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Tyson Foods Inc · 10-K · For 10/3/09

Filed On 11/23/09, 7:44am ET   ·   Accession Number 100493-9-67   ·   SEC File 1-14704

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11/23/09  Tyson Foods Inc                   10-K       10/03/09   17:4.7M

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Tyson Foods, Inc. Form 10-K 10/03/09                HTML   2.09M 
 2: EX-10.14    Material Contract -- exhibit_1014                   HTML     75K 
 3: EX-10.22    Material Contract -- exhibit_1022                   HTML     85K 
 4: EX-10.30    Material Contract -- exhibit_1030                   HTML     18K 
 5: EX-10.32    Material Contract -- exhibit_1032                   HTML     15K 
 6: EX-10.34    Material Contract -- exhibit_1034                   HTML     18K 
 7: EX-10.39    Material Contract -- exhibit_1039                   HTML     24K 
 8: EX-10.41    Material Contract -- exhibit_1041                   HTML     43K 
 9: EX-10.43    Material Contract -- exhibit_1043                   HTML     38K 
10: EX-10.44    Material Contract -- exhibit_1044                   HTML     30K 
11: EX-12.1     Statement re: Computation of Ratios -- exhibit_121  HTML     39K 
12: EX-21       Subsidiaries of the Registrant -- exhibit_21        HTML     56K 
13: EX-23       Consent of Experts or Counsel -- exhibit_23         HTML      9K 
14: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
                          -- exhibit_311                                         
15: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
                          -- exhibit_312                                         
16: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML     10K 
                          -- exhibit_321                                         
17: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML      9K 
                          -- exhibit_322                                         


10-K   —   Tyson Foods, Inc. Form 10-K 10/03/09


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X]   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
         For the fiscal year ended October 3, 2009

[ ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
         For the transition period from ________________ to ________________

Commission File No. 001-14704

TYSON FOODS, INC.
(Exact Name of Registrant as specified in its Charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
71-0225165
(I.R.S. Employer Identification No.)
   
2200 Don Tyson Parkway, Springdale, Arkansas
(Address of principal executive offices)
72762-6999
(Zip Code)
   
Registrant's telephone number, including area code:
(479) 290-4000

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class
Class A Common Stock, Par Value $0.10
Name of Each Exchange on Which Registered
New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: Not Applicable

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes [ ]    No [ ]

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

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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 Act). Yes [ ] No [X]

 
 

 

On March 28, 2009, the aggregate market value of the registrant’s Class A Common Stock, $0.10 par value (Class A stock), and Class B Common Stock, $0.10 par value (Class B stock), held by non-affiliates of the registrant was $2,902,509,297 and $208,165, respectively. Class B stock is not publicly listed for trade on any exchange or market system. However, Class B stock is convertible into Class A stock on a share-for-share basis, so the market value was calculated based on the market price of Class A stock.

On October 31, 2009, there were 306,647,117 shares of the registrant's Class A stock and 70,021,155 shares of its Class B stock outstanding.

INCORPORATION BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the registrant's Annual Meeting of Shareholders to be held February 5, 2010, are incorporated by reference into Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS
     
PART I
 
PAGE
Item 1.
Business
3
Item 1A.
Risk Factors
7
Item 1B.
Unresolved Staff Comments
12
Item 2.
Properties
12
Item 3.
Legal Proceedings
13
Item 4.
Submission of Matters to a Vote of Security Holders
15
     
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
16
Item 6.
Selected Financial Data
18
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
36
Item 8.
Financial Statements and Supplementary Data
38
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
81
Item 9A.
Controls and Procedures
81
Item 9B.
Other Information
81
     
PART I
Item 10.
Directors, Executive Officers and Corporate Governance
82
Item 11.
Executive Compensation
82
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
82
Item 13.
Certain Relationships and Related Transactions, and Director Independence
83
Item 14.
Principal Accounting Fees and Services
83
     
PART IV
Item 15.
Exhibits, Financial Statement Schedules
83
     

 
 

 

PART I

ITEM 1. BUSINESS

GENERAL
Founded in 1935, Tyson Foods, Inc. and its subsidiaries (collectively, “Company,” “we,” “us” or “our”) are the world’s largest meat protein company and the second-largest food production company in the Fortune 500 with one of the most recognized brand names in the food industry. We produce, distribute and market chicken, beef, pork, prepared foods and related allied products. Our operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods. Some of the key factors influencing our business are customer demand for our products; the ability to maintain and grow relationships with customers and introduce new and innovative products to the marketplace; accessibility of international markets; market prices for our products; the cost of live cattle and hogs, raw materials and grain; and operating efficiencies of our facilities.

We operate a fully vertically integrated poultry production process. Our integrated operations consist of breeding stock, contract growers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Through our wholly-owned subsidiary, Cobb-Vantress, Inc. (Cobb), we are one of the leading poultry breeding stock suppliers in the world. Investing in breeding stock research and development allows us to breed into our flocks the characteristics found to be most desirable.

We also process live fed cattle and hogs and fabricate dressed beef and pork carcasses into primal and sub-primal meat cuts, case ready beef and pork and fully-cooked meats. In addition, we derive value from allied products such as hides and variety meats sold to further processors and others.

We produce a wide range of fresh, value-added, frozen and refrigerated food products. Our products are marketed and sold primarily by our sales staff to national and regional grocery retailers, regional grocery wholesalers, meat distributors, warehouse club stores, military commissaries, industrial food processing companies, national and regional chain restaurants or their distributors, international export companies and domestic distributors who serve restaurants, foodservice operations such as plant and school cafeterias, convenience stores, hospitals and other vendors. Additionally, sales to the military and a portion of sales to international markets are made through independent brokers and trading companies.

We have been exploring ways to commercialize our supply of poultry litter and animal fats. In June 2007, we announced a 50/50 joint venture with Syntroleum Corporation, called Dynamic Fuels LLC. Dynamic Fuels LLC will produce renewable synthetic fuels targeting the renewable diesel and jet fuel markets. Construction of production facilities is expected to continue through early 2010, with production targeted soon thereafter.

FINANCIAL INFORMATION OF SEGMENTS
We operate in four segments: Chicken, Beef, Pork and Prepared Foods. The contribution of each segment to net sales and operating income (loss), and the identifiable assets attributable to each segment, are set forth in Note 20, “Segment Reporting” of the Notes to Consolidated Financial Statements.

DESCRIPTION OF SEGMENTS
Chicken: Chicken operations include breeding and raising chickens, as well as processing live chickens into fresh, frozen and value-added chicken products and logistics operations to move products through the supply chain. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets. It also includes sales from allied products and our chicken breeding stock subsidiary.

Beef: Beef operations include processing live fed cattle and fabricating dressed beef carcasses into primal and sub-primal meat cuts and case-ready products. This segment also includes sales from allied products such as hides and variety meats, as well as logistics operations to move products through the supply chain. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets. Allied products are marketed to manufacturers of pharmaceuticals and technical products.

Pork: Pork operations include processing live market hogs and fabricating pork carcasses into primal and sub-primal cuts and case-ready products. This segment also includes our live swine group, related allied product processing activities and logistics operations to move products through the supply chain. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other

 
 

 

food processors, as well as to international markets. We sell allied products to pharmaceutical and technical products manufacturers, as well as a limited number of live swine to pork processors.

Prepared Foods: Prepared Foods operations include manufacturing and marketing frozen and refrigerated food products, as well as logistics operations to move products through the supply chain. Products include pepperoni, bacon, beef and pork pizza toppings, pizza crusts, flour and corn tortilla products, appetizers, prepared meals, ethnic foods, soups, sauces, side dishes, meat dishes and processed meats. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets.

RAW MATERIALS AND SOURCES OF SUPPLY
Chicken: The primary raw materials used in our chicken operations are corn and soybean meal used as feed and live chickens raised primarily by independent contract growers. Our vertically-integrated chicken process begins with the grandparent breeder flocks and ends with broilers for processing. Breeder flocks (i.e., grandparents) are raised to maturity in grandparent growing and laying farms where fertile eggs are produced. Fertile eggs are incubated at the grandparent hatchery and produce pullets (i.e., parents). Pullets are sent to breeder houses, and the resulting eggs are sent to our hatcheries. Once chicks have hatched, they are sent to broiler farms. There, contract growers care for and raise the chicks according to our standards, with advice from our technical service personnel, until the broilers reach the desired processing weight. Adult chickens are transported to processing plants, and finished products are sent to distribution centers, then delivered to customers.

We operate our own feed mills to produce scientifically-formulated feeds. In fiscal 2009, corn and soybean meal were major production costs, representing roughly 45% of our cost of growing a live chicken. In addition to feed ingredients to grow the chickens, we use cooking ingredients, packaging materials and cryogenic agents. We believe our sources of supply for these materials are adequate for our present needs, and we do not anticipate any difficulty in acquiring these materials in the future. While we produce nearly all our inventory of breeder chickens and live broilers, from time-to-time we purchase live, ice-packed or deboned chicken to meet production requirements.

Beef: The primary raw materials used in our beef operations are live cattle. We do not have facilities of our own to raise cattle but have cattle buyers located throughout cattle producing areas who visit independent feed yards and buy live cattle on the open spot market. These buyers are trained to select high quality animals, and we continually measure their performance. We also enter into various risk-sharing and procurement arrangements with producers to secure a supply of livestock for our facilities. We believe the sources of supply of live cattle are adequate for our present needs.

Pork: The primary raw materials used in our pork operations are live hogs. The majority of our live hog supply is obtained through various procurement relationships with independent producers. We also employ buyers who purchase hogs on a daily basis, generally a few days before the animals are processed. These buyers are trained to select high quality animals, and we continually measure their performance. We believe the sources of supply of live hogs are adequate for our present needs. Additionally, we raise a number of weanling swine to sell to independent finishers and supply a minimal amount of live swine for our own processing needs.

Prepared Foods: The primary raw materials used in our prepared foods operations are commodity based raw materials, including chicken, beef, pork, corn, flour and vegetables. Some of these raw materials are provided by the Chicken, Beef and Pork segments, while others may be purchased from numerous suppliers and manufacturers. We believe the sources of supply of raw materials are adequate for our present needs.

SEASONAL DEMAND
Demand for chicken and beef products generally increases during the spring and summer months and generally decreases during the winter months. Pork and prepared foods products generally experience increased demand during the winter months, primarily due to the holiday season, while demand decreases during the spring and summer months.

CUSTOMERS
Wal-Mart Stores, Inc. accounted for 13.8% of our fiscal 2009 consolidated sales. Sales to Wal-Mart Stores, Inc. were included in the Chicken, Beef, Pork and Prepared Foods segments. Any extended discontinuance of sales to this customer could, if not replaced, have a material impact on our operations. No other single customer or customer group represents more than 10% of fiscal 2009 consolidated sales.


 
 

 

COMPETITION
Our food products compete with those of other national and regional food producers and processors and certain prepared food manufacturers. Additionally, our food products compete in markets around the world.

We seek to achieve a leading market position for our products via our principal marketing and competitive strategy, which includes:
 
identifying target markets for value-added products;
 
concentrating production, sales and marketing efforts to appeal to and enhance demand from those markets; and
 
utilizing our national distribution systems and customer support services.

Past efforts indicate customer demand can be increased and sustained through application of our marketing strategy, as supported by our distribution systems. The principal competitive elements are price, product safety and quality, brand identification, breadth and depth of the product offering, availability of products, customer service and credit terms.

INTERNATIONAL
We exported to more than 90 countries in fiscal 2009. Major export markets include Canada, Central America, China, the European Union, Japan, Mexico, the Middle East, Russia, South Korea, Taiwan and Vietnam.

We have the following international operations:

 
Tyson de Mexico, a Mexican subsidiary, is a vertically-integrated poultry production company;
 
Cobb-Vantress, a chicken breeding stock subsidiary, has business interests in Argentina, Brazil, the Dominican Republic, India, Ireland, Italy, Japan, the Netherlands, Peru, the Philippines, Spain, Sri Lanka, the United Kingdom and Venezuela;
 
Tyson do Brazil, a Brazilian subsidiary, is a vertically-integrated poultry production company;
 
Shandong Tyson Xinchang Foods, joint ventures in China in which we have a majority interest, is a vertically-integrated poultry production company;
 
Tyson Dalong, a joint venture in China in which we have a majority interest, is a chicken further processing facility;
 
Jiangsu-Tyson, a Chinese poultry breeding company, is building a vertically-integrated poultry operation with production expected to begin in fiscal 2011;
 
Godrej Tyson Foods, a joint venture in India in which we have a majority interest, is a poultry processing business; and
 
Cactus Argentina, a majority interest in a vertically-integrated beef operation joint venture in Argentina; however, we do not consolidate the entity due to the lack of controlling interest.

We continue to explore growth opportunities in foreign countries. Additional information regarding export sales, long-lived assets located in foreign countries and income (loss) from foreign operations is set forth in Note 20, “Segment Reporting” of the Notes to Consolidated Financial Statements.

RESEARCH AND DEVELOPMENT
We conduct continuous research and development activities to improve product development, to automate manual processes in our processing plants and growout operations, and to improve chicken breeding stock. In 2007, we opened the Discovery Center, which includes 19 research kitchens and a USDA-inspected pilot plant. The Discovery Center brings new market-leading retail and foodservice products to the customer faster and more effectively.

ENVIRONMENTAL REGULATION AND FOOD SAFETY
Our facilities for processing chicken, beef, pork and prepared foods, milling feed and housing live chickens and swine are subject to a variety of federal, state and local environmental laws and regulations, which include provisions relating to the discharge of materials into the environment and generally provide for protection of the environment. We believe we are in substantial compliance with such applicable laws and regulations and are not aware of any violations of such laws and regulations likely to result in material penalties or material increases in compliance costs. The cost of compliance with such laws and regulations has not had a material adverse effect on our capital expenditures, earnings or competitive position, and except as described below, is not anticipated to have a material adverse effect in the future.

Congress and the United States Environmental Protection Agency are considering various options to control greenhouse gas emissions. It is unclear at this time when or if such options will be finalized, or what the final form may be. Due to the uncertainty surrounding this issue, it is premature to speculate on the specific nature of impacts that imposition of greenhouse gas emission controls would have on us, and whether such impacts would have a material adverse effect.


 
 

 

We work to ensure our products meet high standards of food safety and quality. In addition to our own internal Food Safety and Quality Assurance oversight and review, our chicken, beef, pork and prepared foods products are subject to inspection prior to distribution, primarily by the United States Department of Agriculture (USDA) and the United States Food and Drug Administration (FDA). We are also participants in the United States Hazard Analysis Critical Control Point (HACCP) program and are subject to the Sanitation Standard Operating Procedures and the Public Health Security and Bioterrorism Preparedness and Response Act of 2002.

EMPLOYEES AND LABOR RELATIONS
As of October 3, 2009, we employed approximately 117,000 employees. Approximately 100,000 employees were employed in the United States and 17,000 employees were in foreign countries, primarily China, Mexico and Brazil. Approximately 33,000 employees in the United States were subject to collective bargaining agreements with various labor unions, with approximately 6% of those employees included under agreements expiring in fiscal 2010. These agreements expire over periods throughout the next several years. Approximately 7,000 employees in foreign countries were subject to collective bargaining agreements. We believe our overall relations with our workforce are good.

MARKETING AND DISTRIBUTION
Our principal marketing objective is to be the primary provider of chicken, beef, pork and prepared foods products for our customers and consumers. As such, we utilize our national distribution system and customer support services to achieve the leading market position for our products. On an ongoing basis, we identify distinct markets and business opportunities through continuous consumer and market research. In addition to supporting strong regional brands across multiple protein lines, we build the Tyson brand primarily through well-defined product-specific advertising and public relations efforts focused toward key consumer targets with specific needs. These efforts are designed to present key Tyson products as everyday solutions to relevant consumer problems thereby gaining adoption into regular eating routines. Further, we use a coordinated mix of activities designed to connect with our customers and consumers on both rational and emotional levels. We utilize our national distribution system and customer support services to achieve the leading market position for our products.

We have the ability to produce and ship fresh, frozen and refrigerated products worldwide. Domestically, our distribution system extends to a broad network of food distributors and is supported by our owned or leased cold storage warehouses, public cold storage facilities and our transportation system. Our distribution centers accumulate fresh and frozen products so we can fill and consolidate less-than-truckload orders into full truckloads, thereby decreasing shipping costs while increasing customer service. In addition, we provide our customers a wide selection of products that do not require large volume orders. Our distribution system enables us to supply large or small quantities of products to meet customer requirements anywhere in the continental United States. Internationally, we utilize both rail and truck refrigerated transportation to domestic ports, where consolidations take place to transport to foreign destinations. We use ocean and air transportation to meet the delivery needs of our foreign customers.

PATENTS AND TRADEMARKS
We have filed a number of patents and trademarks relating to our processes and products that either have been approved or are in the process of application. Because we do a significant amount of brand name and product line advertising to promote our products, we consider the protection of our trademarks to be important to our marketing efforts. We also have developed non-public proprietary information regarding our production processes and other product-related matters. We utilize internal procedures and safeguards to protect the confidentiality of such information and, where appropriate, seek patent and/or trademark protection for the technology we utilize.

INDUSTRY PRACTICES
Our agreements with customers are generally short-term, primarily due to the nature of our products, industry practices and fluctuations in supply, demand and price for such products. In certain instances where we are selling further processed products to large customers, we may enter into written agreements whereby we will act as the exclusive or preferred supplier to the customer, with pricing terms that are either fixed or variable. Due to volatility of the cost of raw materials, fixed price contracts are generally limited to three months in duration.

AVAILABILITY OF SEC FILINGS AND CORPORATE GOVERNANCE DOCUMENTS ON INTERNET WEBSITE
We maintain an internet website for investors at http://ir.tyson.com. On this website, we make available, free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to any of those reports, as soon as reasonably practicable after we electronically file such reports with, or furnish to, the Securities and Exchange Commission. Also available on the website for investors are the Corporate Governance Principles, Audit Committee charter, Compensation Committee charter, Governance Committee charter, Nominating Committee charter, Code of Conduct and Whistleblower Policy. Our corporate governance documents are available in print, free of charge to any shareholder who requests them.

 
 

 

CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain information in this report constitutes forward-looking statements. Such forward-looking statements include, but are not limited to, current views and estimates of future economic circumstances, industry conditions in domestic and international markets, our performance and financial results, including, without limitation, debt-levels, return on invested capital, value-added product growth, capital expenditures, tax rates, access to foreign markets and dividend policy. These forward-looking statements are subject to a number of factors and uncertainties that could cause our actual results and experiences to differ materially from anticipated results and expectations expressed in such forward-looking statements. We wish to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Among the factors that may cause actual results and experiences to differ from anticipated results and expectations expressed in such forward-looking statements are the following: (i) the effect of, or changes in, general economic conditions; (ii) fluctuations in the cost and availability of inputs and raw materials, such as live cattle, live swine, feed grains (including corn and soybean meal) and energy; (iii) market conditions for finished products, including competition from other global and domestic food processors, supply and pricing of competing products and alternative proteins and demand for alternative proteins; (iv) successful rationalization of existing facilities and operating efficiencies of the facilities; (v) risks associated with our commodity trading risk management activities; (vi) access to foreign markets together with foreign economic conditions, including currency fluctuations, import/export restrictions and foreign politics; (vii) outbreak of a livestock disease (such as avian influenza (AI) or bovine spongiform encephalopathy (BSE)), which could have an effect on livestock we own, the availability of livestock we purchase, consumer perception of certain protein products or our ability to access certain domestic and foreign markets; (viii) changes in availability and relative costs of labor and contract growers and our ability to maintain good relationships with employees, labor unions, contract growers and independent producers providing us livestock; (ix) issues related to food safety, including costs resulting from product recalls, regulatory compliance and any related claims or litigation; (x) changes in consumer preference and diets and our ability to identify and react to consumer trends; (xi) significant marketing plan changes by large customers or loss of one or more large customers; (xii) adverse results from litigation; (xiii) risks associated with leverage, including cost increases due to rising interest rates or changes in debt ratings or outlook; (xiv) compliance with and changes to regulations and laws (both domestic and foreign), including changes in accounting standards, tax laws, environmental laws and occupational, health and safety laws; (xv) our ability to make effective acquisitions or joint ventures and successfully integrate newly acquired businesses into existing operations; (xvi) effectiveness of advertising and marketing programs; and (xvii) those factors listed under Item 1A. “Risk Factors.”

ITEM 1A. RISK FACTORS
These risks, which should be considered carefully with the information provided elsewhere in this report, could materially adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Fluctuations in commodity prices and in the availability of raw materials, especially feed grains, live cattle, live swine and other inputs could negatively impact our earnings.
Our results of operations and financial condition are dependent upon the cost and supply of raw materials such as feed grains, live cattle, live swine, energy and ingredients, as well as the selling prices for our products, many of which are determined by constantly changing market forces of supply and demand over which we have limited or no control. Corn and soybean meal are major production costs in the poultry industry, representing roughly 45% of our cost of growing a chicken in fiscal 2009. As a result, fluctuations in prices for these feed ingredients, which include competing demand for corn and soybean meal for use in the manufacture of renewable energy, can adversely affect our earnings. Production of feed ingredients is affected by, among other things, weather patterns throughout the world, the global level of supply inventories and demand for grains and other feed ingredients, as well as agricultural and energy policies of domestic and foreign governments.

