TYSON FOODS, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended
December 29, 2012
or
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¨
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
001-14704
(Commission File Number)
______________________________________________
TYSON FOODS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________
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Delaware
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71-0225165
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2200 Don Tyson Parkway, Springdale, Arkansas
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72762-6999
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(Address of principal executive offices)
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(Zip Code)
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(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 short
er
period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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x
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Accelerated filer
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¨
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
December 29, 2012
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Class
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Outstanding Shares
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Class A Common Stock, $0.10 Par Value (Class A stock)
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284,518,786
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Class B Common Stock, $0.10 Par Value (Class B stock)
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70,015,755
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TYSON FOODS, INC.
INDEX
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PAGE
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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2
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Item 1.
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Financial Statements
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TYSON FOODS, INC.
(In millions, except per share data)
(Unaudited)
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Three Months Ended
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|||||||
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December 29, 2012
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December 31, 2011
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||||||
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Sales
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$
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8,402
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$
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8,329
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Cost of Sales
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7,865
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7,836
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Gross Profit
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537
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493
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Selling, General and Administrative
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237
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215
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Operating Income
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300
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278
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Other (Income) Expense:
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||||||||
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Interest income
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(1
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)
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(2
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)
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||||
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Interest expense
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37
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49
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||||
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Other, net
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—
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(12
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)
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||||
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Total Other (Income) Expense
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36
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35
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Income before Income Taxes
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264
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243
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Income Tax Expense
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96
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87
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Net Income
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168
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156
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Less: Net Loss Attributable to Noncontrolling Interest
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(5
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)
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—
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Net Income Attributable to Tyson
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$
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173
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$
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156
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Weighted Average Shares Outstanding:
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||||||||
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Class A Basic
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285
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297
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Class B Basic
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70
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70
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Diluted
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362
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376
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Net Income Per Share Attributable to Tyson:
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Class A Basic
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$
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0.50
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$
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0.43
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Class B Basic
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$
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0.45
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$
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0.39
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Diluted
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$
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0.48
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$
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0.42
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Dividends Declared Per Share:
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Class A
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$
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0.160
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$
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0.040
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Class B
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$
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0.144
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$
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0.036
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See accompanying Notes to Consolidated Condensed Financial Statements.
3
TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
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Three Months Ended
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|||||||
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December 29, 2012
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December 31, 2011
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Net Income
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$
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168
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$
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156
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Other Comprehensive Income (Loss), Net of Taxes:
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|||||||
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Derivatives accounted for as cash flow hedges
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(9
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(1
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Investments
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(2
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1
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Currency translation
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(1
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3
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Postretirement benefits
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1
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1
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Total Other Comprehensive Income (Loss), Net of Taxes
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(11
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4
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Comprehensive Income
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157
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160
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Less: Comprehensive Loss Attributable to Noncontrolling Interest
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(5
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—
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Comprehensive Income Attributable to Tyson
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$
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162
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$
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160
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See accompanying Notes to Consolidated Condensed Financial Statements.
4
TYSON FOODS, INC.
(In millions, except share and per share data)
(Unaudited)
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December 29, 2012
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September 29, 2012
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||||||
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Assets
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Current Assets:
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Cash and cash equivalents
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$
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951
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$
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1,071
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Accounts receivable, net
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1,365
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1,378
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Inventories
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2,932
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2,809
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Other current assets
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139
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145
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Total Current Assets
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5,387
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5,403
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Net Property, Plant and Equipment
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4,043
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4,022
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Goodwill
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1,891
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1,891
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Intangible Assets
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126
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129
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Other Assets
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427
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451
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Total Assets
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$
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11,874
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$
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11,896
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Liabilities and Shareholders’ Equity
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Current Liabilities:
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Current debt
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$
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519
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$
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515
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Accounts payable
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1,435
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1,372
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Other current liabilities
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892
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943
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Total Current Liabilities
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2,846
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2,830
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Long-Term Debt
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1,907
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1,917
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Deferred Income Taxes
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536
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558
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Other Liabilities
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527
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549
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Commitments and Contingencies (Note 13)
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Shareholders’ Equity:
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Common stock ($0.10 par value):
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Class A-authorized 900 million shares, issued 322 million shares
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32
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32
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Convertible Class B-authorized 900 million shares, issued 70 million shares
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7
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7
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Capital in excess of par value
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2,281
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2,278
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Retained earnings
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4,444
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4,327
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Accumulated other comprehensive loss
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(74
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)
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(63
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)
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Treasury stock, at cost – 37 million shares at December 29, 2012, and 33 million shares at September 29, 2012
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(656
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)
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(569
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)
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Total Tyson Shareholders’ Equity
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6,034
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6,012
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Noncontrolling Interest
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24
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30
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Total Shareholders’ Equity
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6,058
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6,042
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Total Liabilities and Shareholders’ Equity
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$
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11,874
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$
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11,896
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See accompanying Notes to Consolidated Condensed Financial Statements.
5
TYSON FOODS, INC.
(In millions)
(Unaudited)
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Three Months Ended
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||||||
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December 29, 2012
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December 31, 2011
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|||||
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Cash Flows From Operating Activities:
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|||||||
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Net income
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$
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168
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$
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156
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Depreciation and amortization
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130
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122
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Deferred income taxes
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(9
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24
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Other, net
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23
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27
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Net changes in working capital
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(122
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)
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9
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Cash Provided by Operating Activities
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190
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338
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Cash Flows From Investing Activities:
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|||||||
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Additions to property, plant and equipment
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(157
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)
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(182
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)
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Purchases of marketable securities
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(7
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)
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(8
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)
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Proceeds from sale of marketable securities
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8
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11
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Other, net
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4
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3
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Cash Used for Investing Activities
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(152
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)
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(176
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)
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Cash Flows From Financing Activities:
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Payments on debt
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(35
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)
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(25
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)
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Net proceeds from borrowings
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24
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45
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Purchases of Tyson Class A common stock
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(115
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)
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(50
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)
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Dividends
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(53
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)
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(15
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)
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Other, net
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21
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22
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Cash Used for Financing Activities
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(158
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)
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(23
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)
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Effect of Exchange Rate Change on Cash
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—
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2
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Increase (Decrease) in Cash and Cash Equivalents
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(120
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)
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141
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Cash and Cash Equivalents at Beginning of Year
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1,071
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716
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Cash and Cash Equivalents at End of Period
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$
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951
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$
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857
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See accompanying Notes to Consolidated Condensed Financial Statements.
6
TYSON FOODS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The consolidated condensed financial statements have been prepared by Tyson Foods, Inc. (“Tyson,” “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 29, 2012
. 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, which are of a normal recurring nature, necessary to state fairly our financial position as of
December 29, 2012
, and the results of operations for the
three
months ended
December 29, 2012
, and
December 31, 2011
. 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 over which we exercise control and, when applicable, entities for which we have a controlling financial interest or variable interest entities for which we are the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
VARIABLE INTEREST ENTITIES
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 for which we consolidate as we are the primary beneficiary. At
December 29, 2012
, Dynamic Fuels had
$157 million
of total assets, of which
$146 million
was net property, plant and equipment, and
$117 million
of total liabilities, of which
$100 million
was long-term debt. At
September 29, 2012
, Dynamic Fuels had
$177 million
of total assets, of which
$146 million
was net property, plant and equipment, and
$124 million
of total liabilities, of which
$100 million
was long-term debt.
SHARE REPURCHASES
A summary of cumulative share repurchases of our Class A common stock is as follows (in millions):
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Three Months Ended
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||||||||||||||
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December 29, 2012
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December 31, 2011
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|||||||||||||
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Shares
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Dollars
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Shares
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Dollars
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|||||||||||
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Shares repurchased:
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||||||||||||||
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Under share repurchase program
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5.1
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$
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100
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1.8
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$
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35
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To fund certain obligations under equity compensation plans
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0.8
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15
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0.8
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15
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Total share repurchases
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5.9
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$
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115
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2.6
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$
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50
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||||
As of
December 29, 2012
,
30.1 million
shares remained available for repurchase under our share repurchase program. The share repurchase program has no fixed or scheduled termination date and the timing and extent to which we repurchase shares will depend upon, among other things, our working capital needs, market conditions, liquidity targets, our debt obligations and regulatory requirements. In addition to the share repurchase program, we purchase shares on the open market to fund certain obligations under our equity compensation plans.
7
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued guidance regarding the presentation of comprehensive income. This guidance is effective for annual periods, and interim periods within those years, beginning after December 15, 2011. We adopted this guidance in the first quarter of fiscal year 2013. The adoption required a separate statement of comprehensive income and additional disclosures on our consolidated condensed financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2011, the FASB issued guidance enhancing disclosures related to offsetting of certain assets and liabilities. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not expect the adoption will have a significant impact on our consolidated condensed financial statements.
