Pilgrim's Pride Corporation 2nd Qtr. FY 07
UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File number 1-9273


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

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)


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 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. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

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

Number of shares outstanding of the issuer’s common stock, as of April 30, 2007, was 66,555,733.
 
1

 
PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
   
March 31, 2007 and September 30, 2006
   
       Three months and six months ended March 31, 2007 and April 1, 2006
   
Six months ended March 31, 2007 and April 1, 2006
   
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Quantitative and Qualitative Disclosures about Market Risk
 
Controls and Procedures
     
PART II. OTHER INFORMATION
 
Legal Proceedings
 
Risk Factors
 
Submission of Matters to a Vote of Security Holders
 
Exhibits
 
 
2


PART I. FINANCIAL INFORMATION
  
Item 1. Financial Statements
  
Pilgrim's Pride Corporation
  
 
(Unaudited)
  
   
 March 31, 2007
  
 September 30, 2006
  
   
 (In thousands, except share and per share data)
  
Assets
              
Current Assets:
              
Cash and cash equivalents
  
$
69,170
  
$
156,404
  
Investment in available for sale securities
    
24,000
    
21,246
  
Trade accounts and other receivables, less allowance for doubtful
accounts
    
391,569
    
263,149
  
Inventories
   
896,331
    
585,940
  
Income taxes receivable
   
76,683
    
39,167
  
Current deferred income taxes
    
81,493
    
7,288
  
Other current assets
   
48,489
    
32,480
  
Total Current Assets
    
1,587,735
    
1,105,674
  
               
Investment in Available for Sale Securities
    
31,042
    
115,375
  
Other Assets
    
101,283
    
50,825
  
Goodwill
    
515,387
    
--
  
Property, Plant and Equipment:
              
Land
    
92,984
    
52,493
  
Buildings, machinery and equipment
    
2,435,408
    
1,702,949
  
Autos and trucks
    
54,249
    
57,177
  
Construction-in-progress
    
122,886
    
63,853
  
     
2,705,527
    
1,876,472
  
Less accumulated depreciation
    
(793,977
)
  
(721,478
)
     
1,911,550
    
1,154,994
  
   
$
4,146,997
  
$
2,426,868
  
Liabilities and Stockholders’ Equity
              
Current Liabilities:
              
Accounts payable
  
$
392,137
  
$
293,685
  
Accrued expenses
    
462,373
    
272,830
  
Current maturities of long-term debt
    
8,253
    
10,322
  
Total Current Liabilities
    
862,763
    
576,837
  
               
Long-Term Debt, Less Current Maturities
    
1,789,519
    
554,876
  
Deferred Income Taxes
    
338,788
    
175,869
  
Other long-term liabilities
    
85,048
    
--
  
Minority Interest in Subsidiary
    
2,033
    
1,958
  
Commitments and Contingencies
              
               
Stockholders’ Equity:
              
Preferred stock, $.01 par value, 5,000,000 authorized shares; none issued
    
--
    
--
  
Common stock - $.01 par value, 160,000,000 authorized shares; 66,555,733 issued
    
665
    
665
  
Additional paid-in capital
    
469,779
    
469,779
  
Retained earnings
    
594,942
    
646,750
  
Accumulated other comprehensive loss
    
3,460
    
134
  
Total Stockholders’ Equity
    
1,068,846
    
1,117,328
  
   
$
4,146,997
  
$
2,426,868
  

See notes to consolidated financial statements.

3
Index


Pilgrim’s Pride Corporation and Subsidiaries
(Unaudited)
  
           
   
Three Months Ended
  
Six Months Ended
  
   
March 31, 2007
  
April 1, 2006
  
March 31, 2007
  
April 1, 2006
 
   
(in thousands, except share and per share data)
  
Net Sales
  
$
1,993,965
  
$
1,265,709
  
$
3,331,097
  
$
2,609,521
  
Cost of sales
    
1,910,023
    
1,228,508
    
3,181,628
    
2,453,920
  
Gross profit
    
83,942
    
37,201
    
149,469
    
155,601
  
Selling, general and administrative
    
95,641
    
75,137
    
164,073
    
147,339
  
Operating income (loss)
   
(11,699
)
  
(37,936
)
  
(14,604
)
  
8,262
  
Other Expense (Income):
                          
Interest expense
    
39,295
    
13,271
    
53,209
    
25,666
  
Interest income
    
(1,684
)
  
(3,214
)
  
(2,992
)
  
(7,161
)
Loss on early extinguishment of debt
    
14,475
    
--
    
14,475
    
--
  
Foreign exchange (gain)/loss
   
10
    
(190
)
  
1,514
    
(810
)
Miscellaneous, net
    
(3,678
)
  
(702
)
  
(6,194
)
  
1,028
  
Total other expenses, net
    
48,418
    
9,165
    
60,012
    
18,723
  
                           
Loss before income taxes
    
(60,117
)
  
(47,101
)
  
(74,616
)
  
(10,461
)
Income tax (benefit) expense
   
(20,040
)
  
(15,147
)
  
(25,804
)
  
(4,185
)
Net loss
 
$
(40,077
)
$
(31,954
)
$
(48,812
)
$
(6,276
)
                           
Net loss per common share- basic and diluted
  
$
(0.60
)
$
(0.48
)
$
(0.73
)
$
(0.09
)
Dividends declared per common share
  
$
0.0225
  
$
0.0225
  
$
0.0450
  
$
1.0450
  
                           
Weighted average shares outstanding
    
66,555,733
    
66,555,733
    
66,555,733
    
66,555,733
  
                           
See notes to consolidated financial statements.


