UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(X)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 28, 2009

 

 

 

OR

 

 

(  )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

EXCHANGE ACT OF 1934

 

For the transition period from _________to________

 

001-14704

(Commission File Number)

______________

TYSON FOODS, INC.

(Exact name of registrant as specified in its charter)

______________

 

Delaware

71-0225165

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

2200 Don Tyson Parkway, Springdale, Arkansas

72762-6999

(Address of principal executive offices)

(Zip Code)

 

 

(479) 290-4000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           Yes x      No o

 

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 (or for such shorter period that the registrant was required to submit and post such files). Yes o      No o

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

 

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company o

 

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

 


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 28, 2009.

 

Class

Outstanding Shares

Class A Common Stock, $0.10 Par Value (Class A stock)

307,560,610

Class B Common Stock, $0.10 Par Value (Class B stock)

70,021,155

 

 

 

TYSON FOODS, INC.

INDEX

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

PAGE

 

 

Consolidated Condensed Statements of Income
for the Three and Six Months Ended
March 28, 2009, and March 29, 2008

3

 

 

Consolidated Condensed Balance Sheets
March 28, 2009, and September 27, 2008

4

 

 

Consolidated Condensed Statements of Cash Flows
for the Six Months Ended
March 28, 2009, and March 29, 2008

5

 

 

Notes to Consolidated Condensed Financial Statements

6

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

37

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

Item 4.

Controls and Procedures

52

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

52

Item 1A.

Risk Factors

54

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults Upon Senior Securities

55

Item 4.

Submission of Matters to a Vote of Security Holders

55

Item 5.

Other Information

56

Item 6.

Exhibits

56

SIGNATURES

57

 

 

 

 

 

 

2

 


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TYSON FOODS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

March 28, 2009

 

 

 

March 29, 2008

 

 

 

March 28, 2009

 

 

 

March 29, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

6,307

 

 

 

$

6,336

 

 

 

$

12,828

 

 

 

$

12,812

 

Cost of Sales

 

 

6,054

 

 

 

 

6,021

 

 

 

 

12,557

 

 

 

 

12,182

 

 

 

 

253

 

 

 

 

315

 

 

 

 

271

 

 

 

 

630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative

 

 

209

 

 

 

 

231

 

 

 

 

425

 

 

 

 

446

 

Other Charges

 

 

15

 

 

 

 

30

 

 

 

 

15

 

 

 

 

36

 

Operating Income (Loss)

 

 

29

 

 

 

 

54

 

 

 

 

(169

)

 

 

 

148

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(5

)

 

 

 

(2

)

 

 

 

(9

)

 

 

 

(4

)

Interest expense

 

 

74

 

 

 

 

55

 

 

 

 

137

 

 

 

 

108

 

Other, net

 

 

3

 

 

 

 

(4

)

 

 

 

21

 

 

 

 

(23

)

 

 

 

72

 

 

 

 

49

 

 

 

 

149

 

 

 

 

81

 

Income (Loss) from Continuing Operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes and Minority Interest

 

 

(43

)

 

 

 

5

 

 

 

 

(318

)

 

 

 

67

 

Income Tax Expense (Benefit)

 

 

47

 

 

 

 

2

 

 

 

 

(108

)

 

 

 

23

 

Income (Loss) from Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before Minority Interest

 

 

(90

)

 

 

 

3

 

 

 

 

(210

)

 

 

 

44

 

Minority Interest

 

 

-

 

 

 

 

-

 

 

 

 

(2

)

 

 

 

-

 

Income (Loss) from Continuing Operations

 

 

(90

)

 

 

 

3

 

 

 

 

(208

)

 

 

 

44

 

Loss from Discontinued Operation, net of tax

 

 

(14

)

 

 

 

(8

)

 

 

 

(8

)

 

 

 

(15

)

Net Income (Loss)

 

$

(104

)

 

 

$

(5

)

 

 

$

(216

)

 

 

$

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Basic

 

 

303

 

 

 

 

280

 

 

 

 

303

 

 

 

 

280

 

Class B Basic

 

 

70

 

 

 

 

70

 

 

 

 

70

 

 

 

 

70

 

Diluted

 

 

373

 

 

 

 

355

 

 

 

 

373

 

 

 

 

355

 

Earnings (Loss) Per Share from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Basic

 

$

(0.25

)

 

 

$

0.01

 

 

 

$

(0.57

)

 

 

$

0.13

 

Class B Basic

 

$

(0.22

)

 

 

$

0.01

 

 

 

$

(0.51

)

 

 

$

0.12

 

Diluted

 

$

(0.24

)

 

 

$

0.01

 

 

 

$

(0.56

)

 

 

$

0.13

 

Loss Per Share from Discontinued Operation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Basic

 

$

(0.04

)

 

 

$

(0.03

)

 

 

$

(0.02

)

 

 

$

(0.05

)

Class B Basic

 

$

(0.04

)

 

 

$

(0.02

)

 

 

$

(0.02

)

 

 

$

(0.04

)

Diluted

 

$

(0.04

)

 

 

$

(0.03

)

 

 

$

(0.02

)

 

 

$

(0.05

)

Net Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Basic

 

