form10q_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 June 28, 2008


OR

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

Commission File number 1-9273

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

Delaware
 
75-1285071
(State or other jurisdiction of
 
(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.)

 
 

 
PILGRIM’S PRIDE CORPORATION  
June 28, 2008

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 July 29, 2008, was 74,055,733.

 
1

 
PILGRIM’S PRIDE CORPORATION   
June 28, 2008


 
PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES
 
 
PART I. FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements (Unaudited)
   
June 28, 2008 and September 29, 2007
   
Three months and nine months ended June 28, 2008 and June 30, 2007
   
Nine months ended June 28, 2008 and June 30, 2007
   
 
Item 2.
 
Item 3.
 
Item 4.
     
PART II. OTHER INFORMATION
 
 
Item 1.
 
Item 1A.
 
Item 6.
 
 


2

PILGRIM’S PRIDE CORPORATION  
June 28, 2008


PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
PILGRIM’S PRIDE CORPORATION
 
 
(Unaudited)
 
   
June 28,
 2008
   
September 29,
 2007
 
Assets:
 
(In thousands)
 
Cash and cash equivalents
  $ 54,071     $ 66,168  
Investment in available-for-sale securities
    10,790       8,153  
Trade accounts and other receivables, less allowance for doubtful accounts
    110,490       114,678  
Inventories
    1,103,168       925,340  
Income taxes receivable
    22,990       61,901  
Current deferred income taxes
    25,532       8,095  
Other current assets
    82,331       47,959  
Assets held for sale
    3,900       15,534  
Assets of discontinued business
    40,731       53,232  
                 
Total current assets
    1,454,003       1,301,060  
                 
Investment in available-for-sale securities
    54,342       46,035  
Other assets
    123,544       138,546  
Goodwill
    499,669       505,166  
Property, plant and equipment, net
    1,715,627       1,783,429  
                 
    $ 3,847,185     $ 3,774,236  
                 
Liabilities and stockholders’ equity:
               
Accounts payable
    466,056       398,512  
Accrued expenses
    444,338       497,262  
Current maturities of long-term debt
    2,295       2,872  
Liabilities of discontinued business
    5,648       6,556  
                 
Total current liabilities
    918,337       905,202  
                 
Long-term debt, less current maturities
    1,518,979       1,318,558  
Deferred income taxes
    178,102       326,570  
Other long-term liabilities
    84,721       51,685  
Commitments and contingencies
           
                 
Preferred stock
           
Common stock
    741       665  
Additional paid-in capital
    646,923       469,779  
Retained earnings
    486,557       687,775  
Accumulated other comprehensive income
    12,825       14,002  
                 
Total stockholders’ equity
    1,147,046       1,172,221  
                 
    $ 3,847,185     $ 3,774,236  
See notes to consolidated financial statements.
 


3

PILGRIM’S PRIDE CORPORATION   
June 28, 2008


PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
June 28,
 2008
   
June 30,
 2007
   
June 28,
 2008
   
June 30,
 2007
 
   
(In thousands, except share and per share data)
 
Net sales
  $ 2,207,476     $ 2,104,499     $ 6,355,623     $ 5,383,641  
Cost of sales
    2,154,265       1,869,674       6,220,688       5,002,528  
Asset impairment
                12,022        
                                 
Gross profit
    53,211       234,825       122,913       381,113  
                                 
Selling, general and administrative expenses
    92,291       97,929       299,283       259,792  
Restructuring charges
    3,451             9,120        
                                 
Operating income (loss)
    (42,531 )     136,896       (185,490 )     121,321  
                                 
Other expense (income):
                               
Interest expense
    35,500       40,018       99,212       92,309  
Interest income
    (646 )     (198 )     (1,600 )     (3,191 )
Loss on early extinguishment of debt
                      14,475  
Miscellaneous, net
    (590 )     (2,869 )     (4,614 )     (7,548 )
                                 
Total other expense
    34,264       36,951       92,998       96,045  
                                 
Income (loss) from continuing operations before income taxes
    (76,795 )     99,945       (278,488 )     25,276  
                                 
Income tax expense (benefit)
    (28,451 )     36,668       (85,477 )     10,844  
                                 
Income (loss) from continuing operations
    (48,344 )     63,277       (193,011 )     14,432  
                                 
Loss from operation of discontinued business, net of tax
    (4,437 )     (636 )     (4,450 )     (603 )
                                 
Gain on sale of discontinued business,
net of tax
                903        
                                 
Net income (loss)
  $ (52,781 )   $ 62,641     $ (196,558 )   $ 13,829  
                                 
Income (loss) per common share—basic and diluted:
                               
