub-total 659,415 587,516 646,815 Total $ 7,598,599 $ 5,235,565 $ 5,666,275 Operating Income (Loss): Chcken: Unted States $ 192,447 $ 28,619 $ 405,662 Mexco 13,116 (17,960) 39,809 Sub-total 205,563 10,659 445,471 Turkey (4,655) (15,511) (22,539) Other Products: Unted States 28,637 6,216 8,250 Mexco 2,992 1,638 4,630 Sub-total 31,629 7,854 12,880 Total $ 232,537 $ 3,002 $ 435,812 Depreciation and Amortization:(b) Chcken: Unted States $ 183,808 $ 109,346 $ 114,131 Mexco 11,015 11,305 12,085 Sub-total 194,823 120,651 126,216 Turkey 1,587 6,593 3,343 Other Products: Unted States 8,278 7,743 5,196 Mexco 215 146 189 Sub-total 8,493 7,889 5,385 Total $ 204,903 $ 135,133 $ 134,944 Total Assets: Chcken: Unted States $ 3,247,812 $ 1,897,763 $ 2,059,579 Mexco 348,894 361,887 287,414 Sub-total 3,596,706 2,259,650 2,346,993 Turkey 69,653 76,908 77,319 Other Products: Unted States 103,757 88,650 85,581 Mexco 4,120 1,660 2,010 Sub-total 107,877 90,310 87,591 Total $ 3,774,236 $ 2,426,868 $ 2,511,903 Capital Expenditures (excluding acquisition): Chcken: Unted States $ 164,449 $ 133,106 $ 102,470 Mexco 1,633 6,536 4,924 Sub-total 166,082 139,642 107,394 Turkey 502 257 3,604 Other Products: Unted States 5,699 3,567 5,448 Mexco 40 416 142 Sub-total 5,739 3,983 5,590 Total $ 172,323 $ 143,882 $ 116,588 48
  • 54. PILGRIM’S PRIDE CORPORATION September 29, 2007 (a) The Company acqured Gold Kst on December 27, 2006 for $1.139 bllon. For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of Gold Kst n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of Gold Kst from December 27, 2006 through December 30, 2006 were not materal. (b) Includes amortzaton of captalzed fnancng costs of approxmately $6.6 mllon, $2.6 mllon, and $2.3 mllon n fscal 2007, 2006 and 2005, respectvely, and amortzaton of ntangble assets of approxmately $6.3 mllon n fscal 2007. The followng table presents certan tems as a percentage of net sales for the perods ndcated: Fscal Year Ended September 29, September 30, October 1, 2007 2006 2005 Net sales 100.0 % 100.0 % 100.0 % Cost and Expenses Cost of sales 92.2 94.3 86.8 Gross proft 7.8 5.7 13.2 Sellng, general and admnstratve expense 4.7 5.6 5.5 Operatng ncome 3.1 0.1 7.7 Interest expense, net 1.6 0.8 0.7 Income (loss) before ncome taxes 1.2 (0.7) 7.1 Net ncome (loss) 0.6 (0.7) 4.7 49
  • 55. PILGRIM’S PRIDE CORPORATION September 29, 2007 Results of Operations Fiscal 2007 Compared to Fiscal 2006 Net Sales. Net sales for fscal 2007 ncreased $2,363.0 mllon, or 45.1%, over fscal 2006. The followng table provdes addtonal nformaton regardng net sales (dollars n mllons): Fscal Year Ended September 29, Change from Percentage Source 2007 Fscal 2006 Change Chcken: Unted States $ 6,328.3 $ 2,229.9 54.4 % (a) Mexco 488.5 69.8 16.7 % (b) 6,816.8 2,299.7 50.9 % Turkey 122.4 (8.5) (6.5) % (c) Other products: Unted States 638.7 68.1 11.9 % (d) Mexco 20.7 3.7 21.8 % (e) 659.4 71.8 12.2 % Net Sales $ 7,598.6 $ 2,363.0 45.1 % (a) U.S. chcken sales ncreased prmarly as the result of a 41.1% ncrease n volume due to the acquston of Gold Kst on December 27, 2006, ncreases n the average sellng prces of chcken and, for legacy Plgrm’s Prde products, an mproved product mx contanng more hgher-margn, value-added products. (b) Mexco chcken sales ncreased compared to fscal year 2006, due prmarly to ncreases n producton and a 21.2% ncrease n prcng per pound sold. (c) Turkey sales declned due prmarly to an 8.1% decrease n prcng of turkey products. (d) U.S. sales of other products ncreased prmarly due to the acquston of Gold Kst on December 27, 2006 and mproved prcng from renderng operatons. (e) Mexco other products sales ncreased due to ncreased sales volumes of and ncreased sales prces for commercal feed. 50
  • 56. PILGRIM’S PRIDE CORPORATION September 29, 2007 Gross Profit. Gross proft for fscal 2007 ncreased $293.9 mllon, or 98.8%, over fscal 2006. The followng table provdes gross proft nformaton (dollars n mllons): Fscal Year Ended Percentage Percentage September 29, Change from Percentage of Net Sales of Net Sales Components 2007 Fscal 2006 Change Fscal 2007 Fscal 2006 Net sales $ 7,598.6 $ 2,363.0 45.1 % 100.0 % 100.0 % Cost of sales 7,007.1 2,069.1 41.9 % 92.2 % 94.3 % (a) Gross proft $ 591.5 $ 293.9 98.8 % 7.8 % 5.7 % (b) (a) Cost of sales n the U.S. chcken operatons ncreased $1,995.7 mllon due prmarly to the acquston of Gold Kst and ncreased quanttes and costs of energy and feed ngredents. We also experenced n fscal 2007, and contnue to experence, ncreased producton and freght costs related to operatonal neffcences, labor shortages at several facltes and hgher fuel costs. We beleve the labor shortages are attrbutable n part to heghtened publcty of governmental mmgraton enforcement efforts, ongong Company complance efforts and contnued changes n the Company’s employment practces n lght of recently publshed governmental best practces and the pendng new labor hrng regulatons. Cost of sales n our Mexco chcken operatons ncreased prmarly due to ncreased feed ngredent cost. (b) Gross proft as a percent of net sales mproved 2.1 percentage ponts due to sales prces n the ndustry ncreasng n response to the ncreased cost of feed ngredents. 51
  • 57. PILGRIM’S PRIDE CORPORATION September 29, 2007 Operating Income. Operatng ncome for fscal 2007 compared to fscal 2006 ncreased $229.5 mllon, as descrbed n the followng table (dollars n mllons): Fscal Year Ended September 29, Change from Percentage Source 2007 Fscal 2006 Change Chcken: Unted States $ 192.5 $ 163.9 573.1 % Mexco 13.1 31.0 173.2 % 205.6 194.9 NM % Turkey (4.7) 10.8 70.0 % Other Products: Unted States 28.6 22.4 361.3 % Mexco 3.0 1.4 87.5 % 31.6 23.8 305.1 % Operatng Income $ 232.5 $ 229.5 NM % NM = Not meanngful Fscal Year Ended Percentage Percentage September 29, Change from Percentage of Net Sales of Net Sales Components 2007 Fscal 2006 Change Fscal 2007 Fscal 2006 Gross proft $ 591.5 $ 293.9 98.8 % 7.8 % 5.7 % Sellng, general and admnstratve expense 359.0 64.4 21.9 % 4.7 % 5.6 % (a) Operatng ncome $ 232.5 $ 229.5 NM % 3.1 % 0.1 % (b) NM = Not meanngful (a) Sellng, general and admnstratve expense ncreased due prmarly to the acquston of Gold Kst. (b) The ncrease n operatng ncome when compared to fscal 2006 s due prmarly to the acquston of Gold Kst, ncreases n the average sellng prces of chcken, mproved product mx and a reducton of sellng, general and admnstratve expenses as a percentage of net sales, offset by ncreased producton and freght costs and the other factors descrbed above. Interest Expense. Consoldated nterest expense ncreased 148.6% to $125.8 mllon n fscal 2007, when compared to $50.6 mllon for fscal 2006, due prmarly to ncreased borrowng for the acquston of Gold Kst. Interest Income. Interest ncome decreased 54.0% to $4.6 mllon n fscal 2007, compared to $10.0 mllon n fscal 2006, due to lower nvestment balances. 52
  • 58. PILGRIM’S PRIDE CORPORATION September 29, 2007 Loss on Early Extinguishment of Debt. Durng fscal 2007, the Company recognzed loss on early extngushment of debt of $26.4 mllon, whch ncluded premums of $16.9 mllon along wth unamortzed loan costs of $9.5 mllon. These losses related to the redempton of $77.5 mllon of our 9 1/4/% Senor Subordnated Notes due 2013 and all of our 9 5/8% Senor Notes due 2011. Income Tax Expense. Consoldated ncome tax expense n fscal 2007 was $44.6 mllon, compared to tax beneft of $2.1 mllon n fscal 2006. The ncrease n consoldated ncome tax expense s the result of the pretax earnngs n fscal 2007 versus pre-tax loss n the U.S. and Mexco n 2006 and an ncrease n tax contngency reserves. In addton, fscal 2006 ncluded ncome tax expense of $25.8 mllon for the restructurng of the Mexco operatons and subsequent repatraton of earnngs from Mexco under the Amercan Jobs Creaton Act of 2004, and a $10.6 mllon beneft from a change n an estmate, both of whch are descrbed n Note A to the Consoldated Fnancal Statements. Fiscal 2006 Compared to Fiscal 2005 Net Sales. Net sales for fscal 2006 decreased $430.7 mllon, or 7.6%, when compared to fscal 2005. The followng table provdes addtonal nformaton regardng net sales (dollars n mllons): Fscal Year Ended September 30, Change from Percentage Source 2006 Fscal 2005 Change Chcken: Unted States $ 4,098.4 $ (312.8) (7.1) % (a) Mexco 418.7 15.3 3.8 % (b) 4,517.1 (297.5) (6.2) % Turkey 130.9 (73.9) (36.1) % (c) Other Products: Unted States 570.6 (55.5) (8.9) % (d) Mexco 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. chcken sales declned prmarly due to 15.8% lower breast meat prces and 19.7% lower leg quarter prces and 2.3% reducton n volume. (b) Mexco chcken sales ncreased compared to fscal year 2005, due prmarly to ncreases n producton, partally offset by a 9.1% decrease n prcng per pound sold. (c) Turkey sales declned due to our decson n the frst quarter of fscal 2006 to cease producton of certan products at our Francona, Pennsylvana turkey cookng operatons. (d) U.S. sales of other products decreased prmarly due to the dvesture of certan dstrbuton centers whose sales ncluded a large volume of non-poultry products. (e) Mexco other products sales decreased due to reduced sales volumes of commercal feed. 53
  • 59. PILGRIM’S PRIDE CORPORATION September 29, 2007 Gross Profit. Gross proft for fscal 2006 decreased $447.6 mllon, or 60.1%, over fscal 2005. The followng table provdes gross proft nformaton (dollars n mllons): Fscal Year Ended Percentage Percentage September 30, Change from Percentage of Net Sales of Net Sales Components 2006 Fscal 2005 Change Fscal 2006 Fscal 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 proft $ 297.6 $ (447.6) (60.1) % 5.7 % 13.2 % (a) Cost of sales n the U.S. chcken operatons ncreased $71.8 mllon due prmarly to ncreased energy and packagng costs. Cost of sales n our turkey operatons decreased sgnfcantly because of the restructurng of ths dvson n fscal 2004 and frst quarter of fscal 2006. Cost of sales n our Mexco chcken operatons ncreased $71.6 mllon prmarly due to a 9.7% ncrease n producton volumes. Operating Income. Operatng ncome for fscal 2006 compared to fscal 2005 decreased $432.8 mllon, or 99.3%, as descrbed n the followng table (dollars n mllons): Fscal Year Ended September 30, Change from Percentage Source 2006 Fscal 2005 Change Chcken: Unted States $ 28.6 $ (377.1) (93.0) % Mexco (17.9) (57.7) (145.0) % 10.7 (434.8) (97.6) % Turkey (15.5) 7.0 31.1 % Other Products: Unted States 6.2 (2.0) (24.4) % Mexco 1.6 (3.0) (65.2) % 7.8 (5.0) (39.1) % Operatng Income $ 3.0 $ (432.8) (99.3) % Fscal Year Ended Percentage Percentage September 30, Change from Percentage of Net Sales of Net Sales Components 2006 Fscal 2005 Change Fscal 2006 Fscal 2005 Gross proft $ 297.6 $ (447.6) (60.1) % 5.7 % 13.2 % Sellng, general and admnstratve expense 294.6 (14.8) (4.8) % 5.6 % 5.5 % (a) Operatng ncome $ 3.0 $ (432.8) (99.3) % 0.1 % 7.7 % (b) 54
  • 60. PILGRIM’S PRIDE CORPORATION September 29, 2007 (a) Sellng, general and admnstratve expense decreased due prmarly to a decrease n costs assocated wth our proft-based retrement and compensaton plans. (b) The decrease n operatng ncome when compared to fscal 2005 s due prmarly to lower market prcng for chcken products, as well as ncreased costs for energy and packagng. Interest Expense. Consoldated nterest expense ncreased 2.0% to $50.6 mllon n fscal 2006, when compared to $49.6 mllon for fscal 2005, due prmarly to hgher average outstandng debt balances experenced n the fscal year. Interest Income. Interest ncome ncreased 75.4% to $10.0 mllon n fscal 2006, compared to $5.7 mllon n fscal 2005, due to hgher average nvestment balances and slghtly hgher rates. Income Tax Expense. Consoldated ncome tax beneft n fscal 2006 was $2.1 mllon, compared to tax expense of $138.5 mllon n fscal 2005. The decrease n consoldated ncome tax expense s the result of the pretax loss n fscal 2006 versus sgnfcant earnngs n the U.S. and Mexco n fscal 2005. In addton, fscal 2006 ncluded ncome tax expense of $25.8 mllon for the restructurng of the Mexco operatons and subsequent repatraton of earnngs from Mexco under the Amercan Jobs Creaton Act of 2004, and a $10.6 mllon beneft from a change n an estmate, both of whch are descrbed n Note A to the Consoldated Fnancal Statements. Liquidity and Capital Resources The followng table presents our avalable sources of lqudty as of September 29, 2007 (dollars n mllons): Faclty Amount Source of Lqudty Amount Outstandng Avalable Cash and cash equvalents $ -- $ -- $ 66.2 Investments n avalable-for-sale securtes -- -- 8.2 Debt facltes: Revolvng credt facltes 350.0 26.3 238.8 (a) Revolvng/term faclty 550.0 -- 550.0 Recevables purchase agreement 300.0 300.0 -- (a) At September 29, 2007, the Company had $84.9 mllon n letters of credt outstandng relatng to normal busness transactons. In September 2006, the Company entered nto an amended and restated revolver/term credt agreement wth a maturty date of September 21, 2016. At September 29, 2007, ths revolver/term credt agreement provdes for an aggregate commtment of $1.172 bllon consstng of () a $550 mllon revolvng/term loan commtment and () $622.4 mllon n varous term loans. At September 29, 2007, the Company had nothng outstandng under the revolver and $622.4 mllon outstandng n varous term loans. The total credt faclty s presently secured by certan fxed assets wth a current avalablty of $550.0 mllon. From tme to tme, f certan condtons are satsfed, the Company 55
  • 61. PILGRIM’S PRIDE CORPORATION September 29, 2007 has the rght to ncrease the revolvng/term loan commtment and term loan commtment to a total maxmum amount of $1.0 bllon and $750 mllon, respectvely. Borrowngs under the revolvng/ term loan commtment are avalable on a revolvng bass untl September 21, 2011 at whch tme the outstandng borrowngs wll be converted to a term loan maturng on September 21, 2016. The fxed rate term loans bear nterest at rates rangng from 6.84% to 7.06%. The voluntary converted loans bear nterest at rates rangng from LIBOR plus 1.0%-2.0%, dependng upon the Company’s total debt to captalzaton rato. The floatng rate term loans bear nterest at LIBOR plus 1.50%-1.75% based on the rato of the Company’s debt to EBITDA, as defned n the agreement. The revolvng/term loans provde for nterest rates rangng from LIBOR plus 1.0%-2.0%, dependng upon the Company’s total debt to captalzaton rato. Revolvng/term loans converted to term loans on September 21, 2011 wll be payable n equal quarterly prncpal payments of 10% per annum of the orgnal prncpal amount begnnng the calendar quarter followng the converson date wth the remanng balance due on the maturty date. Of the term loans outstandng, $208.7 mllon must be repad n equal quarterly prncpal payments of 1% per annum of the orgnal prncpal amount wth the remanng balance due on the maturty date. All borrowngs are subject to the avalablty of elgble collateral and no materal adverse change provsons. Commtment fees charged on the unused balance of ths faclty range from 0.20% to 0.40%, dependng upon the Company’s total debt to captalzaton rato. One-half of the outstandng oblgatons under the domestc revolvng credt faclty are guaranteed by Plgrm Interests, Ltd., an entty related to our Senor Charman, Lonne “Bo” Plgrm. On December 15, 2006, the Company borrowed $100 mllon at 6.84% under our revolver/term credt agreement and used substantally all of the funds to repay, n full, term loans payable to an nsurance company under a note purchase agreement maturng n 2012 and 2013. In January 2007, the Company borrowed (1) $780 mllon under our revolver/term credt agreement and (2) $450 mllon under our brdge loan agreement to fund the Gold Kst acquston. On January 24, 2007, the Company closed on the sale of $400 mllon of 7 5/8% Senor Notes due 2015 (the “Senor Notes”) and $250 mllon of 8 3/8% Senor Subordnated Notes due 2017 (the “Subordnated Notes”), sold at par. Interest s payable on May 1 and November 1 of each year, begnnng November 1, 2007. We may redeem all or part of the Senor Notes on or after May 1, 2011. We may redeem all or part of the Subordnated Notes on or after May 1, 2012. Before May 1, 2010, we also may redeem up to 35% of the aggregate prncpal amount of each of the Senor Notes and the Subordnated Notes wth the proceeds of certan equty offerngs. Each of these optonal redemptons s at a premum as descrbed n the ndentures under whch the notes were ssued. The proceeds from the sale of the notes, after underwrtng dscounts, were used to (1) retre the loans outstandng under our brdge loan agreement, (2) repurchase $77.5 mllon of the Company’s 9 1/4% Senor Subordnated Notes due 2013 at a premum of $7.4 mllon plus accrued nterest of $1.3 mllon and (3) reduce outstandng revolvng loans under our revolver/term credt agreement. Loss on early extngushment of debt ncludes the $7.4 mllon premum along wth unamortzed loan costs of $7.1 mllon related to the retrement of these Notes. 56
  • 62. PILGRIM’S PRIDE CORPORATION September 29, 2007 On September 21, 2007, the Company redeemed all of ts 9 5/8% Senor Notes due 2011 at a total cost of $307.5 mllon. To fund a porton of the aggregate redempton prce, the Company sold $300 mllon of trade recevables under ts Recevables Purchase Agreement. Loss on early extngushment of debt ncludes the $9.5 mllon premum along wth unamortzed loan costs of $2.5 mllon related to the retrement of these Notes. As of September 29, 2007, we had a $300.0 mllon commtment under a domestc revolvng credt faclty that provdes for nterest rates rangng from LIBOR plus 0.75-1.75%, dependng upon our total debt to captalzaton rato. From tme to tme, f certan condtons are satsfed, the Company has the rght to ncrease the revolvng commtment to a total maxmum amount of $450 mllon. At September 29, 2007, $215.1 mllon was avalable for borrowng under the domestc revolvng credt faclty. Borrowngs aganst ths faclty are subject to the avalablty of elgble collateral and no materal adverse change provsons. The oblgatons under ths faclty are secured by domestc chcken nventores. Commtment fees charged on the unused balance of ths faclty range from 0.175% to 0.35%, dependng upon the Company’s total debt to captalzaton rato. One-half of the outstandng oblgatons under the domestc revolvng credt faclty are guaranteed by Plgrm Interests, Ltd., an entty related to our Senor Charman, Lonne “Bo” Plgrm. On September 25, 2006, a subsdary of the Company, Avícola Plgrm’s Prde de Méxco, S. de R.L. de C.V. (the “Borrower”), entered nto a secured revolvng credt agreement of up to $75 mllon wth a fnal maturty date of September 25, 2011. In March 2007, the Borrower elected to reduce the commtment under ths agreement to approxmately $50 mllon. Outstandng amounts bear nterest at rates rangng from the hgher of the Prme Rate or Federal Funds Effectve Rate plus 0.5%; LIBOR plus 1.25%-2.75%; or TIIE plus 1.05%-2.55% dependng on the loan desgnaton. Oblgatons under ths agreement are secured by a securty nterest n and len upon all captal stock and other equty nterests of the Company’s Mexcan subsdares. All the oblgatons of the Borrower are secured by uncondtonal guaranty by the Company. At September 29, 2007, $26.3 mllon was outstandng and approxmately $23.7 mllon was avalable for borrowngs. All borrowngs are subject to no materal adverse effect provsons. We also mantan operatng leases for varous types of equpment, some of whch contan resdual value guarantees for the market value of assets at the end of the term of the lease. The terms of the lease maturtes range from one to seven years. We estmate the maxmum potental amount of the resdual value guarantees s approxmately $21.1 mllon; however, the actual amount would be offset by any recoverable amount based on the far market value of the underlyng leased assets. No lablty has been recorded related to ths contngency as the lkelhood of payments under these guarantees s not consdered to be probable and the far value of the guarantees s mmateral. We hstorcally have not experenced sgnfcant payments under smlar resdual guarantees. At September 29, 2007, our workng captal decreased to $379.1 mllon and our current rato decreased to 1.42 to 1, compared wth workng captal of $528.8 mllon and a current rato of 1.92 to 1 at September 30, 2006, prmarly due to lower cash balances and recevables and hgher accounts payable and accrued labltes, partally offset by ncreased nventores. 57
  • 63. PILGRIM’S PRIDE CORPORATION September 29, 2007 Trade accounts and other recevables were $130.2 mllon at September 29, 2007, compared to $263.1 mllon at September 30, 2006. The $132.9 mllon, or 50.5%, decrease n trade accounts and other recevables was prmarly due to the September 2007 sale of $300.0 mllon trade recevables under the Recevables Purchase Agreement, partally offset by recevables obtaned from the Gold Kst acquston. Inventores were $961.9 mllon at September 29, 2007, compared to $585.9 mllon at September 30, 2006. The $376.0 mllon, or 64.2%, ncrease n nventores was prmarly due to the Gold Kst acquston and ncreased product costs n fnshed chcken products and lve nventores as a result of hgher feed ngredent costs. Accounts payable ncreased $108.6 mllon, or 37.0%, to $402.3 mllon at September 29, 2007, compared to $293.7 mllon at September 30, 2006. The ncrease was prmarly due to the Gold Kst acquston and hgher feed ngredent costs. Accrued labltes ncreased $227.2 mllon, or 83.3%, to $500.0 mllon compared to $272.8 mllon at September 30, 2006. Ths ncrease s due prmarly to the Gold Kst acquston. Cash flows provded by operatng actvtes were $464.0 mllon and $30.4 mllon for fscal 2007 and 2006, respectvely. The ncrease n cash flows provded by operatng actvtes for fscal 2007 when compared to fscal 2006 was prmarly due to ncreased net ncome and lower recevables. Cash flows provded by (used n) nvestng actvtes were ($1.184) bllon and $32.3 mllon for fscal 2007 and 2006, respectvely. Cash of $1.102 bllon was used to acqure Gold Kst. Captal expendtures (excludng busness acqustons) of $172.3 mllon and $143.8 mllon for fscal years 2007 and 2006, respectvely, were prmarly ncurred to acqure and expand certan facltes, mprove effcences, reduce costs and for the routne replacement of equpment. Cash was used to purchase nvestment securtes of $125.0 mllon n fscal 2007 and $318.3 mllon n fscal 2006. Cash proceeds n fscal 2007 from the sale or maturty of nvestment securtes was $208.7 mllon. We antcpate spendng approxmately $290 mllon to $300 mllon n fscal 2008 to mprove effcences and for the routne replacement of equpment at our current operatons. We expect to fnance such expendtures wth avalable cash and operatng cash flows and exstng revolvng/term and revolvng credt facltes. Cash flows used n fnancng actvtes were $630.2 mllon and $38.8 mllon for the fscal years 2007 and 2006, respectvely. The ncrease n cash provded by fnancng actvtes for fscal 2007, when compared to fscal 2006, was attrbutable to proceeds receved from long-term debt, ncludng proceeds of $1.23 bllon borrowed to fund the Gold Kst acquston. We are a party to many routne contracts n whch we provde general ndemntes n the normal course of busness to thrd partes for varous rsks. Among other consderatons, we have not recorded a lablty for any of these ndemntes as, based upon the lkelhood of payment, the far value of such ndemntes s mmateral. 58