$

(0.29

)

 

 

$

(0.02

)

 

 

$

(0.59

)

 

 

$

0.08

 

Class B Basic

 

$

(0.26

)

 

 

$

(0.01

)

 

 

$

(0.53

)

 

 

$

0.08

 

Diluted

 

$

(0.28

)

 

 

$

(0.02

)

 

 

$

(0.58

)

 

 

$

0.08

 

Cash Dividends Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

$

0.040

 

 

 

$

0.040

 

 

 

$

0.080

 

 

 

$

0.080

 

Class B

 

$

0.036

 

 

 

$

0.036

 

 

 

$

0.072

 

 

 

$

0.072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

3

 


TYSON FOODS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions, except share and per share data)

(Unaudited)

 

 

 

March 28, 2009

 

 

 

September 27, 2008

 

Assets

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

817

 

 

 

$

250

 

Restricted cash

 

 

234

 

 

 

 

-

 

Accounts receivable, net

 

 

1,083

 

 

 

 

1,271

 

Inventories

 

 

2,064

 

 

 

 

2,538

 

Other current assets

 

 

162

 

 

 

 

143

 

Assets of discontinued operation held for sale

 

 

-

 

 

 

 

159

 

Total Current Assets

 

 

4,360

 

 

 

 

4,361

 

Restricted Cash

 

 

76

 

 

 

 

-

 

Net Property, Plant and Equipment

 

 

3,484

 

 

 

 

3,519

 

Goodwill

 

 

2,470

 

 

 

 

2,511

 

Intangible Assets

 

 

148

 

 

 

 

128

 

Other Assets

 

 

399

 

 

 

 

331

 

Total Assets

 

$

10,937

 

 

 

$

10,850

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Current debt

 

$

275

 

 

 

$

8

 

Trade accounts payable

 

 

957

 

 

 

 

1,217

 

Other current liabilities

 

 

778

 

 

 

 

878

 

Total Current Liabilities

 

 

2,010

 

 

 

 

2,103

 

Long-Term Debt

 

 

3,477

 

 

 

 

2,888

 

Deferred Income Taxes

 

 

231

 

 

 

 

291

 

Other Liabilities

 

 

586

 

 

 

 

554

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock ($0.10 par value):

 

 

 

 

 

 

 

 

 

Class A-authorized 900 million shares, issued 322 million shares

 

 

32

 

 

 

 

32

 

Class B-authorized 900 million shares, issued 70 million shares

 

 

7

 

 

 

 

7

 

Capital in excess of par value

 

 

2,168

 

 

 

 

2,161

 

Retained earnings

 

 

2,760

 

 

 

 

3,006

 

Accumulated other comprehensive income (loss)

 

 

(104

)

 

 

 

41

 

 

 

 

4,863

 

 

 

 

5,247

 

Less treasury stock, at cost-

 

 

 

 

 

 

 

 

 

15 million shares at March 28, 2009, and September 27, 2008

 

 

230

 

 

 

 

233

 

Total Shareholders’ Equity

 

 

4,633

 

 

 

 

5,014

 

Total Liabilities and Shareholders’ Equity

 

$

10,937

 

 

 

$

10,850

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

4

 


TYSON FOODS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

March 28, 2009

 

 

 

March 29, 2008

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(216

)

 

 

$

29

 

Depreciation and amortization

 

 

245

 

 

 

 

251

 

Deferred income taxes

 

 

(75

)

 

 

 

(1

)

Other, net

 

 

86

 

 

 

 

34

 

Net changes in working capital

 

 

367

 

 

 

 

(169

)

Cash Provided by Operating Activities

 

 

407

 

 

 

 

144

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(160

)

 

 

 

(210

)

Proceeds from sale of property, plant and equipment

 

 

7

 

 

 

 

19

 

Proceeds from sale of investments

 

 

9

 

 

 

 

21

 

Change in restricted cash to be used for investing activities

 

 

(76

)

 

 

 

-

 

Proceeds from sale of marketable securities

 

 

25

 

 

 

 

63

 

Purchases of marketable securities

 

 

(13

)

 

 

 

(83

)

Proceeds from sale of discontinued operation

 

 

43

 

 

 

 

-

 

Acquisitions, net of cash acquired

 

 

(76

)

 

 

 

-

 

Other, net

 

 

4

 

 

 

 

-

 

Cash Used for Investing Activities

 

 

(237

)

 

 

 

(190

)

 

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

 

Net borrowings (payments) on revolving credit facilities

 

 

(2

)

 

 

 

195

 

Payments on debt

 

 

(51

)

 

 

 

(31

)

Proceeds from borrowings of debt

 

 

851

 

 

 

 

3

 

Debt issuance costs

 

 

(58

)

 

 

 

-

 

Change in restricted cash to be used for financing activities

 

 

(234

)

 

 

 

-

 

Purchases of treasury shares

 

 

(4

)

 

 

 

(16

)

Dividends

 

 

(30

)

 

 

 

(28

)

Change in negative book cash balances

 

 

(90

)

 

 

 

(73

)

Stock options exercised and other, net

 

 

4

 

 

 

 

4

 

Cash Provided by Financing Activities

 

 

386

 