We have cattle under contract at feed yards owned by third parties; however, most of the cattle we process are purchased from independent producers. We have cattle buyers located throughout cattle producing areas who visit feed yards and buy live cattle on the

 
 

 

open spot market. We also enter into various risk-sharing and procurement arrangements with producers who help secure a supply of livestock for daily start-up operations at our facilities. The majority of our live swine supply is obtained through various procurement arrangements with independent producers. We also employ buyers who purchase hogs on a daily basis, generally a few days before the animals are required for processing. In addition, we raise live swine and sell feeder pigs to independent producers for feeding to processing weight and have contract growers feed a minimal amount of company-owned live swine for our own processing needs. Any decrease in the supply of cattle or swine on the spot market could increase the price of these raw materials and further increase per head cost of production due to lower capacity utilization, which could adversely affect our financial results.

Market demand and the prices we receive for our products may fluctuate due to competition from global and domestic food producers and processors.
We face competition from other global and domestic food producers and processors. Some of the factors on which we compete and which may drive demand for our products include:

 
price;
 
product safety and quality;
 
brand identification;
 
breadth and depth of the product offering;
 
availability of our products;
 
customer service; and
 
credit terms.

Demand for our products also is affected by competitors’ promotional spending, the effectiveness of our advertising and marketing programs and the availability or price of competing proteins.

We attempt to obtain prices for our products that reflect, in part, the price we must pay for the raw materials that go into our products. If we are not able to obtain higher prices for our products when the price we pay for raw materials increases, we may be unable to maintain positive margins.

Outbreaks of livestock diseases can adversely impact our ability to conduct our operations and demand for our products.
Demand for our products can be adversely impacted by outbreaks of livestock diseases, which can have a significant impact on our financial results. Efforts are taken to control disease risks by adherence to good production practices and extensive precautionary measures designed to ensure the health of livestock. However, outbreaks of disease and other events, which may be beyond our control, either in our own livestock or cattle and hogs owned by independent producers who sell livestock to us, could significantly affect demand for our products, consumer perceptions of certain protein products, the availability of livestock for purchase by us and our ability to conduct our operations. Moreover, the outbreak of livestock diseases, particularly in our Chicken segment, could have a significant effect on the livestock we own by requiring us to, among other things, destroy any affected livestock. Furthermore, an outbreak of disease could result in governmental restrictions on the import and export of our products to or from our suppliers, facilities or customers. This could also result in negative publicity that may have an adverse effect on our ability to market our products successfully and on our financial results.

We are subject to risks associated with our international operations, which could negatively affect our sales to customers in foreign countries, as well as our operations and assets in such countries.
In fiscal 2009, we exported to more than 90 countries. Major export markets include Canada, Central America, China, the European Union, Japan, Mexico, the Middle East, Russia, South Korea, Taiwan and Vietnam. Our export sales for fiscal 2009 totaled $2.7 billion. In addition, we had approximately $329 million of long-lived assets located in foreign countries, primarily Brazil, China and Mexico, at the end of fiscal 2009. In fiscal 2009, approximately 3% of the loss from continuing operations before income taxes and minority interest was from foreign operations.

 
 

 

As a result, we are subject to various risks and uncertainties relating to international sales and operations, including:

 
imposition of tariffs, quotas, trade barriers and other trade protection measures imposed by foreign countries regarding the import of poultry, beef and pork products, in addition to import or export licensing requirements imposed by various foreign countries;
 
closing of borders by foreign countries to the import of poultry, beef and pork products due to animal disease or other perceived health or safety issues;
 
impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies, particularly the Canadian dollar, the Chinese renminbi, the Mexican peso, the European euro, the British pound sterling, and the Brazilian real;
 
political and economic conditions;
 
difficulties and costs associated with complying with, and enforcing remedies under, a wide variety of complex domestic and international laws, treaties and regulations, including, without limitation, the United States' Foreign Corrupt Practices Act and economic and trade sanctions enforced by the United States Department of the Treasury's Office of Foreign Assets Control;
 
different regulatory structures and unexpected changes in regulatory environments;
 
tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation;
 
potentially negative consequences from changes in tax laws; and
 
distribution costs, disruptions in shipping or reduced availability of freight transportation.

Negative consequences relating to these risks and uncertainties could jeopardize or limit our ability to transact business in one or more of those markets where we operate or in other developing markets and could adversely affect our financial results.

We depend on the availability of, and good relations with, our employees.
We have approximately 117,000 employees, of whom approximately 40,000 are covered by collective bargaining agreements or are members of labor unions. Our operations depend on the availability and relative costs of labor and maintaining good relations with employees and the labor unions. If we fail to maintain good relations with our employees or with the unions, we may experience labor strikes or work stoppages, which could adversely affect our financial results.

We depend on contract growers and independent producers to supply us with livestock.
We contract primarily with independent contract growers to raise the live chickens processed in our poultry operations. A majority of our cattle and hogs are purchased from independent producers who sell livestock to us under marketing contracts or on the open market. If we do not attract and maintain contracts with growers or maintain marketing relationships with independent producers, our production operations could be negatively affected.

If our products become contaminated, we may be subject to product liability claims and product recalls.
Our products may be subject to contamination by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella and generic E. coli. These pathogens are found generally in the environment; therefore, there is a risk they, as a result of food processing, could be present in our products. These pathogens also can be introduced to our products as a result of improper handling at the further processing, foodservice or consumer level. These risks may be controlled, but may not be eliminated, by adherence to good manufacturing practices and finished product testing. We have little, if any, control over proper handling procedures once our products have been shipped for distribution. Even an inadvertent shipment of contaminated products may be a violation of law and may lead to increased risk of exposure to product liability claims, product recalls (which may not entirely mitigate the risk of product liability claims), increased scrutiny and penalties, including injunctive relief and plant closings, by federal and state regulatory agencies, and adverse publicity, which could exacerbate the associated negative consumer reaction. Any of these occurrences may have an adverse effect on our financial results.

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


 
 

 

Our level of indebtedness and the terms of our indebtedness could negatively impact our business and liquidity position.
Our indebtedness, including borrowings under our revolving credit facility, may increase from time to time for various reasons, including fluctuations in operating results, working capital needs, capital expenditures and possible acquisitions, joint ventures or other significant initiatives. Our consolidated indebtedness level could adversely affect our business because:

 
it may limit or impair our ability to obtain financing in the future;
 
our credit rating could restrict or impede our ability to access capital markets at desired rates and increase our borrowing costs;
 
it may reduce our flexibility to respond to changing business and economic conditions or to take advantage of business opportunities that may arise;
 
a portion of our cash flow from operations must be dedicated to interest payments on our indebtedness and is not available for other purposes; and
 
it may restrict our ability to pay dividends.

Our revolving credit facility contains affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens and encumbrances; incur debt; merge, dissolve, liquidate or consolidate; make acquisitions and investments; dispose of or transfer assets; pay dividends or make other payments in respect of our capital stock; amend material documents; change the nature of our business; make certain payments of debt; engage in certain transactions with affiliates; and enter into sale/leaseback or hedging transactions, in each case, subject to certain qualifications and exceptions. If availability under this facility is less than the greater of 15% of the commitments and $150 million, we will be required to maintain a minimum fixed charge coverage ratio.

Our 10.50% Senior notes due March 2014 also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: incur additional debt and issue preferred stock; make certain investments and restricted payments; create liens; create restrictions on distributions from restricted subsidiaries; engage in specified sales of assets and subsidiary stock; enter into transactions with affiliates; enter new lines of business; engage in consolidation, mergers and acquisitions; and engage in certain sale/leaseback transactions.

An impairment in the carrying value of goodwill could negatively impact our consolidated results of operations and net worth.
Goodwill is initially recorded at fair value and is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators are present. In assessing the recoverability of goodwill, we make estimates and assumptions about sales, operating margin growth rates and discount rates based on our budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. Goodwill valuations have been calculated using an income approach based on the present value of future cash flows of each reporting unit. Under the income approach, we are required to make various judgmental assumptions about appropriate discount rates. The recent disruptions in global credit and other financial markets and deterioration of economic conditions, could, among other things, cause us to increase the discount rate used in the goodwill valuations. We could be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of our business or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future. Impairment charges could substantially affect our financial results in the periods of such charges. In fiscal 2009, we recorded a non-cash partial impairment of $560 million of our beef reporting unit’s goodwill. As of October 3, 2009, we had $1.9 billion of goodwill, which represented approximately 18.1% of total assets.

Domestic and international government regulations could impose material costs.
Our operations are subject to extensive federal, state and foreign laws and regulations by authorities that oversee food safety standards and processing, packaging, storage, distribution, advertising, labeling and export of our products. Our facilities for processing chicken, beef, pork, prepared foods and milling feed and for housing live chickens and swine are subject to a variety of international, federal, state and local laws relating to the protection of the environment, including provisions relating to the discharge of materials into the environment, and to the health and safety of our employees. Our chicken, beef and pork processing facilities are participants in the HACCP program and are subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002. In addition, our products are subject to inspection prior to distribution, primarily by the USDA and the FDA. Loss of or failure to obtain necessary

 
 

 

permits and registrations could delay or prevent us from meeting current product demand, introducing new products, building new facilities or acquiring new businesses and could adversely affect operating results. Additionally, we are routinely subject to new or modified laws, regulations and accounting standards, such as country of origin labeling (COOL) requirements. If we are found to be out of compliance with applicable laws and regulations in these or other areas, we could be subject to civil remedies, including fines, injunctions, recalls or asset seizures, as well as potential criminal sanctions, any of which could have an adverse effect on our financial results.

A material acquisition, joint venture or other significant initiative could affect our operations and financial condition.
We have recently completed acquisitions and entered into joint venture agreements and periodically evaluate potential acquisitions, joint ventures and other initiatives (collectively, “transactions”), and we may seek to expand our business through the acquisition of companies, processing plants, technologies, products and services, which could include material transactions. A material transaction may involve a number of risks, including:

 
failure to realize the anticipated benefits of the transaction;
 
difficulty integrating acquired businesses, technologies, operations and personnel with our existing business;
 
diversion of management attention in connection with negotiating transactions and integrating the businesses acquired;
 
exposure to unforeseen or undisclosed liabilities of acquired companies; and
 
the need to obtain additional debt or equity financing for any transaction.

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

Market fluctuations could negatively impact our operating results as we hedge certain transactions.
Our business is exposed to fluctuating market conditions. We use derivative financial instruments to reduce our exposure to various market risks including changes in commodity prices, interest rates and foreign exchange rates. We hold certain positions, primarily in grain and livestock futures, that do not qualify as hedges for financial reporting purposes. These positions are marked to fair value, and the unrealized gains and losses are reported in earnings at each reporting date. Therefore, losses on these contracts will adversely affect our reported operating results. While these contracts reduce our exposure to changes in prices for commodity products, the use of such instruments may ultimately limit our ability to benefit from favorable commodity prices.

Deterioration of economic conditions could negatively impact our business.
Our business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects of governmental initiatives to manage economic conditions. Any such changes could adversely affect the demand for our products, or the cost and availability of our needed raw materials, cooking ingredients and packaging materials, thereby negatively affecting our financial results.

The recent disruptions in global credit and other financial markets and deterioration of economic conditions, could, among other things:

 
make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future;
 
cause our lenders to depart from prior credit industry practice and make more difficult or expensive the granting of any amendment of, or waivers under, our credit agreement to the extent we may seek them in the future;
 
impair the financial condition of some of our customers and suppliers thereby increasing customer bad debts or non-performance by suppliers;
 
negatively impact global demand for protein products, which could result in a reduction of sales, operating income and cash flows;
 
decrease the value of our investments in equity and debt securities, including our marketable debt securities, company-owned life insurance and pension and other postretirement plan assets;
 
negatively impact our commodity risk management activities if we are required to record additional losses related to derivative financial instruments; or
 
impair the financial viability of our insurers.

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

 
 

 

The loss of one or more of our largest customers could negatively impact our business.
Our business could suffer significant set backs in sales and operating income if our customers’ plans and/or markets should change significantly, or if we lost one or more of our largest customers, including, for example, Wal-Mart Stores, Inc., which accounted for 13.8% of our sales in fiscal 2009. Many of our agreements with our customers are generally short-term, primarily due to the nature of our products, industry practice and the fluctuation in demand and price for our products.

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

Extreme factors or forces beyond our control could negatively impact our business.
Natural disasters, fire, bioterrorism, pandemic or extreme weather, including droughts, floods, excessive cold or heat, hurricanes or other storms, could impair the health or growth of livestock or interfere with our operations due to power outages, fuel shortages, damage to our production and processing facilities or disruption of transportation channels, among other things. Any of these factors, as well as disruptions in our information systems, could have an adverse effect on our financial results.

Our renewable energy ventures and other initiatives might not be as successful as we expect.
We have been exploring ways to commercialize animal fats and other by-products from our operations, as well as the poultry litter of our contract growers, to generate energy and other value-added products. For example, in fiscal 2007, we announced the formation of Dynamic Fuels LLC, a joint venture with Syntroleum Corporation. We will continue to explore other ways to commercialize opportunities outside our core business, such as renewable energy and other technologically-advanced platforms. These initiatives might not be as financially successful as we initially announced or would expect due to factors that include, but are not limited to, possible discontinuance of tax credits, competing energy prices, failure to operate at the volumes anticipated, abilities of our joint venture partners and our limited experience in some of these new areas.

Members of the Tyson family can exercise significant control.
Members of the Tyson family beneficially own, in the aggregate, 99.97% of our outstanding shares of Class B Common Stock, $0.10 par value (Class B stock) and 2.36% of our outstanding shares of Class A Common Stock, $0.10 par value (Class A stock), giving them control of approximately 70% of the total voting power of our outstanding voting stock. In addition, three members of the Tyson family serve on our Board of Directors. As a result, members of the Tyson family have the ability to exert substantial influence or actual control over our management and affairs and over substantially all matters requiring action by our stockholders, including amendments to our restated certificate of incorporation and by-laws, the election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of ownership may also delay or prevent a change in control otherwise favored by our other stockholders and could depress our stock price. Additionally, as a result of the Tyson family’s significant ownership of our outstanding voting stock, we have relied on the “controlled company” exemption from certain corporate governance requirements of the New York Stock Exchange. Pursuant to these exemptions, our compensation committee, which is made up of independent directors, does not have sole authority to determine the compensation of our executive officers, including our chief executive officer.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None

ITEM 2. PROPERTIES
We have sales offices and production and distribution operations in the following states: Alabama, Arizona, Arkansas, California, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington and Wisconsin. Additionally, we, either directly or through our subsidiaries, have sales offices, facilities or participate in joint venture operations in Argentina, Brazil, Canada, China, the Dominican Republic, Hong Kong, India, Ireland, Italy, Japan, Mexico, the Netherlands, Peru, the Philippines, Russia, South Korea, Spain, Sri Lanka, Taiwan, the United Arab Emirates, the United Kingdom and Venezuela.

 
 

 


   
Number of Facilities
   
Owned
Leased
Total
Chicken Segment:
       
   Processing plants
 
61
2
63
   Rendering plants
 
14
-
14
   Blending mills
 
2
-
2
   Feed mills
 
42
-
42
   Broiler hatcheries
 
62
7
69
   Breeder houses
 
483
747
1,230
   Broiler farm houses
 
864
812
1,676
Beef Segment Production Facilities
 
12
-
12
Pork Segment Production Facilities
 
9
-
9
Prepared Foods Segment Processing Plants
 
22
1
23
         
Distribution Centers
 
10
2
12
Cold Storage Facilities
 
65
10
75
         
     
Capacity(1)
Fiscal 2009
     
per week at
Average Capacity
     
Utilization
Chicken Processing Plants
   
48 million head
90%
Beef Production Facilities
   
170,000 head
82%
Pork Production Facilities
   
437,000 head
90%
Prepared Foods Processing Plants
   
45 million pounds
82%

(1)  
Capacity based on a five day week for Chicken and Prepared Foods, while Beef and Pork are based on a six day week.

Chicken: Chicken processing plants include various phases of slaughtering, dressing, cutting, packaging, deboning and further-processing. We also have 17 pet food operations, which are part of the Chicken processing plants. The blending mills, feed mills and broiler hatcheries have sufficient capacity to meet the needs of the chicken growout operations.

Beef: Beef plants include various phases of slaughtering live cattle and fabricating beef products. Some also treat and tan hides. The Beef segment includes three case-ready operations that share facilities with the Pork segment. One of the beef facilities contains a tallow refinery. Carcass facilities reduce live cattle to dressed carcass form. Processing facilities conduct fabricating operations to produce boxed beef and allied products.

Pork: Pork plants include various phases of slaughtering live hogs and fabricating pork products and allied products. The Pork segment includes three case-ready operations that share facilities with the Beef segment.

Prepared Foods: Prepared Foods plants process fresh and frozen chicken, beef, pork and other raw materials into pizza toppings, branded and processed meats, appetizers, prepared meals, ethnic foods, soups, sauces, side dishes, pizza crusts, flour and corn tortilla products and meat dishes.

We believe our present facilities are generally adequate and suitable for our current purposes; however, seasonal fluctuations in inventories and production may occur as a reaction to market demands for certain products. We regularly engage in construction and other capital improvement projects intended to expand capacity and improve the efficiency of our processing and support facilities.

ITEM 3. LEGAL PROCEEDINGS
Refer to the discussion of our certain legal proceedings pending against us under Part II, Item 8, Notes to Consolidated Financial Statements, Note 22: “Contingencies,” which discussion is incorporated herein by reference. Listed below are certain additional legal proceedings for which we are involved.

On October 23, 2001, a putative class action lawsuit styled R. Lynn Thompson, et al. vs. Tyson Foods, Inc. was filed in the District Court for Mayes County, Oklahoma by three property owners on behalf of all owners of lakefront property on Grand Lake O’ the Cherokees. Simmons Foods, Inc. and Peterson Farms, Inc. also are defendants. The plaintiffs allege the defendants’ operations diminished the water quality in the lake thereby interfering with the plaintiffs’ use and enjoyment of their properties. The plaintiffs

 
 

 

sought injunctive relief and an unspecified amount of compensatory damages, punitive damages, attorneys’ fees and costs. While the District Court certified a class, on October 4, 2005, the Court of Civil Appeals of the State of Oklahoma reversed, holding the plaintiffs’ claims were not suitable for disposition as a class action. This decision was upheld by the Oklahoma Supreme Court and the case was remanded to the District Court with instructions that the matter proceed only on behalf of the three named plaintiffs. Plaintiffs seek injunctive relief, restitution and compensatory and punitive damages in an unspecified amount in excess of $10,000. We and the other defendants have denied liability and asserted various defenses. Defendants have requested a trial date, but the court has not yet scheduled the matter for trial.

In 2004, representatives of our subsidiary, Tyson Fresh Meats, Inc. (“TFM”), met with the U.S. Environmental Protection Agency (“USEPA”) staff to discuss alleged wastewater and late report filing violations under the Clean Water Act relating to the 2002 Second and Final Consent Decree that governed compliance requirements for TFM’s Dakota City, Nebraska, facility. TFM vigorously disputed these allegations. The U.S. Department of Justice (“DOJ”), on behalf of USEPA, recently requested that TFM enter into a tolling agreement concerning possible civil penalties and injunctive relief for Clean Water Act violations, which was executed in July 2008, and enter into negotiations with DOJ and USEPA regarding a potential settlement of this matter. Pursuant to negotiations with DOJ and USEPA, a settlement in principal was reached on December 30, 2008, which would require the payment of $2,026,500 in penalties. On August 20, 2009 a Joint Stipulation Motion was filed in the U.S. District Court for the District of Nebraska documenting the settlement agreement. The Court approved the settlement on August 31, 2009. The penalties were paid by TFM on September 15, 2009, and the matter was resolved.

On January 9, 2003, we received a notice of liability letter from Union Pacific Railroad Company (“Union Pacific”) relating to our alleged contributions of waste oil to the Double Eagle Refinery Superfund Site in Oklahoma City, Oklahoma. On August 22, 2006, the United States and the State of Oklahoma filed a lawsuit styled United States of America, et al. v. Union Pacific Railroad Co. in the United States District Court for the Western District of Oklahoma seeking more than $22 million (the amount sought has subsequently increased to more than $30 million) to remediate the Double Eagle site. Certain Tyson entities joined a “potentially responsible parties” group on October 31, 2006. A settlement between the “potentially responsible parties” group, the United States, and the State of Oklahoma was reached and the Tyson entities paid $625,586 (for 135,997 alleged gallons of waste oil) into escrow towards the settlement of the matter. In furtherance of finalizing the settlement, on June 20, 2008 the DOJ filed a complaint styled United States of America, et al. v. Albert Investment Co., Inc. et al. against numerous alleged responsible parties, including various Tyson entities (the “Litigation”). A proposed Consent Decree addressing all alleged liability of Tyson for the site was lodged on June 27, 2008. On August 15, 2008, Union Pacific submitted to the United States its Comments and Objections to the proposed Consent Decree. In its Comments and Objections, Union Pacific claimed that the Tyson entities' alleged gallons of waste oil should be 160,819 rather than the 135,997 gallons set forth in the proposed Consent Decree. On October 10, 2008, Union Pacific initiated litigation to challenge the proposed Consent Decree by filing a motion to intervene in the Litigation, which the court denied. Union Pacific appealed this decision to the United States Court of Appeals for the Tenth Circuit. The "potentially responsible parties" group and other parties filed briefs in the Tenth Circuit, and oral arguments occurred on September 21, 2009. If the proposed Consent Decree is entered, the escrowed amount will be paid to the United States and the State of Oklahoma.