Continuing operations
  $ (0.69 )   $ 0.95     $ (2.85 )   $ 0.22  
Discontinued business
    (0.06 )     (0.01 )     (0.05 )     (0.01 )
                                 
Net income (loss)
  $ (0.75 )   $ 0.94     $ (2.90 )   $ 0.21  
                                 
Dividends declared per common share
  $ 0.0225     $ 0.0225     $ 0.0675     $ 0.0675  
                                 
Weighted average shares outstanding
    70,182,107       66,555,733       67,764,524       66,555,733  
                                 
Reconciliation of net income (loss) to comprehensive income (loss):
                               
Net income (loss)
  $ (52,781 )   $ 62,641     $ (196,558 )   $ 13,829  
Unrealized gain (loss) on securities
    (491 )     44       (1,177 )     3,370  
                                 
Comprehensive income (loss)
  $ (53,272 )   $ 62,685     $ (197,735 )   $ 17,199  
See notes to consolidated financial statements.
 

4

PILGRIM’S PRIDE CORPORATION   
June 28, 2008


PILGRIM’S PRIDE CORPORATION AND SUBSIDIARIES
(Unaudited)
 
   
Nine Months Ended
 
   
June 28,
 2008
   
June 30,
2007
 
   
(In thousands)
 
Cash flows from operating activities:
           
Net income (loss)
  $ (196,558 )   $ 13,829  
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
               
Depreciation and amortization
    176,802       145,678  
Asset impairment
    12,022        
Loss on early extinguishment of debt
          7,099  
Gain on property disposals
    (4,141 )     (492 )
Deferred income tax expense (benefit)
    (87,489 )     1,395  
Changes in operating assets and liabilities, net of effect of business acquired:
               
Accounts and other receivables
    12,106       (58,066 )
Inventories
    (175,458 )     (112,353 )
Other current assets
    (30,196 )     (7,984 )
Accounts payable and accrued expenses
    (37,661 )     (15,984 )
Income taxes, net
    (5,089 )     32,474  
Other
    (16,107     9,012  
                 
Cash provided by (used in) operating activities
    (351,769 )     14,608  
                 
Cash flows for investing activities:
               
Acquisitions of property, plant and equipment
    (97,641 )     (134,951 )
Purchases of investment securities
    (25,491 )     (360,485 )
Proceeds from sale or maturity of investment securities
    18,770       441,987  
Business acquisitions
          (1,108,817 )
Proceeds from property disposals
    19,217       5,184  
                 
Cash used in investing activities
    (85,145 )     (1,157,082 )
                 
Cash flows from financing activities:
               
Proceeds from sale of common stock
    177,220        
Borrowing for acquisition
          1,230,000  
Proceeds from long-term debt
    1,217,020       774,791  
Payments on long-term debt
    (1,016,983 )     (982,723 )
Change in outstanding cash management obligations
    57,678       41,450  
Debt issue costs
    (5,457 )     (15,565 )
Cash dividends paid
    (4,661 )     (4,493 )
                 
Cash provided by financing activities
    424,817       1,043,460  
                 
Decrease in cash and cash equivalents
    (12,097 )     (99,014 )
Cash and cash equivalents at beginning of period
    66,168       156,404  
                 
Cash and cash equivalents at end of period
  $ 54,071     $ 57,390  
See notes to consolidated financial statements.
 

 

5

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

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 nine months ended June 28, 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 Current Report on Form 8-K dated May 12, 2008.

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.

6

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

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 fiscal 2007.

   
Nine Months Ended
June 30, 2007
Pro forma
 
   
(In thousands, expect per share amounts and shares outstanding)
 
Net sales
 
$
5,911,451  
Depreciation and amortization
  $ 169,722  
Operating income
  $ 90,769  
Interest expense, net
  $ 114,940  
Loss from continuing operations before taxes
  $ (29,659 )
Loss from continuing operations
  $ (19,752 )
Net loss
  $ (20,355 )
Loss from continuing operations per common share
  $ (0.30 )
Net loss per common share
  $ (0.31 )
Weighted average shares outstanding
    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.


7

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

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.


8

PILGRIM’S PRIDE CORPORATION  
June 28, 2008

NOTE B—DISCONTINUED BUSINESS

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 during the second quarter of fiscal 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.