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

Effect of Exchange Rate Change on Cash

 

 

11

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Increase in Cash and Cash Equivalents

 

 

567

 

 

 

 

11

 

Cash and Cash Equivalents at Beginning of Year

 

 

250

 

 

 

 

42

 

Cash and Cash Equivalents at End of Period

 

$

817

 

 

 

$

53

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

5

 


TYSON FOODS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1:  ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

The consolidated condensed financial statements have been prepared by Tyson Foods, Inc. (“the Company,” “we,” “us” or “our”). Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. Although we believe the disclosures contained herein are adequate to make the information presented not misleading, these consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended September 27, 2008. Preparation of consolidated condensed financial statements requires us to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

We believe the accompanying consolidated condensed financial statements contain all adjustments necessary to present fairly our financial position as of March 28, 2009, the results of operations for the three and six months ended March 28, 2009, and March 29, 2008, and cash flows for the six months ended March 28, 2009, and March 29, 2008. Results of operations and cash flows for the periods presented are not necessarily indicative of results to be expected for the full year.

 

CONSOLIDATION

The consolidated condensed 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 under Financial Accounting Standards Board (FASB) Interpretation No. 46R “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46R). Effective June 30, 2008, we began consolidating Dynamic Fuels since we are the primary beneficiary as defined by FIN 46R.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This standard 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. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. At the beginning of the first quarter fiscal 2009, we partially adopted SFAS No. 157 as allowed by FASB Staff Position (FSP) 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and liabilities. FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarified the application of SFAS No. 157 in inactive markets, was issued in October 2008 and was effective with our adoption of SFAS No. 157. As of the beginning of the first quarter fiscal 2009, we have applied the provisions of SFAS No. 157 to our financial instruments and the impact was not material. Under FSP 157-2, we will be required to apply SFAS No. 157 to our nonfinancial assets and liabilities at the beginning of fiscal 2010. We are currently reviewing the applicability of SFAS No. 157 to our nonfinancial assets and liabilities, as well as the potential impact on our consolidated financial statements.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (SFAS No. 159). This statement provides 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

 

6

 


period. When adopted at the beginning of the first quarter fiscal 2009, we did not elect the fair value option under SFAS No. 159 and, therefore, there was no impact to our consolidated financial statements.

In April 2007, the FASB issued Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (FIN 39-1), 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 FIN 39-1 to our consolidated condensed financial statements beginning in the first quarter of fiscal 2009. We did not restate the prior periods as the impact was not material.

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 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 under Statement 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008; therefore, we adopted SFAS No. 161 in the second quarter of fiscal 2009. See Note 5: Derivative Financial Instruments for SFAS No. 161 required disclosures.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and should be reported as equity in the consolidated financial statements, rather than in the liability or mezzanine section between liabilities and equity. SFAS No. 160 also requires consolidated net income be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The impact of SFAS No. 160 will not have a material impact on our current Consolidated Financial Statements. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008; therefore, we expect to adopt SFAS No. 160 at the beginning of fiscal 2010.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” and in April 2009 issued FASB Staff Position SFAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (collectively, SFAS No. 141R). SFAS No. 141R establishes 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. SFAS No. 141R 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 expect to adopt SFAS No. 141R for any business combinations entered into beginning in fiscal 2010.

 

In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 specifies that 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. FSP APB 14-1 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. Therefore, we expect to adopt the provisions of FSP APB 14-1 beginning in the first quarter of fiscal 2010. The provisions of FSP APB 14-1 are required to be applied retrospectively to all periods presented. Upon retrospective adoption, we anticipate our effective interest rate on our 3.25% Convertible Senior Notes due 2013 will range from 8.0% to 8.50%, which would result in the recognition of an approximate $90 million to $100 million discount to these notes with the offsetting after tax amount recorded to capital in excess of par value. This discount will be accreted until the maturity date at the effective interest rate, which will not materially impact fiscal 2008 interest expense, but will result in an estimated $15 million to $20 million increase to our fiscal 2009 interest expense.

 

7

 


In December 2008, the FASB issued FSP SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP SFAS 132(R)-1). FSP SFAS 132(R)-1 amends SFAS No. 132(R), “Employer’s Disclosures about Pensions and Other Postretirement Benefits,” to require additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009, with early adoption permitted. We will adopt the disclosure requirements of FSP SFAS 132(R)-1 beginning with our fiscal 2010 annual report.

 

In April 2009, the FASB issued FSP SFAS 115-2, SFAS 124-2 and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP SFAS 115-2). FSP SFAS 115-2 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 some new disclosure requirements for both debt and equity securities. FSP SFAS 115-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We will adopt FSP SFAS 115-2 in the third quarter of fiscal 2009. We do not expect the adoption will have a significant impact on our consolidated financial statements.

 

In April 2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions that are Not Orderly” (FSP SFAS 157-4). FSP SFAS 157-4 provides additional guidance for estimating the fair value of assets and liabilities within the scope of SFAS No. 157 in markets that have experienced a significant reduction in volume and activity in relation to normal activity. FSP SFAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We will adopt FSP SFAS 157-4 in the third quarter of fiscal 2009. We do not expect the adoption will have a significant impact on our consolidated financial statements.