4
Index


Pilgrim’s Pride Corporation and Subsidiaries
(Unaudited)
  
       
   
Six Months Ended
  
   
 March 31, 2007
  
 April 1, 2006 
  
   
(in thousands)
  
Cash Flows From Operating Activities:
             
Net loss
  
$
(48,812
)
$
(6,276
)
Adjustments to reconcile net loss to cash provided by operating activities
              
Depreciation and amortization
    
87,673
    
65,092
  
Loss on early extinguishment of debt
    
7,099
    
--
  
Impairment of assets
    
--
    
3,767
  
Loss on property disposals
    
(306
)
  
1,215
  
Deferred income taxes
    
6,194
 
  
(605
)
Changes in operating assets and liabilities
              
Accounts and other receivables
    
(13,383
)
  
59,192
  
Income taxes receivable
    
(11,738
)
  
(14,822
)
Inventories
    
(64,090
)
  
(81,353
)
Other current assets
    
(3,511
)
  
(11,471
)
Accounts payable and accrued expenses
    
(23,528
)
  
(10,642
)
Other
    
8,664
  
(2,134
)
Cash provided by (used for) operating activities
    
(55,738
)
  
1,963
  
               
Investing Activities:
              
Acquisitions of property, plant and equipment
    
(94,449
)
  
(74,519
)
Business acquisitions
    
(1,108,817
)
  
--
  
Purchases of investment securities
    
(357,248
)
  
(212,403
)
Proceeds from sale/maturity of investment securities
    
436,536
    
319,260
  
Proceeds from property disposals
    
4,959
    
2,717
  
Other, net
    
7,940
 
  
(3
)
Cash provided by (used for) investing activities
    
(1,111,079
)
  
35,052
  
               
Financing Activities:
              
Borrowing for acquisition
    
1,230,000
    
--
  
Proceeds from notes payable to banks
    
--
    
83,000
  
Repayments on notes payable to banks
    
--
    
(83,000
)
Proceeds from long-term debt
    
774,791
    
--
  
Payments on long-term debt
    
(906,673
)
  
(32,350
)
        Debt issue costs     (15,565 )   
 -- 
  
Cash dividends paid
    
(2,995
)
  
(69,551
)
Cash provided by (used for) financing activities
    
1,079,558
    
(101,901
)
               
Effect of exchange rate changes on cash and cash equivalents
    
25
    
(1
)
Decrease in cash and cash equivalents
    
(87,234
)
  
(64,887
)
Cash and cash equivalents at beginning of year
    
156,404
    
132,567
  
Cash and Cash Equivalents at End of Period
  
$
69,170
  
$
67,680
  
 
              
               
See notes to consolidated financial statements.
 
5
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Pilgrim’s Pride Corporation (referred to herein as “Pilgrim’s,” “the Company,” “we,” “us,” “our” or similar terms) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments unless otherwise disclosed) considered necessary for a fair presentation have been included. Operating results for the period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending September 29, 2007. For further information, refer to the consolidated financial statements and footnotes thereto included in Pilgrim’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

The consolidated financial statements include the accounts of Pilgrim’s and its wholly and majority owned subsidiaries. Significant intercompany accounts and transactions have been eliminated.

The assets and liabilities of the foreign subsidiaries are translated at end-of-period exchange rates, except for any non-monetary assets, which are translated at equivalent dollar costs at dates of acquisition using historical rates. Operations of foreign subsidiaries are translated at average exchange rates in effect during the period.

During July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation Number 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum requirements a tax position must meet before being recognized in the financial statements. In addition, FIN 48 prohibits the use of Statement of Financial Accounting Standards (SFAS) Number 5, Accounting for Contingencies, in evaluating the recognition and measurement of uncertain tax positions. The Company will be required to adopt FIN 48 on September 30, 2007, and has not yet assessed the impact of the adoption of this standard on the Company’s financial statements.

During September 2006, the FASB issued SFAS Number 157, Fair Value Measurements. SFAS Number 157 establishes a framework for measuring fair value within generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS Number 157 does not require any new fair value measurements in generally accepted accounting principles. However, the definition of fair value in SFAS Number 157 may affect assumptions used by companies in determining fair value. The Company will be required to adopt SFAS Number 157 on September 28, 2008. The Company has not completed its evaluation of the impact of adoption SFAS Number 157 on the Company’s financial statements, but currently believes the impact of the adoption of SFAS Number 157 will not require material modification of the Company’s fair value measurement and will be substantially limited to expanded disclosures in the notes to the Company’s consolidated financial statements.

6
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

Total comprehensive income (loss) was $(40.0) million and $(31.7) million for the three months and $(45.5) million and $(6.1) million for the six months ended March 31, 2007 and April 1, 2006, respectively.

NOTE B—BUSINESS ACQUISITION

On December 27, 2006, through a tender offer we acquired 45,343,812 shares of Gold Kist Inc. (“Gold Kist”) common stock representing 88.87% of all outstanding shares. Subsequently we completed the purchase of all remaining shares and on January 9, 2007, Gold Kist became a wholly owned subsidiary of the Company. The acquired assets and assumed liabilities are included in our March 31, 2007 balance sheet using a preliminary allocation of the purchase price. However, we have not completed certain appraisals and other purchase price adjustments. During the quarter ended March 31, 2007, the Company recognized a liability of $20.0 million for certain of Gold Kist’s unfavorable sales contracts. However, the Company has not yet completed its analysis of all its purchase and sales contracts assumed in the acquisition.

The purchase price for Gold Kist was $21.00 per share for all outstanding common shares plus the assumption of approximately $143.5 million of Gold Kist’s debt. In the second quarter of fiscal 2007, we retired the Gold Kist 10 1/4% Senior Notes due 2014 with a book value of $128.5 million at a cost of $149.8 million plus accrued interest and the Gold Kist Subordinated Capital Certificates of Interest at par plus accrued interest and a premium of one year’s interest. The Company also paid transaction costs. This acquisition was initially funded by (1) $780 million borrowed under our revolving-term secured credit facility, and (2) $450 million borrowed under our $450 million Senior Unsecured Term Loan Agreement (“Bridge Loan”) (see Note D below).

In connection with the acquisition, the Company determined that certain of the Gold Kist benefit plans will be frozen immediately with the intent to ultimately terminate. As a result, the Company recorded an additional purchase price adjustment of $82.5 million representing the current estimated incremental cost of termination. We do not anticipate any material net periodic benefit costs (income) related to these plans in fiscal 2007. Additionally, we conformed Gold Kist’s accounting policies to the Company’s accounting policies and provided for deferred income taxes on all related purchase adjustments.