For a period of time, we will continue to incur cash flow activities that are associated with our former turkey business. These activities 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
   
Nine Months Ended
 
   
June 28,
 2008
   
June 30,
 2007
   
June 28,
 2008
   
June 30,
 2007
 
   
(In thousands)
 
Net sales
  $ 14,779     $ 13,887     $ 70,791     $ 65,842  
                                 
Loss from operation of discontinued business before income taxes
  $ (7,127 )   $ (1,022 )   $ (7,149 )   $ (968 )
Income tax benefit
    (2,690 )     (386 )     (2,699 )     (365 )
                                 
Loss from operation of discontinued business, net of tax
  $ (4,437 )   $ (636 )   $ (4,450 )   $ (603 )
                                 
Gain on sale of discontinued business before income taxes
  $     $     $ 1,450     $  
Income tax expense
                547        
                                 
Gain on sale of discontinued business, net of tax
  $     $     $ 903     $  



9

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

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 June 28, 2008 and September 29, 2007.

   
June 28,
 2008
   
September 29,
 2007
 
   
(In thousands)
 
Trade accounts and other receivables, less allowance for doubtful accounts
  $ 7,599     $ 16,687  
Inventories
    33,132       36,545  
                 
Assets of discontinued business
  $ 40,731     $ 53,232  
                 
Accounts payable
  $ 3,965     $ 3,804  
Accrued expenses
    1,683       2,752  
                 
Liabilities of discontinued business
  $ 5,648     $ 6,556  

NOTE C—RESTRUCTURING ACTIVITIES

Results of operations for the three and nine months ended June 28, 2008 include restructuring charges related to the Company’s decision to close a processing complex in Siler City, North Carolina, an administrative office in Duluth, Georgia 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 were completed in June 2008. The affected processing complex and distribution centers employed approximately 1,100 individuals. Virtually all of these individuals were impacted by the decision to close these facilities.

The Company incurred all anticipated restructuring costs during the second and third quarters of fiscal 2008. Almost all of these costs will result in cash expenditures. The Company recognized $3.4 million of lease commitment costs in the third quarter of fiscal 2008. The Company recognized $3.0 million of employee retention and severance costs and $2.7 million of miscellaneous closing costs in the second quarter of fiscal 2008. 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.



10

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

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 entity (“SPE”) wholly owned by the Company, which in turn sells a percentage ownership interest to third parties. The SPE is a separate corporate entity and its assets will be available first and foremost to satisfy the claims of its creditors. 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 $271.7 million at June 28, 2008. The outstanding amount of Pooled Receivables sold and the remaining Pooled Receivables available for sale under this Agreement at June 28, 2008 were $269.0 million and $2.7 million, respectively. The loss recognized on the sold receivables during the nine months ended June 28, 2008 was not material.

NOTE E—INVENTORIES

   
June 28,
2008
   
September 29,
2007
 
   
(In thousands)
 
Chicken:
           
Live chicken and hens
  $ 407,894     $ 343,185  
Feed and eggs
    258,589       223,631  
Finished chicken products
    417,154       337,052  
                 
Total chicken inventories
    1,083,637       903,868  
                 
Other products:
               
Commercial feed, table eggs, retail farm store and other
  $ 13,717     $ 11,327  
Distribution inventories (other than chicken products)
    5,814       10,145  
                 
Total other products inventories
    19,531       21,472  
                 
Total inventories
  $ 1,103,168     $ 925,340  

NOTE F—PROPERTY, PLANT AND EQUIPMENT

   
June 28,
2008
   
September 29,
2007
 
   
(In thousands)
 
Land
  $ 108,946     $ 114,365  
Buildings, machinery and equipment
    2,438,491       2,366,418  
Autos and trucks
    64,185       59,489  
Construction-in-progress
    118,904       123,001  
                 
Property, plant and equipment, gross
    2,730,526       2,663,273  
                 
Accumulated depreciation
    (1,014,899 )     (879,844 )
                 
Property,  plant and equipment, net
  $ 1,715,627     $ 1,783,429  



11

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

NOTE G—NOTES PAYABLE AND LONG-TERM DEBT

 
Maturity
 
June 28,
2008
   
September 29,
2007
 
     
(In thousands)
 
               
Senior unsecured notes, at 7 5/8%
2015
  $ 400,000     $ 400,000  
Senior subordinated notes, at 8 3/8%
2017
    250,000       250,000  
Secured revolving credit facility with notes payable at LIBOR plus 1.25% to LIBOR plus 2.75%
2013
               
Secured revolving credit facility with notes payable at LIBOR plus 1.65% to LIBOR plus 3.125%
2011
      54,120         26,293  
Secured revolving/term credit facility with four notes payable at LIBOR plus a spread, one note payable at 7.34% and one note payable at 7.56%
2016
        795,775           622,350  
Other
Various
    21,379       22,787  
                   
Notes payable and long-term debt
      1,521,274       1,321,430  
                   
Current maturities of long-term debt
      (2,295 )     (2,872 )
                   
Notes payable and long-term debt, less current maturities
    $ 1,518,979     $ 1,318,558  

At June 28, 2008, $213.4 million was available for borrowing under the Company’s secured revolving credit facility expiring in 2013, $375.0 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 certain 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 June 28, 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.


