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EX-21 - SUBSIDIARIES OF REGISTRANT - PILGRIMS PRIDE CORPdex21.htm
EX-12 - RATIO OF EARNINGS TO FIXED CHARGES - PILGRIMS PRIDE CORPdex12.htm
EX-23 - CONSENT OF ERNST & YOUNG LLP - PILGRIMS PRIDE CORPdex23.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - PILGRIMS PRIDE CORPdex322.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - PILGRIMS PRIDE CORPdex321.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - PILGRIMS PRIDE CORPdex312.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - PILGRIMS PRIDE CORPdex311.htm
EX-10.20 - AMENDMENT NO. 1 TO THE CREDIT AGREEMENT DATED AS OF DECEMBER 28, 2009 - PILGRIMS PRIDE CORPdex1020.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

x

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

For the fiscal year ended December 26, 2010

OR

 

¨

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

For the transition period from                      to                     

Commission File number 1-9273

LOGO

PILGRIM’S PRIDE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   75-1285071
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
1770 Promontory Circle, Greeley, Colorado   80634-9038
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (970) 506-8000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, Par Value $0.01   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨    No  ¨

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

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

 

 

Large Accelerated Filer  ¨

     Accelerated Filer  x
 

Non-accelerated Filer  ¨

   (Do not check if a smaller reporting company)   Smaller reporting company  ¨

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

The aggregate market value of the Registrant’s Common Stock, $0.01 par value, held by non-affiliates of the Registrant as of June 27, 2010, was $347,373,396. For purposes of the foregoing calculation only, all directors, executive officers and 5% beneficial owners have been deemed affiliates.

Number of shares of the Registrant’s Common Stock outstanding as of February 11, 2011 was 214,281,914.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.


Table of Contents

PILGRIM’S PRIDE CORPORATION

FORM 10-K

TABLE OF CONTENTS

 

  

PART I

     Page   

Item 1.

  

Business

     3   

Item 1A.

  

Risk Factors

     30   

Item 1B.

  

Unresolved Staff Comments

     40   

Item 2.

  

Properties

     40   

Item 3.

  

Legal Proceedings

     41   
   PART II   

Item 5.

  

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

     49   

Item 6.

  

Selected Financial Data

     52   

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     57   

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     83   

Item 8.

  

Financial Statements and Supplementary Data (see Index to Financial Statements and Schedules below)

     84   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     85   

Item 9A.

  

Controls and Procedures

     85   

Item 9B.

  

Other Information

     89   
   PART III   

Item 10.

  

Directors and Executive Officers and Corporate Governance

     90   

Item 11.

  

Executive Compensation

     90   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     90   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     90   

Item 14.

  

Principal Accounting Fees and Services

     91   
   PART IV   

Item 15.

  

Exhibits and Financial Statement Schedule

     92   

Signatures

     97   

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

 

Report of Independent Registered Public Accounting Firm

     99   

Consolidated Balance Sheets as of December 26, 2010 and September  26, 2009

     100   

Consolidated Statements of Operations for the twelve months ended December 26, 2010, the three months ended December 27, 2009, the twelve months ended September 26, 2009 and the twelve months ended September 27, 2008

     101   

Consolidated Statements of Comprehensive Income (Loss) for the twelve months ended December 26, 2010, the three months ended December 27, 2009, the twelve months ended September 26, 2009 and the twelve months ended September 27, 2008

     103   

Consolidated Statements of Stockholders’ Equity for the twelve months ended December 26, 2010, the three months ended December 27, 2009, the twelve months ended September 26, 2009 and the twelve months ended September 27, 2008

     104   

Consolidated Statements of Cash Flows for the twelve months ended December 26, 2010, the three months ended December 27, 2009, the twelve months ended September 26, 2009 and the twelve months ended September 27, 2008

     106   

Notes to Consolidated Financial Statements

     107   

Schedule II—Valuation and Qualifying Accounts for the twelve months ended December 26, 2010, the three months ended December 27, 2009, the twelve months ended September 26, 2009 and the twelve months ended September 27, 2008

     163   

 

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PART I

Item 1.    Business

Company Overview

Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “PPC,” “the Company,” “we,” “us,” “our,” or similar terms) is the second-largest chicken producer in the world with operations in the United States (“US”), Mexico and Puerto Rico. We are primarily engaged in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products to retailers, distributors and foodservice operators. We employ approximately 42,300 people and have the capacity to process more than 38 million birds per week for a total of more than 10.3 billion pounds of live chicken annually. In 2010, we generated $6.9 billion in total revenue, and produced 7.7 billion pounds of chicken products.

In December 2009, we adopted Amended and Restated Corporate Bylaws (the “Restated Bylaws”), which changed our fiscal year end from the Saturday nearest September 30 of each year to the last Sunday in December of each year. This change aligns our reporting cycle with the fiscal calendar of our majority stockholder, JBS USA Holdings, Inc. (“JBS USA”). The change was effective for our 2010 fiscal year, which began December 28, 2009 and ended December 26, 2010 and resulted in an approximate three-month transition period which began September 27, 2009 and ended December 27, 2009 (the “Transition Period”). We now operate on the basis of a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. The reader should assume any reference we make to a particular year (for example, 2010) in this report applies to our fiscal year and not the calendar year.

In January 2007, we completed the acquisition of Gold Kist Inc. (“Gold Kist”), which we refer to as the Gold Kist acquisition. Gold Kist operated a fully-integrated chicken production business that included live production, processing, marketing and distribution. This acquisition positioned us as one of the largest chicken companies in the US, and that position provided us with opportunities to expand our geographic reach and customer base and further pursue value-added and prepared chicken opportunities.

We have a broad geographic reach and we offer our diverse customer base a balanced portfolio of fresh and prepared chicken products. We have consistently provided our customers with high quality products and service with a focus on delivering higher-value, higher-margin, prepared food products. As such we have become a valuable partner to our customers and a recognized industry leader. Our sales efforts are largely targeted towards the foodservice industry, principally chain restaurants and food processors such as Yum! Brands®, Burger King®, Wendy’s®, Chick-fil-A® and retail customers including grocery store chains and wholesale clubs such as Kroger®, Wal-Mart®, Costco®, Publix® and Sam’s Club®. We also export products to customers in approximately 95 countries, including Mexico, Russia and China.

 

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Mexico represented approximately 9.4% of our net sales in 2010. We are the second-largest producer and seller of chicken in Mexico and are one of the lower-cost producers of chicken in the country. While the market for chicken products in Mexico is less developed than in the US, with sales attributed to fewer, more basic products, we have been successful in differentiating our products through high-quality client service and product improvements such as dry-air chilled, eviscerated products. Additionally, we are an important player in the live market, which accounts for 30% of the chicken sales in Mexico. We believe that Mexican supermarket chains consider us one of the leaders in innovation for fresh products. Our strategy is to capitalize on this trend through our vast US experience in products, quality and our well-known service.

Our primary product types are fresh chicken products, prepared chicken products and export chicken products. We sell our fresh chicken products to the foodservice and retail markets. Our fresh chicken products consist of refrigerated (non-frozen) whole or cut-up chicken, either pre-marinated or non-marinated and prepackaged case-ready chicken. Our case-ready chicken includes various combinations of freshly refrigerated, whole chickens and chicken parts in trays, bags or other consumer packs labeled and priced ready for the retail grocer’s fresh meat counter. Our fresh chicken sales in 2010 accounted for 49.9% of our total US chicken sales.

We also sell prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties and bone-in chicken parts. These products are sold either refrigerated or frozen and may be fully cooked, partially cooked or raw. In addition, these products are breaded or non-breaded and either pre-marinated or non-marinated. Our prepared chicken products sales in 2010 accounted for 39.9% of our total US chicken sales.

Export and other chicken products primarily consist of whole chickens and chicken parts sold mostly in bulk, non-branded form either refrigerated to distributors in the US or frozen for distribution to export markets. In the US, prices of these products are negotiated daily or weekly and are generally related to market prices quoted by the US Department of Agriculture (“USDA”) or other public price reporting services. We sell US-produced chicken products for export to Eastern Europe (including Russia), the Far East (including China), Mexico and other world markets.

Our primary end markets consist of the foodservice and retail channels, as well as selected export markets. The foodservice market principally consists of chain restaurants, food processors, broad-line distributors and certain other institutions located throughout the continental US. We supply chicken products ranging from portion-controlled refrigerated chicken parts to fully-cooked and frozen, breaded or non-breaded chicken parts or formed products.

Our categories within foodservice include frozen, fresh and corporate accounts. Fresh and frozen chicken products are usually pre-cut to customer specifications and are often marinated to enhance value and product differentiation. Corporate accounts include further-

 

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processed and value-added products supplied to select foodservice customers improving their ability to manage product consistency and quality in a cost efficient manner. We believe we are positioned to be the primary or secondary supplier to national and international chain restaurants who require multiple suppliers of chicken products. Additionally, we believe we are well suited to be the sole supplier for many regional chain restaurants. Regional chain restaurants often offer better margin opportunities and a growing base of business. We believe we have operational strengths in terms of full-line product capabilities, high-volume production capacities, research and development expertise and extensive distribution and marketing experience relative to smaller and non-vertically integrated producers. Foodservice growth is anticipated to continue, despite the effects resulting from the ongoing economic slowdown in the US. Due to internal growth and the impact of the Gold Kist acquisition, our sales to the foodservice market from 2006 through 2010 grew at a compounded annual growth rate of 5.1% and represented 64.3% of our total US chicken sales in 2010.

The retail market consists primarily of grocery store chains, wholesale clubs and other retail distributors. We concentrate our efforts in this market on sales of branded, prepackaged cut-up and whole chicken and chicken parts to grocery store chains and retail distributors. For many years, we have invested in both trade and retail marketing designed to establish high levels of brand name awareness and consumer preferences. We utilize numerous marketing techniques, including advertising, to develop and strengthen trade and consumer awareness and increase brand loyalty for consumer products marketed under the Pilgrim’s Pride® and Pilgrim’s™ brands. We believe our efforts to achieve and maintain brand awareness and loyalty help to provide more secure distribution for our products. We also believe our efforts at brand awareness generate greater price premiums than would otherwise be the case in certain markets. Additionally, we maintain an active program to identify consumer preferences. The program primarily consists of discovering and validating new product ideas, packaging designs and methods through sophisticated qualitative and quantitative consumer research techniques in key geographic markets. Due to internal growth and the impact of the Gold Kist acquisition, our sales to the retail market from 2006 through 2010 grew at a compounded annual growth rate of 14.8% and represented 25.5% of our total US chicken sales in 2010.

Our third end market is our export business. Export and other chicken products primarily consist of whole chickens and chicken parts sold mostly in bulk, non-branded form either refrigerated to distributors in the US or frozen for distribution to export markets. We believe that US chicken exports will continue to grow as worldwide demand increases for high-grade, low-cost meat protein sources. We also believe that worldwide demand for higher-margin prepared foods products will increase over the next several years.

Historically, we have targeted international markets to generate additional demand for our dark chicken meat, which is a natural by-product of our US operations given our concentration on prepared chicken products and the US customers’ general preference for white chicken meat. We have also begun selling prepared chicken products for export to the international divisions of our US chain restaurant customers. Utilizing the extensive sales network of JBS USA, we believe that we can accelerate the sales of value-added chicken

 

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products into international channels. We believe that the history of our successful export sales and our relationship with JBS USA position us favorably to capitalize on international growth.

As a vertically integrated company, we control every phase of the production of our products. We currently operate in 14 US states, Puerto Rico and Mexico. Our plants are strategically located to supply our distribution network and ensure that customers timely receive the freshest products. We operate nine fresh foodservice processing plants, eight case-ready processing plants, nine prepared fresh foods plants, 12 prepared foods cook plants, three processing plants in Mexico and 14 distribution centers (five in the US, one in Puerto Rico, and eight in Mexico). Additionally, we reopened an idled processing plant in Douglas, Georgia, which we plan to have at full capacity by fall 2011. This plant will contribute additional capacity as we anticipate higher market demand due to continued increase in chicken consumption and a broader economic recovery. Seven additional processing plants and two prepared foods plants are currently idle. Combined with our network of approximately 4,100 growers, 32 feed mills and 40 hatcheries, we are well positioned to keep up with the growing demand for our products. We believe that vertical integration helps us better manage food safety and quality, as well as more effectively control margins and improve customer service.

Since December 2008, we have engaged in restructuring our business through significant operational changes to reduce costs and operate more efficiently. As a result of this restructuring, we have realigned our operations to flatten the organization, expedite decision-making and reduce costs. We have initiated programs to promote lean manufacturing within the organization and processes to create a fully integrated supply chain structure. The operational changes were directed in two phases and generated approximately $190 million in total savings. Phase I focused on preserving cash and mitigating losses through tactical moves including shift reductions, associated headcount reductions and other lean manufacturing initiatives. Phase II reduced our production footprint and served to mitigate capacity utilization and efficiency issues created by previously enacted production cuts. Additionally, we are further benefitting from cost savings through our integration with JBS USA, with estimated annual synergy savings to date of approximately $170.0 million across transportation, purchasing, logistics, insurance and legal.

Since 2008, we have recognized costs related to these restructuring and integration efforts totaling $231.5 million.

Emergence from Bankruptcy

On December 1, 2008, we and six of our subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division, seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code. We emerged from our Chapter 11 bankruptcy proceedings on December 28, 2009. In connection with our emergence from bankruptcy, our common stock outstanding immediately prior to the emergence was cancelled and converted into the right to receive

 

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newly-issued shares of common stock of the reorganized Company based on a one-for-one exchange ratio, which constitutes 36.0% of the total number of shares of our newly-issued common stock. The remaining shares of our newly-issued common stock, constituting 64.0% of our total issued and outstanding common stock on the date of our emergence from bankruptcy, were purchased by JBS USA, a wholly-owned indirect subsidiary of JBS S.A., a Brazil-based meat producer, for $800.0 million in cash. Subsequently, JBS USA increased its stake in our Company to 67.3%. Upon exiting from bankruptcy, we and certain of our subsidiaries entered into an exit credit facility that provides for an aggregate commitment of $1.75 billion (the “Exit Credit Facility”). The facility consisted of a three-year $600.0 million revolving credit facility, a three-year $375.0 million Term A facility and a five-year $775.0 million Term B facility. As of December 26, 2010, a principal amount of $205.3 million under the revolving loan commitment and a principal amount of $632.5 million under the Term B facility were outstanding.

The Industry

Industry Overview

The US consumes more chicken than any other protein (approximately 30 billion pounds projected in calendar year 2010) and chicken is the second most consumed protein globally after pork. The US is the world’s largest producer of chicken and was projected to produce approximately 36 billion pounds of ready-to-cook broiler meat in calendar year 2010, representing 22.0% of the total world production. China and Brazil produce the second and third most broiler meat, with 16.9% and 15.3% of the world market, respectively.

The US is the second-largest exporter of broiler meat behind Brazil. The US was projected to export 6.5 billion pounds in calendar year 2010 which would account for 34.0% of the total world exports and 18.0% of the total US production. The top five exporters control over 90% of the market. The broiler export marketplace has grown at a rapid pace since the early 1990s. The growth has been driven by various geopolitical events such as the collapse of the former Soviet Union as well as changing consumer preferences. Key importers of broilers include Russia, China, the EU, Mexico and Saudi Arabia. Other export markets such as Hong Kong, Vietnam, the Middle East and Africa are projected to increase their imports of US chicken.

The US market is concentrated with four major chicken producers accounting for over 50% of production. The US chicken industry is largely vertically integrated with major producers owning and operating feed mills, processing plants and further processing plants while contracting out breeding and broiler production to thousands of contractually bound chicken farmers. More than 90% of all chickens raised for consumption are produced by farmers under a contract with processing companies. Processing companies provide the growers with chickens, feed, vaccines and medicines required for the production of broilers. The grower supplies all systems and labor required to bring the broilers up to slaughter weight. The grower is then paid based on the weight gain exhibited by the flock.

 

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According to the USDA, chicken production in the US has increased at a compounded annual growth rate of 3.5% over the past 20 years. Similarly, per capita consumption of chicken has increased at a compounded annual growth rate of 1.6%. During this same period of time, per capita beef consumption has declined at a compounded annual growth rate of 0.7% while pork has declined at a compounded annual growth rate of 0.3%. The growth in chicken demand is attributable to (i) relative affordability compared to other proteins such as beef and pork, (ii) the increasingly health conscious nature of US consumers, (iii) chicken’s consistent quality and versatility and (iv) its introduction on many foodservice menus. In addition, global protein demand has remained strong, and we believe protein demand will continue to expand consistent with rising standards of living and a growing middle class in developing countries around the world.

We benefit from a shorter production lifecycle of chickens compared to other proteins. While production for beef takes approximately 28 to 30 months from breeding to slaughter and the hog production required for pork takes 11 to 12 months, the production lifecycle for the broiler is only ten weeks. There are three key components of broilers that are sold for consumption: the breast, the wing and the leg quarters. An estimated 80% of broiler production in the US is sold in separate parts, rather than as a whole bird. This is due primarily to an increase in demand associated with the white meat of the breast, as well as demand for boneless breasts and wings.

The chicken industry has two major customer categories—foodservice and retail. While the overall chicken market has grown consistently, the majority of this growth in recent years has been in the foodservice market. According to estimates from the National Chicken Council, from calendar year 1999 through calendar year 2010, the value of wholesale shipments of chicken products to the foodservice market were estimated to grow at a compounded annual growth rate of approximately 5.5%, compared to 5.1% growth for the chicken industry overall.

Key Industry Dynamics

Pricing. Like other commodities, changes to either the supply or demand components of the market can largely impact the profitability of key players in the industry. Specifically, given the low margins associated with the broiler industry, a change in pricing of commodity chicken products has a significant impact on the income generated by the producer. Items that impact chicken pricing in the US include international demand, changes in production by other broiler exporting countries, input costs, and the demand associated with substitute products such as beef and pork. While broiler producers attempt to match supply and demand, a minor change in downstream demand can impact whether the planned supply meets the market need.

Feed. Broilers are fed corn and soybean meal as well as certain vitamins and minerals. Corn and soybean meal account for approximately 65% and 24% of the feed, respectively. Broiler production is significantly more efficient from a feed perspective than cattle or hogs.