The following summarizes our purchase price at March 31, 2007, (in thousands):

       
Purchase 50,146,368 shares at $21.00 per share
  
$
1,053,074
  
Premium paid on retirement of debt
    
22,208
  
Retirement of various share-based compensation awards
    
25,677
  
Various costs and fees
    
45,639
  
Total purchase price at March 31, 2007
  
$
1,146,598
  

The following table summarizes our current estimates of the fair value of the assets acquired and liabilities assumed at the date of acquisition of Gold Kist. The purchase price allocation is preliminary and will be finalized after completion of the independent appraisal of certain of the assets acquired and additional analysis of the liabilities assumed, which is currently underway. Upon completion of our analysis, significant adjustments may be required.
 
7
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index
 

Purchase price allocation:
(In thousands):

Current Assets
  
$
421,468
  
Plant, Property & Equipment
    
755,434
 
Goodwill
    
515,387
  
Other assets
    
64,332
 
Total assets acquired
    
1,756,621
  
Current liabilities
    
279,527
  
Long-term debt, less current maturities
    
140,674
 
Deferred income taxes
    
111,206
  
Other long-term liabilities
    
78,616
  
Total liabilities assumed
    
610,023
  
Total purchase price
 
$
1,146,598
  
 
        

Goodwill represents the purchase price in excess of the value assigned to identifiable tangible and intangible assets. The value assigned to goodwill is supported by expected benefits gained by consolidating the two companies.

The following unaudited pro forma financial information has been presented as if the acquisition had occurred at the beginning of each period presented.

In thousands, except share and per share data
  
 
Three Months Ended
  
 
Six Months Ended
  
   
March 31, 2007
(Actual)
  
April 1, 2006
(Pro forma)
  
March 31, 2007
(Pro forma)
  
April 1, 2006
(Pro forma)
  
Net sales
  
$
1,993,965
  
$
1,795,249
  
$
3,858,907
  
$
3,680,202
  
Depreciation and amortization
  
$
54,976
  
$
57,347
  
$
112,775
  
$
111,088
  
Operating income (loss)
  
$
(11,699
)
$
(74,376
)
$
(45,036
)
$
(31,490
)
Interest expense, net
  
$
37,611
  
$
31,291
  
$
76,038
  
$
61,293
  
Income (loss) before taxes
 
$
(60,117
)
$
(103,329
)
$
(129,431
)
$
(90,400
)
Net income (loss)
  
$
(40,077
)
$
(65,738
)
$
(82,920
)
$
(55,073
)
Net income (loss) per common share
 
$
(0.60
)
$
(0.99
)
$
(1.25
)
$
(0.83
)
Weighted average shares outstanding
    
66,555,733
    
66,555,733
    
66,555,733
    
66,555,733
  
 
8
 
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

NOTE C—INVENTORIES

   
March 31,
  
September 30,
  
(In thousands)
    
2007
    
2006
  
Chicken:
              
Live chicken and hens
  
$
343,076
  
$
196,284
  
Feed and eggs
    
224,867
    
132,309
  
Finished chicken products
    
271,574
    
201,516
  
     
839,517
    
530,109
  
Turkey:
              
Live turkey and hens
  
$
8,471
  
$
7,138
  
Feed and eggs
   
3,673
    
4,740
  
Finished turkey products
    
22,512
    
26,685
  
     
34,656
    
38,563
  
Other Products:
              
Commercial feed, table eggs, retail farm store and other
  
$
11,740
  
$
7,080
  
Distribution inventories (other than chicken & turkey products)
    
10,418
    
10,188
  
     
22,158
    
17,268
  
               
Total Inventories
  
$
896,331
  
$
585,940
  


9
 
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

NOTE D—NOTES PAYABLE AND LONG-TERM DEBT
   
Final
Maturity
  
March 31, 2007
  
September 30, 2006
  
               
Senior unsecured notes, at 9 5/8%
    
2011
  
$
299,391
  
$
299,601
  
Senior subordinated unsecured notes, at 9 1/4%
    
2013
    
5,135
    
82,640
  
Senior unsecured notes, at 7 5/8%
    
2015
    
400,000
    
--
  
Senior unsecured notes, at 8 3/8%
    
2017
    
250,000
    
--
  
Secured revolving credit facility with notes payable at LIBOR plus 1.25% to LIBOR plus 2.75%
    
2011
    
50,472
    
74,682
  
Note payable to an insurance company at 6.68%
    
2012
    
--
    
50,115
  
Notes payable to an insurance company at LIBOR plus 2.2075%
    
2013
    
--
    
41,333
  
Revolving-term secured credit facility with notes payable at US Treasuries, plus a spread
    
2016
    
25,000
    
--
  
Term credit facility, with notes payable at LIBOR plus 1.75%
    
2016
    
540,000
    
--
  
Term loan payable at 7.06%
    
2016
    
110,000
        
Term loan payable at 6.84%
    
2016
    
99,750
    
--
  
Other
   
Various
    
18,024
    
16,827
  
           
1,797,772
    
565,198
  
Less current maturities
          
(8,253
)
  
(10,322
)
Total
        
$
1,789,519
  
$
554,876
  
                     


On December 15, 2006, the Company borrowed $100 million at 6.84% under our term credit facility using the majority of the funds to retire the notes payable to an insurance company maturing in 2012 and 2013.

In January 2007, the Company borrowed (1) $780 million under our revolving-term secured credit agreement and (2) $450 million under our Bridge Loan agreement. On January 24, 2007, the Company closed on the sale of $400 million of 7 5/8% Senior Notes due 2015 (the “Senior Notes”) and $250 million of 8 3/8% Senior Subordinated Notes due 2017 (the “Subordinated Notes”), sold at par. Interest is payable on May 1 and November 1 of each year, beginning November 1, 2007. We may redeem all or part of the Senior Notes on or after May 1, 2011. We may redeem all or part of the Subordinated Notes on or after May 1, 2012. Before May 1, 2010, we also may redeem up to 35% of the aggregate principal amount of each of the Senior Notes and the Subordinated Notes with the proceeds of certain equity offerings. Each of these optional redemptions is at a premium as described in the indentures under which the notes were issued. The proceeds from the sale of the notes, after underwriting discounts, were used to (1) retire the Bridge Loan, (2) repurchase $75.7 million of the Company’s 9 1/4% Senior Subordinated Notes due 2013 at a premium of $7.4 million plus accrued interest of $1.3 million and (3) reduce the balance owed under our revolving-term secured agreement. Early extinguishment of debt of $14.5 million includes the $7.4 million premium along with unamortized loan costs of $7.1 million.