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. Total inventory consists of the following (in millions):
|
December 29, 2012
|
September 29, 2012
|
||||||
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Processed products:
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|||||||
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Weighted-average method – chicken and prepared foods
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$
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824
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$
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754
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First-in, first-out method – beef and pork
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595
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611
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|||
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Livestock – first-in, first-out method
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1,038
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|
952
|
|
|||
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Supplies and other – weighted-average method
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475
|
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492
|
|
|||
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Total inventories
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$
|
2,932
|
|
$
|
2,809
|
|
|
The major categories of property, plant and equipment and accumulated depreciation are as follows (in millions):
|
December 29, 2012
|
September 29, 2012
|
||||||
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Land
|
$
|
101
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$
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101
|
|
|
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Buildings and leasehold improvements
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2,901
|
|
2,868
|
|
|||
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Machinery and equipment
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5,276
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5,208
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|
|||
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Land improvements and other
|
411
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408
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|
|||
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Buildings and equipment under construction
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304
|
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298
|
|
|||
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8,993
|
|
8,883
|
|
||||
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Less accumulated depreciation
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4,950
|
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4,861
|
|
|||
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Net property, plant and equipment
|
$
|
4,043
|
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$
|
4,022
|
|
|
Other current liabilities are as follows (in millions):
|
December 29, 2012
|
September 29, 2012
|
||||||
|
Accrued salaries, wages and benefits
|
$
|
272
|
|
$
|
382
|
|
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Self-insurance reserves
|
274
|
|
274
|
|
|||
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Other
|
346
|
|
287
|
|
|||
|
Total other current liabilities
|
$
|
892
|
|
$
|
943
|
|
|
8
The major components of debt are as follows (in millions):
|
December 29, 2012
|
September 29, 2012
|
||||||
|
Revolving credit facility
|
$
|
—
|
|
$
|
—
|
|
|
|
Senior notes:
|
|||||||
|
3.25% Convertible senior notes due October 2013 (2013 Notes)
|
458
|
|
458
|
|
|||
|
6.60% Senior notes due April 2016 (2016 Notes)
|
638
|
|
638
|
|
|||
|
7.00% Notes due May 2018
|
120
|
|
120
|
|
|||
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4.50% Senior notes due June 2022 (2022 Notes)
|
1,000
|
|
1,000
|
|
|||
|
7.00% Notes due January 2028
|
18
|
|
18
|
|
|||
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Discount on senior notes
|
(23
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)
|
(28
|
)
|
|||
|
GO Zone tax-exempt bonds due October 2033 (0.14% at 12/29/2012)
|
100
|
|
100
|
|
|||
|
Other
|
115
|
|
126
|
|
|||
|
Total debt
|
2,426
|
|
2,432
|
|
|||
|
Less current debt
|
519
|
|
515
|
|
|||
|
Total long-term debt
|
$
|
1,907
|
|
$
|
1,917
|
|
|
Revolving Credit Facility
We have a
$1.0 billion
revolving credit facility that supports short-term funding needs and letters of credit. The facility will mature and the commitments thereunder will terminate in
August 2017
. After reducing the amount available by outstanding letters of credit issued under this facility, the amount available for borrowing at
December 29, 2012
, was
$962 million
. At
December 29, 2012
, we had outstanding letters of credit issued under this facility totaling
$38 million
, none of which were drawn upon. We had an additional
$151 million
of bilateral letters of credit issued separately from the revolving credit 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’ Gulf Opportunity Zone tax-exempt bonds.
This facility is unsecured. However, if at any time (the Collateral Trigger Date) we shall fail to have (a) a corporate rating from Moody's Investors Service, Inc. (Moody's) of "Ba1" or better, (b) a corporate rating from Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business (S&P), of "BB+" or better, or (c) a corporate rating from Fitch Ratings, a wholly owned subsidiary of Fimalac, S.A. (Fitch), of "BB+" or better, we, any subsidiary that has guaranteed any material indebtedness of the Company, and substantially all of our other domestic subsidiaries shall be required to secure the obligations under the credit agreement and related documents with a first-priority perfected security interest in our and such subsidiary's cash, deposit and securities accounts, accounts receivable and related assets, inventory and proceeds of any of the foregoing (the Collateral Requirement).
If on any date prior to any Collateral Trigger Date we shall have (a) a corporate rating from Moody's of "Baa2" or better, (b) a corporate rating from S&P of "BBB" or better and (c) a corporate rating from Fitch of "BBB" or better, in each case with stable or better outlook, then the Collateral Requirement will no longer be effective.
This facility is fully guaranteed by Tyson Fresh Meats, Inc (TFM Parent), our wholly owned subsidiary, until such date TFM Parent is released from all of its guarantees of other material indebtedness. If in the future any of our other subsidiaries shall guarantee any of our material indebtedness, such subsidiary shall also be required to guarantee the indebtedness, obligations and liabilities under this facility.
9
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. At
December 29, 2012
, the conversion rate was
59.5360
shares of Class A stock per
$1,000
principal amount of notes, which is equivalent to a conversion price of
$16.80
per share of Class A stock. The conversion rate and conversion price of the 2013 Notes are subject to adjustments which include, among other events, making cash dividends or distributions to the holders of our Class A common stock during any quarterly fiscal period in excess of
$0.04
per share. 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
$21.84
); 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
December 29, 2012
, none of the conditions permitting conversion of the 2013 Notes had been satisfied.
The 2013 Notes were originally accounted for as a combined instrument because the conversion feature did not meet the requirements to be accounted for separately as a derivative financial instrument. However, we adopted new accounting guidance in the first quarter of fiscal 2010 and applied it retrospectively to all periods presented. This new accounting guidance required us to separately account for the liability and equity conversion features. Upon retrospective adoption, our effective interest rate on the 2013 Notes was determined to be
8.26%
, which resulted 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 is being accreted over the
five
-year term of the convertible notes at the effective interest rate.
In connection with the issuance of the 2013 Notes, we entered into separate convertible note hedge transactions with respect to our Class A 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 the current strike price of
$16.80
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 the current exercise price of
$22.18
per share, subject to adjustment. The warrants are exercisable on various dates from
January 2014
through
April 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 conversion price of the 2013 Notes from
$16.80
per share to
$22.18
per share, thus reducing the potential future economic dilution associated with conversion of the 2013 Notes. If our share price is below
$22.18
upon exercise of the warrants, there is no economic net share impact. A
10%
increase in our share price above the
$22.18
warrant exercise 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.
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 June 7, 2012, Moody's upgraded the credit rating of these notes from "Ba1" to "Baa3." This upgrade decreased the interest rate on the 2016 Notes from
6.85%
to
6.60%
, effective beginning with the six-month interest payment due October 1, 2012.
10
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. If any amounts are disbursed related to this guarantee, we would seek recovery of
50%
(up to
$50 million
) from Syntroleum Corporation in accordance with our 2008 warrant agreement with Syntroleum Corporation.
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; dispose of or transfer assets; change the nature of our business; engage in certain transactions with affiliates; and enter into sale/leaseback or hedging transactions, in each case, subject to certain qualifications and exceptions. In addition, we are required to maintain minimum interest expense coverage and maximum debt-to-capitalization ratios.
Our 2022 Notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens; engage in certain sale/leaseback transactions; and engage in certain consolidations, mergers and sales of assets.
We were in compliance with all debt covenants at
December 29, 2012
.
The effective tax rate was
36.3%
and
35.8%
for the
first
quarter of fiscal years
2013
and
2012
, respectively.
The effective tax rate for the first quarter of fiscal 2013 was impacted by such items as the domestic production deduction, state income taxes and losses in foreign jurisdictions and related valuation allowances.
Unrecognized tax benefits were
$139 million
and
$168 million
at
December 29, 2012
, and
September 29, 2012
, respectively. This change is primarily a result of audit settlements related to temporary differences. Substantially all of the unrecognized tax benefits, if recognized, would impact our effective tax rate.
We classify interest and penalties on unrecognized tax benefits as income tax expense. At
December 29, 2012
, and
September 29, 2012
, before tax benefits, we had
$62 million
and
$64 million
, respectively, of accrued interest and penalties on unrecognized tax benefits.
We are subject to income tax examinations for U.S. federal income taxes for fiscal years 2003 through 2011, and for foreign, state and local income taxes for fiscal years 2001 through 2011. During the next twelve months, it is reasonably possible the amount of unrecognized tax benefits could change, but such changes are anticipated to be immaterial in amount.
During the
first
quarter of fiscal 2013, we recorded
$3 million
of equity earnings in joint ventures and
$3 million
in net foreign currency exchange losses, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
During the
first
quarter of fiscal 2012, we recorded
$6 million
of equity earnings in joint ventures and
$5 million
in net foreign currency exchange gains, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
11
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data):
|
Three Months Ended
|
||||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
Numerator:
|
||||||||
|
Net income
|
$
|
168
|
|
$
|
156
|
|
||
|
Less: Net loss attributable to noncontrolling interest
|
(5
|
)
|
—
|
|
||||
|
Net income attributable to Tyson
|
173
|
|
156
|
|
||||
|
Less Dividends Declared:
|
||||||||
|
Class A
|
46
|
|
12
|
|
||||
|
Class B
|
10
|
|
3
|
|
||||
|
Undistributed earnings
|
$
|
117
|
|
$
|
141
|
|
||
|
Class A undistributed earnings
|
$
|
96
|
|
$
|
117
|
|
||
|
Class B undistributed earnings
|
21
|
|
24
|
|
||||
|
Total undistributed earnings
|
$
|
117
|
|
$
|
141
|
|
||
|
Denominator:
|
||||||||
|
Denominator for basic earnings per share:
|
||||||||
|
Class A weighted average shares
|
285
|
|
297
|
|
||||
|
Class B weighted average shares, and shares under the if-converted method for diluted earnings per share
|
70
|
|
70
|
|
||||
|
Effect of dilutive securities:
|
||||||||
|
Stock options and restricted stock
|
5
|
|
5
|
|
||||
|
Convertible 2013 Notes
|
2
|
|
4
|
|
||||
|
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
|
362
|
|
376
|
|
||||
|
Net Income Per Share Attributable to Tyson:
|
||||||||
|
Class A Basic
|
$
|
0.50
|
|
$
|
0.43
|
|
||
|
Class B Basic
|
$
|
0.45
|
|
$
|
0.39
|
|
||
|
Diluted
|
$
|
0.48
|
|
$
|
0.42
|
|
||
Approximately
8 million
and
4 million
of our stock-based compensation shares were antidilutive for the
three
months ended
December 29, 2012
, and
December 31, 2011
, respectively. These shares were not included in the dilutive earnings per share calculation.