In November 2006, the Audit Committee of our Board of Directors engaged outside counsel to conduct a review of certain payments that had been made by one of our subsidiaries in Mexico, including payments to individuals employed by Mexican governmental bodies. The payments were discontinued in November 2006. Although the review process is ongoing, we believe the amount of these payments is immaterial, and we do not expect any material impact to our financial statements. We have contacted the Securities and Exchange Commission and the U.S. Department of Justice to inform them of our review and preliminary findings and are cooperating fully with these governmental authorities.

Since 2003, nine lawsuits have been brought against Tyson and several other poultry companies by approximately 150 plaintiffs in Washington County, Arkansas Circuit Court (Green v. Tyson Foods, Inc., et al., Bible v. Tyson Foods, Inc., Beal v. Tyson Foods, Inc., et al., McWhorter v. Tyson Foods, Inc., et al., McConnell v. Tyson Foods, Inc., et al., Carroll v. Tyson Foods, Inc., et al., Belew v. Tyson Foods, Inc., et al., Gonzalez v. Tyson Foods, Inc., et al., and Rasco v. Tyson Foods, Inc., et al.) alleging that the land application of poultry litter caused arsenic and pathogenic mold and fungi contamination of the air, soil and water in and around Prairie Grove, Arkansas. In addition to the poultry company defendants, plaintiffs sued Alpharma, the manufacturer of a feed ingredient containing an organic arsenic compound that has been used in the broiler industry. Plaintiffs are seeking recovery for several types of personal injuries, including several forms of cancer. On August 2, 2006, the Court granted summary judgment in favor of Tyson and the other poultry company defendants in the first case to go to trial and denied summary judgment as to Alpharma. The case was tried against Alpharma and the jury returned a verdict in favor of Alpharma. Plaintiffs appealed the summary judgment in favor of the poultry company defendants and the Court stayed the remaining eight lawsuits pending the appeal. On May 8, 2008, the Arkansas Supreme Court reversed the summary judgment in favor of the poultry company defendants. The remanded trial in this case against the poultry company defendants began on April 30, 2009 and on May 14, 2009, the jury returned a verdict in favor of us and the other poultry company defendants. On July 13, 2009, plaintiffs filed a notice of appeal to the Arkansas Supreme Court.

 
 

 

Other Matters: We have approximately 117,000 employees and, at any time, have various employment practices matters outstanding. In the aggregate, these matters are significant to the Company, and we devote significant resources to managing employment issues. Additionally, we are subject to other lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. While the ultimate results of these matters cannot be determined, they are not expected to have a material adverse effect on our consolidated results of operations or financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.

EXECUTIVE OFFICERS OF THE COMPANY
Our Officers serve one year terms from the date of their election, or until their successors are appointed and qualified. No family relationships exist among these officers. The name, title, age and year of initial election to executive office of our executive officers are listed below:
 

Name
Title
Age
Year Elected
Richard A. Greubel, Jr.
Group Vice President and International President
47
2007
Craig J. Hart
Senior Vice President, Controller and Chief Accounting Officer
53
2004
Kenneth J. Kimbro
Senior Vice President, Chief Human Resources Officer
56
2009
Dennis Leatherby
Executive Vice President and Chief Financial Officer
49
1994
James V. Lochner
Chief Operating Officer
57
2005
Donnie Smith
President and Chief Executive Officer
50
2008
David L. Van Bebber
Executive Vice President and General Counsel
53
2008
Jeffrey D. Webster
Group Vice President, Renewable Products
48
2008

 
Richard A. Greubel, Jr. was appointed Group Vice President and International President in May 2007, after serving as Group Vice President, International since August 2006, and President and Managing Director for Monsanto’s Brazil business since 2001. 

Craig J. Hart was appointed Senior Vice President, Controller and Chief Accounting Officer in September 2004 after serving as Vice President of Special Projects since 2001. Mr. Hart was initially employed by IBP in 1978.

Kenneth J. Kimbro was appointed Senior Vice President, Chief Human Resources Officer in 2001. Mr. Kimbro was initially employed by IBP in 1995.

Dennis Leatherby was appointed Executive Vice President and Chief Financial Officer in June 2008 after serving as Senior Vice President, Finance and Treasurer since 1998. He also served as Interim Chief Financial Officer from July 2004 to June 2006. Mr. Leatherby was initially employed by the Company in 1990.

James V. Lochner was appointed Chief Operating Officer on November 19, 2009, after serving as Senior Group Vice President, Fresh Meats and Margin Optimization since May 2006, Senior Group Vice President, Margin Optimization, Purchasing and Logistics since October 2005, Group Vice President, Purchasing, Travel, and Aviation since November 2004 and Group Vice President, Fresh Meats since 2001. Mr. Lochner was initially employed by IBP in 1983.

Donnie Smith was appointed President and Chief Executive Officer on November 19, 2009, after serving as Senior Group Vice President, Poultry and Prepared Foods since January 2009, Group Vice President of Consumer Products since January 2008, Group Vice President of Logistics and Operations Services since April 2007, Senior Vice President Information Systems, Purchasing and Distribution since May 2006, Senior Vice President and Chief Information Officer since November 2005, and Senior Vice President, Supply Chain Management since October 2001. Mr. Smith was initially employed by the Company in 1980.

David L. Van Bebber was appointed Executive Vice President and General Counsel in May 2008, after serving as Senior Vice President and Deputy General Counsel since September 2004 and Senior Vice President, Legal Services since November 2000. Mr. Van Bebber was initially employed by Lane Processing in 1982. Lane Processing was acquired by the Company in 1986.

Jeffrey D. Webster was appointed Group Vice President, Renewable Products in November 2008, after serving as Senior Vice President, Renewable Products since April 2006, Senior Vice President, Strategy and Development since June 2005 and Vice President, Strategy since January 2004. Mr. Webster was initially employed by the Company in 2004.

 
 

 

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We have issued and outstanding two classes of capital stock, Class A stock and Class B stock. Holders of Class B stock may convert such stock into Class A stock on a share-for-share basis. Holders of Class B stock are entitled to 10 votes per share while holders of Class A stock are entitled to one vote per share on matters submitted to shareholders for approval. As of October 31, 2009, there were approximately 34,000 holders of record of our Class A stock and 10 holders of record of our Class B stock, excluding holders in the security position listings held by nominees.

DIVIDENDS
Cash dividends cannot be paid to holders of Class B stock unless they are simultaneously paid to holders of Class A stock. The per share amount of the cash dividend paid to holders of Class B stock cannot exceed 90% of the cash dividend simultaneously paid to holders of Class A stock. We have paid uninterrupted quarterly dividends on common stock each year since 1977 and expect to continue our cash dividend policy during fiscal 2010. In both fiscal 2009 and 2008, the annual dividend rate for Class A stock was $0.16 per share and the annual dividend rate for Class B stock was $0.144 per share.

MARKET INFORMATION
The Class A stock is traded on the New York Stock Exchange under the symbol “TSN.” No public trading market currently exists for the Class B stock. The high and low closing sales prices of our Class A stock for each quarter of fiscal 2009 and 2008 are represented in the table below.

   
Fiscal 2009
   
Fiscal 2008
 
   
High
   
Low
   
High
   
Low
 
First Quarter
  $ 12.87     $ 4.40     $ 18.53     $ 14.11  
Second Quarter
    9.93       7.59       16.95       13.26  
Third Quarter
    13.88       9.33       19.44       13.68  
Fourth Quarter
    13.23       10.95       17.07       12.14  

ISSUER PURCHASES OF EQUITY SECURITIES
The table below provides information regarding our purchases of Class A stock during the periods indicated.

Period
       
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (1)
 
June 28 to July 25, 2009
          207,871     $ 12.73       -       22,474,439  
July 26 to Aug. 29, 2009
          172,107       11.42       -       22,474,439  
Aug. 30 to Oct. 3, 2009
          248,339       12.44       -       22,474,439  
Total
    (2 )     628,317     $ 12.26       -       22,474,439  

(1)
On February 7, 2003, we announced our board of directors approved a plan to repurchase up to 25 million shares of Class A stock from time to time in open market or privately negotiated transactions. The plan has no fixed or scheduled termination date.
(2)
We purchased 628,317 shares during the period that were not made pursuant to our previously announced stock repurchase plan, but were purchased to fund certain company obligations under our equity compensation plans. These transactions included 541,476 shares purchased in open market transactions and 86,841 shares withheld to cover required tax withholdings on the vesting of restricted stock.


 
 

 

PERFORMANCE GRAPH
The following graph shows a five-year comparison of cumulative total returns for our Class A stock, the S&P 500 Index and a group of peer companies described below.
 

 
Years Ending
 
Base Period
         
 
10/2/04
10/1/05
9/30/06
9/29/07
9/27/08
10/3/09
Tyson Foods, Inc.
100
110.73
98.44
111.59
80.14
79.15
S&P 500 Index
100
112.25
124.37
144.81
112.99
105.18
Peer Group
100
105.63
116.75
125.17
124.24
113.10

The total cumulative return on investment (change in the year-end stock price plus reinvested dividends), which is based on the stock price or composite index at the end of fiscal 2004, is presented for each of the periods for the Company, the S&P 500 Index and a peer group. The peer group includes: Campbell Soup Company, ConAgra Foods, Inc., General Mills, Inc., H.J. Heinz Co., Hershey Foods Corp., Hormel Foods Corp., Kellogg Co., McCormick & Co., Pilgrim’s Pride Corporation, Sara Lee Corp. and Smithfield Foods, Inc. The graph compares the performance of the Company with that of the S&P 500 Index and peer group, with the investment weighted on market capitalization.


 
 

 

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR FINANCIAL SUMMARY
in millions, except per share and ratio data
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Summary of Operations
                             
Sales
  $ 26,704     $ 26,862     $ 25,729     $ 24,589     $ 24,801  
Goodwill impairment
    560       -       -       -       -  
Operating income (loss)
    (215 )     331       613       (50 )     655  
Net interest expense
    293       206       224       238       227  
Income (loss) from continuing operations
    (536 )     86       268       (174 )     314  
Income (loss) from discontinued operation
    (1 )     -       -       (17 )     58  
Cumulative effect of change in accounting principle
    -       -       -       (5 )     -  
Net income (loss)
    (537 )     86       268       (196 )     372  
Diluted earnings (loss) per share:
                                       
Income (loss) from continuing operations
    (1.44 )     0.24       0.75       (0.51 )     0.88  
Income (loss) from discontinued operation
    -       -       -       (0.05 )     0.16  
Cumulative effect of change in accounting principle
    -       -       -       (0.02 )     -  
Net income (loss)
    (1.44 )     0.24       0.75       (0.58 )     1.04  
Dividends per share:
                                       
Class A
    0.160       0.160       0.160       0.160       0.160  
Class B
    0.144       0.144       0.144       0.144       0.144  
Balance Sheet Data
                                       
Total assets
  $ 10,595     $ 10,850     $ 10,227     $ 11,121     $ 10,504  
Total debt
    3,552       2,896       2,779       3,979       2,995  
Shareholders' equity
    4,352       5,014       4,731       4,440       4,671  
Other Key Financial Measures
                                       
Depreciation and amortization
  $ 496     $ 493     $ 514     $ 517     $ 501  
Capital expenditures
    368       425       285       531       571  
Return on invested capital
    (2.7 )%     4.3 %     7.7 %     (0.6 )%     8.6 %
Effective tax rate
    (2.7 )%     44.6 %     34.6 %     35.0 %     28.7 %
Total debt to capitalization
    44.9 %     36.6 %     37.0 %     47.3 %     39.1 %
Book value per share
  $ 11.56     $ 13.28     $ 13.31     $ 12.51     $ 13.19  
Closing stock price high
    13.88       19.44       24.08       18.70       19.47  
Closing stock price low
    4.40       12.14       14.20       12.92       14.12  

Notes to Five-Year Financial Summary
a.
Fiscal 2009 was a 53-week year, while the other years presented were 52-week years.
b.
Fiscal 2009 included a $560 million non-tax deductible charge related to Beef segment goodwill impairment and a $15 million pretax charge related to closing a prepared foods plant.
c.
Fiscal 2008 included $76 million of pretax charges related to: restructuring a beef operation; closing a poultry plant; asset impairments for packaging equipment, intangible assets, unimproved real property and software; flood damage; and severance charges. Additionally, fiscal 2008 included an $18 million non-operating gain related to the sale of an investment.
d.
Fiscal 2007 included tax expense of $17 million related to a fixed asset tax cost correction, primarily related to a fixed asset system conversion in 1999.
e.
Fiscal 2006 included $63 million of pretax charges primarily related to closing one poultry plant, two beef plants and two prepared foods plants.
f.
Fiscal 2005 included $33 million of pretax charges related to a legal settlement involving our live swine operations, a non-recurring income tax net benefit of $15 million including benefit from the reversal of certain income tax reserves, partially offset by an income tax charge related to the one-time repatriation of foreign income under the American Jobs Creation Act and $14 million of pretax charges primarily related to closing two poultry plants and one prepared foods plant. Additionally, the effective tax rate was affected by the federal income tax effect of the Medicare Part D subsidy in fiscal 2005 of $55 million because this amount was not subject to federal income tax.
g.
Return on invested capital is calculated by dividing operating income (loss) by the sum of the average of beginning and ending total debt and shareholders’ equity.
h.
The 2006 total debt to capitalization ratio is not adjusted for the $750 million short-term investment we had on deposit at September 30, 2006. When adjusted for the $750 million short-term investment, the debt to capitalization ratio was 42.1%.
i.
In March 2009, we completed the sale of the beef processing, cattle feed yard and fertilizer assets of three of our Alberta, Canada subsidiaries (collectively, Lakeside). Lakeside was reported as a discontinued operation for all periods presented.

 
 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DESCRIPTION OF THE COMPANY
We are the world’s largest meat protein company and the second-largest food production company in the Fortune 500 with one of the most recognized brand names in the food industry. We produce, distribute and market chicken, beef, pork, prepared foods and related allied products. Our operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods. Some of the key factors influencing our business are customer demand for our products; the ability to maintain and grow relationships with customers and introduce new and innovative products to the marketplace; accessibility of international markets; market prices for our products; the cost of live cattle and hogs, raw materials and grain; and operating efficiencies of our facilities.

OVERVIEW

 
Chicken Segment – Fiscal 2009 operating results were negatively impacted in the first half of fiscal 2009 by high grain costs and net losses on our commodity risk management activities related to grain and energy purchases. The second half of fiscal 2009 benefited as we had worked through the majority of our long grain positions, had more stable grain prices and made several operational improvements. Operating margins in the first half of fiscal 2009 were negative 7.2%, while the second half improved to positive 3.5%.
 
Beef Segment – Fiscal 2009 operating loss was $346 million, which included a $560 million non-cash goodwill impairment.  Excluding the goodwill impairment charge, operating results doubled as compared to fiscal 2008. We sustained our operational improvements made in fiscal 2008 and continue to have strong performance, which shows in our fiscal 2009 operating results.
   
Beef Goodwill Impairment – We perform our annual goodwill impairment test on the first day of the fourth quarter.  We estimate the fair value of our reporting units using a discounted cash flow analysis. This analysis requires us to make various judgmental estimates and assumptions about sales, operating margins, growth rates and discount factors. The recent disruptions in global credit and other financial markets and deterioration of economic conditions led to an increase in our discount rate. The discount rate used in our annual goodwill impairment test increased to 10.1% in fiscal 2009 from 9.3% in fiscal 2008. There were no significant changes in the other key estimates and assumptions.  The increased discount rate resulted in the non-cash partial impairment of our beef reporting unit's goodwill. The impairment has no impact on management’s estimates of the Beef segment’s long-term profitability or value.
 
Pork Segment – While our operating income was down as compared to the record year we had in fiscal 2008, we still had solid operating earnings of $160 million, or 4.7%, with strong demand for our products and adequate supplies of hogs.
 
Prepared Foods Segment – In fiscal 2009, we had improvements in our sales volumes, which led to operating margins of 4.7%. In addition, we made several operational improvements that allow us to run our plants more efficiently.
 
Liquidity – In March 2009, we replaced our then existing $1.0 billion revolving credit facility set to expire in fiscal 2010 with a new $1.0 billion revolving credit facility which expires in March 2012. In addition, we issued $810 million of senior notes. In conjunction with these transactions, we paid down and terminated our accounts receivable securitization agreement. These transactions, as well as a significant decrease in our working capital needs, helped to strengthen our liquidity position. At October 3, 2009, we had nearly $1.2 billion in total cash (including restricted cash), as well as $733 million available for borrowing under our revolving credit facility.
 
Acquisitions –
   
In October 2008, we completed the acquisition of three vertically-integrated poultry companies in southern Brazil.
   
In August 2009, we acquired 60% equity interest in a joint venture with a vertically-integrated poultry operation in eastern China.
 
In March 2009, we completed the sale of the beef processing, cattle feed yard and fertilizer assets of three of our Alberta, Canada subsidiaries (collectively, Lakeside) to XL Foods Inc., a Canadian-owned beef processing business, and an entity affiliated with XL Foods. We received total consideration of $145 million, which included cash received at closing, collateralized notes receivable and XL Foods Preferred Stock.
 
Our accounting cycle resulted in a 53-week year for fiscal 2009 and a 52-week year for both fiscal 2008 and 2007.

 
 

 


   
in millions, except per share data
 
   
2009
   
2008
   
2007
 
Net income (loss)
  $ (537 )   $ 86     $ 268  
Net income (loss) per diluted share
    (1.44 )     0.24       0.75  

 
2009 – Net loss includes the following items:
 
$560 million non-cash, non-tax deductible charge related to a goodwill impairment in our Beef segment; and
 
 
$15 million charge related to the closing of our Ponca City, Oklahoma, processed meats plant.
 
 
2008 – Net income includes the following items:
 
$33 million of charges related to asset impairments, including packaging equipment, intangible assets, unimproved real property and software;
 
 
$17 million charge related to restructuring our Emporia, Kansas, beef operation;
 
 
$13 million charge related to closing our Wilkesboro, North Carolina, Cooked Products poultry plant;
 
 
$13 million of charges related to flood damage at our Jefferson, Wisconsin, plant and severance charges related to the FAST initiative; and
 
 
$18 million non-operating gain related to sale of an investment.
 
 
2007 – Net income includes the following item:
 
$17 million of tax expense related to a fixed asset tax cost correction, primarily related to a fixed asset system conversion in 1999.
 


FISCAL 2010 OUTLOOK
 
Segments:
Chicken – At the end of fiscal 2009, industry pullet placements were down 5-6% as a result of weaker demand. However, we expect demand will improve as we get further into fiscal 2010, and we expect the pricing environment to improve aided by cold storage inventories which are down relative to the levels we have seen over the last several years. We also currently expect to see grain costs down as compared to fiscal 2009. Additionally, we will continue to focus on making operational improvements to help maximize our margins.
Beef – While we expect a reduction in cattle supplies of 1-2% in fiscal 2010, we do not expect a significant change in the fundamentals of our Beef business as it relates to fiscal 2009. We expect adequate supplies to operate our plants. We will manage our spreads by maximizing our revenues through product mix, minimizing our operating costs, while keeping our focus on quality and customer service.
Pork – We expect to see a gradual decline in hog supplies through the first half of fiscal 2010, which will accelerate into the second half of fiscal 2010, resulting in industry slaughter slightly higher than 2007 (or roughly 4% less than fiscal 2009). However, we still believe we will have adequate supplies in the regions in which we operate. We will manage our spreads by continuing to control our costs and maximizing our revenues.
Prepared Foods – Raw material costs will likely increase in fiscal 2010, but we have made some changes in our sales contracts that move us further away from fixed price contracts toward formula pricing, which will better enable us to absorb rising raw material costs. With the changes we have made with our sales contracts and the operational efficiencies we made during fiscal 2009, we expect strong results in fiscal 2010.
 
 
 

 

SUMMARY OF RESULTS – CONTINUING OPERATIONS

Sales
 
in millions
 
   
2009
   
2008
   
2007
 
Sales
  $ 26,704     $ 26,862     $ 25,729  
Change in sales volume
    4.4 %     (0.7 )%        
Change in average sales price
    (4.8 )%     5.1 %        
Sales growth (decline)
    (0.6 )%     4.4 %        
 
 
2009 vs. 2008 –
 
Average Sales Price - The decline in sales was largely due to a reduction in average sales prices, which accounted for a decrease of approximately $1.2 billion. While all segments had a reduction in average sales prices, the majority of the decrease was driven by the Beef and Pork segments.
 
Sales Volume - Sales were positively impacted by an increase in sales volume, which accounted for an increase of approximately $1.0 billion. This was primarily due to an extra week in fiscal 2009, increased sales volume in our Chicken segment, which was driven by inventory reductions, and sales volume related to recent acquisitions.
 
2008 vs. 2007
 
Average Sales Price - The improvement in sales was largely due to improved average sales prices, which accounted for an increase of approximately $1.5 billion. While all segments had improved average sales prices, the majority of the increase was driven by the Chicken and Beef segments.
 
Sales Volume - Sales were negatively impacted by a decrease in sales volume, which accounted for a decrease of approximately $318 million. This was primarily due to a decrease in Beef volume and the sale of two poultry production facilities in fiscal 2007, partially offset by an increase in Pork volume.
 