 

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Approximately 1.9 pounds of feed are required for each pound of chicken, as compared to approximately 8.3 and 3.5 pounds for cattle and hogs, respectively.

In the past, cost of feed had been largely steady, with occasional spikes resulting from externalities. These externalities often took the form of poor weather conditions, such as droughts or excessive rains leading to poor crop yields. More recently, however, feed prices have risen significantly due in part to the increased use of corn for ethanol production in the US.

Relationship with JBS USA

JBS USA currently owns 67.3% of our total issued and outstanding common stock. As a majority owned subsidiary of JBS USA, we work closely with JBS USA management to identify areas where both companies can seek synergies and benefit together. As part of our broader reorganization plan, we moved our headquarters to Greeley, Colorado, the headquarters of JBS USA.

Over the past two years, we have closed, idled or sold ten plants and eight distribution centers, reduced or consolidated production at other facilities, streamlined our workforce and reduced administrative and corporate expenses, including closing our corporate headquarters and satellite headquarters as part of our relationship with JBS USA. We reopened the idled processing plant in Douglas, Georgia, which we plan to have at full capacity by fall 2011. We are further benefitting from cost savings through our integration with JBS USA, with estimated annual synergy savings to date of approximately $170.0 million across transportation, purchasing, logistics, insurance and legal.

Since 2008, we have recognized costs related to these restructuring and integration efforts totaling $231.5 million.

While the US is our largest market, we have a growing focus on international markets as we diversify our geographic presence and expand our revenue base. Our key international markets include Eastern Europe (including Russia), the Far East (including China) and Mexico. We are leveraging JBS USA’s existing international network and distribution capabilities to tap new markets such as Africa and the Middle East.

Working with JBS USA, we have integrated sophisticated risk management techniques into our operations through the adoption of an Enterprise Risk Management (“ERM”) approach. In implementing ERM, we have taken steps to avoid, reduce and insure the different risks inherent in our business from a holistic viewpoint. We focus not only on operational risk, but financial and strategic risk as well. These areas of focus include input costs (commodity pricing, live and processed product cost and spoilage), revenue risk (sales price and mix), financial risk (adequate controls, timely and effective reporting systems and other management and governance systems) as well as competitive risks and market trends. We aim to identify, categorize and respond to these risks in a systematic manner to manage as much of their impact on our business as possible.

 

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Recent Developments

On December 16, 2010, Don Jackson informed the Board of Directors of the Company (the “Board”) of his resignation as Chief Executive Officer and President of the Company effective on January 2, 2011 so that he could assume the position of Chief Executive Officer and President of JBS USA. Dr. Jackson will continue as a member of the Board. Under Dr. Jackson’s employment agreement, he was not entitled to any severance payment in connection with his resignation and must repay a portion of the signing bonus he received upon commencing employment with the Company.

Also on December 16, 2010, the Board approved the retention of William W. Lovette as Chief Executive Officer and President of the Company, effective January 3, 2011. Prior to his appointment as Chief Executive Officer and President of the Company, Mr. Lovette served as President and Chief Operating Officer for Case Foods, Inc. from October 2008 through December 2010. Before joining Case Foods, Inc., Mr. Lovette spent twenty-five years with Tyson Foods in various roles in senior management, including President of its International Business Unit, President of its Foodservice Business Unit and Senior Group Vice President of Poultry and Prepared Foods.

On January 14, 2011, the Company and Mr. Lovette entered into an Employment Agreement and a Restricted Share Agreement. The Employment Agreement provides that Mr. Lovette’s employment commenced on January 3, 2011 and will continue for 3 years, unless terminated earlier in accordance with the provisions described below (the “Term of Employment”). Mr. Lovette received a cash sign-on bonus of $250,000 and has an annual base salary of $1 million under the Employment Agreement. Mr. Lovette will be obligated to repay the sign-on bonus to the Company if his employment with the Company ends for any reason prior to December 31, 2011 or he has not established a residence in the vicinity of the Company’s headquarters in Colorado by such date. In addition, for each full year during the Term of Employment, Mr. Lovette will be eligible to earn an annual cash bonus under the Company’s Short-Term Incentive Plan, with the amount of such bonus for 2011 guaranteed to be at least $500,000. Under the Employment Agreement, the Company will arrange to purchase Mr. Lovette’s prior residence in Arkansas for up to approximately $2.13 million. Furthermore, the Company will use reasonable efforts to cause Mr. Lovette to be elected or appointed as a member of Board by no later than the Company’s 2011 annual meeting of stockholders.

Under the Employment Agreement and the Restricted Share Agreement, the Company awarded Mr. Lovette 200,000 restricted shares of Company common stock, with half of such shares vesting on January 3, 2013 and the remainder vesting January 3, 2014, subject to Mr. Lovette’s continued employment with the Company through such dates.

 

 

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Competitive Strengths

We believe that our competitive strengths will enable us to maintain and grow our position as a leading chicken company and to capitalize on future favorable growth opportunities:

Leading market position in the growing chicken industry. We are the second-largest chicken producer in the US with a 16.9% market share, only slightly behind the largest competitor, Tyson Foods, who maintains a 21.6% market share, based on ready-to-cook production. We believe we can maintain this leading market position as we are one of the few producers in the chicken industry that can fully supply larger retailers and foodservice companies due to our broad product offering and technical capabilities. We are a viable supplier for large integrated customers due to our ability to ensure supply, demonstrate innovation and new product development and provide competitive pricing. Our vertical integration gives us control over our supply of chicken and chicken parts. Further, our processing facilities offer a wide range of capabilities and are particularly suited to the high-volume production as well as low-volume custom production runs necessary to meet both the capacity and quality requirements of our customer base. Finally, we have established a reputation for dependable quality, highly responsive service and excellent technical support.

Experienced management team. We have a proven senior management team whose tenure in the chicken industry has spanned numerous market cycles and is among the most experienced in the industry. Our senior management team is led by William W. Lovette, our CEO, who has 28 years of experience in the chicken industry. Our management team has successfully improved and realigned our business since emerging from bankruptcy and instilled a corporate culture focused on performance and accountability. Our senior operating executives have backgrounds with leading agribusiness companies, including Tyson Foods, Inc., ConAgra Foods, Inc., Bunge Limited and IBP, Inc., among others. We believe that this combination of backgrounds and experience will continue to provide the foundation for a focused business strategy and will enable us to maintain and strengthen long-term relationships with customers and help us grow our business in the future. We also benefit from management ideas, best practices, and talent shared with the seasoned management team at our majority stockholder, JBS USA, and its parent company, JBS S.A., who have over 50 years of combined experience operating protein processing facilities in South America, the United States and Australia.

Leaner, more focused enterprise since emergence from bankruptcy. Following our restructuring efforts, we are a more efficient and lean organization supported by a market-driven business strategy. Since 2008, we have closed, idled or sold ten plants and eight distribution centers, reduced or consolidated production at other facilities, streamlined our workforce and reduced administrative and corporate expenses including closing our corporate headquarters and satellite headquarters as part of our becoming a majority owned subsidiary of JBS USA. These restructuring efforts have led to streamlined operations which have allowed us to realize approximately $190 million of estimated annualized cost reductions. We

 

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are also benefitting from cost savings through the integration with JBS USA, with estimated annual savings to date of approximately $170 million across transportation, purchasing, logistics, insurance and legal. Further, we are a financially stronger company with a more conservative balance sheet. The reorganization has allowed us to reduce our debt from $2.1 billion prior to entering bankruptcy to $1.3 billion currently.

Since 2008, we have recognized costs related to these restructuring and integration efforts totaling $231.5 million.

Blue chip and diverse customer base. We benefit from strong relationships with leading foodservice and retail companies, including Sysco®, US Foodservice, Gordon Foodservice, Yum! Brands®, Wendy’s®, Chick-fil-A®, Kroger®, Wal-Mart®, Costco®, Publix®, Sam’s Club®, ConAgra Foods®, and Nestle®, many of whom have been doing business with us for more than five years. We sell our products to a large and diverse customer base, with over 5,000 customers and no concentrations above 6.5% of sales except for our largest customer, Wal-Mart Stores, Inc., which accounted for 11.3% of net sales in 2010. In 2010, we regained approximately 100 million pounds of further-processed volume from various customers that was lost prior to our emergence from bankruptcy.

Relationship with JBS USA. In addition to cost savings through the integration of certain corporate functions and the rationalization of facilities, our relationship with JBS USA allows us to enjoy several advantages given its diversified international operations and strong record in commodity risk management. We are leveraging JBS USA’s international network and seek to expand into untapped international markets and strengthen our presence in geographies in which we already operate. In addition, JBS USA’s expertise in managing the risk associated with volatile commodity inputs will help us to further improve our operations and manage our margins.

Business Strategy

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

Leverage our leading industry position using our scale and brand recognition. We are the second-largest producer of chicken products in the US. We have developed and acquired complementary markets, distributor relationships and geographic locations, establishing relationships with broad-line national distributors and retailers which have enabled us to expand our customer base and provide nationwide distribution capabilities for all of our product lines. As a result, we believe we are one of only two US chicken producers that can supply the growing demand for a broad range of price competitive standard and specialized products with well-known brand names on a nationwide basis from a single-source supplier.

Be a market-driven chicken company. We have taken decisive action over the last two years and fundamentally restructured our Company to be a market-driven company clearly focused on delivering the best service, selection and value to our customers as efficiently as possible. We created a comprehensive business plan focused on our core retail and

 

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foodservice customers, with their demand driving our supply and production planning. We have improved our sales mix, pricing and cost controls to optimize our product margin and continue to focus on improving yields, labor and plant-related costs to drive better operating efficiencies. We are minimizing commodity production and recapturing and growing volume in further-processed, higher-margin products.

Capitalize on attractive US prepared foods market. We focus our US growth initiatives on sales of prepared foods to the foodservice and value-added retail markets because they continue to be two of the fastest growing and most profitable segments in the chicken industry. We believe there has been significant growth in the number of foodservice operators offering chicken on their menus and in the number of chicken products offered. Foodservice operators are increasingly purchasing prepared chicken products, which allow them to reduce labor costs while providing greater product consistency, quality and variety across all restaurant locations. Products sold to these market segments require further processing, which enables us to charge a premium for our products, reducing the impact of feed ingredient costs on our profitability and improving and stabilizing our profit margins. Feed ingredient costs typically decrease from approximately 31-49% of total production cost for fresh chicken products to approximately 16-24% for prepared chicken products. Our sales of prepared chicken products grew from $1,940.1 million in 2006 to $2,336.9 million through 2010, a compounded annual growth rate of 4.5%. Prepared foods sales, including export sales, represented 41.2% of our total US chicken revenues in 2010, which we believe provides us with a significant competitive advantage and reduces our exposure to feed price fluctuations.

Our well-known brands, including Pierce Chicken® and Wing-Dings®, allow us to have a sizeable range of prepared foods chicken offerings. Similarly, our broad array of highly customized cooked chicken products, including breaded cutlets, sizzle strips and marinated wings, for restaurants and specialty foodservice customers complement our lines of pre-cooked breast fillets, tenderloins, burgers, nuggets, salads and other prepared products for institutional foodservice, fast-food and retail customers.

Enhance US fresh chicken profitability through value-added, branded products. Our fresh chicken sales, including export sales, accounted for $3,325.9 million, or 58.5%, of our US chicken sales in 2010. In addition to maintaining the sales of traditional fresh chicken products, our strategy is to shift the mix of our US fresh chicken products by continuing to increase sales of products with higher-margin and rising demand, such as fixed-weight packaged products and marinated chicken and chicken parts and to continually shift portions of this product mix into the higher value and margin prepared chicken products. Much of our fresh chicken products are sold under the recently re-launched Pilgrim’sTM brand name, which is a well-known brand in the chicken industry.

 

 

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

 

   

Benchmarking live and plant costs against the industry; and

 

   

Conducting monthly performance reviews with senior management.

We also continue to initiate fundamental process improvements to streamline our operations. Examples include:

 

   

Replacing automated deboning equipment with hand deboning (“cone lines”) to improve yield;

 

   

Reducing outside cold-storage warehouses from 51 to 17; and

 

   

Upgrading capacity of ovens and spiral freezers to increase throughput.

In addition, we have a proven history of increasing capacity while improving operating efficiencies at acquired properties in both the US and Mexico.

We plan to increase production by a total of 10%, or 3.9 million birds per week, over the next two years. We reopened the idled processing plant in Douglas, Georgia, in January 2011, which we plan to have at full capacity by fall 2011. If market conditions are favorable, we plan to further expand production capacity at existing facilities and possibly reopen a second idled facility.

Capitalize on export opportunities. We will continue to focus on international opportunities to complement our US chicken operations and capitalize on attractive export markets. According to the USDA, the export of US chicken products increased at a compounded annual growth rate of 4% from 1999 through 2009. We believe US chicken exports will continue to grow as worldwide demand increases for high-grade, low-cost meat protein sources. Historically, we targeted international markets to generate additional demand for our dark chicken meat, which is a natural by-product of our US operations given our concentration on prepared foods products and the US customers’ general preference for white chicken meat. As part of this initiative, we created a significant international distribution network into several markets, including Mexico, which we now utilize not only for dark chicken meat distribution, but also for various higher-margin prepared foods and other poultry products. We employ both a direct international sales force and export brokers. Our key international markets include Eastern Europe (including Russia), the Far East (including China) and Mexico. We plan to further diversify our international markets, and the relationship with our majority owner, JBS USA, has improved our access to markets such as Africa, the Middle East and Asia. We believe substantial opportunities exist to expand our

 

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sales to these markets by capitalizing on direct international distribution channels supplemented by our existing export broker relationships. Our export sales accounted for approximately 9.9% of our US chicken sales in 2010.

Reportable Business Segment

We operate in one reportable business segment, as a producer and seller of chicken products we either produce or purchase for resale in the US, Puerto Rico and Mexico. We conduct separate operations in the US, Puerto Rico and Mexico; however, for geographic reporting purposes, we include Puerto Rico with our US operations.

In January 2010, we announced organizational changes that resulted in the merger of our former Other Products segment into our Chicken segment. Data related to our former Other Products segment, which included primarily non-chicken products sold through our distribution centers, table eggs, animal feed and offal, is no longer reported directly to the chief operating decision maker. This information is now reported through chicken operations management. We reclassified prior year segment disclosures to conform to the new segment presentation.

Narrative Description of Business

Products and Markets

Our chicken products consist primarily of:

 

  (1)

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

 

  (2)

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

 

  (3)

Export and other chicken products, which are primarily parts and whole chicken, either refrigerated or frozen for US export or domestic use, and prepared chicken products for US export.

 

 

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Our chicken products are sold primarily to:

 

  (1)

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

 

  (2)

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

 

  (3)

Export and other chicken product customers, who purchase chicken products for export to Eastern Europe (including Russia), the Far East (including China), Mexico and other world markets. Our export and other chicken products, with the exception of our exported prepared chicken products, consist of whole chickens and chicken parts sold primarily in bulk, non-branded form, either refrigerated to distributors in the US or frozen for distribution to export markets.

Our other products consist of:

 

  (1)

Other types of meat protein along with various other staples purchased and sold by our distribution centers as a convenience to our chicken customers who purchase through the distribution centers.

 

  (2)

The production and sale of table eggs, commercial feeds and related items, live hogs and protein conversion products.

 

 

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The following table sets forth, for the periods beginning with 2006, net sales attributable to each of our primary product lines and markets served with those products. We based the table on our internal sales reports and their classification of product types and customers.

 

     2010      Transition
Period
     2009      2008      2007(a)      2006  
     (52 weeks)      (13 Weeks)      (52 weeks)      (52 weeks)      (52 weeks)      (52 weeks)  

US chicken:

     (In thousands)   

Prepared chicken:

                 

Foodservice

     $ 1,822,036           $ 420,944           $ 1,828,038           $ 2,033,489           $ 1,897,643           $ 1,567,297     

Retail

       440,071             114,866             466,538             518,576             511,470             308,486     
                                                     

Total prepared chicken

       2,262,107             535,810             2,294,576             2,552,065             2,409,113             1,875,783     

Fresh chicken:

                 

Foodservice

       1,828,960             437,782             2,128,112             2,550,339             2,280,057             1,388,451     

Retail

       1,006,012             225,636             984,950             1,041,446             975,659             496,560     
                                                     

Total fresh chicken

       2,834,972             663,418             3,113,062             3,591,785             3,255,716             1,885,011     

Export and other:

                 

Export:

                 

Prepared chicken

       74,755             21,353             85,135             94,795             83,317             64,338     

Fresh chicken

       490,972             110,197             553,407             818,239             559,429             257,823     
                                                     

Total export(b)

       565,727             131,550             638,542             913,034             642,746             322,161     

Other chicken by-products

       15,576             3,426             17,734             20,163             20,779             15,448     
                                                     

Total export and other

       581,303             134,976             656,276             933,197             663,525             337,609     
                                                     

Total US chicken

       5,678,382             1,334,204             6,063,914             7,077,047             6,328,354             4,098,403     

Mexico chicken

       615,433             127,557             487,785             543,583             488,466             418,745     
                                                     

Total chicken

       6,293,815             1,461,761             6,551,699             7,620,630             6,816,820             4,517,148     

Other products:

                 

US

       558,675             132,500             505,738             863,495             661,115             618,575     

Mexico

       29,139             8,473             30,618             34,632             20,677             17,006     
                                                     

Total other products

       587,814             140,973             536,356             898,127             681,792             635,581     
                                                     

Total net sales

     $ 6,881,629           $ 1,602,734           $ 7,088,055           $ 8,518,757           $ 7,498,612           $ 5,152,729     
                                                     

Total US prepared chicken

     $ 2,336,862           $ 557,163           $ 2,379,711           $ 2,646,860           $ 2,492,430           $ 1,940,121     

Total US fresh chicken

     $ 3,325,944           $ 773,615           $ 3,666,469           $ 4,410,024           $ 3,815,145           $ 2,142,834     

 

(a)

The Gold Kist acquisition on December 27, 2006 was accounted for as a purchase.

 

(b)

Export items include certain chicken parts that have greater value in the overseas markets than in the US.