 

In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (FSP SFAS 107-1). FSP SFAS 107-1 amends SFAS No. 107, “Disclosures about Fair Values of Financial Instruments” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require disclosures about fair value of financial instruments in interim financial statements. FSP SFAS 107-1 is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We will adopt the disclosure requirements of FSP SFAS 107-1 in the third quarter of fiscal 2009.

 

NOTE 2: ACQUISITIONS

 

In October 2008, we acquired three vertically integrated poultry companies in southern Brazil, which included Macedo Agroindustrial, Avicola Itaiopolis and Frangobras. The aggregate purchase price was $67 million, which includes $17 million of mandatory deferred payments to be made through 2011. In addition, we have $11 million of contingent purchase price based on production volumes payable through fiscal 2010. The preliminary purchase price includes $24 million allocated to Goodwill and $8 million allocated to Intangible Assets. We expect these companies will have sales of approximately $85-$90 million in fiscal 2009.

 

NOTE 3: 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 for total consideration of $145 million. 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 next two years and (c) $24 million of XL Foods Preferred Stock to be redeemed over the next five years. In addition to consideration received from XL Foods, we also have approximately $12 million of net cash inflows expected from clearing receivable and payable balances.

 

We recorded a pretax loss on sale of Lakeside of $10 million, which included goodwill of $59 million, as well as currency translation adjustment gains of $37 million.

 

8

 


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

 

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

March 28, 2009

 

 

 

March 29, 2008

 

 

 

March 28, 2009

 

 

 

March 29, 2008

 

Sales

 

$

210 

 

 

 

$

276 

 

 

 

$

461 

 

 

 

$

566 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax income (loss) from discontinued operation

 

$

 

 

 

$

(13)

 

 

 

$

11 

 

 

 

$

(23)

 

Loss on sale of discontinued operation

 

 

(10)

 

 

 

 

 

 

 

 

(10)

 

 

 

 

 

Income tax expense (benefit)

 

 

 

 

 

 

(5)

 

 

 

 

 

 

 

 

(8)

 

Loss from discontinued operation

 

$

(14)

 

 

 

$

(8)

 

 

 

$

(8)

 

 

 

$

(15)

 

 

 

1.

Operating results for the three and six months ended March 28, 2009, included all activity for the periods up to the date of sale, which occurred on March 13, 2009.

 

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

 

 

 

 

 

 

September 27, 2008

 

Assets of discontinued operation held for sale:

 

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

$

82

 

Net property, plant and equipment

 

 

 

 

 

 

77

 

Total assets of discontinued operation held for sale

 

 

 

 

 

$

159

 

 

NOTE 4: DISPOSITIONS AND OTHER CHARGES

 

On March 27, 2009, we announced the decision to close our Ponca City, Oklahoma, processed meats plant. The plant is expected to cease operation sometime in our fourth fiscal quarter of 2009. The closing will result in the elimination of approximately 600 jobs. During the second quarter of fiscal 2009, we recorded charges of $15 million, which included $14 million for estimated 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 Condensed Statements of Income in Other Charges. No material adjustments to the accrual are anticipated.

 

On February 29, 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 the second quarter of fiscal 2008, we recorded charges of $13 million for estimated impairment charges. This amount is reflected in the Chicken segment’s Operating Income (Loss) and included in the Consolidated Condensed Statements of Income in Other Charges.

 

On January 25, 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 the second quarter of fiscal 2008, we recorded charges of $10 million for estimated 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 Condensed Statements of Income in Other Charges. We have fully paid employee termination benefits and other plant-closing related liabilities.

 

In the first quarter of fiscal 2008, 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 Condensed Statements of Income.

 

9

 


In the first quarter of 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 the first quarter of 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 Condensed Statements of Income in Other Charges. We have fully paid the related employee termination benefits.

 

NOTE 5: 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 mark-to-market valuations 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 letter of credits, 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 March 28, 2009.

 

Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS No. 133(R)), requires companies recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Condensed Balance Sheets. 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, as defined by SFAS No. 133(R), 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. 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 and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components

 

10

 


excluded from the assessment of effectiveness are recognized in earnings in the current period. Ineffectiveness related to our cash flow hedges was not significant for the three and six months ended March 28, 2009, and March 29, 2008.

 

As of March 28, 2009, we had the following aggregated notionals of outstanding forward contracts accounted for as cash flow hedges:

 

 

Notional Volume

Commodity:

 

Corn

8 million bushels

Soy meal

32,800 tons

 

The net amount of pretax losses in accumulated other comprehensive income (loss) as of March 28, 2009, expected to be reclassified into earnings within the next 12 months was $26 million. During the three and six months ended March 28, 2009, 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 SFAS No. 133(R).