  • 64. PILGRIM’S PRIDE CORPORATION September 29, 2007 Our loan agreements generally oblgate us to remburse the applcable lender for ncremental ncreased costs due to a change n law that mposes () any reserve or specal depost requrement aganst assets of, deposts wth or credt extended by such lender related to the loan, () any tax, duty or other charge wth respect to the loan (except standard ncome tax) or () captal adequacy requrements. In addton, some of our loan agreements contan a wthholdng tax provson that requres us to pay addtonal amounts to the applcable lender or other fnancng party, generally f wthholdng taxes are mposed on such lender or other fnancng party as a result of a change n the applcable tax law. These ncreased cost and wthholdng tax provsons contnue for the entre term of the applcable transacton, and there s no lmtaton on the maxmum addtonal amounts we could be oblgated to pay under such provsons. Any falure to pay amounts due under such provsons generally would trgger an event of default, and, n a secured fnancng transacton, would enttle the lender to foreclose upon the collateral to realze the amount due. Off-Balance Sheet Arrangements On June 29, 1999, the Camp County Industral Development Corporaton ssued $25.0 mllon of varable-rate envronmental facltes revenue bonds supported by letters of credt obtaned by us. We may draw from these proceeds over the constructon perod for new sewage and sold waste dsposal facltes at a poultry by-products plant to be bult n Camp County, Texas. We are not requred to borrow the full amount of the proceeds from these revenue bonds. All amounts borrowed from these funds wll be due n 2029. The revenue bonds are supported by letters of credt obtaned by us under our revolvng credt facltes whch are secured by our domestc chcken nventores. The bonds wll be recorded as debt of the Company f and when they are spent to fund constructon. In connecton wth the Recevables Purchase Agreement dated June 26, 1998, as amended, the Company sells, on a revolvng bass, certan of ts trade recevables (the “Pooled Recevables”) to a specal purpose corporaton wholly owned by the Company, whch n turn sells a percentage ownershp nterest to thrd partes. As of September 29, 2007, $300.0 mllon n Pooled Recevables had been sold. Durng fscal 2006 and 2005 there were no Pooled Recevables sold. The gross proceeds resultng from the sale are ncluded n cash flows from operatng actvtes n the Consoldated Statements of Cash Flows. Losses on these sales were mmateral. Contractual Obligations Contractual oblgatons at September 29, 2007 were as follows (dollars n mllons): Payments Due By Perod Less than More than Contractual Oblgatons Total 1 year 1-3 years 3-5 years 5 years Long-term debt(a) $ 1,321.4 $ 2.9 $ 3.7 $ 29.3 $ 1,285.5 Guarantee fees 31.2 3.6 7.0 7.0 13.6 Operatng leases 147.5 46.8 65.4 30.3 5.0 Purchase oblgatons 40.1 40.1 -- -- -- Total $ 1,540.2 $ 93.4 $ 76.1 $ 66.6 $ 1,304.1 (a) Excludes $84.9 mllon n letters of credt outstandng related to normal busness transactons. 59
  • 65. PILGRIM’S PRIDE CORPORATION September 29, 2007 Critical Accounting Policies and Estimates General. Our dscusson and analyss of our fnancal condton and results of operatons are based upon our fnancal statements, whch have been prepared n accordance wth accountng prncples generally accepted n the U.S. The preparaton of these fnancal statements requres us to make estmates and judgments that affect the reported amounts of assets, labltes, revenues and expenses. On an ongong bass, we evaluate our estmates, ncludng those related to revenue recognton, customer programs and ncentves, allowance for doubtful accounts, nventores, ncome taxes and product recall accountng. We base our estmates on hstorcal experence and on varous other assumptons that are beleved to be reasonable under the crcumstances, the results of whch form the bass for makng judgments about the carryng values of assets and labltes that are not readly apparent from other sources. Actual results may dffer from these estmates under dfferent assumptons or condtons. We beleve the followng crtcal accountng polces affect our more sgnfcant judgments and estmates used n the preparaton of our fnancal statements. Revenue Recognition. Revenue s recognzed upon shpment and transfer of ownershp of the product to the customer and s recorded net of estmated ncentve offerngs ncludng specal prcng agreements, promotons and other volume-based ncentves. Revsons to these estmates are charged back to net sales n the perod n whch the facts that gve rse to the revson become known. Inventory. Lve poultry nventores are stated at the lower of cost or market and breeder hens at the lower of cost, less accumulated amortzaton, or market. The costs assocated wth breeder hens are accumulated up to the producton stage and amortzed over ther productve lves usng the unt-of- producton method. Fnshed poultry products, feed, eggs and other nventores are stated at the lower of cost (frst-n, frst-out method) or market. We record valuatons and adjustments for our nventory and for estmated obsolescence at or equal to the dfference between the cost of nventory and the estmated market value based upon known condtons affectng nventory obsolescence, ncludng sgnfcantly aged products, dscontnued product lnes, or damaged or obsolete products. We allocate meat costs between our varous fnshed poultry products based on a by-product costng technque that reduces the cost of the whole brd by estmated yelds and amounts to be recovered for certan by-product parts. Ths prmarly ncludes leg quarters, wngs, tenders and offal, whch are carred n nventory at the estmated recovery amounts, wth the remanng amount beng reflected as our breast meat cost. Generally, the Company performs an evaluaton of whether any lower of cost or market adjustments are requred at the segment level based on a number of factors, ncludng: () pools of related nventory, () product contnuaton or dscontnuaton, () estmated market sellng prces and (v) expected dstrbuton channels. If actual market condtons or other factors are less favorable than those projected by management, addtonal nventory adjustments may be requred. Property, Plant and Equipment. The Company records mparment charges on long-lved assets used n operatons when events and crcumstances ndcate that the assets may be mpared and the undscounted cash flows estmated to be generated by those assets are less than the carryng amount of those assets. The mparment charge s determned based upon the amount the net book value of the assets exceeds ther far market value. In makng these determnatons, the Company utlzes certan assumptons, ncludng, but not lmted to: () future cash flows estmated to be generated by these 60
  • 66. PILGRIM’S PRIDE CORPORATION September 29, 2007 assets, whch are based on addtonal assumptons such as asset utlzaton, remanng length of servce and estmated salvage values; () estmated far market value of the assets; and () determnatons wth respect to the lowest level of cash flows relevant to the respectve mparment test, generally groupngs of related operatonal facltes. Litigation and Contingent Liabilities. The Company s subject to lawsuts, nvestgatons and other clams related to employment, envronmental, product, and other matters, and s requred to assess the lkelhood of any adverse judgments or outcomes to these matters as well as potental ranges of probable losses. A determnaton of the amount of reserves requred, ncludng legal defense costs, f any, for these contngences s made when losses are determned to be probable and reasonably estmatble and after consderable analyss of each ndvdual ssue. These reserves may change n the future due to favorable or adverse judgments, changes n the Company’s assumptons, the effectveness of strateges or other factors beyond the Company’s control. Accrued Self Insurance. Insurance expense for casualty clams and employee-related health care benefts are estmated usng hstorcal experence and actuaral estmates. Stop-loss coverage s mantaned wth thrd party nsurers to lmt the Company’s total exposure. Certan categores of clam labltes are actuarally determned. The assumptons used to arrve at perodc expenses are revewed regularly by management. However, actual expenses could dffer from these estmates and could result n adjustments to be recognzed. Purchase Price Accounting. The Company allocates the total purchase prce n connecton wth acqustons to assets and labltes based upon ther estmated far values. For property, plant and equpment and ntangble assets other than goodwll, for sgnfcant acqustons, the Company has hstorcally reled upon the use of thrd party valuaton experts to assst n the estmaton of far values. Hstorcally, the carryng value of acqured accounts recevable, nventory and accounts payable have approxmated ther far value as of the date of acquston, though adjustments are made wthn purchase prce accountng to the extent needed to record such assets and labltes at far value. Wth respect to accrued labltes, the Company uses all avalable nformaton to make ts best estmate of the far value of the acqured labltes and, when necessary, may rely upon the use of thrd party actuaral experts to assst n the estmaton of far value for certan labltes, prmarly self-nsurance accruals. Income Taxes. The Company recognzes deferred tax assets and labltes for the effect of temporary dfferences between the book and tax bases of recorded assets and labltes. Taxes are provded for nternatonal subsdares based on the assumpton that ther earnngs are ndefntely renvested n foregn subsdares and as such deferred taxes are not provded for n U.S. ncome taxes that would be requred n the event of dstrbuton of these earnngs. We also reduce deferred tax assets by a valuaton allowance f t s more lkely than not that some porton or all of the deferred tax asset wll not be realzed. We revew the recoverablty of any tax assets recorded on the balance sheet, prmarly operatng loss carryforwards, based on both hstorcal and antcpated earnngs levels of the ndvdual operatons and provde a valuaton allowance when t s more lkely than not that amounts wll not be recovered. The Company has reserves for taxes that may become payable n future years as a result of audts by tax authortes. Although the Company beleves that the postons taken on prevously fled tax returns are reasonable, t nevertheless has establshed tax reserves n recognton that varous taxng authortes 61
  • 67. PILGRIM’S PRIDE CORPORATION September 29, 2007 may challenge the postons taken by the Company resultng n addtonal labltes for tax and nterest. The tax reserves are revewed as crcumstances warrant and adjusted as events occur that affect the Company’s potental lablty for addtonal taxes, such as lapsng of applcable statutes of lmtatons, concluson of tax audts, addtonal exposure based on current calculatons, dentfcaton of new ssues, release of admnstratve gudance, or renderng of a court decson affectng a partcular tax ssue. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Market Risk Sensitive Instruments and Positions The rsk nherent n our market rsk senstve nstruments and postons s prmarly the potental loss arsng from adverse changes n the prce of feed ngredents, foregn currency exchange rates and nterest rates as dscussed below. The Company does not beleve ts market rsk related to ts avalable- for-sale securtes s materal. The senstvty analyses presented do not consder the effects that such adverse changes may have on overall economc actvty, nor do they consder addtonal actons our management may take to mtgate our exposure to such changes. Actual results may dffer. Feed Ingredients. We purchase certan commodtes, prmarly corn and soybean meal. As a result, our earnngs are affected by changes n the prce and avalablty of such feed ngredents. As market condtons dctate, we wll from tme to tme fx future feed ngredent prces usng varous hedgng technques, ncludng forward purchase agreements wth supplers and futures contracts. We do not use such fnancal nstruments for tradng purposes and are not a party to any leveraged dervatves. Market rsk s estmated as a hypothetcal 10% ncrease n the weghted-average cost of our prmary feed ngredents as of September 29, 2007. Based on our feed consumpton durng fscal 2007, such an ncrease would have resulted n an ncrease to cost of sales of approxmately $236.3 mllon. A 10% change n endng feed ngredents nventores at September 29, 2007 would be $5.0 mllon, excludng any potental mpact on producton costs of chcken and turkey nventory. Foreign Currency. Our earnngs are affected by foregn exchange rate fluctuatons related to the Mexcan peso net monetary poston of our Mexco subsdares. We manage ths exposure prmarly by attemptng to mnmze our Mexcan peso net monetary poston, but from tme to tme, we have also consdered executng hedges to help mnmze ths exposure. Such nstruments, however, have hstorcally not been economcally feasble. We are also exposed to the effect of potental exchange rate fluctuatons to the extent that amounts are repatrated from Mexco to the U.S. However, we currently antcpate that the future cash flows of our Mexco subsdares wll be renvested n our Mexco operatons. In addton, the Mexcan peso exchange rate can drectly and ndrectly mpact our results of operatons and fnancal poston n several ways, ncludng potental economc recesson n Mexco resultng from a devalued peso. The mpact on our fnancal poston and results of operatons resultng from a hypothetcal change n the exchange rate between the U.S. dollar and the Mexcan peso cannot be reasonably estmated. Foregn currency exchange gans and losses, representng the change n the U.S. dollar value of the net monetary assets of our Mexco subsdares denomnated n Mexcan pesos, was a loss of $1.4 mllon n fscal 2007, a loss of $0.1 mllon n fscal 2006, and a gan of $0.5 mllon n fscal 2005. On September 29, 2007, the Mexcan peso closed at 10.93 to 1 U.S. dollar, compared to 11.01 at September 30, 2006. No assurance can be gven as to how future movements n the peso could affect our future earnngs. 62
  • 68. PILGRIM’S PRIDE CORPORATION September 29, 2007 Interest Rates. Our earnngs are also affected by changes n nterest rates due to the mpact those changes have on our varable-rate debt nstruments. We had varable-rate debt nstruments representng approxmately 34.5% of our long-term debt at September 29, 2007. Holdng other varables constant, ncludng levels of ndebtedness, a 25 bass ponts ncrease n nterest rates would have ncreased our nterest expense by $1.1 mllon for fscal 2007. These amounts are determned by consderng the mpact of the hypothetcal nterest rates on our varable-rate long-term debt at September 29, 2007. Market rsk for fxed-rate long-term debt s estmated as the potental ncrease n far value resultng from a hypothetcal 25 bass ponts decrease n nterest rates and amounts to approxmately $3.4 mllon as of September 29, 2007, usng dscounted cash flow analyss. Impact of Inflation. Due to low to moderate nflaton n the U.S. and Mexco and our rapd nventory turnover rate, the results of operatons have not been sgnfcantly affected by nflaton durng the past three-year perod. Item 8. Financial Statements and Supplementary Data The consoldated fnancal statements together wth the report of our ndependent regstered publc accountng frm and fnancal statement schedule are ncluded on pages 82 through 114 of ths report. Fnancal statement schedules other than those ncluded heren have been omtted because the requred nformaton s contaned n the consoldated fnancal statements or related notes, or such nformaton s not applcable. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applcable. Item 9A. Controls and Procedures As of September 29, 2007, an evaluaton was performed under the supervson and wth the partcpaton of the Company’s management, ncludng the Senor Charman of the Board of Drectors, Chef Executve Offcer and Chef Fnancal Offcer, of the effectveness of the desgn and operaton of the Company’s “dsclosure controls and procedures” (as defned n Rules 13a-15(e) and 15d-15(e) under the Securtes Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluaton, the Company’s management, ncludng the Senor Charman of the Board of Drectors, Chef Executve Offcer and Chef Fnancal Offcer, concluded the Company’s dsclosure controls and procedures were effectve to ensure that nformaton requred to be dsclosed by the Company n reports that t fles or submts under the Exchange Act s recorded, processed, summarzed and reported wthn the tme perods specfed n Securtes and Exchange Commsson rules and forms, and that nformaton we are requred to dsclose n our reports fled wth the Securtes and Exchange Commsson s accumulated and communcated to our management, ncludng our Senor Charman of the Board of Drectors, Chef Executve Offcer and Chef Fnancal Offcer, as approprate to allow tmely decsons regardng requred dsclosure. In the fourth quarter of fscal 2007, the Company substantally completed the ntegraton of Gold Kst’s accountng processes nto the legacy systems, polces and procedures of Plgrm’s Prde. 63
  • 69. PILGRIM’S PRIDE CORPORATION September 29, 2007 In connecton wth the evaluaton descrbed above, the Company’s management, ncludng the Senor Charman of the Board, Chef Executve Offcer and Chef Fnancal Offcer, dentfed no other change n the Company’s nternal control over fnancal reportng that occurred durng the Company’s fscal quarter ended September 29, 2007 and that has materally affected, or s reasonably lkely to materally affect, the Company’s nternal control over fnancal reportng. 64
  • 70. PILGRIM’S PRIDE CORPORATION September 29, 2007 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Plgrm’s Prde Corporaton’s (“PPC”) management s responsble for establshng and mantanng adequate nternal control over fnancal reportng, as such term s defned n Exchange Act Rules 13a-15(f). PPC’s nternal control system s desgned to provde reasonable assurance regardng the relablty of fnancal reportng and the preparaton of fnancal statements n accordance wth generally accepted accountng prncples. Under the supervson and wth the partcpaton of management, ncludng ts prncpal executve offcer and prncpal fnancal offcer, PPC’s management assessed the desgn and operatng effectveness of nternal control over fnancal reportng as of September 29, 2007 based on the framework set forth n Internal Control-Integrated Framework ssued by the Commttee of Sponsorng Organzaton of the Treadway Commsson. Based on ths assessment, management concluded that PPC’s nternal control over fnancal reportng was effectve as of September 29, 2007. Ernst & Young LLP, an ndependent regstered publc accountng frm, has ssued an attestaton report on the effectveness of the Company’s nternal control over fnancal reportng as of September 29, 2007. That report s ncluded heren. /s/ Lonne “Bo” Plgrm Lonne “Bo” Plgrm Senor Charman of the Board of Drectors /s/ O. B. Goolsby, Jr. O. B. Goolsby, Jr. Presdent, Chef Executve Offcer Drector /s/ Rchard A. Cogdll Rchard A. Cogdll Chef Fnancal Offcer, Secretary and Treasurer Drector 65
  • 71. PILGRIM’S PRIDE CORPORATION September 29, 2007 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Drectors and Stockholders Plgrm’s Prde Corporaton We have audted Plgrm’s Prde Corporaton’s nternal control over fnancal reportng as of September 29, 2007, based on crtera establshed n Internal Control - Integrated Framework ssued by the Commttee of Sponsorng Organzatons of the Treadway Commsson (the COSO crtera). Plgrm’s Prde Corporaton’s management s responsble for mantanng effectve nternal control over fnancal reportng and for ts assessment of the effectveness of nternal control over fnancal reportng ncluded n the accompanyng Management’s Report on Internal Control Over Financial Reporting. Our responsblty s to express an opnon on the effectveness of the Company’s nternal control over fnancal reportng based on our audt. We conducted our audt n accordance wth the standards of the Publc Company Accountng Oversght Board (Unted States). Those standards requre that we plan and perform the audt to obtan reasonable assurance about whether effectve nternal control over fnancal reportng was mantaned n all materal respects. Our audt ncluded obtanng an understandng of nternal control over fnancal reportng, assessng the rsk that a materal weakness exsts, testng and evaluatng the desgn and operatng effectveness of nternal control based on the assessed rsk, and performng such other procedures as we consdered necessary n the crcumstances. We beleve that our audt provdes a reasonable bass for our opnon. A company’s nternal control over fnancal reportng s a process desgned to provde reasonable assurance regardng the relablty of fnancal reportng and the preparaton of fnancal statements for external purposes n accordance wth generally accepted accountng prncples. A company’s nternal control over fnancal reportng ncludes those polces and procedures that (1) pertan to the mantenance of records that, n reasonable detal, accurately and farly reflect the transactons and dspostons of the assets of the company; (2) provde reasonable assurance that transactons are recorded as necessary to permt preparaton of fnancal statements n accordance wth generally accepted accountng prncples, and that recepts and expendtures of the company are beng made only n accordance wth authorzatons of management and drectors of the company; and (3) provde reasonable assurance regardng preventon or tmely detecton of unauthorzed acquston, use, or dsposton of the company’s assets that could have a materal effect on the fnancal statements. Because of ts nherent lmtatons, nternal control over fnancal reportng may not prevent or detect msstatements. Also, projectons of any evaluaton of effectveness to future perods are subject to the rsk that controls may become nadequate because of changes n condtons, or that the degree of complance wth the polces or procedures may deterorate. In our opnon, Plgrm’s Prde Corporaton mantaned, n all materal respects, effectve nternal control over fnancal reportng as of September 29, 2007, based on the COSO crtera. 66