 

 

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The following table sets forth, beginning with 2006, the percentage of net US chicken sales attributable to each of our primary product lines and the markets serviced with those products. We based the table and related discussion on our internal sales reports and their classification of product types and customers.

 

     2010             Transition
Period
            2009             2008             2007(a)             2006         

Prepared chicken:

                                   

Foodservice

     32.1         %         31.6         %         30.1         %         28.8         %         30.1         %         38.2         %   

Retail

     7.8         %         8.6         %         7.8         %         7.3         %         8.1         %         7.5         %   
                                                                       

Total prepared chicken

     39.9         %         40.2         %         37.9         %         36.1         %         38.2         %         45.7         %   

Fresh chicken:

                                   

Foodservice

     32.2         %         32.8         %         35.1         %         36         %         36         %         33.9         %   

Retail

     17.7         %         16.9         %         16.2         %         14.7         %         15.4         %         12.1         %   
                                                                       

Total fresh chicken

     49.9         %         49.7         %         51.3         %         50.7         %         51.4         %         46         %   

Export and other:

                                   

Export:

                                   

Prepared chicken

     1.3         %         1.6         %         1.4         %         1.3         %         1.3         %         1.6         %   

Fresh chicken

     8.6         %         8.3         %         9.1         %         11.6         %         8.8         %         6.3         %   
                                                                       

Total export(b)

     9.9         %         9.9         %         10.5         %         12.9         %         10.1         %         7.9         %   

Other chicken by-products

     0.3         %         0.2         %         0.3         %         0.3         %         0.3         %         0.4         %   
                                                                       

Total export and other

     10.2         %         10.1         %         10.8         %         13.2         %         10.4         %         8.3         %   
                                                                       

Total US chicken

     100         %         100         %         100         %         100         %         100         %         100         %   
                                                                       

Total US prepared chicken as a percent of US chicken

     41.2         %         41.8         %         39.3         %         37.4         %         39.5         %         47.3         %   

Total US fresh chicken as a percent of US chicken

     58.5         %         58.0         %         60.4         %         62.3         %         60.2         %         52.3         %   

 

(a)

The Gold Kist acquisition on December 27, 2006 was accounted for as a purchase.

 

(b)

Export items include certain chicken parts that have greater value in the overseas markets than in the US.

United States

Product Types

Fresh Chicken Overview. Fresh chicken is an important component of our sales and accounted for $2,835.0 million, or 49.9%, of our total US chicken sales in 2010 and $1,885.0 million, or 46% in 2006. In addition to maintaining sales of mature, traditional fresh chicken products, our strategy has been to shift the mix of our US fresh chicken products by continuing to increase sales of faster-growing products, such as marinated whole chicken and chicken parts, and to continually shift portions of this product mix into the higher-value prepared chicken category.

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

 

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Prepared Chicken Overview. In 2010, $2,262.1 million, or 39.9%, of our US chicken sales were in prepared chicken products to foodservice customers and retail distributors, as compared to $1,875.8 million, or 45.7%, in 2006. These numbers reflect the impact of our historical strategic focus for growth in the prepared chicken markets and our acquisition of Gold Kist, which had a greater focus on fresh chicken sales. The market for prepared chicken products has experienced, and we believe will continue to experience, greater growth and higher average sales prices than fresh chicken products. Also, the production and sale in the US of prepared chicken products reduce the impact of the costs of feed ingredients on our profitability. Feed ingredient costs are the single largest component of our US cost of sales, representing approximately 36.8% of our US cost of sales in 2010. The production of feed ingredients is positively or negatively affected primarily by the global level of supply inventories, demand for feed ingredients, the agricultural policies of the US and foreign governments and weather patterns throughout the world. As further processing is performed, feed ingredient costs become a decreasing percentage of a product’s total production cost, thereby reducing their impact on our profitability. Products sold in this form enable us to charge a premium, reduce the impact of feed ingredient costs on our profitability and improve and stabilize our profit margins.

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

Export and Other Chicken Products Overview. Our export and other products consist of whole chickens and chicken parts sold primarily in bulk, non-branded form, either refrigerated to distributors in the US or frozen for distribution to export markets, and branded and non-branded prepared chicken products for distribution to export markets. In 2010, approximately $581.3 million, or 10.2%, of our total US chicken sales were attributable to US chicken export and other products, as compared to $337.6 million, or 8.3%, in 2006. These exports and other products, other than the prepared chicken products, have historically been characterized by lower prices and greater price volatility than our more value-added product lines.

Markets for Chicken Products

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

We believe the Company is positioned to be the primary or secondary supplier to national and international chain restaurants who require multiple suppliers of chicken products.

 

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Additionally, we believe we are well suited to be the sole supplier for many regional chain restaurants. Regional chain restaurants often offer better margin opportunities and a growing base of business.

We believe we have operational strengths in terms of full-line product capabilities, high-volume production capacities, research and development expertise and extensive distribution and marketing experience relative to smaller and non-vertically integrated producers. Foodservice growth, outside of any temporary effects resulting from the current recessionary impacts being experienced in the US, is anticipated to continue. Due to internal growth and the impact of the Gold Kist acquisition, our sales to the foodservice market from 2006 through 2010 grew at a compounded annual growth rate of 5.1% and represented 64.3% of the net sales of our US chicken operations in 2010.

Foodservice—Prepared Chicken. Our prepared chicken sales to the foodservice market were $1,822.0 million in 2010 compared to $1,567.3 million in 2006, a compounded annual growth rate of approximately 3.6%. In addition to the significant increase in sales created by the acquisition of Gold Kist, we attribute this growth in sales of prepared chicken to the foodservice market to a number of factors:

 

   

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

 

   

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

 

   

There is a strong need among larger foodservice companies for a limited-source supplier base in the prepared chicken market. A viable supplier must be able to ensure supply, demonstrate innovation and new product development and provide competitive pricing. We have been successful in our objective of becoming a supplier of choice by being the primary or secondary prepared chicken supplier to many large foodservice companies because:

 

  ¡  

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

 

  ¡  

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

 

  ¡  

We have established a reputation for dependable quality, highly responsive service and excellent technical support.

 

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As a result of the experience and reputation developed with larger customers, we have increasingly become the principal supplier to mid-sized foodservice organizations.

 

   

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

 

   

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

Foodservice—Fresh Chicken. We produce and market fresh, refrigerated chicken for sale to US quick-service restaurant chains, delicatessens and other customers. These chickens have the giblets removed, are usually of specific weight ranges and are usually pre-cut to customer specifications. They are often marinated to enhance value and product differentiation. By growing and processing to customers’ specifications, we are able to assist quick-service restaurant chains in controlling costs and maintaining quality and size consistency of chicken pieces sold to the consumer. Our fresh chicken products sales to the foodservice market were $1,829.0 million in 2010 compared to $1,388.5 million in 2006, a compounded annual growth rate of approximately 6.7%.

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

We utilize numerous marketing techniques, including advertising, to develop and strengthen trade and consumer awareness and increase brand loyalty for consumer products marketed under the Pilgrim’s Pride® and Pilgrim’s™ brands. We believe our efforts to achieve and maintain brand awareness and loyalty help to provide more secure distribution for our products. We also believe our efforts at brand awareness generate greater price premiums than would otherwise be the case in certain markets. We also maintain an active program to identify consumer preferences. The program primarily consists of discovering and validating new product ideas, packaging designs and methods through sophisticated qualitative and quantitative consumer research techniques in key geographic markets. After conducting a thorough evaluation that included a competitive review, consumer studies, Spherical® branding discipline analyses and new packaging development, we introduced a new brand, logo and package design to consumers in September 2010. At that time, we unveiled approximately 100 re-branded fresh chicken items in supermarkets and super centers across the US. We plan to continue our re-branding efforts in the first quarter of 2011 by unveiling over 40 re-branded frozen chicken items.

 

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Due to internal growth and the impact of the Gold Kist acquisition, our sales to the retail market from 2006 through 2010 grew at a compounded annual growth rate of 14.8% and represented 25.5% of the net sales of our US chicken operations in 2010.

Retail—Prepared Chicken. We sell retail-oriented prepared chicken products primarily to grocery store chains located throughout the US. Our prepared chicken products sales to the retail market were $440.1 million in 2010 compared to $308.5 million in 2006, a compounded annual growth rate of approximately 8.7%. We believe that our growth in this market segment will continue as retailers concentrate on satisfying consumer demand for more products that are quick, easy and convenient to prepare at home.

Retail—Fresh Chicken. Our prepackaged retail products include various combinations of freshly refrigerated, whole chickens and chicken parts in trays, bags or other consumer packs labeled and priced ready for the retail grocer’s fresh meat counter. Our retail fresh chicken products are sold in the central, southwestern, southeastern and western regions of the US. Our fresh chicken sales to the retail market were $1,006.0 million in 2010 compared to $496.6 million in 2006, a compounded annual growth rate of approximately 18.1% resulting primarily from our acquisition of Gold Kist in fiscal 2007. We believe the retail prepackaged fresh chicken business will continue to be a large and relatively stable market, providing opportunities for product differentiation and regional brand loyalty.

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

Historically, we have targeted international markets to generate additional demand for our dark chicken meat, which is a natural by-product of our US operations given our concentration on prepared chicken products and the US customers’ general preference for white chicken meat. We have also begun selling prepared chicken products for export to the international divisions of our US chain restaurant customers. We believe that US chicken exports will continue to grow as worldwide demand increases for high-grade, low-cost meat protein sources.

Markets for Other Products

We have regional distribution centers located in Arizona, Texas and Utah that are primarily focused on distributing our own chicken products; however, the distribution centers also distribute certain poultry and non-poultry products purchased from third parties to independent grocers and quick-service restaurants. Our non-chicken distribution business is conducted as an accommodation to our customers and to achieve greater economies of scale in

 

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distribution logistics. Chicken sales from our regional distribution centers are included in the chicken sales amounts contained in the above tables; however, all non-chicken sales amounts are contained in the Other Products sales in the above tables.

We market fresh eggs under private labels, in various sizes of cartons and flats to US retail grocery and institutional foodservice customers located primarily in Texas. We have a housing capacity for approximately 1.4 million commercial egg laying hens which can produce approximately 30 million dozen eggs annually and are currently operating at 100% of our housing capacity. US egg prices are determined weekly based upon reported market prices. The US egg industry has been consolidating over the last few years, with the 25 largest producers accounting for approximately 80% of the total number of egg laying hens in service during 2010. We compete with other US egg producers primarily on the basis of product quality, reliability, price and customer service.

Many of our US feed mills produce and sell some livestock feeds to local dairy farmers and livestock producers. We also have a small pork operation that we obtained through the Gold Kist acquisition that raises and sells live hogs to processors. Also included in this category are chicken by-products, which we convert into protein products and sell primarily to manufacturers of pet foods.

Mexico

Background

The Mexico market represented approximately 9.4% of our net sales in 2010. We are the second-largest producer and seller of chicken in Mexico. We believe that we are one of the lower-cost producers of chicken in Mexico.

Product Types

While the market for chicken products in Mexico is less developed than in the US, with sales attributed to fewer, more basic products, we have been successful in differentiating our products through high-quality client service and product improvements. Additionally, we are an important player in the live market, which accounts for 30% of the chicken sales in Mexico.

Markets

We sell our chicken products primarily to wholesalers, large restaurant chains, fast food accounts, supermarket chains and direct retail distribution in selected markets. Our largest presence is by far in the central states of the country where we have been able to gain market share. Our presence in Mexico reaches 74% of the population.

 

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Foreign Operations Risks

Our foreign operations pose special risks to our business and operations. A discussion of foreign operations risks is included in Item 1A. “Risk Factors.”

General

Competitive Conditions

The chicken industry is highly competitive and our largest US competitor has greater financial and marketing resources than we do. In addition, our liquidity constraints have had a negative effect on our competitive position, relative to our competitors that are less highly leveraged. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” In the US, Mexico and Puerto Rico, we compete principally with other vertically integrated poultry companies. We are one of the largest producers of chicken in the US, Mexico and Puerto Rico. The largest producer in the US is Tyson Foods, Inc. The largest producer in Mexico is Industrias Bachoco S.A.B. de C.V.

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

In Mexico, where product differentiation has traditionally been limited, we believe product quality and price have been the most critical competitive factors. As a result of the January 2008 elimination of a tariff with regard to the import of chicken leg quarters into Mexico, greater amounts of chicken have been imported into Mexico from the US. Industry exports of ready-to-cook chicken into Mexico have increased to 816 million pounds, or 12.0% of all US ready-to-cook chicken exports, in calendar year 2009 from 522 million pounds, or 10.0% of all US ready-to-cook chicken exports, in calendar year 2005. These trends, should they continue to increase, could negatively affect the profitability of Mexican chicken producers located in the northern states of Mexico. While we believe the impact on producers, such as us, located in the central states of Mexico should be much less pronounced, we can provide no assurances that the elimination of this tariff or future changes in trade protection measures will not materially and adversely affect our Mexico operations.

We are not a significant competitor in the distribution business as it relates to products other than chicken. We distribute these products solely as a convenience to our chicken customers. The broad-line distributors do not consider us to be a factor in those markets. The

 

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competition related to our other products such as table eggs, feed and protein are much more regionalized and no one competitor is dominant.

Restructuring Efforts

Since February 2008, we made a series of significant operational changes to reduce costs and operate more efficiently, as well as realize substantial benefits through synergies following the JBS USA acquisition. Before emerging from bankruptcy, we focused on preserving cash and mitigating losses through tactical moves, including shift reductions and associated headcount reductions along with other lean manufacturing initiatives. We also reduced our production footprint and served to mitigate capacity utilization and efficiency issues created by previously enacted across-the-board production cuts. These changes included:

 

   

Consolidating or eliminating second shifts at Live Oak, Florida, and Nacogdoches and Waco, Texas.

 

   

Expanding focus on lean manufacturing to reduce waste and gain additional value from existing processes.

 

   

Strengthening the management team by hiring senior-level industry veterans to oversee sales, marketing and business development. Jerry Wilson joined the Company in early March 2009 as executive vice president of sales and marketing. He was previously vice president of sales and marketing for Keystone Foods. Greg Tatum joined the Company in February 2009 as senior vice president of business development. He previously served as chief financial officer of Claxton Poultry and served in a business development role previously at Seaboard Corporation.

 

   

Closing processing facilities or complexes in Athens, Alabama; Athens, Georgia; Dalton, Georgia; Douglas, Georgia (we reopened this facility and plan to have it at full capacity by fall 2011); El Dorado, Arkansas; Franconia, Pennsylvania; Clinton, Arkansas; Bossier City, Louisiana, and Siler City, North Carolina.

 

   

Selling a closed processing complex in Farmerville, Louisiana.

 

   

Selling closed distribution centers in Cincinnati, Ohio; Plant City, Florida; El Paso, Texas, and Pompano Beach, Florida.

 

   

Closing distribution centers in Houston, Texas; Oskaloosa, Iowa; Jackson, Mississippi, and Nashville, Tennessee.

 

   

Closing sales and administrative offices in Dallas, Texas, and Duluth, Georgia.

 

   

Reducing or consolidating production at various other facilities throughout the US.

 

 

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These changes generated total savings of approximately $190.0 million per year.

As of December 26, 2010, the total exit or disposal activities undertaken by us have eliminated approximately 12,000 positions and resulted in net charges totaling $84.2 million.

Since exiting from bankruptcy, we have focused on integrating our operations into the existing operations of JBS USA. We have made a series of changes to further this integration, including streamlining administrative functions and sales networks, consolidating distribution networks, optimizing freight and storage costs, capturing shared purchasing opportunities, consolidating treasury and risk management systems and implementing best practices throughout the business. We have also continued to streamline our operations and sell assets as part of our restructuring. Since our emergence from bankruptcy, we have eliminated 458 corporate and administrative positions across the organization as a result of our integration with JBS USA. As of December 26, 2010, the remaining total planned reduction in workforce of non-production positions under our integration is approximately 20 positions. The total annual synergy savings to date from these integration efforts are estimated to be approximately $170.0 million across transportation, purchasing, logistics, insurance and legal.

Since 2008, we have recognized costs related to these restructuring and integration efforts totaling $231.5 million.

In addition, we are continuing to realize other business improvements and efficiency gains from ongoing actions and more favorable product mix since exiting from bankruptcy. These ongoing improvements include reductions in selling, general and administrative expenses through administrative headcount reductions; supply chain and margin improvements; savings from contract rejections; and additional improvements. We also continue to review and evaluate various restructuring and other alternatives to streamline our operations, improve efficiencies and reduce costs. Such initiatives may include selling assets, consolidating operations and functions, employee relocation and voluntary and involuntary employee separation programs. Any such actions may require us to obtain the pre-approval of our lenders under our Exit Credit Facility. In addition, such actions will subject the Company to additional short-term costs, which may include asset impairment charges, lease commitment costs, employee retention and severance costs and other costs. Certain of these activities may have a disproportionate impact on our income relative to the cost savings.

We plan to increase production by a total of 10%, or 3.9 million birds per week, over the next two years. We reopened the idled processing plant in Douglas, Georgia, which we plan to have at full capacity by fall 2011. If market conditions are favorable, we plan to further expand production capacity at existing facilities and possibly reopen a second idled facility.

Key Customers

Our two largest customers accounted for approximately 17.6% of our net sales in 2010, and our largest customer, Wal-Mart Stores Inc., accounted for 11.3% of our net sales in 2010.

 

 

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Regulation and Environmental Matters

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

Our operations are subject to extensive regulation by the EPA and other state and local authorities relating to handling and discharge of waste water, storm water, air emissions, treatment, storage and disposal of wastes, handling of hazardous substances and remediation of contaminated soil, surface water and groundwater. Our Mexican operations also are subject to extensive regulation by Mexican environmental authorities. The EPA and/or other US or Mexican state and local authorities may, from time to time, adopt revisions to environmental rules and regulations, and/or changes in the terms and conditions of our environmental permits, with which we must comply. Compliance with existing or new environmental requirements, including more stringent limitations imposed or expected in recently-renewed or soon-to be renewed environmental permits, will require capital expenditures and operating expenses which may be significant. In addition, a number of our facilities, that have been operating below capacity due to economic conditions or where upgrades have been delayed or deferred, will require capital expenditures before production can be restored to pre-bankruptcy levels in compliance with environmental requirements.