10
 
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

NOTE E—RELATED PARTY TRANSACTIONS

Lonnie “Bo” Pilgrim, the Chairman and, through certain related entities, the major stockholder of the Company (collectively, the “major stockholder”), owns an egg laying and a chicken growing operation. In addition, at certain times during the year, the major stockholder may purchase from the Company live chickens and hens and certain feed inventories during the grow-out process and then contract with the Company to resell the birds at maturity using a market-based formula, with price subject to a ceiling price calculated at his cost plus two percent. No purchases have been made by the Company under this agreement since the first quarter of fiscal 2006 when the major stockholder recognized an operating margin of $4,539 on gross amounts paid by the Company to the major stockholder as described below in “Live chicken purchases from major stockholder.”

Much of the Company’s debt obligations have been guaranteed by and entity controlled by the Company’s major stockholders. In consideration of such guarantees, the Company has paid to Pilgrim Interests, Ltd., an affiliate of Lonnie “Bo” Pilgrim, the amounts described below in “Loan Guaranty Fees”.

Transactions with related parties are summarized as follows:

 
  
Three Months Ended
  
Six Months Ended
  
   
March 31, 2007
  
April 1, 2006
  
March 31, 2007
  
April 1,2006
  
   
(in thousands)
  
Lease payments on commercial egg property
  
$
188
  
$
188
  
$
375
  
$
375
  
Contract grower pay
  
$
202
  
$
238
  
$
401
  
$
473
  
Other sales to major stockholder
  
$
165
  
$
152
  
$
312
  
$
372
  
Live chicken purchases from major stockholder
 
$
-
  
$
-
  
$
-
  
$
231
  
Loan guaranty fees
 
$
1,165
  
$
367
  
$
1,501
  
$
777
  
Lease payments and operating expenses on airplane
  
$
131
  
$
120
  
$
250
  
$
251
  

NOTE F—COMMITMENTS and CONTINGENCIES

At March 31, 2007, the Company had $86.1 million in letters of credit outstanding relating to normal business transactions.

Among the claims presently pending against the Company are claims brought by current and former employees seeking compensation for the time spent donning and doffing work equipment. We are aware of an industry-wide investigation by the Wage and Hour Division of the U.S. Department of Labor to ascertain compliance with various wage and hour issues, including the compensation of employees for the time spent on activities such as donning and doffing work equipment. Due, in part, to the government investigation and the recent U.S. Supreme Court decision in IBP, Inc. v. Alvarez, it is possible that we may be subject to additional employee claims. We intend to assert vigorous defenses to the litigation. Nonetheless, there can be no assurances that other similar claims may not be brought against the Company. Currently we do not expect these cases to have a material impact on our financial position or results of operations.

11
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

On December 31, 2003, we were served with a purported class action complaint styled “Angela Goodwin, Gloria Willis, Johnny Gill, Greg Hamilton, Nathan Robinson, Eddie Gusby, Pat Curry, Persons Similarly Situated v. ConAgra Poultry Company and Pilgrim’s Pride, Incorporated” in the United States District Court, Western District of Arkansas, El Dorado Division, alleging racial and age discrimination at one of the facilities we acquired from ConAgra. Two of the named plaintiffs, Greg Hamilton and Gloria Willis, were voluntarily dismissed from this action. We believe we have meritorious defenses to the class certification as well as the individual claims and we intend to vigorously oppose class certification and defend these claims. After considering our available resources, we do not expect these cases to have a material impact on our financial position or results of operations.

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 the financial position or results of operations of the Company.

NOTE G—BUSINESS SEGMENTS

We operate in three reportable business segments as (1) a producer and seller of chicken products, (2) a producer and seller of turkey products and (3) and seller of other products.

The following table presents certain information regarding our segments:

12
 
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index


   
Three Months Ended
  
Six Months Ended
  
   
March 31, 2007(a)
  
April 1, 2006
  
March 31, 2007(a)
  
April 1, 2006
  
   
(In thousands)
  
Net Sales to Customers:
                          
Chicken:
                          
United States
 
$
1,683,463
  
$
985,208
  
$
2,714,412
  
$
2,019,374
  
Mexico
    
111,046
    
104,031
    
233,955
    
196,434
  
Sub-total
    
1,794,509
    
1,089,239
    
2,948,367
    
2,215,808
  
Turkey
    
12,256
    
17,115
    
64,106
    
79,019
  
Other Products:
                          
United States
   
183,194
    
154,083
    
312,169
    
307,613
  
Mexico
    
4,006
    
5,272
    
6,455
    
7,081
  
Sub-total
    
187,200
    
159,355
    
318,624
    
314,694
  
Total
  
$
1,993,965
  
$
1,265,709
  
$
3,331,097
  
$
2,609,521
  
Operating Income (Loss):
                          
Chicken:
                          
United States
 
$
(4,148
)
$
(37,716
)
$
(15,594
)
$
16,146
  
Mexico
    
(12,605
)
  
1,844
    
(11,276
)
  
(5,226
)
Sub-total
    
(16,753
)
  
(35,872
)
  
(26,870
)
  
10,920
  
Turkey(b)
    
261
    
(6,716
)
  
2,767
    
(12,358
)
Other Products:
                          
United States
   
4,273
    
4,314
    
8,412
    
8,904
  
Mexico
    
520
    
338
    
1,087
    
796
  
Sub-total
    
4,793
    
4,652
    
9,499
    
9,700
  
Total
  
$
(11,699
)
$
(37,936
)
$
(14,604
)
$
8,262
  
Depreciation and Amortization(c)
                          
Chicken:
                          
United States
  
$
49,046
  
$
28,717
  
$
76,491
  
$
54,278
  
Mexico
    
2,746
    
3,125
    
5,552
    
5,718
  
Sub-total
    
51,792
    
31,842
    
82,043
    
59,996
  
Turkey
    
401
    
772
    
775
    
1,553
  
Other Products:
                          
United States
   
2,729
    
2,090
    
4,757
    
3,467
  
Mexico
    
54
    
40
    
98
    
76
  
Sub-total
    
2,783
    
2,130
    
4,855
    
3,543
  
Total
  
$
54,976
  
$
34,744
  
$
87,673
  
$
65,092
  

(a)
The Company acquired Gold Kist Inc. on December 27, 2006 for $1,146.6 million plus assumed liabilities. The acquisition has been accounted for as a purchase and the results of operations have been included in our consolidated results of operations since the acquisition date.
   