12

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

NOTE H—INCOME TAXES

We recorded an income tax benefit of $85.5 million for the nine months ended June 28, 2008 resulting from a loss from continuing operations before taxes of $278.5 million. 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 nine months ended June 28, 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.

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 adjustments to 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 nine months ended June 28, 2008, we recognized $2.3 million in interest and penalties related to uncertain tax positions. As of June 28, 2008, we have accrued $14.1 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 any significant 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.


13

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

NOTE I—COMMON STOCK

In May 2008, the Company completed a public offering of 7.5 million shares of its common stock for total consideration of approximately $177.4 million ($177.2 million, net of costs incurred to complete the sale). The Company used the net proceeds of the offering to reduce outstanding indebtedness under two of its revolving credit facilities and for general corporate purposes.

NOTE J—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
   
Nine Months Ended
 
   
June 28, 2008
   
June 30, 2007
   
June 28, 2008
   
June 30, 2007
 
   
(In thousands)
 
                         
Lease payments on commercial egg property
  $ 188     $ 188     $ 563     $ 563  
Contract grower pay
  $ 259     $ 250     $ 779     $ 651  
Other sales to major stockholder
  $ 205     $ 148     $ 557     $ 460  
Loan guaranty fees
  $ 1,304     $ 1,081     $ 3,431     $ 2,582  
Lease payments and operating expenses on airplane
  $ 116     $ 121     $ 351     $ 371  

NOTE K—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 June 28, 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 material losses 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.

14

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

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 US Department of Labor to ascertain compliance with various wage and hour issues, including the compensation of employees for the time spent on such activities such as donning and doffing clothing and personal protective equipment. Due, in part, to the government investigation and the recent US Supreme Court decision in IBP, Inc. v. Alvarez, it is possible that we may be subject to additional employee claims. 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.

US Immigration and Customs Enforcement has recently been investigating identity theft within our workforce. With our cooperation, during the past eight months US Immigration and Customs Enforcement has arrested approximately 350 of our employees believed to have engaged in identity theft at five of our facilities.  No assurances can be given that further enforcement efforts by governmental authorities against our employees or the Company will not disrupt a portion of our workforce or our operations at one or more of our facilities, thereby negatively impacting our business.

NOTE L—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
   
Nine Months Ended
 
   
June 28, 2008
   
June 30,
 2007
   
June 28, 2008(a)
   
June 30,
 2007(a)
 
   
(In thousands)
 
Net sales to customers
                       
Chicken:
                       
United States
  $ 1,829,163     $ 1,809,317     $ 5,280,272     $ 4,523,729  
Mexico
    154,165       131,636       402,475       365,591  
Total chicken
    1,983,328       1,940,953       5,682,747       4,889,320  
                                 
Other Products:
                               
United States
    214,135       157,794       648,431       482,114  
Mexico
    10,013       5,752       24,445       12,207  
Total other products
    224,148       163,546       672,876       494,321  
                                 
    $ 2,207,476     $ 2,104,499     $ 6,355,623     $ 5,383,641  
Operating income (loss)
                               
Chicken:
                               
United States
  $ (65,425 )   $ 116,749     $ (241,081 )   $ 101,155  
Mexico
    6,964       14,427       (848 )     3,151  
Total chicken
    (58,461 )     131,176       (241,929 )     104,306  
                                 
Other products:
                               
United States
    18,366       4,872       74,601       15,080  
Mexico
    1,015       848       2,980       1,935  
Total other products
    19,381       5,720       77,581       17,015  
                                 
Asset impairment
                (12,022 )      
Restructuring charges
    (3,451 )           (9,120 )      
                                 
    $ (42,531 )   $ 136,896     $ (185,490 )   $ 121,321  
Depreciation and amortization(b)(c)(d)
                               
Chicken:
                               
United States
  $ 54,292     $ 53,629     $ 158,624     $ 130,120  
Mexico
    2,587       2,754       7,831       8,306  
Total chicken
    56,879       56,383       166,455       138,426  
                                 
Other products:
                               
United States
    3,565       1,160       9,465       5,917  
Mexico
    62       58       187       156  
Total other products
    3,627       1,218       9,652       6,073  
                                 
    $ 60,506     $ 57,601     $ 176,107     $ 144,499  
     
 
(a)
The Company acquired Gold Kist on December 27, 2006 for $1.139 billion.
 
