Edgar Filing: PILGRIMS PRIDE CORP

for10q_body.htm

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 29, 2008

¨	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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ 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

Number of shares outstanding of the issuer’s common stock, as of May 5, 2008, was 66,555,733.

INDEX

INDEX PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets March 29, 2008 and September 29, 2007
		Consolidated Statements of Operations Three months and six months ended March 29, 2008 and March 31, 2007
		Consolidated Statements of Cash Flows Six months ended March 29, 2008 and March 31, 2007
		Notes to Consolidated Financial Statements as of March 29, 2008
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 6.	Exhibits

SIGNATURES
EXHIBIT INDEX

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PILGRIM’S PRIDE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	March 29, 2008		September 29, 2007
Assets:	(In thousands)
Cash and cash equivalents	$	97,195	$	66,168
Investment in available-for-sale securities		10,205		8,153
Trade accounts and other receivables, less allowance for doubtful accounts		89,346		113,486
Inventories		1,085,515		925,340
Income taxes receivable		62,193		61,901
Current deferred income taxes		22,901		8,095
Other current assets		77,597		47,959
Assets held for sale		6,335		15,534
Assets of discontinued business		34,976		53,232

Total current assets		1,486,263		1,299,868

Investment in available-for-sale securities		44,227		46,035
Other assets		125,053		138,546
Goodwill		499,669		505,166
Property, plant and equipment, net		1,736,817		1,784,621

	$	3,892,029	$	3,774,236

Liabilities and stockholders’ equity:
Accounts payable		425,988		398,512
Accrued expenses		457,543		491,252
Current maturities of long-term debt		2,891		2,872
Liabilities of discontinued business		18,437		12,566

Total current liabilities		904,859		905,202

Long-term debt, less current maturities		1,629,930		1,318,558
Deferred income taxes		248,486		326,570
Other long-term liabilities		83,990		51,685
Commitments and contingencies		—		—

Preferred stock		—		—
Common stock		665		665
Additional paid-in capital		469,779		469,779
Retained earnings		541,004		687,775
Accumulated other comprehensive income		13,316		14,002

Total stockholders’ equity		1,024,764		1,172,221

	$	3,892,029	$	3,774,236
See notes to consolidated financial statements.

INDEX

PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
	Three Months Ended						Six Months Ended
	March 29, 2008			March 31, 2007			March 29, 2008			March 31, 2007
	(In thousands, except share and per share data)
Net sales	$	2,100,794		$	1,987,185		$	4,148,147		$	3,279,142
Cost of sales		2,124,173			1,903,136			4,066,423			3,132,855
Asset impairment		12,022			—			12,022			—

Gross profit (loss)		(35,401	)		84,049			69,702			146,287

Selling, general and administrative expenses		102,559			94,723			206,992			161,863
Restructuring charges		5,669			—			5,669			—

Operating loss		(143,629	)		(10,674	)		(142,959	)		(15,576	)

Other expense (income):
Interest expense		33,777			38,696			63,788			52,416
Interest income		(446	)		(1,684	)		(954	)		(2,993	)
Loss on early extinguishment of debt		—			14,475			—			14,475
Miscellaneous, net		(1,161	)		(3,668	)		(4,024	)		(4,679	)

Total other expense (income)		32,170			47,819			58,810			59,219

Loss from continuing operations before income taxes		(175,799	)		(58,493	)		(201,769	)		(74,795	)

Income tax benefit		(64,295	)		(19,426	)		(57,055	)		(25,872	)

Loss from continuing operations		(111,504	)		(39,067	)		(144,714	)		(48,923	)

Income (loss) from operation of discontinued business, net of tax		(847	)		(1,010	)		34			111

Gain on sale of discontinued business, net of tax		903			—			903			—

Net loss	$	(111,448	)	$	(40,077	)	$	(143,777	)	$	(48,812	)

Gain (loss) per common share—basic and diluted:
Continuing operations	$	(1.67	)	$	(0.59	)	$	(2.17	)	$	(0.73	)
Discontinued business		—			(0.01	)		0.01			—

Net loss	$	(1.67	)	$	(0.60	)	$	(2.16	)	$	(0.73	)

Dividends declared per common share	$	0.0225		$	0.0225		$	0.0450		$	0.0450

Weighted average shares outstanding		66,555,733			66,555,733			66,555,733			66,555,733

Reconciliation of net loss to comprehensive loss:
Net loss	$	(111,448	)	$	(40,077	)	$	(143,777	)	$	(48,812	)
Unrealized gain (loss) on securities		(518	)		92			(715	)		3,613

Comprehensive loss	$	(111,966	)	$	(39,985	)	$	(144,492	)	$	(45,199	)
See notes to consolidated financial statements.