We have
two
classes of capital stock, Class A stock and Class B 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 cash dividends paid to holders of Class B stock cannot exceed
90%
of the cash dividends paid to holders of Class A stock.
We allocate undistributed earnings based upon a
1
to
0.9
ratio per share to Class A stock and Class B stock, respectively. We allocate undistributed earnings based on this ratio due to historical dividend patterns, voting control of Class B shareholders and contractual limitations of dividends to Class B stock.
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.
12
Our risk management programs are periodically 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, 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 deal with credit-worthy counterparties. Additionally, our derivative contracts are mostly short-term in duration and we generally do not make use of credit-risk-related contingent features. No significant concentrations of credit risk existed at
December 29, 2012
.
We recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Condensed 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) (OCI) 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 and option contracts of forecasted purchases (i.e., grains) and certain foreign exchange forward contracts.
|
|
•
|
Fair Value Hedges – include certain commodity forward contracts related to firm commitments (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 and option commodity contracts in excess of our physical consumption requirements and generally do not hedge forecasted transactions beyond
18
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 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 for the
three
months ended
December 29, 2012
, and
December 31, 2011
.
We had the following aggregated notional values of outstanding forward and option contracts accounted for as cash flow hedges (in millions, except soy meal tons):
|
Metric
|
December 29, 2012
|
September 29, 2012
|
|||||||
|
Commodity:
|
|||||||||
|
Corn
|
Bushels
|
10
|
|
12
|
|
||||
|
Soy meal
|
Tons
|
228,800
|
|
164,700
|
|
||||
|
Foreign Currency
|
United States dollar
|
$
|
59
|
|
$
|
80
|
|
||
As of
December 29, 2012
, the net amounts expected to be reclassified into earnings within the next 12 months are not significant. During the
three
months ended
December 29, 2012
, and
December 31, 2011
, we did not reclassify significant 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.
13
The following table sets forth the pretax impact of cash flow hedge derivative instruments on the Consolidated Condensed Statements of Income (in millions):
|
Gain/(Loss)
Recognized in OCI On Derivatives |
Consolidated Condensed
Statements of Income
Classification
|
Gain/(Loss)
Reclassified from OCI to Earnings |
|||||||||||||||
|
Three Months Ended
|
Three Months Ended
|
||||||||||||||||
|
December 29,
2012 |
December 31,
2011 |
December 29,
2012 |
December 31,
2011 |
||||||||||||||
|
Cash Flow Hedge – Derivatives designated as hedging instruments:
|
|||||||||||||||||
|
Commodity contracts
|
$
|
(13
|
)
|
$
|
2
|
|
Cost of Sales
|
$
|
4
|
|
$
|
(6
|
)
|
||||
|
Foreign exchange contracts
|
—
|
|
(5
|
)
|
Other Income/Expense
|
(2
|
)
|
5
|
|
||||||||
|
Total
|
$
|
(13
|
)
|
$
|
(3
|
)
|
$
|
2
|
|
$
|
(1
|
)
|
|||||
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. We had the following aggregated notional values of outstanding forward contracts entered into to hedge forecasted commodity purchases which are accounted for as a fair value hedge (in millions):
|
Metric
|
December 29, 2012
|
September 29, 2012
|
|||||
|
Commodity:
|
|||||||
|
Live Cattle
|
Pounds
|
228
|
|
232
|
|
||
|
Lean Hogs
|
Pounds
|
284
|
|
239
|
|
||
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 same period. We include the gain or loss on the hedged items (i.e., livestock purchase firm commitments) in the same line item, Cost of Sales, as the offsetting gain or loss on the related livestock forward position.
|
in millions
|
|
||||||||
|
Consolidated Condensed
Statements of Income
Classification
|
Three Months Ended
|
||||||||
|
December 29,
2012 |
December 31,
2011 |
||||||||
|
Gain/(Loss) on forwards
|
Cost of Sales
|
$
|
4
|
|
$
|
(8
|
)
|
||
|
Gain/(Loss) on purchase contract
|
Cost of Sales
|
(4
|
)
|
8
|
|
||||
Ineffectiveness related to our fair value hedges was not significant for the
three
months ended
December 29, 2012
, and
December 31, 2011
.
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 Condensed Statements of Income during the period of change. Ineffectiveness related to our foreign net investment hedges was not significant for the
three
months ended
December 29, 2012
, and
December 31, 2011
. At both
December 29, 2012
, and
September 29, 2012
, we had
$27 million
aggregate outstanding notional values related to our forward foreign currency contracts accounted for as foreign net investment hedges.
14
The following table sets forth the pretax impact of these derivative instruments on the Consolidated Condensed Statements of Income (in millions):
|
Gain/(Loss)
Recognized in OCI
On Derivatives
|
Consolidated Condensed
Statements of Income
Classification
|
Gain/(Loss)
Reclassified from
OCI to Earnings
|
|||||||||||||||
|
Three Months Ended
|
Three Months Ended
|
||||||||||||||||
|
December 29,
2012 |
December 31,
2011 |
December 29,
2012 |
December 31,
2011 |
||||||||||||||
|
Net Investment Hedge – Derivatives designated as hedging instruments:
|
|||||||||||||||||
|
Foreign exchange contracts
|
$
|
—
|
|
$
|
(1
|
)
|
Other Income/Expense
|
$
|
—
|
|
$
|
—
|
|
||||
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, 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.
The objective of our undesignated grains, livestock and energy 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 future sale 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 options and futures positions to mitigate a portion of this risk. Changes in market value of the open livestock options and 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 and option 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 that impacts current earnings.
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.
We had the following aggregate outstanding notional values related to our undesignated positions (in millions, except soy meal tons):
|
Metric
|
December 29, 2012
|
September 29, 2012
|
|||||||
|
Commodity:
|
|||||||||
|
Corn
|
Bushels
|
36
|
|
19
|
|
||||
|
Soy Meal
|
Tons
|
65,200
|
|
1,200
|
|
||||
|
Soy Oil
|
Pounds
|
—
|
|
17
|
|
||||
|
Live Cattle
|
Pounds
|
223
|
|
68
|
|
||||
|
Lean Hogs
|
Pounds
|
11
|
|
108
|
|
||||
|
Foreign Currency
|
United States dollars
|
$
|
151
|
|
$
|
165
|
|
||
|
Interest Rate
|
Average monthly notional debt
|
$
|
25
|
|
$
|
27
|
|
||
15
The following table sets forth the pretax impact of the undesignated derivative instruments on the Consolidated Condensed Statements of Income (in millions):
|
Consolidated Condensed
Statements of Income
Classification
|
Gain/(Loss)
Recognized in Earnings
|
||||||||
|
Three Months Ended
|
|||||||||
|
December 29, 2012
|
December 31, 2011
|
||||||||
|
Derivatives not designated as hedging instruments:
|
|||||||||
|
Commodity contracts
|
Sales
|
$
|
11
|
|
$
|
(3
|
)
|
||
|
Commodity contracts
|
Cost of Sales
|
(7
|
)
|
29
|
|
||||
|
Foreign exchange contracts
|
Other Income/Expense
|
1
|
|
3
|
|
||||
|
Total
|
$
|
5
|
|
$
|
29
|
|
|||
The following table sets forth the fair value of all derivative instruments outstanding in the Consolidated Condensed Balance Sheets (in millions):
|
Fair Value
|
|||||||
|
December 29, 2012
|
September 29, 2012
|
||||||
|
Derivative Assets:
|
|||||||
|
Derivatives designated as hedging instruments:
|
|||||||
|
Commodity contracts
|
$
|
5
|
|
$
|
32
|
|
|
|
Derivatives not designated as hedging instruments:
|
|||||||
|
Commodity contracts
|
29
|
|
21
|
|
|||
|
Foreign exchange contracts
|
1
|
|
1
|
|
|||
|
Total derivative assets – not designated
|
30
|
|
22
|
|
|||
|
Total derivative assets
|
$
|
35
|
|
$
|
54
|
|
|
|
Derivative Liabilities:
|
|||||||
|
Derivatives designated as hedging instruments:
|
|||||||
|
Commodity contracts
|
$
|
12
|
|
$
|
6
|
|
|
|
Foreign exchange contracts
|
—
|
|
1
|
|
|||
|
Total derivative liabilities – designated
|
12
|
|
7
|
|
|||
|
Derivatives not designated as hedging instruments:
|
|||||||
|
Commodity contracts
|
75
|
|
96
|
|
|||
|
Foreign exchange contracts
|
2
|
|
2
|
|
|||
|
Interest rate contracts
|
1
|
|
—
|
|
|||
|
Total derivative liabilities – not designated
|
78
|
|
98
|
|
|||
|
Total derivative liabilities
|
$
|
90
|
|
$
|
105
|
|
|
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 when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. See Note 10: Fair Value Measurements for a reconciliation to amounts reported in the Consolidated Condensed Balance Sheets in Other current assets and Other current liabilities.