     
(b)
Includes amortization of capitalized financing costs of $1.7 million, $1.1 million, $3.8 million and $2.9 million recognized in the third quarter of fiscal 2008, the third quarter of fiscal 2007, the first nine months of fiscal 2008 and the first nine months of fiscal 2007, respectively.
 
     
(c)
Includes amortization of intangible assets of $2.5 million recognized in the third quarter of fiscal 2008 and $7.6 million recognized in the first nine months of fiscal 2008 related to the Gold Kist acquisition.
 
     
(d)
Excludes depreciation costs incurred by our discontinued turkey business of $0.4 million, $0.7 million and $1.2 million during the third quarter of fiscal 2007, the first nine months of fiscal 2008 and the first nine months of fiscal 2007, respectively. Our discontinued turkey business did not incur depreciation costs during the third quarter of fiscal 2008.
 

NOTE M—SUBSEQUENT EVENTS

In July 2008, the Company announced plans to consolidate the tray-pack chicken business from its El Dorado, Arkansas processing complex into six other case-ready facilities within 60 days. Approximately 600 hourly positions will be eliminated by September 2008 because of this action.

In July 2008, the Company announced plans to close its distribution center in El Paso, Texas within 60 days. The distribution center currently employs 34 people.

15

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

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 date of this report, with nearby futures reaching a high of $7.54 per bushel for corn and $427.90 per ton for soybean meal in June 2008 and remaining $5.77 per bushel and $374.70 per ton, respectively, on July 25, 2008. While chicken selling prices have generally improved over the same period, 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 operating losses, were the primary contributors to our $52.8 million net loss for the third 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 $196.6 million net loss for the first nine 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, an administrative office and six distribution centers, a 5% planned reduction of production in the second half of fiscal 2008 when compared to the same prior-year period, and the planned consolidation of the tray-pack chicken business from our El Dorado, Arkansas processing complex into six other case-ready facilities and closure of a distribution center in El Paso, Texas.  See Note C—Restructuring Activities and Note M—Subsequent Events 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 third quarter of fiscal 2008 rose 44.3% in the US and 36.1% 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 third quarter of fiscal 2008 increased 0.9% and 8.2%, respectively, over the same period last year mainly because of improved market pricing. Total pounds sold in the US during the third quarter of fiscal 2008 were up 0.2% from the same period last year and total pounds sold in Mexico during the third quarter of fiscal 2008 were up 8.3% from the same period last year.

Feed ingredient costs incurred during the first nine months of fiscal 2008 rose 32.6% in the US and 24.9% 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 nine months of fiscal 2008 increased 3.2% and 7.6%, respectively, over the same period last year mainly because of improved market pricing. Total pounds sold in the US during the first nine months of fiscal 2008 were up 13.1% from the same period last year due to the Gold Kist acquisition and total pounds sold in Mexico during the first nine months of fiscal 2008 were up 2.3% from the same period last year.

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 nine months ended June 28, 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. See Note B—Discontinued Business of the notes to our consolidated financial statements included elsewhere herein.

Results of operations for the three and nine months ended June 28, 2008 include asset impairment and restructuring charges related to the Company’s decision to close a processing complex in Siler City, North Carolina, an administrative office in Duluth, Georgia and distribution centers in Plant City and Pompano Beach, Florida; Oskaloosa, Iowa; Jackson, Mississippi; Cincinnati, Ohio; and Nashville, Tennessee. The Company recognized restructuring charges of $3.5 million in the third quarter of fiscal 2008. The Company recognized non-cash asset impairment charges of $12.0 million and restructuring charges of $5.7 million during the second quarter of fiscal 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.

In May 2008, the Company completed a public offering of 7.5 million shares of its common stock for total consideration of approximately $177.4 million ($177.2 million, net of costs incurred to complete the sale). The Company used the net proceeds of the offering to reduce outstanding indebtedness under two of its revolving credit facilities and for general corporate purposes.

16

PILGRIM’S PRIDE CORPORATION  
June 28, 2008

In July 2008, the Company announced plans to consolidate the tray-pack chicken business from its El Dorado, Arkansas processing complex into six other case-ready facilities within 60 days. Approximately 600 hourly positions will be eliminated by September 2008 because of this action. In July 2008, the Company also announced plans to close its distribution center in El Paso, Texas within 60 days. The distribution center currently employs 34 people.

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 any significant 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.

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 38.3% of our consolidated cost of sales in the first nine 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.