  • 72. PILGRIM’S PRIDE CORPORATION September 29, 2007 We also have audted, n accordance wth the standards of the Publc Company Accountng Oversght Board (Unted States), the consoldated balance sheets of Plgrm’s Prde Corporaton as of September 29, 2007 and September 30, 2006, and the related consoldated statements of operatons, stockholders’ equty, and cash flows for each of the three years n the perod ended September 29, 2007, of Plgrm’s Prde Corporaton, and our report dated November 13, 2007, expressed an unqualfed opnon thereon. Ernst & Young LLP Dallas, Texas November 13, 2007 67
  • 73. PILGRIM’S PRIDE CORPORATION September 29, 2007 Item 9B. Other Information Not Applcable. PART III Item 10. Directors and Executive Officers and Corporate Governance Certan nformaton regardng our executve offcers has been presented under “Executve Offcers” ncluded n Item 1. “Busness,” above. Reference s made to the secton enttled “Electon of Drectors” of the Company’s Proxy Statement for ts 2008 Annual Meetng of Stockholders, whch secton s ncorporated heren by reference. Reference s made to the secton enttled “Secton 16(a) Benefcal Ownershp Reportng Complance” of the Company’s Proxy Statement for ts 2008 Annual Meetng of Stockholders, whch secton s ncorporated heren by reference. We have adopted a Code of Busness Conduct and Ethcs, whch apples to all employees, ncludng our Chef Executve Offcer and our Chef Fnancal Offcer and Prncpal Accountng Offcer. The full text of our Code of Busness Conduct and Ethcs s publshed on our webste, at www.plgrmsprde.com, under the “Investors-Corporate Governance” capton. We ntend to dsclose future amendments to, or wavers from, certan provsons of ths Code on our webste wthn four busness days followng the date of such amendment or waver. See Item 13. “Certan Relatonshps and Related Transactons, and Drector Independence.” Item 11. Executive Compensation See Item 13. “Certan Relatonshps and Related Transactons, and Drector Independence.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters See Item 13. “Certan Relatonshps and Related Transactons, and Drector Independence.” As of September 29, 2007, the Company dd not have any compensaton plans (ncludng ndvdual compensaton arrangements) under whch equty securtes of the Company are authorzed for ssuance by the Company. Item 13. Certain Relationships and Related Transactions, and Director Independence Addtonal nformaton responsve to Items 10, 11, 12 and 13 s ncorporated by reference from the sectons enttled “Securty Ownershp,” “Board of Drectors Independence,” “Commttees of the Board of Drectors,” “Electon of Drectors,” “Report of the Compensaton Commttee,” “Compensaton Dscusson and Analyss,” “Executve Compensaton,” “Compensaton Commttee Interlocks and Insder Partcpaton” and “Certan Transactons” of the Company’s Proxy Statement for ts 2008 Annual Meetng of Stockholders. 68
  • 74. PILGRIM’S PRIDE CORPORATION September 29, 2007 Item 14. Principal Accounting Fees and Services The nformaton requred by ths tem s ncorporated heren by reference from the secton enttled “Independent Regstered Publc Accountng Frm Fee Informaton” of the Company’s Proxy Statement for ts 2008 Annual Meetng of Stockholders. PART IV Item 15. Exhibits and Financial Statement Schedules (a) Fnancal Statements (1) The fnancal statements and schedules lsted n the ndex to fnancal statements and schedules on page 3 of ths report are fled as part of ths report. (2) All other schedules for whch provson s made n the applcable accountng regulatons of the SEC are not requred under the related nstructons or are not applcable and therefore have been omtted. (3) The fnancal statements schedule enttled “Valuaton and Qualfyng Accounts and Reserves” s fled as part of ths report on page 114. (b) Exhbts Exhbt Number 2.1 Agreement and Plan of Reorganzaton dated September 15, 1986, by and among Plgrm’s Prde Corporaton, a Texas corporaton; Plgrm’s Prde Corporaton, a Delaware corporaton; and Dors Plgrm Julan, Aubrey Hal Plgrm, Paulette Plgrm Rolston, Evanne Plgrm, Lonne “Bo” Plgrm, Lonne Ken Plgrm, Greta Plgrm Owens and Patrck Wayne Plgrm (ncorporated by reference from Exhbt 2.1 to the Company’s Regstraton Statement on Form S-1 (No. 33-8805) effectve November 14, 1986). 2.2 Agreement and Plan of Merger dated September 27, 2000 (ncorporated by reference from Exhbt 2 of WLR Foods, Inc.’s Current Report on Form 8-K (No. 000-17060) dated September 28, 2000). 2.3 Agreement and Plan of Merger dated as of December 3, 2006, by and among the Company, Proten Acquston Corporaton, a wholly owned subsdary of the Company, and Gold Kst Inc. (ncorporated by reference from Exhbt 99.(D)(1) to Amendment No. 11 to the Company’s Tender Offer Statement on Schedule TO fled on December 5, 2006). 3.1 Certfcate of Incorporaton of the Company, as amended (ncorporated by reference from Exhbt 3.1 of the Company’s Annual Report on Form 10-K for the fscal year ended October 2, 2004). 3.2 Amended and Restated Corporate Bylaws of the Company (ncorporated by reference from Exhbt 4.4 of the Company’s Regstraton Statement on Form S-8 (No. 333-111929) fled on January 15, 2004). 69
  • 75. PILGRIM’S PRIDE CORPORATION September 29, 2007 4.1 Certfcate of Incorporaton of the Company, as amended (ncluded as Exhbt 3.1). 4.2 Amended and Restated Corporate Bylaws of the Company (ncluded as Exhbt 3.2). 4.3 Indenture, dated November 21, 2003, between Plgrm’s Prde Corporaton and The Bank of New York as Trustee relatng to Plgrm’s Prde’s 9 ¼% Senor Notes due 2013 (ncorporated by reference from Exhbt 4.1 of the Company’s Regstraton Statement on Form S-4 (No. 333-111975) fled on January 16, 2004). 4.4 Form of 9 ¼% Note due 2013 (ncorporated by reference from Exhbt 4.3 of the Company’s Regstraton Statement on Form S-4 (No. 333-111975) fled on January 16, 2004). 4.5 Senor Debt Securtes Indenture dated as of January 24, 2007, by and between the Company and Wells Fargo Bank, Natonal Assocaton, as trustee (ncorporated by reference from Exhbt 4.1 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.6 Frst Supplemental Indenture to the Senor Debt Securtes Indenture dated as of January 24, 2007, by and between the Company and Wells Fargo Bank, Natonal Assocaton, as trustee (ncorporated by reference from Exhbt 4.2 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.7 Form of 7 5/8% Senor Note due 2015 (ncorporated by reference from Exhbt 4.3 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.8 Senor Subordnated Debt Securtes Indenture dated as of January 24, 2007, by and between the Company and Wells Fargo Bank, Natonal Assocaton, as trustee (ncorporated by reference from Exhbt 4.4 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.9 Frst Supplemental Indenture to the Senor Subordnated Debt Securtes Indenture dated as of January 24, 2007, by and between the Company and Wells Fargo Bank, Natonal Assocaton, as trustee (ncorporated by reference from Exhbt 4.5 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.10 Form of 8 3/8% Subordnated Note due 2017 (ncorporated by reference from Exhbt 4.6 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 10.1 Plgrm’s Industres, Inc. Proft Sharng Retrement Plan, restated as of July 1, 1987 (ncorporated by reference from Exhbt 10.1 of the Company’s Form 8-K fled on July 1, 1992).  10.2 Senor Executve Performance Bonus Plan of the Company (ncorporated by reference from Exhbt A n the Company’s Proxy Statement dated December 13, 1999).  10.3 Arcraft Lease Extenson Agreement between B.P. Leasng Co. (L.A. Plgrm, ndvdually) and Plgrm’s Prde Corporaton (formerly Plgrm’s Industres, Inc.) effectve November 15, 1992 (ncorporated by reference from Exhbt 10.48 of the Company’s Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 70
  • 76. PILGRIM’S PRIDE CORPORATION September 29, 2007 10.4 Broler Grower Contract dated May 6, 1997 between Plgrm’s Prde Corporaton and Lonne “Bo” Plgrm (Farm 30) (ncorporated by reference from Exhbt 10.49 of the Company’s Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.5 Commercal Egg Grower Contract dated May 7, 1997 between Plgrm’s Prde Corporaton and Plgrm Poultry G.P. (ncorporated by reference from Exhbt 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 Plgrm’s Prde Corporaton and Plgrm Poultry G.P. (ncorporated by reference from Exhbt 10.23 of the Company’s Quarterly Report on Form 10-Q for the three months ended January 2, 1999). 10.7 Heavy Breeder Contract dated May 7, 1997 between Plgrm’s Prde Corporaton and Lonne “Bo” Plgrm (Farms 44, 45 & 46) (ncorporated by reference from Exhbt 10.51 of the Company’s Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.8 Broler Grower Contract dated January 9, 1997 by and between Plgrm’s Prde and O.B. Goolsby, Jr. (ncorporated by reference from Exhbt 10.25 of the Company’s Regstraton Statement on Form S-1 (No. 333-29163) effectve June 27, 1997). 10.9 Broler Grower Contract dated January 15, 1997 by and between Plgrm’s Prde Corporaton and B.J.M. Farms (ncorporated by reference from Exhbt 10.26 of the Company’s Regstraton Statement on Form S-1 (No. 333-29163) effectve June 27, 1997). 10.10 Broler Grower Agreement dated January 29, 1997 by and between Plgrm’s Prde Corporaton and Clfford E. Butler (ncorporated by reference from Exhbt 10.27 of the Company’s Regstraton Statement on Form S-1 (No. 333-29163) effectve June 27, 1997). 10.11 Recevables Purchase Agreement dated June 26, 1998 between Plgrm’s Prde Fundng Corporaton, as Seller, Plgrm’s Prde Corporaton, as Servcer, Pooled Accounts Recevable Captal Corporaton, as Purchaser, and Nesbtt Burns Securtes Inc., as Agent (ncorporated by reference from Exhbt 10.33 of the Company’s Quarterly Report on Form 10-Q for the three months ended June 27, 1998). 10.12 Purchase and Contrbuton Agreement dated as of June 26, 1998 between Plgrm’s Prde Fundng Corporaton and Plgrm’s Prde Corporaton (ncorporated by reference from Exhbt 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 Plgrm’s Prde Corporaton and Plgrm Interests, Ltd., dated June 11, 1999 (ncorporated by reference from Exhbt 10.24 of the Company’s Annual Report on Form 10-K for the fscal year ended October 2, 1999). 10.14 Broler Producton Agreement between Plgrm’s Prde Corporaton and Lonne “Bo” Plgrm dated November 15, 2005 (ncorporated by reference from Exhbt 99.1 of the Company’s Current Report on Form 8-K dated November 10, 2005). 71
  • 77. PILGRIM’S PRIDE CORPORATION September 29, 2007 10.15 Commercal Property Lease dated December 29, 2000 between Plgrm’s Prde Corporaton and Plgrm Poultry G.P. (ncorporated by reference from Exhbt 10.30 of the Company’s Quarterly Report on Form 10-Q for the three months ended December 30, 2000). 10.16 Amendment No. 1 dated as of July 12, 2002 to Recevables Purchase Agreement dated as of June 26, 1998 among Plgrm’s Prde Fundng Corporaton, the Company, Farway Fnance Corporaton (as successor n nterest to Pooled Accounts Recevable Captal Corporaton) and BMO Nesbtt Burns Corp. (f/k/a Nesbtt Burns Securtes Inc.) (ncorporated by reference from Exhbt 10.32 of the Company’s Annual Report on Form 10-K fled on December 6, 2002). 10.17 Amendment No. 3 dated as of July 18, 2003 to Recevables Purchase Agreement dated as of June 26, 1998 between Plgrm’s Prde Fundng Corporaton (“Seller”), Plgrm’s Prde Corporaton as ntal Servcer, Farway Fnance Corporaton (as successor n nterest to Pooled Accounts Recevable Captal Corporaton) (“Purchaser”) and Harrs Nesbtt Corporaton as agent for the purchaser (ncorporated by reference from Exhbt 10.1 of the Company’s Quarterly Report on Form 10-Q fled July 23, 2003). 10.18 Agrcultural Lease between Plgrm’s Prde Corporaton (Lessor) and Patrck W. Plgrm (Tenant) dated May 1, 2003 (ncorporated by reference from Exhbt 10.15 of the Company’s Quarterly Report on Form 10-Q fled July 23, 2003). 10.19 Amendment No. 4 dated as of December 31, 2003 to Recevables Purchase Agreement dated as of June 26, 1998, among Plgrm’s Prde Fundng Corporaton, Plgrm’s Prde Corporaton as ntal Servcer, Farway Fnance Company, LLC (as successor to Farway Fnance Corporaton) as purchaser and Harrs Nesbtt Corp. (f/k/a BMO Nesbtt Burns Corp.) as agent for the purchaser (ncorporated by reference from Exhbt 10.4 of the Company’s Quarterly Report on Form 10-Q fled February 4, 2004). 10.20 Amendment No. 1 dated as of December 31, 2003 to Purchase and Contrbuton Agreement dated as of June 26, 1998, between Plgrm’s Prde Fundng Corporaton and Plgrm’s Prde Corporaton (ncorporated by reference from Exhbt 10.5 of the Company’s Quarterly Report on Form 10-Q fled February 4, 2004). 10.21 Employee Stock Investment Plan of the Company (ncorporated by reference from Exhbt 4.1 of the Company’s Regstraton Statement on Form S-8 (No. 333-111929) fled on January 15, 2004).  10.22 Purchase and Amendment Agreement between Plgrm’s Prde Corporaton and ConAgra Foods, Inc. dated August 3, 2005 (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K dated August 4, 2005). 10.23 Amended and Restated 2005 Deferred Compensaton Plan of the Company (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K dated December 30, 2005).  10.24 Vendor Servce Agreement dated effectve December 28, 2005 between Plgrm’s Prde Corporaton and Pat Plgrm (ncorporated by reference from Exhbt 10.2 of the Company’s Current Report on Form 8-K dated January 6, 2006). 72
  • 78. PILGRIM’S PRIDE CORPORATION September 29, 2007 10.25 Transportaton Agreement dated effectve December 28, 2005 between Plgrm’s Prde Corporaton and Pat Plgrm (ncorporated by reference from Exhbt 10.3 of the Company’s Current Report on Form 8-K dated January 6, 2006). 10.26 Ground Lease Agreement dated effectve January 4, 2006 between Plgrm’s Prde Corporaton and Pat Plgrm (ncorporated by reference from Exhbt 10.4 of the Company’s Current Report on Form 8-K dated January 6, 2006). 10.27 Credt Agreement by and among the Avícola Plgrm’s Prde de Méxco, S. de R.L. de C.V. (the “Borrower”), Plgrm’s Prde Corporaton, certan Mexco subsdares of the Borrower, ING Captal LLC, and the lenders sgnatory thereto dated as of September 25, 2006 (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K fled on September 28, 2006). 10.28 2006 Amended and Restated Credt Agreement by and among CoBank, ACB, Agrland, FCS and the Company dated as of September 21, 2006 (ncorporated by reference from Exhbt 10.2 of the Company’s Current Report on Form 8-K fled on September 28, 2006). 10.29 Frst Amendment to the Plgrm’s Prde Corporaton Amended and Restated 2005 Deferred Compensaton Plan Trust, dated as of November 29, 2006 (ncorporated by reference from Exhbt 10.03 of the Company’s Current Report on Form 8-K fled on December 05, 2006).  10.30 Agreement and Plan of Merger dated as of December 3, 2006, by and among the Company, the Purchaser and Gold Kst Inc. (ncorporated by reference from Exhbt 99.(D)(1) to Amendment No. 11 to the Company’s Tender Offer Statement on Schedule TO fled on December 5, 2006). 10.31 Frst Amendment to Credt Agreement, dated as of December 13, 2006, by and among the Company, as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as a syndcaton party, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.01 to the Company’s Current Report on Form 8-K fled on December 19, 2006). 10.32 Second Amendment to Credt Agreement, dated as of January 4, 2007, by and among the Company, as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as a syndcaton party, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.01 to the Company’s Current Report on Form 8-K fled on January 9, 2007). 10.33 Fourth Amended and Restated Secured Credt Agreement, dated as of February 8, 2007, by and among the Company, To-Rcos, Ltd., To-Rcos Dstrbuton, Ltd., Bank of Montreal, as agent, SunTrust Bank, as syndcaton agent, U.S. Bank Natonal Assocaton and Wells Fargo Bank, Natonal Assocaton, as co-documentaton agents, BMO Captal Market, as lead arranger, and the other lenders sgnatory thereto (ncorporated by reference from Exhbt 10.01 of the Company’s Current Report on Form 8-K dated February 12, 2007). 73
  • 79. PILGRIM’S PRIDE CORPORATION September 29, 2007 10.34 Thrd Amendment to Credt Agreement, dated as of February 7, 2007, by and among the Company as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and the sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as a syndcaton party, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.02 of the Company’s Current Report on Form 8-K dated February 12, 2007). 10.35 Frst Amendment to Credt Agreement, dated as of March 15, 2007, by and among the Borrower, the Company, the Subsdary Guarantors, ING Captal LLC, and the Lenders (ncorporated by reference from Exhbt 10.01 of the Company’s Current Report on Form 8-K dated March 20, 2007). 10.36 Fourth Amendment to Credt Agreement, dated as of July 3, 2007, by and among the Company as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and the sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as syndcaton party, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.1 of the Company’s Quarterly Report on Form 10-Q fled July 31, 2007). 10.37 Amendment No. 5 to Recevables Purchase Agreement dated as of August 20, 2007, among the Company, Plgrm’s Prde Fundng Corporaton, Farway Fnance Company, LLC and BMO Captal Markets Corp. (ncorporated by reference from Exhbt 10.01 of the Company’s Current Report on Form 8-K dated August 24, 2007). 10.38 Retrement and Consultng Agreement dated as of October 10, 2007, between the Company and Clfford E. Butler (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K dated October 10, 2007).  10.39 Ffth Amendment to Credt Agreement, dated as of August 7, 2007, by and among the Company as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and the sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as syndcaton party, and the other syndcaton partes sgnatory thereto.* 10.40 Sxth Amendment to Credt Agreement, dated as of November 7, 2007, by and among the Company as borrower, CoBank, ACB, as admnstratve agent, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K dated November 13, 2007). 12 Rato of Earnngs to Fxed Charges for the years ended September 29, 2007, September 30, 2006, October 1, 2005, October 2, 2004, September 27, 2003, and September 28, 2002.* 21 Subsdares of Regstrant.* 23 Consent of Ernst & Young LLP.* 31.1 Certfcaton of Co-Prncpal Executve Offcer pursuant to Secton 302 of the Sarbanes-Oxley Act of 2002.* 74
  • 80. PILGRIM’S PRIDE CORPORATION September 29, 2007 31.2 Certfcaton of Co-Prncpal Executve Offcer pursuant to Secton 302 of the Sarbanes-Oxley Act of 2002.* 31.3 Certfcaton of Chef Fnancal Offcer pursuant to Secton 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certfcaton of Co-Prncpal Executve Offcer of Plgrm’s Prde Corporaton pursuant to Secton 906 of the Sarbanes-Oxley Act of 2002.* 32.2 Certfcaton of Co-Prncpal Executve Offcer of Plgrm’s Prde Corporaton pursuant to Secton 906 of the Sarbanes-Oxley Act of 2002.* 32.3 Certfcaton of Chef Fnancal Offcer of Plgrm’s Prde Corporaton pursuant to Secton 906 of the Sarbanes-Oxley Act of 2002.* *Filed herewith Represents a management contract or compensation plan arrangement 75
  • 81. PILGRIM’S PRIDE CORPORATION September 29, 2007 SIGNATURES Pursuant to the requrements of Secton 13 or 15(d) of the Securtes Exchange Act of 1934, the regstrant has duly caused ths report to be sgned on ts behalf by the undersgned, thereunto duly authorzed on the 19th day of November 2007. PILGRIM’S PRIDE CORPORATION By: /s/ Rchard A. Cogdll Rchard A. Cogdll Chef Fnancal Offcer, Secretary and Treasurer (Prncpal Fnancal and Accountng Offcer) 76
  • 82. PILGRIM’S PRIDE CORPORATION September 29, 2007 Pursuant to the requrements of the Securtes Exchange Act of 1934, ths report has been sgned below by the followng persons on behalf of the Regstrant and n the capactes and on the date ndcated. Sgnature Ttle Date /s/ Lonne “Bo” Plgrm Senor Charman of the Board 11/19/07 Lonne “Bo” Plgrm /s/ Lonne Ken Plgrm Charman of the Board 11/19/07 Lonne Ken Plgrm /s/ Clfford E. Butler Vce Charman of the Board 11/19/07 Clfford E. Butler /s/ O.B. Goolsby, Jr. Presdent 11/19/07 O.B. Goolsby, Jr. Chef Executve Offcer Drector /s/ Rchard A. Cogdll Chef Fnancal Offcer, 11/19/07 Rchard A. Cogdll Secretary and Treasurer Drector (Prncpal Fnancal and Accountng Offcer) /s/ Charles L. Black Drector 11/19/07 Charles L. Black /s/ Lnda Chavez Drector 11/19/07 Lnda Chavez /s/ S. Key Coker Drector 11/19/07 S. Key Coker /s/ Keth W. Hughes Drector 11/19/07 Keth W. Hughes 77
  • 83. PILGRIM’S PRIDE CORPORATION September 29, 2007 Sgnature Ttle Date /s/ Blake D. Lovette Drector 11/19/07 Blake D. Lovette /s/ Vance C. Mller, Sr. Drector 11/19/07 Vance C. Mller, Sr. /s/ James G. Vetter, Jr. Drector 11/19/07 James G. Vetter, Jr. /s/ Donald L. Wass, Ph.D. Drector 11/19/07 Donald L. Wass, Ph.D. 78
  • 84. PILGRIM’S PRIDE CORPORATION September 29, 2007 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Drectors and Stockholders Plgrm’s Prde Corporaton We have audted the accompanyng consoldated balance sheets of Plgrm’s Prde Corporaton as of September 29, 2007 and September 30, 2006, and the related consoldated statements of operatons, stockholders’ equty, and cash flows for each of the three years n the perod ended September 29, 2007. Our audts also ncluded the fnancal statement schedule lsted n the ndex at Item 15(a). These fnancal statements and schedule are the responsblty of the Company’s management. Our responsblty s to express an opnon on these fnancal statements and schedule based on our audts. We conducted our audts n accordance wth the standards of the Publc Company Accountng Oversght Board (Unted States). Those standards requre that we plan and perform the audt to obtan reasonable assurance about whether the fnancal statements are free of materal msstatement. An audt ncludes examnng, on a test bass, evdence supportng the amounts and dsclosures n the fnancal statements. An audt also ncludes assessng the accountng prncples used and sgnfcant estmates made by management, as well as evaluatng the overall fnancal statement presentaton. We beleve that our audts provde a reasonable bass for our opnon. In our opnon, the fnancal statements referred to above present farly, n all materal respects, the consoldated fnancal poston of Plgrm’s Prde Corporaton as of September 29, 2007 and September 30, 2006, and the consoldated results of ts operatons and ts cash flows for each of the three years n the perod ended September 29, 2007, n conformty wth U.S. generally accepted accountng prncples. Also, n our opnon, the related fnancal statement schedule, when consdered n relaton to the basc fnancal statements taken as a whole, presents farly n all materal respects the nformaton set forth theren. We have also audted, n accordance wth the standards of the Publc Company Accountng Oversght Board (Unted States), the effectveness of Plgrm’s Prde Corporaton’s nternal control over fnancal reportng as of September 29, 2007 based on crtera establshed n Internal Control - Integrated Framework ssued by the Commttee of Sponsorng Organzatons of the Treadway Commsson, and our report dated November 13, 2007, expressed an unqualfed opnon thereon. Ernst & Young LLP Dallas, Texas November 13, 2007 79