16
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
Level 1
— Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.
Level 2
— Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
|
•
|
Quoted prices for similar assets or liabilities in active markets;
|
|
•
|
Quoted prices for identical or similar assets in non-active markets;
|
|
•
|
Inputs other than quoted prices that are observable for the asset or liability; and
|
|
•
|
Inputs derived principally from or corroborated by other observable market data.
|
Level 3 —
Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following tables set forth by level within the fair value hierarchy our financial assets and liabilities accounted for at fair value on a recurring basis according to the valuation techniques we used to determine their fair values (in millions):
|
December 29, 2012
|
Level 1
|
Level 2
|
Level 3
|
Netting (a)
|
Total
|
||||||||||||||
|
Assets:
|
|||||||||||||||||||
|
Commodity Derivatives
|
$
|
—
|
|
$
|
34
|
|
$
|
—
|
|
$
|
(21
|
)
|
$
|
13
|
|
||||
|
Foreign Exchange Forward Contracts
|
—
|
|
1
|
|
—
|
|
—
|
|
1
|
|
|||||||||
|
Available for Sale Securities:
|
|||||||||||||||||||
|
Debt securities
|
—
|
|
26
|
|
85
|
|
—
|
|
111
|
|
|||||||||
|
Equity securities
|
3
|
|
—
|
|
—
|
|
—
|
|
3
|
|
|||||||||
|
Deferred Compensation Assets
|
22
|
|
158
|
|
—
|
|
—
|
|
180
|
|
|||||||||
|
Total Assets
|
$
|
25
|
|
$
|
219
|
|
$
|
85
|
|
$
|
(21
|
)
|
$
|
308
|
|
||||
|
Liabilities:
|
|||||||||||||||||||
|
Commodity Derivatives
|
$
|
—
|
|
$
|
87
|
|
$
|
—
|
|
$
|
(87
|
)
|
$
|
—
|
|
||||
|
Foreign Exchange Forward Contracts
|
—
|
|
2
|
|
—
|
|
(1
|
)
|
1
|
|
|||||||||
|
Interest Rate Swap
|
—
|
|
1
|
|
—
|
|
—
|
|
1
|
|
|||||||||
|
Total Liabilities
|
$
|
—
|
|
$
|
90
|
|
$
|
—
|
|
$
|
(88
|
)
|
$
|
2
|
|
||||
|
September 29, 2012
|
Level 1
|
Level 2
|
Level 3
|
Netting (a)
|
Total
|
||||||||||||||
|
Assets:
|
|||||||||||||||||||
|
Commodity Derivatives
|
$
|
—
|
|
$
|
53
|
|
$
|
—
|
|
$
|
(40
|
)
|
$
|
13
|
|
||||
|
Foreign Exchange Forward Contracts
|
—
|
|
1
|
|
—
|
|
(1
|
)
|
—
|
|
|||||||||
|
Available for Sale Securities:
|
|||||||||||||||||||
|
Debt securities
|
—
|
|
27
|
|
86
|
|
—
|
|
113
|
|
|||||||||
|
Equity securities
|
6
|
|
1
|
|
—
|
|
—
|
|
7
|
|
|||||||||
|
Deferred Compensation Assets
|
31
|
|
149
|
|
—
|
|
—
|
|
180
|
|
|||||||||
|
Total Assets
|
$
|
37
|
|
$
|
231
|
|
$
|
86
|
|
$
|
(41
|
)
|
$
|
313
|
|
||||
|
Liabilities:
|
|||||||||||||||||||
|
Commodity Derivatives
|
$
|
—
|
|
$
|
102
|
|
$
|
—
|
|
$
|
(100
|
)
|
$
|
2
|
|
||||
|
Foreign Exchange Forward Contracts
|
—
|
|
3
|
|
—
|
|
—
|
|
3
|
|
|||||||||
|
Interest Rate Swap
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Total Liabilities
|
$
|
—
|
|
$
|
105
|
|
$
|
—
|
|
$
|
(100
|
)
|
$
|
5
|
|
||||
17
|
(a)
|
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, when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. At
December 29, 2012
, and
September 29, 2012
, we had posted with various counterparties
$67 million
and
$59 million
, respectively, of cash collateral and held no cash collateral.
|
The following table provides a reconciliation between the beginning and ending balance of debt securities measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in millions):
|
Three Months Ended
|
|||||||
|
December 29, 2012
|
December 31, 2011
|
||||||
|
Balance at beginning of year
|
$
|
86
|
|
$
|
83
|
|
|
|
Total realized and unrealized gains (losses):
|
|||||||
|
Included in earnings
|
—
|
|
1
|
|
|||
|
Included in other comprehensive income (loss)
|
—
|
|
(2
|
)
|
|||
|
Purchases
|
3
|
|
6
|
|
|||
|
Issuances
|
—
|
|
—
|
|
|||
|
Settlements
|
(4
|
)
|
(4
|
)
|
|||
|
Balance at end of period
|
$
|
85
|
|
$
|
84
|
|
|
|
Total gains (losses) for the three-month period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at end of period
|
$
|
—
|
|
$
|
—
|
|
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Assets and Liabilities:
Our derivatives, including commodities, foreign exchange forward contracts and an interest rate swap, primarily include exchange-traded and over-the-counter contracts which are further described in Note 9: Derivative Financial Instruments. We record our commodity derivatives at fair value using quoted market prices adjusted for credit and non-performance risk and internal models that use as their basis readily observable market inputs including current and forward commodity market prices. Our foreign exchange forward contracts are recorded at fair value based on quoted prices and spot and forward currency prices adjusted for credit and non-performance risk. Our interest rate swap is recorded at fair value based on quoted LIBOR swap rates adjusted for credit and non-performance risk. We classify these instruments in Level 2 when quoted market prices can be corroborated utilizing observable current and forward commodity market prices on active exchanges, observable market transactions of spot currency rates and forward currency prices or observable benchmark market rates at commonly quoted intervals.
Available for Sale Securities:
Our investments in marketable debt securities are classified as available-for-sale and are included in Other Assets in the Consolidated Condensed Balance Sheets. These investments, which are generally long-term in nature with maturities ranging up to
35
years, are reported at fair value based on pricing models and quoted market prices adjusted for credit and non-performance risk. We classify our investments in U.S. government and agency debt securities as Level 2 as fair value is generally estimated using discounted cash flow models that are primarily industry-standard models that consider various assumptions, including time value and yield curve as well as other readily available relevant economic measures. We classify certain corporate, asset-backed and other debt securities as Level 3 as there is limited activity or less observable inputs into valuation models, including current interest rates and estimated prepayment, default and recovery rates on the underlying portfolio or structured investment vehicle. We also classify privately held redeemable preferred stock securities as Level 3 as there is limited activity or less observable inputs into valuation models, including current interest rates and credit worthiness of the underlying private issuer. Significant changes to assumptions or unobservable inputs in the valuation of our Level 3 instruments would not have a significant impact to our consolidated financial statements.
Additionally, we have
eight million
shares of Syntroleum Corporation common stock and
4.25 million
warrants, which expire in June 2015, to purchase an equivalent amount of Syntroleum Corporation common stock at an average price of
$2.87
. We record the shares and warrants in Other Assets in the Consolidated Condensed Balance Sheets at fair value based on quoted market prices. We classify the shares as Level 1 as the fair value is based on unadjusted quoted prices available in active markets. We classify the warrants as Level 2 as fair value can be corroborated based on observable market data.