INDEX

PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Six Months Ended
	March 29, 2008			March 31, 2007
	(In thousands)
Cash flows from operating activities:
Net loss	$	(143,777	)	$	(48,812	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		116,296			87,673
Asset impairment		12,022			—
Loss on early extinguishment of debt		—			7,099
Gain on property disposals		(1,570	)		(306	)
Deferred income tax (benefit) expense		(56,082	)		6,194
Changes in operating assets and liabilities:
Accounts and other receivables		36,879			(13,383	)
Inventories		(154,874	)		(64,090	)
Other current assets		(33,699	)		(3,511	)
Accounts payable and accrued expenses		(18,224	)		(27,984	)
Income taxes, net		(14,723	)		(11,738	)
Other		12,018			16,629

Cash used in operating activities		(245,734	)		(52,229	)

Cash flows for investing activities:
Acquisitions of property, plant and equipment		(70,216	)		(94,449	)
Purchases of investment securities		(18,466	)		(357,248	)
Proceeds from sale or maturity of investment securities		13,969			436,536
Business acquisitions		—			(1,108,817	)
Proceeds from property disposals		18,717			4,959

Cash used in investing activities		(55,996	)		(1,119,019	)

Cash flows from financing activities:
Borrowing for acquisition		—			1,230,000
Proceeds from long-term debt		810,516			774,791
Payments on long-term debt		(498,932	)		(906,673	)
Change in outstanding cash management obligations		24,168			4,456
Debt issue costs		—			(15,565	)
Cash dividends paid		(2,995	)		(2,995	)

Cash provided by financing activities		332,757			1,084,014

Increase (decrease) in cash and cash equivalents		31,027			(87,234	)
Cash and cash equivalents at beginning of period		66,168			156,404

Cash and cash equivalents at end of period	$	97,195		$	69,170
See notes to consolidated financial statements.

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 (“US”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the US Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by US 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 three and six months ended March 29, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending September 27, 2008. 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 29, 2007.

The consolidated financial statements include the accounts of Pilgrim’s and its 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.

Certain reclassifications have been made to prior periods to conform to current period presentations.

The Company and certain retirement plans that it sponsors invest in a variety of financial instruments. In response to the continued turbulence in global financial markets, we have analyzed our portfolios of investments and, to the best of our knowledge, none of our investments, including money market funds units, commercial paper and municipal securities, have been downgraded because of this turbulence, and neither we nor any fund in which we participate hold significant amounts of structured investment vehicles, mortgage backed securities, collateralized debt obligations, auction-rate securities, credit derivatives, hedge funds investments, fund of funds investments or perpetual preferred securities.

INDEX

On December 27, 2006, we acquired a majority of the outstanding common stock of Gold Kist Inc. (“Gold Kist”) through a tender offer. We subsequently acquired all remaining Gold Kist shares and, on January 9, 2007, Gold Kist became our wholly owned subsidiary. 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. The following unaudited financial information has been presented as if the acquisition had occurred at the beginning of each period presented.

	Six Months Ended
	March 29, 2008 Actual			March 31, 2007 Pro forma
	(In thousands, except share and per share data)
Net sales	$	4,148,147		$	3,806,952
Depreciation and amortization	$	115,601		$	112,776
Operating loss	$	(142,959	)	$	(46,008	)
Interest expense, net	$	62,834		$	75,245
Loss from continuing operations before taxes	$	(201,769	)	$	(129,610	)
Loss from continuing operations	$	(144,714	)	$	(83,031	)
Net loss	$	(143,777	)	$	(82,920	)
Net loss per common share	$	(2.16	)	$	(1.25	)
Weighted average shares outstanding		66,555,733			66,555,733

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations. This Statement improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects by establishing principles and requirements for how the acquirer (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company must apply prospectively SFAS No. 141(R) to business combinations for which the acquisition date occurs during or subsequent to the first quarter of fiscal 2010. The impact that adoption of SFAS No. 141(R) will have on the Company’s financial condition, results of operations and cash flows is dependent upon many factors. Such factors would include, among others, the fair values of the assets acquired and the liabilities assumed in any applicable business combination, the amount of any costs the Company would incur to effect any applicable business combination, and the amount of any restructuring costs the Company expected but was not obligated to incur as the result of any applicable business combination. Thus, we cannot accurately predict the effect SFAS No. 141(R) will have on future acquisitions at this time.

INDEX

In December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This Statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for how that reporting entity (a) identifies, labels and presents in its consolidated statement of financial position the ownership interests in subsidiaries held by parties other than itself, (b) identifies and presents on the face of its consolidated statement of operations the amount of consolidated net income attributable to itself and to the noncontrolling interest, (c) accounts for changes in its ownership interest while it retains a controlling financial interest in a subsidiary, (d) initially measures any retained noncontrolling equity investment in a subsidiary that is deconsolidated, and (e) discloses other information about its interests and the interests of the noncontrolling owners. The Company must apply prospectively the accounting requirements of SFAS No. 160 in the first quarter of fiscal 2010. The Company should also apply retroactively the presentation and disclosure requirements of the Statement for all periods presented at that time. The Company does not expect the adoption of SFAS No. 160 will have a material impact on its financial position, financial performance or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company must apply the requirements of SFAS No. 161 in the first quarter of fiscal 2010. The Company does not expect the adoption of SFAS No. 161 will have a material impact on its financial position, financial performance or cash flows.

NOTE B—DISCONTINUED BUSINESS

In March 2008, the Company sold certain assets of its turkey business for $18.6 million and recorded a gain of $1.5 million ($0.9 million, net of tax) in Gain on sale of discontinued business, net of tax in the consolidated statement of operations for the three and six months ended March 29, 2008. This business was composed of substantially all of our former turkey segment. The results of this business are included in Income (loss) from operation of discontinued business, net of tax for all periods presented.