 
Cost of Sales
 
in millions
 
   
2009
   
2008
   
2007
 
Cost of sales
  $ 25,501     $ 25,616     $ 24,300  
Gross margin
  $ 1,203     $ 1,246     $ 1,429  
Cost of sales as a percentage of sales
    95.5 %     95.4 %     94.4 %

 
2009 vs. 2008 –
 
Cost of sales decreased $115 million. Cost per pound contributed to a $1.1 billion decrease, offset partially by an increase in sales volume increasing cost of sales $987 million.
   
Increase due to net losses of $257 million in fiscal 2009, as compared to net gains of $206 million in fiscal 2008, from our commodity risk management activities related to grain and energy purchases, which exclude the effect from related physical purchase transactions which impact current and future period operating results.
   
Increase due to sales volumes, which included an extra week in fiscal 2009, as well as increased sales volume in our Chicken segment, which was driven by inventory reductions and sales volume related to recent acquisitions.
   
Decrease in average domestic live cattle and hog costs of approximately $1.2 billion.
 
2008 vs. 2007 –
 
Cost of sales increased $1.3 billion. Cost per pound contributed to a $1.6 billion increase, offset partially by a decrease in sales volume reducing cost of sales $323 million.
   
Increase of over $1.0 billion in costs in the Chicken segment, which included increased input costs of approximately $900 million, including grain costs, other feed ingredient costs and cooking ingredients. Plant costs, including labor and logistics, increased by approximately $200 million. These increases were partially offset by increased net gains of $127 million from our commodity risk management activities related to grain purchases, which exclude the impact from related physical purchase transactions which impact current and future period operating results.
   
Increase in average domestic live cattle costs of approximately $271 million.
   
Increase in operating costs in the Beef and Pork segments of approximately $180 million.
   
Decrease due to sales volume included lower Beef and Chicken sales volume, partially offset by higher Pork sales volume.
   
Decrease due to net gains of $173 million from our commodity risk management activities related to forward futures contracts for live cattle and hog purchases as compared to the same period of fiscal 2007. These amounts exclude the impact from related physical purchase transactions, which impact future period operating results.
   
Decrease in average live hog costs of approximately $117 million.

 
 

 


Selling, General and Administrative
 
in millions
 
   
2009
   
2008
   
2007
 
Selling, general and administrative
  $ 841     $ 879     $ 814  
As a percentage of sales
    3.1 %     3.3 %     3.2 %

 
2009 vs. 2008 –
 
Decrease of $33 million related to advertising and sales promotions.
 
Decrease of $11 million related to the change in investment returns on company-owned life insurance, which is used to fund non-qualified retirement plans.
 
Other reductions include decreases in our payroll-related expenses and professional fees.
 
Increase of $20 million due to our newly acquired foreign operations.
 
2008 vs. 2007 –
 
Increase of $29 million related to unfavorable investment returns on company-owned life insurance, which is used to fund non-qualified retirement plans.
 
Increase of $16 million related to advertising and sales promotions.
 
Increase of $14 million due to a favorable actuarial adjustment related to retiree healthcare plan recorded in fiscal 2007.
 
Increase of $9 million due to a gain recorded in fiscal 2007 on the disposition of an aircraft.


Goodwill Impairment
 
in millions
 
   
2009
   
2008
   
2007
 
    $ 560     $ -     $ -  

 
2009 – We perform our annual goodwill impairment test on the first day of the fourth quarter.  We estimate the fair value of our reporting units using a discounted cash flow analysis. This analysis requires us to make various judgmental estimates and assumptions about sales, operating margins, growth rates and discount factors. The recent disruptions in global credit and other financial markets and deterioration of economic conditions led to an increase in our discount rate. The discount rate used in our annual goodwill impairment test increased to 10.1% in fiscal 2009 from 9.3% in fiscal 2008. There were no significant changes in the other key estimates and assumptions.  The increased discount rate resulted in the non-cash partial impairment of our beef reporting unit's goodwill. The impairment has no impact on managements' estimates of the Beef segment’s long-term profitability or value.


Other Charges
 
in millions
 
   
2009
   
2008
   
2007
 
    $ 17     $ 36     $ 2  

 
2009 – Included $15 million charge related to closing our Ponca City, Oklahoma, processed meats plant.
 
2008
 
Included $17 million charge related to restructuring our Emporia, Kansas, beef operation.
 
Included $13 million charge related to closing our Wilkesboro, North Carolina, Cooked Products poultry plant.
 
Included $6 million of severance charges related to the FAST initiative.


Interest Income
 
in millions
 
   
2009
   
2008
   
2007
 
    $ 17     $ 9     $ 8  

 
2009 – The increase is due to the increase in our cash balance.


 
 

 


Interest Expense
 
in millions
 
   
2009
   
2008
   
2007
 
  Cash interest expense
  $ 273     $ 214     $ 229  
  Non-cash interest expense
    37       1       3  
Total Interest Expense
  $ 310     $ 215     $ 232  

 
2009 vs. 2008
 
Cash interest expense includes interest expense related to the coupon rates for senior notes, commitment/letter of credit fees incurred on our revolving credit facilities, as well as other miscellaneous recurring cash payments. The increase was due primarily to higher average weekly indebtedness of approximately 13%. We also had an increase in the overall average borrowing rates.
 
Non-cash interest expense primarily includes interest related to the amortization of debt issuance costs and discounts/premiums on note issuances. The increase was primarily due to debt issuance costs incurred on the new credit facility in fiscal 2009, the 10.5% Notes due March 2014 (2014 Notes) issued in fiscal 2009 and amendment fees paid in December 2008 on our then existing credit agreements. In addition, we had an increase due to the accretion of the debt discount on the 2014 Notes. Non-cash interest expense also includes an unrealized loss on our interest rate swap and the gain/loss on bond buybacks.
 
2008 vs. 2007 – The reduction in cash interest expense was due to a lower average borrowing rate, as well as lower average weekly indebtedness of approximately 2%.


Other (Income) Expense, net
 
in millions
 
   
2009
   
2008
   
2007
 
    $ 18     $ (29 )   $ (21 )

 
2009 – Included $24 million in foreign currency exchange loss.
 
2008 – Included $18 million non-operating gain related to the sale of an investment.
 
2007 – Included $14 million in foreign currency exchange gain.


Effective Tax Rate
     
   
2009
   
2008
   
2007
 
      (2.7 )%     44.6 %     34.6 %

 
2009 –
 
Reduced the effective tax rate 37.2% due to impairment of goodwill, which is not deductible for income tax purposes.
 
Reduced the effective tax rate 3.9% due to increase in foreign valuation allowances.
 
Increased the effective tax rate 2.3% due to general business credits.
 
Increased the effective tax rate 1.8% due to tax planning in foreign jurisdictions.
 
2008 –
 
Increased the effective tax rate 5.0% due to increase in state valuation allowances.
 
Increased the effective tax rate 4.4% due to increase in unrecognized tax benefits.
 
Increased the effective tax rate 3.8% due to net negative returns on company-owned life insurance policies, which is not deductible for federal income tax purposes.
 
Reduced the effective tax rate 3.8% due to general business credits.
 
2007 –
 
Increased the effective tax rate 4.2% due to a fixed asset tax cost correction, primarily related to a fixed asset system conversion in 1999.
 
Increased the effective tax rate 3.2% due to the federal income tax effect of the reductions in estimated Medicare Part D subsidy in fiscal 2007, which is not deductible for federal income tax purposes.
 
Reduced the effective tax rate 4.6% due to the reduction of income tax reserves based on favorable settlement of disputed matters.

 
 

 
SEGMENT RESULTS
We operate in four segments: Chicken, Beef, Pork and Prepared Foods. The following table is a summary of sales and operating income (loss), which is how we measure segment income (loss). Segment results exclude the results of our discontinued operation, Lakeside.

                                 
in millions
 
   
Sales
   
Operating Income (Loss)
 
   
2009
   
2008
   
2007
   
2009
   
2008
   
2007
 
Chicken
  $ 9,660     $ 8,900     $ 8,210     $ (157 )   $ (118 )   $ 325  
Beef
    10,782       11,664       11,540       (346 )     106       51  
Pork
    3,426       3,587       3,314       160       280       145  
Prepared Foods
    2,836       2,711       2,665       133       63       92  
Other
    -       -       -       (5 )     -       -  
Total
  $ 26,704     $ 26,862     $ 25,729     $ (215 )   $ 331     $ 613  


Chicken Segment Results
                         
in millions
 
   
2009
   
2008
   
Change 2009 vs. 2008
   
2007
   
Change 2008 vs. 2007
 
Sales
  $ 9,660     $ 8,900     $ 760     $ 8,210     $ 690  
Sales Volume Change
                    8.8 %             (0.4 )%
Average Sales Price Change
                    (0.2 )%             8.9 %
                                         
Operating Income (Loss)
  $ (157 )   $ (118 )   $ (39 )   $ 325     $ (443 )
Operating Margin
    (1.6 )%     (1.3 )%             4.0 %        

 
2008 – Operating loss included $26 million of charges related to: plant closings; impairments of unimproved real property and software; and severance.
 
2007 – Operating income included a $10 million gain on the sale of two poultry plants and related support facilities.

 
2009 vs. 2008 –
 
Sales Volume The increase in sales volume for fiscal 2009 was due to the extra week in fiscal 2009, as well as inventory reductions and sales volume related to recent acquisitions.
 
Average Sales Price The inventory reductions and recent acquisitions lowered the average sales price, as most of the inventory reduction related to commodity products shipped internationally and sales volume from recent acquisitions was on lower priced products.
 
Operating Loss –
   
Operational Improvements – Operating results were positively impacted by operational improvements, which included: yield, mix and live production performance improvements; additional processing flexibility; and reduced interplant product movement.
   
Derivative Activities – Operating results included the following amounts for commodity risk management activities related to grain and energy purchases. These amounts exclude the impact from related physical purchase transactions, which impact current and future period operating results.

2009 – Loss
$(257) million
2008 – Income
206 million
 Decline in operating results
$(463) million

   
SG&A Expenses – We reduced our selling, general and administrative expenses during fiscal 2009 by approximately $37 million.
   
Grain Costs – Operating results were positively impacted in fiscal 2009 by a decrease in grain costs of $28 million.
   
 
2008 vs. 2007 –
 
Sales and Operating Income (Loss) – Sales increased as a result of an increase in average sales prices, partially offset by a decrease in sales volume due to the sale of two poultry plants in fiscal 2007. Operating results were adversely impacted by increased input costs of approximately $900 million, including grain costs, other feed ingredient costs and cooking ingredients. Plant costs, including labor and logistics, increased by approximately $200 million. This was partially offset by increased net gains of $127 million from our commodity trading risk management activities related to grain purchases, which exclude the impact from related physical purchase transactions which impact current and future period operating results. Operating results were also negatively impacted by increased selling, general and administrative expenses of $43 million.

 
 

 


Beef Segment Results
                         
in millions
 
   
2009
   
2008
   
Change 2009 vs. 2008
   
2007
   
Change 2008 vs. 2007
 
Sales
  $ 10,782     $ 11,664     $ (882 )   $ 11,540     $ 124  
Sales Volume Change
                    0.5 %             (4.6 )%
Average Sales Price Change
                    (8.0 )%             5.9 %
                                         
Operating Income (Loss)
  $ (346 )   $ 106     $ (452 )   $ 51     $ 55  
Operating Margin
    (3.2 )%     0.9 %             0.4 %        

 
2009 – Operating loss included a $560 million non-cash charge related to the partial impairment of goodwill.
 
2008 – Operating income included $35 million of charges related to: plant restructuring, impairments of packaging equipment and intangible assets, and severance.

 
2009 vs. 2008 –
 
Sales and Operating Income (Loss) –
   
While our average sales prices have decreased as compared to fiscal 2008, we have still maintained a margin as the average live costs decreased in line with the drop in our average sales price.
   
Derivative Activities – Operating results included the following amounts for commodity risk management activities related to forward futures contracts for live cattle. These amounts exclude the impact from related physical sale and purchase transactions, which impact current and future period operating results.

2009 – Income
$102 million
2008 – Income
53 million
Improvement in operating results
$49 million

 
2008 vs. 2007 –
 
Sales and Operating Income – Sales and operating income were impacted positively by higher average sales prices and improved operational efficiencies, partially offset by decreased sales volume due primarily to closure of the Emporia, Kansas, slaughter operation. Operating results were also negatively impacted by higher operating costs. Fiscal 2008 operating results include realized and unrealized net gains of $53 million from our commodity risk management activities related to forward futures contracts for live cattle, excluding the related impact from the physical sale and purchase transactions, compared to realized and unrealized net losses of $2 million recorded in fiscal 2007. Operating results were positively impacted by an increase in average sales prices exceeding the increase in average live prices.

 
 

 
 
Pork Segment Results
                         
in millions
 
   
2009
   
2008
   
Change 2009 vs. 2008
   
2007
   
Change 2008 vs. 2007
 
Sales
  $ 3,426     $ 3,587     $ (161 )   $ 3,314     $ 273  
Sales Volume Change
                    1.7 %             6.1 %
Average Sales Price Change
                    (6.1 )%             2.1 %
                                         
Operating Income
  $ 160     $ 280     $ (120 )   $ 145     $ 135  
Operating Margin
    4.7 %     7.8 %             4.4 %        

 
2008 – Operating income included $5 million of charges related to impairment of packaging equipment and severance.
   
 
2009 vs. 2008 –
 
Sales and Operating Income –
   
Operating results for fiscal 2009 were strong, but down when compared to the record year we had in fiscal 2008. While sales volume was relatively flat versus fiscal 2008, results were negatively impacted by a decrease in our average sales prices, which were only partially offset by the decrease in average live costs.
   
Derivative Activities – Operating results included the following amounts for commodity risk management activities related to forward futures contracts for live hogs. These amounts exclude the impact from related physical sale and purchase transactions, which impact current and future period operating results.

2009 – Income
$55 million
2008 – Income
95 million
Decline in operating results
($40) million

 
2008 vs. 2007 –
 
Sales and Operating Income – Operating results were impacted positively by lower average live prices and strong export sales, which led to increased sales volume and a record year for operating margins. Fiscal 2008 operating results include realized and unrealized net gains of $95 million from our commodity risk management activities related to forward futures contracts for live hogs, excluding the related impact from the physical sale and purchase transactions, compared to realized and unrealized net gains of $3 million recorded in fiscal 2007. This was partially offset by higher operating costs, as well as lower average sales prices.

Prepared Foods Segment Results
                     
in millions
 
   
2009
   
2008
   
Change 2009 vs. 2008
   
2007
   
Change 2008 vs. 2007
 
Sales
  $ 2,836     $ 2,711     $ 125     $ 2,665     $ 46  
Sales Volume Change
                    5.2 %             1.5 %
Average Sales Price Change
                    (0.6 )%             0.2 %
                                         
Operating Income
  $ 133     $ 63     $ 70     $ 92     $ (29 )
Operating Margin
    4.7 %     2.3 %             3.5 %        

 
2009 – Operating income included a $15 million charge related to closing our Ponca City, Oklahoma, processed meats plant.
 
2008 – Operating income included $10 million of charges related to flood damage, an intangible asset impairment and severance.
 
2007 – Operating income included $7 million of charges related to intangible asset impairments.
   
 
2009 vs. 2008 –
 
Sales and Operating Income – Operating results improved due to an increase in sales volume, as well as a reduction in raw material costs that exceeded the decrease in our average sales prices. In addition, we made several operational improvements in fiscal 2009 that allow us to run our plants more efficiently. We began realizing the majority of these improvements in our operating results during the latter part of fiscal 2009.
   
 
2008 vs. 2007 –
 
Sales and Operating Income – Operating results were negatively impacted by higher raw material costs, which include wheat, dairy and cooking ingredient costs, partially offset by lower pork costs. Results were positively impacted by an increase in average sales prices.

 
 

 

LIQUIDITY AND CAPITAL RESOURCES
Our cash needs for working capital, capital expenditures and growth opportunities are expected to be met with current cash on hand, cash flows provided by operating activities, or short-term borrowings. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business.  However, we may take advantage of opportunities to generate additional liquidity or refinance through capital market transactions. The amount, nature and timing of any capital market transactions will depend on our operating performance and other circumstances, our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.


Cash Flows from Operating Activities
         
in millions
 
   
2009
   
2008
   
2007
 
Net income (loss)
  $ (537 )   $ 86     $ 268  
Non-cash items in net income (loss):
                       
Depreciation and amortization
    496       493       514  
Deferred taxes
    (26 )     35       5  
Impairment of goodwill
    560       -       -  
Impairment and write-down of assets
    32       57       14  
Other, net
    68       26       (15 )
Changes in working capital
    432       (409 )     (108 )
Net cash provided by operating activities
  $ 1,025     $ 288     $ 678  

Changes in working capital:
 
2009 – Increased primarily due to a reduction in inventory and accounts receivable balances, partially offset by a reduction in accounts payable. The lower inventory balance was primarily due to the reduction of inventory volumes, as well as a decrease in raw material costs.
 
2008 – Decreased primarily due to higher inventory and accounts receivable balances, partially offset by a higher accounts payable balance. Higher inventory balances were driven by an increase in raw material costs and inventory volume.
 
2007 – Decreased primarily due to higher inventory and accounts receivable balances, partially offset by a higher accounts payable balance.


Cash Flows from Investing Activities
         
in millions
 
   
2009
   
2008
   
2007
 
Additions to property, plant and equipment
  $ (368 )   $ (425 )   $ (285 )
Proceeds from sale of property, plant and equipment
    9       26       76  
Proceeds from sale (purchase) of marketable securities, net
    19       (3 )     16  
Proceeds from sale of short-term investment
    -       -       770  
Proceeds from sale of investments
    15       22       -  
Acquisitions, net of cash acquired
    (93 )     (17 )     -  
Proceeds from sale of discontinued operation
    75       -       -  
Change in restricted cash to be used for investing activities
    (43 )     -       -  
Other, net
    (41 )     (2 )     2  
Net cash provided by (used for) investing activities
  $ (427 )   $ (399 )   $ 579  

 
Additions to property, plant and equipment include acquiring new equipment and upgrading our facilities to maintain competitive standing and position us for future opportunities. In fiscal 2009, our capital spending included spending for: improvements made in our prepared foods operations to increase efficiences; Dynamic Fuels LLC’s (Dynamic Fuels) first facility; and foreign operations. In fiscal 2008, our capital spending included equipment updates in our chicken plants, as well as packaging equipment upgrades in our Fresh Meats case-ready facilities. In fiscal 2007, we focused on reducing our capital spending.
   
Capital spending for fiscal 2010 is expected to be approximately $600 million, and includes:
     
approximately $400 million on current core business capital spending;
     
approximately $150 million on foreign operations, which includes post-acquisition capital spending related to our Brazil and China acquisitions; and
     
approximately $50 million related to Dynamic Fuels, most of which relates to the completion of Dynamic Fuels’ first facility. Construction of the first facility is expected to continue through early 2010, with production targeted soon thereafter. At October 3, 2009, we had $43 million in restricted cash available for spending on this facility.

 
 

 


   
Acquisitions – In October 2008, we acquired three vertically integrated poultry companies in southern Brazil. The aggregate purchase price was $67 million, of which $4 million of mandatory deferred payments remains to be paid through fiscal 2011. In addition, we have $15 million of contingent purchase price based on production volumes anticipated to be paid through fiscal 2011. The joint ventures in China called Shandong Tyson Xinchang Foods received the necessary government approvals during fiscal 2009. The aggregate purchase price for our 60% equity interest was $21 million, which excludes $93 million of cash transferred to the joint venture for future capital needs.
   
Proceeds from sale of assets in fiscal 2007 include $40 million received related to the sale of two poultry plants and related support facilities.
   
Short-term investment was purchased in fiscal 2006 with proceeds from $1.0 billion of senior notes maturing on April 1, 2016 (2016 Notes). The short-term investment was held in an interest bearing account with a trustee. In fiscal 2007, we used proceeds from sale of the short-term investment to repay our outstanding $750 million 7.25% Notes due October 1, 2006.
   
Change in restricted cash – In October 2008, Dynamic Fuels received $100 million in proceeds from the sale of Gulf Opportunity Zone tax-exempt bonds made available by the federal government to the regions affected by Hurricanes Katrina and Rita in 2005. The cash received from these bonds is restricted and can only be used towards the construction of the Dynamic Fuels’ facility.


Cash Flows from Financing Activities
         
in millions
 
   
2009
   
2008
   
2007
 
Net borrowings (payments) on revolving credit facilities
  $ 15     $ (213 )   $ 53  
Payments on debt
    (380 )     (147 )     (1,263 )
Net proceeds from borrowings
    852       449       -  
Net proceeds from Class A stock offering
    -       274       -  
Convertible note hedge transactions
    -       (94 )     -  
Warrant transactions
    -       44       -  
Purchases of treasury shares
    (19 )     (30 )     (61 )
Dividends
    (60 )     (56 )     (56 )
Stock options exercised
    1       9       74  
Change in negative book cash balances
    (65 )     67       9  
Change in restricted cash to be used for financing activities
    (140 )     -       -  
Debt issuance costs
    (59 )     -       -  
Other, net
    5       18       (8 )
Net cash provided by (used for) financing activities
  $ 150     $ 321     $ (1,252 )

 
Net borrowings (payments) on revolving credit facilities primarily include activity related to the accounts receivable securitization facility. With the entry into the new revolving credit facility and issuance of the 2014 Notes in March 2009, we repaid all outstanding borrowings under our accounts receivable securitization facility and terminated the facility.
 
