Annual Report — Form 10-K Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10-K Tyson Foods, Inc. Form 10-K 10/03/09 HTML 2.13M
2: EX-10.14 Material Contract -- exhibit_1014 HTML 77K
3: EX-10.22 Material Contract -- exhibit_1022 HTML 87K
4: EX-10.30 Material Contract -- exhibit_1030 HTML 19K
5: EX-10.32 Material Contract -- exhibit_1032 HTML 17K
6: EX-10.34 Material Contract -- exhibit_1034 HTML 20K
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10: EX-10.44 Material Contract -- exhibit_1044 HTML 31K
11: EX-12.1 Statement re: Computation of Ratios -- exhibit_121 HTML 41K
12: EX-21 Subsidiaries of the Registrant -- exhibit_21 HTML 58K
13: EX-23 Consent of Experts or Counsel -- exhibit_23 HTML 10K
14: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 14K
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15: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 14K
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(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 March28, 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 October3, 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.
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 October10, 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
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
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
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.
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 October3, 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
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
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 September27, 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 November15, 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 November15, 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):
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):
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.
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):
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):
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.
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.
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