INDEX

For a period of time, we will continue to incur cash flow activities that are associated with our former turkey business. These activities—the grow-out and processing of turkeys—are transitional in nature. We have entered into a short-term co-pack agreement with the acquirer of the former turkey business under which they will process turkeys for sale to our customers through the end of fiscal 2008. For the period of time until we have collected funds on the sale of these turkeys, we will continue to incur cash flow activity and to report operating activity in Income (loss) from operation of discontinued business, net of tax, although at a substantially reduced level. Upon completion of these activities, the cash flows and the operating activity reported in Income (loss) from operation of discontinued business, net of tax will be eliminated.

Neither our continued involvement in the distribution and sale of these turkeys or the co-pack agreement confers upon us the ability to influence the operating and/or financial policies of the turkey business under its new ownership.

The following amounts related to our turkey business have been segregated from continuing operations and included in Income (loss) from operation of discontinued business, net of tax and Gain on sale of discontinued business, net of tax in the consolidated statements of operations:

	Three Months Ended						Six Months Ended
	March 29, 2008			March 31, 2007			March 29, 2008		March 31, 2007
	(In thousands)
Net sales	$	10,154		$	6,780		$	56,012	$	51,955

Income (loss) from operation of discontinued business before income taxes	$	(1,361	)	$	(1,623	)	$	54	$	179
Income tax expense (benefit)		(514	)		(613	)		20		68

Income (loss) from operation of discontinued business, net of tax	$	(847	)	$	(1,010	)	$	34	$	111

Gain on sale of discontinued business before income taxes	$	1,450		$	—		$	1,450	$	—
Income tax expense		547			—			547		—

Gain on sale of discontinued business, net of tax	$	903		$	—		$	903	$	—

INDEX

Property, plant and equipment related to our turkey business has been segregated and included in Assets held for sale in the consolidated balance sheet as of September 29, 2007. The following assets and liabilities related to our turkey business have been segregated and included in Assets of discontinued business and Liabilities of discontinued business, as appropriate, in the consolidated balance sheets as of March 29, 2008 and September 29, 2007.

	March 29, 2008		September 29, 2007
	(In thousands)
Trade accounts and other receivables, less allowance for doubtful accounts	$	3,970	$	16,687
Inventories		31,006		36,545

Assets of discontinued business	$	34,976	$	53,232

Accounts payable	$	15,120	$	3,804
Accrued expenses		3,317		8,762

Liabilities of discontinued business	$	18,437	$	12,566

NOTE C—RESTRUCTURING ACTIVITIES

Results of operations for the three and six months ended March 29, 2008 include restructuring charges related to the Company’s decision to close a processing complex in Siler City, North Carolina and distribution centers in Plant City and Pompano Beach, Florida; Oskaloosa, Iowa; Jackson, Mississippi; Cincinnati, Ohio; and Nashville, Tennessee. In March 2008, the Company’s Board of Directors approved the closings as part of a plan intended to curtail losses amid record-high costs for corn, soybean meal and other feed ingredients and an oversupply of chicken in the United States. The closings began in March 2008 and are expected to be completed by June 2008. The affected processing complex and distribution centers currently employ approximately 1,100 individuals. Virtually all of these individuals will be impacted by the decision to close these facilities.

In connection with these closings, the Company also recorded a non-cash asset impairment of $12.0 million in the second quarter of fiscal 2008 to reduce the carrying amounts of certain assets to their estimated fair values. The Company also expects to incur incremental costs of $9.2 million through the end of fiscal 2008. Such costs include lease commitment costs of $3.5 million, employee retention and severance costs of $3.0 million and miscellaneous closing costs of $2.7 million. Almost all such costs will be cash expenditures. These costs will be expensed throughout the transition period. The Company recognized approximately $5.7 million of these charges during the second quarter of fiscal 2008 and expects to recognize the remaining charges during the third quarter of fiscal 2008. The charges recognized during the second quarter of fiscal 2008 consisted of $3.0 million of employee retention and severance costs and $2.7 million of miscellaneous closing costs.

INDEX

NOTE D—ACCOUNTS RECEIVABLE

In connection with the Receivables Purchase Agreement dated June 26, 1998, as amended (the “Agreement”), the Company sells, on a revolving basis, certain of its trade receivables (the “Pooled Receivables”) to a special purpose corporation wholly owned by the Company, which in turn sells a percentage ownership interest to third parties. The aggregate amount of Pooled Receivables sold plus the remaining Pooled Receivables available for sale under this Agreement declined from $300.0 million at September 29, 2007 to $288.1 million at March 29, 2008. The outstanding amount of Pooled Receivables sold and the remaining Pooled Receivables available for sale under this Agreement at March 29, 2008 were $270.6 million and $17.5 million, respectively. The loss recognized on the sold receivables during the six months ended March 29, 2008 was not material.