18
|
(in millions)
|
December 29, 2012
|
September 29, 2012
|
|||||||||||||||||||||
|
Amortized
Cost Basis |
|
Fair
Value |
|
Unrealized
Gain/(Loss) |
|
Amortized
Cost Basis |
|
Fair
Value |
|
Unrealized
Gain/(Loss) |
|
||||||||||||
|
Available for Sale Securities:
|
|||||||||||||||||||||||
|
Debt Securities:
|
|||||||||||||||||||||||
|
U.S. Treasury and Agency
|
$
|
25
|
|
$
|
26
|
|
$
|
1
|
|
$
|
26
|
|
$
|
27
|
|
$
|
1
|
|
|||||
|
Corporate and Asset-Backed (a)
|
63
|
|
65
|
|
2
|
|
64
|
|
66
|
|
2
|
|
|||||||||||
|
Redeemable Preferred Stock
|
20
|
|
20
|
|
—
|
|
20
|
|
20
|
|
—
|
|
|||||||||||
|
Equity Securities:
|
|||||||||||||||||||||||
|
Common Stock and Warrants
|
9
|
|
3
|
|
(6
|
)
|
9
|
|
7
|
|
(2
|
)
|
|||||||||||
|
(a)
|
At both
December 29, 2012
, and
September 29, 2012
, the amortized cost basis for Corporate and Asset-Backed debt securities had been reduced by accumulated other than temporary impairments of
$2 million
.
|
Unrealized holding gains (losses), net of tax, are excluded from earnings and reported in OCI until the security is settled or sold. On a quarterly basis, we evaluate whether losses related to our available-for-sale securities are temporary in nature. Losses on equity securities are recognized in earnings if the decline in value is judged to be other than temporary. If losses related to our debt securities are determined to be other than temporary, the loss would be recognized in earnings if we intend, or more likely than not will be required, to sell the security prior to recovery. For debt securities in which we have the intent and ability to hold until maturity, losses determined to be other than temporary would remain in OCI, other than expected credit losses which are recognized in earnings. We consider many factors in determining whether a loss is temporary, including the length of time and extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. We recognized no other than temporary impairments in earnings for the
three
months ending
December 29, 2012
, and
December 31, 2011
. No other than temporary losses were deferred in OCI as of
December 29, 2012
, and
September 29, 2012
.
Deferred Compensation Assets:
We maintain non-qualified deferred compensation plans for certain executives and other highly compensated employees. Investments are maintained within a trust and include money market funds, mutual funds and life insurance policies. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The investments are recorded at fair value based on quoted market prices and are included in Other Assets in the Consolidated Condensed Balance Sheets. We classify the investments which have observable market prices in active markets in Level 1 as these are generally publicly-traded mutual funds. The remaining deferred compensation assets are classified in Level 2, as fair value can be corroborated based on observable market data. Realized and unrealized gains (losses) on deferred compensation are included in earnings.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. We did not have any significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the
three
months ended
December 29, 2012
, and
December 31, 2011
.
Other Financial Instruments
Fair value of our debt is principally estimated using Level 2 inputs based on quoted prices for those or similar instruments. Fair value and carrying value for our debt are as follows (in millions):
|
December 29, 2012
|
September 29, 2012
|
||||||||||||||
|
Fair Value
|
Carrying Value
|
Fair Value
|
Carrying Value
|
||||||||||||
|
Total Debt
|
$
|
2,606
|
|
$
|
2,426
|
|
$
|
2,596
|
|
$
|
2,432
|
|
|||
19
The before and after tax changes in the components of other comprehensive income (loss) are as follows (in millions):
|
Three Months Ended
|
||||||||||||||||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||||||||||||||
|
Before Tax
|
Tax
|
After Tax
|
Before Tax
|
Tax
|
After Tax
|
|||||||||||||||
|
Derivatives accounted for as cash flow hedges:
|
||||||||||||||||||||
|
(Gain) loss reclassified to Cost of Sales
|
$
|
(4
|
)
|
$
|
2
|
|
$
|
(2
|
)
|
$
|
6
|
|
$
|
(2
|
)
|
$
|
4
|
|
||
|
(Gain) loss reclassified to Other Income/Expense
|
2
|
|
(1
|
)
|
1
|
|
(5
|
)
|
2
|
|
(3
|
)
|
||||||||
|
Unrealized gain (loss)
|
(13
|
)
|
5
|
|
(8
|
)
|
(3
|
)
|
1
|
|
(2
|
)
|
||||||||
|
Investments:
|
||||||||||||||||||||
|
Unrealized gain (loss)
|
(4
|
)
|
2
|
|
(2
|
)
|
2
|
|
(1
|
)
|
1
|
|
||||||||
|
Currency translation:
|
||||||||||||||||||||
|
Translation adjustment
|
(1
|
)
|
—
|
|
(1
|
)
|
3
|
|
—
|
|
3
|
|
||||||||
|
Postretirement benefits
|
1
|
|
—
|
|
1
|
|
1
|
|
—
|
|
1
|
|
||||||||
|
Total Other Comprehensive Income (Loss)
|
$
|
(19
|
)
|
$
|
8
|
|
$
|
(11
|
)
|
$
|
4
|
|
$
|
—
|
|
$
|
4
|
|
||
We operate in
four
segments: Chicken, Beef, Pork and Prepared Foods. We measure segment profit as operating income (loss).
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, hotel chains and noncommercial foodservice establishments such as schools, 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, hotel chains and noncommercial foodservice establishments such as schools, 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, hotel chains and noncommercial foodservice establishments such as schools, 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 and 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, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international markets.
The results from Dynamic Fuels are included in Other.
20
Information on segments and a reconciliation to income before income taxes are as follows (in millions):
|
Three Months Ended
|
|||||||||
|
December 29, 2012
|
December 31, 2011
|
||||||||
|
Sales:
|
|||||||||
|
Chicken
|
$
|
2,956
|
|
$
|
2,762
|
|
|||
|
Beef
|
3,485
|
|
3,467
|
|
|||||
|
Pork
|
1,363
|
|
1,475
|
|
|||||
|
Prepared Foods
|
841
|
|
861
|
|
|||||
|
Other
|
20
|
|
54
|
|
|||||
|
Intersegment Sales
|
(263
|
)
|
(290
|
)
|
|||||
|
Total Sales
|
$
|
8,402
|
|
$
|
8,329
|
|
|||
|
Operating Income (Loss):
|
|||||||||
|
Chicken
|
$
|
107
|
|
$
|
32
|
|
|||
|
Beef
|
46
|
|
31
|
|
|||||
|
Pork
|
125
|
|
165
|
|
|||||
|
Prepared Foods
|
33
|
|
51
|
|
|||||
|
Other
|
(11
|
)
|
(1
|
)
|
|||||
|
Total Operating Income
|
300
|
|
278
|
|
|||||
|
Total Other (Income) Expense
|
36
|
|
35
|
|
|||||
|
Income before Income Taxes
|
$
|
264
|
|
$
|
243
|
|
|||
The Beef segment had sales of
$43 million
and
$64 million
in the
first
quarter of fiscal years
2013
and
2012
, respectively, from transactions with other operating segments of the Company and Dynamic Fuels. The Pork segment had sales of
$220 million
and
$226 million
in the
first
quarter of fiscal years
2013
and
2012
, respectively, from transactions with other operating segments of the Company. The aforementioned sales from intersegment transactions, which were at market prices, were included in the segment sales in the above table.
Commitments
We guarantee obligations of certain outside third parties, which consist primarily of a lease and grower loans, which are substantially collateralized by the underlying assets. Terms of the underlying debt cover periods up to
ten
years, and the maximum potential amount of future payments as of
December 29, 2012
, was
$71 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 remaining terms of the lease maturities cover periods over the next
seven
years. The maximum potential amount of the residual value guarantees is
$56 million
, of which
$50 million
could be recoverable through various recourse provisions and an additional undeterminable recoverable amount based on the fair value of the underlying leased assets. The likelihood of material payments under these guarantees is not considered probable. At
December 29, 2012
, and
September 29, 2012
, 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
December 29, 2012
, was approximately
$290 million
. The total receivables under these programs were
$39 million
and
$25 million
at
December 29, 2012
, and
September 29, 2012
, respectively, and are included, net of allowance for uncollectible amounts, in Accounts Receivable at
December 29, 2012
, and
September 29, 2012
, in our Consolidated Condensed 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
$13 million
and
$10 million
at
December 29, 2012
, and
September 29, 2012
, respectively.
21
Contingencies
We are involved in various claims and legal proceedings. We routinely assess the likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. We record accruals for such matters to the extent that we conclude a loss is probable and the financial impact, should an adverse outcome occur, is reasonably estimable. Such accruals are reflected in the Company’s consolidated condensed financial statements. In our opinion, we have made appropriate and adequate accruals for these matters and believe the probability of a material loss beyond the amounts accrued to be remote; however, the ultimate liability for these matters is uncertain, and if accruals are not adequate, an adverse outcome could have a material effect on the consolidated condensed financial condition or results of operations. Listed below are certain claims made against the Company and/or our subsidiaries for which the potential exposure is considered material to the Company’s consolidated condensed financial statements. We believe we have substantial defenses to the claims made and intend to vigorously defend these matters.
We have pending against us a lawsuit styled DeAsencio v. Tyson Foods, Inc. (E. Dist. Pennsylvania, August 22, 2000) in which the plaintiffs allege that we failed to compensate certain poultry plant employees for the time it takes to engage in pre- and post-shift activities such as changing into and out of protective and sanitary clothing and walking to and from the changing area, work areas and break areas in violation of the Federal Labor Standards Act (FLSA). They seek back wages, liquidated damages, pre- and post-judgment interest, and attorneys’ fees. Plaintiffs appealed a jury verdict and final judgment entered in our favor on June 22, 2006. On September 7, 2007, the U.S. Court of Appeals for the Third Circuit reversed the jury verdict and remanded the case to the District Court for further proceedings. We sought rehearing en banc, which was denied by the Court of Appeals on October 5, 2007. The United States Supreme Court denied our petition for a writ of certiorari on June 9, 2008. The new trial date has not been set.