  • 85. PILGRIM’S PRIDE CORPORATION September 29, 2007 Consoldated Balance Sheets Plgrm’s Prde Corporaton (In thousands, except shares and per share data) September 29, 2007 September 30, 2006 Assets Current Assets: Cash and cash equvalents $ 66,168 $ 156,404 Investment n avalable-for-sale securtes 8,153 21,246 Trade accounts and other recevables, less allowance for doubtful accounts 130,173 263,149 Inventores 961,885 585,940 Income taxes recevable 61,901 39,167 Current deferred taxes 8,095 7,288 Other current assets 47,959 32,480 Total Current Assets 1,284,334 1,105,674 Investment in Available-for-Sale Securities 46,035 115,375 Other Assets 138,546 50,825 Goodwill 505,166 -- Property, Plant and Equipment: Land 115,101 52,493 Buldngs, machnery and equpment 2,391,154 1,702,949 Autos and trucks 59,559 57,177 Constructon n progress 124,193 63,853 2,690,007 1,876,472 Less accumulated deprecaton (889,852) (721,478) 1,800,155 1,154,994 $ 3,774,236 $ 2,426,868 Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable $ 402,316 $ 293,685 Accrued expenses 500,014 272,830 Current maturtes of long-term debt 2,872 10,322 Total Current Labltes 905,202 576,837 Long-Term Debt, Less Current Maturities 1,318,558 554,876 Deferred Income Taxes 326,570 175,869 Other Long-Term Liabilities 51,685 1,958 Commitments and Contingencies -- -- Stockholders’ Equity: Preferred stock, $.01 par value, 5,000,000 authorzed shares; none ssued -- -- Common stock, $.01 par value, 160,000,000 authorzed shares; 66,555,733 ssued and outstandng 665 665 Addtonal pad-n captal 469,779 469,779 Retaned earnngs 687,775 646,750 Accumulated other comprehensve ncome 14,002 134 Total Stockholders’ Equty 1,172,221 1,117,328 $ 3,774,236 $ 2,426,868 See Notes to Consoldated Fnancal Statements 80
  • 86. PILGRIM’S PRIDE CORPORATION September 29, 2007 Consoldated Statements of Operatons Plgrm’s Prde Corporaton (In thousands, except per share data) Three Years Ended September 29, 2007 2007 2006 2005 Net Sales $ 7,598,599 $ 5,235,565 $ 5,666,275 Cost and Expenses: Cost of sales 7,007,061 4,937,965 4,921,076 Gross Proft 591,538 297,600 745,199 Sellng, general and admnstratve 359,001 294,598 309,387 Operatng Income 232,537 3,002 435,812 Other Expenses (Income): Interest expense 125,757 50,601 49,585 Interest ncome (4,640) (10,048) (5,653) Loss on early extngushment of debt 26,463 -- -- Foregn exchange (gan) loss 1,378 144 (474) Mscellaneous, net (8,028) (1,378) (11,169) 140,930 39,319 32,289 Income (Loss) Before Income Taxes 91,607 (36,317) 403,523 Income Tax Expense (Benefit) 44,590 (2,085) 138,544 Net Income (Loss) $ 47,017 $ (34,232) $ 264,979 Net Income (Loss) per Common Share-Basic and Diluted $ 0.71 $ (0.51) $ 3.98 See Notes to Consoldated Fnancal Statements 81
  • 87. PILGRIM’S PRIDE CORPORATION September 29, 2007 Consoldated Statements of Stockholders’ Equty Plgrm’s Prde Corporaton (In thousands, except shares and per share data) Accumulated Shares of Total Additional Other Common Par Paid-In Retained Comprehensive Treasury Stock Value Capital Earnings Income (Loss) Stock Total Balance at October 2, 2004 66,826,833 $668 $431,662 $492,542 ($348) ($1,568) $922,956 Sale of common stock 15,443,054 154 521,774 521,928 Purchase and retrement of common stock (15,443,054) (154) (482,092) (482,246) Net ncome for year 264,979 264,979 Other comprehensve loss (25) (25) Total comprehensve ncome 264,954 Cash dvdends declared ($.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 Cancellaton of Treasury Stock (271,100) (3) (1,565) 1,568 Net loss for year (34,232) (34,232) Other comprehensve ncome 507 507 Total comprehensve loss (33,725) Cash dvdends declared ($1.09 per share) (72,545) (72,545) Balance at September 30, 2006 66,555,733 665 469,779 646,750 134 -- 1,117,328 Net ncome for year 47,017 47,017 Other comprehensve ncome 13,868 13,868 Total comprehensve ncome 60,885 Cash dvdends declared ($.09 per share) (5,992) (5,992) Balance at September 29, 2007 66,555,733 $665 $469,779 $687,775 $14,002 -- $1,172,221 See Notes to Consoldated Fnancal Statements 82
  • 88. PILGRIM’S PRIDE CORPORATION September 29, 2007 Consoldated Statements of Cash Flows Plgrm’s Prde Corporaton (In thousands) Three Years Ended September 29, 2007 2007 2006 2005 Cash Flows From Operating Activities: Net ncome (loss) $ 47,017 $ (34,232) $ 264,979 Adjustments to reconcle net ncome (loss) to cash provded by operatng actvtes: Deprecaton and amortzaton 204,903 135,133 134,944 Non-cash loss on early extngushment of debt 9,543 -- -- Asset mparment -- 3,767 -- (Gan) loss on property dsposals (446) 1,781 4,326 Deferred ncome taxes 83,884 20,455 2,247 Changes n operatng assets and labltes, net of the effect of busness acqured: Accounts and other recevables 247,217 31,121 21,192 Income taxes (payable) recevable 5,570 (55,363) (38,251) Inventores (129,645) (58,612) 82,669 Prepad expenses and other current assets (2,981) (6,594) 20,800 Accounts payable, and accrued expenses (5,097) (3,501) (610) Other 3,999 (3,573) 777 Cash Provded by Operatng Actvtes 463,964 30,382 493,073 Investing Activities: Acqustons of property, plant and equpment (172,323) (143,882) (116,588) Purchase of nvestment securtes (125,045) (318,266) (305,458) Proceeds from sale or maturty of nvestment securtes 208,676 490,764 -- Busness acquston, net of cash acqured (1,102,069) -- -- Proceeds from property dsposals 6,286 4,148 4,963 Other, net -- (506) (524) Cash Provded by (Used n) Investng Actvtes (1,184,475) 32,258 (417,607) Financing Activities: Proceeds from notes payable to banks -- 270,500 -- Repayments on notes payable to banks -- (270,500) -- Proceeds from long-term debt 751,255 74,683 -- Payments on long-term debt (1,368,700) (36,950) (16,829) Bank overdraft actvty 39,231 -- -- Purchases for retrement of common stock -- -- (482,246) Sale of common stock -- -- 521,928 Borrowng for acquston 1,230,000 -- -- Equty and debt ssue costs (15,565) (3,938) -- Cash dvdends pad (5,992) (72,545) (3,993) Cash Provded by (Used n) Fnancng Actvtes 630,229 (38,750) 18,860 Effect of exchange rate changes on cash and cash equvalents 46 (53) 76 (Decrease) ncrease n cash and cash equvalents (90,236) 23,837 94,402 Cash and cash equvalents at begnnng of year 156,404 132,567 38,165 Cash and Cash Equivalents at End of Year $ 66,168 $ 156,404 $ 132,567 Supplemental Disclosure Information: Cash pad durng the year for: Interest (net of amount captalzed) $ 104,394 $ 48,590 $ 46,945 Income taxes pad $ 11,164 $ 37,813 $ 172,929 See Notes to Consoldated Fnancal Statements 83
  • 89. PILGRIM’S PRIDE CORPORATION September 29, 2007 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Plgrm’s Prde Corporaton (referred to heren as “the Company,” “we,” “us,” “our,” or smlar terms) s the world’s largest chcken company. In the U.S., we produce both prepared and fresh chcken and fresh turkey. In Mexco and Puerto Rco, we produce exclusvely fresh chcken. Through vertcal ntegraton, we control the breedng, hatchng and growng of chckens and the processng and preparaton, packagng and sale of our product lnes. Our prepared chcken products nclude porton-controlled breast fllets, tenderlons and strps, delcatessen products, salads, formed nuggets and pattes and bone-n chcken parts. These products are sold ether refrgerated or frozen and may be fully cooked, partally cooked or raw. In addton, these products are breaded or non-breaded and ether pre-marnated or non-marnated. The Company also sells fresh chcken products to the foodservce and retal markets. Our fresh chcken products consst of refrgerated (non-frozen) whole or cut-up chcken, ether pre-marnated or non-marnated, and pre-packaged chcken n varous combnatons of freshly refrgerated, whole chckens and chcken parts. Our turkey products nclude fresh and frozen whole brds. In addton, we have fully cooked whole turkeys avalable. Accounting Adjustments and Reclassifications Durng the fourth quarter of fscal 2006, we recorded certan accountng adjustments (“Accountng Adjustments”) n our 2006 Consoldated Fnancal Statements. These Accountng Adjustments related to the accountng for the Plgrm’s Prde Retrement Plan for Unon Employees and certan post- employment beneft oblgatons n Mexco. These Accountng Adjustments resulted n a charge of $4.6 mllon, net of tax, n our Consoldated Statement of Operatons that related to pror perods. We beleve these Accountng Adjustments, consdered ndvdually and n the aggregate, were not materal to our Consoldated Fnancal Statements for the years ended September 30, 2006 or October 1, 2005. As a result, they were reflected as an adjustment n fscal 2006 only. In makng ths assessment, we consdered qualtatve and quanttatve factors, ncludng the sgnfcant earnngs we reported n fscal 2005 and the mpact of makng these Accountng Adjustments n fscal 2006, prmarly based on ther sgnfcance to other key fnancal measures and consderaton of the trend of earnngs for 2006 versus the pror perods presented. Certan tems n pror year fnancal statements have been reclassfed to the current year’s presentaton. 84
  • 90. PILGRIM’S PRIDE CORPORATION September 29, 2007 Principles of Consolidation The consoldated fnancal statements nclude the accounts of Plgrm’s Prde Corporaton and ts majorty owned subsdares. Sgnfcant ntercompany accounts and transactons have been elmnated. The Company reports on the bass of a 52/53-week fscal year that ends on the Saturday closest to September 30. As a result, fscal years 2007, 2006, and 2005 each had 52 weeks. The fnancal statements of the Company’s Mexco subsdares are remeasured as f the U.S. dollar were the functonal currency. Accordngly, we translate assets and labltes, other than non-monetary assets, of the Mexco subsdares at current exchange rates. We translate non-monetary assets usng the hstorcal rates n effect on the date of acquston. We translate ncome and expenses at average exchange rates n effect durng the perod. Foregn exchange gans or losses are separately stated as a component of “Other Expenses (Income)” n the Consoldated Statement of Operatons. Revenue Recognition Revenue s recognzed upon shpment and transfer of ownershp of the product to the customer and s recorded net of estmated ncentve offerngs ncludng specal prcng agreements, promotons and other volume-based ncentves. Revsons to these estmates are charged back to net sales n the perod n whch the facts that gve rse to the revson become known. Shipping and Handling Costs Costs assocated wth the products shpped to customers are recognzed n cost of sales. Cash Equivalents The Company consders hghly lqud nvestments wth a maturty of three months or less when purchased to be cash equvalents. Investment in Available-for-Sale Securities The Company’s nvestments at September 29, 2007 are n debt and equty securtes whch are classfed as avalable for sale and carred at market value. Investments are classfed based on ther underlyng contractual maturty at date of purchase by the Company. Certan nvestments are held n trust as compensatng balance arrangements for our nsurance lablty and are classfed as long- term based on a maturty date greater than one year from the balance sheet date and management’s ntenton not to use such assets n the next twelve months. Avalable-for-sale nvestments wth a remanng maturty date of one year or less from the balance sheet date are classfed as current assets and those wth a maturty date of greater than one year are classfed as long-term assets based on management’s ntenton not to use such assets n the next twelve months. Investments n debt securtes are prmarly nvested n muncpal bonds. The average maturty perod of the Company’s nvestments at September 29, 2007 was 1-3 years. All equty securtes are classfed as long-term. Approxmately $0.9 mllon, net of tax, n unrealzed gans related to these nvestments at September 29, 2007 were recorded as accumulated other comprehensve ncome, a separate component of stockholders’ equty. 85
  • 91. PILGRIM’S PRIDE CORPORATION September 29, 2007 Fair Value of Financial Instruments The carryng values of cash and cash equvalents, accounts recevable, and accounts payable at September 29, 2007 and September 30, 2006 approxmated ther far values due to the short-term nature of these tems. Long-term nvestments are adjusted to far value on a monthly bass. The far values of the Company’s long-term nvestments n avalable for sale securtes was $46.0 mllon. See Note E for dscusson of the far value of the Company’s long-term debt. Concentrations of Credit Risk The Company’s fnancal nstruments that are exposed to concentratons of credt rsk consst prmarly of cash equvalents, nvestment securtes, and trade recevables. The Company’s cash equvalents are n hgh-qualty securtes placed wth major banks and fnancal nsttutons. Concentratons of credt rsk wth respect to recevables are lmted due to the large number of customers and ther dsperson across geographc areas. Wth the excepton of one customer that accounts for approxmately 14.0% of accounts recevable at September 29, 2007 and 12% of net sales for fscal 2007 prmarly related to our chcken segment, the Company does not beleve t has sgnfcant concentratons of credt rsk n ts accounts recevable, whch are generally unsecured. Credt evaluatons are performed on all sgnfcant customers and updated as crcumstances dctate. Inventories Lve poultry nventores are stated at the lower of cost or market and breeder hens at the lower of cost, less accumulated amortzaton, or market. The costs assocated wth breeder hens are accumulated up to the producton stage and amortzed over the productve lves usng the unt-of-producton method. Fnshed poultry products, feed, eggs and other nventores are stated at the lower of cost (frst-n, frst- out method) or market. We record valuatons and adjustments for our nventory and for estmated obsolescence at or equal to the dfference between the cost of nventory and the estmated market value based upon known condtons affectng the nventory’s obsolescence, ncludng sgnfcantly aged products, dscontnued product lnes, or damaged or obsolete products. We allocate meat costs between our varous fnshed poultry products based on a by-product costng technque that reduces the cost of the whole brd by estmated yelds and amounts to be recovered for certan by-product parts, prmarly ncludng leg quarters, wngs, tenders and offal, whch are carred n nventory at the estmated recovery amounts, wth the remanng amount beng reflected as our breast meat cost. Generally, the Company performs an evaluaton of whether any lower of cost or market adjustments are requred at the segment level based on a number of factors, ncludng: () pools of related nventory, () product age, condton and contnuaton or dscontnuaton, () estmated market sellng prces and (v) expected dstrbuton channels. If actual market condtons or other factors are less favorable than those projected by management, addtonal nventory adjustments may be requred. 86
  • 92. PILGRIM’S PRIDE CORPORATION September 29, 2007 Property, Plant and Equipment Property, plant and equpment are stated at cost, and repar and mantenance costs are expensed as ncurred. Deprecaton s computed usng the straght-lne method over the estmated useful lves of these assets. Deprecaton expense was $196.4 mllon, $130.5 mllon and $130.6 mllon n fscal 2007, 2006 and 2005, respectvely. Estmated useful lves for buldng, machnery and equpment are 5 years to 33 years and for automobles and trucks are 3 years to 10 years. The charge to ncome resultng from amortzaton of assets recorded under captal leases s ncluded wth deprecaton expense. The Company records mparment charges on long-lved assets used n operatons when events and crcumstances ndcate that the assets may be mpared and the undscounted cash flows estmated to be generated by those assets are less than the carryng amount of those assets. The mparment charge s determned based upon the amount the net book value of the assets exceeds ther far market value. In makng these determnatons, the Company utlzes certan assumptons, ncludng, but not lmted to: () future cash flows estmates expected to be generated by these assets, whch are based on addtonal assumptons such as asset utlzaton, remanng length of servce and estmated salvage values; () estmated far market value of the assets; and () determnatons wth respect to the lowest level of cash flows relevant to the respectve mparment test, generally groupngs of related operatonal facltes. Accrued Expenses The carryng values of accrued expenses were as follows: September 29, September 30, 2007 2006 (Dollars in thousands) Compensaton and benefts $ 231,401 $ 143,555 Interest 49,063 5,276 Other 219,550 123,999 Accrued expenses $ 500,014 $ 272,830 Purchase Price Accounting The Company allocates the total purchase prce n connecton wth acqustons to assets and labltes based upon ther estmated far values. For property, plant and equpment and ntangble assets other than goodwll, for sgnfcant acqustons, the Company has hstorcally reled upon the use of thrd-party valuaton experts to assst n the estmaton of far values. Hstorcally, the carryng value of acqured accounts recevable, nventory and accounts payable have approxmated ther far value as of the date of acquston, though adjustments are made wthn purchase prce accountng to the extent needed to record such assets and labltes at far value. Wth respect to accrued labltes, the Company uses all avalable nformaton to make ts best estmate of the far value of the acqured labltes and, when necessary, may rely upon the use of thrd-party actuaral experts to assst n the estmaton of far value for certan labltes, prmarly penson and self-nsurance accruals. 87
  • 93. PILGRIM’S PRIDE CORPORATION September 29, 2007 Litigation and Contingent Liabilities The Company s subject to lawsuts, nvestgatons and other clams related to employment, envronmental, product, and other matters, and s requred to assess the lkelhood of any adverse judgments or outcomes to these matters as well as potental ranges of probable losses. A determnaton of the amount of reserves requred, ncludng antcpated cost of defense, f any, for these contngences s made when losses are determned to be probable and after consderable analyss of each ndvdual ssue. These reserves may change n the future due to changes n the Company’s assumptons, the effectveness of strateges, or other factors beyond the Company’s control. Accrued Self Insurance Insurance expense for casualty clams and employee-related health care benefts are estmated usng hstorcal and current experence and actuaral estmates. Stop-loss coverage s mantaned wth thrd-party nsurers to lmt the Company’s total exposure. Certan categores of clam labltes are actuarally determned. The assumpton used to arrve at perodc expenses s revewed regularly by management. However, actual expenses could dffer from these estmates and could result n adjustments to be recognzed. Income Taxes We recognze deferred tax assets and labltes for the effect of temporary dfferences between the book and tax bases of recorded assets and labltes. Taxes are provded for nternatonal subsdares based on the assumpton that ther earnngs are ndefntely renvested n foregn subsdares and as such deferred taxes are not provded for n U.S. ncome taxes that would be requred n the event of dstrbuton of these earnngs. We also reduce deferred tax assets by a valuaton allowance f t s more lkely than not that some porton or all of the deferred tax asset wll not be realzed. We revew the recoverablty of any tax assets recorded on the balance sheet, prmarly operatng loss carryforwards, based on both hstorcal and antcpated earnngs levels of the ndvdual operatons and provde a valuaton allowance when t s more lkely than not that amounts wll not be recovered. As of September 29, 2007, the Company had reserves totalng $26.9 mllon for taxes that may become payable n future years as a result of audts by tax authortes. Although the Company beleves that the postons taken on prevously fled tax returns are reasonable, t nevertheless has establshed tax reserves n recognton that varous taxng authortes may challenge the postons taken by the Company resultng n addtonal labltes for tax and nterest. The tax reserves are revewed as crcumstances warrant and adjusted as events occur that affect the Company’s potental lablty for addtonal taxes, such as lapsng of applcable statutes of lmtatons, concluson of tax audts, addtonal exposure based on current calculatons, dentfcaton of new ssues, release of admnstratve gudance, or renderng of a court decson affectng a partcular tax ssue. 88
  • 94. PILGRIM’S PRIDE CORPORATION September 29, 2007 Common Stock Pror to November 21, 2003, the Company had two classes of authorzed 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 reclassfed nto one share of new common stock. The new common stock s our only class of authorzed common stock. The new common stock s lsted on the New York Stock Exchange under the symbol “PPC” and regstered under the Securtes Exchange Act of 1934. Followng the reclassfcaton, our certfcate of ncorporaton contans no provsons for Class A common stock or Class B common stock. In connecton wth the elmnaton of the dual class captal structure, our certfcate of ncorporaton now authorzes 160 mllon shares of common stock nstead of 100 mllon shares of Class A common stock and 60 mllon shares of Class B common stock. Except as to votng rghts, the rghts of the new common stock are substantally dentcal to the rghts of the Class A common stock and Class B common stock. Each share of common stock that was reclassfed nto our new common stock s generally enttled to cast twenty votes on all matters submtted to a vote of the stockholders untl there s a change n the benefcal ownershp of such share. The reclassfcaton had no sgnfcant effect on our Consoldated Fnancal Statements, as the combnaton of the Class A and Class B shares nto a new class of common stock dd not affect the overall shares of common stock outstandng. Pror year balances reflect ths reclassfcaton as f t had occurred as of the earlest perod presented. As of September 29, 2007, we estmate that approxmately 26 mllon shares of our common stock carry 20 votes per share, of whch 25.3 mllon shares are benefcally owned by our Senor Charman, Lonne “Bo” Plgrm, or certan related enttes. Net Income (Loss) per Common Share Net ncome (loss) per common share s based on the weghted average number of shares of common stock outstandng durng the year. The weghted average number of shares outstandng (basc and dluted) ncluded heren were 66,555,733 n 2007, 2006 and 2005. Use of Estimates The preparaton of fnancal statements n conformty wth accountng prncples generally accepted n the U.S. requres management to make estmates and assumptons that affect the reported amounts of assets and labltes and dsclosure of contngent assets and labltes at the date of the fnancal statements and the reported amounts of revenues and expenses durng the reportng perod. Actual results could dffer from those estmates. 89