NOTE E—INVENTORIES

	March 29, 2008		September 29, 2007
	(In thousands)
Chicken:
Live chicken and hens	$	402,393	$	343,185
Feed and eggs		449,609		223,631
Finished chicken products		212,447		337,052

Total chicken inventories		1,064,449		903,868

Other products:
Commercial feed, table eggs, retail farm store and other	$	11,962	$	11,327
Distribution inventories (other than chicken products)		9,104		10,145

Total other products inventories		21,066		21,472

Total inventories	$	1,085,515	$	925,340

NOTE F—PROPERTY, PLANT AND EQUIPMENT

	March 29, 2008			September 29, 2007
	(In thousands)
Land	$	108,475		$	114,365
Buildings, machinery and equipment		2,396,922			2,366,418
Autos and trucks		60,979			59,489
Construction-in-progress		127,585			124,193

Property, plant and equipment, gross		2,693,961			2,664,465

Accumulated depreciation		(957,144	)		(879,844	)

Property, plant and equipment, net	$	1,736,817		$	1,784,621

INDEX

NOTE G—NOTES PAYABLE AND LONG-TERM DEBT

	Maturity	March 29, 2008			September 29, 2007
		(In thousands)

Senior unsecured notes, at 7.625%	2015	$	400,000		$	400,000
Senior subordinated notes, at 8.375%	2017		250,000			250,000
Secured revolving credit facility with notes payable at LIBOR plus 0.75% to LIBOR plus 2.25%	2013		137,000			—
Secured revolving credit facility with notes payable at LIBOR plus 1.25% to LIBOR plus 3.25%	2011		52,116			26,293
Secured revolving/term credit facility with two notes payable at LIBOR plus a spread, one note payable at 6.84% and one note payable at 7.08%	2016		771,300			622,350
Other	Various		22,405			22,787

Notes payable and long-term debt			1,632,821			1,321,430

Current maturities of long-term debt			(2,891	)		(2,872	)

Notes payable and long-term debt, less current maturities		$	1,629,930		$	1,318,558

At March 29, 2008, $76.4 million was available for borrowing under the Company’s secured revolving credit facility expiring in 2013, $400.0 million was available for borrowing under the revolving portion of the Company’s secured revolving/term credit facility expiring in 2016 and no funds were available for borrowing under the Company’s secured revolving credit facility expiring in 2011.

The Company is required, by certain provisions of its debt agreements, to maintain levels of working capital and net worth, to limit dividends to a maximum of $26.0 million per year, and to maintain various fixed charge, leverage, current and debt-to-equity ratios. The Company’s debt agreements are also generally cross-defaulted with one another, and the Company’s leases are generally cross-defaulted with the credit agreements. At March 29, 2008, the Company has fully complied with these covenants. In April 2008, the Company and its lenders amended certain covenants in its credit facilities and receivables purchase facility effective through the end of fiscal 2009 to levels the Company believes it can comply with in the near-term despite the current economic issues facing the chicken industry.

NOTE H—INCOME TAXES

We recorded an income tax benefit of $57.1 million for the six months ended March 29, 2008 on a loss from continuing operations before taxes of $201.8 million. Income tax expense related to the operation and disposal of our discontinued turkey business during the first six months of fiscal 2008 was not material. The difference between the effective rate reflected in the provision for income taxes and the amounts determined by applying the applicable statutory United States tax rate for the six months ended March 29, 2008 is primarily due to an increase in the valuation allowance on net operating loss carryforwards in Mexico recorded in the first quarter of fiscal 2008.

INDEX

On September 30, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). This Interpretation required us to develop a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Adoption of FIN 48 had no significant effect on the Company’s financial condition. The net unrecognized tax benefits of $32.9 million include $26.3 million that, if recognized, would benefit our effective income tax rate and $6.6 million that, if recognized, would reduce goodwill.

The Company files numerous consolidated and separate income tax returns in the United States Federal jurisdiction, the Mexico Federal jurisdiction and in many state jurisdictions. With few exceptions, the Company is no longer subject to US Federal, state or local income tax examinations for years before 2003 and is no longer subject to Mexico income tax examinations by tax authorities for years before 2005. We are currently under audit by the Internal Revenue Service for the tax years ended September 26, 2003 to September 30, 2006. It is likely that the examination phase of the audit will conclude in 2008, and it is reasonably possible a reduction in our FIN 48 liability may occur; however, quantification of an estimated range cannot be made at this time.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the six months ended March 29, 2008, we recognized $2.1 million in interest and penalties related to uncertain tax positions. As of March 29, 2008, we have accrued approximately $13.9 million of interest and penalties related to uncertain tax positions.

In October 2007, Mexico enacted a new minimum corporation tax assessed on companies doing business in that country after January 1, 2008 (“IETU”). While the Company does not anticipate paying taxes under IETU, the new law will affect the Company’s tax planning strategies to fully realize its deferred tax assets under Mexico’s regular income tax. The Company evaluated the impact of IETU on its Mexico operations and, because of the treatment of net operating losses under the new law, established a valuation allowance for net operating losses it believes do not meet the more likely than not realization criteria of SFAS No. 109, Accounting for Income Taxes; this valuation allowance resulted in a $12.7 million charge to tax expense in the first quarter of fiscal 2008.

INDEX

NOTE I—RELATED PARTY TRANSACTIONS

Lonnie “Bo” Pilgrim, the Senior 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.

Certain transactions with related parties are summarized as follows:

	Three Months Ended				Six Months Ended
	March 29, 2008		March 31, 2007		March 29, 2008		March 31, 2007
	(In thousands)

Lease payments on commercial egg property	$	188	$	188	$	375	$	375
Contract grower pay	$	260	$	202	$	520	$	401
Other sales to major stockholder	$	190	$	165	$	353	$	312
Loan guaranty fees	$	1,165	$	1,165	$	2,127	$	1,501
Lease payments and operating expenses on airplane	$	123	$	131	$	235	$	250

NOTE J—COMMITMENTS AND CONTINGENCIES

We are a party to many routine contracts in which we provide general indemnities in the normal course of business to third parties for various risks. Among other considerations, we have not recorded a liability for any of these indemnities as based upon the likelihood of payment, the fair value of such indemnities would not have a material impact on our financial condition, results of operations and cash flows.