Some of our properties have been impacted by contamination from spills or other releases, and we have incurred costs to remediate such contamination. In addition, in the past we acquired businesses with operations such as pesticide and fertilizer production that involved greater use of hazardous materials and generation of more hazardous wastes than our current operations. While many of those operations have been sold or closed, some environmental laws impose strict and, in certain circumstances, joint and several liability for costs of investigation and remediation of contaminated sites on current and former owners and operators of the sites, and on persons who arranged for disposal of wastes at such sites. In addition, current owners or operators of such contaminated sites may seek to recover cleanup costs from us based on past operations or contractual indemnifications. See “Item 1A. Risk Factors” for risks associated with compliance with existing or changing environmental requirement.

We anticipate increased regulation by the USDA concerning food safety, by the FDA concerning the use of medications in feed and by the EPA and various other state agencies

 

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concerning discharges to the environment. Although we do not anticipate any regulations having a material adverse effect upon us, a material adverse effect may occur.

Employees and Labor Relations

As of December 26, 2010, we employed approximately 37,100 persons in the US and approximately 5,200 persons in Mexico. Approximately 29% of US employees and 57% of Mexico employees are members of collective bargaining units. We have not experienced any work stoppage at any location in over six years. We believe our relations with our employees are satisfactory. At any given time, we will be in some stage of contract negotiation with various collective bargaining units. The Company is currently in negotiation with union locals in four locations, and there is no assurance that agreement will be reached, or if reached, on terms that are favorable to the Company. In the absence of an agreement, there could be a strike or other labor action at any of these locations.

Financial Information about Foreign Operations

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

Available Information

The Company’s Internet website is http://www.pilgrims.com. The Company makes available, free of charge, through its Internet website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Directors and Officers Forms 3, 4 and 5, and amendments to those reports, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the Securities and Exchange Commission. The public may read and copy any materials that the Company files with the Securities and Exchange Commission at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 and may obtain information about the operation of the Public Information Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.

In addition, the Company makes available, through its Internet website, the Company’s Business Code of Conduct and Ethics, Corporate Governance Guidelines and the written charter of the Audit Committee, each of which is available in print to any stockholder who requests it by contacting the Secretary of the Company at 1770 Promontory Circle, Greeley, Colorado 80634-9038. Information contained on the Company’s website is not included as part of, or incorporated by reference into, this report.

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

 

 

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Executive Officers

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

 

Name

   Age     

Positions

Wesley Mendonça Batista

     40       Chairman of the Board

William W. Lovette

     50       President and Chief Executive Officer

Gary D. Tucker

     62       Principal Financial Officer and Chief Accounting Officer

Wesley Mendonça Batista, 40, currently serves as Chairman of the Board of Pilgrim’s Pride Corporation. Mr. Batista became President and Chief Executive Officer of JBS S.A. in February 2011. Mr. Batista previously served as President and Chief Executive Officer of JBS USA for approximately four years. Mr. Batista also serves as Chairman of the Board of JBS USA and is the Vice President of JBS S.A.’s board of directors. Mr. Batista has served in various capacities at JBS S.A. since 1987. Mr. Batista is the brother of Joesley Mendonça Batista, Chairman of the Board of JBS S.A., and José Batista Júnior, a Director of the Company and a Director of JBS S.A., and is the son of José Batista Sobrinho, the founder of JBS S.A. and a member of its board of directors. Mr. Batista brings to our board significant senior leadership and industry experience. Mr. Batista has long been one of the most respected executives in Brazil’s protein industry, and his reputation is now firmly established worldwide. Mr. Batista grew up in the protein industry, and it is his strategic insight and entrepreneurial spirit that has facilitated the growth of JBS through numerous acquisitions, expanding its reach across the globe. As Chairman of the Board, Mr. Batista has direct responsibility for Pilgrim’s Pride’s strategy and operations.

William W. Lovette, 50, joined Pilgrim’s as President and Chief Executive Officer on January 3, 2011. He brings more than 28 years of industry leadership experience to Pilgrim’s. He previously served two years as President and Chief Operating Officer of Case Foods, Inc. Before joining Case Foods, Inc., Mr. Lovette spent 25 years with Tyson Foods in various roles in senior management, including President of its International Business Unit, President of its Foodservice Business Unit and Senior Group Vice President of Poultry and Prepared Foods. Mr. Lovette earned a B.S. degree from Texas A&M University. In addition, he is a graduate of Harvard Business School’s Advanced Management Program.

Gary D. Tucker, 62, has served as the Principal Financial Officer and Chief Accounting Officer for Pilgrim’s since December 2009. He also serves as the Company’s Secretary. He joined the Company in June 2003 as Senior Vice President, Corporate Controller. He began his professional career with Arthur Andersen & Company where he worked for 12 years with a client base including several publicly traded companies. Mr. Tucker spent 10 years with IBP, Inc. in various roles in senior financial management, including Director, Financial Reporting and Taxes; Director, Budgeting and Financial Analysis; and Vice President, Controller for IBP subsidiary, Foodbrands America, and as Vice President, Finance and Administration for IBP subsidiary, Specialty Brands, Inc. Mr. Tucker earned a B.S. degree in business administration from the University of Southern Mississippi and an MBA from Texas A&M University-Commerce. He is a Certified Public Accountant.

 

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Item 1A.  Risk Factors

Forward Looking Statements

Certain written and oral statements made by our Company and subsidiaries of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made herein, in our other filings with the SEC, in press releases, and in certain other oral and written presentations.

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

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

In making these statements, we are not undertaking, and specifically decline to undertake, any obligation to address or update each or any factor in future filings or communications regarding our business or results, and we are not undertaking to address how any of these factors may have caused changes in information contained in previous filings or communications. The risks described below are not the only risks we face, and additional risks and uncertainties may also impair our business operations. The occurrence of any one or more of the following or other currently unknown factors could materially adversely affect our business and operating results.

Risk Factors

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

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

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

 

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The production of feed ingredients is positively or negatively affected primarily by the global level of supply inventories and demand for feed ingredients, the agricultural policies of the United States and foreign governments and weather patterns throughout the world. In particular, weather patterns often change agricultural conditions in an unpredictable manner. A significant change in weather patterns could affect supplies of feed ingredients, as well as both the industry’s and our ability to obtain feed ingredients, grow chickens or deliver products.

The cost of corn and soybean meal, our primary feed ingredients, increased significantly from August 2006 to July 2008. Market prices for feed ingredients decreased throughout 2009 and the first six months of 2010, but rose significantly again in the third and fourth quarters of 2010. There can be no assurance that the price of corn or soybean meal will not continue to rise as a result of, among other things, increasing demand for these products around the world and alternative uses of these products, such as ethanol and biodiesel production.

High feed ingredient prices have had, and may continue to have, a material adverse effect on our operating results, which has resulted in, and may continue to result in, additional non-cash expenses due to impairment of the carrying amounts of certain of our assets. We periodically seek, to the extent available, to enter into advance purchase commitments or financial derivative contracts for the purchase of feed ingredients in an effort to manage our feed ingredient costs. The use of these instruments may not be successful.

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 precautions designed to ensure that our flocks are healthy and that our processing plants and other facilities operate in a sanitary and environmentally-sound manner. However, events beyond our control, such as the outbreaks of disease, either in our own flocks or elsewhere, could significantly affect demand for our products or our ability to conduct our operations. Furthermore, an outbreak of disease could result in governmental restrictions on the import and export of our fresh chicken or other products to or from our suppliers, facilities or customers, or require us to destroy one or more of our flocks. This could also result in the cancellation of orders by our customers and create adverse publicity that may have a material adverse effect on our ability to market our products successfully and on our business, reputation and prospects.

During the first half of 2006, there was substantial publicity regarding a highly pathogenic strain of avian influenza, known as H5N1, which has been affecting Asia since 2002 and which has also been found in Europe and Africa. It is widely believed that H5N1 is being spread by migratory birds, such as ducks and geese. There have also been some cases where H5N1 is believed to have passed from birds to humans as humans came into contact with live birds that were infected with the disease.

 

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Although highly pathogenic H5N1 has not been identified in North America, there have been outbreaks of low pathogenic strains of avian influenza in North America, and in Mexico outbreaks of both high and low-pathogenic strains of avian influenza are a fairly common occurrence. Historically, the outbreaks of low pathogenic avian influenza have not generated the same level of concern, or received the same level of publicity or been accompanied by the same reduction in demand for poultry products in certain countries as that associated with the highly pathogenic H5N1 strain. Accordingly, even if the highly pathogenic H5N1 strain does not spread to North or Central America, there can be no assurance that it will not materially adversely affect demand for North or Central American produced poultry internationally and/or domestically, and, if it were to spread to North or Central America, there can be no assurance that it would not significantly affect our ability to conduct our operations and/or demand for our products, in each case in a manner having a material adverse effect on our business, reputation and/or prospects.

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

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

Product liability claims or product recalls can adversely affect our business reputation, expose us to increased scrutiny by federal and state regulators and may not be fully covered by insurance.

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

 

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adverse effect on our ability to market our products successfully or on our business, reputation, prospects, financial condition and results of operations.

If our poultry products become contaminated, we may be subject to product liability claims and product recalls. There can be no assurance that any litigation or reputational injury associated with product recalls will not have a material adverse effect on our ability to market our products successfully or on our business, reputation, prospects, financial condition and results of operations.

We currently maintain insurance with respect to certain of these risks, including product liability insurance, property insurance, workers compensation insurance, business interruption insurance and general liability insurance, but in many cases such insurance is expensive, difficult to obtain and no assurance can be given that such insurance can be maintained in the future on acceptable terms, or in sufficient amounts to protect us against losses due to any such events, or at all. Moreover, even though our insurance coverage may be designed to protect us from losses attributable to certain events, it may not adequately protect us from liability and expenses we incur in connection with such events. Additionally, in the past, two of our insurers encountered financial difficulties and were unable to fulfill their obligations under the insurance policies as anticipated and, separately, two of our other insurers contested coverage with respect to claims covered under policies purchased, forcing us to litigate the issue of coverage before we were able to collect under these policies.

Competition in the chicken industry with other vertically integrated poultry companies may make us unable to compete successfully in these industries, which could adversely affect our business.

The chicken industry is highly competitive. In both the United States and Mexico, we primarily compete with other vertically integrated chicken companies.

In general, the competitive factors in the US chicken industry include:

 

   

Price;

 

   

Product quality;

 

   

Product development;

 

   

Brand identification;

 

   

Breadth of product line; and

 

   

Customer service.

 

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Competitive factors vary by major market. In the foodservice market, competition is based on consistent quality, product development, service and price. In the US retail market, we believe that competition is based on product quality, brand awareness, customer service and price. Further, there is some competition with non-vertically integrated further processors in the prepared chicken business. In addition, the bankruptcy proceedings and the associated risks and uncertainties may be used by competitors in an attempt to divert existing customers or may discourage future customers from purchasing products under long-term arrangements.

In Mexico, where product differentiation has traditionally been limited, we believe product quality and price have been the most critical competitive factors. As a result of the January 2008 elimination of a tariff with regard to the import of chicken leg quarters into Mexico, greater amounts of chicken have been imported into Mexico from the US. Industry exports of ready-to-cook chicken into Mexico have increased to 816 million pounds, or 12.0% of all US ready-to-cook chicken exports, in calendar year 2009 from 522 million pounds, or 10.0% of all US ready-to-cook chicken exports, in calendar year 2005. These trends, should they continue to increase, could negatively affect the profitability of Mexican chicken producers located in the northern states of Mexico. While we believe the impact on producers, such as us, located in the central states of Mexico should be much less pronounced, we can provide no assurances that the elimination of this tariff or future changes in trade protection measures will not materially and adversely affect our Mexico operations.

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

Our two largest customers accounted for approximately 17.6% of our net sales in 2010, and our largest customer, Wal-Mart Stores Inc., accounted for 11.3% of our net sales in 2010. Our business could suffer significant setbacks in revenues and operating income if we lost one or more of our largest customers, or if our customers’ plans and/or markets should change significantly.

Our foreign operations pose special risks to our business and operations.

We have significant operations and assets located in Mexico and may participate in or acquire operations and assets in other foreign countries in the future. Foreign operations are subject to a number of special risks, including among others:

 

   

Currency exchange rate fluctuations;

 

   

Trade barriers;

 

   

Exchange controls;

 

   

Expropriation; and

 

   

Changes in laws and policies, including tax laws and laws governing foreign-owned operations.

 

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Currency exchange rate fluctuations have adversely affected us in the past. Exchange rate fluctuations or one or more other risks may have a material adverse effect on our business or operations in the future.

Our operations in Mexico are conducted through subsidiaries organized under the laws of Mexico. We may rely in part on intercompany loans and distributions from our subsidiaries to meet our obligations. Claims of creditors of our subsidiaries, including trade creditors, will generally have priority as to the assets of our subsidiaries over our claims. Additionally, the ability of our Mexican subsidiaries to make payments and distributions to us will be subject to, among other things, Mexican law. In the past, these laws have not had a material adverse effect on the ability of our Mexican subsidiaries to make these payments and distributions. However, laws such as these may have a material adverse effect on the ability of our Mexican subsidiaries to make these payments and distributions in the future.

Disruptions in international markets and distribution channels could adversely affect our business.

Historically, we have targeted international markets to generate additional demand for our products. In particular, given US customers’ general preference for white meat, we have targeted international markets for the sale of dark chicken meat, specifically leg quarters, which are a natural by-product of our US operations’ concentration on prepared chicken products. As part of this initiative, we have created a significant international distribution network into several markets in Mexico, Eastern Europe (including Russia), and the Far East (including China). Our success in these markets may be, and our success in recent periods has been, adversely affected by disruptions in chicken export markets. For example, China has imposed anti-dumping and countervailing duties on the US chicken producers. Until these duties are modified or eliminated, the duty rates can be expected to deter Chinese importers from purchases of US-origin chicken products, including our chicken products, and can be expected to diminish the volume of such purchases. In addition, Russia effectively banned US poultry imports shipped after January 1, 2010 because of a chlorine treatment procedure required by US Department of Agriculture regulations. While Russia did allow US poultry imports to resume and we began exporting products to Russia again in September 2010, there can be no assurances that new disruptions will not arise. For example, Russia has indicated that it will develop its own internal poultry production and has set an import quota of 350,000 metric tons of poultry for 2011. A significant risk is disruption due to import restrictions and tariffs, other trade protection measures, and import or export licensing requirements. In addition, disruptions may be caused by outbreaks of disease such as avian influenza, either in our flocks or elsewhere in the world, and resulting changes in consumer preferences. For example, the occurrence of avian influenza in Eastern Europe in October 2005 affected demand for poultry in Europe. On February 7, 2011, Mexico, the top foreign buyer of US chicken in calendar year 2010, announced that it would investigate US producers over dumping complaints lodged by Mexican chicken processors. Mexican chicken processors allege US producers sold chicken legs and thighs on the Mexican market below their cost of production in 2010. One or more of these or other disruptions in the international markets and distribution channels could adversely affect our business.

 

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

Our operations will continue to be subject to federal, state and local governmental regulation, including in the health, safety and environmental areas. We anticipate increased regulation by various agencies concerning food safety, the use of medication in feed formulations and the disposal of chicken by-products and wastewater discharges.

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

Further, in June 2010, the USDA, Grain Inspection, Packers and Stockyards Administration, or GIPSA, proposed new regulations under the Packers and Stockyards Act, or PSA, that would apply to all stages of a live poultry dealer’s poultry grow-out, including the pullet, breeder and broiler stages. The new regulations, if adopted as proposed, would likely have a significant impact on the relationship between integrated poultry processors, like us, and their independent growers. Among other things, the proposed regulations would substantially limit our and our independent contract growers’ freedom of contract, and affect the way we pay our independent contract growers. Many of the proposed new regulations are, in our view, unclear, vague and would likely require litigation to determine their scope and impact. Such litigation could be costly to our industry and us.

GIPSA has also proposed a regulation designed to overturn judicial precedent from several federal Circuit Courts of Appeal and eliminate the requirement that GIPSA or live poultry producers demonstrate competitive harm to prove violations of PSA sections that limit unfair, unjustly discriminatory or deceptive practices and undue or unreasonable preferences or advantages in live poultry purchasing practices. If adopted as proposed, the new regulations could lead to government enforcement actions and private litigation against integrated poultry producers that could have a material adverse effect on our operations and financial and operating results.

In addition, unknown matters, new laws and regulations, or stricter interpretations of existing laws or regulations may also materially affect our business or operations in the future.

New immigration legislation or increased enforcement efforts in connection with existing immigration legislation could cause the costs of doing business to increase, cause us to change the way we conduct our business or otherwise disrupt our operations.

Immigration reform continues to attract significant attention in the public arena and the US Congress. If new federal immigration legislation is enacted or if states in which we do

 

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business enact immigration laws, such laws may contain provisions that could make it more difficult or costly for us to hire US citizens and/or legal immigrant workers. In such case, we may incur additional costs to run our business or may have to change the way we conduct our operations, either of which could have a material adverse effect on our business, operating results and financial condition. Also, despite our past and continuing efforts to hire only US citizens and/or persons legally authorized to work in the US, we may be unable to ensure that all of their employees are US citizens and/or persons legally authorized to work in the US. For example, US Immigration and Customs Enforcement has investigated identity theft within our workforce. With our cooperation, during 2008 US Immigration and Customs Enforcement arrested approximately 300 employees believed to have engaged in identity theft at five of our facilities. No assurances can be given that further enforcement efforts by governmental authorities will not disrupt a portion of our workforce or operations at one or more facilities, thereby negatively impacting our business. Also, no assurance can be given that further enforcement efforts by governmental authorities will not result in the assessment of fines that could adversely affect our financial position, operating results or cash flows.

Loss of essential employees could have a significant negative impact on our business.

Our success is largely dependent on the skills, experience, and efforts of our management and other employees. The loss of the services of one or more members of our senior management or of numerous employees with essential skills could have a negative effect on our business, financial condition and results of operations. If we are not able to retain or attract talented, committed individuals to fill vacant positions when needs arise, it may adversely affect our ability to achieve our business objectives.

Our performance depends on favorable labor relations with our employees and our compliance with labor laws. Any deterioration of those relations or increase in labor costs due to our compliance with labor laws could adversely affect our business.