(b)
Included in the operating losses for the turkey segment for the three months ended April 1, 2006 are charges of $3.8 million to write certain assets down to estimated realizable value. These assets are held for sale and are related to the Franconia, Pennsylvania turkey cooking facility at which the Company ceased production of certain products in March 2006. Also included in the operating losses for the turkey segment for the same three month period are accrued severance expenses totaling $0.2 million. In addition to the previous items, the operating losses for the turkey segment for the six months ended April 1, 2006 include charges of $2.5 million to reduce the carrying value of certain packaging and supplies, bringing the total of such charges for the six months ended April 1, 2006 to $6.5 million.
   
(c)
Includes amortization of capitalized financing costs of approximately $1.1 million and $0.9 million for the three month periods and $1.8 million and $1.6 million for the six month periods ending March 31, 2007 and April 1, 2006, respectively.
   

13
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of the Company

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

Business Acquisition

On December 27, 2006, we acquired 88.87% of all outstanding shares of common stock of Gold Kist Inc. which was the third largest chicken company in the U.S., accounting for approximately 8.8% of chicken produced in the U.S. in 2005. On January 9, 2007, we acquired all remaining shares of Gold Kist common stock, making Gold Kist a wholly owned subsidiary of the Company. The assets and liabilities of Gold Kist have been included in the accompanying balance sheet using an allocation based on preliminary valuations and purchase price adjustments. See Note B - “Business Acquisition” of the notes to our consolidated financial statements included elsewhere in this Quarterly Report.

We are in the process of fully integrating the operations of Gold Kist into the Company. We intend to do this as rapidly as possible without interrupting the business. We expect the acquisition and its integration will result in significant cost saving opportunities and enhanced growth. We are currently preparing an optimization plan for all production and distribution facilities and determining and implementing a “best practice” approach across all operations.

Executive Summary
 
During the first six months of fiscal 2007, amid growing demand for corn-based ethanol, feed ingredient prices were at very high levels when compared to the prior year period, which adversely affected our business. The average price of corn during our second quarter of fiscal 2007 was 82.6% higher than during the second quarter of fiscal 2006 and 17.2% higher than during the first quarter of fiscal 2007. While we have succeeded in passing on some of these higher costs to our customers, most of the benefit from these price increases was not fully realized in the second quarter of fiscal 2007. However, our U.S. operations returned to profitability late in the second quarter of fiscal 2007 and we continue to address pricing opportunities in customer contracts as they arise.
 
The net loss of $40.1 million for the second quarter of fiscal 2007 is $8.1 million greater than the net loss of $32.0 million for the second quarter of fiscal 2006. This increased loss is primarily driven by:

§  
Increased cost of sales due to increased feed costs between the two periods, as feed ingredient costs rose 38.2% in the U.S. and 39.0% in Mexico, due primarily to corn and soybean meal prices.
§  
Although our average chicken selling prices in the U.S. were up 10.9% over the same period last year, the increase was not sufficient to completely offset the increased feed cost.

§  
Net interest expense increased $27.6 million due primarily to the financing of the acquisition of Gold Kist.

§  
A $14.5 million loss on the early extinguishment of debt incurred during the financing of the Gold Kist acquisition during the second quarter of fiscal 2007.

The net loss of $48.8 million for the first six months of fiscal 2007 is $42.5 million higher than the net loss of $6.3 million for the first six months of fiscal 2006. This increase is primarily driven by the following items offset by improved market prices for our chicken products:

§  
Increased cost of sales due to increased feed costs between the two periods. Feed ingredient costs rose 35.7% in the U.S. and 33.3% in Mexico chicken divisions, respectively, due primarily to corn and soybean meal prices.

§  
Net interest expense increased $31.7 million in the first six months of fiscal 2007, when compared to the same period in fiscal 2006, due primarily to the financing of the acquisition of Gold Kist.

§  
A $14.5 million loss on the early extinguishment of debt during the second quarter of fiscal 2007.

Business Environment

Profitability in the poultry industry is materially affected by the commodity prices of feed ingredients, chicken and turkey, which are determined by supply and demand factors. As a result, the chicken and turkey industries are subject to cyclical earnings fluctuations. Cyclical earnings fluctuations can be mitigated somewhat by:

- Business strategy;
- Product mix;
- Sales and marketing plans; and
- Operating efficiencies.

In an effort to reduce price volatility and to generate higher, more consistent profit margins, we have concentrated on the production and marketing of prepared foods products. Prepared foods products generally have higher profit margins than our other products. Also, the production and sale in the U.S. of prepared foods products reduces the impact of the costs of feed ingredients on our profitability. Feed ingredient purchases are the single largest component of our cost of sales, representing approximately 32.6% of our consolidated cost of sales in the first six months of fiscal 2007. The production of feed ingredients is positively or negatively affected primarily by weather patterns throughout the world, the global level of supply inventories and demand for feed ingredients, and the agricultural policies of the U.S. and foreign governments. 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.