At March 29, 2008, the Company had $86.6 million in letters of credit outstanding relating to normal business transactions.

The Company is subject to various legal proceedings and claims which arise in the ordinary course of business. Below is a summary of the most significant claims outstanding against the Company. In the Company’s opinion, it has made appropriate and adequate accruals for claims where necessary, and the Company believes the probability of a material loss beyond the amounts accrued to be remote; however, the ultimate liability for these matters is uncertain, and if significantly different than the amounts accrued, the ultimate outcome could have a material effect on the financial condition or results of operations of the Company. The Company believes it has substantial defenses to the claims made and intends to vigorously defend these cases.

INDEX

Among the claims presently pending against the Company are claims seeking unspecified damages brought by current and former employees seeking compensation for the time spent donning and doffing clothing and personal protective equipment. We are aware of an industry-wide investigation by the Wage and Hour Division of the U.S. Department of Labor to ascertain compliance with various wage and hour issues, including the compensation of employees for the time spent on such activities such as donning and doffing clothing and personal protective 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.

NOTE K—BUSINESS SEGMENTS

Subsequent to the sale of our turkey operations, we operate in two reportable business segments as (1) a producer and seller of chicken products and (2) a seller of other products. The following table presents certain information regarding our segments:

	Three Months Ended						Six Months Ended
	March 29, 2008			March 31, 2007			March 29, 2008			March 31, 2007(a)
	(In thousands)
Net sales to customers(b)
Chicken:
United States	$	1,722,967		$	1,683,463		$	3,451,109		$	2,714,412
Mexico		127,312			111,046			248,310			233,955
Total chicken		1,850,279			1,794,509			3,699,419			2,948,367

Other Products:
United States		243,907			188,670			434,296			324,320
Mexico		6,608			4,006			14,432			6,455
Total other products		250,515			192,676			448,728			330,775

	$	2,100,794		$	1,987,185		$	4,148,147		$	3,279,142
Operating income (loss)(c)
Chicken:
United States	$	(156,562	)	$	(2,862	)	$	(175,656	)	$	(13,799	)
Mexico		(3,720	)		(12,605	)		(7,812	)		(11,276	)
Total chicken		(160,282	)		(15,467	)		(183,468	)		(25,075	)

Other products:
United States		33,464			4,273			56,235			8,412
Mexico		880			520			1,965			1,087
Total other products		34,344			4,793			58,200			9,499

Asset impairment		(12,022	)		—			(12,022	)		—
Restructuring charges		(5,669	)		—			(5,669	)		—

	$	(143,629	)	$	(10,674	)	$	(142,959	)	$	(15,576	)
Depreciation and amortization(d)(e)(f)
Chicken:
United States	$	53,875		$	49,046		$	104,332		$	76,491
Mexico		2,618			2,746			5,244			5,552
Total chicken		56,493			51,792			109,576			82,043

Other products:
United States		3,501			2,729			5,900			4,757
Mexico		63			54			125			98
Total other products		3,564			2,783			6,025			4,855

	$	60,057		$	54,575		$	115,601		$	86,898

(a)

The Company acquired Gold Kist 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 spanning from December 27, 2006 through December 30, 2006. The operating results and cash flows of Gold Kist for that period were not material.

(b)

Excludes net sales generated by our discontinued turkey business of $10.2 million, $6.8 million, $56.0 million and $52.0 million recognized in the second quarter of fiscal 2008, the second quarter of fiscal 2007, the first six months of fiscal 2008 and the first six months of fiscal 2007, respectively.

(c)

Excludes operating income (loss) generated by our discontinued turkey business of $(1.2) million, $(1.0) million, $0.6 million and $1.0 million recognized in the second quarter of fiscal 2008, the second quarter of fiscal 2007, the first six months of fiscal 2008 and the first six months of fiscal 2007, respectively.

(d)

Includes amortization of capitalized financing costs of $1.1 million, $1.1 million, $2.1 million and $1.5 million recognized in the second quarter of fiscal 2008, the second quarter of fiscal 2007, the first six months of fiscal 2008 and the first six months of fiscal 2007, respectively.

(e)

Includes amortization of intangible assets of $2.5 million recognized in the second quarter of fiscal 2008 and $5.1 million recognized in the first six months of fiscal 2008 related to the Gold Kist acquisition.

(f)

Excludes depreciation costs incurred by our discontinued turkey business of $0.3 million, $0.4 million, $0.7 million and $0.8 million during the second quarter of fiscal 2008, the second quarter of fiscal 2007, the first six months of fiscal 2008 and the first six months of fiscal 2007, respectively.

INDEX

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of the Company

Pilgrim’s Pride is the world’s largest chicken company and has one of the best known brand names in the chicken industry. In the United States (“US”), we produce both prepared and fresh chicken. In Mexico and Puerto Rico, we exclusively produce fresh chicken. Through vertical integration we control the breeding, hatching and growing of chickens. Our products are sold to foodservice, retail and frozen entrée customers primarily through foodservice distributors, retailers and restaurants throughout the US and Puerto Rico and in the northern and central regions of Mexico. We operate in two business segments and two geographical areas.