We have pending
eleven
separate wage and hour actions involving Tyson Fresh Meats Inc.’s plants located in Garden City and Emporia, Kansas (Garcia, et al. v. Tyson Foods, Inc., Tyson Fresh Meats, Inc., D. Kansas, May 15, 2006), Storm Lake, Iowa (Bouaphakeo (f/k/a Sharp), et al. v. Tyson Foods, Inc., N.D. Iowa, February 6, 2007), Columbus Junction, Iowa (Guyton (f/k/a Robinson), et al. v. Tyson Foods, Inc., d.b.a Tyson Fresh Meats, Inc., S.D. Iowa, September 12, 2007), Joslin, Illinois (Murray, et al. v. Tyson Foods, Inc., C.D. Illinois, January 2, 2008; and DeVoss v. Tyson Foods, Inc. d.b.a. Tyson Fresh Meats, C.D. Illinois, March 2, 2011), Dakota City, Nebraska (Gomez, et al. v. Tyson Foods, Inc., D. Nebraska, January 16, 2008), Madison, Nebraska (Acosta, et al. v Tyson Foods, Inc. d.b.a Tyson Fresh Meats, Inc., D. Nebraska, February 29, 2008), Perry and Waterloo, Iowa (Edwards, et al. v. Tyson Foods, Inc. d.b.a Tyson Fresh Meats, Inc., S.D. Iowa, March 20, 2008); Council Bluffs, Iowa (Maxwell (f/k/a Salazar), et al. v. Tyson Foods, Inc. d.b.a Tyson Fresh Meats, Inc., S.D. Iowa, April 29, 2008); Logansport, Indiana (Carter, et al. v. Tyson Foods, Inc. and Tyson Fresh Meats, Inc., N.D. Indiana, April 29, 2008); and Goodlettsville, Tennessee (Abadeer v. Tyson Foods, Inc., and Tyson Fresh Meats, Inc., M.D. Tennessee, February 6, 2009). The actions allege we failed to pay employees for all hours worked, including overtime compensation for the time it takes to change into protective work uniforms, safety equipment and other sanitary and protective clothing worn by employees, and for walking to and from the changing area, work areas and break areas in violation of the FLSA and analogous state laws. The plaintiffs seek back wages, liquidated damages, pre- and post-judgment interest, attorneys’ fees and costs. Each case is proceeding in its jurisdiction.
|
•
|
After a trial in the Garcia case, which involved the Garden City, Kansas facility, a jury verdict in favor of the plaintiffs was entered on March 17, 2011. Exclusive of pre- and post-judgment interest, attorneys’ fees and costs, the jury found violations of federal and state laws for pre- and post-shift work activities and awarded damages in the amount of
$503,011
. Plaintiffs’ counsel filed an application for attorneys’ fees and expenses which we contested. On December 7, 2012, the court granted plaintiffs' application and awarded a total of
$3,609,723
. We filed an appeal with the Tenth Circuit Court of Appeals on December 27, 2012.
|
|
•
|
A jury trial was held in the Bouaphakeo case, which involved the Storm Lake, Iowa pork plant and resulted in a jury verdict in favor of the plaintiffs for violations of federal and state laws for pre- and post-shift work activities. The trial court also awarded the plaintiffs liquidated damages, resulting in total damages awarded in the amount of
$5,784,758
. We have appealed the jury's verdict and trial court's award. The plaintiffs' counsel has also filed an application for attorneys' fees and expenses in the amount of
$2,692,145
.
|
|
•
|
A jury trial was held in the Guyton case, which involved the Columbus Junction, Iowa pork plant, and resulted in a jury verdict in favor of Tyson on April 25, 2012. The plaintiffs filed a post-trial motion, which remains pending in the trial court.
|
|
•
|
The Maxwell case has been resolved by the parties, and the parties filed a joint motion for approval of the terms of settlement with the trial court on October 31, 2012, which the trial court has preliminarily approved.
|
|
•
|
A bench trial in the Acosta case began January 22, 2013.
|
|
•
|
The Gomez case is scheduled for trial on March 18, 2013. The trial court in the Edwards case, which involves the Perry and Waterloo, Iowa facilities, split the case into two trials. The trial involving the Perry facility is scheduled to begin October 7, 2013, and the trial involving the Waterloo facility is scheduled to begin December 9, 2013.
|
22
We have pending
one
wage and hour action involving our Tyson Prepared Foods plant located in Jefferson, Wisconsin (Weissman, et al. v. Tyson Prepared Foods, Inc., Jefferson County (Wisconsin) Circuit Court, October 20, 2010). The plaintiffs allege that employees should be paid for the time it takes to engage in pre- and post-shift activities such as changing into and out of protective and sanitary clothing and the associated time it takes to walk to and from their workstations post-donning and pre-doffing of protective and sanitary clothing.
Six
named plaintiffs seek to act as state law class representatives on behalf of all current and former employees who were allegedly not paid for time worked and seek back wages, liquidated damages, pre- and post-judgment interest, and attorneys’ fees and costs. On May 16, 2011, the plaintiffs filed a motion to certify a state law class of all hourly employees who have worked at the Jefferson plant from October 20, 2008, to the present. We have filed motions for summary judgment seeking dismissal of the claims, or, in the alternative, to limit the claims made for non-compensable clothes changing activities. The court granted summary judgment in favor of Tyson on August 31, 2012, and the plaintiffs filed a notice of appeal on October 5, 2012.
On June 19, 2005, the Attorney General and the Secretary of the Environment of the State of Oklahoma filed a complaint in the U.S. District Court for the Northern District of Oklahoma against us,
three
of our subsidiaries and
six
other poultry integrators. The complaint, which was subsequently amended, asserts a number of state and federal causes of action including, but not limited to, counts under Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), Resource Conservation and Recovery Act (RCRA), and state-law public nuisance theories. The amended complaint asserts that defendants and certain contract growers who are not named in the amended complaint polluted the surface waters, groundwater and associated drinking water supplies of the Illinois River Watershed (IRW) through the land application of poultry litter. Oklahoma asserts that this alleged pollution has also caused extensive injury to the environment (including soils and sediments) of the IRW and that the defendants have been unjustly enriched. Oklahoma’s claims cover the entire IRW, which encompasses more than
one million
acres of land and the natural resources (including lakes and waterways) contained therein. Oklahoma seeks wide-ranging relief, including injunctive relief, compensatory damages in excess of
$800 million
, an unspecified amount in punitive damages and attorneys’ fees. We and the other defendants have denied liability, asserted various defenses, and filed a third-party complaint that asserts claims against other persons and entities whose activities may have contributed to the pollution alleged in the amended complaint. The district court has stayed proceedings on the third party complaint pending resolution of Oklahoma’s claims against the defendants. On October 31, 2008, the defendants filed a motion to dismiss for failure to join the Cherokee Nation as a required party or, in the alternative, for judgment as a matter of law based on the plaintiffs’ lack of standing. This motion was granted in part and denied in part on July 22, 2009. In its ruling, the district court dismissed Oklahoma’s claims for cost recovery and for natural resources damages under CERCLA and for unjust enrichment under Oklahoma common law. This ruling also narrowed the scope of Oklahoma’s remaining claims by dismissing all damage claims under its causes of action for Oklahoma common law nuisance, federal common law nuisance, and Oklahoma common law trespass, leaving only its claims for injunctive relief for trial. On August 18, 2009, the Court granted partial summary judgment in favor of the defendants on Oklahoma’s claims for violations of the Oklahoma Registered Poultry Feeding Operations Act. Oklahoma later voluntarily dismissed the remainder of this claim. On September 2, 2009, the Cherokee Nation filed a motion to intervene in the lawsuit. Its motion to intervene was denied on September 15, 2009, and the Cherokee Nation filed a notice of appeal of that ruling in the Tenth Circuit Court of Appeals on September 17, 2009. A non-jury trial of the case began on September 24, 2009. At the close of Oklahoma’s case-in-chief, the Court granted the defendants’ motions to dismiss claims based on RCRA, nuisance per se, and health risks related to bacteria. The defense rested its case on January 13, 2010, and closing arguments were held on February 11, 2010. On September 21, 2010, the Court of Appeals affirmed the district court’s denial of the Cherokee Nation’s motion to intervene. On October 6, 2010, the Cherokee Nation and the State of Oklahoma filed a petition for rehearing or
en banc
review seeking reconsideration of this ruling. The Court of Appeals denied this petition. The district court has not yet rendered its decision from the trial, which ended in February 2010.