14
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

As a significant portion of the U.S. chicken production is exported, the commodity prices of chicken and turkey can be, and in the first and second quarters of fiscal 2006 were, adversely affected by disruptions in export markets. Disruptions in the first and second quarters of fiscal 2006 included the effects focus and concern over avian influenza had on international demand for poultry products and the need to reroute products in transit to locations other than those intended as these concerns materialized. Disruptions at times may also be caused by restrictions on imports of U.S.-produced poultry products imposed by foreign governments for a variety of reasons, including the protection of their domestic poultry producers and allegations of consumer health issues. For example, Russia and Japan have restricted the importation of U.S.-produced poultry for both of these reasons in recent periods. In July 2003, the U.S. and Mexico entered into a safeguard agreement with regard to imports into Mexico of chicken leg quarters from the U.S. Under this agreement, a tariff rate for chicken leg quarters of 98.8% of the sales price was established. This tariff rate was reduced on January 1, 2007 to 19.8% and is scheduled to be eliminated on January 1, 2008. The tariff was imposed due to concerns that the duty-free importation of such products as provided by the North American Free Trade Agreement would injure Mexico’s chicken industry. As such tariffs are reduced, we expect greater amounts of chicken to be imported into Mexico from the U.S., which could negatively affect the profitability of Mexican chicken producers and positively affect the profitability of U.S. exporters of chicken to Mexico. Although this could have a negative impact on our Mexican chicken operations, we believe that this will be mitigated by the close proximity of our U.S. operations to the Mexico border. We have the largest U.S. production and distribution capacities near the Mexican border, which gives us a strategic advantage to capitalize on exports of U.S. chicken to Mexico. Because these disruptions in chicken export markets are often political, no assurances can be given as to when the existing disruptions will be alleviated or that new ones will not arise.

Business Segments

We operate in three reportable business segments as (1) a producer and seller of chicken products, (2) a producer and seller of turkey products and (3) seller of other products.

The following table presents certain information regarding our segments:

15
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index


   
Three Months Ended
  
Six Months Ended
  
   
March 31, 2007(a)
  
April 1, 2006
  
March 31, 2007(a)
  
April 1, 2006
  
   
(In thousands)
  
Net Sales to Customers:
                          
Chicken:
                          
United States
 
$
1,683,463
  
$
985,208
  
$
2,714,412
  
$
2,019,374
  
Mexico
    
111,046
    
104,031
    
233,955
    
196,434
  
Sub-total
    
1,794,509
    
1,089,239
    
2,948,367
    
2,215,808
  
Turkey
    
12,256
    
17,115
    
64,106
    
79,019
  
Other Products:
                          
United States
   
183,194
    
154,083
    
312,169
    
307,613
  
Mexico
    
4,006
    
5,272
    
6,455
    
7,081
  
Sub-total
    
187,200
    
159,355
    
318,624
    
314,694
  
Total
  
$
1,993,965
  
$
1,265,709
  
$
3,331,097
  
$
2,609,521
  
Operating Income (Loss):
                          
Chicken:
                          
United States
 
$
(4,148
)
$
(37,716
)
$
(15,594
)
$
16,146
  
Mexico
    
(12,605
)
  
1,844
    
(11,276
)
  
(5,226
)
Sub-total
    
(16,753
)
  
(35,872
)
  
(26,870
)
  
10,920
  
Turkey(b)
    
261
    
(6,716
)
  
2,767
    
(12,358
)
Other Products:
                          
United States
   
4,273
    
4,314
    
8,412
    
8,904
  
Mexico
    
520
    
338
    
1,087
    
796
  
Sub-total
    
4,793
    
4,652
    
9,499
    
9,700
  
Total
  
$
(11,699
)
$
(37,936
)
$
(14,604
)
$
8,262
  
Depreciation and Amortization(c)
                          
Chicken:
                          
United States
  
$
49,046
  
$
28,717
  
$
76,491
  
$
54,278
  
Mexico
    
2,746
    
3,125
    
5,552
    
5,718
  
Sub-total
    
51,792
    
31,842
    
82,043
    
59,996
  
Turkey
    
401
    
772
    
775
    
1,553
  
Other Products:
                          
United States
   
2,729
    
2,090
    
4,757
    
3,467
  
Mexico
    
54
    
40
    
98
    
76
  
Sub-total
    
2,783
    
2,130
    
4,855
    
3,543
  
Total
  
$
54,976
  
$
34,744
  
$
87,673
  
$
65,092
  

(a)
The Company acquired Gold Kist Inc. on December 27, 2006 for $1,146.6 million plus assumed liabilities. The acquisition has been accounted for as a purchase and the results of operations have been included in our consolidated results of operations since the acquisition date.
   
(b)
Included in the operating losses for the turkey segment for the three months ended April 1, 2006 are charges of $3.8 million to write certain assets down to estimated realizable value. These assets are held for sale and are related to the Franconia, Pennsylvania turkey cooking facility at which the Company ceased production of certain products in March 2006. Also included in the operating losses for the turkey segment for the same three month period are accrued severance expenses totaling $0.2 million. In addition to the previous items, the operating losses for the turkey segment for the six months ended April 1, 2006 include charges of $2.5 million to reduce the carrying value of certain packaging and supplies, bringing the total of such charges for the six months ended April 1, 2006 to $6.5 million.
   
(c)
Includes amortization of capitalized financing costs of approximately $1.1 million and $0.9 million for the three month periods and $1.8 million and $1.6 million for the six month periods ending March 31, 2007 and April 1, 2006, respectively.
   

16
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

The following table presents certain items as a percentage of net sales for the periods indicated:

   
Percentage of Net Sales
  
   
Three Months Ended
  
 Six Months Ended
  
   
March 31, 2007
  
 April 1, 2006
  
 March 31, 2007
  
April 1, 2006
  
Net Sales
    
100.0
%
  
100.0
%
  
100.0
%
  
100.0
%
Costs and Expenses
                          
Cost of sales
    
95.8
%
  
97.1
%
  
95.5
%
  
94.0
%
Gross profit
    
4.2
%
  
2.9
%
  
4.5
%
  
6.0
%
Selling, general and administrative
    
4.8
%
  
5.9
%
  
4.9
%
  
5.6
%
Operating Income (Loss)
    
(0.6
)%
  
(3.0
)%
  
(0.4
)%
  
0.3
%
Interest expense
    
2.0
%
  
1.0
%
  
1.6
%
  
1.0
%
Interest income
    
(0.1
)%
  
(0.3
)%
  
(0.1
)%
  
(0.3
)%
                           
Income (loss) before income taxes
    
(3.0
)%
  
(3.7
)%
  
(2.2
)%
  
(0.4
)%
Net income (loss)
    
(2.0
)%
  
(2.5
)%
  
(1.5
)%
  
(0.2
)%

Results of Operations

The changes in our results of operations for the three-month and six-month periods ending March 31, 2007, as compared to the same periods in fiscal 2006 are impacted greatly as a result of the acquisition of Gold Kist on December 27, 2006 as discussed in Note B to the financial statements included elsewhere in this quarterly report. The acquisition resulted in significant increases in net sales and related costs, including interest expense.