As of December 26, 2010, we employed approximately 37,100 persons in the US and approximately 5,200 persons in Mexico. Approximately 29% of US employees and 57% of Mexico employees are members of collective bargaining units. We have not experienced any work stoppage at any location in over six years. We believe our relations with our employees are satisfactory. At any given time, we will be in some stage of contract negotiation with various collective bargaining units. The Company is currently in negotiation with union locals in four locations, and there is no assurance that agreement will be reached, or if reached, on terms that are favorable to the Company. In the absence of an agreement, we may become subject to a strike, a work stoppage or other labor action at any of these locations.

While we believe our relations with our employees are satisfactory, at any given time, we will be in some stage of contract negotiation with various collective bargaining units. We plan to negotiate new collective bargaining agreements covering approximately 5,200 employees in the US to replace existing collective bargaining agreements that expired in 2010 or will expire in 2011.

 

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Extreme weather or natural disasters could negatively impact our business.

Extreme weather or natural disasters, including droughts, floods, excessive cold or heat, hurricanes or other storms, could impair the health or growth of our flocks, production or availability of feed ingredients, or interfere with our operations due to power outages, fuel shortages, damage to our production and processing facilities or disruption of transportation channels, among other things. Any of these factors could have an adverse effect on our financial results.

We may face significant costs for compliance with existing or changing environmental requirements and for potential environmental obligations relating to current or discontinued operations.

Compliance with existing or changing environmental requirements, including more stringent limitations imposed or expected in recently-renewed or soon-to be renewed environmental permits, will require capital expenditures for installation of new or upgraded pollution control equipment at some of our facilities. In addition, a number of our facilities, that have been operating below capacity due to economic conditions or where upgrades have been delayed or deferred, will require capital expenditures before production can be restored to pre-bankruptcy levels in compliance with environmental requirements.

In the past, we have acquired businesses with operations such as pesticide and fertilizer production that involved greater use of hazardous materials and generation of more hazardous wastes than our current operations. While many of those operations have been sold or closed, some environmental laws impose strict and, in certain circumstances, joint and several liability for costs of investigation and remediation of contaminated sites on current and former owners and operators of the sites, and on persons who arranged for disposal of wastes at such sites. In addition, current owners or operators of such contaminated sites may seek to recover cleanup costs from us based on past operations or contractual indemnifications.

New environmental requirements, stricter interpretations of existing environmental requirements, or obligations related to the investigation or clean-up of contaminated sites, may materially affect our business or operations in the future.

JBS USA holds a majority of our common stock and has the ability to control the vote on most matters brought before the holders of our common stock.

JBS USA holds a majority of the shares and voting power of our common stock and is entitled to appoint a majority of the members of our board of directors. As a result, JBS USA will, subject to restrictions on its voting power and actions in a stockholders agreement between us and JBS USA and our organization documents, have the ability to control our management, policies and financing decisions, elect a majority of the members of our board of directors at the annual meeting and control the vote on most matters coming before the holders of our common stock.

 

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We may not be able to fully achieve the anticipated synergy gains from the integration of our business with JBS USA.

While we have been able to realize substantial benefits through synergies since the JBS USA acquisition, we may not be able to fully achieve all of the anticipated synergistic gains of the JBS USA acquisition within the time frames expected. The combined company’s ability to fully realize the anticipated benefits of the acquisition depends, to a large extent, on our ability to continue to integrate our business with JBS USA. The combination of two independent companies has been, and will continue to be a complex, costly and time-consuming process. As a result, the combined company has been, and will continue to be required to devote significant management attention and resources to integrating the business practices and operations of JBS USA and us. In addition, the on-going integration of the two companies could result in unanticipated problems, expenses, liabilities, competitive responses, loss of customer and supplier relationships, and diversion of management’s attention. As a result, we cannot make any affirmative guarantees that the full benefits of the transaction, including the synergies, cost savings or sales or growth opportunities that we expect, will be fully realized within the anticipated time frame.

Our operations are subject to general risks of litigation.

We are involved in an on-going basis in litigation arising in the ordinary course of business or otherwise. Trends in litigation may include class actions involving consumers, shareholders, employees or injured persons, and claims relating to commercial, labor, employment, antitrust, securities or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty and adverse litigation trends and outcomes could adversely affect our financial results.

We depend on contract growers and independent producers to supply us with livestock.

We contract primarily with independent contract growers to raise the live chickens processed in our poultry operations. If we do not attract and maintain contracts with growers or maintain marketing and purchasing relationships with independent producers, our production operations could be negatively affected.

A material acquisition, joint venture or other significant initiative could affect our operations and financial condition.

We periodically evaluate potential acquisitions, joint ventures and other initiatives, and we may seek to expand our business through the acquisition of companies, processing plants, technologies, products and services. These potential transactions may involve a number of risks, including:

 

   

Failure to realize the anticipated benefits of the transaction;

 

   

Difficulty integrating acquired businesses, technologies, operations and personnel with our existing business;

 

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Diversion of management attention in connection with negotiating transactions and integrating the businesses acquired;

 

   

Exposure to unforeseen or undisclosed liabilities of acquired companies; and

 

   

The need to obtain additional debt or equity financing for any transaction.

We may not be able to address these risks and successfully develop these acquired companies or businesses into profitable units. If we are unable to do this, such expansion could adversely affect our financial results.

Changes in consumer preference could negatively impact our business.

The food industry in general is subject to changing consumer trends, demands and preferences. Trends within the food industry change often, and failure to identify and react to changes in these trends could lead to, among other things, reduced demand and price reductions for our products, and could have an adverse effect on our financial results.

The consolidation of customers could negatively impact our business.

Our customers, such as supermarkets, warehouse clubs and food distributors, have consolidated in recent years, and consolidation is expected to continue throughout the US and in other major markets. These consolidations have produced large, sophisticated customers with increased buying power who are more capable of operating with reduced inventories, opposing price increases, and demanding lower pricing, increased promotional programs and specifically tailored products. These customers also may use shelf space currently used for our products for their own private label products. Because of these trends, our volume growth could slow or we may need to lower prices or increase promotional spending for our products, any of which would adversely affect our financial results.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

Operating Facilities

We operate 26 poultry processing plants located in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, North Carolina, South Carolina, Tennessee, Texas, Virginia, and West Virginia. We have one chicken processing plant in Puerto Rico and three chicken processing plants in Mexico.

 

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The US chicken processing plants have the weekly capacity to process 34.7 million broilers and operated at 92.9% of capacity in 2010. Our Mexico facilities have the capacity to process 3.2 million broilers per week and operated at 77.9% of capacity in 2010. Our Puerto Rico processing plant has the capacity to process 0.3 million birds per week and operated at 105.7% of capacity in 2010 based on one eight-hour shift per day.

In the US, the processing plants are supported by 33 hatcheries, 27 feed mills and eight rendering facilities. The hatcheries, feed mills and rendering plants operated at 87.4%, 76.6% and 61.2% of capacity, respectively, in 2010. In Puerto Rico, the processing plant is supported by one hatchery, one feed mill and one rendering facility which operated at 85.1%, 78.6% and 74.0% of capacity, respectively, in 2010. In Mexico, the processing plants are supported by six hatcheries, four feed mills and two rendering facilities. The Mexico hatcheries, feed mills and rendering facilities operated at 95.8%, 80.7% and 59.9% of capacity, respectively, in 2010.

We also operate 12 prepared chicken plants. These plants are located in Alabama, Georgia, Louisiana, South Carolina, Tennessee, Texas and West Virginia. These plants have the capacity to produce approximately 1,211.2 million pounds of further processed product per year and in 2010 operated at approximately 91.5% of capacity.

Other Facilities and Information

We own a partially automated distribution freezer located outside of Pittsburg, Texas, which includes 125,000 square feet of storage area. We operate a commercial egg operation in Pittsburg, Texas and a pork grow-out operation in Jefferson, Georgia. We own administrative office buildings in Pittsburg, Texas and Atlanta, Georgia; an office building in Mexico City, which houses our Mexican marketing offices; and an office building in Broadway, Virginia, which houses additional sales and marketing, research and development, and support activities. We lease an office building in Querétaro, Mexico, which houses our Mexican administrative functions, and a building in Richardson, Texas, which houses our computer data center. Our corporate offices share a building with JBS USA in Greeley, Colorado.

We have five regional distribution centers located in Arizona, Texas, and Utah, two of which we own and three of which we lease.

Most of our domestic property, plant and equipment are pledged as collateral on our long-term debt and credit facilities. See Item  7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Item 3.  Legal Proceedings

Grower Claims and Proceedings

Ricky Arnold et al. v. Pilgrim’s Pride Corp., et al. On September 10, 2008, a lawsuit styled “Ricky Arnold, et al. v. Pilgrim’s Pride Corp., et al.” was filed against our Company and two of its representatives. In this lawsuit, filed in the Circuit Court of Van Buren County,

 

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Arkansas, nearly 100 contract poultry growers and their spouses assert claims of fraud and deceit, constructive fraud, fraud in the inducement, promissory estoppel, and violations of the Arkansas Livestock and Poultry Contract Protection Act relating to the idling of our Clinton, Arkansas processing plant. The total amount of damages sought by the contract poultry growers is unliquidated and unknown at this time. We filed a Notice of Suggestion of Bankruptcy. The Court has not issued an order in response to it. The plaintiffs filed proofs of claim in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”), and we filed objections to the proofs of claim. The plaintiffs in the Arnold case, and a number of other growers from the Clinton, Arkansas facility filed proofs of claim in the bankruptcy case. We anticipate that the Arnold case will be resolved as a part of the claim resolution process in the Bankruptcy Court. We express no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to us.

Sheila Adams, et al. v. Pilgrim’s Pride Corporation. On June 1, 2009, approximately 555 former and current independent contract broiler growers, their spouses and poultry farms filed an adversary proceeding against us in the Bankruptcy Court styled “Sheila Adams, et al. v. Pilgrim’s Pride Corporation.” In the adversary proceeding, the plaintiffs assert claims against us for: (i) violations of Sections 202(a), (b) and (e), 7 US C. § 192 of the Packers and Stockyards Act of 1921 (the “PSA”); (ii) intentional infliction of emotional distress; (iii) violations of the Texas Deceptive Trade Practices Act (“DTPA”); (iv) promissory estoppel; (v) simple fraud; and (vi) fraud by non-disclosure. The plaintiffs also filed a motion to withdraw the reference of the adversary proceeding from the Bankruptcy Court to the Marshall Court. The motion was filed with the US District Court for the Northern District of Texas—Fort Worth Division (the “Fort Worth Court”). The Bankruptcy Court recommended the reference be withdrawn, but that the Fort Worth Court retain venue over the action to ensure against forum shopping. The Fort Worth Court granted the motion to withdraw the reference and consolidated this action with the City of Clinton proceeding described below. We filed a motion to dismiss the plaintiffs’ claims. The Fort Worth Court granted in part and denied in part our motion, dismissing the following claims and ordering the plaintiffs to file a motion to amend their lawsuit and re-plead their claims with further specificity or the claims would be dismissed with prejudice: (i) intentional infliction of emotional distress; (ii) promissory estoppel; (iii) simple fraud and fraudulent nondisclosure; and (iv) DTPA claims with respect to growers from Oklahoma, Arkansas, and Louisiana. The plaintiffs filed a motion for leave to amend on October 7, 2009. Plaintiffs’ motion for leave was granted and the plaintiffs filed their Amended Complaint on December 7, 2009. Subsequent to the Fort Worth Court granting in part and denying in part our motion to dismiss, the plaintiffs filed a motion to transfer venue of the proceeding from the Fort Worth Court to the Marshall Court. We filed a response to the motion, but the motion to transfer was granted on December 17, 2009. On December 29, 2009, we filed our answer to plaintiffs’ Amended Complaint with the Marshall Court. Recently, the Marshall Court established litigation deadlines. Bench trials are scheduled to begin June 14, 2011. The parties are currently engaged in discovery. We intend to defend vigorously against the merits of the plaintiffs’ claims. We express no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to us.

 

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City of Clinton, Arkansas. On June 1, 2009, the City of Clinton, Arkansas filed an adversary proceeding against us in the Bankruptcy Court. In the proceeding, the City of Clinton alleged that our Company is liable for alleged violations of the PSA, for engaging in fraud and fraudulent nondisclosure, and under the promissory estoppel doctrine relating to the Company’s idling of its Clinton poultry processing plant. The City of Clinton alleged that it suffered $28.6 million in damages relating to its construction of a wastewater facility to purify water discharged from our processing facility based on alleged representations made by our representatives. The City of Clinton also sought to recover unspecified exemplary damages, attorneys’ fees, pre- and post-judgment interest, and costs of court. The Fort Worth Court granted our motion to dismiss and ordered the City of Clinton to file a motion to amend its lawsuit and re-plead its claims with further specificity or the claims would be dismissed with prejudice. The City of Clinton filed a motion for leave to amend on September 30, 2009. We opposed the motion and on December 2, 2009, the Fort Worth Court ruled that the City of Clinton could not replead its claims and dismissed the claims with prejudice. On December 31, 2009, the City of Clinton filed its Notice of Appeal seeking to challenge the Fort Worth Court’s ruling. Oral argument before the United States Fifth Circuit Court of Appeals occurred on November 3, 2010. On January 18, 2011, the Fifth Circuit affirmed the Fort Worth Court’s judgment in favor of the Company.

Grower Proofs of Claim

Approximately 161 former independent contract broiler growers, their spouses and poultry farms filed proofs of claim against us relating to the idling of the Company’s El Dorado, Arkansas; Douglas, Georgia; Siler City and Sanford, North Carolina; and Athens, Alabama processing facilities. Eight of the growers also filed administrative claims against us. The growers’ claims include: (i) fraud; (ii) fraudulent inducement; (iii) violations of the Packers & Stockyards Act; (iv) breach of fiduciary duty; (v) promissory estoppel; (vi) equitable estoppel; (vii) restitution; and (viii) deceptive trade practices. The claims relate to the growers’ allegations that they were required to spend significant amounts improving their poultry farms in order to continue their contractual relationship with our Company and predecessor companies. On December 17, 2009, we filed objections to the proofs of claim and administrative claims. The parties have engaged in discovery. Since discovery commenced, we announced that we are reopening the Douglas, Georgia complex. Consequently, we circulated new poultry grower contracts with releases to those growers that own and/or operate poultry farms within or near Douglas, Georgia. Because numerous growers signed the poultry grower agreement that contained the release of their claims, approximately 133 of the 161 growers in this consolidated claims administration proceeding withdrew their proofs of claim and motions for administrative expense claims. There are currently approximately 48 growers in this proceeding. We intend to defend vigorously against the merits of the growers’ claims. We express no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to us.

Numerous former independent contract growers located in our Clinton, Arkansas complex filed proofs of claim against us relating to the Arnold litigation referenced above. The claims include: (i) fraud and deceit; (ii) constructive fraud; (iii) fraud in the inducement;

 

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(iv) promissory estoppel; (v) a request for declaratory relief; and (vi) violations of the Arkansas Livestock and Poultry Contract Protection Act, and relate to the growers’ allegations that they were required to spend significant amounts improving their poultry farms in order to continue their contractual relationship with our Company and predecessor companies prior to us idling our Clinton processing facility. Most of the growers in this consolidated claims administration proceeding were named plaintiffs in the case styled, “Ricky Arnold, et al. v. Pilgrim’s Pride Corporation, et al.” discussed above. On November 30, 2009, we filed objections to the proofs of claim. On August 2, 2010, we filed numerous motions for summary judgment requesting the Bankruptcy Court to dismiss each grower’s causes of action against our Company. In response to the dispositive motions, the growers conceded that their numerous fraud and statutory claims lacked merit; consequently, the parties recently submitted agreed orders dismissing these claims with prejudice. The sole remaining cause of action alleged by the growers against us is promissory estoppel. The hearing on our motions for summary judgment with respect to the promissory estoppel claims occurred on October 19, 2010. On December 15, 2010, the Bankruptcy Court granted the Company’s summary judgment motion on 106 of the 107 growers’ promissory estoppel claims. With regard to the sole remaining grower, the Company intends to defend vigorously against the merits of the grower’s claims. We express no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to us.

Securities Litigation

On October 29, 2008, Ronald Acaldo filed suit in the US District Court for the Eastern District of Texas, Marshall Division, against us and individual defendants Lonnie “Bo” Pilgrim, Lonnie Ken Pilgrim, J. Clinton Rivers, Richard A. Cogdill and Clifford E. Butler. The Complaint alleged that our Company and the individual defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by allegedly failing to disclose that “(i) the Company’s hedges to protect it from adverse changes in costs were not working and in fact were harming the Company’s results more than helping; (ii) the Company’s inability to continue to use illegal workers would adversely affect its margins; (iii) the Company’s financial results were continuing to deteriorate rather than improve, such that the Company’s capital structure was threatened; (iv) the Company was in a much worse position than its competitors due to its inability to raise prices for consumers sufficient to offset cost increases, whereas its competitors were able to raise prices to offset higher costs affecting the industry; and (v) the Company had not made sufficient changes to its business to succeed in the more difficult industry conditions.” Mr. Acaldo further alleged that he purports to represent a class of all persons or entities who acquired the common stock of our Company from May 5, 2008 through September 24, 2008. The Complaint sought unspecified injunctive relief and an unspecified amount of damages.

On November 21, 2008, defendants filed a Motion to Dismiss and Brief in Support Thereof, asserting that plaintiff failed to identify any misleading statements, failed to adequately plead scienter against any defendants, failed to adequately plead loss causation,

 

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failed to adequately plead controlling person liability and, as to the omissions that plaintiff alleged defendants did not make, defendants alleged that the omissions were, in fact, disclosed.

On November 13, 2008, Chad Howes filed suit in the US District Court for the Eastern District of Texas, Marshall Division, against us and individual defendants Lonnie “Bo” Pilgrim, Lonnie Ken Pilgrim, J. Clinton Rivers, Richard A. Cogdill and Clifford E. Butler. The allegations in the Howes Complaint are identical to those in the Acaldo Complaint, as are the class allegations and relief sought. The defendants were never served with the Howes Complaint.