  • 95. PILGRIM’S PRIDE CORPORATION September 29, 2007 Pending Adoption of Recent Accounting Pronouncements In June 2006, the Fnancal Accountng Standards Board (“FASB”) ssued Interpretaton (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. Ths Interpretaton clarfes the accountng for uncertanty n ncome taxes recognzed n an enterprse’s fnancal statements. FIN No. 48 prescrbes a recognton threshold and measurement attrbute for the fnancal statement recognton and measurement of a tax poston taken or expected to be taken n a tax return. The Company must adopt ths Interpretaton n the frst quarter of fscal 2008. The Company has not completed ts evaluaton as to the mpact that adopton wll have on ts consoldated fnancal statements. In September 2006, the FASB ssued Statement of Fnancal Accountng Standards (“SFAS”) No. 157, Fair Value Measurements. Ths Statement defnes far value, establshes a framework for measurng far value n generally accepted accountng prncples, and expands dsclosures about far value measurements. SFAS No. 157 does not requre any new far value measurements. However, for some enterprses, the applcaton of ths Statement wll change current practce. The Company must adopt SFAS No. 157 n the frst quarter of fscal 2009. Although the Company has not completed ts evaluaton as to the mpact that adopton wll have on ts Consoldated Fnancal Statements, t currently beleves the adopton of SFAS No. 157 wll not requre materal modfcaton of ts far value measurements and wll be substantally lmted to expanded dsclosures n the notes to ts Consoldated Fnancal Statements. In January 2007, the FASB ssued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Ths Statement permts an enterprse to choose to measure many fnancal nstruments and certan other tems at far value. SFAS No. 159 wll become effectve for the Company n the frst quarter of fscal 2009. The Company s currently evaluatng the mpact that use of the far value measurement opton on ts fnancal nstruments and other applcable tems would have on ts Consoldated Fnancal Statements. NOTE B – BUSINESS ACQUISITION On December 27, 2006, we acqured 45,343,812 shares, representng 88.9% of shares outstandng, of Gold Kst Inc. (“Gold Kst”) common stock through a tender offer. We subsequently acqured all remanng Gold Kst shares and, on January 9, 2007, Gold Kst became a wholly owned subsdary of the Company. Gold Kst, based n Atlanta, Georga, was the thrd largest chcken company n the Unted States, accountng for more than nne percent of chcken produced n the Unted States n recent years. Gold Kst operated a fully-ntegrated chcken producton busness that ncluded lve producton, processng, marketng and dstrbuton. For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of Gold Kst n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of Gold Kst from December 27, 2006 through December 30, 2006 were not materal. We have ncluded the acqured assets and assumed labltes n our balance sheet usng an allocaton of the purchase prce based on an apprasal receved from a thrd-party valuaton specalst. 90
  • 96. PILGRIM’S PRIDE CORPORATION September 29, 2007 The followng summarzes our purchase prce at December 27, 2006 (n thousands): Purchase 50,146,368 shares at $21.00 per share $ 1,053,074 Premum pad on retrement of debt 22,208 Retrement of varous share-based compensaton awards 25,677 Varous costs and fees 37,740 Total purchase prce $ 1,138,699 We retred the Gold Kst 10 1/4% Senor Notes due 2014 wth a book value of $128.5 mllon at a cost of $149.8 mllon plus accrued nterest and the Gold Kst Subordnated Captal Certfcates of Interest at par plus accrued nterest and a premum of one year’s nterest. We also pad acquston transacton costs and funded change n control payments to certan Gold Kst employees. Ths acquston was ntally funded by (1) $780 mllon borrowed under our revolvng-term secured credt faclty and (2) $450 mllon borrowed under our $450 mllon Senor Unsecured Term Loan Agreement (“Brdge Loan”) (see Note E below). In connecton wth the acquston, we elected to freeze certan of the Gold Kst beneft plans wth the ntent to ultmately termnate them. We recorded a purchase prce adjustment of $65.6 mllon to ncrease the beneft plans lablty to the $82.5 mllon current estmated cost of these plan termnatons. We do not antcpate any materal net perodc beneft costs (ncome) related to these plans n the future. Addtonally, we conformed Gold Kst’s accountng polces to our accountng polces and provded for deferred ncome taxes on all related purchase adjustments. The followng summarzes our estmates of the far value of the assets acqured and labltes assumed at the date of acquston (n thousands): Current assets $ 418,583 Property, plant and equpment 675,054 Goodwll 505,166 Intangble assets 64,500 Other assets 65,597 Total assets acqured 1,728,900 Current labltes 276,194 Long-term debt, less current maturtes 140,674 Deferred ncome taxes 93,509 Other long-term labltes 79,824 Total labltes assumed 590,201 Total purchase prce $ 1,138,699 91
  • 97. PILGRIM’S PRIDE CORPORATION September 29, 2007 Goodwll and other ntangble assets reflected above were determned to meet the crtera for recognton apart from tangble assets acqured and labltes assumed. Intangble assets related to the acquston conssted of the followng at December 27, 2006: Estimated Amortization Fair Value Period (In millions) (In years) Intangble assets subject to amortzaton: Customer relatonshps $ 51,000 13.0 Trade name 13,200 3.0 Non-compete agreements 300 3.0 Total ntangble assets subject to amortzaton 64,500 Goodwll 505,166 Total ntangble assets $ 569,666 Weghted average amortzaton perod 10.9 Goodwll, whch s recognzed n the Company’s chcken segment, represents the purchase prce n excess of the value assgned to dentfable tangble and ntangble assets. We elected to acqure Gold Kst at a prce that resulted n the recognton of goodwll because of the followng strategc and fnancal benefts: - The combned company s now postoned as the world’s leadng chcken producer and that poston has provded us wth enhanced abltes to: Compete more effcently and provde even better customer servce; • Expand our geographc reach and customer base; • Further pursue value-added and prepared foods opportuntes; and • Offer long-term growth opportuntes for our stockholders, employees, and growers. • - The combned company s better postoned to compete n the ndustry both nternatonally and n the Unted States as addtonal consoldaton occurs. The amortzable ntangble assets were determned by us to have fnte lves. The useful lfe for the customer relatonshps ntangble asset we recognzed was based on our forecasts of customer turnover. The useful lfe for the trade name ntangble asset we recognzed was based on the estmated length of our use of the Gold Kst trade name whle t s phased out and replaced wth the Plgrm’s Prde trade name. The useful lfe of the non-compete agreements ntangble asset we recognzed was based on the remanng lfe of the agreements. We amortze these ntangble assets over ther remanng useful lves on a straght-lne bass. Annual amortzaton expense for these ntangble assets was $6.3 mllon n fscal 2007. We expect to recognze annual amortzaton expense of $8.4 mllon n fscal 2008 and fscal 2009, $5.1 mllon n fscal 2010, $3.9 mllon n fscal 2011 through fscal 2019, and $1.0 mllon n fscal 2020. 92
  • 98. PILGRIM’S PRIDE CORPORATION September 29, 2007 The followng unaudted pro forma fnancal nformaton has been presented as f the acquston had occurred at the begnnng of each perod presented. Fiscal 2007 Fiscal 2006 Pro forma Pro forma (In thousands, except shares and per share data) Net sales $ 8,126,409 $ 7,352,018 Deprecaton and amortzaton $ 230,126 $ 228,105 Operatng ncome (loss) $ 201,986 $ (53,585) Interest expense, net $ 146,928 $ 125,314 Income (loss) before taxes $ 36,372 $ (172,740) Net ncome (loss) $ 12,832 $ (118,571) Net ncome (loss) per common share $ 0.19 $ (1.78) Weghted average shares outstandng 66,555,733 66,555,733 NOTE C – ACCOUNTS RECEIVABLE In connecton wth the Recevables Purchase Agreement dated June 26, 1998, as amended, the Company sells, on a revolvng bass, certan of ts trade recevables (the “Pooled Recevables”) to a specal purpose corporaton wholly owned by the Company, whch n turn sells a percentage ownershp nterest to thrd partes. As of September 29, 2007, $300.0 mllon n Pooled Recevables had been sold. Durng fscal 2006 and 2005 there were no Pooled Recevables sold. The gross proceeds resultng from the sale are ncluded n cash flows from operatng actvtes n the Consoldated Statements of Cash Flows. Losses on the sale were mmateral. 93
  • 99. PILGRIM’S PRIDE CORPORATION September 29, 2007 NOTE D – INVENTORIES Inventores consst of the followng (dollars n thousands): September 29, September 30, 2007 2006 Chcken: Lve chcken and hens $ 343,185 $ 196,284 Feed and eggs 223,631 132,309 Fnshed chcken products 337,052 201,516 903,868 530,109 Turkey: Lve turkey and hens 8,839 7,138 Feed and eggs 2,664 4,740 Fnshed turkey products 25,929 26,685 37,432 38,563 Other Products: Commercal feed, table eggs, and retal farm store 11,327 7,080 Dstrbuton nventores 9,258 10,188 20,585 17,268 Total Inventores $ 961,885 $ 585,940 NOTE E – NOTES PAYABLE AND LONG-TERM DEBT The followng table presents our long-term debt as of September 29, 2007 and September 30, 2006 (dollars n thousands): Fnal September 29, September 30, Maturty 2007 2006 Senor unsecured notes, at 7 5/8% 2015 $ 400,000 $ -- Senor unsecured notes, at 8 3/8% 2017 250,000 -- Senor unsecured notes, at 9 5/8% 2011 -- 299,601 Senor subordnated unsecured notes, at 9 1/4% 2013 5,135 82,640 Secured revolvng credt faclty wth notes payable at LIBOR plus 1.25% to LIBOR plus 2.75% 2011 26,293 74,682 Note payable to an nsurance company at 6.68% 2012 -- 50,115 Notes payable to an nsurance company at LIBOR plus 2.2075% 2013 -- 41,333 Secured revolvng-term/credt faclty wth notes payable at LIBOR or US Treasures, plus a spread 2016 622,350 -- Other Varous 17,652 16,827 1,321,430 565,198 Less current maturtes (2,872) (10,322) Total $ 1,318,558 $ 554,876 94
  • 100. PILGRIM’S PRIDE CORPORATION September 29, 2007 In September 2006, the Company entered nto an amended and restated revolver/term credt agreement wth a maturty date of September 21, 2016. At September 29, 2007 ths revolver/term credt agreement provdes for an aggregate commtment of $1.172 bllon consstng of () a $550 mllon revolvng/term loan commtment and () $622.4 mllon n varous term loans. At September 29, 2007, the Company had nothng outstandng under the revolver and $622.4 mllon outstandng n varous term loans. The total credt faclty s presently secured by certan fxed assets wth a current avalablty of $550.0 mllon. From tme to tme, f certan condtons are satsfed, the Company has the rght to ncrease the revolvng/term loan commtment and term loan commtment to a total maxmum amount of $1.0 bllon and $750 mllon, respectvely. Borrowngs under the revolvng/term loan commtment are avalable on a revolvng bass untl September 21, 2011 at whch tme the outstandng borrowngs wll be converted to a term loan maturng on September 21, 2016. The fxed rate term loans bear nterest at rates rangng from 6.84% to 7.06%. The voluntary converted loans bear nterest at rates rangng from LIBOR plus 1.0%- 2.0%, dependng upon the Company’s total debt to captalzaton rato. The floatng rate term loans bear nterest at LIBOR plus 1.50%-1.75% based on the rato of the Company’s debt to EBITDA, as defned n the agreement. The revolvng/term loans provde for nterest rates rangng from LIBOR plus 1.0%- 2.0%, dependng upon the Company’s total debt to captalzaton rato. Revolvng/term loans converted to term loans on September 21, 2011 wll be payable n equal quarterly prncpal payments of 10% per annum of the orgnal prncpal amount begnnng the calendar quarter followng the converson date wth the remanng balance due on the maturty date. Of the term loans outstandng, $208.7 mllon must be repad n equal quarterly prncpal payments of 1% per annum of the orgnal prncpal amount wth the remanng balance due on the maturty date. All borrowngs are subject to the avalablty of elgble collateral and no materal adverse change provsons. Commtment fees charged on the unused balance of ths faclty range from 0.20% to 0.40%, dependng upon the Company’s total debt to captalzaton rato. One-half of the outstandng oblgatons under the revolver/term credt agreement are guaranteed by Plgrm Interests, Ltd., an entty related to our Senor Charman, Lonne “Bo” Plgrm. On December 15, 2006, the Company borrowed $100 mllon at 6.84% under our revolver/term credt agreement and used substantally all of the funds to repay, n full, term loans payable to an nsurance company under a note purchase agreement maturng n 2012 and 2013. In January 2007, the Company borrowed (1) $780 mllon under our revolver/term credt agreement and (2) $450 mllon under our brdge loan agreement to fund the Gold Kst acquston. On January 24, 2007, the Company closed on the sale of $400 mllon of 7 5/8% Senor Notes due 2015 (the “Senor Notes”) and $250 mllon of 8 3/8% Senor Subordnated Notes due 2017 (the “Subordnated Notes”), sold at par. Interest s payable on May 1 and November 1 of each year, begnnng November 1, 2007. We may redeem all or part of the Senor Notes on or after May 1, 2011. We may redeem all or part of the Subordnated Notes on or after May 1, 2012. Before May 1, 2010, we also may redeem up to 35% of the aggregate prncpal amount of each of the Senor Notes and the Subordnated Notes wth the proceeds of certan equty offerngs. Each of these optonal redemptons s at a premum as descrbed n the ndentures under whch the notes were ssued. The proceeds from the sale of the notes, after underwrtng dscounts, were used to (1) retre the loans outstandng under our brdge loan agreement, (2) repurchase $77.5 mllon of the Company’s 9 1/4% Senor Subordnated Notes due 2013 at a premum of $7.4 mllon plus accrued nterest of $1.3 mllon and (3) reduce outstandng revolvng loans under our revolvng/term credt agreement. Loss on early extngushment of debt ncludes the $7.4 mllon premum along wth unamortzed loan costs of $7.1 mllon related to the retrement of these Notes. 95
  • 101. PILGRIM’S PRIDE CORPORATION September 29, 2007 On September 21, 2007, the Company redeemed all of ts 9 5/8% Senor Notes due 2011 at a total cost of $307.5 mllon. To fund a porton of the aggregate redempton prce, the Company sold $300 mllon of trade recevables under ts Recevables Purchase Agreement. Loss on early extngushment of debt ncludes the $9.5 mllon premum along wth unamortzed loan costs of $2.5 mllon related to the retrement of these Notes. As of September 29, 2007, we had a $300.0 mllon commtment under a domestc revolvng credt faclty that provdes for nterest rates rangng from LIBOR plus 0.75-1.75%, dependng upon our total debt to captalzaton rato. From tme to tme, f certan condtons are satsfed, the Company has the rght to ncrease the revolvng commtment to a total maxmum amount of $450 mllon. At September 29, 2007, $215.1 mllon was avalable for borrowng under the domestc revolvng credt faclty. Borrowngs aganst ths faclty are subject to the avalablty of elgble collateral and no materal adverse change provsons. The oblgatons under ths faclty are secured by domestc chcken nventores. Commtment fees charged on the unused balance of ths faclty range from 0.175% to 0.35%, dependng upon the Company’s total debt to captalzaton rato. One-half of the outstandng oblgatons under the domestc revolvng credt faclty are guaranteed by Plgrm Interests, Ltd., an entty related to our Senor Charman, Lonne “Bo” Plgrm. On September 25, 2006, a subsdary of the Company, Avícola Plgrm’s Prde de Méxco, S. de R.L. de C.V. (the “Borrower”), entered nto a secured revolvng credt agreement of up to $75 mllon wth a fnal maturty date of September 25, 2011. In March 2007, the Borrower elected to reduce the commtment under ths agreement to approxmately $50 mllon. Outstandng amounts bear nterest at rates rangng from the hgher of the Prme Rate or Federal Funds Effectve Rate plus 0.5%; LIBOR plus 1.25%-2.75%; or TIIE plus 1.05%-2.55% dependng on the loan desgnaton. Oblgatons under ths agreement are secured by a securty nterest n and len upon all captal stock and other equty nterests of the Company’s Mexcan subsdares. All the oblgatons of the Borrower are secured by uncondtonal guaranty by the Company. At September 29, 2007, $26.3 mllon was outstandng and approxmately $23.7 mllon was avalable under ths lne. All borrowngs are subject to no materal adverse effect provsons. On June 29, 1999, the Camp County Industral Development Corporaton ssued $25.0 mllon of varable-rate envronmental facltes revenue bonds supported by letters of credt obtaned by us. We may draw from these proceeds over the constructon perod for new sewage and sold waste dsposal facltes at a poultry by-products plant to be bult n Camp County, Texas. We are not requred to borrow the full amount of the proceeds from these revenue bonds. All amounts borrowed from these funds wll be due n 2029. The revenue bonds are supported by letters of credt obtaned by us under our avalable revolvng credt facltes. The bonds wll be recorded as debt of the Company f and when they are spent to fund constructon. Most of our domestc nventores and domestc fxed assets are pledged as collateral on our long- term debt and credt facltes. Annual maturtes of long-term debt for the fve years subsequent to September 29, 2007 are: 2008 -- $2.9 mllon; 2009 -- $2.4 mllon; 2010 -- $1.3 mllon; 2011 -- $27.9 mllon; 2012 -- $1.3 mllon and thereafter -- $1.286 bllon. 96
  • 102. PILGRIM’S PRIDE CORPORATION September 29, 2007 The Company s requred, by certan provsons of ts debt agreements, to mantan levels of workng captal and net worth, to lmt dvdends to a maxmum of $26 mllon per year, and to mantan varous fxed charge, leverage, current and debt-to-equty ratos. In fscal 2006, wavers were obtaned to permt a specal $1 per share dvdend. At September 29, 2007, the Company has fully compled wth these covenants. Total nterest expense was $125.8 mllon, $50.6 mllon and $49.6 mllon n fscal 2007, 2006 and 2005, respectvely. Interest related to new constructon captalzed n fscal 2007, 2006 and 2005 was $5.7 mllon, $4.3 mllon and $2.8 mllon, respectvely. The far value of long-term debt, at September 29, 2007 and September 30, 2006 and based upon quoted market prces for the same or smlar ssues where avalable or by usng dscounted cash flow analyss, was approxmately $1.338 bllon and $592.3 mllon, respectvely. NOTE F – INCOME TAXES Income (loss) before ncome taxes after allocaton of certan expenses to foregn operatons for fscal 2007, 2006 and 2005 was $80.0 mllon, ($19.7) mllon and $361.1 mllon, respectvely, for U.S. operatons and $11.6 mllon, ($16.6) mllon and $42.4 mllon, respectvely, for foregn operatons. The provsons for ncome taxes are based on pre-tax fnancal statement ncome (loss). The components of ncome tax expense (beneft) are set forth below (dollars n thousands): 2007 2006 2005 Current: Federal $ (37,191) $ (23,147) $ 117,518 Foregn 1,573 5,130 3,880 State and other (3,676) (4,523) 14,899 Total current (39,294) (22,540) 136,297 Deferred: Federal 73,285 9,511 (1,594) Foregn (1,637) 10,221 4,475 State and other 12,236 723 113 Total deferred 83,884 20,455 2,994 Change n valuaton allowance -- -- (747) $ 44,590 $ (2,085) $ 138,544 97
  • 103. PILGRIM’S PRIDE CORPORATION September 29, 2007 The followng s a reconclaton between the statutory U.S. federal ncome tax rate and the Company’s effectve ncome tax rate: 2007 2006 2005 Federal ncome tax rate 35.0% (35.0)% 35.0% State tax rate, net 2.6 (0.7) 2.1 Permanent Items 2.9 Dfference n U.S. statutory tax rate and foregn country effectve tax rate (0.8) (1.0) (1.3) Tax credts (8.0) (13.1) (1.1) Tax effect of Amercan Jobs Creaton Act repatraton -- 68.3 0.6 Currency related dfferences 3.8 8.4 (1.1) Change n contngency reserves 6.8 (29.7) -- Change n valuaton allowance -- -- (0.2) Change n tax rate 3.2 -- -- Other 3.2 (3.0) 0.3 Total 48.7% (5.8)% 34.3% Deferred ncome taxes reflect the net effects of temporary dfferences between the carryng amounts of assets and labltes for fnancal reportng purposes and the amounts used for ncome tax purposes. Sgnfcant components of the Company’s deferred tax labltes and assets are as follows (dollars n thousands): 2007 2006 Deferred tax labltes: Property and equpment $ 256,341 $ 144,361 Inventores 109,410 43,627 Pror use of cash accountng 16,936 18,457 Acquston related tems 14,820 15,600 Deferred foregn taxes 25,002 24,127 Identfed ntangbles 21,964 -- Other 58,956 36,570 Total deferred tax labltes 503,429 282,742 Deferred tax assets: Foregn net operatng losses 41,257 42,683 Expenses deductble n dfferent years 143,697 71,478 Total deferred tax asset 184,954 114,161 Net deferred tax labltes $ 318,475 $ 168,581 98