Payments on debt include –
   
In fiscal 2009, we bought back $293 million of notes, which included: $161 million 8.25% Notes due October 2011 (2011 Notes); $94 million 7.95% Notes due February 2010 (2010 Notes); and $38 million 2016 Notes.
   
In fiscal 2008, we bought back $40 million 2016 Notes and repaid the remaining $25 million outstanding Lakeside term loan.
   
In fiscal 2007, we used proceeds from sale of the short-term investment to repay our outstanding $750 million 7.25% Notes due October 1, 2006. In addition, we used cash from operations to reduce the amount outstanding under the Lakeside term loan by $320 million, repay the outstanding $125 million 7.45% Notes due June 1, 2007, and reduce other borrowings.
 
Net proceeds from borrowings include –
   
In fiscal 2009, we issued $810 million of 2014 Notes. After the original issue discount of $59 million, based on an issue price of 92.756% of face value, we received net proceeds of $751 million. We used the net proceeds towards the repayment of our borrowings under our accounts receivable securitization facility and for other general corporate purposes.
   
In fiscal 2009, Dynamic Fuels received $100 million in proceeds from the sale of Gulf Opportunity Zone tax-exempt bonds made available by the Federal government to the regions affected by Hurricane Katrina and Rita in 2005. These floating rate bonds are due October 1, 2033.
   
In fiscal 2008, we issued $458 million 3.25% Convertible Senior Notes due October 15, 2013. Net proceeds were used for the net cost of the related Convertible Note Hedge and Warrant Transactions, toward the repayment of our borrowings under the accounts receivable securitization facility, and for other general corporate purposes.

 
 

 


 
In fiscal 2008, we issued 22.4 million shares of Class A stock in a public offering. Net proceeds were used toward repayment of our borrowings under the accounts receivable securitization facility and for other general corporate purposes.
 
In conjunction with the entry into our new credit facility and the issuance of the 2014 Notes during fiscal 2009, we paid $48 million for debt issuance costs.
 
We have $140 million of 2010 Notes outstanding. We originally placed $234 million of the net proceeds from the 2014 Notes in a blocked cash collateral account to be used for the payment, prepayment, repurchase or defeasance of the 2010 Notes. At October 3, 2009, we had $140 million remaining in the blocked cash collateral account.
 
At October 3, 2009, we had $839 million outstanding 2011 Notes. We plan presently to use current cash on hand and cash flows from operations for payment on the 2011 Notes.


Liquidity
                     
in millions
 
 
Commitments
Expiration Date
 
Facility
Amount
   
Outstanding Letters
of Credit under
Revolving Credit Facility
(no draw downs)
   
Amount Borrowed
   
Amount Available
 
Cash and cash equivalents
                      $ 1,004  
Revolving credit facility
March 2012
  $ 1,000     $ 267     $ -     $ 733  
Total liquidity
                            $ 1,737  

The revolving credit facility supports our short-term funding needs and letters of credit. Letters of credit are issued primarily in support of workers’ compensation insurance programs, derivative activities and Dynamic Fuels’ Gulf Opportunity Zone tax-exempt bonds.
We completed the sale of Lakeside in March 2009. Inclusive of the working capital of Lakeside initially retained by us at closing, as well as consideration received from XL Foods, we expect the following future cash flows based on the October 3, 2009, currency exchange rate: approximately $10 million in fiscal 2010; $45 million in notes receivable, plus interest, to be paid by March 2011 by XL Foods; and $24 million of XL Foods preferred stock redeemable through March 2014. The discontinuance of Lakeside’s operation will not have a material effect on our future operating cash flows.
Our current ratio at October 3, 2009, and September 27, 2008, was 2.20 to 1 and 2.07 to 1, respectively.

Deterioration of Credit and Capital Markets
Credit market conditions deteriorated rapidly during our fourth quarter of fiscal 2008 and continued into fiscal 2009. Several major banks and financial institutions failed or were forced to seek assistance through distressed sales or emergency government measures. While not all-inclusive, the following summarizes some of the impacts to our business:

Credit Facility
Cash flows from operating activities and current cash on hand are our primary sources of liquidity for funding debt service and capital expenditures. We also have a revolving credit facility, with a committed capacity of $1.0 billion, to provide additional liquidity for working capital needs, letters of credit, and as a source of financing for growth opportunities. As of October 3, 2009, we had outstanding letters of credit under our revolving credit agreement totaling $267 million, none of which were drawn upon, which left $733 million available for borrowing. Our revolving credit facility is funded by a syndicate of 19 banks, with commitments ranging from $6 million to $115 million per bank. If any of the banks in the syndicate were unable to perform on their commitments to fund the facility, our liquidity could be impaired, which could reduce our ability to fund working capital needs, support letters of credit or finance our growth opportunities.

Customers/Suppliers
The financial condition of some of our customers and suppliers could also be impaired by current market conditions. Although we have not experienced a material increase in customer bad debts or non-performance by suppliers, current market conditions increase the probability we could experience losses from customer or supplier defaults. Should current credit and capital market conditions result in a prolonged economic downturn in the United States and abroad, demand for protein products could be reduced, which could result in a reduction of sales, operating income and cash flows. In addition, we rely on livestock producers throughout the country to supply our live cattle and hogs. If these producers are adversely impacted by the current economic conditions and go out of business, our livestock supply for processing could be significantly impacted.

Additionally, we have cash flow assistance programs in which certain livestock suppliers participate. Under these programs, we pay an amount for livestock equivalent to a standard cost to grow such livestock during periods of low market sales prices. The amounts of such payments that are in excess of the market sales price are recorded as receivables and accrue interest. Participating suppliers are obligated to repay these receivables balances when market sales prices exceed this standard cost, or upon termination of the

 
 

 

agreement. Our maximum obligation associated with these programs is limited to the fair value of each participating livestock supplier’s net tangible assets. Although we believe the aggregate maximum obligation under the program is unlikely to ever be reached, the potential maximum obligation as of October 3, 2009, is approximately $250 million. The total receivables under these programs were $72 million and $7 million at October 3, 2009 and September 27, 2008, respectively. Even though these programs are limited to the net tangible assets of the participating livestock suppliers, we also manage a portion of our credit risk associated with these programs by obtaining security interests in livestock suppliers' assets. After analyzing residual credit risks and general market conditions, we have recorded an allowance for these programs' estimated uncollectible receivables of $20 million and $2 million at October 3, 2009, and September 27, 2008, respectively.

Investments
The value of our investments in equity and debt securities, including our marketable debt securities, company-owned life insurance and pension and other postretirement plan assets, has been impacted by the market volatility over the past year. These instruments were recorded at fair value as of October 3, 2009. During fiscal 2009, we had a reduction in fair value resulting in the recognition through earnings of $11 million.

We currently oversee two domestic and one foreign subsidiary non-contributory qualified defined benefit pension plans. All three pension plans are frozen to new participants and no additional benefits will accrue for participants. Based on our 2009 actuarial valuation, we anticipate contributions of $2 million to these plans for fiscal 2010. We also have one domestic unfunded defined benefit plan. Based on our 2009 actuarial valuation, we anticipate contributions of $2 million to this plan for fiscal 2010.

Financial Instruments
As part of our commodity risk management activities, we use derivative financial instruments, primarily futures and options, to reduce our exposure to various market risks related to commodity purchases. Similar to the capital markets, the commodities markets have been volatile over the past year. Grain and some energy prices reached an all-time high during our fourth quarter of fiscal 2008 before falling sharply. While the reduction in grain and energy prices benefit us long-term, we recorded losses related to these financial instruments in fiscal 2009 of $257 million. We have recently implemented policies to reduce our earnings volatility associated with mark-to-market derivative activities, including more use of normal physical purchases and normal physical sales which are not required to be marked to market.

Insurance
We rely on insurers as a protection against liability claims, property damage and various other risks. Our primary insurers maintain an A.M. Best Financial Strength Rating of A or better. Nevertheless, we continue to monitor this situation as insurers have been and are expected to continue to be impacted by the current capital market environment.


Capitalization
       
in millions
 
   
2009
   
2008
 
Senior notes
  $ 3,323     $ 2,858  
GO Zone tax-exempt bonds
    100       -  
Other indebtedness
    129       38  
Total Debt
  $ 3,552     $ 2,896  
                 
Total Equity
  $ 4,352     $ 5,014  
                 
Debt to Capitalization Ratio
    44.9 %     36.6 %

In fiscal 2009, we issued $810 million of 2014 Notes. The 2014 Notes had an original issue discount of $59 million, based on an issue price of 92.756% of face value. We used the net proceeds towards the repayment of our borrowings under our accounts receivable securitization facility and for other general corporate purposes. In addition, Dynamic Fuels received $100 million in proceeds from the sale of Gulf Opportunity Zone tax-exempt bonds made available by the Federal government to the regions affected by Hurricane Katrina and Rita in 2005. These floating rate bonds are due October 1, 2033.
In fiscal 2009, we bought back $293 million of notes, which included: $161 million 2011 Notes; $94 million 2010 Notes; and $38 million 2016 Notes.
At October 3, 2009, we had a total of approximately $1.2 billion of cash and cash equivalents and restricted cash.


 
 

 

Credit Ratings
2016 Notes
On September 4, 2008, Standard & Poor’s (S&P) downgraded the credit rating from “BBB-” to “BB.” This downgrade increased the interest rate on the 2016 Notes from 6.85% to 7.35%, effective beginning with the six-month interest payment due October 1, 2008.

On November 13, 2008, Moody’s Investors Services, Inc. (Moody’s) downgraded the credit rating from “Ba1” to “Ba3.” This downgrade increased the interest rate on the 2016 Notes from 7.35% to 7.85%, effective beginning with the six-month interest payment due April 1, 2009.

S&P currently rates the 2016 Notes “BB.” Moody’s currently rates this debt “Ba3.” A further one-notch downgrade by either ratings agency would increase the interest rates on the 2016 Notes by an additional 0.25%.

Revolving Credit Facility
S&P’s corporate credit rating for Tyson Foods, Inc. is “BB.” Moody’s corporate credit rating for Tyson Foods, Inc. is “Ba3.” If S&P were to downgrade our corporate credit rating to “B+” or lower or Moody’s were to downgrade our corporate credit rating to “B1” or lower, our letter of credit fees would increase by an additional 0.25%.

Debt Covenants
Our revolving credit facility contains affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens and encumbrances; incur debt; merge, dissolve, liquidate or consolidate; make acquisitions and investments; dispose of or transfer assets; pay dividends or make other payments in respect to our capital stock; amend material documents; change the nature of our business; make certain payments of debt; engage in certain transactions with affiliates; and enter into sale/leaseback or hedging transactions, in each case, subject to certain qualifications and exceptions. If availability under this facility is less than the greater of 15% of the commitments and $150 million, we will be required to maintain a minimum fixed charge coverage ratio.

Our 2014 Notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: incur additional debt and issue preferred stock; make certain investments and restricted payments; create liens; create restrictions on distributions from restricted subsidiaries; engage in specified sales of assets and subsidiary stock; enter into transactions with affiliates; enter new lines of business; engage in consolidation, mergers and acquisitions; and engage in certain sale/leaseback transactions.

OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements material to our financial position or results of operations. The off-balance sheet arrangements we have are guarantees of debt of outside third parties, including a lease and grower loans, and residual value guarantees covering certain operating leases for various types of equipment. See Note 10, “Commitments” of the Notes to Consolidated Financial Statements for further discussion.

CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of October 3, 2009:
                           
in millions
 
   
Payments Due by Period
 
   
2010
      2011-2012       2013-2014    
2015 and thereafter
   
Total
 
Debt and capital lease obligations:
                                 
Principal payments (1)
  $ 219     $ 866     $ 1,280     $ 1,241     $ 3,606  
Interest payments (2)
    289       444       327       220       1,280  
Guarantees (3)
    22       33       43       16       114  
Operating lease obligations (4)
    79       120       55       22       276  
Purchase obligations (5)
    423       55       19       22       519  
Capital expenditures (6)
    267       11       -       -       278  
Other long-term liabilities (7)
    13       5       5       36       59  
Total contractual commitments
  $ 1,312     $ 1,534     $ 1,729     $ 1,557     $ 6,132  

(1)
In the event of a default on payment, acceleration of the principal payments could occur.
(2)
Interest payments include interest on all outstanding debt. Payments are estimated for variable rate and variable term debt based on effective rates at October 3, 2009, and expected payment dates.
(3)
Amounts include guarantees of debt of outside third parties, which consist of a lease and grower loans, all of which are substantially collateralized by the underlying assets, as well as residual value guarantees covering certain operating leases for various types of equipment. The amounts included are the maximum potential amount of future payments.

 
 

 


(4)
Amounts include minimum lease payments under lease agreements.
(5)
Amounts include agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligations amount included items, such as future purchase commitments for grains, livestock contracts and fixed grower fees that provide terms that meet the above criteria. We have excluded future purchase commitments for contracts that do not meet these criteria. Purchase orders have not been included in the table, as a purchase order is an authorization to purchase and may not be considered an enforceable and legally binding contract. Contracts for goods or services that contain termination clauses without penalty have also been excluded.
(6)
Amounts include estimated amounts to complete buildings and equipment under construction as of October 3, 2009.
(7)
Amounts include items that meet the definition of a purchase obligation and are recorded in the Consolidated Balance Sheets.

In addition to the amounts shown above in the table, we have unrecognized tax benefits of $233 million and related interest and penalties of $71 million at October 3, 2009, recorded as liabilities. During fiscal 2010, tax audit resolutions could potentially reduce these amounts by approximately $30 million, either because tax positions are sustained on audit or because we agree to their disallowance.

The maximum contractual obligation associated with our cash flow assistance programs at October 3, 2009, based on the estimated fair values of the livestock supplier’s net tangible assets on that date, aggregated to approximately $250 million, or approximately $178 million remaining maximum commitment after netting the cash flow assistance related receivables.

The minority partner in our Shandong Tyson Xinchang Foods joint ventures in China has the right to exercise put options to require us to purchase their entire 40% equity interest at a price equal to the minority partner’s contributed capital plus (minus) its pro-rata share of the joint venture's accumulated and undistributed net earnings (losses). The put options are exercisable for a five-year term commencing the later of (i) April 2011 or (ii) the date upon which a shareholder of the minority partner is no longer general manager of the joint venture operations. At October 3, 2009, the put options, if they had been exercisable, would have resulted in a purchase price of approximately $74 million for the minority partner’s entire equity interest.

RECENTLY ISSUED/ADOPTED ACCOUNTING PRONOUNCEMENTS
Refer to the discussion under Part II, Item 8, Notes to Consolidated Financial Statements, Note 1: Business and Summary of Significant Accounting Policies for recently issued accounting pronouncements and Note 2: Change in Accounting Principles for recently adopted accounting pronouncements.


 
 

 

CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of certain accounting estimates we consider critical.

Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From Assumptions
         
Contingent liabilities
       
We are subject to lawsuits, investigations and other claims related to wage and hour/labor, environmental, product, taxing authorities and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses.
 
A determination of the amount of reserves and disclosures required, if any, for these contingencies are made after considerable analysis of each individual issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. We disclose contingent liabilities when the risk of loss is reasonably possible or probable.
 
Our contingent liabilities contain uncertainties because the eventual outcome will result from future events, and determination of current reserves requires estimates and judgments related to future changes in facts and circumstances, differing interpretations of the law and assessments of the amount of damages, and the effectiveness of strategies or other factors beyond our control.
 
We have not made any material changes in the accounting methodology used to establish our contingent liabilities during the past three fiscal years.
 
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our contingent liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.
         
Marketing and advertising costs
       
We incur advertising, retailer incentive and consumer incentive costs to promote products through marketing programs. These programs include cooperative advertising, volume discounts, in-store display incentives, coupons and other programs.
 
Marketing and advertising costs are charged in the period incurred. We accrue costs based on the estimated performance, historical utilization and redemption of each program.
 
Cash consideration given to customers is considered a reduction in the price of our products, thus recorded as a reduction to sales. The remainder of marketing and advertising costs is recorded as a selling, general and administrative expense.
 
Recognition of the costs related to these programs contains uncertainties due to judgment required in estimating the potential performance and redemption of each program.
 
These estimates are based on many factors, including experience of similar promotional programs.
 
We have not made any material changes in the accounting methodology used to establish our marketing accruals during the past three fiscal years.
 
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our marketing accruals. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.
 
A 10% change in our marketing accruals at October 3, 2009, would impact pretax earnings by approximately $9 million.

 
 

 


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From Assumptions
         
Accrued self insurance
       
We are self insured for certain losses related to health and welfare, workers’ compensation, auto liability and general liability claims.
 
We use an independent third-party actuary to assist in determining our self-insurance liability. We and the actuary consider a number of factors when estimating our self-insurance liability, including claims experience, demographic factors, severity factors and other actuarial assumptions.
 
We periodically review our estimates and assumptions with our third-party actuary to assist us in determining the adequacy of our self-insurance liability. Our policy is to maintain an accrual within the central to high point of the actuarial range.
 
Our self-insurance liability contains uncertainties due to assumptions required and judgment used.
 
Costs to settle our obligations, including legal and healthcare costs, could increase or decrease causing estimates of our self-insurance liability to change.
 
Incident rates, including frequency and severity, could increase or decrease causing estimates in our self-insurance liability to change.
 
We have not made any material changes in the accounting methodology used to establish our self-insurance liability during the past three fiscal years.
 
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our self-insurance liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.
 
A 10% increase in the actuarial range at October 3, 2009, would result in an increase in the amount we recorded for our self-insurance liability of approximately $15 million. A 10% decrease in the actuarial range at October 3, 2009, would result in a reduction in the amount we recorded for our self-insurance liability of approximately $3 million.
         
Impairment of long-lived assets
       
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Examples include a significant adverse change in the extent or manner in which we use a long-lived asset or a change in its physical condition.
 
When evaluating long-lived assets for impairment, we compare the carrying value of the asset to the asset’s estimated undiscounted future cash flows. An impairment is indicated if the estimated future cash flows are less than the carrying value of the asset. The impairment is the excess of the carrying value over the fair value of the long-lived asset.
 
We recorded impairment charges related to long-lived assets of $25 million, $52 million and $6 million, respectively, in fiscal years 2009, 2008 and 2007.
 
Our impairment analysis contains uncertainties due to judgment in assumptions and estimates surrounding undiscounted future cash flows of the long-lived asset, including forecasting useful lives of assets and selecting the discount rate that reflects the risk inherent in future cash flows to determine fair value.
 
We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets during the last three fiscal years.
 
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments of long-lived assets. However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses that could be material.

 
 

 


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From Assumptions
         
Impairment of goodwill and other intangible assets
   
Goodwill impairment is determined using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.
 
The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
 
The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit).
 
For other intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
 
We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and other intangible assets. However, we could be required to evaluate the recoverability of goodwill and other intangible assets prior to the required annual assessment if we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of the business or a sustained decline in market capitalization.
 
We estimate the fair value of our reporting units, generally our operating segments, using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. Assumptions about sales, operating margins and growth rates are based on our budgets, business plans, economic projections, anticipated future cash flows and marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period.
 
While estimating the fair value of our Chicken and Beef reporting units, we assumed operating margins in future years in excess of the annualized margins realized in the most current year. The fair value estimates for these reporting units assume normalized operating margin assumptions and improved operating efficiencies based on long-term expectations and margins historically realized in the beef and chicken industries. We estimate the fair value of our Chicken reporting unit would be in excess of its carrying amount, including goodwill, by sustaining long-term operating margins of approximately 5.0%. After the $560 million non-cash impairment recognized in fiscal 2009, we estimate the fair value of our Beef reporting unit would be in excess of its carrying amount, including goodwill, by sustaining long-term operating margins of approximately 2.0%.
 
Other intangible asset fair values have been calculated for trademarks using a royalty rate method. Assumptions about royalty rates are based on the rates at which similar brands and trademarks are licensed in the marketplace.
 
Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions.
 
We have not made any material changes in the accounting methodology used to evaluate impairment of goodwill and other intangible assets during the last three years.
 
The recent disruptions in global credit and other financial markets and deterioration of economic conditions led to an increase in our discount rate. The discount rate used in our annual goodwill impairment test increased to 10.1% in fiscal 2009 from 9.3% in fiscal 2008. There were no significant changes in the other key estimates and assumptions.  As a result of the significantly increased discount rate, we failed the first step of the fiscal 2009 goodwill impairment analysis for our Beef reporting unit and performed the second step. The second step resulted in a $560 million non-cash partial impairment of the Beef reporting unit's goodwill.
 
No other reporting units failed the first step of the annual goodwill impairment analysis in fiscal 2009, 2008 and 2007 and therefore, the second step was not necessary. However, a 10% decline in fair value of our Chicken reporting unit would have caused the carrying value for this reporting unit to be in excess of fair value which would require the second step to be performed. The second step could have resulted in an impairment loss for the Chicken reporting unit's goodwill.
 
After the $560 million non-cash impairment recognized in fiscal 2009, a 17% decline in fair value of our Beef reporting unit would have caused the adjusted carrying value for this reporting unit to be in excess of fair value.
 
Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, and our credit ratings.  While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units and other intangible assets, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, we may be required to perform the second step which could result in additional material impairments of our goodwill.
 
Our fiscal 2009 other intangible asset impairment analysis did not result in a material impairment charge. A hypothetical 10% decrease in the fair value of intangible assets would not result in a material impairment.

 
 

 


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ From Assumptions
         
Income taxes
       
We estimate total income tax expense based on statutory tax rates and tax planning opportunities available to us in various jurisdictions in which we earn income.
 
Federal income tax includes an estimate for taxes on earnings of foreign subsidiaries expected to be remitted to the United States and be taxable, but not for earnings considered indefinitely invested in the foreign subsidiary.
 
Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse.
 
Valuation allowances are recorded when it is likely a tax benefit will not be realized for a deferred tax asset.
 
We record unrecognized tax benefit liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due.
 
Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.
 
Changes in projected future earnings could affect the recorded valuation allowances in the future.
 
Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax regulations across the tax jurisdictions where we operate.
 
Our analysis of unrecognized tax benefits contains uncertainties based on judgment used to apply the more likely than not recognition and measurement thresholds.
 
We do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.
 
To the extent we prevail in matters for which unrecognized tax benefits have been established, or are required to pay amounts in excess of our recorded unrecognized tax benefits, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the period of resolution.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

Market risk relating to our operations results primarily from changes in commodity prices, interest rates and foreign exchange rates, as well as credit risk concentrations. To address certain of these risks, we enter into various derivative transactions as described below. If a derivative instrument is accounted for as a hedge, depending on the nature of the hedge, changes in the fair value of the instrument either will be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or be recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is recognized immediately. Additionally, we hold certain positions, primarily in grain and livestock futures that either do not meet the criteria for hedge accounting or are not designated as hedges. With the exception of normal purchases and normal sales that are expected to result in physical delivery, we record these positions at fair value, and the unrealized gains and losses are reported in earnings at each reporting date. Changes in market value of derivatives used in our risk management activities relating to forward sales contracts are recorded in sales. Changes in market value of derivatives used in our risk management activities surrounding inventories on hand or anticipated purchases of inventories are recorded in cost of sales.

The sensitivity analyses presented below are the measures of potential losses of fair value resulting from hypothetical changes in market prices related to commodities. Sensitivity analyses do not consider the actions we may take to mitigate our exposure to changes, nor do they consider the effects such hypothetical adverse changes may have on overall economic activity. Actual changes in market prices may differ from hypothetical changes.

 
 

 

Commodities Risk: We purchase certain commodities, such as grains and livestock, in the course of normal operations. As part of our commodity risk management activities, we use derivative financial instruments, primarily futures and options, to reduce the effect of changing prices and as a mechanism to procure the underlying commodity. However, as the commodities underlying our derivative financial instruments can experience significant price fluctuations, any requirement to mark-to-market the positions that have not been designated or do not qualify as hedges could result in volatility in our results of operations. Contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation. Contracts designated and highly effective at meeting this risk reduction and correlation criteria are recorded using hedge accounting. The following table presents a sensitivity analysis resulting from a hypothetical change of 10% in market prices as of October 3, 2009, and September 27, 2008, on the fair value of open positions. The fair value of such positions is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures prices. The market risk exposure analysis includes hedge and non-hedge derivative financial instruments.

Effect of 10% change in fair value
       
in millions
 
   
2009
   
2008
 
Livestock:
           
Cattle
  $ 20     $ 78  
Hogs
    12       31  
                 
Grain
    1       88  

Interest Rate Risk: At October 3, 2009, we had fixed-rate debt of $3.3 billion with a weighted average interest rate of 7.9%. We have exposure to changes in interest rates on this fixed-rate debt. Market risk for fixed-rate debt is estimated as the potential increase in fair value, resulting from a hypothetical 10% decrease in interest rates. A hypothetical 10% decrease in interest rates would have increased the fair value of our fixed-rate debt by approximately $32 million at October 3, 2009, and $45 million at September 27, 2008. The fair values of our debt were estimated based on quoted market prices and/or published interest rates.

At October 3, 2009, we had variable rate debt of $218 million with a weighted average interest rate of 4.3%. A hypothetical 10% increase in interest rates effective at October 3, 2009, and September 27, 2008, would have a minimal effect on interest expense.

Foreign Currency Risk: We have foreign exchange gain/loss exposure from fluctuations in foreign currency exchange rates primarily as a result of certain receivable and payable balances. The primary currency exchanges we have exposure to are the Canadian dollar, the Chinese renminbi, the Mexican peso, the European euro, the British pound sterling and the Brazilian real. We periodically enter into foreign exchange forward contracts to hedge some portion of our foreign currency exposure. A hypothetical 10% change in foreign exchange rates effective at October 3, 2009, and September 27, 2008, related to the foreign exchange forward contracts would have a $15 million and $11 million, respectively, impact on pretax income. In the future, we may enter into more foreign exchange forward contracts as a result of our international growth strategy.

Concentrations of Credit Risk: Our financial instruments exposed to concentrations of credit risk consist primarily of cash equivalents and trade receivables. Our cash equivalents are in high quality securities placed with major banks and financial institutions. Concentrations of credit risk with respect to receivables are limited due to our large number of customers and their dispersion across geographic areas. We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. At October 3, 2009, and September 27, 2008, 13.0% and 12.2%, respectively, of our net accounts receivable balance was due from Wal-Mart Stores, Inc. No other single customer or customer group represents greater than 10% of net accounts receivable.

 
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME

   
Three years ended October 3, 2009
 
   
in millions, except per share data
 
                   
   
2009
   
2008
   
2007
 
Sales
  $ 26,704     $ 26,862     $ 25,729  
Cost of Sales
    25,501       25,616       24,300  
      1,203       1,246       1,429  
Operating Expenses:
                       
Selling, general and administrative
    841       879       814  
Goodwill impairment
    560       -       -  
Other charges
    17       36       2  
Operating Income (Loss)
    (215 )     331       613  
Other (Income) Expense:
                       
Interest income
    (17 )     (9 )     (8 )
Interest expense
    310       215       232  
Other, net
    18       (29 )     (21 )
      311       177       203  
                         
Income (Loss) from Continuing Operations before
Income Taxes and Minority Interest
    (526 )     154       410  
Income Tax Expense
    14       68       142  
Income (Loss) from Continuing Operations
before Minority Interest
    (540 )     86       268  
Minority Interest
    (4 )     -       -  
Income (Loss) from Continuing Operations
    (536 )     86       268  
Loss from Discontinued Operation, Net of Tax $11, $0, $0
    (1 )     -       -  
Net Income (Loss)
  $ (537 )   $ 86     $ 268  
                         
Weighted Average Shares Outstanding:
                       
Class A Basic
    302       281       273  
Class B Basic
    70       70       75  
Diluted
    372       356       355  
Earnings (Loss) Per Share from Continuing Operations:
                       
Class A Basic
  $ (1.47 )   $ 0.25     $ 0.79  
Class B Basic
  $ (1.32 )   $ 0.22     $ 0.70  
Diluted
  $ (1.44 )   $ 0.24     $ 0.75  
Loss Per Share from Discontinued Operation:
                       
Class A Basic
  $ -     $ -     $ -  
Class B Basic
  $ -     $ -     $ -  
Diluted
  $ -     $ -     $ -  
Net Earnings (Loss) per Share:
                       
Class A Basic
  $ (1.47 )   $ 0.25     $ 0.79  
Class B Basic
  $ (1.32 )   $ 0.22     $ 0.70  
Diluted
  $ (1.44 )   $ 0.24     $ 0.75  
See accompanying notes.
                       

 
 

 

CONSOLIDATED BALANCE SHEETS

 
in millions, except share and per share data
 
             
   
2009
   
2008
 
Assets
           
Current Assets:
           
Cash and cash equivalents
  $ 1,004     $ 250  
Restricted cash
    140       -  
Accounts receivable, net
    1,100       1,271  
Inventories, net
    2,009       2,538  
Other current assets
    122       143  
Assets of discontinued operation held for sale
    -       159  
Total Current Assets
    4,375       4,361  
Restricted Cash
    43       -  
Net Property, Plant and Equipment
    3,576       3,519  
Goodwill
    1,917       2,511  
Intangible Assets
    187       128  
Other Assets
    497       331  
Total Assets
  $ 10,595     $ 10,850  
                 
Liabilities and Shareholders’ Equity
               
Current Liabilities:
               
Current debt
  $ 219     $ 8  
Trade accounts payable
    1,013       1,217  
Other current liabilities
    761       878  
Total Current Liabilities
    1,993       2,103  
Long-Term Debt
    3,333       2,888  
Deferred Income Taxes
    280       291  
Other Liabilities
    539       525  
Minority Interest
    98       29  
Shareholders’ Equity:
               
Common stock ($0.10 par value):
               
Class A-authorized 900 million shares:
               
issued 322 million shares in both 2009 and 2008
    32       32  
Convertible Class B-authorized 900 million shares:
               
issued 70 million shares in both 2009 and 2008
    7       7  
Capital in excess of par value
    2,180       2,161  
Retained earnings
    2,409       3,006  
Accumulated other comprehensive income
    (34 )     41  
      4,594       5,247  
Less treasury stock, at cost-
               
16 million shares in 2009 and 15 million shares in 2008
    242       233  
Total Shareholders’ Equity
    4,352       5,014  
Total Liabilities and Shareholders’ Equity
  $ 10,595     $ 10,850  
See accompanying notes.
               

 
 

 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     
Three years ended October 3, 2009
 
                     
in millions
 
                                     
             
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
 
                                     
Class A Common Stock:
                                   
Balance at beginning of year
    322     $ 32       300     $ 30       284     $ 28  
Issuance of Class A Common Stock
    -       -       22       2       -       -  
Conversion from Class B shares
    -       -       -       -       16       2  
Balance at end of year
    322       32       322       32       300       30  
                                                 
Class B Common Stock:
                                               
Balance at beginning of year
    70       7       70       7       86       9  
Conversion to Class A shares
    -       -       -       -       (16 )     (2 )
Balance at end of year
    70       7       70       7       70       7  
                                                 
Capital in Excess of Par Value:
                                               
Balance at beginning of year
            2,161               1,877               1,835  
Issuance of Class A Common Stock
            -               272               -  
Convertible note hedge transactions
            -               (58 )             -  
Warrant transactions
            -               44               -  
Stock options exercised
            (5 )             (5 )             9  
Restricted shares issued
            (12 )             (14 )             (26 )
Restricted shares canceled
            2               2               27  
Restricted share amortization
            19               19               24  
Reclassification and other
            15               24               8  
Balance at end of year
            2,180               2,161               1,877  
                                                 
Retained Earnings:
                                               
Balance at beginning of year
            3,006               2,993               2,781  
Cumulative effect for adoption of new accounting guidance (1)
            -               (17 )             -  
Net income (loss)
            (537 )             86               268  
Dividends paid
            (60 )             (56 )             (56 )
Balance at end of year
            2,409               3,006               2,993  
                                                 
Accumulated Other Comprehensive Income (Loss), Net of Tax:
                                               
Balance at beginning of year
            41               50               17  
Net hedging (gain) loss recognized in earnings
            36               (25 )             (20 )
Net hedging unrealized gain (loss)
            (30 )             23               20  
Loss on investments reclassified to other income
            3               -               -  
Unrealized gain (loss) on investments
            7               (1 )             -  
Currency translation adjustment gain reclassified to loss from discontinued operation
            (41 )             -               -  
Currency translation adjustment
            (40 )             (2 )             24  
Net change in postretirement liabilities
            (10 )             (4 )             -  
Net change in pension liability, prior to adoption of new accounting guidance (1)
            -               -               6  
Adjustment to initially apply new accounting guidance (1)
            -               -               3  
Balance at end of year
            (34 )             41               50  
                                                 
Treasury Stock:
                                               
Balance at beginning of year
    15       (233 )     14       (226 )     15       (230 )
Purchase of treasury shares
    2       (19 )     2       (30 )     3       (61 )
Stock options exercised
    -       1       -       11       (4 )     65  
Restricted shares issued
    (1 )     12       (1 )     16       (2 )     27  
Restricted shares canceled
    -       (3 )     -       (4 )     2       (27 )
Balance at end of year
    16       (242 )     15       (233 )     14       (226 )
                                                 
Total Shareholders’ Equity
          $ 4,352             $ 5,014             $ 4,731  
                                                 
Comprehensive Income (Loss):
                                               
Net income (loss)
          $ (537 )           $ 86             $ 268  
Other comprehensive income (loss), net of tax
            (75 )             (9 )             30  
Total Comprehensive Income (Loss)
          $ (612 )           $ 77             $ 298  
                                                 
See accompanying notes.
                                               
                                                 
(1) Cumulative effect for adoption of new accounting guidance relates to: 2008 – uncertainty in income taxes; 2007 – defined benefit and post retirement plans
 

 
 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Three years ended October 3, 2009
 
   
in millions
 
                   
   
2009
   
2008
   
2007
 
Cash Flows From Operating Activities:
                 
Net income (loss)
  $ (537 )   $ 86     $ 268  
Adjustments to reconcile net income (loss) to cash provided by operating activities:
                       
Depreciation
    445       468       482  
Amortization
    51       25       32  
Deferred taxes
    (26 )     35       5  
Impairment of goodwill
    560       -       -  
Impairment and write-down of assets
    32       57       14  
Other, net
    68       26       (15 )
(Increase) decrease in accounts receivable
    137       (59 )     (66 )
(Increase) decrease in inventories
    493       (376 )     (166 )
Increase (decrease) in trade accounts payable
    (148 )     98       91  
Increase (decrease) in income taxes payable/receivable
    33       (22 )     24  
Decrease in interest payable
    (60 )     -       (35 )
Net change in other current assets and liabilities
    (23 )     (50 )     44  
Cash Provided by Operating Activities
    1,025       288       678  
Cash Flows From Investing Activities:
                       
Additions to property, plant and equipment
    (368 )     (425 )     (285 )
Proceeds from sale of property, plant and equipment
    9       26       76  
Purchases of marketable securities
    (37 )     (115 )     (131 )
Proceeds from sale of marketable securities
    56       112       147  
Proceeds from sale of investments
    15       22       -  
Proceeds from sale of short-term investment
    -       -       770  
Change in restricted cash to be used for investing activities
    (43 )     -       -  
Proceeds from sale of discontinued operation
    75       -       -  
Acquisitions, net of cash acquired
    (93 )     (17 )     -  
Other, net
    (41 )     (2 )     2  
Cash Provided by (Used for) Investing Activities
    (427 )     (399 )     579  
Cash Flows From Financing Activities:
                       
Net borrowings (payments) on revolving credit facilities
    15       (213 )     53  
Payments of debt
    (380 )     (147 )     (1,263 )
Net proceeds from borrowings
    852       449       -  
Net proceeds from Class A stock offering
    -       274       -  
Convertible note hedge transactions
    -       (94 )     -  
Warrant transactions
    -       44       -  
Purchase of treasury shares
    (19 )     (30 )     (61 )
Dividends
    (60 )     (56 )     (56 )
Debt issuance costs
    (59 )     -       -  
Change in restricted cash to be used for financing activities
    (140 )     -       -  
Stock options exercised
    1       9       74  
Change in negative book cash balances
    (65 )     67       9  
Other, net
    5       18       (8 )
Cash Provided by (Used for) Financing Activities
    150       321       (1,252 )
Effect of Exchange Rate Change on Cash
    6       (2 )     9  
Increase in Cash and Cash Equivalents
    754       208       14  
Cash and Cash Equivalents at Beginning of Year
    250       42       28  
Cash and Cash Equivalents at End of Year
  $ 1,004     $ 250     $ 42  
See accompanying notes.
                       
                         


 
 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business: Tyson Foods, Inc. (collectively, “Company,” “we,” “us” or “our”), founded in 1935 with world headquarters in Springdale, Arkansas, is one of the world’s largest processor and marketer of chicken, beef and pork and the second-largest food production company in the Fortune 500. We produce a wide variety of brand name protein-based and prepared food products marketed in the United States and approximately 90 countries around the world.

Consolidation: The consolidated financial statements include the accounts of all wholly-owned subsidiaries, as well as majority-owned subsidiaries for which we have a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation.

We have an investment in a joint venture, Dynamic Fuels LLC (Dynamic Fuels), in which we have a 50 percent ownership interest. Dynamic Fuels qualifies as a variable interest entity.  Effective June 30, 2008, we began consolidating Dynamic Fuels since we are the primary beneficiary.

Fiscal Year: We utilize a 52- or 53-week accounting period ending on the Saturday closest to September 30. The Company's accounting cycle resulted in a 53-week year for fiscal year 2009 and a 52-week year for fiscal years 2008 and 2007.

Reclassification: Certain reclassifications were made to prior periods to conform to current presentations in the Consolidated Financial Statements. The effect of these reclassifications was not significant to the Consolidated Financial Statements.

Discontinued Operation: In June 2008, we executed a letter of intent with XL Foods Inc. (XL Foods) to sell the beef processing, cattle feed yard and fertilizer assets of three of our Alberta, Canada subsidiaries (collectively, Lakeside), which were part of our Beef segment. In March 2009, we completed the sale and sold these assets and related inventories. The financial statements report Lakeside as a discontinued operation. See Note 4: Discontinued Operation in the Notes to Consolidated Financial Statements for further information.

Cash and Cash Equivalents: Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as part of our cash management activity. The carrying values of these assets approximate their fair market values. We primarily utilize a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts where funds are moved to, and several “zero-balance” disbursement accounts for funding payroll, accounts payable, livestock procurement, grower payments, etc. As a result of our cash management system, checks issued, but not presented to the banks for payment, may result in negative book cash balances. These negative book cash balances are included in trade accounts payable and other current liabilities. At October 3, 2009, and September 27, 2008, checks outstanding in excess of related book cash balances totaled approximately $254 million and $322 million, respectively.

Accounts Receivable: We record accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and relationships with and economic status of our customers. At October 3, 2009, and September 27, 2008, our allowance for uncollectible accounts was $33 million and $12 million, respectively. We generally do not have collateral for our receivables, but we do periodically evaluate the credit worthiness of our customers.

Inventories: Processed products, livestock and supplies and other are valued at the lower of cost or market. Cost includes purchased raw materials, live purchase costs, growout costs (primarily feed, contract grower pay and catch and haul costs), labor and manufacturing and production overhead, which are related to the purchase and production of inventories.

         
in millions
 
   
2009
   
2008
 
Processed products:
           
Weighted-average method – chicken and prepared foods
  $ 629     $ 920  
First-in, first-out method – beef and pork
    414       571  
Livestock – first-in, first-out method
    631       701  
Supplies and other – weighted-average method
    335       346  
Total inventory, net
  $ 2,009     $ 2,538  

 
 

 

Property, Plant and Equipment: Property, plant and equipment are stated at cost and primarily depreciated on a straight-line method, using estimated lives for buildings and leasehold improvements of 10 to 33 years, machinery and equipment of three to 12 years and land improvements and other of three to 20 years. Major repairs and maintenance costs that significantly extend the useful life of the related assets are capitalized. Normal repairs and maintenance costs are charged to operations.

We review the carrying value of long-lived assets at each balance sheet date if indication of impairment exists. Recoverability is assessed using undiscounted cash flows based on historical results and current projections of earnings before interest and taxes. We measure impairment as the excess of carrying cost over the fair value of an asset. The fair value of an asset is measured using discounted cash flows of future operating results based on a discount rate that corresponds to our cost of capital.

Goodwill and Other Intangible Assets: Goodwill and indefinite life intangible assets are initially recorded at fair value and not amortized, but are reviewed for impairment at least annually or more frequently if impairment indicators arise. Our goodwill is allocated by reporting unit, and we follow a two-step process to evaluate if a potential impairment exists. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit). We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and other indefinite life intangible assets.

We have estimated the fair value of our reporting units using a discounted cash flow analysis. This analysis requires us to make various judgmental estimates and assumptions about sales, operating margins, growth rates and discount factors. The recent disruptions in global credit and other financial markets and deterioration of economic conditions led to an increase in our discount rate used in the 2009 annual goodwill impairment analysis. There were no significant changes in the other key assumptions and estimates. As a result of the increased discount rate, we failed the first step of the 2009 goodwill impairment analysis for our Beef reporting unit and performed the second step. The second step resulted in a $560 million non-cash partial impairment of the Beef reporting unit's goodwill. During fiscal 2009, 2008 and 2007, all of our reporting units passed the first step of the goodwill impairment analysis, with the exception of the Beef reporting unit during fiscal 2009.

While estimating the fair value of our Beef and Chicken reporting units, we assumed operating margins in future years in excess of the annual margins realized in the most recent year. The fair value estimates for these reporting units assume normalized operating margin assumptions and improved operating efficiencies based on long-term expectations and operating margins historically realized in the beef and chicken industries. Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, and our credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, we may be required to perform the second step in future years, which could result in additional material impairments of our goodwill.

For our other indefinite life intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The fair value of trademarks is determined using a royalty rate method based on expected revenues by trademark.

Investments: We have investments in joint ventures and other entities. We use the cost method of accounting where our voting interests are less than 20 percent and the equity method of accounting where our voting interests are in excess of 20 percent, but we do not have a controlling interest or a variable interest in which we are the primary beneficiary. Investments in joint ventures and other entities are reported in the Consolidated Balance Sheets in Other Assets.