On May 14, 2009, the Court consolidated the Acaldo and Howes cases and renamed the style of the case, “In re: Pilgrim’s Pride Corporation Securities Litigation.” On May 21, 2009, the Court granted the Pennsylvania Public Fund Group’s Motion for Appointment of Lead Plaintiff. Thereafter, on June 26, 2009, the lead plaintiff filed a Consolidated (and amended) Complaint. The Consolidated Complaint dismissed the Company and Clifford E. Butler as Defendants. In addition, the Consolidated Complaint added the following directors as Defendants: Charles L. Black, Key Coker, Blake D. Lovette, Vance C. Miller, James G. Vetter, Jr., Donald L. Wass, Linda Chavez, and Keith W. Hughes. The Consolidated Complaint alleges four causes of action: violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder solely against Lonnie “Bo” Pilgrim, Clint Rivers, and Richard A. Cogdill (referred as the “Officer Defendants”). Those claims assert that, during the Class Period of May 5, 2008 through October 28, 2008, the defendants, through various financial statements, press releases and conference calls, made material misstatements of fact and/or omitted to disclose material facts by purportedly failing to completely impair the goodwill associated with the Gold Kist acquisition. The Consolidated Complaint also asserts claims under Section 11 of the Securities Act of 1933 against all defendants, asserting that, statements made in a registration statement in connection with the May 14, 2008 secondary offering of our common stock were materially false and misleading for their failure to completely impair the goodwill associated with the Gold Kist acquisition. Finally, the Consolidated Complaint asserts a violation of Section 15 of the Securities Act of 1933 against the Officer Defendants only, claiming that the Officer Defendants were controlling persons of the Company and the other defendants in connection with the Section 11 violation. By the Consolidated Complaint, the lead plaintiff seeks certification of the Class, undisclosed damages, and costs and attorneys’ fees.

On July 27, 2009, defendants filed a Motion to Dismiss the Consolidated Complaint for its failure to adequately plead, as to the Sections 10(b) and 20(a) claims, scienter and loss causation and, as to the Sections 11 and 15 claims, for its failure to adequately plead misrepresentations and omissions. Defendants requested that the Consolidated Complaint be dismissed with prejudice. The plaintiffs filed an Opposition to the Motion to Dismiss on August 27, 2009. Defendants filed a Reply Brief on September 10, 2009 and plaintiffs filed a Sur-Reply on September 24, 2009. The Court has not yet ruled on the Motion to Dismiss.

 

 

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On August 17, 2010, the Court issued its Memorandum Opinion and Order on the motion to dismiss, granting in part and denying in part, the defendants’ motion. The Court dismissed without prejudice the plaintiffs’ claims alleging securities fraud under Section 10(b) of the Exchange Act and Rule 10b-5 and for controlling person liability under Section 20(a) of the Exchange Act. The Court denied defendants’ motion to dismiss with respect to the plaintiffs’ claim for negligent misrepresentation under Section 11 of the Securities Act and for controlling person liability under Section 15 of the Securities Act. The plaintiffs were granted leave to amend their complaint but elected not to do so. The defendants filed their Original Answer to the Complaint on November 15, 2010.

No discovery has commenced in the consolidated case, and the case has not been set for trial. We express no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to us by virtue of the consolidated case. We understand that the Officer Defendants intend to defend vigorously against the merits of the action and any attempts by the lead plaintiff to certify a class action.

ERISA Claims and Proceedings

On December 17, 2008, Kenneth Patterson filed suit in the US District Court for the Eastern District of Texas, Marshall Division, against Lonnie “Bo” Pilgrim, Lonnie Ken Pilgrim, Clifford E. Butler, J. Clinton Rivers, Richard A. Cogdill, Renee N. DeBar, our Compensation Committee and other unnamed defendants (the “Patterson action”). On January 2, 2009, a nearly identical suit was filed by Denise M. Smalls in the same court against the same defendants (the “Smalls action”). The complaints in both actions, brought pursuant to section 502 of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 US C. § 1132, alleged that the individual defendants breached fiduciary duties to participants and beneficiaries of the Pilgrim’s Pride Stock Investment Plan (the “Stock Plan”), as administered through the Pilgrim’s Pride Retirement Savings Plan (the “RSP”), and the To-Ricos, Inc. Employee Savings and Retirement Plan (the “To-Ricos Plan”) (collectively, the “Plans”). The allegations in the complaints were similar to the allegations made in the Acaldo securities case discussed above. Patterson and Smalls further alleged that they purported to represent a class of all persons or entities who were participants in or beneficiaries of the Plans at any time between May 5, 2008 through the present and whose accounts held our common stock or units in our common stock. Both complaints sought actual damages in the amount of any losses the Plans suffered, to be allocated among the participants’ individual accounts as benefits due in proportion to the accounts’ diminution in value, attorneys’ fees, an order for equitable restitution and the imposition of constructive trust, and a declaration that each of the defendants have breached their fiduciary duties to the Plans’ participants.

The defendants filed a motion to dismiss the Patterson complaint on April 16, 2009. Mr. Patterson filed a response brief in opposition to the motion on May 15, 2009 and the defendants filed a reply in support of their motion on June 1, 2009. On July 9, 2009, the defendants filed a motion seeking to dismiss the Smalls complaint.

 

 

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The Court did not rule on either motion to dismiss. Instead, on July 20, 2009, the Court entered an order consolidating the Smalls and Patterson actions. On August 12, 2009, the Court ordered that the consolidated case will proceed under the caption “In re Pilgrim’s Pride Stock Investment Plan ERISA Litigation, No. 2:08-cv-472-TJW.”

Patterson and Smalls filed a consolidated amended complaint (“Amended Complaint”) on March 2, 2010. The Amended Complaint names as defendants the Pilgrim’s Pride Board of Directors, Lonnie “Bo” Pilgrim, Lonnie Ken Pilgrim, Charles L. Black, Linda Chavez, S. Key Coker, Keith W. Hughes, Blake D. Lovette, Vance C. Miller, James G. Vetter, Jr., Donald L. Wass, J. Clinton Rivers, Richard A. Cogdill, the Pilgrim’s Pride Pension Committee, Robert A. Wright, Jane Brookshire, Renee N. DeBar, the Pilgrim’s Pride Administrative Committee, Gerry Evenwel, Stacey Evans, Evelyn Boyden, and “John Does 1-10.” The Amended Complaint purports to assert claims on behalf of persons who were participants in or beneficiaries of the RSP or the To-Ricos Plan at any time between January 29, 2008 through December 1, 2008 (“the alleged class period”), and whose accounts included investments in the Company’s common stock.

Like the original Patterson and Smalls complaints, the allegations in the Amended Complaint are similar to those made in the Acaldo securities case. The Amended Complaint alleges that the defendants breached ERISA fiduciary duties to participants and beneficiaries of the RSP and To-Ricos Plan by permitting both Plans to continue investing in the Company’s common stock during the alleged class period. The Amended Complaint also alleges that certain defendants were “appointing” fiduciaries who failed to monitor the performance of the defendant-fiduciaries they appointed. Further, the Amended Complaint alleges that all defendants are liable as co-fiduciaries for one another’s alleged breaches. Plaintiffs seek actual damages in the amount of any losses the RSP and To-Ricos Plan suffered, to be allocated among the participants’ individual accounts as benefits due in proportion to the accounts’ alleged diminution in value, costs and attorneys’ fees, an order for equitable restitution and the imposition of constructive trust, and a declaration that each of the defendants have breached their ERISA fiduciary duties to the RSP and To-Ricos Plan’s participants.

The defendants filed a motion to dismiss the Amended Complaint on May 3, 2010. The plaintiffs responded to that motion on July 2, 2010, dropping plaintiff Smalls from the case and adding an additional plaintiff, Stanley Sylvestros. The defendants filed their reply in support of their motion to dismiss on August 2, 2010. The court has not yet ruled on the motion.

Tax Claims and Proceedings

The United States Department of Treasury, Internal Revenue Service (“IRS”) has filed an amended proof of claim in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division (the “Bankruptcy Court”) pursuant to which the IRS asserts claims that total $74.7 million. We have filed in the Bankruptcy Court (i) an objection to the IRS’ amended proof of claim, and (ii) a motion requesting the Bankruptcy Court to determine our US

 

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federal tax liability pursuant to Sections 105 and 505 of the Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The objection and motion assert that the Company has no liability for the additional US federal taxes that have been asserted for pre-petition periods by the IRS. The IRS has responded in opposition to our objection and motion. On July 8, 2010, the Bankruptcy Court granted our unopposed motion requesting that the Bankruptcy Court abstain from determining our federal tax liability. As a result, we intend to work with the IRS through the normal processes and procedures that are available to all taxpayers outside of bankruptcy (including the United States Tax Court (“Tax Court”) proceedings discussed below) to resolve the IRS’ amended proof of claim.

In connection with the amended proof of claim, on May 26, 2010, we filed a petition in Tax Court in response to a Notice of Deficiency that was issued to the Company as the successor in interest to Gold Kist. The Notice of Deficiency and the Tax Court proceeding relate to a loss that Gold Kist claimed for its tax year ended June 26, 2004. The matter is currently in the early stages of litigation.

On August 10, 2010, we filed two petitions in Tax Court. The first petition relates to three Notices of Deficiency that were issued to us with respect to our 2003, 2005 and 2007 tax years. The second petition relates to a Notice of Deficiency that was issued to us with respect to Gold Kist’s tax year ended June 30, 2005, and its short tax year ended September 30, 2005. Both cases are currently in the early stages of litigation.

We express no opinion as to the likelihood of an unfavorable outcome or the amount or range of any possible loss to us related to the above Tax Court cases.

The Notices of Deficiency and the Tax Court proceedings discussed above cover the same tax years and the same amounts that were asserted by the IRS in its $74.7 million amended proof of claim that was filed in the Bankruptcy Court.

Other Claims and Proceedings

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

 

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PART II

 

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

Market Information

Effective December 1, 2008, the New York Stock Exchange (“NYSE”) delisted our common stock as a result of the Company’s filing of its Chapter 11 petition. Our common stock was then quoted on the Pink Sheets Electronic Quotation Service under the ticker symbol “PGPDQ.PK.” The Company applied with the NYSE to list its common stock upon its exit from bankruptcy under its prior ticker symbol “PPC.” Effective December 29, 2009, the NYSE listed our common stock and it is now quoted under our ticker symbol “PPC.”

High and low prices of the Company’s common stock for 2010 and 2009 are as follows:

 

      2010 Prices      2009 Prices  

Quarter

   High      Low      High      Low  

First

   $ 11.53       $ 7.63       $ 4.98       $ 0.14   

Second

   $ 13.05       $ 6.38       $ 2.99       $ 0.46   

Third

   $ 7.70       $ 5.73       $ 6.70       $ 1.40   

Fourth

   $     8.10       $     5.35       $ 7.90       $ 3.67   

Transition Period

         $     8.45       $     5.31   

Holders

The Company estimates there were approximately 21,400 holders (including individual participants in security position listings) of the Company’s common stock as of February 10, 2011.

Mandatory Exchange Transaction

The Amended and Restated Certificate of Incorporation (the “Restated Certificate of Incorporation”) provides that, if JBS USA completes an initial public offering of common stock of JBS USA (the “JBS USA Common Stock”) and the offered shares are listed on a national securities exchange, then, at any time during an exchange window (as set forth therein) falling within the period commencing on the date of the closing of the offering and ending on January 27, 2012, JBS USA will have the right to deliver written notice of the mandatory exchange of the common stock of the Company (the “Mandatory Exchange Transaction”) to the Company. Upon delivery to the Company of notice of the Mandatory Exchange Transaction each share of common stock of the Company held by stockholders other than JBS USA (the “Exchanged Holders”) will automatically, without any further action on behalf of the Company or any of the Exchanged Holders, be transferred to JBS USA in exchange for a number of duly authorized, validly issued, fully paid and non-assessable shares of JBS USA Common Stock equal to the exchange offer ratio set forth therein.

 

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Dividends

The Company did not pay dividends in 2010 or 2009. On December 28, 2009, the Company and JBS USA entered into a stockholders agreement. The stockholders agreement, among other things, prohibits the Company from declaring dividends other than on a pro rata basis until the completion of the Mandatory Exchange Transaction. Our Exit Credit Facility also prohibits us from paying dividends on our common stock. Further, the indenture governing our 7 7/8% Senior Notes restricts, but does not prohibit, the Company from declaring dividends.

Issuer Purchases of Equity Security in 2010

 

Period

  Total Number
of Shares
Purchased

(a)
          Average Price
Paid per
Share

(b)
          Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs

(c)
    Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

(d)
 

September 27, 2010 to October 24, 2010

    -          -          -        -   

October 25, 2010 to November 28, 2010

    7,000,000        (i )      5.96        (i)        -        -   

November 29, 2010 to December 26, 2010

    -          -          -        -   
                                   

Total

    7,000,000          5.96          -        -   
                                   

 

(i)

The Company did not repurchase any of its equity securities in 2010. However, on November 5, 2010, JBS USA acquired 7,000,000 shares of common stock of the Company from Pilgrim Interests, Ltd., an entity related to Lonnie “Bo” Pilgrim, a member of the Company’s Board of Directors, in exchange for $41,720,000 in cash. The purchase was effected pursuant to a letter agreement dated as of November 5, 2010, among JBS USA, Pilgrim Interests, Ltd. and Lonnie “Bo” Pilgrim.

Total Return on Registrant’s Common Equity

The following graph compares the performance of the Company with that of the Russell 2000 composite index and a peer group of companies for the period from December 28, 2009 to December 26, 2010, with the investment weighted on market capitalization. Data for periods prior to December 28, 2009 is not shown because we were in bankruptcy prior to that date and financial results before and after December 28, 2009 are not comparable. The total cumulative return on investment (change in the year-end stock price plus reinvested dividends) for each of the periods for the Company, the Russell 2000 composite index and the peer group is based on the stock price or composite index at the beginning of the applicable period. Companies in the peer group index include Cagle’s, Inc., Sanderson Farms Inc., Hormel Foods Corp., Smithfield Foods Inc. and Tyson Foods Inc.

 

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The graph covers the period from December 28, 2009 to December 26, 2010, and reflects the performance of the Company’s single class of common stock. The stock price performance represented by this graph is not necessarily indicative of future stock performance.

LOGO

 

    12/28/09     1/24/10     2/28/10     3/28/10     4/25/10     5/30/10     6/27/10     7/25/10     8/29/10     9/26/10     10/24/10     11/28/10     12/26/10  

Pilgrim’s Pride Corporation

  $ 100.00      $ 96.75      $ 101.01      $ 118.81      $ 144.01      $ 89.36      $ 80.52      $ 78.28      $ 71.89      $ 64.50      $ 66.41      $ 74.69      $ 79.73   

Russell 2000

    100.00        97.50        99.43        107.52        117.59        104.99        102.45        103.44        98.17        106.91        112.18        116.98        126.08   

Peer Group

    100.00        103.88        116.36        127.06        127.53        117.64        115.30        117.45        115.93        115.23        116.19        123.84        133.18   

 

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Item 6. Selected Financial Data

 

(In thousands, except ratios and

per share data)

  2010(a)           13 weeks
ended
Dec 27, 2009(a)
          13 weeks
ended
Dec 27, 2008
          2009(a)(b)           2008(a)(b)        
                                                             

Income Statement Data:

                   

Net sales

  $ 6,881,629        $ 1,602,734        $     1,876,991        $ 7,088,055        $     8,518,757     

Gross profit (loss)(f)

    460,993          68,753          (100,142       310,803          (247,359  

Goodwill impairment

    -          -          -          -          501,446     

Operating income (loss)(f)

    185,427          7,589          (178,241       67,327          (1,057,696  

Interest expense, net

    101,748          44,193          39,569          157,543          131,627     

Loss on early extinguishment of debt

    11,726          -          -          -          -     

Reorganization items, net

    18,541          32,726          13,250          87,275          -     

Income (loss) from continuing operations before income taxes(f)

    66,488          (68,446       (229,091       (173,849       (1,185,909  

Income tax expense (benefit)(g)

    (23,838       (102,371       278          (21,586       (194,921  

Income (loss) from continuing operations(f)

    90,326          33,925          (229,369       (152,263       (990,988  

Net income (loss) attributable to noncontrolling interest

    3,185          312          (13       (82       1,184     

Net income (loss)(f)

    87,141          33,613          (228,782       (151,582       (998,581  

Ratio of earnings to fixed charges(h)

    1.49       (h )        (h )        (h )        (h )    

Per Common Share Data:

                   

Income (loss) from continuing operations

  $ 0.41        $ 0.45        $ (3.10     $ (2.06     $ (14.31  

Net income (loss)

    0.41          0.45          (3.09       (2.05       (14.40  

Cash dividends

    -          -          -          -          0.09     

Book value

    5.01          2.58          1.75          2.04          5.07     

Balance Sheet Summary:

                   

Working capital surplus (deficit)(i)

    971,830          675,256          757,862          858,030          (1,262,242  

Total assets

    3,218,898          3,209,463          3,215,135          3,060,504          3,298,709     

Notes payable and current maturities of long-term debt(j)

    58,144          221,195          -          -          1,874,469     

Long-term debt, less current maturities(j)

    1,281,160          1,876,277          41,521          41,062          67,514     

Total stockholders’ equity

    1,072,663          191,952          129,420          150,920          351,741     

Cash Flow Summary:

                   

Cash flows from operating activities

  $ 14,605        $ (4,057     $ (168,674     $ 64,934        $ (680,852  

Depreciation and amortization(k)

    231,045          56,705          60,158          236,005          240,305     

Impairment of goodwill and other assets

    26,484          -          -          5,409          514,630     

Purchases of investment securities

    (17,201       (6,024       (5,629       (19,958       (38,043  

Proceeds from sale or maturity of investment securities

    68,100          4,511          4,591          18,946          27,545     

Acquisitions of property, plant and equipment

    (179,332       (30,463       (29,028       (88,193       (152,501  

Business acquisitions, net of equity consideration(c)(d)(e)

    -          -          -          -          -     

Cash flows from financing activities

    (29,480       48,250          223,595          101,153          797,743     

Other Data:

                   

EBITDA(l)

  $     384,484        $     31,015        $ (130,906     $     212,911        $ (818,924  

Adjusted EBITDA(l)