Fiscal Second Quarter 2007 Compared to Fiscal Second Quarter 2006

Net Sales. Net Sales for the second quarter of fiscal 2007 increased $728.3 million, or 57.5%, over the second quarter of fiscal 2006. The following table provides additional information regarding net sales (dollars in millions):

   
 
Fiscal Quarter Ended
  
Change from
Fiscal Quarter Ended
          
   
March 31,
  
April 1,
  
Percentage
      
Source
  
2007
  
2006
  
Change
      
                   
Chicken-
                  
United States
  
$
1,683.5
  
$
698.3
    
70.9
%
  
(a
)
Mexico
    
111.0
    
7.0
    
6.7
%
  
(b
)
   
$
1,794.5
  
$
705.3
    
64.7
%
      
                           
Turkey
  
$
12.3
  
$
(4.8
)
  
(28.4
)%
  
(c
)
                           
Other Products-
                          
United States
  
$
183.2
  
$
29.1
    
18.9
%
      
Mexico
    
4.0
    
(1.3
)
  
(24.0
)%
      
   
$
187.2
  
$
27.8
    
17.5
%
  
(d
)
   
$
1,994.0
  
$
728.3
    
57.5
%
      


17
 
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index


(a)
U.S. chicken sales for the quarter increased compared to the same quarter last fiscal year due primarily to the acquisition of Gold Kist Inc., whose results are included for the full quarter, offset in part by a reduction in sales resulting from our previously announced 5% year-over-year production cuts . Also, sales rose due to a 10.9% increase in net revenue per pound sold.
   
(b)
Mexico chicken sales increased compared to the second quarter of last fiscal year because of a 5.0% increase in revenue per pound sold and a 1.7% increase in pounds sold.
   
(c)
Turkey sales declined due to our decision in the first quarter of fiscal 2006 to cease production of certain products at our Franconia, Pennsylvania turkey cooking operation although the plant continued to process into March 2006.
   
(d)
Other product sales increased due to the addition of the distribution centers added through the Gold Kist acquisition offset somewhat by reduced sales in Mexico.
   

Gross Profit. Gross profit increased $46.7 million, or 125.5%, in the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006.

The following table provides gross profit information (dollars in millions):

   
Quarter
  
Change From
      
Percentage of
  
Percentage
      
   
Ended
  
Quarter Ended
      
Net Sales
  
of Net Sales
      
   
March 31,
  
April 1,
  
Percentage
  
Second Quarter
  
Second Quarter
      
Components
  
2007
  
2006
  
Change
  
Fiscal 2007
  
Fiscal 2006
      
                           
Net sales
  
$
1,994.0
  
$
728.3
    
57.5
%
  
100.0
%
  
100.0
%
      
Cost of sales
    
1,910.1
    
681.6
    
55.5
%
  
95.8
%
  
97.1
%
  
(a
)
                                       
Gross profit
  
$
83.9
  
$
46.7
    
125.5
%
  
4.2
%
  
2.9
%
  
(b
)
 

(a)
Cost of sales increased compared to the same quarter last fiscal year due to the acquisition of Gold Kist and a 38.2% increase in the cost of feed. These increases were offset by a $7.7 million decrease in the cost of sales in the turkey division due to the decision to cease production on March 3, 2006, of certain products at our Franconia, Pennsylvania turkey cooking facility. Included in cost of sales for the second quarter of fiscal 2006 was a charge of $3.8 million to impair the carrying value of certain equipment formerly used in our turkey division and currently held for sale and $0.2 million for severance costs.
   
(b)
Gross profit increased $46.7 million due to increased selling prices and the acquisition of Gold Kist offset somewhat by increased cost of feed.

Operating Income (Loss). Operating loss for the second quarter of fiscal 2007 decreased $26.2 million, or 69.2%, when compared to the second quarter of fiscal 2006.

18
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

The following tables provide operating income (loss) information (dollars in millions):

       
Change from
      
   
Quarter Ended
  
Quarter Ended
      
   
March 31,
  
April 1,
  
Percentage
  
Source
  
2007
  
2006
  
Change
  
                 
Chicken
                    
United States
  
$
(4.2
)
$
33.5
    
89.0
%
Mexico
    
(12.6
)
  
(14.4
)
  
(783.6
)%
   
$
(16.8
)
$
19.1
    
53.2
%
Turkey
  
$
0.3
  
$
7.0
    
103.9
%
                     
Other Products
                    
United States
  
$
4.3
  
$
(0.1
)
  
(1.0
)%
Mexico
    
0.5
    
0.2
    
53.8
%
   
$
4.8
  
$
0.1
    
3.0
%
Operating Income (Loss)
  
$
(11.7
)
$
26.2
    
69.2
%


       
Change from
      
Percentage
  
Percentage
      
   
Quarter Ended
  
Quarter Ended
      
of Net Sales
 
of Net Sales
      
   
March 31,
  
April 1,
  
Percentage
  
Second Quarter
  
Second Quarter
      
Components
  
2007
  
2006
  
Change
  
Fiscal 2007
  
Fiscal 2006
      
                             
Gross profit
  
$
83.9
  
$
46.7
    
125.5
%
  
4.2
%
  
2.9
%
      
Selling, general and administrative expense
    
95.6
    
20.5
    
27.3
%
  
4.8
%
  
5.9
%
  
(a
)
                                       
Operating income (loss)
  
$
(11.7
)
$
26.2
    
69.2
%
  
(0.6
)%
  
(3.0
)%
  
(b
)

(a)
Selling, general and administrative expense increased due to the Gold Kist acquisition.
   
(b)
Increased operating income is primarily due to the items discussed above under gross profit offset by increased selling, general and administrative expense.

Interest Expense. Interest expense increased $26.0 million to $39.3 million in the second quarter of fiscal 2007, when compared to $13.3 million for the second quarter of fiscal 2006, due primarily to the funds borrowed to complete the Gold Kist acquisition. As a percentage of sales, interest expense in the second quarter of fiscal 2007 increased to 2.0% from 1.0% in the second quarter of fiscal 2006.