 

The following table sets forth the pretax impact of cash flow hedge derivative instruments on the Consolidated Condensed Statements of Income for the three and six months ended March 28, 2009 (in millions):

 

 

Gain/(Loss)

Consolidated Condensed

Gain/(Loss)

 

 

Recognized in OCI

Statements of Income

Reclassified from

 

 

on Derivatives

Classification

AOCI to Earnings

 

 

March 28, 2009

 

March 28, 2009

 

 

3 Months

6 Months

 

3 Months

6 Months

 

Cash Flow Hedge - Derivatives designated

 

 

 

 

 

 

as hedging instruments under SFAS 133:

 

 

 

 

 

 

Commodity contracts

$(22)

$(61)

Cost of Sales

$(29)

$(44)

 

Foreign exchange contracts

(1)

Other Income/Expense

 

Total

$(23)

$(52)

 

$(29)

$(37)

 

 

 

1.

OCI – Other Comprehensive Income; AOCI – Accumulated Other Comprehensive Income

 

Fair value hedges

We designate certain futures contracts as fair value hedges of firm commitments to purchase livestock for slaughter. Our objective of these hedges is to minimize the risk of changes in fair value created by fluctuations in commodity prices associated with fixed price livestock firm commitments. As of March 28, 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

146 million pounds

Lean Hogs

90 million pounds

 

For these derivative instruments that 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.

 

11

 


 

 

 

 

in millions

 

Consolidated Condensed

 

 

 

Statements of Income

 

March 28, 2009

 

Classification

 

3 months

6 months

Gain/(loss) on forwards

Cost of Sales

 

$47 

$115 

Gain/(loss) on purchase contract

Cost of Sales

 

(47)

(115)

 

Ineffectiveness related to our fair value hedges was not significant for the three and six months ended March 28, 2009, and March 29, 2008.

 

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 other comprehensive income 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 Condensed Statements of Income during the period of change. Ineffectiveness related to our foreign net investment hedges was not significant for the three and six months ended March 28, 2009, and March 29, 2008. As of March 28, 2009, we had approximately $96 million aggregate outstanding notionals related to our 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 Condensed Statements of Income for the three and six months ended March 28, 2009 (in millions):

 

 

Gain/(Loss)

Consolidated Condensed

Gain/(Loss)

 

 

Recognized in OCI

Statements of Income

Reclassified from

 

 

on Derivatives

Classification

AOCI to Earnings

 

 

March 28, 2009

 

March 28, 2009

 

 

3 Months

6 Months

 

3 Months

6 Months

 

Net Investment Hedge - Derivatives

 

 

 

 

 

 

designated as hedging instruments

 

 

 

 

 

 

under SFAS 133:

 

 

 

 

 

 

Foreign exchange contracts

$(5)

$(1)

Other Income/Expense

$-

$-

 

 

 

1.

Amounts reclassified from AOCI 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

 

12

 


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 next 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 March 28, 2009, we had the following aggregate outstanding notionals related to our undesignated positions:

 

 

Notional Volume

Commodity:

 

Corn

28 million bushels

Soy meal

347,300 tons

Live Cattle

213 million pounds

Lean Hogs

1 million pounds

Natural Gas

2,870 billion British Thermal Units

Foreign Currency

$98 million United States dollars

Interest Rate

$68 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 $58 million and $24 million at March 28, 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 mark-to-market changes. However, once the positions are liquidated and included in the sales price to the customer, there is ultimately no earnings impact as any previous mark-to-market gains or losses are included in the prices of the poultry products.

 

The following table sets forth the pretax impact of these derivative instruments on the Consolidated Condensed Statements of Income for the three and six months ended March 28, 2009 (in millions):

 

 

 

Consolidated Condensed

 

Gain/(Loss)

 

 

 

Statements of Income

 

Recognized

 

 

 

Classification

 

in Earnings

 

 

 

 

 

March 28, 2009

 

 

 

 

 

3 Months

6 Months

 

Derivatives not designated as hedging

 

 

 

 

 

 

instruments under SFAS 133:

 

 

 

 

 

 

Commodity contracts

 

Sales

 

$(7)

$(22)

 

Commodity contracts

 

Cost of Sales

 

(27)

(174)

 

Foreign exchange contracts

 

Other Income/Expense

 

 

Interest rate contracts

 

Interest Expense

 

-

 

Total

 

 

 

$(28)

$(184)

 

 

 

13

 


The following table sets forth the fair value of all derivative instruments outstanding in the Consolidated Condensed Balance Sheet as of March 28, 2009 (in millions):

                                                                                                                                                                                                        

 

March 28, 2009

 

 

Balance Sheet

Fair

 

 

Classification

Value

 

Derivative Assets:

 

 

 

Derivatives designated as hedging

 

 

 

instruments under SFAS 133:

 

 

 

Commodity contracts

Other current assets

$17

 

Total derivative assets - designated

 

17

 

 

 

 

 

Derivatives not designated as hedging

 

 

 

instruments under SFAS 133:

 

 

 

Commodity contracts

Other current assets

12

 

Foreign exchange contracts

Other current assets

2

 

Total derivative assets – not designated

 

14

 

 

 

 

 

Total derivative assets

 

$31

 

 

 

 

 

Derivative Liabilities:

 

 

 

Derivatives designated as hedging

 

 

 

instruments under SFAS 133:

 

 

 

Commodity contracts

Other current liabilities

$6

 

Foreign exchange contracts

Other current liabilities

6

 

Total derivative liabilities – designated

 

12

 

 

 

 

 

Derivatives not designated as hedging

 

 

 

instruments under SFAS 133:

 

 

 

Commodity contracts

Other current liabilities

81

 

Foreign exchange contracts

Other current liabilities

1

 

Interest rate contracts

Other current liabilities

3

 

Total derivative liabilities – not designated

 

85

 

 

 

 

 

Total derivative liabilities

 

$97

 

 

 

1.