    481,906          64,947          (115,221       314,719          (274,516  

Key Indicators (as a percent of net sales):

                   

Gross profit (loss)(f)

    6.7        %        4.3        %        (5.3     %        4.4        %        (2.9     %   

Selling, general and administrative expenses

    3.0        %        3.9        %        3.9        %        3.4        %        3.4        %   

Operating income (loss)(f)

    2.7        %        0.5        %        (9.5     %        0.9        %        (12.4     %   

Interest expense, net

    1.5        %        2.8        %        2.1        %        2.2        %        1.5        %   

Income (loss) from continuing operations(f)

    1.3        %        2.1        %        (12.2     %        (2.1     %        (11.6     %   

Net income (loss)(f)

    1.3        %        2.1        %        (12.2     %        (2.1     %        (11.7     %   

 

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2007(a)(b)(c)           2006(a)(b)           2005(a)(b)           2004(a)(b)(d)           2003(a)(b)           2002(a)(b)           2001(a)(b)(e)           2000(a)        
                                    (53 weeks)                                                        
                             
$     7,498,612        $     5,152,729        $     5,461,437        $     5,077,471        $     2,313,667        $     2,185,600        $     1,975,877        $     1,499,439     
  592,730          297,083          751,317          611,838          249,363          153,599          197,561          165,828     
  -          -          -          -          -          -          -          -     
  237,191          11,105          458,351          385,968          137,605          48,457          90,253          80,488     
  118,542          38,965          42,632          48,419          30,726          24,199          25,619          17,779     
  26,463          -          -          -          -          -          1,433          -     
  -          -          -          -          -          -          -          -     
  98,926          (26,063       427,547          332,863          144,482          28,267          62,728          62,786     
  47,319          1,573          147,543          127,142          37,870          (2,475       21,051          10,442     
  51,607          (27,636       280,004          205,721          106,244          31,466          41,677          52,344     
  91          563          185          (36       (368       724          -          -     
  47,017          (34,232       264,979          128,340          56,036          14,335          41,137          52,344     
  1.63       (h )        7.69       6.22       4.37       1.21       1.80       3.04  
                             
$ 0.77        $ (0.42     $ 4.20        $ 3.28        $ 2.59        $ 0.75        $ 1.01        $ 1.27     
  0.71          (0.51       3.98          2.05          1.36          0.35          1.00          1.27     
  0.09          1.09          0.06          0.06          0.06          0.06          0.06          0.06     
  17.61          16.79          18.38          13.87          10.46          9.59          9.27          8.33     
                             
  395,858          528,837          404,601          383,726          211,119          179,037          203,350          124,531     
  3,774,236          2,426,868          2,511,903          2,245,989          1,257,484          1,227,890          1,215,695          705,420     
  2,872          10,322          8,603          8,428          2,680          3,483          5,099          4,657     
  1,318,558          554,876          518,863          535,866          415,965          450,161          467,242          165,037     
  1,172,221          1,117,328          1,223,598          922,956          446,696          394,324          380,932          342,559     
                             
$ 463,964        $ 30,329        $ 493,073        $ 272,404        $ 98,892        $ 98,113        $ 87,833        $ 130,803     
  204,903          135,133          134,944          113,788          74,187          70,973          55,390          36,027     
  -          3,767          -          45,384          -          -          -          -     
  (125,045       (318,266       (305,458       -          -          -          -          -     
  208,676          490,764          -          -          -          -          -          -     
  (172,323       (143,882       (116,588       (79,642       (53,574       (80,388       (112,632       (92,128  
  (1,102,069       -          -          (272,097       (4,499       -          (239,539       -     
  630,229          (38,750       18,860          96,665          (39,767       (21,793       246,649          (24,769  
                             
$ 415,817        $ 145,429        $ 602,802        $ 493,119        $ 247,550        $ 122,746        $ 141,877        $ 115,356     
  442,189          148,633          602,617          493,155          247,918          122,022          143,310          115,356     
                             
  7.9        %        5.8        %        13.8        %        12.1        %        10.8        %        7.0        %        10.0        %        11.1        %   
  4.7        %        5.6        %        5.4        %        4.3        %        4.8        %        4.8        %        5.4        %        5.7        %   
  3.2        %        0.2        %        8.4        %        7.6        %        5.9        %        2.2        %        4.6        %        5.4        %   
  1.6        %        0.8        %        0.8        %        1.0        %        1.3        %        1.1        %        1.3        %        1.2        %   
  0.7        %        (0.5     %        5.1        %        4.1        %        4.6        %        1.4        %        2.1        %        3.5        %   
  0.6        %        (0.7     %        4.9        %        2.1        %        2.4        %        0.7        %        2.1        %        3.5        %   

 

(a)

In December 2009, we changed our fiscal year end from the Saturday nearest September 30 of each year to the last Sunday in December of each year. The change was effective for our 2010 fiscal year, which began December 28, 2009 and ended December 26, 2010 and resulted in an approximate three-month transition period which began September 27, 2009 and ended December 27, 2009. The reader should assume any reference we make to a particular year (for example, 2010) in this report applies to our fiscal year and not the calendar year.

 

(b)

In March 2008, the Company sold certain assets of its turkey business. We are reporting our operations with respect to this business as a discontinued operation for all periods presented.

 

(c)

The Company acquired Gold Kist Inc. on December 27, 2006, for $1.139 billion. For financial reporting purposes, we have not included the operating results and cash flows of Gold Kist in our consolidated financial statements for the period from December 27, 2006, through December 30, 2006. The operating results and cash flows of Gold Kist from December 27, 2006, through December 30, 2006, were not material.

 

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Table of Contents
(d)

The Company acquired the ConAgra Chicken division on November 23, 2003, for $635.2 million including the non-cash value of common stock issued of $357.5 million. The acquisition has been accounted for as a purchase and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date.

 

(e)

The Company acquired WLR Foods on January 27, 2001, for $239.5 million and the assumption of $45.5 million of indebtedness. The acquisition has been accounted for as a purchase and the results of operations for this acquisition have been included in our consolidated results of operations since the acquisition date.

 

(f)

Gross profit, operating income and net income include the following non-recurring recoveries, restructuring charges and other unusual items for each of the years presented:

 

     2010     Transition
Period
    13 Weeks Ended
December 27, 2008
    2009     2008     2005      2004  

Effect on gross profit and operating income:

     (In millions)   

Operational restructuring charges

   $ (4.3   $ (2.9   $ -      $ (12.5   $ (28.0   $ -       $ -   

Non-recurring recoveries for recall insurance

   $ -      $ -      $ -      $ -      $ -      $ -       $ 23.8   

Non-recurring recoveries for vitamin and methionine litigation

   $ -      $ -      $ -      $ -      $ -      $ -       $ 0.1   

Additional effect on operating income:

               

Goodwill impairment

   $ -      $ -      $ -      $ -      $ (501.4   $ -       $ -   

Administrative restructuring charges

   $ (66.0   $ 1.4      $ (2.4   $ (2.0   $ (16.2   $ -       $ -   

Other income from litigation settlement

   $ -      $ -      $ -      $ -      $ -      $ 11.7       $ -   

Other income from vitamin and methionine litigation

   $ -      $ -      $ -      $ -      $ -      $ -       $ 0.9   

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

 

     2004     2003     2002  

Recall effects (estimated)

   $ (20.0   $ (65.0   $   

Losses from avian influenza (estimated)

   $      $ (7.3   $ (25.6

 

(g)

Income tax benefit in 2010 resulted primarily from the benefit on the deconsolidation for tax purposes of the Mexico operations and a decrease in valuation allowance. The deconsolidation for tax purposes of the Mexico operations was in response to changes in the Mexican tax laws that became effective January 1, 2010. The deconsolidation reduces the accrued taxes that had been previously recognized under the consolidated filing status as it eliminates recapturing certain taxes required under the new consolidation laws. Income tax benefit for the Transition Period resulted primarily from the release of valuation allowance because of new provisions that increased US federal net operating loss carry backs net of tax expense for new Mexico tax legislation. Income tax expense for the thirteen weeks ended December 27, 2008 resulted primarily from an increase in valuation allowance. Income tax benefit in 2009 resulted primarily from a decrease in reserves for unrecognized tax benefits. Income tax benefit in 2008 resulted primarily from significant net operating losses incurred in 2008. The increase in tax expense in 2007 over 2006 resulted primarily from increased pretax earnings in 2007. The decrease in tax expense in 2006 from 2005 resulted primarily from a pretax loss in 2006 versus significant earnings in 2005. While the tax expense for 2005 increased over 2004, the effective tax rate for 2005 decreased from 2004. This decrease was primarily due to an increase in net income before tax in our Mexico operations, which are taxed at a lower rate than our US operations. Tax expense increased in 2004 over 2003 primarily as a result of increased pretax earnings in 2004. Tax expense increased in 2003 over fiscal 2002 primarily as a result of increased pretax earnings in 2003. This increase was offset by a benefit resulting from the reduction in a valuation allowance for net operating loss carry forwards for Mexican tax purposes. An income tax benefit for 2002 resulted from a tax benefit of $11.9 million due to Mexican tax law changes in 2002.

 

(h)

For purposes of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest (including capitalized interest) on all indebtedness, amortization of capitalized financing costs and that portion of rental expense that we believe to be representative of interest. Earnings were inadequate to cover fixed charges by $69.5 million, $229.8 million, $176.5 million, $1,191.2 million and $30.4 million in the Transition Period, the three months ended December 27, 2008, 2009, 2008 and 2006, respectively.

 

(i)

We experienced a working capital deficit in 2008. Upon the filing of the Chapter 11 petitions, certain of our debt obligations became automatically and immediately due and payable, subject to an automatic stay of any action to collect, assert, or recover a claim against the Company and the application of applicable bankruptcy law. As a result, the accompanying Consolidated Balance Sheet as of September 27, 2008, included reclassifications of $1,872.1 million to reflect as current certain long-term debt under the Company’s credit facilities that was accelerated.

 

(j)

The Company had current maturities of pre-petition long-term debt totaling $4.2 million and pre-petition long-term debt totaling $1,999.8 million at September 26, 2009, that were included in Liabilities subject to compromise.

 

(k)

Includes amortization of capitalized financing costs of approximately $14.8 million, $1.4 million, $1.5 million, $6.8 million, $4.9 million, $6.6 million, $2.6 million, $2.3 million, $2.0 million, $1.5 million, $1.4 million, $1.9 million, and $1.2 million in 2010, the Transition Period, the three months ended December 27,2008, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001 and 2000, respectively.

 

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(l)

“EBITDA” is defined as the sum of income (loss) from continuing operations plus interest, taxes, depreciation and amortization. “Adjusted EBITDA” is calculated by adding to EBITDA certain items of expense and deducting from EBITDA certain items of income that we believe are not indicative of our ongoing operating performance consisting of: (i) income (loss) attributable to noncontrolling interests in the period from 2002 through 2010 and the Transition Period, (ii) goodwill impairment in 2008, (iii) restructuring charges in 2010, 2009, 2008 and 2007, (iv) reorganization items in 2010 and 2009 and (v) losses on early extinguishment of debt in 2007 and 2010. EBITDA is presented because it is used by us and we believe it is frequently used by securities analysts, investors and other interested parties, in addition to and not in lieu of results prepared in conformity with GAAP, to compare the performance of companies. We believe investors would be interested in our Adjusted EBITDA because this is how our management analyzes EBITDA from continuing operations. We also believe that Adjusted EBITDA, in combination with our financial results calculated in accordance with GAAP, provides investors with additional perspective regarding the impact of certain significant items on EBITDA and facilitates a more direct comparison of its performance with its competitors. EBITDA and Adjusted EBITDA are not measurements of financial performance under GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under GAAP. Some of the limitations of these measures are:

 

   

They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

   

They do not reflect changes in, or cash requirements for, our working capital needs;

   

They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

   

They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

   

EBITDA does not reflect the impact of earnings or charges attributable to noncontrolling interests;

   

They do not reflect the impact of earnings or charges resulting from matters we consider to not be indicative of our ongoing operations; and

   

They do not reflect limitations on or costs related to transferring earnings from our subsidiaries to us.

In addition, other companies in our industry may calculate these measures differently than we do, limiting their usefulness as a comparative measure. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with GAAP. You should compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally.

A reconciliation of income (loss) from continuing operations to EBITDA and Adjusted EBITDA is as follows:

 

    2010     Transition
Period
    13 Weeks Ended
December 27, 2008
    2009     2008     2007     2006  
    (In thousands)  

Income (loss) from continuing operations

    $ 90,326        $ 33,925        $ (229,367     $ (152,263     $ (990,988     $ 51,607      $ (27,636 )   

Add:

             

Interest expense, net (i)

    101,748        44,193        39,569        157,543        131,627        118,542        38,965   

Income tax expense (benefit)

    (23,838     (102,371     278        (21,586     (194,921     47,319        1,573   

Depreciation and amortization of continuing operations

    231,045        56,705        60,158        236,005        240,305        204,903        135,133   

Minus:

             

Amortization of capitalized financing costs(ii)

    14,797        1,437        1,544        6,788        4,947        6,554        2,606   
                                                       

EBITDA

    384,484        31,015        (130,906     212,911        (818,924     415,817        145,429   

Add:

             

Goodwill impairment (iii)

    -        -        -        -        501,446        -        -   

Restructuring charges (iv)

    70,340        1,518        2,422        14,451        44,146        -        3,767   

Reorganization items, net (v)

    18,541        32,726        13,250        87,275        -        -        -   

Loss on early extinguishment of debt (vi)

    11,726        -        -        -        -        26,463        -   

Minus:

             

Net income (loss) attributable to noncontrolling interest

    3,185        312        (13     (82     1,184        91        563   
                                                       

Adjusted EBITDA

    $ 481,906        $ 64,947        $ (115,221     $ 314,719        $ (274,516     $ 442,189        $ 148,633   
                                                       

 

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    2005     2004     2003     2002     2001     2000  
    (In thousands)  

Income (loss) from continuing operations

    $ 280,004        $ 205,721        $ 106,244        $ 31,466        $ 41,677        $ 52,344   

Add:

           

Interest expense, net (i)

    42,632        48,419        30,726        24,199        25,619        17,779   

Income tax expense (benefit)

    147,543        127,142        37,870        (2,475     21,051        10,442   

Depreciation and amortization of continuing operations

    134,944        113,788        74,187        70,973        55,390        36,027   

Minus:

           

Amortization of capitalized financing costs(ii)

    2,321        1,951        1,477        1,417        1,860        1,236   
                                               

EBITDA

    602,802        493,119        247,550        122,746        141,877        115,356   

Add:

           

Goodwill impairment (iii)

    -        -        -        -        -        -   

Restructuring charges (iv)

    -        -        -        -        -        -   

Reorganization items, net (v)

    -        -        -        -        -        -   

Loss on early extinguishment of debt (vi)

    -        -        -        -        1,433        -   

Minus:

           

Net income (loss) attributable to noncontrolling interest

    185        (36     (368     724        -        -   
                                               

Adjusted EBITDA

    $ 602,617        $ 493,155        $ 247,918        $ 122,022        $ 143,310        $ 115,356   
                                               

 

  (i)

Interest expense, net, consists of interest expense less interest income.

  (ii)

Amortization of capitalized financing costs is included in both interest expense, net and depreciation and amortization above.

  (iii)

Goodwill impairment includes costs recognized to write off the carrying amount of goodwill recognized in the acquisition of Gold Kist.

  (iv)

Restructuring charges includes tangible asset impairment, severance and change-in-control compensation costs, and losses incurred on both the sale of unneeded broiler eggs and flock depletion.

  (v)

Reorganization items, net, includes professional fees directly related to our reorganization, the elimination of unamortized loan costs associated with certain of our terminated borrowing arrangements, the recognition in earnings of a previously unrealized gain on a derivative instrument purchased to hedge interest rate risk related to certain of our terminated borrowing arrangements, expenses related to the execution of a borrowing arrangement during our reorganization, costs related to post-petition facility closures, gains recognized on the sales of a processing facility and undeveloped land and a loss recognized on the sale of our interest in a hog farming joint venture.

  (vi)

Loss on early extinguishment of debt includes premiums paid and the elimination of unamortized loan costs related to the pre-petition retirement of certain of our unsecured notes.

 

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

Description of the Company

We are the second-largest chicken producer in the world with operations in the US, Mexico and Puerto Rico. We are primarily engaged in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products to retailers, distributors and foodservice operators. Our primary product types are fresh chicken products, prepared chicken products and export chicken products. We sell our fresh chicken products to the foodservice and retail markets. We sell our prepared food products to foodservice customers and retail distributors. We also export products to customers in approximately 95 countries, including Mexico, Russia and China. As a vertically integrated company, we control every phase of the production of our products. We operate feed mills, hatcheries, processing plants and distribution centers in 14 US states, Puerto Rico and Mexico. We operate in one reportable business segment, as a producer and seller of chicken products we either produce or purchase for resale. Our fresh chicken products consist of refrigerated (non-frozen) whole or cut-up chicken, either pre-marinated or non-marinated, and pre-packaged chicken in various combinations of freshly refrigerated, whole chickens and chicken parts. Our prepared chicken products include portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties and bone-in chicken parts. These products are sold either refrigerated or frozen and may be fully cooked, partially cooked or raw. In addition, these products are breaded or non-breaded and either pre-marinated or non-marinated.

We have a broad geographic reach, and we offer our diverse customer base a balanced portfolio of fresh and prepared chicken products. We have consistently provided our customers with high quality products and service with a focus on delivering higher-value, higher-margin, prepared food products. As such, we have become a valuable partner to our customers and a recognized industry leader. Our sales efforts are largely targeted towards the foodservice industry, principally chain restaurants and food processors. In 2010, we sold 6.9 billion pounds of dressed chicken and generated net sales of $6.9 billion. Our US operations, including Puerto Rico, accounted for 90.6% of our net sales in 2010. Our Mexico operations generated the remaining 9.4% of our net sales in that year.