Interest Income. Interest income decreased from $3.2 million in the second quarter of fiscal 2006 to $1.7 million in the second quarter of fiscal 2007 due to reduced investments. As a percentage of sales, interest income in the second quarter of fiscal 2007 decreased to 0.1% from 0.3% in the second quarter of fiscal 2006.

19
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

Early Extinguishment of Debt. Early extinguishment of debt of $14.5 million in the second quarter of fiscal 2007 represents the premium paid of $7.4 million and the write off of $7.1 million of unamortized loan costs.

Miscellaneous, Net. Consolidated miscellaneous, net expense (income) of $(3.7) million for the second quarter of fiscal 2007 consisted mainly of investment and dividend income. Miscellaneous, net was $(0.7) for the second quarter of fiscal 2006.

Income Tax (Benefit) Expense. Consolidated income tax benefit in the second quarter of fiscal 2007 was $(20.0) million, compared to $(15.1) million in the second quarter of fiscal 2006. This income tax benefit was primarily due to the loss before income taxes in the U.S.

First Six Months of Fiscal 2007 Compared to First Six Months of Fiscal 2006

Net Sales. Net Sales for the first six months of fiscal 2007 increased $721.6 million, or 27.7%, versus the first six months of fiscal 2006. The following table provides additional information regarding net sales (dollars in millions):

   
 
First Six Months Ended
  
Change from
First Six Months Ended
          
   
March 31,
  
April 1,
  
Percentage
      
Source
  
2007
  
2006
  
Change
      
                   
Chicken-
                          
United States
  
$
2,714.4
  
$
695.0
    
34.4
%
  
(a
)
Mexico
    
234.0
    
37.6
    
19.1
%
  
(b
)
   
$
2,948.4
  
$
732.6
    
33.1
%
      
                           
Turkey
  
$
64.1
  
$
(14.9
)
  
(18.9
)%
  
(c
)
                           
Other Products-
                          
United States
  
$
312.1
  
$
4.5
    
1.5
%
      
Mexico
    
6.5
    
(0.6
)
  
(8.5
)%
      
   
$
318.6
  
$
3.9
    
1.2
%
      
   
$
3,331.1
  
$
721.6
    
27.7
%
      

(a)
U.S. chicken sales for the first six months of fiscal 2007 were 27.7% more than the first six months of fiscal 2006 primarily because of the Gold Kist acquisition, offset in part by a reduction in sales resulting from our previously announced 5% year-over-year production cuts which became fully effective in January 2007.
   
(b)
Mexico chicken sales increased due to a 15.1% increase in net revenue per pound sold during the first six months of fiscal 2007 versus the first six months of fiscal 2006 and a 3.5% increase in pounds sold.
   
(c)
Turkey sales declined because of the March 2006 discontinuation of certain products discussed above.
   

Gross Profit. Gross profit decreased $6.1 million, or 3.9%, in the first six months of fiscal 2007 compared to the first six months of fiscal 2006.

The following table provides gross profit information (dollars in millions):

       
Change From
      
Percentage of
  
Percentage of
      
   
First Six
  
First Six
      
Net Sales
  
Net Sales
      
   
Months Ended
  
Months Ended
      
First Six
  
First Six
      
   
March 31,
  
April 1,
  
Percentage
  
Months
 
Months
     
Components
  
2007
  
2006
  
Change
  
Fiscal 2007
  
Fiscal 2006
      
                           
Net sales
  
$
3,331.1
  
$
721.6
    
27.7
%
  
100.0
%
  
100.0
%
      
Cost of sales
    
3,181.6
    
727.7
    
29.7
%
  
95.5
%
  
94.0
%
  
(a
)
                                       
Gross profit
  
$
149.5
  
$
(6.1
)
  
(3.9
)%
  
4.5
%
  
6.0
%
  
(b
)
 

(a)
Cost of sales increased primarily due to the Gold Kist acquisition. Cost of sales also, increased due to a 34.3% increase in feed cost per pound. These increases were offset by a $24.1 million decrease in the cost of sales in the turkey division due to the decision to cease production on March 3, 2006, of certain products at our Franconia, Pennsylvania turkey cooking facility. Included in cost of sales for the first six months of fiscal 2006 was a charge of $3.8 million to impair the carrying value of certain equipment currently held for sale and formerly used in our turkey division, a charge of $2.5 million to reduce the carrying value of certain packaging and supplies associated with those products and $0.2 million for severance costs.
   
(b)
Gross profit decreased primarily due to feed costs increasing faster than selling prices.


20
PILGRIM’S PRIDE CORPORATION 
March 31, 2007
Index

Operating Income. Operating income for the first six months of fiscal 2007 decreased $22.9 million when compared to the first six months of fiscal 2006.

The following tables provide operating income information (dollars in millions):

       
Change from
      
   
First Six
  
First Six
      
   
Months Ended
  
Months Ended
      
   
March 31,
  
April 1,
  
Percentage
  
Source
  
2007
  
2006
  
Change
  
                 
Chicken
                
United States
  
$
(15.6
)
$
(31.7
)
  
(196.6
)%
Mexico
    
(11.3
)
  
(6.1
)
  
(115.8
)%
   
$
(26.9
)
$
(37.8
)
  
(346.1
)%
Turkey
  
$
2.8
  
$
15.2
    
122.4
%
                     
Other Products
                    
United States
  
$
8.4
  
$
(0.6
)
  
(5.5
)%
Mexico
    
1.1
    
0.3
    
36.6
%
   
$
9.5
  
$
(0.3
)
  
(2.1
)%
Operating Income
  
$
(14.6
)
$
(22.9
)
  
(276.8
)%


       
Change from
      
Percentage
 
Percentage
      
   
First Six
  
First Six
      
of Net Sales
  
of Net Sales
      
   
Months Ended
  
Months Ended
      
First Six
  
First Six
      
   
March 31,
  
April 1,
  
Percentage
  
Months
 
Months
     
Components
  
2007
  
2006
  
Change
  
Fiscal 2007
  
Fiscal 2006
      
                             
Gross profit
  
$
149.5
  
$
(6.1
)
  
(3.9
)%
  
4.5
%
  
6.0
%
      
Selling, general and administrative expense
    
164.1
    
16.8
    
11.4
%
  
4.9
%