We have investments in marketable debt securities. As of October 3, 2009, and September 27, 2008, $81 million and $94 million, respectively, were classified in Other Assets in the Consolidated Balance Sheets, with maturities ranging up to 47 years. We have determined all our marketable debt securities are available-for-sale investments. These investments are reported at fair value based on quoted market prices as of the balance sheet date, with unrealized gains and losses, net of tax, recorded in other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such

 
 

 

amortization is recorded in interest income. The cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of debt securities and declines in value judged to be other than temporary are recorded on a net basis in other income. Interest and dividends on securities classified as available-for-sale are recorded in interest income.

Accrued Self Insurance: We use a combination of insurance and self-insurance mechanisms in an effort to mitigate the potential liabilities for health and welfare, workers’ compensation, auto liability and general liability risks. Liabilities associated with our risks retained are estimated, in part, by considering claims experience, demographic factors, severity factors and other actuarial assumptions.

Capital Stock: We have two classes of capital stock, Class A Common Stock, $0.10 par value (Class A stock) and Class B Common Stock, $0.10 par value (Class B stock). Holders of Class B stock may convert such stock into Class A stock on a share-for-share basis. Holders of Class B stock are entitled to 10 votes per share, while holders of Class A stock are entitled to one vote per share on matters submitted to shareholders for approval. As of October 3, 2009, members of the Tyson family beneficially own, in the aggregate, 99.97% of the outstanding shares of Class B stock and 2.36% of the outstanding shares of Class A stock, giving the Tyson family control of approximately 70% of the total voting power of the outstanding voting stock. Cash dividends cannot be paid to holders of Class B stock unless they are simultaneously paid to holders of Class A stock. The per share amount of the cash dividend paid to holders of Class B stock cannot exceed 90% of the cash dividend simultaneously paid to holders of Class A stock. We pay quarterly cash dividends to Class A and Class B shareholders. We paid Class A dividends per share of $0.16 and Class B dividends per share of $0.144 in each of fiscal years 2009, 2008 and 2007.

The Class B stock is considered a participating security requiring the use of the two-class method for the computation of basic earnings per share. The two-class computation method for each period reflects the cash dividends paid for each class of stock, plus the amount of allocated undistributed earnings (losses) computed using the participation percentage, which reflects the dividend rights of each class of stock. Basic earnings per share were computed using the two-class method for all periods presented. The shares of Class B stock are considered to be participating convertible securities since the shares of Class B stock are convertible on a share-for-share basis into shares of Class A stock. Diluted earnings per share were computed assuming the conversion of the Class B shares into Class A shares as of the beginning of each period.

Financial Instruments: We purchase certain commodities, such as grains and livestock in the course of normal operations. As part of our commodity risk management activities, we use derivative financial instruments, primarily futures and options, to reduce our exposure to various market risks related to these purchases, as well as to changes in foreign currency exchange rates. Contract terms of a financial instrument qualifying as a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts designated and highly effective at meeting risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument is accounted for as a hedge, changes in the fair value of the instrument will be offset either against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is immediately recognized in earnings as a component of cost of sales. Instruments we hold as part of our risk management activities that do not meet the criteria for hedge accounting are marked to fair value with unrealized gains or losses reported currently in earnings. Changes in market value of derivatives used in our risk management activities relating to forward sales contracts are recorded in sales. Changes in market value of derivatives used in our risk management activities surrounding inventories on hand or anticipated purchases of inventories or supplies are recorded in cost of sales. We generally do not hedge anticipated transactions beyond 18 months.

Revenue Recognition: We recognize revenue when title and risk of loss are transferred to customers, which is generally on delivery based on terms of sale. Revenue is recognized as the net amount estimated to be received after deducting estimated amounts for discounts, trade allowances and product terms.

Litigation Reserves: There are a variety of legal proceedings pending or threatened against us. Accruals are recorded when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated based on current law, progress of each case, opinions and views of legal counsel and other advisers, our experience in similar matters and intended response to the litigation. These amounts, which are not discounted and are exclusive of claims against third parties, are adjusted periodically as assessment efforts progress or additional information becomes available. We expense amounts for administering or litigating claims as incurred. Accruals for legal proceedings are included in Other current liabilities in the Consolidated Balance Sheets.

Freight Expense: Freight expense associated with products shipped to customers is recognized in cost of sales.

Advertising and Promotion Expenses: Advertising and promotion expenses are charged to operations in the period incurred. Customer incentive and trade promotion activities are recorded as a reduction to sales based on amounts estimated as being due to customers, based primarily on historical utilization and redemption rates, while other advertising and promotional activities are recorded as selling, general and administrative expenses. Advertising and promotion expenses for fiscal years 2009, 2008 and 2007 were $491 million, $495 million and $467 million, respectively.

 
 

 

Use of Estimates: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements: In December 2007, the Financial Accounting Standards Board (FASB) issued guidance to establish accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and may be reported as equity in the consolidated financial statements, rather than in the liability or mezzanine section between liabilities and equity. This guidance also requires consolidated net income be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement is not expected to have a material impact on our consolidated financial statements; however, certain financial statement presentation changes and additional required disclosures will be made. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008; therefore, we will adopt at the beginning of fiscal 2010.

In December 2007, the FASB issued guidance establishing principles and requirements for how an acquirer in a business combination: 1) recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; 2) recognizes and measures goodwill acquired in a business combination or a gain from a bargain purchase; and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. This guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008; therefore, we will adopt this guidance for any business combinations entered into beginning in fiscal 2010.

In May 2008, the FASB issued guidance which specifies issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The amount allocated to the equity component represents a discount to the debt, which is amortized into interest expense using the effective interest method over the life of the debt. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. We will adopt the provisions of this guidance beginning in the first quarter of fiscal 2010. The provisions are required to be applied retrospectively to all periods presented. Upon retrospective adoption, our effective interest rate on our 3.25% Convertible Senior Notes due 2013 will be 8.26%, which would result in the recognition of a $92 million discount to these notes with the offsetting after tax amount of $56 million recorded to capital in excess of par value. This discount will be accreted over the five-year term of the convertible notes at the effective interest rate, which will not materially impact fiscal 2008 interest expense, but will result in an estimated $17 million non-cash increase to our reported fiscal year 2009 interest expense.

In December 2008, the FASB issued guidance requiring additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. This guidance is effective for fiscal years ending after December 15, 2009, with early adoption permitted. We will adopt the disclosure requirements beginning with our fiscal 2010 annual report.

In June 2009, the FASB issued guidance removing the concept of a qualifying special-purpose entity (QSPE). This guidance also clarifies the requirements for isolation and limitations on portions of financial assets eligible for sale accounting. This guidance is effective for fiscal years beginning after November 15, 2009. Accordingly, we will adopt this guidance in fiscal year 2011. We are in process of evaluating the potential impacts.

In June 2009, the FASB issued guidance requiring an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This guidance requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This guidance is effective for fiscal years beginning after November 15, 2009. Accordingly, we will adopt this guidance in fiscal year 2011. We are in process of evaluating the potential impacts.

Subsequent Events: We have evaluated subsequent events through the time of filing on November 23, 2009, which represents the date the Consolidated Financial Statements were issued.

NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES

In September 2006, the FASB issued guidance for using fair value to measure assets and liabilities. This guidance also requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. This guidance applies whenever other standards require (or permit)

 
 

 

assets or liabilities to be measured at fair value. At the beginning of fiscal 2009, we partially adopted this standard, as allowed, which delayed the effective date for nonfinancial assets and liabilities. As of the beginning of fiscal 2009, we applied these provisions to our financial instruments and the impact was not material. We will be required to apply fair value measurements to our nonfinancial assets and liabilities at the beginning of fiscal 2010. The adoption did not have a significant impact on our consolidated financial statements.
 
In February 2007, the FASB issued guidance providing companies with an option to report selected financial assets and liabilities, firm commitments, and nonfinancial warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. When adopted at the beginning of fiscal 2009, we did not elect this fair value option and, therefore, there was no impact to our consolidated financial statements.

In April 2007, the FASB issued guidance which requires entities that offset the fair value amounts recognized for derivative receivables and payables to also offset the fair value amounts recognized for the right to reclaim cash collateral with the same counterparty under a master netting agreement. We applied the provisions of this guidance to our consolidated financial statements beginning in fiscal 2009. We did not restate prior periods as the impact was not material.

In March 2008, the FASB issued guidance for disclosures about derivative instruments and hedging activities. This guidance establishes enhanced disclosure requirements about: 1) how and why an entity uses derivative instruments; 2) how derivative instruments and related hedged items are accounted for; and 3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This guidance was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008; therefore, we adopted in fiscal 2009. See Note 6: Derivative Financial Instruments for required disclosures.

In April 2009, the FASB issued guidance regarding the recognition and presentation of other-than-temporary impairments. This standard provides new guidance on the recognition and presentation of an other-than-temporary impairment for debt securities classified as available-for-sale and held-to-maturity and provides certain new disclosure requirements for both debt and equity securities. This standard was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted in fiscal 2009. The adoption did not have a significant impact on our consolidated financial statements.

In April 2009, the FASB issued additional guidance for estimating the fair value of assets and liabilities in markets that have experienced a significant reduction in volume and activity in relation to normal activity. This guidance was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted in fiscal 2009. The adoption did not have a significant impact on our consolidated financial statements.

In April 2009, the FASB issued guidance to require disclosures about fair value of financial instruments in interim financial statements. This guidance was effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance during fiscal 2009 and made the required disclosures during our applicable interim reports.

In May 2009, the FASB issued guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This standard was effective for interim and annual periods ending after June 15, 2009. We adopted this guidance in fiscal 2009. See “Subsequent Events” in Note 1: Business and Summary of Significant Accounting Policies for required disclosures.

NOTE 3: ACQUISITIONS

In August 2009, we completed the establishment of related joint ventures in China referred to as Shandong Tyson Xinchang Foods. The aggregate purchase price for our 60% equity interest was $21 million, which excludes $93 million of cash transferred to the joint venture for future capital needs. The preliminary purchase price included $29 million allocated to Intangible Assets and $19 million allocated to Goodwill, as well as the assumption of $76 million of Current and Long-Term Debt.

In October 2008, we acquired three vertically integrated poultry companies in southern Brazil: Macedo Agroindustrial, Avicola Itaiopolis and Frangobras. The aggregate purchase price was $67 million, including $4 million of mandatory deferred payments to be made through fiscal 2011. In addition, we have $15 million of contingent purchase price based on production volumes payable through fiscal 2011. The purchase price included $23 million allocated to Goodwill and $19 million allocated to Intangible Assets.


 
 

 
NOTE 4: DISCONTINUED OPERATION

In June 2008, we executed a letter of intent with XL Foods to sell the beef processing, cattle feed yard and fertilizer assets of three of our Alberta, Canada subsidiaries (collectively, Lakeside), which were part of our Beef segment. On March 13, 2009, we completed the sale and sold these assets and related inventories for total consideration of $145 million, based on exchange rates then in effect. This included (a) cash received at closing of $43 million, (b) $78 million of collateralized notes receivable from either XL Foods or an affiliated entity to be collected throughout the two years following closing, and (c) $24 million of XL Foods Preferred Stock to be redeemed over the next five years.

We recorded a pretax loss on sale of Lakeside of $10 million in fiscal 2009, which included an allocation of beef reporting unit goodwill of $59 million and cumulative currency translation adjustment gains of $41 million.

The following is a summary of Lakeside’s operating results (in millions):

   
2009
   
2008
   
2007
 
Sales
  $ 461     $ 1,268     $ 1,171  
                         
Pretax income from discontinued operation
  $ 20     $ -     $ -  
Loss on sale of discontinued operation
    (10 )     -       -  
Income tax expense
    11       -       -  
Loss from discontinued operation
  $ (1 )   $ -     $ -  

The carrying amounts of Lakeside’s assets held for sale included the following (in millions):

     
Assets of discontinued operation held for sale:
     
Inventories
  $ 82  
Net property, plant and equipment
    77  
Total assets of discontinued operation held for sale
  $ 159  

NOTE 5: DISPOSITIONS AND OTHER CHARGES

In March 2009, we announced the decision to close our Ponca City, Oklahoma, processed meats plant. The plant ceased operations in August 2009. The closing resulted in the elimination of approximately 600 jobs. During fiscal 2009, we recorded charges of $15 million, which included $14 million for impairment charges and $1 million of employee termination benefits. The charges are reflected in the Prepared Foods segment’s Operating Income and included in the Consolidated Statements of Income in Other Charges. No material adjustments to the accrual are anticipated.

In fiscal 2008, we recorded charges of $10 million related to intangible asset impairments. Of this amount, $8 million is reflected in the Beef segment’s Operating Income and $2 million in the Prepared Foods segment’s Operating Income, and both are recorded in the Consolidated Statements of Income in Cost of Sales. We recorded charges of $7 million related to flood damage at our Jefferson, Wisconsin, plant. This amount is reflected in the Prepared Foods segment’s Operating Income and included in the Consolidated Statements of Income in Cost of Sales. We also recorded a charge of $6 million related to the impairment of unimproved real property in Memphis, Tennessee. This amount is reflected in the Chicken segment’s Operating Income (Loss) and included in the Consolidated Statements of Income in Cost of Sales. Additionally, we recorded an $18 million non-operating gain as the result of a private equity firm’s purchase of a technology company in which we held a minority interest. This gain was recorded in Other Income in the Consolidated Statements of Income.

In February 2008, we announced discontinuation of an existing product line and closing of one of our three poultry plants in Wilkesboro, North Carolina. The Wilkesboro cooked products plant ceased operations in April 2008. The closure resulted in elimination of approximately 400 jobs. In fiscal 2008, we recorded charges of $13 million for impairment charges. This amount is reflected in the Chicken segment’s Operating Income (Loss) and included in the Consolidated Statements of Income in Other Charges.

In January 2008, we announced the decision to restructure operations at our Emporia, Kansas, beef plant. Beef slaughter operations ceased during the second quarter of fiscal 2008. However, the facility is still used to process certain commodity, specialty cuts and ground beef, as well as a cold storage and distribution warehouse. This restructuring resulted in elimination of approximately 1,700 jobs at the Emporia plant. In fiscal 2008, we recorded charges of $10 million for impairment charges and $7 million of other closing costs, consisting of $6 million for employee termination benefits and $1 million in other plant-closing related liabilities. These amounts were reflected in the Beef segment’s Operating Income (Loss) and included in the Consolidated Statements of Income in Other Charges. We have fully paid employee termination benefits and other plant-closing related liabilities.
 
 

 

In fiscal 2008, management approved plans for implementation of certain recommendations resulting from the previously announced FAST initiative, which was focused on process improvement and efficiency creation. As a result, in fiscal 2008, we recorded charges of $6 million related to employee termination benefits resulting from termination of approximately 200 employees. Of these charges, $2 million, $2 million, $1 million and $1 million, respectively, were recorded in the Chicken, Beef, Pork and Prepared Foods segments’ Operating Income (Loss) and included in the Consolidated Statements of Income in Other Charges. We have fully paid the employee termination benefits.

In May 2007, we announced the completion of the sale of two of our Alabama poultry plants and related support facilities. As part of strategic efforts to reduce the production of commodity chicken, we sold our processing plants in Ashland and Gadsden, which also included a nearby feed mill and two hatcheries. These facilities employed approximately 1,200 employees, of which approximately 800 were hired by the acquiring company, while the remaining employees were offered the opportunity to transfer to our other operations in Alabama. We recorded a gain of $10 million on the sale in fiscal 2007. The gain was recorded in the Chicken segment’s Operating Income (Loss) and included in the Consolidated Statements of Income in Cost of Sales.

NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS

Our business operations give rise to certain market risk exposures mostly due to changes in commodity prices, foreign currency exchange rates and interest rates. We manage a portion of these risks through the use of derivative financial instruments, primarily futures and options, to reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Forward contracts on various commodities, including grains, livestock and energy, are primarily entered into to manage the price risk associated with forecasted purchases of these inputs used in our production processes. Foreign exchange forward contracts are entered into to manage the fluctuations in foreign currency exchange rates, primarily as a result of certain receivable and payable balances. We also periodically utilize interest rate swaps to manage interest rate risk associated with our variable-rate borrowings.

Our risk management programs are reviewed by our Board of Directors’ Audit Committee. These programs are monitored by senior management and may be revised as market conditions dictate. Our current risk management programs utilize industry-standard models that take into account the implicit cost of hedging. Risks associated with our market risks and those created by derivative instruments and the fair values are strictly monitored at all times, using value-at-risk and stress tests.  Credit risks associated with our derivative contracts are not significant as we minimize counterparty concentrations, utilize margin accounts or letters of credit, and primarily deal with counterparties with solid credit. Additionally, our derivative contracts are mostly short-term in duration and we do not make use of credit-risk-related contingent features. No significant concentrations of credit risk existed at October 3, 2009.

We recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets, with the exception of normal purchases and normal sales expected to result in physical delivery.  The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged (i.e., fair value hedge, cash flow hedge, or hedge of a net investment in a foreign operation). We qualify, or designate, a derivative financial instrument as a hedge when contract terms closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. If a derivative instrument is accounted for as a hedge, depending on the nature of the hedge, changes in the fair value of the instrument either will be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or be recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is recognized in earnings immediately. We designate certain forward contracts as follows:

 
Cash Flow Hedges – include certain commodity forward contracts of forecasted purchases (i.e., grains) and certain foreign exchange forward contracts.
 
Fair Value Hedges – include certain commodity forward contracts of forecasted purchases (i.e., livestock).
 
Net Investment Hedges – include certain foreign currency forward contracts of permanently invested capital in certain foreign subsidiaries.

Cash flow hedges
Derivative instruments, such as futures and options, are designated as hedges against changes in the amount of future cash flows related to procurement of certain commodities utilized in our production processes. We do not purchase forward commodity contracts in excess of our physical consumption requirements and generally do not hedge forecasted transactions beyond 12 months. The objective of these hedges is to reduce the variability of cash flows associated with the forecasted purchase of those commodities.  For the derivative instruments we designate and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses representing hedge ineffectiveness are recognized in earnings in the current period. Ineffectiveness related to our cash flow hedges was not significant during fiscal 2009, 2008 and 2007.

 
 

 
As of October 3, 2009, we had the following aggregated notionals of outstanding forward contracts accounted for as cash flow hedges:

 
Notional Volume
Commodity:
 
Corn
4 million bushels
Soy meal
16,900 tons

The net amount of pretax losses in accumulated OCI as of October 3, 2009, expected to be reclassified into earnings within the next 12 months was $3 million. During fiscal 2009, 2008 and 2007, we did not reclassify any pretax gains/losses into earnings as a result of the discontinuance of cash flow hedges due to the probability the original forecasted transaction would not occur by the end of the originally specified time period or within the additional period of time allowed by generally accepted accounting principles.

The following table sets forth the pretax impact of cash flow hedge derivative instruments on the Consolidated Statements of Income (in millions):

   
Gain/(Loss)
 
Consolidated
 
Gain/(Loss)
 
   
Recognized in OCI
 
Statements of Income
 
Reclassified from
 
   
on Derivatives
 
Classification
 
OCI to Earnings
 
   
2009
   
2008
   
2007
     
2009
   
2008
   
2007
 
Cash Flow Hedge - Derivatives designated
                                     
as hedging instruments:
                                     
Commodity contracts
  $ (61 )   $ 39     $ 33  
Cost of Sales
  $ (67 )   $ 42     $ 34  
Foreign exchange contracts
    8       (2 )     -  
Other Income/Expense
    6       -       -  
Total
  $ (53 )   $ 37     $ 33       $ (61 )   $ 42     $ 34  

Fair value hedges
We designate certain futures contracts as fair value hedges of firm commitments to purchase livestock for slaughter. Our objective of these hedges is to minimize the risk of changes in fair value created by fluctuations in commodity prices associated with fixed price livestock firm commitments. As of October 3, 2009, we had the following aggregated notionals of outstanding forward contracts entered into to hedge forecasted commodity purchases which are accounted for as a fair value hedge:

 
Notional Volume
Commodity:
 
Live Cattle
133 million pounds
Lean Hogs
171 million pounds

For these derivative instruments we designate and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings in the current period.  We include the gain or loss on the hedged items (i.e., livestock purchase firm commitments) in the same line item, cost of sales, as the offsetting gain or loss on the related livestock forward position.

   
in millions
 
 
Consolidated
                 
 
Statements of Income
                 
 
Classification
 
2009
   
2008
   
2007
 
Gain/(loss) on forwards
Cost of Sales
  $ 152     $ 65     $ (13 )
Gain/(loss) on purchase contract
Cost of Sales
    (152 )     (65 )     13  

Ineffectiveness related to our fair value hedges was not significant during fiscal 2009, 2008 and 2007.

Foreign net investment hedges
We utilize forward foreign exchange contracts to protect the value of our net investments in certain foreign subsidiaries. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in OCI as part of the cumulative translation adjustment to the extent it is effective, with the related amounts due to or from counterparties included in other liabilities or other assets. We utilize the forward-rate method of assessing hedge effectiveness.  Any ineffective portions of net investment hedges are recognized in the Consolidated Statements of Income during the period of change. Ineffectiveness related to our foreign net investment hedges was not significant during fiscal 2009, 2008 and 2007. As of October 3, 2009, we had no forward foreign currency contracts accounted for as foreign net investment hedges.
 