Executive Summary

Feed ingredient prices increased substantially between the first quarter of fiscal 2007 and the second quarter of fiscal 2008 and have continued to increase through the date of this report. While chicken selling prices have generally improved over the same periods, chicken selling prices have not improved sufficiently to offset the higher costs of feed ingredients, which, along with the interest expense recognized on borrowings incurred due to the acquisition of Atlanta-based Gold Kist Inc. (“Gold Kist”) and to fund losses, were the primary contributors to our $111.4 million net loss for the second quarter of fiscal 2008. These same factors, along with deferred income tax valuation allowances recognized in Mexico in the first quarter of fiscal 2008, were the primary contributors to our $143.8 million net loss for the first six months of fiscal 2008. Although we continue to focus substantial efforts on increasing our sales prices in order to cover these increased costs, there can be no assurances as to if or when we will be able to raise our prices sufficiently to offset these incremental costs or return to profitability.

In response to this challenging environment, we have taken a number of actions, including the closure of a processing plant and six distribution centers and a 5% planned reduction of production in the second half of fiscal 2008 when compared to the same prior year period. See Note C—Restructuring Activities of the notes to the consolidated financial statements included elsewhere herein. We are also continuing to evaluate our production facilities for potential mix changes, closure, sale and/or consolidation in an effort to position the Company for a return to profitability. However, there can be no assurances that we will be successful in any of these efforts or that continuing losses will not have a material adverse effect on our business, operations or financial condition.

Feed ingredient costs incurred during the second quarter of fiscal 2008 rose 33.7% in the US and 23.0% in Mexico over the same period last year principally because of higher corn and soybean meal prices. Our average chicken selling prices in the US and Mexico during the second quarter of fiscal 2008 increased 2.5% and 12.5%, respectively, over the same period last year mainly because of improved market pricing. Total pounds sold in the US during the second quarter of fiscal 2008 were down 0.2% from the same period last year and total pounds sold in Mexico during the second quarter of fiscal 2008 were up 2.0% from the same period last year.

INDEX

Feed ingredient costs incurred during the first six months of fiscal 2008 rose 27.5% in the US and 19.2% in Mexico over the same period last year principally because of higher corn and soybean meal prices. Our average chicken selling prices in the US and Mexico during the first six months of fiscal 2008 increased 5.0% and 6.8%, respectively, over the same period last year mainly because of improved market pricing. Total pounds sold in the US during the first six months of fiscal 2008 were up 21.1% from the same period last year due to the Gold Kist acquisition and total pounds sold in Mexico during the second quarter of fiscal 2008 were down 0.6% from the same period last year.

Results of operations for the three and six months ended March 29, 2008 include restructuring charges related to the Company’s decision to close a processing complex in Siler City, North Carolina and distribution centers in Plant City and Pompano Beach, Florida; Oskaloosa, Iowa; Jackson, Mississippi; Cincinnati, Ohio; and Nashville, Tennessee. The Company recognized non-cash asset impairment charges of $12.0 million and other restructuring charges of $5.7 million related to these closings during the second quarter of fiscal 2008 and expects to incur additional costs of $3.5 million related to these closings during the remainder of 2008. See Note C—Restructuring Activities of the notes to our consolidated financial statements included elsewhere herein.

On December 27, 2006, we acquired 88.9% of all outstanding common shares of Gold Kist. Gold Kist was the third-largest chicken company in the US, accounting for approximately 9% of all chicken produced domestically in recent years. On January 9, 2007, we acquired the remaining Gold Kist common shares, making Gold Kist a wholly owned subsidiary of Pilgrim’s Pride Corporation. 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 spanning from December 27, 2006 through December 30, 2006. The operating results and cash flows of Gold Kist for that period were not material.

INDEX

Business Environment

Profitability in the chicken industry is materially affected by the commodity prices of chicken and feed ingredients that, in turn, are influenced by a variety of supply and demand factors. As a result, the chicken industry is subject to cyclical earnings fluctuations. Cyclical earnings fluctuations can be mitigated somewhat by (a) business strategy, (b) product mix, (c) sales and marketing plans and (d) operating efficiencies.

Feed ingredient purchases are the single largest component of our cost of sales. They represented 38.8% of our consolidated cost of sales in the first six months of fiscal 2008. The production of feed ingredients is affected primarily by weather patterns throughout the world, the level of supply inventories, demand for feed ingredients, and the agricultural policies of the US and foreign governments. The costs of corn and soybean meal, our primary feed ingredients, increased significantly between the first quarter of fiscal 2007 and the date of this report and 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.

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. We believe that prepared foods products will generally have higher profit margins than our other products. Also, we believe that the production and sale in the US of prepared foods products will generally reduce the impact of feed ingredient costs on our profitability. Feed ingredient costs become a decreasing percentage of a product’s total production cost as further processing is performed, thereby generally reducing their impact on our profitability. However, because a significant portion of these products have typically been sold under fixed price contracts, often only negotiated on an annual basis, in periods of rapidly escalating feed ingredient prices, such as that experienced in the past year, sales of these products may not generate higher, more consistent profit margins as we are less often able to pass these higher costs on to our customers until the previous negotiated contract terms have expired.