17

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

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. In addition, we believe that the production and sale of prepared foods products in the US 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 that are only negotiated on an annual basis, sales of these products may not generate higher, more consistent profit margins during periods of selling price and input cost volatility. We are often unable to pass higher costs on to our customers in periods of rapidly escalating feed ingredient prices, such as that experienced in the past year, until the previous negotiated contract terms have expired. Given the current uncertainties surrounding input prices of our feed ingredient costs, to help mitigate this issue, we have begun negotiating with customers to reduce the contract periods to periods of less than one year whenever possible.

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

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
   
Nine Months Ended
 
   
June 28, 2008
   
June 30,
 2007
   
June 28, 2008(a)
   
June 30,
 2007(a)
 
   
(In thousands)
 
Net sales to customers
                       
Chicken:
                       
United States
  $ 1,829,163     $ 1,809,317     $ 5,280,272     $ 4,523,729  
Mexico
    154,165       131,636       402,475       365,591  
Total chicken
    1,983,328       1,940,953       5,682,747       4,889,320  
                                 
Other Products:
                               
United States
    214,135       157,794       648,431       482,114  
Mexico
    10,013       5,752       24,445       12,207  
Total other products
    224,148       163,546       672,876       494,321  
                                 
    $ 2,207,476     $ 2,104,499     $ 6,355,623     $ 5,383,641  
Operating income (loss)
                               
Chicken:
                               
United States
  $ (65,425 )   $ 116,749     $ (241,081 )   $ 101,155  
Mexico
    6,964       14,427       (848 )     3,151  
Total chicken
    (58,461 )     131,176       (241,929 )     104,306  
                                 
Other products:
                               
United States
    18,366       4,872       74,601       15,080  
Mexico
    1,015       848       2,980       1,935  
Total other products
    19,381       5,720       77,581       17,015  
                                 
Asset impairment
                (12,022 )      
Restructuring charges
    (3,451 )           (9,120 )      
                                 
    $ (42,531 )   $ 136,896     $ (185,490 )   $ 121,321  
Depreciation and amortization(b)(c)(d)
                               
Chicken:
                               
United States
  $ 54,292     $ 53,629     $ 158,624     $ 130,120  
Mexico
    2,587       2,754       7,831       8,306  
Total chicken
    56,879       56,383       166,455       138,426  
                                 
Other products:
                               
United States
    3,565       1,160       9,465       5,917  
Mexico
    62       58       187       156  
Total other products
    3,627       1,218       9,652       6,073  
                                 
    $ 60,506     $ 57,601     $ 176,107     $ 144,499  
     
 
(a)
The Company acquired Gold Kist on December 27, 2006 for $1.139 billion.
 
     
(b)
Includes amortization of capitalized financing costs of $1.7 million, $1.1 million, $3.8 million and $2.9 million recognized in the third quarter of fiscal 2008, the third quarter of fiscal 2007, the first nine months of fiscal 2008 and the first nine months of fiscal 2007, respectively.
 
     
(c)
Includes amortization of intangible assets of $2.5 million recognized in the third quarter of fiscal 2008 and $7.6 million recognized in the first nine months of fiscal 2008 related to the Gold Kist acquisition.
 
     
(d)
Excludes depreciation costs incurred by our discontinued turkey business of $0.4 million, $0.7 million and $1.2 million during the third quarter of fiscal 2007, the first nine months of fiscal 2008 and the first nine months of fiscal 2007, respectively. Our discontinued turkey business did not incur depreciation costs during the third quarter of fiscal 2008.
 

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

   
Percentage of Net Sales
 
   
Three Months Ended
   
Nine Months Ended
 
   
June 28, 2008
   
June 30, 2007
   
June 28, 2008
   
June 30, 2007
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    97.6 %     88.8 %     97.9 %     92.9 %
Asset impairment
    %     %     0.2 %     %
Gross profit
    2.4 %     11.2 %     1.9 %     7.1 %
Selling, general and administrative (“SG&A”) expenses
    4.2 %     4.7 %     4.7 %     4.8 %
Restructuring charges
    0.2 %     %     0.1 %     %
Operating income (loss)
    (2.0 ) %     6.5 %     (2.9 ) %     2.3 %
Interest expense
    1.6 %     1.9 %     1.6 %     1.7 %
Income (loss) from continuing operations
 before income taxes
    (3.5 )   %     4.7 %     (4.4 )   %     0.5 %
Income (loss) from continuing operations
    (2.2 ) %     3.0 %     (3.0 ) %     0.3 %
Net income (loss)
    (2.4 ) %     3.0 %     (3.1 ) %     0.3 %

All percentage of net sales ratios included above are calculated from the face of the Consolidated Financial Statements included elsewhere herein.