Our derivative assets and liabilities are presented in our Consolidated Condensed Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral in accordance with FIN 39-1, when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. See Note 11: Fair Value Measurements for a reconciliation to amounts reported in the Consolidated Condensed Balance Sheet.

 

 

14

 


NOTE 6:  INVENTORIES

 

Processed products, livestock and supplies and other inventories 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 related to the purchase and production of inventories. Total inventory consists of the following (in millions):

 

 

 

 

March 28, 2009

 

September 27, 2008

 

Processed products:

 

 

 

 

 

 

 

 

Weighted-average method - chicken and prepared foods

 

 

$

697

 

$

920

 

First-in, first-out method - beef and pork

 

 

 

399

 

 

571

 

Livestock - first-in, first-out method

 

 

 

617

 

 

701

 

Supplies and other - weighted-average method

 

 

 

351

 

 

346

 

Total inventory

 

 

$

2,064

 

$

2,538

 

 

NOTE 7:  PROPERTY, PLANT AND EQUIPMENT

 

The major categories of property, plant and equipment and accumulated depreciation, at cost, are as follows (in millions):

 

 

 

 

March 28, 2009

 

September 27, 2008

 

Land

 

 

$

95

 

$

89

 

Buildings and leasehold improvements

 

 

 

2,472

 

 

2,440

 

Machinery and equipment

 

 

 

4,566

 

 

4,382

 

Land improvements and other

 

 

 

215

 

 

210

 

Buildings and equipment under construction

 

 

 

286

 

 

352

 

 

 

 

 

7,634

 

 

7,473

 

Less accumulated depreciation

 

 

 

4,150

 

 

3,954

 

Net property, plant and equipment

 

 

$

3,484

 

$

3,519

 

 

NOTE 8:  OTHER CURRENT LIABILITIES

 

Other current liabilities are as follows (in millions):

                           

 

 

 

March 28, 2009

 

September 27, 2008

 

Accrued salaries, wages and benefits

 

 

$

225

 

$

259

 

Self-insurance reserves

 

 

 

227

 

 

236

 

Other

 

 

 

326

 

 

383

 

Total other current liabilities

 

 

$

778

 

$

878

 

 

NOTE 9: COMMITMENTS

 

We guarantee debt of outside third parties, which involve 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 March 28, 2009, was $57 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 seven years. The maximum potential amount of the residual value guarantees is $57 million, of which $23 million would be recoverable through various recourse provisions and an 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 March 28, 2009, and September 27, 2008, no material liabilities for guarantees were recorded.

 

15

 


NOTE 10:  LONG-TERM DEBT

 

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

 

 

 

March 28, 2009

 

September 27, 2008

 

 

 

 

 

 

 

 

 

Revolving credit facility – expires March 2012

 

$

-

 

 

 

 

Revolving credit facility – terminated March 2009

 

 

 

 

$

-

 

Accounts receivable securitization facility – terminated March 2009

 

 

 

 

 

-

 

Senior notes:

 

 

 

 

 

 

 

7.95% Notes due February 2010 (2010 Notes)

 

 

234

 

 

234

 

8.25% Notes due October 2011 (2011 Notes)

 

 

961

 

 

998

 

3.25% Convertible senior notes due October 2013 (2013 Notes)

 

 

458

 

 

458

 

10.50% Senior notes due March 2014 (2014 Notes)

 

 

752

 

 

-

 

7.85% Senior notes due April 2016 (2016 Notes)

 

 

960

 

 

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 (0.35% at 3/28/09)

 

 

100

 

 

-

 

Other

 

 

79

 

 

38

 

Total debt

 

 

3,752

 

 

2,896

 

Less current debt

 

 

275

 

 

8

 

Total long-term debt

 

$

3,477

 

$

2,888

 

 

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 the 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, will be based on a percentage of certain eligible receivables and eligible inventory and will be reduced by certain reserves. After reducing the amount available by outstanding letters of credit, the amount available for borrowing under this facility at March 28, 2009, was $621 million. At March 28, 2009, we had outstanding letters of credit totaling approximately $379 million, none of which were drawn upon, 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. These assets totaled $3.4 billion at March 28, 2009.

 

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 and terminated 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 paid semi-annually in arrears on April 15 and October 15. The conversion rate initially is 59.1935 shares of Class A

 

16

 


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 March 28, 2009, none of the conditions permitting conversion of the 2013 Notes had been satisfied.

 

The 2013 Notes were accounted for as a combined instrument pursuant to EITF Issue 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion.” 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 the accounts receivable securitization facility and for other general corporate purposes. We also placed $234 million of the net proceeds in a

 

17

 


blocked cash collateral account which will be used for the payment, prepayment, repurchase or defeasance of the 2010 Notes. These proceeds are recorded in Restricted Cash-Short Term in the Consolidated Condensed Balance Sheets. The 2014 Notes are fully and unconditionally guaranteed by substantially all of our domestic subsidiaries.