INDEX

Since a significant portion of US chicken production is exported, the commodity prices of chicken can be adversely affected by disruptions in export markets. Material disruptions in recent years included the negative impact that concerns over avian influenza had on international demand for poultry products. Disruptions may also be caused by restrictions on imports of US-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. Both Russia and Japan have restricted the importation of US-produced poultry for both of these reasons in recent periods. In July 2003, the US and Mexico entered into a safeguard agreement with regard to imports into Mexico of chicken leg quarters from the US. Under this agreement, a tariff rate for chicken leg quarters of 98.8% of the sales price was established. This tariff was imposed because of concerns that the duty-free importation of such products as provided by the North American Free Trade Agreement would injure Mexico’s poultry industry. This tariff rate was eliminated on January 1, 2008. As a result of the elimination of this tariff, we expect greater amounts of chicken to be imported into Mexico from the US. This could negatively affect the profitability of Mexican chicken producers, including our Mexico operations. Because disruptions in poultry export markets are often political, no assurances can be given as to when the existing disruptions will be alleviated or that new ones will not arise.

Business Segments

	Three Months Ended						Six Months Ended
	March 29, 2008			March 31, 2007			March 29, 2008			March 31, 2007(a)
	(In thousands)
Net sales to customers(b)
Chicken:
United States	$	1,722,967		$	1,683,463		$	3,451,109		$	2,714,412
Mexico		127,312			111,046			248,310			233,955
Total chicken		1,850,279			1,794,509			3,699,419			2,948,367

Other Products:
United States		243,907			188,670			434,296			324,320
Mexico		6,608			4,006			14,432			6,455
Total other products		250,515			192,676			448,728			330,775

	$	2,100,794		$	1,987,185		$	4,148,147		$	3,279,142
Operating income (loss)(c)
Chicken:
United States	$	(156,562	)	$	(2,862	)	$	(175,656	)	$	(13,799	)
Mexico		(3,720	)		(12,605	)		(7,812	)		(11,276	)
Total chicken		(160,282	)		(15,467	)		(183,468	)		(25,075	)

Other products:
United States		33,464			4,273			56,235			8,412
Mexico		880			520			1,965			1,087
Total other products		34,344			4,793			58,200			9,499

Asset impairment		(12,022	)		—			(12,022	)		—
Restructuring charges		(5,669	)		—			(5,669	)		—

	$	(143,629	)	$	(10,674	)	$	(142,959	)	$	(15,576	)
Depreciation and amortization(d)(e)(f)
Chicken:
United States	$	53,875		$	49,046		$	104,332		$	76,491
Mexico		2,618			2,746			5,244			5,552
Total chicken		56,493			51,792			109,576			82,043

Other products:
United States		3,501			2,729			5,900			4,757
Mexico		63			54			125			98
Total other products		3,564			2,783			6,025			4,855

	$	60,057		$	54,575		$	115,601		$	86,898

(a)

(b)

(c)

(d)

(e)

Includes amortization of intangible assets of approximately $2.5 million recognized in the second quarter of fiscal 2008 and $5.1 million recognized in the first six months of fiscal 2008 related to the Gold Kist acquisition.

(f)

Excludes depreciation costs incurred by our discontinued turkey business of approximately $0.3 million, $0.4 million, $0.7 million and $0.8 million during the second quarter of fiscal 2008, the second quarter of fiscal 2007, the first six months of fiscal 2008 and the first six months of fiscal 2007, respectively.

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 29, 2008			March 31, 2007			March 29, 2008			March 31, 2007
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		101.1	%		95.8	%		98.0	%		95.5	%
Asset impairment		0.6	%		—	%		0.3	%		—	%
Gross profit (loss)		(1.7	) %		4.2	%		1.7	%		4.5	%
Selling, general and administrative (“SG&A”) expenses		4.9	%		4.7	%		5.0	%		5.0	%
Restructuring charges		0.2	%		—	%		0.1	%		—	%
Operating loss		(6.8	) %		(0.5	) %		(3.4	) %		(0.5	) %
Interest expense		1.6	%		1.9	%		1.5	%		1.6	%
Loss from continuing operations before income taxes		(8.4	) %		(2.9	) %		(4.9	) %		(2.3	) %
Loss from continuing operations		(5.3	) %		(2.0	) %		(3.5	) %		(1.5	) %
Net loss		(5.3	) %		(2.0	) %		(3.5	) %		(1.5	) %

INDEX

Results of Operations

Fiscal Second Quarter 2008 Compared to Fiscal Second Quarter 2007

Net sales. Net sales for the second quarter of fiscal 2008 increased $113.6 million, or 5.7%, over the second quarter of fiscal 2007. The following table provides net sales information:

			Change from Fiscal Quarter Ended March 31, 2007
Source	Fiscal Quarter Ended March 29, 2008		Amount		Percentage
	(In millions, except percentages)
Chicken:
United States	$	1,723.0	$	39.5		2.3	%	(a)
Mexico		127.3		16.3		14.7	%	(b)
Total chicken		1,850.3		55.8		3.1	%

Other products:
United States		243.9		55.2		29.3	%	(c)
Mexico		6.6		2.6		65.0	%	(d)
Total other products		250.5		57.8		30.0	%

Total net sales	$	2,100.8	$	113.6		5.7	%

(a)

US chicken sales for the second quarter of fiscal 2008 increased from the same period last year primarily as the result of a 2.5% increase in the average selling prices of chicken.