18

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

Results of Operations

Fiscal Third Quarter 2008 Compared to Fiscal Third Quarter 2007

Net sales.  Net sales for the third quarter of fiscal 2008 increased $103.0 million, or 4.9%, over the third quarter of fiscal 2007. The following table provides net sales information:

       
Change from Three
Months Ended June 30, 2007
 
 
Source
  Three Months Ended
June 28, 2008
 
Amount
Percentage
 
   
(In millions, except percentages)
 
Chicken:
             
United States
  $ 1,829.1   $ 19.7 1.1 %
(a)
Mexico
    154.2     22.6 17.1 %
(b)
Total chicken
    1,983.3     42.3 2.2 %  
                   
Other products:
                 
United States
    214.2     56.5 35.7 %
(c)
Mexico
    10.0     4.2 74.1 %
(d)
Total other products
    224.2     60.7 37.1 %  
                   
Total net sales
  $ 2,207.5   $ 103.0 4.9 %  
   
 
(a)
US chicken sales for the third quarter of fiscal 2008 increased from the same period last year primarily as the result of a 0.9% increase in revenue per pound sold and a 0.2% increase in pounds sold.
   
(b)
Mexico chicken sales in the current quarter increased from the third quarter of fiscal 2007 primarily because of an 8.2% increase in revenue per pound sold and an 8.3% increase in pounds sold.
   
(c)
US sales of other products increased mainly as the result of improved pricing on commercial eggs and protein conversion products and higher sales volumes of protein conversion products. Protein conversion 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 $181.6 million, or 77.3%, in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. The following table provides gross profit (loss) information:

               
Percentage of Net Sales
   
 
 
 
Components
 
Three Months Ended
June 28,
2008
   
Change From Three
Months Ended
June 30, 2007
   
Three Months Ended
June 28,
2008
   
Three Months Ended
June 30,
2007
   
 
Amount
   
Percentage
 
(In millions, except percentages)
   
                                 
Net sales
  $ 2,207.5     $ 103.0       4.9 %     100.0 %     100.0 %  
Cost of sales
    2,154.3       284.6       15.2 %     97.6 %     88.8 %
(a)
                                           
Gross profit
  $ 53.2     $ (181.6 )     (77.3 ) %     2.4 %     11.2 %
(b)
 
 
(a)
Cost of sales incurred in the third quarter of fiscal 2008 increased when compared to the same period last year primarily because of increased feed ingredients and energy costs. We also experienced in the third 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)
Gross profit as a percent of net sales generated in the third quarter of fiscal 2008 decreased 8.8 percentage points from the same period last year primarily because of increased feed ingredient, energy, production and freight costs partially offset by improved pricing.
 
 
19

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

 
Operating income (loss).  Operating income for the third quarter of fiscal 2008 decreased $179.4 million, or 131.0%, compared to the third quarter of fiscal 2007. The following tables provide operating income (loss) information:
 

   
Three Months Ended
   
Change from Three Months Ended June 30, 2007
 
Source
 
June 28, 2008
   
Amount
   
Percentage
 
   
(In millions, except percentages)
 
Chicken:
                 
United States
  $ (65.4 )   $ (182.2 )     (156.0 ) %
Mexico
    6.9       (7.5 )     (52.1 ) %
Total chicken
    (58.5 )     (189.7 )     (144.6 ) %
                         
Other products:
                       
United States
    18.4       13.5       275.5 %
Mexico
    1.0       0.2       25.0 %
Total other products
    19.4       13.7       240.4 %
                         
Asset impairment
                %
Restructuring charges
    (3.4 )     (3.4 )     %
                         
Total operating loss
  $ (42.5 )   $ (179.4 )     (131.0 ) %

               
Percentage of Net Sales
   
   
Three Months
Ended
June 28, 2008
               
Three Months Ended
June 28, 2008
   
Three Months Ended
June 30, 2007
   
   
Change From Quarter Ended
June 30, 2007
   
Components
 
Amount
   
Percentage
   
(In millions, except percentages)
                                 
Gross profit
  $ 53.2     $ (181.6 )     (77.3 ) %     2.4 %     11.2 %  
SG&A expenses
    92.3       (5.6 )     (5.8 ) %     4.2 %     4.7 %
(a)
Restructuring charges
    3.4       3.4             0.2 %     %
(b)
                                           
Operating loss
  $ (42.5 )   $ (179.4 )     (131.0 ) %     (2.0 ) %     6.5 %
(c)
   
 
(a)
Selling, general and administrative expenses incurred in the third quarter of fiscal 2008 decreased from the same period last year primarily because of decreased insurance costs partially offset by increased costs for intangibles amortization, outside services and brokered sales activity.
   