In December 2009, we adopted the Restated Bylaws, which changed our fiscal year end from the Saturday nearest September 30 of each year to the last Sunday in December of each year. This change aligns our reporting cycle with the fiscal calendar of our majority stockholder, JBS USA. The change was effective for our 2010 fiscal year, which began December 28, 2009 and ended December 26, 2010 and resulted in an approximate three-month transition period which began September 27, 2009 and ended December 27, 2009 (the “Transition Period”). We now operate on the basis of a 52/53-week fiscal year that ends on the Sunday falling on or before December 31. The reader should assume any reference we make to a particular year (for example, 2010) in this report applies to our fiscal year and not the calendar year.

 

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Executive Summary

We reported net income attributable to Pilgrim’s Pride Corporation of $87.1 million, or $0.41 per common share, for 2010. These operating results included gross profit of $461.0 million. During 2010, we received $14.6 million of cash from operations. At December 26, 2010, we had cash and cash equivalents totaling $106.1 million.

Market prices for feed ingredients increased significantly in the last six months of 2010 after decreasing throughout 2009 and the first six months of 2010. Market prices for feed ingredients remain volatile. Consequently, there can be no assurance that our feed ingredient prices will not continue to increase materially. The following table compares the highest and lowest prices reached on nearby futures for one bushel of corn and one ton of soybean meal during the current year and previous three years:

 

     Corn      Soybean Meal  
   Highest
Price
     Lowest Price      Highest
Price
     Lowest Price  
           

2010:

           

Fourth Quarter

   $ 6.15       $ 4.56       $ 364.90       $ 283.20   

Third Quarter

     5.24         3.25         321.50         293.00   

Second Quarter

     3.79         3.36         296.50         260.60   

First Quarter

     4.26         3.44         321.00         249.60   

2009:

           

Transition Period

     4.13         3.31         336.00         272.00   

Fourth Quarter

     3.83         3.00         424.00         276.00   

Third Quarter

     4.50         3.61         433.40         278.00   

Second Quarter

     4.28         3.38         326.00         264.80   

First Quarter

     5.24         2.90         302.00         237.00   

2008

     7.60         3.35         455.50         254.10   

2007

     4.37         2.62         286.50         160.20   

Market prices for chicken products have stabilized since the end of 2008 but remain below levels sufficient to offset the generally higher costs of feed ingredients. Many producers within the industry, including Pilgrim’s Pride, cut production in 2008 and 2009 in an effort to correct the general oversupply of chicken in the US. Despite these production cuts, there can be no assurance that chicken prices will not decrease due to such factors as weakening demand for breast meat from food service providers and lower prices for chicken leg quarters in the export market as a result of weakness in world economies and restrictive credit markets.

We plan to increase production by a total of 10%, or 3.9 million birds per week, over the next two years. We reopened the idled processing plant in Douglas, Georgia, which we plan to have at full capacity by fall 2011. If market conditions are favorable, we plan to further expand production capacity at existing facilities later and to possibly reopen a second idled facility.

On January 13, 2010, we started purchasing derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to our

 

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anticipated consumption of commodity inputs such as corn, soybean meal and natural gas. As of December 26, 2010, we had long derivative positions in place covering 13.8% and 8.7% of anticipated corn and soybean meal needs, respectively, through December 2011. At December 26, 2010, the fair values of commodity derivative assets and commodity derivative liabilities totaled $33.4 million and $16.4 million, respectively. Our counterparties require that we post cash collateral for changes in the net fair value of the derivative contracts. At December 26, 2010, we had posted $4.5 million of cash collateral with our counterparties to secure our open positions. We do not designate derivative financial instruments that we purchase to mitigate commodity purchase exposures as cash flow hedges; therefore, we recognize changes in the fair value of these derivative financial instruments immediately in earnings. During 2010, we recognized a gain of $69.2 million, and in 2009 and 2008 we recognized losses of $21.1 million and $38.3 million, respectively, related to changes in the fair values of these derivative financial instruments. We did not recognize gains or losses related to changes in derivative financial instruments during the Transition Period. At December 26, 2010, we held written put options expiring between May 2011 and December 2011 on 6,775 corn contracts and 760 soybean meal contracts with an aggregate fair value of $7.9 million. At December 26, 2010, we were also in short positions on 2,805 corn contracts and 692 soybean meal contracts with an aggregate fair value of $8.5 million.

We recognized net reorganization expenses of $18.5 million during 2010. These expenses included (i) costs associated with the elimination of unamortized capitalized finance charges related to our pre-petition secured credit facilities, the 7 5/8% Senior Notes due 2015 and the 8 3/8% Senior Subordinated Notes due 2017, (ii) professional fees charged for post-petition reorganization services and (iii) severance and other costs related to post-petition facility closures and reduction-in-force (“RIF”) actions. These reorganization costs were partially offset by the recognition during the three months ended March 28, 2010 of a previously unrealized gain totaling $4.1 million on a derivative financial instrument designated as a cash flow hedge related to public debt extinguished on December 28, 2009.

During 2010, we recognized $18.2 million in change-in-control compensation and $13.0 million in severance costs related to our integration with JBS USA. We also recognized an $11.7 million loss on the early extinguishment of debt during 2010.

From February 2008 through December 2010, we completed the following exit or disposal activities:

 

   

Closed ten processing facilities/complexes (we reopened a facility in Douglas, Georgia and plan to have it at full capacity by fall 2011) and eight distribution centers;

   

Sold one closed processing complex and four closed distribution centers;

   

Reduced or consolidated production at various other processing facilities/complexes;

   

Closed two administrative office buildings; and

   

Reduced our workforce by 898 non-production positions.

 

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As of December 26, 2010, these exit or disposal activities, undertaken as part of our reorganizational efforts, have eliminated approximately 12,000 positions and resulted in net charges totaling $84.2 million.

Results of operations for 2010, the Transition Period, 2009 and 2008 included exit or disposal costs totaling $32.0 million, $3.2 million, $30.5 million and $16.2 million, respectively. All exit or disposal costs, with the exception of costs related to lease obligations and inventory reserves related to closed facilities, have resulted in cash expenditures or will result in cash expenditures within one year.

Results of operations for 2010, the Transition Period and 2009 included adjustments totaling $11.9 million, $4.1 million, $9.2 million, respectively, which reduced accrued costs. There were no significant adjustments in 2008. Adjustments recognized in the year ended 2010 included favorable adjustments to incentive compensation and related excise taxes upon finalization of an incentive plan analysis as well as the elimination of accrued severance and other exit or disposal costs at the culmination of the related exit or disposal period. These adjustments also included the assumption of a lease obligation related to our closed administrative office by an outside party.

The fair values of our administrative campuses in Pittsburg, Texas and Atlanta, Georgia were estimated using the market approach during the fourth quarter of 2010. We recognized impairment charges totaling $17.9 million and $6.9 million, respectively, during 2010 to reduce the carrying amounts of certain idled assets located at these campuses to fair value. In 2010, we also recognized operational restructuring charges totaling $1.0 million and administrative restructuring charges totaling $0.7 million to impair the carrying amounts of certain idled assets located in Georgia, North Carolina and Texas to fair value.

Since exiting from bankruptcy, we have focused on integrating our operations into the existing operations of JBS USA. We have made a series of changes to further this integration, including streamlining administrative functions and sales networks, consolidating distribution networks, optimizing freight and storage costs, capturing shared purchasing opportunities, consolidating treasury and risk management systems and implementing best practices throughout the business. We have also continued to streamline our operations and sell assets as part of our restructuring. Since our emergence from bankruptcy, we have eliminated 458 corporate and administrative positions across the organization as a result of our integration with JBS USA. As of December 26, 2010, the remaining total planned reduction in workforce of non-production positions under our integration is approximately 20 positions.

We continue to review and evaluate various restructuring and other alternatives to streamline our operations, improve efficiencies and reduce costs. Such initiatives may include selling assets, consolidating operations and functions, employee relocation and voluntary and involuntary employee separation programs. Any such actions may require us to obtain the pre-approval of the lenders under our secured revolving credit and term loan agreement with

 

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CoBank ACB, as Administrative Agent and Collateral Agent, and certain other lenders party thereto (the “Exit Credit Facility”). In addition, such actions will subject us to additional short-term costs, which may include asset impairment charges, lease commitment costs, employee retention and severance costs and other costs. Certain of these activities may have a disproportionate impact on our income relative to the cost savings.

We recently participated in antidumping and countervailing duty proceedings initiated by the Ministry of Commerce of the People’s Republic of China (“MOFCOM”). In these proceedings, MOFCOM examined whether US chicken producers, including us, were dumping certain chicken products into the People’s Republic of China (excluding the Special Administrative Region of Hong Kong), and whether US chicken producers, including us, were receiving countervailable subsidies in respect to those chicken products. MOFCOM concluded these proceedings in September 2010 and imposed antidumping and countervailing duties on the US chicken producers. The duties imposed range from 54.3% to 135.7%. The rate imposed on us is 58.5%. Until these duties are modified or eliminated, the duty rates can be expected to deter Chinese importers from purchases of US-origin chicken products, including our chicken products, and can be expected to diminish the volume of such purchases. The basis for imposing the duties may be challenged by the US in dispute settlement proceedings in the World Trade Organization.

Russia effectively banned US poultry imports shipped after January 1, 2010 due to residue levels left from a chlorine treatment procedure required by US Department of Agriculture regulations. As long as the restrictions remained in place, we were unable to export our chicken products to Russia. On June 24, 2010, Russia and the US announced they had reached an agreement to permit the resumption of US poultry exports to Russia. We began exporting products to Russia again in September 2010. No assurances can be given that new disruptions will not arise. For example, Russia has indicated that it will develop its own internal poultry production and has set an import quota of 350,000 metric tons of poultry for 2011. We have been able to mitigate the impact of these disruptions by selling our products to other customers.

On February 7, 2011, Mexico, the top foreign buyer of US chicken in calendar year 2010, announced that it would investigate US producers over dumping complaints lodged by Mexican chicken processors. Mexican chicken processors allege US producers sold chicken legs and thighs on the Mexican market below their cost of production in 2010.

Emergence from Bankruptcy

On December 1, 2008, we and six of our subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division, seeking reorganization relief under the provisions of Chapter 11 of Title 11 of the United States Code. We emerged from our Chapter 11 bankruptcy proceedings on December 28, 2009. In connection with our emergence from bankruptcy, our common stock outstanding immediately prior to the emergence was cancelled and converted into the right to receive

 

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newly-issued shares of common stock of the reorganized Company based on a one-for-one exchange ratio, which constitutes 36.0% of the total number of shares of our newly-issued common stock. The remaining shares of our newly-issued common stock, constituting 64.0% of our total issued and outstanding common stock on the date of our emergence from bankruptcy, were purchased by JBS USA, a wholly-owned indirect subsidiary of JBS S.A., a Brazil-based meat producer, for $800.0 million in cash. Subsequently, JBS USA increased its stake in our Company to 67.3%. Upon exiting from bankruptcy, we and certain of our subsidiaries entered into our Exit Credit Facility that provides for an aggregate commitment of $1.75 billion. The facility consisted of a three-year $600.0 million revolving credit facility, a three-year $375.0 million Term A facility and a five-year $775.0 million Term B facility. As of December 26, 2010, a principal amount of $205.3 million under the revolving loan commitment and a principal amount of $632.5 million under the Term B facility were outstanding.

Upon exiting from bankruptcy, we did not meet the requirements under Accounting Standards Codification (“ASC”) Topic 852, Reorganizations, to adopt fresh start accounting. Fresh start accounting requires the debtor to use current fair values in its balance sheet for both assets and liabilities and to eliminate all prior earnings or deficits. The two requirements to fresh start accounting are (i) the reorganization value of the company’s assets immediately before the date of confirmation of the plan of reorganization is less than the total of all post-petition liabilities and allowed claims and (ii) the holders of existing voting shares immediately before confirmation of the plan of reorganization receive less than 50.0% of the voting shares upon emergence. Upon exiting from bankruptcy, our fresh start calculation indicated that we did not meet the requirements to adopt fresh start accounting because the reorganization value of our assets exceeded the total of post-petition liabilities and allowed claims. Accordingly, we will continue to carry forward our assets and liabilities at historical values.

See “Note 2. Chapter 11 Proceedings” of our Consolidated Financial Statements included in this Annual Report for additional information on our Chapter 11 filings and proceedings.

Business Segment and Geographic Reporting

We operate in one reportable business segment, as a producer and seller of chicken products we either produce or purchase for resale in the US, Puerto Rico and Mexico. We conduct separate operations in the US, Puerto Rico and Mexico; however, for geographic reporting purposes, we include Puerto Rico with our US operations. Corporate expenses are allocated to Mexico based upon various apportionment methods for specific expenditures incurred related thereto with the remaining amounts allocated to the US.

During 2010, we announced organizational changes that resulted in the merger of our former other products segment into our chicken segment. Data related to our former other products segment, which included primarily non-chicken products sold through our distribution centers, table eggs, animal feed and offal, is no longer reported directly to the

 

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chief operating decision maker. This information is now reported through chicken operations management. We reclassified prior year segment disclosures to conform to the new segment presentation.

Results of Operations

2010 Compared to 2009

Net sales. Net sales for 2010 decreased $206.4 million, or 2.9%, from 2009. The following table provides additional information regarding net sales:

 

             Change from 2009        

Source

   2010      Amount     Percent        
     (In thousands, except percent data)        

United States

    $ 6,237,057         $ (332,595)        (5.1)        % (a)   

Mexico

     644,572         126,169         24.3         % (b)   
                     

Total net sales

    $ 6,881,629         $ (206,426)        (2.9)        %        
                     

 

(a)

US sales generated in 2010 decreased 5.1% from US sales generated in 2009. Sales volume decreased 7.1% primarily because of previously announced production cutbacks and subsequent reorganization efforts. Net revenue per pound sold increased 0.8% from the prior year.

 

(b)

Mexico sales generated in 2010 increased 24.3% from Mexico sales generated in 2009. Sales volume increased 17.9% from the prior year because of increased demand. Net revenue per pound sold increased 7.0% from the prior year primarily because of the appreciation of the Mexican peso against the US dollar in 2010.

Gross profit. Gross profit results improved by $150.2 million, or 48.3%, from a gross profit of $310.8 million incurred in 2009 to gross profit of $461.0 million generated in 2010. The following table provides gross profit information:

 

             Change from 2009            Percent of Net
Sales
       

Components

   2010      Amount      Percent            2010            2009        
     (In thousands, except percent data)        

Net sales

    $ 6,881,629         $ (206,426)         (2.9)        %         100          %         100          %        

Cost of sales

     6,416,318          (348,470)         (5.2)        %         93.2          %         95.4          % (a)   

Operational restructuring charges

     4,318          (8,146)         (65.4)        %         0.1          %         0.2          % (b)   
                                            

Gross profit

     $ 460,993        $   150,190          48.3         %         6.7          %         4.4          % (c)   
                                            

 

(a)

Cost of sales incurred by the US operations during 2010 decreased $429.3 million from cost of sales incurred by the US operations during 2009. This decrease occurred primarily because of improved production efficiencies, production cutbacks and aggregate net gain of $69.2 million recognized by the Company during 2010 on derivative financial instruments. Cost of sales incurred by the Mexico operations during 2010 increased $80.8 million from cost of sales incurred by the Mexico operations during 2009 primarily because of increased production volume.

 

(b)

The Company recognized noncash asset impairment charges in 2010 related to the closing of a processing plant in Georgia and a hatchery in North Carolina. In addition, the Company recognized relocation charges relating to the integration with JBS USA. In 2009, the Company recognized losses on sales of excess eggs and flock depletion at its operational production complexes.

 

(c)

Gross profit as a percent of net sales generated in 2010 increased 2.3 percentage points from 2009 primarily because of the cost-savings impact of production cutbacks, improved production efficiencies and gains recognized from derivative financial instruments during 2010.

 

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Operating income. Operating income increased $118.1 million, or 175.4%, from operating income of $67.3 million incurred for 2009 to operating income of $185.4 million generated for 2010. The following tables provide operating income information:

 

            Change from 2009        

Source

   2010      Amount      Percent        
     (In thousands, except percent data)        

United States

     $ 112,146           $ 73,819           192.6        %   

Mexico

     73,281           44,281           152.7        %   
                      

Total operating income

     $ 185,427           $ 118,100           175.4        %   
                      

 

            Change from 2009             Percent of Net Sales        

Components

   2010      Amount      Percent                 2010                     2009            
     (In thousands, except percent data)        

Gross profit

     $     460,993           $ 150,190          48.3          %         6.7         %         4.4        %       

SG&A expenses

     209,544           (31,945)         (13.2)         %         3.0         %         3.4        %(a)   

Administrative restructuring charges

     66,022           64,035          3,222.7           %         1.0         %         0.1        %(b)   
                                              

Operating income

     $     185,427           $     118,100         175.4           %         2.7         %         0.9        %(c)   
                                              

 

  (a)

SG&A expenses incurred by the US operations during 2010 decreased 14.9% from SG&A expenses incurred by the US operations during 2009 primarily because of reductions in employee compensation and related benefit costs resulting from restructuring actions taken in 2009 and 2010.

 

  (b)

In 2010, the Company incurred administrative restructuring charges, composed of cash-based severance, change-in-control compensation, charges related to the integration with JBS USA, other facility closure costs and noncash impairment charges related to, (i) a feed mill in Georgia, (ii) land in Texas and (iii) two administrative offices in Texas and Georgia. The Company incurred administrative restructuring charges in 2009 composed of cash-based severance, change-in-control compensation, charges related to the integration with JBS USA and other facility closure costs.

 

  (c)

Operating income as a percent of net sales generated in 2010 increased 1.8 percentage points from operating loss as a percent of sales incurred in 2009 primarily because of improved gross profit performance and reductions in employee compensation and related benefit costs resulting from restructuring actions taken in 2009 and 2010.

Interest expense. Consolidated interest expense decreased 34.8% to $105.6 million in 2010 from $161.9 million in 2009 primarily because of decreased average borrowings and a decrease in weighted average interest rate. As a percent of net sales, interest expense in 2010 decreased to 1.5% from 2.3% in 2009.

Early extinguishment of debt. The Company incurred expenses of $11.7 million related to the early extinguishment of debt in 2010. These expenses included costs associated with the elimination of unamortized capitalized finance charges related to the Term A loan and a portion of the Term B loan of the Exit Credit Facility.

Reorganization items. The Company incurred reorganization costs of $18.5 million in 2010. These expenses included (i) costs associated with