 

 

The following table sets forth the pretax impact of these derivative instruments on the Consolidated Statements of Income (in millions):

 
Gain/(Loss)
Consolidated
Gain/(Loss)
 
Recognized in OCI
Statements of Income
Reclassified from
 
on Derivatives
Classification
OCI to Earnings
 
2009
2008
2007
 
2009
2008
2007
Net Investment Hedge - Derivatives
             
designated as hedging instruments:
             
Foreign exchange contracts
$(5)
$-
$-
Other Income/Expense
$(2)
$-
$-

 
1.
Amounts reclassified from OCI relate to the sale of our Lakeside discontinued operation; amounts related to hedge ineffectiveness were not significant.

Undesignated positions
In addition to our designated positions, we also hold forward and option contracts for which we do not apply hedge accounting. These include certain derivative instruments related to commodities price risk, including grains, livestock and energy, foreign currency risk and interest rate risk. We mark these positions to fair value through earnings at each reporting date. We generally do not enter into undesignated positions beyond 18 months. Our undesignated positions primarily include grains, energy, livestock and foreign currency forwards and options.

The objective of our undesignated grains, energy and livestock commodity positions is to reduce the variability of cash flows associated with the forecasted purchase of certain grains, energy and livestock inputs to our production processes. We also enter into certain forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs at fixed prices. The fixed price sales contracts lock in the proceeds from a sale in the future and the fixed cattle and hog purchases lock in the cost. However, the cost of the livestock and the related boxed beef and boxed pork market prices at the time of the sale or purchase could vary from this fixed price. As we enter into fixed forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs, we also enter into the appropriate number of livestock futures positions to mitigate a portion of this risk. Changes in market value of the open livestock futures positions are marked to market and reported in earnings at each reporting date, even though the economic impact of our fixed prices being above or below the market price is only realized at the time of sale or purchase. These positions generally do not qualify for hedge treatment due to location basis differences between the commodity exchanges and the actual locations when we purchase the commodities.

We have a foreign currency cash flow hedging program to hedge portions of forecasted transactions denominated in foreign currencies, primarily with forward contracts, to protect against the reduction in value of forecasted foreign currency cash flows.  Our undesignated foreign currency positions generally would qualify for cash flow hedge accounting.  However, to reduce earnings volatility, we normally will not elect hedge accounting treatment when the position provides an offset to the underlying related transaction.

The objective of our undesignated interest rate swap is to manage interest rate risk exposure on a floating-rate bond. Our interest rate swap agreement effectively modifies our exposure to interest rate risk by converting a portion of the floating-rate bond to a fixed rate basis for the first five years, thus reducing the impact of the interest-rate changes on future interest expense. This interest rate swap does not qualify for hedge treatment due to differences in the underlying bond and swap contract interest-rate indices.

As of October 3, 2009, we had the following aggregate outstanding notionals related to our undesignated positions:

 
Notional Volume
Commodity:
 
Corn
11 million bushels
Soy meal
73,000 tons
Live Cattle
82 million pounds
Lean Hogs
11 million pounds
Natural Gas
850 billion British Thermal Units
Foreign Currency
$124 million United States dollars
Interest Rate
$64 million average monthly notional debt


 
 

 

Included in our undesignated positions are certain commodity grain positions (which do not qualify for hedge treatment) we enter into to manage the risk of costs associated with forward sales to certain customers for which sales prices are determined under cost-plus arrangements. These unrealized positions totaled losses of $17 million and $24 million at October 3, 2009, and September 27, 2008, respectively. When these positions are liquidated, we expect any realized gains or losses will be reflected in the prices of the poultry products sold. Since these derivative positions do not qualify for hedge treatment, they initially create volatility in our earnings associated with changes in fair value. However, once the positions are liquidated and included in the sales price to the customer, there is ultimately no earnings impact as any previous fair value gains or losses are included in the prices of the poultry products.

The following table sets forth the pretax impact of the undesignated derivative instruments on the Consolidated Statements of Income (in millions):

 
Consolidated
 
Gain/(Loss)
 
 
Statements of Income
 
Recognized
 
 
Classification
 
in Earnings
 
     
2009
   
2008
   
2007
 
Derivatives not designated
                   
as hedging instruments:
                   
Commodity contracts
Sales
  $ (34 )   $ (12 )   $ 14  
Commodity contracts
Cost of Sales
    (151 )     259       40  
Foreign exchange contracts
Other Income/Expense
    -       1       1  
Interest rate contracts
Interest Expense
    (4 )     -       -  
Total
    $ (189 )   $ 248     $ 55  

The following table sets forth the fair value of all derivative instruments outstanding in the Consolidated Balance Sheets (in millions):

     
Fair Value
 
 
Balance Sheet
           
 
Classification
 
2009
   
2008
 
Derivative Assets:
             
Derivatives designated as hedging instruments:
             
Commodity contracts
Other current assets
  $ 12     $ 29  
                   
Derivatives not designated as hedging instruments:
                 
Commodity contracts
Other current assets
    9       -  
                   
Total derivative assets
    $ 21     $ 29  
                   
Derivative Liabilities:
                 
Derivatives designated as hedging instruments:
                 
Commodity contracts
Other current liabilities
  $ 2     $ 34  
Foreign exchange contracts
Other current liabilities
    -       2  
Total derivative liabilities – designated
      2       36  
                   
Derivatives not designated as hedging instruments:
                 
Commodity contracts
Other current liabilities
    13       7  
Foreign exchange contracts
Other current liabilities
    1       2  
Interest rate contracts
Other current liabilities
    4       -  
Total derivative liabilities – not designated
      18       9  
                   
Total derivative liabilities
    $ 20     $ 45  

 
1.
Beginning in fiscal 2009, our derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. See Note 12: Fair Value Measurements for a reconciliation to amounts reported in the Consolidated Balance Sheet. We did not restate fiscal 2008 balances as the impact was not material.



 
 

 
NOTE 7: PROPERTY, PLANT AND EQUIPMENT

Major categories of property, plant and equipment and accumulated depreciation at October 3, 2009, and September 27, 2008:

         
in millions
 
   
2009
   
2008
 
Land
  $ 96     $ 89  
Building and leasehold improvements
    2,570       2,440  
Machinery and equipment
    4,640       4,382  
Land improvements and other
    227       210  
Buildings and equipment under construction
    297       352  
      7,830       7,473  
Less accumulated depreciation
    4,254       3,954  
Net property, plant and equipment
  $ 3,576     $ 3,519  

Approximately $278 million will be required to complete buildings and equipment under construction at October 3, 2009.

NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill by segment, net of $286 million of accumulated amortization at October 3, 2009, and September 27, 2008:

         
in millions
 
   
2009
   
2008
 
Chicken
  $ 973     $ 945  
Beef
    563       1,185  
Pork
    317       317  
Prepared Foods
    64       64  
Total Goodwill
  $ 1,917     $ 2,511  

Other intangible assets by type at October 3, 2009, and September 27, 2008:

         
in millions
 
   
2009
   
2008
 
Gross Carrying Value:
           
Trademarks
  $ 57     $ 62  
Patents and intellectual property
    145       94  
Land use rights
    23       -  
Less Accumulated Amortization
    38       28  
Total Intangible Assets
  $ 187     $ 128  

Amortization expense of $10 million, $3 million and $3 million was recognized during fiscal 2009, 2008 and 2007, respectively. We estimate amortization expense on intangible assets for the next five fiscal years subsequent to October 3, 2009 will be: 2010 - $14 million; 2011 - $14 million; 2012 - $13 million; 2013 - $13 million; 2014 - $12 million. Beginning with the date benefits are realized, patents and intellectual property and land use rights are amortized using the straight-line method over their estimated period of benefit of 5-30 years and 10-30 years, respectively.

NOTE 9: OTHER CURRENT LIABILITIES

Other current liabilities at October 3, 2009, and September 27, 2008, include:

         
in millions
 
   
2009
   
2008
 
Accrued salaries, wages and benefits
  $ 187     $ 259  
Self-insurance reserves
    230       236  
Other
    344       383  
Total other current liabilities
  $ 761     $ 878  

 
 

 

NOTE 10: COMMITMENTS

We lease equipment, properties and certain farms for which total rentals approximated $175 million, $163 million and $133 million, respectively, in fiscal 2009, 2008 and 2007. Most leases have terms up to six years with varying renewal periods. The most significant obligations assumed under the terms of the leases are the upkeep of the facilities and payments of insurance and property taxes.

Minimum lease commitments under non-cancelable leases at October 3, 2009, were:

   
in millions
 
2010
  $ 79  
2011
    67  
2012
    53  
2013
    34  
2014
    21  
2015 and beyond
    22  
Total
  $ 276  

We guarantee debt of outside third parties, which consist of a lease and grower loans, all of which are substantially collateralized by the underlying assets. Terms of the underlying debt cover periods up to nine years, and the maximum potential amount of future payments as of October 3, 2009, was $59 million. We also maintain operating leases for various types of equipment, some of which contain residual value guarantees for the market value of the underlying leased assets at the end of the term of the lease. The terms of the lease maturities cover periods up to six years. The maximum potential amount of the residual value guarantees is $55 million, of which $23 million would be recoverable through various recourse provisions and an additional undeterminable recoverable amount based on the fair market value of the underlying leased assets. The likelihood of material payments under these guarantees is not considered probable. At October 3, 2009, and September 27, 2008, no material liabilities for guarantees were recorded.

We have cash flow assistance programs in which certain livestock suppliers participate. Under these programs, we pay an amount for livestock equivalent to a standard cost to grow such livestock during periods of low market sales prices. The amounts of such payments that are in excess of the market sales price are recorded as receivables and accrue interest. Participating suppliers are obligated to repay these receivables balances when market sales prices exceed this standard cost, or upon termination of the agreement.  Our maximum obligation associated with these programs is limited to the fair value of each participating livestock supplier’s net tangible assets.  The potential maximum obligation as of October 3, 2009, is approximately $250 million. The total receivables under these programs were $72 million and $7 million at October 3, 2009, and September 27, 2008, respectively, and are included, net of allowance for uncollectible amounts, in Other Assets in our Consolidated Balance Sheets. Even though these programs are limited to the net tangible assets of the participating livestock suppliers, we also manage a portion of our credit risk associated with these programs by obtaining security interests in livestock suppliers' assets. After analyzing residual credit risks and general market conditions, we have recorded an allowance for these programs' estimated uncollectible receivables of $20 million and $2 million at October 3, 2009 and September 27, 2008, respectively.

The minority partner in our Shandong Tyson Xinchang Foods joint ventures in China has the right to exercise put options to require us to purchase their entire 40% equity interest at a price equal to the minority partner’s contributed capital plus (minus) its pro-rata share of the joint venture's accumulated and undistributed net earnings (losses). The put options are exercisable for a five-year term commencing the later of (i) April 2011 or (ii) the date upon which a shareholder of the minority partner is no longer general manager of the joint venture operations. At October 3, 2009, the put options, if they had been exercisable, would have resulted in a purchase price of approximately $74 million for the minority partner’s entire equity interest. We do not believe the exercise of the put options would materially impact our results of operations or financial condition.

Additionally, we enter into future purchase commitments for various items, such as grains, livestock contracts and fixed grower fees. At October 3, 2009, these commitments totaled:

   
in millions
 
2010
  $ 423  
2011
    36  
2012
    19  
2013
    11  
2014
    8  
2015 and beyond
    22  
Total
  $ 519  

 
 

 

NOTE 11: LONG-TERM DEBT

The major components of long-term debt are as follows (in millions):

   
2009
   
2008
 
             
Revolving credit facility – expires March 2012
  $ -     $ -  
Senior notes:
               
7.95% Notes due February 2010 (2010 Notes)
    140       234  
8.25% Notes due October 2011 (2011 Notes)
    839       998  
3.25% Convertible senior notes due October 2013 (2013 Notes)
    458       458  
10.50% Senior notes due March 2014 (2014 Notes)
    756       -  
7.85% Senior notes due April 2016 (2016 Notes)
    922       960  
7.00% Notes due May 2018
    172       172  
7.125% Senior notes due February 2026
    9       9  
7.00% Notes due January 2028
    27       27  
GO Zone tax-exempt bonds due October 2033 (0.10% at 10/03/09)
    100       -  
Other
    129       38  
Total debt
    3,552       2,896  
Less current debt
    219       8  
Total long-term debt
  $ 3,333     $ 2,888  

Annual maturities of long-term debt for the five fiscal years subsequent to October 3, 2009, are: 2010-$219 million; 2011-$855 million; 2012-$11 million; 2013-$6 million; 2014-$1.2 billion.

Revolving Credit Facility
We entered into a new revolving credit facility in March 2009 totaling $1.0 billion that supports short-term funding needs and letters of credit, which replaced our revolving credit facility scheduled to expire in September 2010. Loans made under this facility will mature and the commitments thereunder will terminate in March 2012. However, if our 2011 Notes are not refinanced, purchased or defeased prior to July 3, 2011, the outstanding loans under this facility will mature on and commitments thereunder will terminate on July 3, 2011. We incurred approximately $30 million in transaction fees which will be amortized over the three-year life of this facility.

Availability under this facility, up to $1.0 billion, is based on a percentage of certain eligible receivables and eligible inventory and is reduced by certain reserves. After reducing the amount available by outstanding letters of credit issued under this facility, the amount available for borrowing under this facility at October 3, 2009, was $733 million. At October 3, 2009, we had outstanding letters of credit issued under this facility totaling approximately $267 million and an additional $51 million of bilateral letters of credit not issued under this facility, none of which were drawn upon. Our letters of credit are issued primarily in support of workers’ compensation insurance programs, derivative activities and Dynamic Fuels’ GO Zone tax-exempt bonds.

This facility is fully and unconditionally guaranteed on a senior secured basis by substantially all of our domestic subsidiaries. The guarantors’ cash, accounts receivable, inventory and proceeds received related to these items secure our obligations under this facility.

2013 Notes
In September 2008, we issued $458 million principal amount 3.25% convertible senior unsecured notes due October 15, 2013, with interest payable semi-annually in arrears on April 15 and October 15. The conversion rate initially is 59.1935 shares of Class A stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of $16.89 per share of Class A stock. The 2013 Notes may be converted before the close of business on July 12, 2013, only under the following circumstances:

 
 

 


during any fiscal quarter after December 27, 2008, if the last reported sale price of our Class A stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is at least 130% of the applicable conversion price on each applicable trading day (which would currently require our shares to trade at or above $21.96); or
during the five business days after any 10 consecutive trading days (measurement period) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class A stock and the applicable conversion rate on each such day; or
upon the occurrence of specified corporate events as defined in the supplemental indenture.

On and after July 15, 2013, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, we will deliver cash up to the aggregate principal amount of the 2013 Notes to be converted and shares of our Class A stock in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the 2013 Notes being converted. As of October 3, 2009, none of the conditions permitting conversion of the 2013 Notes had been satisfied.

The 2013 Notes were accounted for as a combined instrument. Accordingly, we accounted for the entire agreement as one debt instrument because the conversion feature does not meet the requirements to be accounted for separately as a derivative financial instrument.

In connection with the issuance of the 2013 Notes, we entered into separate convertible note hedge transactions with respect to our common stock to minimize the potential economic dilution upon conversion of the 2013 Notes. We also entered into separate warrant transactions. We recorded the purchase of the note hedge transactions as a reduction to capital in excess of par value, net of $36 million pertaining to the related deferred tax asset, and we recorded the proceeds of the warrant transactions as an increase to capital in excess of par value. Subsequent changes in fair value of these instruments are not recognized in the financial statements as long as the instruments continue to meet the criteria for equity classification.

We purchased call options in private transactions for $94 million that permit us to acquire up to approximately 27 million shares of our Class A stock at an initial strike price of $16.89 per share, subject to adjustment. The call options allow us to acquire a number of shares of our Class A stock initially equal to the number of shares of Class A stock issuable to the holders of the 2013 Notes upon conversion. These call options will terminate upon the maturity of the 2013 Notes.

We sold warrants in private transactions for total proceeds of $44 million. The warrants permit the purchasers to acquire up to approximately 27 million shares of our Class A stock at an initial exercise price of $22.31 per share, subject to adjustment. The warrants are exercisable on various dates from January 2014 through March 2014.

The maximum amount of shares that may be issued to satisfy the conversion of the 2013 Notes is limited to 35.9 million shares.  However, the convertible note hedge and warrant transactions, in effect, increase the initial conversion price of the 2013 Notes from $16.89 per share to $22.31 per share, thus reducing the potential future economic dilution associated with conversion of the 2013 Notes.  If our share price is below $22.31 upon conversion of the 2013 Notes, there is no economic net share impact.  Upon conversion, a 10% increase in our share price above the $22.31 conversion price would result in the issuance of 2.5 million incremental shares.  The 2013 Notes and the warrants could have a dilutive effect on our earnings per share to the extent the price of our Class A stock during a given measurement period exceeds the respective exercise prices of those instruments. The call options are excluded from the calculation of diluted earnings per share as their impact is anti-dilutive.

2014 Notes
In March 2009, we issued $810 million of senior unsecured notes, which will mature in March 2014. The 2014 Notes carry a 10.50% interest rate, with interest payments due semi-annually on March 1 and September 1. After the original issue discount of $59 million, based on an issue price of 92.756% of face value, we received net proceeds of $751 million. In addition, we incurred offering expenses of $18 million. We used the net proceeds towards the repayment of our borrowings under our former accounts receivable securitization facility and for other general corporate purposes. We also placed $234 million of the net proceeds in a blocked cash collateral account which is used for the payment, prepayment, repurchase or defeasance of the 2010 Notes. At October 3, 2009, we had $140 million remaining in the blocked cash collateral account. The remaining proceeds are recorded in Current Assets as Restricted Cash in the Consolidated Condensed Balance Sheets. The 2014 Notes are fully and unconditionally guaranteed by substantially all of our domestic subsidiaries.


 
 

 

2016 Notes
The 2016 Notes carried an interest rate at issuance of 6.60%, with an interest step up feature dependent on their credit rating. On November 13, 2008, Moody’s Investor Services, Inc. downgraded the credit rating from “Ba1” to “Ba3.” This downgrade increased the interest rate from 7.35% to 7.85%, effective beginning with the six-month interest payment due April 1, 2009.

GO Zone Tax-Exempt Bonds
In October 2008, Dynamic Fuels received $100 million in proceeds from the sale of Gulf Opportunity Zone tax-exempt bonds made available by the federal government to the regions affected by Hurricanes Katrina and Rita in 2005. These floating rate bonds are due October 1, 2033. In November 2008, we entered into an interest rate swap related to these bonds to mitigate our interest rate risk on a portion of the bonds for five years. We also issued a letter of credit as a guarantee for the entire bond issuance. The proceeds from the bond issuance can only be used towards the construction of the Dynamic Fuels’ facility. Accordingly, the unused proceeds are recorded as non-current Restricted Cash in the Consolidated Balance Sheets. We expect the majority of the unused proceeds will be used by our second quarter of fiscal 2010.

Debt Covenants
Our revolving credit facility contains affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens and encumbrances; incur debt; merge, dissolve, liquidate or consolidate; make acquisitions and investments; dispose of or transfer assets; pay dividends or make other payments in respect to our capital stock; amend material documents; change the nature of our business; make certain payments of debt; engage in certain transactions with affiliates; and enter into sale/leaseback or hedging transactions, in each case, subject to certain qualifications and exceptions. If availability under this facility is less than the greater of 15% of the commitments and $150 million, we will be required to maintain a minimum fixed charge coverage ratio.

Our 2014 Notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: incur additional debt and issue preferred stock; make certain investments and restricted payments; create liens; create restrictions on distributions from restricted subsidiaries; engage in specified sales of assets and subsidiary stock; enter into transactions with affiliates; enter new lines of business; engage in consolidation, mergers and acquisitions; and engage in certain sale/leaseback transactions.

Condensed Consolidating Financial Statements
Tyson Fresh Meats, Inc. (TFM), our wholly-owned subsidiary, has fully and unconditionally guaranteed the 2016 Notes. TFM and substantially all of our wholly-owned domestic subsidiaries have fully and unconditionally guaranteed the 2014 Notes. The following financial information presents condensed consolidating financial statements, which include Tyson Foods, Inc. (TFI Parent); Tyson Fresh Meats, Inc. (TFM Parent); the other 2014 Notes' guarantor subsidiaries (Guarantors) on a combined basis; the elimination entries necessary to reflect TFM Parent and the Guarantors, which collectively represent the 2014 Notes' total guarantor subsidiaries (2014 Guarantors), on a combined basis; the 2014 Notes' non-guarantor subsidiaries (Non-Guarantors) on a combined basis; the elimination entries necessary to consolidate TFI Parent, the 2014 Guarantors and the Non-Guarantors; and Tyson Foods, Inc. on a consolidated basis, and is provided as an alternative to providing separate financial statements for the guarantor(s). Certain prior period amounts have been recast to conform with current year presentation and to reflect the legal subsidiary ownership structure as of October 3, 2009.

 
 

 
 
Condensed Consolidating Statement of Income for the year ended October 3, 2009
         
in millions
 
         
2014 Guarantors
                   
   
TFI Parent
   
TFM Parent
   
Guar-antors
   
Elimin-ations
   
Subtotal
   
Non-Guar-antors
   
Elimin-ations
   
Total
 
Net Sales
  $ 11     $ 14,504     $ 12,245     $ (725 )   $ 26,024     $ 709     $ (40 )   $ 26,704