  • 104. PILGRIM’S PRIDE CORPORATION September 29, 2007 The Company has not provded any deferred ncome taxes on the remanng undstrbuted earnngs of ts Mexco subsdares based upon ts determnaton that such earnngs wll be ndefntely renvested. As of September 29, 2007, the cumulatve undstrbuted earnngs of these subsdares were approxmately $92.0 mllon. If such earnngs were not consdered ndefntely renvested, certan deferred foregn and U.S. ncome taxes would have been provded, after consderaton of estmated foregn tax credts. However, determnaton of the amount of deferred ncome taxes s not practcal. The Mexcan tax operatng loss carryforwards of approxmately $147.9 mllon wll expre n the years rangng from 2008 through 2012. The Amercan Jobs Creaton Act was enacted n October 2004 (“Jobs Creaton Act”). The Jobs Creaton Act ncludes a temporary ncentve to U.S. multnatonals to repatrate foregn earnngs at an approxmate effectve 5.25% U.S. federal tax rate. Durng the fourth quarter of fscal year 2006, the Company repatrated $155.0 mllon n prevously unremtted untaxed earnngs under the provsons of the Jobs Creaton Act. The total ncome tax effects of repatratons under the Jobs Creaton Act was $28.2 mllon, of whch $25.8 mllon was recorded fscal 2006. The key components of the 2006 provson ncluded domestc ncome taxes of $10.1 mllon to reflect federal and state taxes on the transacton, a deferred foregn tax provson of $24.1 mllon to accrue for future taxes that wll result from certan ntra-Mexcan dvdends undertaken n 2006 to complete ths transacton, and a beneft of $6.0 mllon to reflect the revaluaton of certan deferred tax assets n Mexco that as a result of the transacton are expected to be realzed at hgher enacted tax rates. In October 2007, Mexco’s legslatve bodes enacted La Ley del Impuesto Empresaral a Tasa Únca (“IETU”), a new mnmum corporaton tax, whch wll be assessed on companes dong busness n Mexco begnnng January 1, 2008. We are currently evaluatng the antcpated mpact that IETU wll have on our busness and operatng results. Because of IETU, there can be no assurance that we wll be able to utlze the net operatng loss carryovers and other deferred tax benefts generated n Mexco. There can also be no assurance that IETU wll not have a materal adverse effect on our fnancal results. NOTE G – COMPREHENSIVE INCOME (LOSS) For the perod endng September 29, 2007, comprehensve ncome was $60.9 mllon, consstng of net ncome of $47.0 mllon, unrealzed gans related to our nvestments n debt securtes of $0.8 mllon, to penson lablty gans of $7.9 mllon and unrealzed gans on cash flow hedges of $3.4 mllon. Ths compares to the fscal year ended September 30, 2006 n whch comprehensve loss was $33.7 mllon, consstng of net loss of $34.2 mllon and unrealzed gans related to our nvestments n debt securtes of $0.5 mllon. Comprehensve ncome for the fscal year ended October 1, 2005 was $265.0 mllon, consstng of net ncome of $265.0 mllon. Accumulated other comprehensve ncome at September 29, 2007 was $14.0 mllon net of taxes of $6.6 mllon and conssted of pretax adjustments for penson lablty gans totalng $14.3 mllon accumulated unrealzed gans on cash flow hedges totalng $5.3 mllon and accumulated unrealzed gan on our nvestments n debt securtes totalng $0.9 mllon. 99
  • 105. PILGRIM’S PRIDE CORPORATION September 29, 2007 NOTE H – SAVINGS AND PENSION PLANS Retirement Plans The Company mantans retrement plans for elgble employees as follows: • the Plgrm’s Prde Retrement Savngs Plan (the “RS Plan”), a Secton 401(k) Salary Deferral Plan • the Plgrm’s Prde Retrement Plan for Unon Employees (the “Unon Plan”), a defned beneft plan • the To-Rco’s Employee Cash or Deferred Arrangement Proft Sharng Plan (the “To-Rco’s Plan”), a Secton 1165(e) Salary Deferral Plan • the legacy Gold Kst Penson Plan (the “GK Penson Plan”), a defned beneft plan acqured wth Gold Kst Inc. The Company mantans three postretrement plans for elgble Mexco employees as requred by Mexco law whch cover prmarly termnaton benefts. Separate dsclosure of plan oblgatons s not consdered materal. The RS Plan s mantaned for certan elgble U.S. employees. Under the RS Plan, elgble employees may voluntarly contrbute a percentage of ther compensaton and there are varous Company matchng provsons. The Unon Plan covers certan locatons or work groups wthn the Company. The To-Rco’s Plan s mantaned for certan elgble Puerto Rcan employees. Under the To-Rco’s Plan, elgble employees may voluntarly contrbute a percentage of ther compensaton and there are varous Company matchng provsons. The GK Penson Plan covers certan elgble U.S. employees who were employed at locatons that Plgrm’s Prde acqured n ts acquston of Gold Kst Inc. and partcpaton n the GK Penson Plan was frozen as of February 8, 2007 for all partcpants wth the excepton of termnated vested partcpants who are or may become permanently and totally dsabled. The plan was frozen for that group as of March 31, 2007. Under all of our retrement plans, the Company’s expenses were $10.0 mllon and $16.0 mllon n fscal 2007 and 2006, respectvely, ncludng the correcton of $4.6 mllon, pretax, as descrbed n Note A. The Company uses a calendar year measurement date for ts defned benefts plans, whle ts postretrement beneft plans use a fscal year end of September 29, 2007. Certan dsclosures are lsted below; other dsclosures are not materal to the fnancal statements. Medical and Life Insurance Plans The acquston of Gold Kst by Plgrm’s Prde resulted n acqurng some postretrement medcal and lfe nsurance oblgatons. In January 2001, Gold Kst began to substantally curtal ts programs for actve employees. On July 1, 2003, Gold Kst termnated medcal coverage for retrees age 65 and older, and only retred employees n the closed group between ages 55 and 65 could contnue ther 100
  • 106. PILGRIM’S PRIDE CORPORATION September 29, 2007 coverage at rates above the average cost of the medcal nsurance plan for actve employees. These retred employees wll all reach the age of 65 by 2012 and labltes of the postretrement medcal plan wll then end. Benefit Obligations, Plan Assets, and Assumptions The followng table sets forth the plans’ change n beneft oblgaton, change n plan assets and economc assumptons for the years ended September 29, 2007 and September 30, 2006 (dollars n thousands): Other Postretirement Pension Benefits Benefits 2007 2006 2007 2006 Change in benefit obligation: Beneft oblgaton at begnnng of year $ 9,882 $ 8,778 $ -- $ -- Servce cost 2,029 2,242 -- -- Interest cost 8,455 458 103 -- Plan partcpant contrbutons 61 27 681 -- Actuaral (gans) losses (12,933) (1,533) (41) -- Acqustons 218,623 -- 2,689 -- Pror servce cost (credt) 237 -- - -- Benefts pad (29,551) (90) (1,000) -- Beneft oblgaton at end of year $ 196,803 $ 9,882 $ 2,432 $ -- Change in plan assets: Far value of plan assets at begnnng of year $ 6,252 $ 5,405 $ -- $ -- Acqustons 139,229 -- -- -- Actual return on plan assets 11,571 208 -- -- Contrbutons by employer 10,462 702 319 -- Plan partcpant contrbutons 61 27 681 -- Benefts pad (29,551) (90) (1,000) -- Far value of plan assets at end of year 138,024 6,252 -- -- Funded status (58,779) (3,630) (2,432) -- Unrecognzed pror servce cost (beneft) 237 -- -- -- Unrecognzed net (gan) loss (14,824) (818) (41) -- Net (accrued) prepad expense (73,366) (4,448) (2,473) -- Accumulated other comprehensve loss 14,587 -- 41 -- Net amount recognzed $ (58,779) $ (4,448) $ (2,432) $ -- Projected beneft oblgaton $ 196,803 $ 9,882 $ 2,432 $ -- Accumulated beneft oblgaton $ 196,217 $ 9,301 $ 2,432 $ -- Far value of plan assets $ 138,024 $ 6,252 $ -- $ -- Weighted-average assumptions used to determine benefit obligation: Dscount rate 5.06% 5.75% 5.87% NA Rate of ncrease n compensaton levels 3.00% 3.00% NA NA The health care cost trend rate used to determne the other postretrement benefts oblgaton at September 29, 2007 and September 30, 2006 was 8.0% and 8.5%, respectvely. The rate wll declne ratably to 5.0% by fscal 2014 and reman at that level thereafter. A 1% ncrease or decrease would have an nsgnfcant mpact on the other postretrement beneft oblgaton as of September 29, 2007. 101
  • 107. PILGRIM’S PRIDE CORPORATION September 29, 2007 Net Periodic Benefit Cost The followng table sets forth the plans’ net perodc beneft cost and economc assumptons for the years ended September 29, 2007 and September 30, 2006 (dollars n thousands): Other Pension Postretirement Benefits Benefits 2007 2006 2007 2006 Components of net periodic benefit cost (income): Servce cost $ 2,029 $ 2,242 $ -- $ -- Interest cost 8,455 458 103 -- Estmated return on plan assets (8,170) (454) -- -- Settlement (gan) loss (2,327) -- -- -- Net perodc beneft cost (ncome) $ (13) $ 2,246 $ 103 $ -- Weighted-average assumptions used to determine benefit cost: Dscount rate 5.06% 5.25% 5.50% NA Rate of ncrease n compensaton levels 3.00% 3.00% NA NA Expected return on plan assets 7.75% 7.75% 7.75% NA A 1% ncrease or decrease n the health care cost trend rate would have an nsgnfcant mpact on the other postretrement servce and nterest cost components for 2007. Unrecognized Gain The followng table sets forth the plans’ accumulated other comprehensve ncome that has not yet been recognzed for the year ended September 29, 2007 (n thousands): Unrecognzed (gan) loss at begnnng of perod $ (818) Curtalment and settlement adjustments 2,327 Actuaral (gan) loss (12,974) Asset (gan) loss (3,400) Pror servce cost (credt) 237 $ (14,628) 102
  • 108. PILGRIM’S PRIDE CORPORATION September 29, 2007 Plan Assets The far value of plan assets for the Company’s penson plans, along wth the asset allocaton by category, s shown below (dollars n thousands): Pension Benefits 2007 2006 Far value of plan assets at end of year $ 138,024 $ 6,252 Asset allocation: Cash and money market funds 2% 0% Equty securtes 71 % 66 % Debt securtes 27 % 34 % Total assets 100 % 100 % Absent regulatory or statutory lmtatons, the target asset allocaton for the nvestment of the assets for our ongong penson plans s 25% n debt securtes and 75% n equty securtes. The plans only nvest n debt and equty nstruments for whch there s a ready publc market. We develop our expected long-term rate of return assumptons based on the hstorcal rates of returns for equty and debt securtes of the type n whch our plans nvest. Benefit Payments The expected beneft payments from the Company’s penson and postretrement plans for the fscal years ndcated are as follows (dollars n thousands): Other Pension Postretirement Expected Benefit Payments for fiscal year: Benefits Benefits 2008 $ 17,614 $ 380 2009 17,502 243 2010 17,010 205 2011 16,230 175 2012 15,812 177 2013-2017 62,515 889 Total $ 146,683 $ 2,069 NOTE I – RELATED PARTY TRANSACTIONS Lonne “Bo” Plgrm, the Senor Charman and, through certan related enttes, the major stockholder of the Company (collectvely, the “major stockholder”) owns an egg layng and a chcken growng operaton. In addton, at certan tmes durng the year, the major stockholder may purchase from the Company lve chckens and hens and certan feed nventores durng the grow-out process and then contract wth the Company to resell the brds at maturty usng a market-based formula, wth prce subject to a celng prce calculated at hs cost plus two percent. No purchases have been 103
  • 109. PILGRIM’S PRIDE CORPORATION September 29, 2007 made by the Company under ths agreement snce the frst quarter of fscal 2006 when the major stockholder recognzed an operatng margn of $4,539 on gross amounts pad by the Company to the major stockholder as descrbed below n “Lve chcken purchases from major stockholder.” For the fscal year ended October 1, 2005, the formula resulted n an operatng margn of $1,017,000 on gross amounts pad by the Company to the major stockholder. Transactons wth the major stockholders or related enttes are summarzed as follows (dollars n thousands): 2007 2006 2005 Lease payments on commercal egg property $ 750 $ 750 $ 750 Contract grower pay 885 976 682 Other sales to major stockholder 620 747 51,258 Lve chcken purchases from major stockholder -- 231 50,070 Loan guaranty fees 3,592 1,615 1,775 Lease payments and operatng expenses on arplane 507 492 536 The Company leases a commercal egg property ncludng all of the ongong costs of the operaton from the Company’s major stockholder. The lease term runs for ten years wth a monthly lease payment of $62,500. A porton of the Company’s debt oblgatons have been guaranteed by Plgrm Interests, Ltd., an entty related to the Company’s Senor Charman, Lonne “Bo” Plgrm. In consderaton of such guarantees, the Company has pad Plgrm Interests, Ltd. a quarterly fee equal to 0.25% of one-half of the average aggregate outstandng balance of such guaranteed debt. Durng fscal 2007, we pad $3.6 mllon to Plgrm Interests, Ltd. The Company leases an arplane from ts major stockholder under an operatng lease agreement that s renewable annually. The terms of the lease agreement requre monthly payments of $33,000 plus operatng expenses. Lease expense was $396,000 for each of the years 2007, 2006 and 2005. Operatng expenses were $111,210, $96,480 and $140,090 n 2007, 2006 and 2005, respectvely. The Company mantans depostory accounts wth a fnancal nsttuton n whch the Company’s major stockholder s also a major stockholder. Fees pad to ths bank n 2007, 2006 and 2005 are nsgnfcant, and as of September 29, 2007, the Company had bank balances at ths fnancal nsttuton of approxmately $1.8 mllon. The major stockholder has deposted $0.3 mllon wth the Company as an advance on mscellaneous expendtures. A son of the major stockholder sold commodty feed products and a lmted amount of other servces to the Company aggregatng approxmately $0.6 mllon n fscal 2007. He also leases an nsgnfcant amount of land from the Company. 104
  • 110. PILGRIM’S PRIDE CORPORATION September 29, 2007 The Company has entered nto chcken grower contracts nvolvng farms owned by certan of ts offcers and drectors, provdng the placement of Company-owned flocks on ther farms durng the grow-out phase of producton. These contracts are on terms substantally the same as contracts entered nto by the Company wth unafflated partes and can be termnated by ether party upon completon of the grow-out of each flock. The aggregate amounts pad by the Company to these offcers and drectors under these grower contracts durng each of the fscal years 2007, 2006 and 2005 were less than $1 mllon n total. NOTE J – COMMITMENTS and CONTINGENCIES General We are a party to many routne contracts n whch we provde general ndemntes n the normal course of busness to thrd partes for varous rsks. Among other consderatons, we have not recorded a lablty for any of these ndemntes as based upon the lkelhood of payment, the far value of such ndemntes s mmateral. Purchase Obligations The Company wll sometmes enter nto non-cancelable contracts to purchase captal equpment and feed ngredents. At September 29, 2007, the Company was party to outstandng purchase contracts totalng $40.1 mllon. Payments for purchases made under these contracts are due n less than 1 year. Leases The Consoldated Statements of Operatons nclude rental expense for operatng leases of approxmately $54.0 mllon, $35.1 mllon and $35.4 mllon n 2007, 2006 and 2005, respectvely. The Company’s future mnmum lease commtments under non-cancelable operatng leases are as follows: 2008 -- $46.8 mllon; 2009 -- $37.1 mllon; 2010 -- $28.2 mllon; 2011 -- $21.0 mllon; 2012 -- $9.3 mllon and thereafter $5.0 mllon. Certan of the Company’s operatng leases nclude rent escalatons. The Company ncludes the rent escalaton n ts mnmum lease payments oblgatons and recognzes them as a component of rental expense on a straght-lne bass over the mnmum lease term. The Company also mantans operatng leases for varous types of equpment, some of whch contan resdual value guarantees for the market value of assets at the end of the term of the lease. The terms of the lease maturtes range from one to seven years. The maxmum potental amount of the resdual value guarantees s estmated to be approxmately $21.1 mllon; however, the actual amount would be offset by any recoverable amount based on the far market value of the underlyng leased assets. No lablty has been recorded related to ths contngency as the lkelhood of payments under these guarantees s not consdered to be probable and the far value of such guarantees s mmateral. The Company hstorcally has not experenced sgnfcant payments under smlar resdual guarantees. 105
  • 111. PILGRIM’S PRIDE CORPORATION September 29, 2007 Financial Instruments At September 29, 2007, the Company had $84.9 mllon n letters of credt outstandng relatng to normal busness transactons. The Company’s loan agreements generally oblgate the Company to remburse the applcable lender for ncremental ncreased costs due to a change n law that mposes () any reserve or specal depost requrement aganst assets of, deposts wth or credt extended by such lender related to the loan, () any tax, duty or other charge wth respect to the loan (except standard ncome tax) or () captal adequacy requrements. In addton, some of the Company’s loan agreements contan a wthholdng tax provson that requres the Company to pay addtonal amounts to the applcable lender or other fnancng party, generally f wthholdng taxes are mposed on such lender or other fnancng party as a result of a change n the applcable tax law. These ncreased cost and wthholdng tax provsons contnue for the entre term of the applcable transacton, and there s no lmtaton on the maxmum addtonal amounts the Company could be oblgated to pay under such provsons. Any falure to pay amounts due under such provsons generally would trgger an event of default, and, n a secured fnancng transacton, would enttle the lender to foreclose upon the collateral to realze the amount due. Litigation The Company s subject to varous legal proceedngs and clams whch arse n the ordnary course of busness. Below s a summary of the most sgnfcant clams outstandng aganst the Company. In the Company’s opnon, t has made approprate and adequate accruals for clams where necessary, and the Company beleves the probablty of a materal loss beyond the amounts accrued to be remote; however, the ultmate lablty for these matters s uncertan, and f sgnfcantly dfferent than the amounts accrued, the ultmate outcome could have a materal effect on the fnancal condton or results of operatons of the Company. The Company beleves t has substantal defenses to the clams made and ntends to vgorously defend these cases. Among the clams presently pendng aganst the Company are clams seekng unspecfed damages brought by current and former employees seekng compensaton for the tme spent donnng and doffng work equpment. We are aware of an ndustry-wde nvestgaton by the Wage and Hour Dvson of the U.S. Department of Labor to ascertan complance wth varous wage and hour ssues, ncludng the compensaton of employees for the tme spent on such actvtes such as donnng and doffng work equpment. Due, n part, to the government nvestgaton and the recent U.S. Supreme Court decson n IBP, Inc. v. Alvarez, t s possble that we may be subject to addtonal employee clams. We ntend to assert vgorous defenses to the ltgaton. Nonetheless, there can be no assurances that other smlar clams may not be brought aganst the Company. On December 31, 2003, we were served wth a purported class acton complant styled “Angela Goodwn, Glora Wlls, Johnny Gll, Greg Hamlton, Nathan Robnson, Edde Gusby, Pat Curry, Persons Smlarly Stuated v. ConAgra Poultry Company and Plgrm’s Prde, Incorporated” n the Unted States Dstrct Court, Western Dstrct of Arkansas, El Dorado Dvson, allegng racal and age dscrmnaton at one of the facltes we acqured from ConAgra. The Court dsmssed the clams of a thrd plantff Robert Nelson n ther entrety based on the theory of judcal estoppel. On May 15, 2007, 106
  • 112. PILGRIM’S PRIDE CORPORATION September 29, 2007 the Court ssued ts order denyng Plantffs’ Moton for Class Certfcaton n ts entrety. The plantffs subsequently wthdrew ther petton appeal to the Eghth Crcut Court of Appeals. Thus the Court’s order denyng plantffs class certfcaton moton stands as a fnal bndng order. Subsequent to the Court’s order on July 18, 2007, the sx remanng plantffs have fled ndvdual actons. We beleve we have mertorous defenses to these ndvdual clams and we ntend to vgorously defend these ndvdual clams. In March 2005, the Company, through arbtraton, settled ltgaton related to a breach of contract that occurred n a pror year. The settlement resulted n a non-recurrng gan of $11.7 mllon beng recognzed and recorded n mscellaneous, net n fscal 2005. NOTE K – BUSINESS SEGMENTS We operate n three reportable busness segments as (1) a producer and seller of chcken products, (2) a producer and seller of turkey products and (3) a seller of other products. Our chcken segment ncludes sales of chcken products we produce and purchase for resale n the U.S., ncludng Puerto Rco, and Mexco. Our chcken segment conducts separate operatons n the U.S. and Puerto Rco and n Mexco and s reported as two separate geographcal areas. Our turkey segment ncludes sales of turkey products we produce and purchase for resale n our turkey and dstrbuton operatons, operatng n the U.S. Our other products segment ncludes dstrbuton of non-poultry products that are purchased from thrd partes and sold to ndependent grocers and quck servce restaurants. Also ncluded n ths category are sales of table eggs, feed, proten products, lve hogs and other tems, some of whch are produced or rased by the Company. Inter-area sales and nter-segment sales, whch are not materal, are accounted for at prces comparable to normal trade customer sales. Corporate expenses are allocated to Mexco based upon varous apportonment methods for specfc expendtures ncurred related thereto wth the remanng amounts allocated to the U.S. portons of the segments based on number of employees. Assets assocated wth our corporate functons, ncluded cash and cash equvalents and nvestments n avalable for sale securtes are ncluded n our chcken segment. Sellng, general and admnstratve expenses related to our dstrbuton centers are allocated based on the proporton of net sales to the partcular segment to whch the product sales relate. Deprecaton and amortzaton, total assets and captal expendtures of our dstrbuton centers are ncluded n our chcken segment based on the prmary focus of the centers. 107
  • 113. PILGRIM’S PRIDE CORPORATION September 29, 2007 The followng table presents certan nformaton regardng our segments (dollars n thousands): (Fiscal Year Ended) September 29, 2007(a) September 30, 2006 October 1, 2005 Net Sales to Customers: Chcken: Unted States $ 6,328,354 $ 4,098,403 $ 4,411,269 Mexco 488,466 418,745 403,353 Sub-total 6,816,820 4,517,148 4,814,622 Turkey 122,364 130,901 204,838 Other Products: Unted States 638,738 570,510 626,056 Mexco 20,677 17,006 20,759 Sub-total 659,415 587,516 646,815 Total 7,598,599 5,235,565 5,666,275 Operating Income (Loss): Chcken: Unted States $ 192,447 $ 28,619 $ 405,662 Mexco 13,116 (17,960) 39,809 Sub-total 205,563 10,659 445,471 Turkey (4,655) (15,511) (22,539) Other Products: Unted States 28,637 6,216 8,250 Mexco 2,992 1,638 4,630 Sub-total 31,629 7,854 12,880 Total $ 232,537 $ 3,002 $ 435,812 Depreciation and Amortization:(b) Chcken: Unted States $ 183,808 $ 109,346 $ 114,131 Mexco 11,015 11,305 12,085 Sub-total 194,823 120,651 126,216 Turkey 1,587 6,593 3,343 Other Products: Unted States 8,278 7,743 5,196 Mexco 215 146 189 Sub-total 8,493 7,889 5,385 Total $ 204,903 $ 135,133 $ 134,944 Total Assets: Chcken: Unted States $ 3,247,812 $ 1,897,763 $ 2,059,579 Mexco 348,894 361,887 287,414 Sub-total 3,596,706 2,259,650 2,346,993 Turkey 69,653 76,908 77,319 Other Products: Unted States 103,757 88,650 85,581 Mexco 4,120 1,660 2,010 Sub-total 107,877 90,310 87,591 Total $ 3,774,236 $ 2,426,868 $ 2,511,903 Capital Expenditures (excluding acquisition): Chcken: Unted States $ 164,449 $ 133,106 $ 102,470 Mexco 1,633 6,536 4,924 Sub-total 166,082 139,642 107,394 Turkey 502 257 3,604 Other Products: Unted States 5,699 3,567 5,448 Mexco 40 416 142 Sub-total 5,739 3,983 5,590 Total $ 172,323 $ 143,882 $ 116,588 108