(b)
In the third quarter of fiscal 2008, the Company recognized restructuring charges related to continuing lease obligations for (a) distribution centers in Nashville, Tennessee and Jackson, Mississippi and (b) an administrative office in Duluth, Georgia.
   
(c)
Operating loss as a percentage of net sales generated in the third quarter of fiscal 2008 increased 8.5 percentage points when compared to the same period last year primarily because of increased feed ingredient, energy, production and freight costs partially offset by improved pricing.

Interest expense. Interest expense decreased 11.3% to $35.5 million in the third quarter of fiscal 2008 from $40.0 million in the third 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 that were not extinguished. As a percentage of sales, interest expense in the third quarter of fiscal 2008 decreased to 1.6% from 1.9% in the third quarter of fiscal 2007.

Miscellaneous, net.  Consolidated miscellaneous income decreased from $2.9 million in the third quarter of fiscal 2007 to $0.6 million in the third quarter of fiscal 2008 primarily because of reduced amounts of both dividend income and investment income partially offset by favorable currency exchange results due to an increase in the average exchange rate between the Mexican peso and the US dollar during those two periods.

Income tax expense (benefit).  Income tax benefit in the third quarter of fiscal 2008 was $28.5 million compared to income tax expense of $36.7 million in the third quarter of fiscal 2007.  The shift from income tax expense to income tax benefit resulted primarily from a pretax loss incurred in the third quarter of fiscal 2008 compared to pretax income generated in the same period in fiscal 2007.

Loss from operation of discontinued business.  The Company incurred a loss from the operation of its discontinued turkey business of $7.1 million ($4.4 million, net of tax) during the third quarter of fiscal 2008 compared to a loss of $1.0 million ($0.6 million, net of tax) during the third quarter of fiscal 2007.  Net sales generated by the discontinued turkey business in the third quarter of fiscal 2008 and the third quarter of fiscal 2007 were $14.8 million and $13.9 million, respectively.

First Nine Months of Fiscal 2008 Compared to First Nine Months of Fiscal 2007

The changes in our results of operations for the nine months ended June 28, 2008, as compared to the same period in fiscal 2007 are impacted greatly as a result of the acquisition of Gold Kist on December 27, 2006.  The acquisition resulted in significant increases in net sales and related costs, including interest expense.


20

PILGRIM’S PRIDE CORPORATION   
June 28, 2008

Net sales.  Net sales for the first nine months of fiscal 2008 increased $972.0 million, or 18.1%, over the first nine months of fiscal 2007. The following table provides net sales information:

             
Change from Nine Months Ended June 30, 2007
 
 
Source
 
 
  Nine Months
Ended
June 28, 2008
 
 
 
Amount
   
Percentage
 
     
(In millions, except percentages)
 
Chicken:
                       
United States
    $ 5,280.2       $ 756.5       16.7 %
(a)
Mexico
      402.5         36.9       10.1 %
(b)
Total chicken
      5,682.7         793.4       16.2 %  
                               
Other products:
                             
United States
      648.5         166.4       34.5 %
(c)
Mexico
      24.4         12.2       100.0 %
(d)
Total other products
      672.9         178.6       36.1 %  
                               
Total net sales
    $ 6,355.6       $ 972.0       18.1 %  
   
 
(a)
US chicken sales for the first nine months of fiscal 2008 increased from the same period last year primarily as the result of a 13.1% increase in volume resulting mainly from the acquisition of Gold Kist on December 27, 2006, increases in the average selling prices of chicken and, for legacy Pilgrim’s Pride products, an improved product mix containing a greater percentage of higher-margin products.
   
(b)
Mexico chicken sales in the first nine months of fiscal 2008 increased from the first nine months of fiscal 2007 primarily because of a 7.6% increase in revenue per pound sold and a 2.3% increase in pounds sold.
   
(c)
US sales of other products increased mainly as the result of the acquisition of Gold Kist on December 27, 2006, improved pricing on commercial eggs and protein conversion products and higher sales volumes of protein conversion products. Protein conversion 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.  Gross profit decreased $258.2 million, or 67.8%, in the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007. The following table provides gross profit information:

               
Percentage of Net Sales
   
Components
 
Nine Months
Ended
June 28, 2008
   
Change From Nine Months Ended
June 30, 2007
   
Nine Months Ended
June 28, 2008
   
Nine Months Ended
June 30, 2007
   
 
Amount
   
Percentage
 
 
 (In millions, except percentages)
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