On May 8, 2008, a lawsuit was filed against the Company and
two
of our employees in the District Court of McCurtain County, Oklahoma styled Armstrong, et al. v. Tyson Foods, Inc., et al. (the Armstrong Case). The lawsuit was brought by a group of
52
poultry growers who allege that certain of our live production practices in Oklahoma constitute fraudulent inducement, fraud, unjust enrichment, negligence, gross negligence, unconscionability, violations of the Oklahoma Business Sales Act, Deceptive Trade Practice violations, violations of the Consumer Protection Act, and conversion, as well as other theories of recovery. The plaintiffs sought damages in an unspecified amount. On October 30, 2009,
20
additional growers represented by the same attorney filed a lawsuit against us in the same court asserting the same or similar claims, which is styled Clardy, et al. v. Tyson Foods, Inc., et al. (the Clardy Case). In both of these cases we have denied all allegations of wrongdoing. In June 2009, the plaintiffs in the Armstrong case requested an expedited trial date for a smaller group of plaintiffs they claimed were facing imminent financial peril. The Court ultimately severed a group of
10
plaintiffs from the Armstrong Case, and a trial began on March 15, 2010. On April 1, 2010, the jury returned a verdict against us and one of our employees, and on April 2, 2010, the Court entered a judgment in the amount of
$8,655,735
, which included punitive damages. Subsequent to the trial, the presiding judge disqualified from the cases and the Oklahoma Supreme Court appointed a new judge to the cases. Following this appointment, the trial court granted our motions for change of venue and to stay all future trials of plaintiffs in the Armstrong Case and the Clardy Case pending the outcome of our appeal of the initial Armstrong Case verdict. The trial court took under advisement the sizes of groupings of plaintiffs in future trials in response to our motion to sever the plaintiffs' claims into individual cases. We appealed the initial Armstrong Case verdict to the Oklahoma Supreme Court based on numerous irregularities and rulings during the trial, and the Oklahoma Supreme Court reversed the verdict and remanded the case back to the trial court. At this time, new trial dates in the Armstrong Case have not been scheduled, nor have trial dates for the Clardy Case.
23
In late 2010, the United States Environmental Protection Agency (EPA) Region 7 began a Clean Air Act investigation of the Company related to operation and maintenance of ammonia refrigeration equipment at multiple facilities. The EPA subsequently referred the matter, which involves allegations of potential non-compliance with the Clean Air Act’s Risk Management Plan requirements at
25
Tyson facilities in Kansas, Missouri, Iowa and Nebraska, to the United States Department of Justice (DOJ). The EPA and DOJ have indicated they will seek monetary penalties and injunctive relief requiring equipment and infrastructure changes at several facilities. Currently we are engaged in settlement discussions with the EPA and DOJ.
TFM Parent, our wholly-owned subsidiary, has fully and unconditionally guaranteed the 2016 Notes. Additionally, TFM Parent has fully and unconditionally guaranteed the 2022 Notes until such date TFM Parent has been released of its guarantee of both (i) Tyson's
$1.0 billion
revolving credit facility and (ii) the 2016 Notes, at which time TFM Parent's guarantee of the 2022 Notes is permanently released. The following financial information presents condensed consolidating financial statements, which include Tyson Foods, Inc. (TFI Parent); TFM Parent; the Non-Guarantors Subsidiaries (Non-Guarantors) on a combined basis; the elimination entries necessary to consolidate TFI Parent, TFM Parent 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. This presentation has been revised from the financial presentation disclosed in periods prior to September 29, 2012, to reflect changes in the subsidiary guarantees associated with the permanent release of certain subsidiary guarantors upon the retirement of the 10.50% Senior Notes due 2014.
|
Condensed Consolidating Statement of Income and Comprehensive Income for the three months ended December 29, 2012
|
in millions
|
|
|||||||||||||||||
|
TFI
Parent |
TFM
Parent |
Non-
Guarantors |
Eliminations
|
Total
|
|||||||||||||||
|
Sales
|
$
|
75
|
|
$
|
4,750
|
|
$
|
3,904
|
|
$
|
(327
|
)
|
$
|
8,402
|
|
||||
|
Cost of Sales
|
16
|
|
4,538
|
|
3,638
|
|
(327
|
)
|
7,865
|
|
|||||||||
|
Gross Profit
|
59
|
|
212
|
|
266
|
|
—
|
|
537
|
|
|||||||||
|
Selling, General and Administrative
|
20
|
|
52
|
|
165
|
|
—
|
|
237
|
|
|||||||||
|
Operating Income
|
39
|
|
160
|
|
101
|
|
—
|
|
300
|
|
|||||||||
|
Other (Income) Expense:
|
|||||||||||||||||||
|
Interest expense, net
|
8
|
|
16
|
|
12
|
|
—
|
|
36
|
|
|||||||||
|
Other, net
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Equity in net earnings of subsidiaries
|
(149
|
)
|
(24
|
)
|
—
|
|
173
|
|
—
|
|
|||||||||
|
Total Other (Income) Expense
|
(141
|
)
|
(8
|
)
|
12
|
|
173
|
|
36
|
|
|||||||||
|
Income (Loss) before Income Taxes
|
180
|
|
168
|
|
89
|
|
(173
|
)
|
264
|
|
|||||||||
|
Income Tax Expense
|
7
|
|
51
|
|
38
|
|
—
|
|
96
|
|
|||||||||
|
Net Income (Loss)
|
173
|
|
117
|
|
51
|
|
(173
|
)
|
168
|
|
|||||||||
|
Less: Net Loss Attributable to Noncontrolling Interest
|
—
|
|
—
|
|
(5
|
)
|
—
|
|
(5
|
)
|
|||||||||
|
Net Income (Loss) Attributable to Tyson
|
173
|
|
117
|
|
56
|
|
(173
|
)
|
173
|
|
|||||||||
|
Comprehensive Income
|
157
|
|
121
|
|
50
|
|
(171
|
)
|
157
|
|
|||||||||
|
Less: Comprehensive Loss Attributable to Noncontrolling Interest
|
—
|
|
—
|
|
(5
|
)
|
—
|
|
(5
|
)
|
|||||||||
|
Comprehensive Income Attributable to Tyson
|
$
|
157
|
|
$
|
121
|
|
$
|
55
|
|
$
|
(171
|
)
|
$
|
162
|
|
||||
24
|
Condensed Consolidating Statement of Income and Comprehensive Income for the three months ended December 31, 2011
|
in millions
|
|
|||||||||||||||||
|
TFI
Parent |
TFM
Parent |
Non-
Guarantors |
Eliminations
|
Total
|
|||||||||||||||
|
Sales
|
$
|
52
|
|
$
|
4,841
|
|
$
|
3,761
|
|
$
|
(325
|
)
|
$
|
8,329
|
|
||||
|
Cost of Sales
|
8
|
|
4,642
|
|
3,511
|
|
(325
|
)
|
7,836
|
|
|||||||||
|
Gross Profit
|
44
|
|
199
|
|
250
|
|
—
|
|
493
|
|
|||||||||
|
Selling, General and Administrative
|
12
|
|
50
|
|
153
|
|
—
|
|
215
|
|
|||||||||
|
Operating Income
|
32
|
|
149
|
|
97
|
|
—
|
|
278
|
|
|||||||||
|
Other (Income) Expense:
|
|||||||||||||||||||
|
Interest expense, net
|
(13
|
)
|
32
|
|
28
|
|
—
|
|
47
|
|
|||||||||
|
Other, net
|
1
|
|
—
|
|
(13
|
)
|
—
|
|
(12
|
)
|
|||||||||
|
Equity in net earnings of subsidiaries
|
(127
|
)
|
(26
|
)
|
—
|
|
153
|
|
—
|
|
|||||||||
|
Total Other (Income) Expense
|
(139
|
)
|
6
|
|
15
|
|
153
|
|
35
|
|
|||||||||
|
Income (Loss) before Income Taxes
|
171
|
|
143
|
|
82
|
|
(153
|
)
|
243
|
|
|||||||||
|
Income Tax (Benefit) Expense
|
15
|
|
40
|
|
32
|
|
—
|
|
87