  • 114. PILGRIM’S PRIDE CORPORATION September 29, 2007 (a) The Company acqured Gold Kst on December 27, 2006 for $1.139 bllon. For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of Gold Kst n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of Gold Kst from December 27, 2006 through December 30, 2006 were not materal. (b) Includes amortzaton of captalzed fnancng costs of approxmately $6.6 mllon, $2.3 mllon, and $2.0 mllon n fscal 2007, 2006 and 2005, respectvely, and amortzaton of ntangble assets of approxmately $6.3 mllon n fscal 2007. The Company had one customer that represented 10% or more of annual net sales n fscal years 2007, 2006 and 2005. As of each of the three years ended September 29, 2007, Mexco has net long lved assets of $106.2 mllon, $116.9 mllon and $122.1 mllon, respectvely. At September 29, 2007, Mexco has net assets of $284.8 mllon. NOTE L – QUARTERLY RESULTS (UNAUDITED) Fiscal Year Ended September 29, 2007 (In thousands, except per share data) Frst Second Thrd Fourth Fscal Quarter Quarter (b) Quarter(b) Quarter(b) Year Net sales $ 1,337,132 $ 1,993,965 $ 2,118,386 $ 2,149,116 $ 7,598,599 Gross proft 65,526 83,942 235,239 206,831 591,538 Operatng ncome (loss) (2.906) (11,699) 136,777 110,365 232,537 Net ncome (loss) (8,736) (40,077) 62,641 33,189 47,017 Per Share: Net ncome (loss) (0.13) (0.60) 0.94 0.50 0.71 Cash dvdends 0.0225 0.0225 0.0225 0.0225 0.090 Fiscal Year Ended September 30, 2006 (In thousands, except per share data) Frst Second Thrd Fourth Fscal Quarter Quarter Quarter Quarter(a) Year Net sales $ 1,343,812 $ 1,265,709 $ 1,287,646 $ 1,338,398 $ 5,235,565 Gross proft 118,400 37,201 42,696 99,303 297,600 Operatng ncome (loss) 46,198 (37,936) (26,737) 21,477 3,002 Net ncome (loss) 25,678 (31,954) (20,473) (7,483) (34,232) Per Share: Net ncome (loss) 0.39 (0.48) (0.31) (0.11) (0.51) Cash dvdends 1.0225 0.0225 0.0225 0.0225 1.090 (a) Included n gross proft n the fourth quarter of fscal 2006 are charges for accountng adjustments of $6.4 mllon, pretax, related to certan beneft plans. Included n net ncome n the fourth quarter of fscal 2006 s a $25.8 mllon tax provson for the Amercan Jobs Creaton Act of 2004 and a $10.6 mllon tax beneft for a change n estmate of contngency reserves as descrbed n Note A and Note F. (b) The Company acqured Gold Kst on December 27, 2006 for $1.139 bllon. For fnancal reportng purposes, we have not ncluded the operatng results and cash flows of Gold Kst n our consoldated fnancal statements for the perod from December 27, 2006 through December 30, 2006. The operatng results and cash flows of Gold Kst from December 27, 2006 through December 30, 2006 were not materal. 109
  • 115. PILGRIM’S PRIDE CORPORATION September 29, 2007 PILGRIM’S PRIDE CORPORATION SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS Addtons Charged to Balance at Charged to Other Balance at Begnnng Costs Accounts- Deductons end Descrpton of Perod and Expenses Descrbe(a) Descrbe(b) of Perod Year ended September 29, 2007: Reserves and allowances deducted From asset accounts: Allowance for doubtful accounts $ 2,084,409 $ 4,768,272 $ 1,324,131 $ 2,313,018 $ 5,863,794 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 (a) Balance of allowance for doubtful accounts establshed for accounts recevable acqured from Gold Kst. (b) Uncollectble accounts wrtten off, net of recoveres. 110
  • 116. PILGRIM’S PRIDE CORPORATION September 29, 2007 Exhibit Index 2.1 Agreement and Plan of Reorganzaton dated September 15, 1986, by and among Plgrm’s Prde Corporaton, a Texas corporaton; Plgrm’s Prde Corporaton, a Delaware corporaton; and Dors Plgrm Julan, Aubrey Hal Plgrm, Paulette Plgrm Rolston, Evanne Plgrm, Lonne “Bo” Plgrm, Lonne Ken Plgrm, Greta Plgrm Owens and Patrck Wayne Plgrm (ncorporated by reference from Exhbt 2.1 to the Company’s Regstraton Statement on Form S-1 (No. 33-8805) effectve November 14, 1986). 2.2 Agreement and Plan of Merger dated September 27, 2000 (ncorporated by reference from Exhbt 2 of WLR Foods, Inc.’s Current Report on Form 8-K (No. 000-17060) dated September 28, 2000). 2.3 Agreement and Plan of Merger dated as of December 3, 2006, by and among the Company, Proten Acquston Corporaton, a wholly-owned subsdary of the Company, and Gold Kst Inc. (ncorporated by reference from Exhbt 99.(D)(1) to Amendment No. 11 to the Company’s Tender Offer Statement on Schedule TO fled on December 5, 2006). 3.1 Certfcate of Incorporaton of the Company, as amended (ncorporated by reference from Exhbt 3.1 of the Company’s Annual Report on Form 10-K for the fscal year ended October 2, 2004). 3.2 Amended and Restated Corporate Bylaws of the Company (ncorporated by reference from Exhbt 4.4 of the Company’s Regstraton Statement on Form S-8 (No. 333-111929) fled on January 15, 2004). 4.1 Certfcate of Incorporaton of the Company, as amended (ncluded as Exhbt 3.1). 4.2 Amended and Restated Corporate Bylaws of the Company (ncluded as Exhbt 3.2). 4.3 Indenture, dated November 21, 2003, between Plgrm’s Prde Corporaton and The Bank of New York as Trustee relatng to Plgrm’s Prde’s 9 ¼% Senor Notes due 2013 (ncorporated by reference from Exhbt 4.1 of the Company’s Regstraton Statement on Form S-4 (No. 333-111975) fled on January 16, 2004). 4.4 Form of 9 ¼% Note due 2013 (ncorporated by reference from Exhbt 4.3 of the Company’s Regstraton Statement on Form S-4 (No. 333-111975) fled on January 16, 2004). 4.5 Senor Debt Securtes Indenture dated as of January 24, 2007, by and between the Company and Wells Fargo Bank, Natonal Assocaton, as trustee (ncorporated by reference from Exhbt 4.1 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.6 Frst Supplemental Indenture to the Senor Debt Securtes Indenture dated as of January 24, 2007, by and between the Company and Wells Fargo Bank, Natonal Assocaton, as trustee (ncorporated by reference from Exhbt 4.2 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.7 Form of 7 5/8% Senor Note due 2015 (ncorporated by reference from Exhbt 4.3 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 111
  • 117. PILGRIM’S PRIDE CORPORATION September 29, 2007 4.8 Senor Subordnated Debt Securtes Indenture dated as of January 24, 2007, by and between the Company and Wells Fargo Bank, Natonal Assocaton, as trustee (ncorporated by reference from Exhbt 4.4 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.9 Frst Supplemental Indenture to the Senor Subordnated Debt Securtes Indenture dated as of January 24, 2007, by and between the Company and Wells Fargo Bank, Natonal Assocaton, as trustee (ncorporated by reference from Exhbt 4.5 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 4.10 Form of 8 3/8% Subordnated Note due 2017 (ncorporated by reference from Exhbt 4.6 to the Company’s Current Report on Form 8-K fled on January 24, 2007). 10.1 Plgrm’s Industres, Inc. Proft Sharng Retrement Plan, restated as of July 1, 1987 (ncorporated by reference from Exhbt 10.1 of the Company’s Form 8-K fled on July 1, 1992).  10.2 Senor Executve Performance Bonus Plan of the Company (ncorporated by reference from Exhbt A n the Company’s Proxy Statement dated December 13, 1999).  10.3 Arcraft Lease Extenson Agreement between B.P. Leasng Co. (L.A. Plgrm, ndvdually) and Plgrm’s Prde Corporaton (formerly Plgrm’s Industres, Inc.) effectve November 15, 1992 (ncorporated by reference from Exhbt 10.48 of the Company’s Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.4 Broler Grower Contract dated May 6, 1997 between Plgrm’s Prde Corporaton and Lonne “Bo” Plgrm (Farm 30) (ncorporated by reference from Exhbt 10.49 of the Company’s Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.5 Commercal Egg Grower Contract dated May 7, 1997 between Plgrm’s Prde Corporaton and Plgrm Poultry G.P. (ncorporated by reference from Exhbt 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 Plgrm’s Prde Corporaton and Plgrm Poultry G.P. (ncorporated by reference from Exhbt 10.23 of the Company’s Quarterly Report on Form 10-Q for the three months ended January 2, 1999). 10.7 Heavy Breeder Contract dated May 7, 1997 between Plgrm’s Prde Corporaton and Lonne “Bo” Plgrm (Farms 44, 45 & 46) (ncorporated by reference from Exhbt 10.51 of the Company’s Quarterly Report on Form 10-Q for the three months ended March 29, 1997). 10.8 Broler Grower Contract dated January 9, 1997 by and between Plgrm’s Prde and O.B. Goolsby, Jr. (ncorporated by reference from Exhbt 10.25 of the Company’s Regstraton Statement on Form S-1 (No. 333-29163) effectve June 27, 1997). 10.9 Broler Grower Contract dated January 15, 1997 by and between Plgrm’s Prde Corporaton and B.J.M. Farms (ncorporated by reference from Exhbt 10.26 of the Company’s Regstraton Statement on Form S-1 (No. 333-29163) effectve June 27, 1997). 112
  • 118. PILGRIM’S PRIDE CORPORATION September 29, 2007 10.10 Broler Grower Agreement dated January 29, 1997 by and between Plgrm’s Prde Corporaton and Clfford E. Butler (ncorporated by reference from Exhbt 10.27 of the Company’s Regstraton Statement on Form S-1 (No. 333-29163) effectve June 27, 1997). 10.11 Recevables Purchase Agreement dated June 26, 1998 between Plgrm’s Prde Fundng Corporaton, as Seller, Plgrm’s Prde Corporaton, as Servcer, Pooled Accounts Recevable Captal Corporaton, as Purchaser, and Nesbtt Burns Securtes Inc., as Agent (ncorporated by reference from Exhbt 10.33 of the Company’s Quarterly Report on Form 10-Q for the three months ended June 27, 1998). 10.12 Purchase and Contrbuton Agreement dated as of June 26, 1998 between Plgrm’s Prde Fundng Corporaton and Plgrm’s Prde Corporaton (ncorporated by reference from Exhbt 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 Plgrm’s Prde Corporaton and Plgrm Interests, Ltd., dated June 11, 1999 (ncorporated by reference from Exhbt 10.24 of the Company’s Annual Report on Form 10-K for the fscal year ended October 2, 1999). 10.14 Broler Producton Agreement between Plgrm’s Prde Corporaton and Lonne “Bo” Plgrm dated November 15, 2005 (ncorporated by reference from Exhbt 99.1 of the Company’s Current Report on Form 8-K dated November 10, 2005). 10.15 Commercal Property Lease dated December 29, 2000 between Plgrm’s Prde Corporaton and Plgrm Poultry G.P. (ncorporated by reference from Exhbt 10.30 of the Company’s Quarterly Report on Form 10-Q for the three months ended December 30, 2000). 10.16 Amendment No. 1 dated as of July 12, 2002 to Recevables Purchase Agreement dated as of June 26, 1998 among Plgrm’s Prde Fundng Corporaton, the Company, Farway Fnance Corporaton (as successor n nterest to Pooled Accounts Recevable Captal Corporaton) and BMO Nesbtt Burns Corp. (f/k/a Nesbtt Burns Securtes Inc.) (ncorporated by reference from Exhbt 10.32 of the Company’s Annual Report on Form 10-K fled on December 6, 2002). 10.17 Amendment No. 3 dated as of July 18, 2003 to Recevables Purchase Agreement dated as of June 26, 1998 between Plgrm’s Prde Fundng Corporaton (“Seller”), Plgrm’s Prde Corporaton as ntal Servcer, Farway Fnance Corporaton (as successor n nterest to Pooled Accounts Recevable Captal Corporaton) (“Purchaser”) and Harrs Nesbtt Corporaton as agent for the purchaser (ncorporated by reference from Exhbt 10.1 of the Company’s Quarterly Report on Form 10-Q fled July 23, 2003). 10.18 Agrcultural Lease between Plgrm’s Prde Corporaton (Lessor) and Patrck W. Plgrm (Tenant) dated May 1, 2003 (ncorporated by reference from Exhbt 10.15 of the Company’s Quarterly Report on Form 10-Q fled July 23, 2003). 113
  • 119. PILGRIM’S PRIDE CORPORATION September 29, 2007 10.19 Amendment No. 4 dated as of December 31, 2003 to Recevables Purchase Agreement dated as of June 26, 1998, among Plgrm’s Prde Fundng Corporaton, Plgrm’s Prde Corporaton as ntal Servcer, Farway Fnance Company, LLC (as successor to Farway Fnance Corporaton) as purchaser and Harrs Nesbtt Corp. (f/k/a BMO Nesbtt Burns Corp.) as agent for the purchaser (ncorporated by reference from Exhbt 10.4 of the Company’s Quarterly Report on Form 10-Q fled February 4, 2004). 10.20 Amendment No. 1 dated as of December 31, 2003 to Purchase and Contrbuton Agreement dated as of June 26, 1998, between Plgrm’s Prde Fundng Corporaton and Plgrm’s Prde Corporaton (ncorporated by reference from Exhbt 10.5 of the Company’s Quarterly Report on Form 10-Q fled February 4, 2004). 10.21 Employee Stock Investment Plan of the Company (ncorporated by reference from Exhbt 4.1 of the Company’s Regstraton Statement on Form S-8 (No. 333-111929) fled on January 15, 2004).  10.22 Purchase and Amendment Agreement between Plgrm’s Prde Corporaton and ConAgra Foods, Inc. dated August 3, 2005 (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K dated August 4, 2005). 10.23 Amended and Restated 2005 Deferred Compensaton Plan of the Company (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K dated December 30, 2005).  10.24 Vendor Servce Agreement dated effectve December 28, 2005 between Plgrm’s Prde Corporaton and Pat Plgrm (ncorporated by reference from Exhbt 10.2 of the Company’s Current Report on Form 8-K dated January 6, 2006). 10.25 Transportaton Agreement dated effectve December 28, 2005 between Plgrm’s Prde Corporaton and Pat Plgrm (ncorporated by reference from Exhbt 10.3 of the Company’s Current Report on Form 8-K dated January 6, 2006). 10.26 Ground Lease Agreement dated effectve January 4, 2006 between Plgrm’s Prde Corporaton and Pat Plgrm (ncorporated by reference from Exhbt 10.4 of the Company’s Current Report on Form 8-K dated January 6, 2006). 10.27 Credt Agreement by and among the Avícola Plgrm’s Prde de Méxco, S. de R.L. de C.V. (the “Borrower”), Plgrm’s Prde Corporaton, certan Mexco subsdares of the Borrower, ING Captal LLC, and the lenders sgnatory thereto dated as of September 25, 2006 (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K fled on September 28, 2006). 10.28 2006 Amended and Restated Credt Agreement by and among CoBank, ACB, Agrland, FCS and the Company dated as of September 21, 2006 (ncorporated by reference from Exhbt 10.2 of the Company’s Current Report on Form 8-K fled on September 28, 2006). 10.29 Frst Amendment to the Plgrm’s Prde Corporaton Amended and Restated 2005 Deferred Compensaton Plan Trust, dated as of November 29, 2006 (ncorporated by reference from Exhbt 10.03 of the Company’s Current Report on Form 8-K fled on December 05, 2006).  114
  • 120. PILGRIM’S PRIDE CORPORATION September 29, 2007 10.30 Agreement and Plan of Merger dated as of December 3, 2006, by and among the Company, the Purchaser and Gold Kst Inc. (ncorporated by reference from Exhbt 99.(D)(1) to Amendment No. 11 to the Company’s Tender Offer Statement on Schedule TO fled on December 5, 2006). 10.31 Frst Amendment to Credt Agreement, dated as of December 13, 2006, by and among the Company, as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as a syndcaton party, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.01 to the Company’s Current Report on Form 8-K fled on December 19, 2006). 10.32 Second Amendment to Credt Agreement, dated as of January 4, 2007, by and among the Company, as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as a syndcaton party, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.01 to the Company’s Current Report on Form 8-K fled on January 9, 2007). 10.33 Fourth Amended and Restated Secured Credt Agreement, dated as of February 8, 2007, by and among the Company, To-Rcos, Ltd., To-Rcos Dstrbuton, Ltd., Bank of Montreal, as agent, SunTrust Bank, as syndcaton agent, U.S. Bank Natonal Assocaton and Wells Fargo Bank, Natonal Assocaton, as co-documentaton agents, BMO Captal Market, as lead arranger, and the other lenders sgnatory thereto (ncorporated by reference from Exhbt 10.01 of the Company’s Current Report on Form 8-K dated February 12, 2007). 10.34 Thrd Amendment to Credt Agreement, dated as of February 7, 2007, by and among the Company as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and the sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as a syndcaton party, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.02 of the Company’s Current Report on Form 8-K dated February 12, 2007). 10.35 Frst Amendment to Credt Agreement, dated as of March 15, 2007, by and among the Borrower, the Company, the Subsdary Guarantors, ING Captal LLC, and the Lenders (ncorporated by reference from Exhbt 10.01 of the Company’s Current Report on Form 8-K dated March 20, 2007). 10.36 Fourth Amendment to Credt Agreement, dated as of July 3, 2007, by and among the Company as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and the sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as syndcaton party, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.1 of the Company’s Quarterly Report on Form 10-Q fled July 31, 2007). 10.37 Amendment No. 5 to Recevables Purchase Agreement dated as of August 20, 2007, among the Company, Plgrm’s Prde Fundng Corporaton, Farway Fnance Company, LLC and BMO Captal Markets Corp. (ncorporated by reference from Exhbt 10.01 of the Company’s Current Report on Form 8-K dated August 24, 2007). 115
  • 121. PILGRIM’S PRIDE CORPORATION September 29, 2007 10.38 Retrement and Consultng Agreement dated as of October 10, 2007, between the Company and Clfford E. Butler (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K dated October 10, 2007).  10.39 Ffth Amendment to Credt Agreement, dated as of August 7, 2007, by and among the Company as borrower, CoBank, ACB, as lead arranger and co-syndcaton agent, and the sole book runner, and as admnstratve, documentaton and collateral agent, Agrland, FCS, as co-syndcaton agent, and as syndcaton party, and the other syndcaton partes sgnatory thereto.* 10.40 Sxth Amendment to Credt Agreement, dated as of November 7, 2007, by and among the Company as borrower, CoBank, ACB, as admnstratve agent, and the other syndcaton partes sgnatory thereto (ncorporated by reference from Exhbt 10.1 of the Company’s Current Report on Form 8-K dated November 13, 2007). 12 Rato of Earnngs to Fxed Charges for the years ended September 29, 2007, September 30, 2006, October 1, 2005, October 2, 2004, September 27, 2003, and September 28, 2002.* 21 Subsdares of Regstrant.* 23 Consent of Ernst & Young LLP.* 31.1 Certfcaton of Co-Prncpal Executve Offcer pursuant to Secton 302 of the Sarbanes- Oxley Act of 2002.* 31.2 Certfcaton of Co-Prncpal Executve Offcer pursuant to Secton 302 of the Sarbanes- Oxley Act of 2002.* 31.3 Certfcaton of Chef Fnancal Offcer pursuant to Secton 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certfcaton of Co-Prncpal Executve Offcer of Plgrm’s Prde Corporaton pursuant to Secton 906 of the Sarbanes-Oxley Act of 2002.* 32.2 Certfcaton of Co-Prncpal Executve Offcer of Plgrm’s Prde Corporaton pursuant to Secton 906 of the Sarbanes-Oxley Act of 2002.* 32.3 Certfcaton of Chef Fnancal Offcer of Plgrm’s Prde Corporaton pursuant to Secton 906 of the Sarbanes-Oxley Act of 2002.* * Filed herewith  Represents a management contract or compensation plan arrangement 116
  • 122. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 10.39 FIFTH AMENDMENT TO CREDIT AGREEMENT Parties: “CoBank”: CoBank, ACB 5500 South Quebec Street Greenwood Vllage, Colorado 80111 “Borrower”: Plgrm’s Prde Corporaton 4845 US Hghway 271 N. Pttsburg, Texas 75686 “Syndcaton Partes”: Whose sgnatures appear below Execution Date: August 7, 2007 Recitals: CoBank (n ts capacty as the Admnstratve Agent (“Agent”), the Syndcaton Partes • sgnatory thereto, and Borrower have entered nto that certan 2006 Amended and Restated Credt Agreement (Convertble Revolvng Loan and Term Loan) dated as of September 21, 2006, that certan Frst Amendment to Credt Agreement dated as of December 13, 2006, that certan Second Amendment to Credt Agreement dated as of January 4, 2007, and that certan Thrd Amendment to Credt Agreement dated as of February 7, 2007, and that certan Fourth Amendment to Credt Agreement dated as of July 3, 2007 (as so amended and as amended, modfed, or supplemented from tme to tme n the future, the “Credit Agreement”) pursuant to whch the Syndcaton Partes, and any entty whch becomes a Syndcaton Party on or after September 21, 2006, have extended certan credt facltes to Borrower under the terms and condtons set forth n the Credt Agreement. Borrower has requested that the Agent and the Syndcaton Partes modfy the defnton of • the GK Len Date, whch the Agent and the Syndcaton Partes are wllng to do under the terms and condtons as set forth n ths Ffth Amendment to Credt Agreement (“Fifth Amendment”). Agreement: Now, therefore, n consderaton of the mutual covenants and agreements heren contaned and other good and valuable consderaton, the recept and adequacy of whch are hereby acknowledged, the partes hereto hereby agree as follows: Amendments to Credit Agreement. The Credt Agreement s amended as of the Effectve • Date as follows: 1.1 Sectons 1.57 s amended to read as follows: 1.57 GK Len Date: means September 23, 2007. 117