 

The 2014 Notes were offered pursuant to Rule 144A of the Securities Act of 1933. Pursuant to a registration rights agreement with the initial purchasers, we agreed to file a registration statement with respect to a registered offer to exchange the 2014 Notes for an issue of registered notes with identical terms (2014 Exchange Notes). If we fail to complete the registered offering providing for the exchange of the 2014 Exchange Notes for all 2014 Notes by September 30, 2009, interest will accrue on the principal amount of the 2014 Notes at an additional annual rate of 0.25% with respect to each subsequent 90-day period, up to a maximum additional annual rate of 1.0% thereafter. We expect to complete the registration and exchange process prior to September 30, 2009, and accordingly have not recorded a liability for the registration payment arrangement.

 

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 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 in Restricted Cash-Long Term in the Consolidated Condensed Balance Sheets. We expect the unused proceeds will be used fully during calendar 2009.

 

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 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 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.

 

Consolidating Financial Statements

Tyson Fresh Meats, Inc. (TFM), a wholly-owned subsidiary of the Company, has fully and unconditionally guaranteed the 2016 Notes. The following financial information presents condensed consolidating financial statements, which include Tyson Foods, Inc. (TFI Parent); Tyson Fresh Meats, Inc. (TFM Parent); the Non-Guarantor Subsidiaries on a combined basis; the elimination entries necessary to consolidate the TFI Parent, TFM Parent and the Non-Guarantor Subsidiaries; and Tyson Foods, Inc. on a consolidated basis, and is provided as an alternative to providing separate financial statements for the guarantor.

 

18

 


 

Condensed Consolidating Statement of Income for the three months ended March 28, 2009

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Net Sales

 

 

$

2

 

 

$

3,319

 

 

$

3,168

 

$

(182)

 

 

$

6,307 

 

Cost of Sales

 

 

5

 

 

3,226

 

 

3,005

 

(182)

 

 

6,054 

 

 

 

 

(3

)

 

93

 

 

163

 

 

 

253 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

31

 

 

49

 

 

129

 

 

 

209 

 

Other charges

 

 

-

 

 

-

 

 

15

 

 

 

15 

 

Operating Income (Loss)

 

 

(34

)

 

44

 

 

19

 

 

 

29 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

60

 

 

-

 

 

9

 

 

 

69 

 

Other, net

 

 

(1

)

 

(2

)

 

6

 

 

 

 

Equity in net earnings of subsidiaries

 

 

(32

)

 

13

 

 

-

 

19

 

 

-  

 

 

 

 

27

 

 

11

 

 

15

 

19

 

 

72 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before Income Taxes and Minority Interest

 

 

(61

)

 

33

 

 

4

 

(19

)

 

(43)

 

Income Tax Expense (Benefit)

 

 

49

 

 

7

 

 

(9

)

 

 

47 

 

Income (Loss) from Continuing Operations

before Minority Interest

 

 

(110

)

 

26

 

 

13

 

(19

)

 

(90)

 

Minority Interest

 

 

1

 

 

-

 

 

(1

)

-

 

 

-

 

Income (Loss) from Continuing Operations

 

 

(111

)

 

26

 

 

14

 

(19

)

 

(90)

 

Income (Loss) from Discontinued Operation

 

 

7

 

 

-

 

 

(21

)

 

 

(14)

 

Net Income (Loss)

 

 

$

(104

)

 

$

26

 

 

$

(7

)

$

(19

)

 

$

(104)

 

 

 

19

 


 

Condensed Consolidating Statement of Income for the three months ended March 29, 2008

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Net Sales

 

 

$

(9

)

 

$

3,633

 

 

$

2,899

 

$

(187)

 

 

$

6,336 

 

Cost of Sales

 

 

54

 

 

3,511

 

 

2,643

 

(187)

 

 

6,021 

 

 

 

 

(63

)

 

122

 

 

256

 

 

 

315 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

29

 

 

51

 

 

151

 

 

 

231 

 

Other charges

 

 

-

 

 

17

 

 

13

 

 

 

30 

 

Operating Income (Loss)

 

 

(92

)

 

54

 

 

92

 

 

 

54 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

48

 

 

6

 

 

(1

)

 

 

53 

 

Other, net

 

 

1

 

 

-

 

 

(5

)

 

 

(4)

 

Equity in net earnings of subsidiaries

 

 

(86

)

 

(7

)

 

-

 

93 

 

 

 

 

 

 

(37

)

 

(1

)

 

(6

)

93 

 

 

49 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before Income Taxes

 

 

(55

)

 

55

 

 

98

 

(93)

 

 

 

Income Tax Expense (Benefit)

 

 

(50

)

 

17

 

 

35

 

 

 

 

Income (Loss) from Continuing Operations

 

 

(5

)

 

38

 

 

63

 

(93)

 

 

 

Loss from Discontinued Operation

 

 

-

 

 

-

 

 

(8

)

 

 

(8)

 

Net Income (Loss)

 

 

$

(5

)

 

$

38

 

 

$

55

 

$

(93)

 

 

$

(5)

 

 

 

20

 


 