(b)

Mexico chicken sales in the current quarter increased from the second quarter of fiscal 2007 primarily because of a 14.7% increase in revenue per pound sold and a 2.0% increase in pounds sold.

(c)

US sales of other products increased mainly as the result of improved pricing on our rendering output. Rendering is the process of converting poultry byproducts into raw materials for grease, animal feed, biodiesel and feed-stock for the chemical industry.

(d)

Mexico sales of other products increased principally because of both higher sales volumes and higher selling prices for commercial feed.

Gross profit (loss). Gross profit decreased $119.4 million, or 142.1%, in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007. The following table provides gross profit (loss) information:

										Percentage of Net Sales
	Quarter Ended March 29, 2008									Second Quarter Fiscal 2008			Second Quarter Fiscal 2007
				Change From Quarter Ended March 31, 2007
Components				Amount			Percentage
(In millions, except percentages)

Net sales	$	2,100.8		$	113.6			5.7	%		100.0	%		100.0	%
Cost of sales		2,124.2			221.0			11.6	%		101.1	%		95.8	%	(a)
Asset impairment		12.0			12.0			—			0.6	%		—	%	(b)

Gross loss	$	(35.4	)	$	(119.4	)		(142.1	) %		(1.7	) %		4.2	%	(c)

(a)	Cost of sales incurred in the second quarter of fiscal 2008 increased when compared to the same period last year primarily because increased costs of feed ingredients and energy. We also experienced in the second quarter of fiscal 2008, and continue to experience, increased production and freight costs related to operational inefficiencies, labor shortages at several facilities, and higher fuel costs. We believe the labor shortages are attributable in part to heightened publicity of governmental immigration enforcement efforts, ongoing Company compliance efforts, and continued changes in the Company’s employment practices in light of recently published governmental best practices and new labor hiring regulations. Cost of sales in our Mexico chicken operations increased mainly because of higher feed ingredient costs.

(b)	In the second quarter of fiscal 2008, the Company recognized non-cash asset impairment charges related to its announced closings of a chicken processing complex in Siler City, North Carolina and six distribution centers throughout the US.

(c)	Gross profit as a percent of net sales generated in the second quarter of fiscal 2008 decreased 5.9 percentage points from the same period last year primarily because of increasing costs of feed ingredients and energy partially offset by improved pricing.

INDEX

Operating income (loss). Operating income for the second quarter of fiscal 2008 decreased $132.9 million, or 1,242.1%, compared to the second quarter of fiscal 2007. The following tables provide operating income (loss) information:

				Change from Fiscal Quarter Ended March 31, 2007
Source	Quarter Ended March 29, 2008			Amount			Percentage
	(In millions, except percentages)
Chicken:
United States	$	(156.6	)	$	(153.7	)		(5300.0	) %	(a)
Mexico		(3.7	)		8.9			70.6	%	(b)
Total chicken		(160.3	)		(144.8	)		(934.2	) %

Other products:
United States		33.5			29.2			679.1	%	(c)
Mexico		0.9			0.4			80.0	%	(d)
Total other products		34.4			29.6			616.7	%

Asset impairment		(12.0	)		(12.0	)		--
Restructuring charges		(5.7	)		(5.7	)		--

Total operating loss	$	(143.6	)	$	(132.9	)		(1,242.1	) %

										Percentage of Net Sales
	Quarter Ended March 29, 2008									Second Quarter Fiscal 2008			Second Quarter Fiscal 2007
				Change From Quarter Ended March 31, 2007
Components				Amount			Percentage
(In millions, except percentages)

Gross loss	$	(35.4	)	$	(119.4	)		(142.1	) %		(1.7	) %		4.2	%
SG&A expenses		102.5			7.8			8.3	%		4.9	%		4.7	%	(a)
Restructuring charges		5.7			5.7			—			0.2	%		—	%	(b)

Operating loss	$	(143.6	)	$	(132.9	)		(1,242.1	) %		(6.8	) %		(0.5	)%	(c)


(a)	Selling, general and administrative expenses incurred in the second quarter of fiscal 2008 increased from the same period last year primarily because of increased costs for intangibles amortization, outside services and brokered sales activity.

(b)	In the second quarter of fiscal 2008, the Company recognized restructuring charges related to its announced closings of a chicken processing complex in Siler City, North Carolina and six distribution centers throughout the US.

(c)	Operating loss as a percentage of net sales generated in the second quarter of fiscal 2008 increased 6.3 percentage points when compared to the same period last year primarily because of increases in feed, production and freight costs partially offset by the increases in the average selling prices of chicken, improved pricing on our rendering output due to increased demand for the raw materials used to produce biodiesel and other alternative fuels and improved product mix and the other factors described above.

INDEX

Interest expense. Interest expense decreased 12.7% to $33.8 million in the second quarter of fiscal 2008 from $38.7 million for the second quarter of fiscal 2007 primarily because of the early extinguishment of debt totaling $299.6 million in September 2007 and lower interest rates on our variable-rate credit facilities partially offset by increased debt under our credit facilities. As a percentage of sales, interest expense in the second quarter of fiscal 2008 decreased to 1.6 % from 1.9 % in the second quarter of fiscal 2007.

Interest income. Interest income decreased from $1.7 million in the second quarter of fiscal 2007 to $0.4 million in the second quarter of fiscal 2008 because of a reduced average level of investment during the current quarter in available-f