  • 123. PILGRIM’S PRIDE CORPORATION September 29, 2007 Conditions to Effectiveness of this Fifth Amendment. The effectveness of ths Ffth • Amendment s subject to satsfacton, n the Admnstratve Agent’s sole dscreton, of each of the followng condtons precedent (the date on whch all such condtons precedent are so satsfed shall be the “Effectve Date”): Delivery of Executed Loan Documents. Borrower shall have delvered to the a. Admnstratve Agent, for the beneft of, and for delvery to, the Admnstratve Agent and the Syndcaton Partes, the followng document, duly executed by Borrower: Ths Ffth Amendment • Syndication Parties Execution; Voting Participant Approval. The Admnstratve b. Agent shall have receved (a) wrtten approval of ths Ffth Amendment by at least the Requred Lenders (ncludng Votng Partcpants); and (b) a copy of ths Ffth Amendment executed by the Syndcaton Partes as requred. Representations and Warranties. The representatons and warrantes of Borrower n c. the Credt Agreement shall be true and correct n all materal respects on and as of the Effectve Date as though made on and as of such date. No Event of Default. No Event of Default shall have occurred and be contnung under d. the Credt Agreement as of the Effectve Date of ths Ffth Amendment. Payment of Fees and Expenses. Borrower shall have pad the Admnstratve Agent, e. by wre transfer of mmedately avalable federal funds (a) all fees presently due under the Credt Agreement (as amended by ths Ffth Amendment); and (b) all expenses owng as of the Effectve Date pursuant to Secton 15.1 of the Credt Agreement. General Provsons. • No Other Modifications. The Credt Agreement, as expressly modfed heren, shall a. contnue n full force and effect and be bndng upon the partes thereto. Successors and Assigns. Ths Ffth Amendment shall be bndng upon and nure to b. the beneft of Borrower, Agent, and the Syndcaton Partes, and ther respectve successors and assgns, except that Borrower may not assgn or transfer ts rghts or oblgatons hereunder wthout the pror wrtten consent of all the Syndcaton Partes. Definitions. Captalzed terms used, but not defned, n ths Ffth Amendment shall c. have the meanng set forth n the Credt Agreement. Severability. Should any provson of ths Ffth Amendment be deemed unlawful d. or unenforceable, sad provson shall be deemed several and apart from all other provsons of ths Ffth Amendment and all remanng provson of ths Ffth Amendment shall be fully enforceable. 118
  • 124. PILGRIM’S PRIDE CORPORATION September 29, 2007 Governing Law. To the extent not governed by federal law, ths Ffth Amendment and e. the rghts and oblgatons of the partes hereto shall be governed by, nterpreted and enforced n accordance wth the laws of the State of Colorado. Headings. The captons or headngs n ths Ffth Amendment are for convenence f. only and n no way defne, lmt or descrbe the scope or ntent of any provson of ths Ffth Amendment. Counterparts. Ths Ffth Amendment may be executed by the partes hereto n separate g. counterparts, each of whch, when so executed and delvered, shall be an orgnal, but all such counterparts shall together consttute one and the same nstrument. Each counterpart may consst of a number of copes hereof, each sgned by less than all, but together sgned by all, of the partes hereto. Copes of documents or sgnature pages bearng orgnal sgnatures, and executed documents or sgnature pages delvered by a party by telefax, facsmle, or e-mal transmsson of an Adobe® fle format document (also known as a PDF fle) shall, n each such nstance, be deemed to be, and shall consttute and be treated as, an orgnal sgned document or counterpart, as applcable. Any party delverng an executed counterpart of ths Ffth Amendment by telefax, facsmle, or e-mal transmsson of an Adobe® fle format document also shall delver an orgnal executed counterpart of ths Ffth Amendment, but the falure to delver an orgnal executed counterpart shall not affect the valdty, enforceablty, and bndng effect of ths Ffth Amendment. [Signatures to follow on next page.] 119
  • 125. PILGRIM’S PRIDE CORPORATION September 29, 2007 IN WITNESS WHEREOF, the partes hereto have caused ths Ffth Amendment to be executed as of the Effectve Date. ADMINISTRATIVE AGENT: CoBank, ACB By: /s/ Jm Stutzman Name: Jm Stutzman Ttle: Vce Presdent BORROWER: Pilgrim’s Pride Corporation By: /s/ Rchard A. Cogdll Name: Rchard A. Cogdll Ttle: Exe. VP, CFO, Sec & Treas. SYNDICATION PARTIES: CoBank, ACB By: /s/ Jm Stutzman Name: Jm Stutzman Ttle: Vce Presdent Agriland, FCS By: /s/ Dwayne C. Young Name: Dwayne C. Young Ttle: Chef Credt Offcer Deere Credit, Inc. By: /s/ John H. Wnger Name: John H. Wnger Ttle: Manager, AFS Credt Operatons 120
  • 126. PILGRIM’S PRIDE CORPORATION September 29, 2007 Bank of the West By: /s/ Lee Rosn Name: Lee Rosn Ttle: Regonal Vce Presdent John Hancock Life Insurance Company By: /s/ Kenneth L. Warlck Name: Kenneth L. Warlck Ttle: Managng Drector The Variable Annuity Life Insurance Company By: /s/ Lochlan O. McNew Name: Lochlan O. McNew Ttle: Managng Drector The United States Life Insurance Company in the City of New York By: /s/ Lochlan O. McNew Name: Lochlan O. McNew Ttle: Managng Drector Merit Life Insurance Co. By: /s/ Lochlan O. McNew Name: Lochlan O. McNew Ttle: Managng Drector 121
  • 127. PILGRIM’S PRIDE CORPORATION September 29, 2007 American General Assurance Company By: /s/ Lochlan O. McNew Name: Lochlan O. McNew Ttle: Managng Drector AIG International Group, Inc. By: /s/ Lochlan O. McNew Name: Lochlan O. McNew Ttle: Managng Drector AIG Annuity Insurance Company By: /s/ Lochlan O. McNew Name: Lochlan O. McNew Ttle: Managng Drector Transamerica Life Insurance Company By: /s/ Stephen Noonan Name: Stephen Noonan Ttle: Vce Presdent The CIT Group/Business Credit, Inc. By: /s/ Tedd Johnson Name: Tedd Johnson Ttle: Vce Presdent 122
  • 128. PILGRIM’S PRIDE CORPORATION September 29, 2007 Metropolitan Life Insurance Company By: /s/ Steven D. Crag Name: Steven D. Crag Ttle: Drector Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank-Nederland” New York Branch By: /s/ Rchard J. Beard Name: Rchard J. Beard Ttle: Executve Drector By: /s/ Rebecca Morrow Name: Rebecca Morrow Ttle: Executve Drector Farm Credit Services of America, PCA By: /s/ Bruce P. Rouse Name: Bruce P. Rouse Ttle: Vce Presdent 123
  • 129. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 12 PILGRIM’S PRIDE CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Year Ended) September 29, September 30, October 1, October 2, September 27, 2007 2006 2005 2004 2003 (In thousands, except ratios) EARNINGS: Income before ncome taxes $ 91,607 $ (36,317) $ 403,523 $ 208,535 $ 63,235 Add: Total fxed charges (see below) 149,493 67,172 64,735 67,168 49,647 Less: Interest captalzed (5,736) (4,298) (2,841) (1,714) (1,535) Total earnngs $ 235,364 $ 26,557 $ 465,417 $ 273,989 $ 111,347 FIXED CHARGES: Interest (a) $ 131,493 $ 54,899 $ 52,426 $ 56,150 $ 40,356 Porton of rental expense representatve of the nterest factor (b) 18,000 12,273 12,309 11,018 9,291 Total fxed charges $ 149,493 $ 67,172 $ 64,735 $ 67,168 $ 49,647 Rato of earnngs to fxed charges 1.57 7.19 4.08 2.24 (c) (a) Interest ncludes amortzaton of captalzed fnancng fees. (b) One-thrd of rental expenses s assumed to be representatve of the nterest factor. (c) Earnngs were nsuffcent to cover fxed charges by $40,615. 124
  • 130. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT JURISDICTION OF INCORPORATION OR ORGANIZATION U.S. Entities PFS DISTRIBUTION COMPANY DELAWARE GK FINANCE CORPORATION DELAWARE PILGRIM’S PRIDE FUNDING CORPORATION DELAWARE PILGRIM’S TURKEY COMPANY, LLC DELAWARE PPC OF DELAWARE BUSINESS TRUST DELAWARE PPC OF DELAWARE, INC. DELAWARE PPC TRANSPORTATION COMPANY DELAWARE PILGRIM’S PRIDE, LLC DELAWARE PPC OF DELAWARE LLC DELAWARE POPPSA 3, LLC DELAWARE POPPSA 4, LLC DELAWARE AGRATECH SEEDS INC. GEORGIA AGRATRADE FINANCING, INC. GEORGIA AGVESTMENTS, INC. GEORGIA GK PECANS, INC. GEORGIA LUKER INC. GEORGIA PPC OF ALABAMA, INC. GEORGIA PILGRIM’S PRIDE CORPORATION FOUNDATION, INC. GEORGIA GC PROPERTIES, GP GEORGIA PILGRIM’S PRIDE CORPORATION POLITICAL ACTION COMMITTEE, INC. GEORGIA PILGRIM’S PRIDE AFFORDABLE HOUSING CORPORATION NEVADA PILGRIM’S PRIDE OF NEVADA, INC. NEVADA PPC MARKETING, LTD. TEXAS GK INSURANCE COMPANY VERMONT VALLEY RAIL SERVICE, INC. VIRGINIA PILGRIM’S PRIDE CORPORATION OF WEST VIRGINIA, INC. WEST VIRGINIA Foreign Entities MAYFLOWER INSURANCE BERMUDA TO-RICOS DISTRIBUTION, LTD. BERMUDA TO-RICOS, LTD. BERMUDA AVICOLA PILGRIM’S PRIDE DE MEXICO, S. DE R.L. DE C. V. MEXICO CARNES Y PRODUCTOS AVICOLA S DE MEXICO S. DE R.L. DE C. V. (INACTIVE) MEXICO COMERCIALIZADORA DE CARNES DE MEXICO S. DE R.L. DE C. V. MEXICO COMPANIA INCUBADORA HIDALGO S. DE R.L. DE C. V. MEXICO GALLINA PESADA S.A. DE C.V. MEXICO GRUPO PILGRIM’S PRIDE FUNDING HOLDINGS S. DE R.L. DE C.V. MEXICO GRUPO PILGRIM’S PRIDE FUNDING S. DE R.L. DE C.V. MEXICO INMOBILIARIA AVICOLA PILGRIM’S PRIDE, S. DE R.L. MEXICO OPERADORA DE PRODUCTOS AVICOLAS S. DE R.L. DE C. V. (INACTIVE) MEXICO PILGRIM’S PRIDE S. DE R.L. DE C. V. MEXICO SERVICIOS ADMINISTRATIVOS PILGRIM’S PRIDE S. DE R.L. DE C. V. MEXICO 125
  • 131. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the ncorporaton by reference n the Regstraton Statements (Form S-8 No. 3-12043, Form S-8 No. 333-74984, Form S-8 No. 333-111929, Form S-3 No. 333-117472, Form S-3 No. 333- 127198, Form S-3 No. 333-130113 and Form S-4 No. 333-111975) of Plgrm’s Prde Corporaton and n the related Prospectuses of our reports dated November 13, 2007, wth respect to the consoldated fnancal statements and schedule of Plgrm’s Prde Corporaton and the effectveness of nternal control over fnancal reportng of Plgrm’s Prde Corporaton, ncluded n ths Annual Report (Form 10-K) for the year ended September 29, 2007. ERNST & YOUNG LLP Dallas, Texas November 13, 2007 126
  • 132. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 31.1 CERTIFICATION BY CO-PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Lonne “Bo” Plgrm, Senor Charman of Plgrm’s Prde Corporaton, certfy that: 1. I have revewed ths annual report on Form 10-K for the fscal year ended September 29, 2007, of Plgrm’s Prde Corporaton; 2. Based on my knowledge, ths report does not contan any untrue statement of a materal fact or omt to state a materal fact necessary to make the statement made, n lght of the crcumstances under whch such statements were made, not msleadng wth respect to the perod covered by ths report; 3. Based on my knowledge, the fnancal statements and other fnancal nformaton ncluded n ths report, farly present n all materal respects the fnancal condton, results of operatons and cash flows of the regstrant as of, and for, the perods presented n ths annual report; 4. The regstrant’s other certfyng offcers and I are responsble for establshng and mantanng dsclosure controls and procedures (as defned n Exchange Act Rules 13a-15(e) and 15d-15(e)) and nternal control over fnancal reportng (as defned n Exchange Act Rules 13a-15(f) and 15d-15(f)) for the regstrant and have: a.) Desgned such dsclosure controls and procedures, or caused such dsclosure controls and procedures to be desgned under our supervson, to ensure that materal nformaton relatng to the regstrant, ncludng ts consoldated subsdares, s made known to us by others wthn those enttes, partcularly durng the perod n whch ths annual report s beng prepared; b.) Desgned such nternal control over fnancal reportng, or caused such nternal control over fnancal reportng to be desgned under our supervson, to provde reasonable assurance regardng the relablty of fnancal reportng and the preparaton of fnancal statements for external purposes n accordance wth generally accepted accountng prncples; c.) Evaluated the effectveness of the regstrant’s dsclosure controls and procedures and presented n ths report our conclusons about the effectveness of the dsclosure controls and procedures, as of the end of the perod covered by ths report based upon such evaluaton; and d.) Dsclosed n ths report any change n the regstrant’s nternal control over fnancal reportng that occurred durng the regstrant’s most recent fscal quarter (the regstrant’s fourth fscal quarter n the case of an annual report) that has materally affected, or s reasonably lkely to materally affect, the regstrant’s nternal control over fnancal reportng; and 127
  • 133. PILGRIM’S PRIDE CORPORATION September 29, 2007 5. The regstrant’s other certfyng offcers and I have dsclosed, based on our most recent evaluaton of nternal control over fnancal reportng, to the regstrant’s audtors and the audt commttee of regstrant’s board of drectors (or persons performng the equvalent functons): a.) All sgnfcant defcences and materal weaknesses n the desgn or operaton of nternal control over fnancal reportng whch are reasonably lkely to adversely affect the regstrant’s ablty to record, process, summarze and report fnancal nformaton; and b.) Any fraud, whether or not materal, that nvolves management or other employees who have a sgnfcant role n the regstrant’s nternal control over fnancal reportng. Date: November 19, 2007 /s/ Lonne “Bo” Plgrm Lonne “Bo” Plgrm Co-Prncpal Executve Offcer 128
  • 134. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 31.2 CERTIFICATION BY CO-PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, O.B. Goolsby, Jr., Chef Executve Offcer of Plgrm’s Prde Corporaton, certfy that: 1. I have revewed ths annual report on Form 10-K for the fscal year ended September 29, 2007, of Plgrm’s Prde Corporaton; 2. Based on my knowledge, ths report does not contan any untrue statement of a materal fact or omt to state a materal fact necessary to make the statement made, n lght of the crcumstances under whch such statements were made, not msleadng wth respect to the perod covered by ths report; 3. Based on my knowledge, the fnancal statements and other fnancal nformaton ncluded n ths report, farly present n all materal respects the fnancal condton, results of operatons and cash flows of the regstrant as of, and for, the perods presented n ths annual report; 4. The regstrant’s other certfyng offcers and I are responsble for establshng and mantanng dsclosure controls and procedures (as defned n Exchange Act Rules 13a-15(e) and 15d-15(e)) and nternal control over fnancal reportng (as defned n Exchange Act Rules 13a-15(f) and 15d-15(f)) for the regstrant and have: a.) Desgned such dsclosure controls and procedures, or caused such dsclosure controls and procedures to be desgned under our supervson, to ensure that materal nformaton relatng to the regstrant, ncludng ts consoldated subsdares, s made known to us by others wthn those enttes, partcularly durng the perod n whch ths annual report s beng prepared; b.) Desgned such nternal control over fnancal reportng, or caused such nternal control over fnancal reportng to be desgned under our supervson, to provde reasonable assurance regardng the relablty of fnancal reportng and the preparaton of fnancal statements for external purposes n accordance wth generally accepted accountng prncples; c.) Evaluated the effectveness of the regstrant’s dsclosure controls and procedures and presented n ths report our conclusons about the effectveness of the dsclosure controls and procedures, as of the end of the perod covered by ths report based upon such evaluaton; and d.) Dsclosed n ths report any change n the regstrant’s nternal control over fnancal reportng that occurred durng the regstrant’s most recent fscal quarter (the regstrant’s fourth fscal quarter n the case of an annual report) that has materally affected, or s reasonably lkely to materally affect, the regstrant’s nternal control over fnancal reportng; and 129
  • 135. PILGRIM’S PRIDE CORPORATION September 29, 2007 5. The regstrant’s other certfyng offcers and I have dsclosed, based on our most recent evaluaton of nternal control over fnancal reportng, to the regstrant’s audtors and the audt commttee of regstrant’s board of drectors (or persons performng the equvalent functons): a.) All sgnfcant defcences and materal weaknesses n the desgn or operaton of nternal control over fnancal reportng whch are reasonably lkely to adversely affect the regstrant’s ablty to record, process, summarze and report fnancal nformaton; and b.) Any fraud, whether or not materal, that nvolves management or other employees who have a sgnfcant role n the regstrant’s nternal control over fnancal reportng. Date: November 19, 2007 /s/ O.B. Goolsby, Jr. O.B. Goolsby, Jr. Co-Prncpal Executve Offcer 130
  • 136. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 31.3 CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Rchard A. Cogdll, Chef Fnancal Offcer of Plgrm’s Prde Corporaton, certfy that: 1. I have revewed ths annual report on Form 10-K for the fscal year ended September 29, 2007, of Plgrm’s Prde Corporaton; 2. Based on my knowledge, ths report does not contan any untrue statement of a materal fact or omt to state a materal fact necessary to make the statement made, n lght of the crcumstances under whch such statements were made, not msleadng wth respect to the perod covered by ths report; 3. Based on my knowledge, the fnancal statements and other fnancal nformaton ncluded n ths report, farly present n all materal respects the fnancal condton, results of operatons and cash flows of the regstrant as of, and for, the perods presented n ths annual report; 4. The regstrant’s other certfyng offcers and I are responsble for establshng and mantanng dsclosure controls and procedures (as defned n Exchange Act Rules 13a-15(e) and 15d-15(e)) and nternal control over fnancal reportng (as defned n Exchange Act Rules 13a-15(f) and 15d-15(f)) for the regstrant and have: a.) Desgned such dsclosure controls and procedures, or caused such dsclosure controls and procedures to be desgned under our supervson, to ensure that materal nformaton relatng to the regstrant, ncludng ts consoldated subsdares, s made known to us by others wthn those enttes, partcularly durng the perod n whch ths annual report s beng prepared; b.) Desgned such nternal control over fnancal reportng, or caused such nternal control over fnancal reportng to be desgned under our supervson, to provde reasonable assurance regardng the relablty of fnancal reportng and the preparaton of fnancal statements for external purposes n accordance wth generally accepted accountng prncples; c.) Evaluated the effectveness of the regstrant’s dsclosure controls and procedures and presented n ths report our conclusons about the effectveness of the dsclosure controls and procedures, as of the end of the perod covered by ths report based upon such evaluaton; and d.) Dsclosed n ths report any change n the regstrant’s nternal control over fnancal reportng that occurred durng the regstrant’s most recent fscal quarter (the regstrant’s fourth fscal quarter n the case of an annual report) that has materally affected, or s reasonably lkely to materally affect, the regstrant’s nternal control over fnancal reportng; and 131
  • 137. PILGRIM’S PRIDE CORPORATION September 29, 2007 5. The regstrant’s other certfyng offcers and I have dsclosed, based on our most recent evaluaton of nternal control over fnancal reportng, to the regstrant’s audtors and the audt commttee of regstrant’s board of drectors (or persons performng the equvalent functons): a.) All sgnfcant defcences and materal weaknesses n the desgn or operaton of nternal control over fnancal reportng whch are reasonably lkely to adversely affect the regstrant’s ablty to record, process, summarze and report fnancal nformaton; and b.) Any fraud, whether or not materal, that nvolves management or other employees who have a sgnfcant role n the regstrant’s nternal control over fnancal reportng. Date: November 19, 2007 /s/ Rchard A. Cogdll Rchard A. Cogdll Prncpal Fnancal and Accountng Offcer 132
  • 138. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 32.1 CERTIFICATION OF CO-PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. § 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to secton 906 of the Sarbanes-Oxley Act of 2002 (subsectons (a) and (b) of secton 1350, chapter 63 of ttle 18, Unted States Code), the undersgned offcer of Plgrm’s Prde Corporaton (the “Company”), does hereby certfy, to such offcer’s knowledge, that: The Annual Report on Form 10-K for the year ended September 29, 2007 (the “Form 10-K”) of the Company fully comples wth the requrements of Secton 13(a) or 15(d) of the Securtes Exchange Act of 1934, and nformaton contaned n the Form 10-K farly presents, n all materal respects, the fnancal condton and results of operatons of the Company. Date: November 19, 2007 /s/ Lonne “Bo” Plgrm Lonne “Bo” Plgrm Co-Prncpal Executve Offcer 133
  • 139. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 32.2 CERTIFICATION OF CO-PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. § 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to secton 906 of the Sarbanes-Oxley Act of 2002 (subsectons (a) and (b) of secton 1350, chapter 63 of ttle 18, Unted States Code), the undersgned offcer of Plgrm’s Prde Corporaton (the “Company”), does hereby certfy, to such offcer’s knowledge, that: The Annual Report on Form 10-K for the year ended September 29, 2007 (the “Form 10-K”) of the Company fully comples wth the requrements of Secton 13(a) or 15(d) of the Securtes Exchange Act of 1934, and nformaton contaned n the Form 10-K farly presents, n all materal respects, the fnancal condton and results of operatons of the Company. Date: November 19, 2007 /s/ O.B. Goolsby, Jr. O.B. Goolsby, Jr. Co-Prncpal Executve Offcer 134
  • 140. PILGRIM’S PRIDE CORPORATION September 29, 2007 EXHIBIT 32.3 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. § 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to secton 906 of the Sarbanes-Oxley Act of 2002 (subsectons (a) and (b) of secton 1350, chapter 63 of ttle 18, Unted States Code), the undersgned offcer of Plgrm’s Prde Corporaton (the “Company”), does hereby certfy, to such offcer’s knowledge, that: The Annual Report on Form 10-K for the year ended September 29, 2007 (the “Form 10-K”) of the Company fully comples wth the requrements of Secton 13(a) or 15(d) of the Securtes Exchange Act of 1934, and nformaton contaned n the Form 10-K farly presents, n all materal respects, the fnancal condton and results of operatons of the Company. Date: November 19, 2007 /s/ Rchard A. Cogdll Rchard A. Cogdll Chef Fnancal and Accountng Offcer 135
  • 141. Officers Board of Directors LONNIE “BO” PILGRIM LONNIE “BO” PILGRIM ¹ Senior Chairman Senior Chairman LONNIE KEN PILGRIM LONNIE KEN PILGRIM ¹ Chairman Chairman O.B. GOOLSBY, JR. O.B. GOOLSBY, JR. President and Chief President and Chief Executive Officer Executive Officer RICHARD A. COGDILL RICHARD A. COGDILL Chief Financial Officer, Chief Financial Officer, Secretary and Treasurer Secretary and Treasurer J. CLINTON RIVERS CHARLES L. BLACK ³ Chief Operating Officer Retired Banker, Mt. Pleasant, Texas LINDA CHAVEZ ² Chairman, Center for Equal Opportunity, Sterling, Virginia S. KEY COKER Executive Vice President, Compass Bank, Dallas, Texas KEITH W. HUGHES ² Consultant and Former CEO of Associates First Capital, Dallas, Texas BLAKE D. LOVETTE¹ Retired Poultry Executive, North Wilkesboro, North Carolina VANCE C. MILLER, SR.¹ ² ³ Chairman of Vance C. Miller Interests, Chairman and Chief Executive Officer of Henry S. Miller Cos., Dallas, Texas JAMES G. VETTER, JR. ¹ Attorney, Godwin Pappas Ronquillo, LLP, Dallas, Texas DONALD L. WASS, PH.D. President, The William Oncken Company of Texas, Dallas, Texas 1 - Member of Compensation Committee 2 - Member of Audit Committee 3 - Member of Compensation Subcommittee
  • 142. 4845 U.S. Hwy. 271 North P.O. Box 93 Pittsburg, TX 75686 (903) 434-1000 www.pilgrimspride.com