Condensed Consolidating Statement of Income for the six months ended March 28, 2009

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Net Sales

 

 

$

4

 

 

$

6,933

 

 

$

6,274

 

$

(383)

 

 

$

12,828 

 

Cost of Sales

 

 

282

 

 

6,745

 

 

5,913

 

(383)

 

 

12,557 

 

 

 

 

(278

)

 

188

 

 

361

 

 

 

271 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

60

 

 

102

 

 

263

 

 

 

425 

 

Other charges

 

 

-

 

 

-

 

 

15

 

 

 

15 

 

Operating Income (Loss)

 

 

(338

)

 

86

 

 

83

 

 

 

(169)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

113

 

 

4

 

 

11

 

 

 

128 

 

Other, net

 

 

-

 

 

(2

)

 

23

 

 

 

21 

 

Equity in net earnings of subsidiaries

 

 

(63

)

 

26

 

 

-

 

37

 

 

-  

 

 

 

 

50

 

 

28

 

 

34

 

37

 

 

149 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before Income Taxes and Minority Interest

 

 

(388

)

 

58

 

 

49

 

(37

)

 

(318)

 

Income Tax Expense (Benefit)

 

 

(153

)

 

28

 

 

17

 

 

 

(108)

 

Income (Loss) from Continuing Operations

before Minority Interest

 

 

(235

)

 

30

 

 

32

 

(37

)

 

(210)

 

Minority Interest

 

 

1

 

 

-

 

 

(3

)

-

 

 

(2)

 

Income (Loss) from Continuing Operations

 

 

(236

)

 

30

 

 

35

 

(37

)

 

(208)

 

Income (Loss) from Discontinued Operation

 

 

20

 

 

8

 

 

(36

)

 

 

(8)

 

Net Income (Loss)

 

 

$

(216

)

 

$

38

 

 

$

(1

)

$

(37

)

 

$

(216)

 

 

 

21

 


 

Condensed Consolidating Statement of Income for the six months ended March 29, 2008

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Net Sales

 

 

$

3

 

 

$

7,430

 

 

$

5,775

 

$

(396)

 

 

$

12,812 

 

Cost of Sales

 

 

49

 

 

7,262

 

 

5,267

 

(396)

 

 

12,182 

 

 

 

 

(46

)

 

168

 

 

508

 

 

 

630 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

54

 

 

96

 

 

296

 

 

 

446 

 

Other charges

 

 

1

 

 

18

 

 

17

 

 

 

36 

 

Operating Income (Loss)

 

 

(101

)

 

54

 

 

195

 

 

 

148 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

96

 

 

11

 

 

(3

)

 

 

104 

 

Other, net

 

 

(12

)

 

(5

)

 

(6

)

 

 

(23)

 

Equity in net earnings of subsidiaries

 

 

(149

)

 

(26

)

 

-

 

175 

 

 

 

 

 

 

(65

)

 

(20

)

 

(9

)

175 

 

 

81 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before Income Taxes

 

 

(36

)

 

74

 

 

204

 

(175)

 

 

67 

 

Income Tax Expense (Benefit)

 

 

(65

)

 

17

 

 

71

 

 

 

23 

 

Income from Continuing Operations

 

 

29

 

 

57

 

 

133

 

(175)

 

 

44 

 

Loss from Discontinued Operation

 

 

-

 

 

-

 

 

(15

)

 

 

(15)

 

Net Income

 

 

$

29

 

 

$

57

 

 

$

118

 

$

(175)

 

 

$

29 

 

 

 

22

 


 

Condensed Consolidating Balance Sheet as of March 28, 2009

in millions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Guarantor Subsidiaries

 

Eliminations

 

Total

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

-

 

 

$

1

 

 

$

816

 

$

-

 

 

$

817

 

 

Restricted cash

 

 

-

 

 

-

 

 

234

 

-

 

 

234

 

 

Accounts receivable, net

 

 

2

 

 

852

 

 

871

 

(642

)

 

1,083

 

 

Inventories

 

 

1

 

 

580

 

 

1,483

 

-

 

 

2,064

 

 

Other current assets

 

 

57

 

 

69

 

 

102

 

(66

)

 

162

 

 

Total Current Assets

 

 

60

 

 

1,502

 

 

3,506

 

(708

)

 

4,360

 

 

Restricted cash

 

 

-

 

 

-

 

 

76

 

-

 

 

76

 

 

Net Property, Plant and Equipment

 

 

41

 

 

922

 

 

2,521

 

-

 

 

3,484

 

 

Goodwill

 

 

-

 

 

1,443

 

 

1,027

 

-

 

 

2,470

 

 

Intangible Assets

 

 

-

 

 

44

 

 

104

 

-

 

 

148

 

 

Other Assets

 

 

270

 

 

63

 

 

202

 

(136

)

 

399

 

 

Investment in subsidiaries

 

 

8,632

 

 

898

 

 

-

 

(9,530

)

 

-

 

 

Total Assets

 

 

$

9,003

 

 

$

4,872

 

 

$

7,436

 

$

(10,374

)

 

$

10,937

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current debt

 

 

$

3

 

 

$

234

 

 

$

38

 

$

-

 <