|
|
|||||||||
|
Net Income (Loss)
|
156
|
|
103
|
|
50
|
|
(153
|
)
|
156
|
|
|||||||||
|
Less: Net Loss Attributable to Noncontrolling Interest
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Net Income (Loss) Attributable to Tyson
|
156
|
|
103
|
|
50
|
|
(153
|
)
|
156
|
|
|||||||||
|
Comprehensive Income
|
160
|
|
100
|
|
51
|
|
(151
|
)
|
160
|
|
|||||||||
|
Less: Comprehensive Loss Attributable to Noncontrolling Interest
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Comprehensive Income Attributable to Tyson
|
$
|
160
|
|
$
|
100
|
|
$
|
51
|
|
$
|
(151
|
)
|
$
|
160
|
|
||||
25
|
Condensed Consolidating Balance Sheet as of December 29, 2012
|
in millions
|
|
|||||||||||||||||
|
TFI
Parent |
TFM
Parent |
Non-
Guarantors |
Eliminations
|
Total
|
|||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Current Assets:
|
|||||||||||||||||||
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
20
|
|
$
|
931
|
|
$
|
—
|
|
$
|
951
|
|
||||
|
Accounts receivable, net
|
1
|
|
514
|
|
850
|
|
—
|
|
1,365
|
|
|||||||||
|
Inventories
|
1
|
|
1,005
|
|
1,926
|
|
—
|
|
2,932
|
|
|||||||||
|
Other current assets
|
115
|
|
63
|
|
128
|
|
(167
|
)
|
139
|
|
|||||||||
|
Total Current Assets
|
117
|
|
1,602
|
|
3,835
|
|
(167
|
)
|
5,387
|
|
|||||||||
|
Net Property, Plant and Equipment
|
32
|
|
871
|
|
3,140
|
|
—
|
|
4,043
|
|
|||||||||
|
Goodwill
|
—
|
|
881
|
|
1,010
|
|
—
|
|
1,891
|
|
|||||||||
|
Intangible Assets
|
—
|
|
25
|
|
101
|
|
—
|
|
126
|
|
|||||||||
|
Other Assets
|
1,233
|
|
147
|
|
231
|
|
(1,184
|
)
|
427
|
|
|||||||||
|
Investment in Subsidiaries
|
11,525
|
|
2,075
|
|
—
|
|
(13,600
|
)
|
—
|
|
|||||||||
|
Total Assets
|
$
|
12,907
|
|
$
|
5,601
|
|
$
|
8,317
|
|
$
|
(14,951
|
)
|
$
|
11,874
|
|
||||
|
Liabilities and Shareholders’ Equity
|
|||||||||||||||||||
|
Current Liabilities:
|
|||||||||||||||||||
|
Current debt
|
$
|
446
|
|
$
|
—
|
|
$
|
145
|
|
$
|
(72
|
)
|
$
|
519
|
|
||||
|
Accounts payable
|
28
|
|
697
|
|
710
|
|
—
|
|
1,435
|
|
|||||||||
|
Other current liabilities
|
4,460
|
|
166
|
|
755
|
|
(4,489
|
)
|
892
|
|
|||||||||
|
Total Current Liabilities
|
4,934
|
|
863
|
|
1,610
|
|
(4,561
|
)
|
2,846
|
|
|||||||||
|
Long-Term Debt
|
1,769
|
|
809
|
|
458
|
|
(1,129
|
)
|
1,907
|
|
|||||||||
|
Deferred Income Taxes
|
—
|
|
130
|
|
420
|
|
(14
|
)
|
536
|
|
|||||||||
|
Other Liabilities
|
170
|
|
133
|
|
265
|
|
(41
|
)
|
527
|
|
|||||||||
|
Total Tyson Shareholders’ Equity
|
6,034
|
|
3,666
|
|
5,540
|
|
(9,206
|
)
|
6,034
|
|
|||||||||
|
Noncontrolling Interest
|
—
|
|
—
|
|
24
|
|
—
|
|
24
|
|
|||||||||
|
Total Shareholders’ Equity
|
6,034
|
|
3,666
|
|
5,564
|
|
(9,206
|
)
|
6,058
|
|
|||||||||
|
Total Liabilities and Shareholders’ Equity
|
$
|
12,907
|
|
$
|
5,601
|
|
$
|
8,317
|
|
$
|
(14,951
|
)
|
$
|
11,874
|
|
||||
26
|
Condensed Consolidating Balance Sheet as of September 29, 2012
|
in millions
|
|
|||||||||||||||||
|
TFI
Parent |
TFM
Parent |
Non-
Guarantors |
Eliminations
|
Total
|
|||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Current Assets:
|
|||||||||||||||||||
|
Cash and cash equivalents
|
$
|
1
|
|
$
|
9
|
|
$
|
1,061
|
|
$
|
—
|
|
$
|
1,071
|
|
||||
|
Accounts receivable, net
|
1
|
|
499
|
|
878
|
|
—
|
|
1,378
|
|
|||||||||
|
Inventories
|
—
|
|
950
|
|
1,859
|
|
—
|
|
2,809
|
|
|||||||||
|
Other current assets
|
139
|
|
100
|
|
90
|
|
(184
|
)
|
145
|
|
|||||||||
|
Total Current Assets
|
141
|
|
1,558
|
|
3,888
|
|
(184
|
)
|
5,403
|
|
|||||||||
|
Net Property, Plant and Equipment
|
31
|
|
873
|
|
3,118
|
|
—
|
|
4,022
|
|
|||||||||
|
Goodwill
|
—
|
|
881
|
|
1,010
|
|
—
|
|
1,891
|
|
|||||||||
|
Intangible Assets
|
—
|
|
26
|
|
103
|
|
—
|
|
129
|
|
|||||||||
|
Other Assets
|
1,257
|
|
151
|
|
251
|
|
(1,208
|
)
|
451
|
|
|||||||||
|
Investment in Subsidiaries
|
11,849
|
|
2,005
|
|
—
|
|
(13,854
|
)
|
—
|
|
|||||||||
|
Total Assets
|
$
|
13,278
|
|
$
|
5,494
|
|
$
|
8,370
|
|
$
|
(15,246
|
)
|
$
|
11,896
|
|
||||
|
Liabilities and Shareholders’ Equity
|
|||||||||||||||||||
|
Current Liabilities:
|
|||||||||||||||||||
|
Current debt
|
$
|
439
|
|
$
|
—
|
|
$
|
167
|
|
$
|
(91
|
)
|
$
|
515
|
|
||||
|
Accounts payable
|
10
|
|
558
|
|
804
|
|
—
|
|
1,372
|
|
|||||||||
|
Other current liabilities
|
4,887
|
|
144
|
|
766
|
|
(4,854
|
)
|
943
|
|
|||||||||
|
Total Current Liabilities
|
5,336
|
|
702
|
|
1,737
|
|
(4,945
|
)
|
2,830
|
|
|||||||||
|
Long-Term Debt
|
1,774
|
|
809
|
|
486
|
|
(1,152
|
)
|
1,917
|
|
|||||||||
|
Deferred Income Taxes
|
—
|
|
135
|
|
432
|
|
(9
|
)
|
558
|
|
|||||||||
|
Other Liabilities
|
156
|
|
146
|
|
294
|
|
(47
|
)
|
549
|
|
|||||||||
|
Total Tyson Shareholders’ Equity
|
6,012
|
|
3,702
|
|
5,391
|
|
(9,093
|
)
|
6,012
|
|
|||||||||
|
Noncontrolling Interest
|
—
|
|
—
|
|
30
|
|
—
|
|
30
|
|
|||||||||
|
Total Shareholders’ Equity
|
6,012
|
|
3,702
|
|
5,421
|
|
(9,093
|
)
|
6,042
|
|
|||||||||
|
Total Liabilities and Shareholders’ Equity
|
$
|
13,278
|
|
$
|
5,494
|
|
$
|
8,370
|
|
$
|
(15,246
|
)
|
$
|
11,896
|
|
||||
27
|
Condensed Consolidating Statement of Cash Flows for the three months ended December 29, 2012
|
in millions
|
|
|||||||||||||||||
|
TFI
Parent |
TFM
Parent |
Non-
Guarantors |
Eliminations
|
Total
|
|||||||||||||||
|
Cash Provided by (Used for) Operating Activities
|
$
|
21
|
|
$
|
234
|
|
$
|
(65
|
)
|
$
|
—
|
|
$
|
190
|
|
||||
|
Cash Flows from Investing Activities:
|
|||||||||||||||||||
|
Additions to property, plant and equipment
|
(2
|
)
|
(24
|
)
|
(131
|
)
|
—
|
|
(157
|
)
|
|||||||||
|
Proceeds from marketable securities, net
|
—
|
|
—
|
|
1
|
|
—
|
|
1
|
|
|||||||||
|
Other, net
|
—
|
|
—
|
|
4
|
|
—
|
|
4
|
|
|||||||||
|
Cash Provided by (Used for) Investing Activities
|
(2
|
)
|
(24
|
)
|
(126
|
)
|
—
|
|
(152
|
)
|
|||||||||
|
Cash Flows from Financing Activities:
|
|||||||||||||||||||
|
Net change in debt
|
—
|
|
—
|
|
(11
|
)
|
—
|
|
(11
|
)
|
|||||||||
|
Purchases of Tyson Class A common stock
|
(115
|
)
|
—
|
|
—
|
|
—
|
|
(115
|
)
|
|||||||||
|
Dividends
|
(53
|
)
|
—
|
|
—
|
|
—
|
|
(53
|
)
|
|||||||||
|
Other, net
|
22
|
|
—
|
|
(1
|
)
|
—
|
|
21
|
|
|||||||||
|
Net change in intercompany balances
|
126
|
|
(199
|
)
|
73
|
|
—
|
|
—
|
|
|||||||||
|
Cash Provided by (Used for) Financing Activities
|
(20
|
)
|
(199
|
)
|
61
|
|
—
|
|
(158
|
)
|
|||||||||
|
Effect of Exchange Rate Change on Cash
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Increase (Decrease) in Cash and Cash Equivalents
|
(1
|
)
|
11
|
|
(130
|
)
|
—
|
|
(120
|
)
|
|||||||||
|
Cash and Cash Equivalents at Beginning of Year
|
1
|
|
9
|
|
1,061
|
|
—
|
|
1,071
|
|
|||||||||
|
Cash and Cash Equivalents at End of Period
|
$
|
—
|
|
$
|
20
|
|
$
|
931
|
|
$
|
—
|
|
$
|
951
|
|
||||
|
Condensed Consolidating Statement of Cash Flows for the three months ended December 31, 2011
|
in millions
|
|
|||||||||||||||||
|
TFI
Parent |
TFM
Parent |
Non-
Guarantors |
Eliminations
|
Total
|
|||||||||||||||
|
Cash Provided by (Used for) Operating Activities
|
$
|
59
|
|
$
|
332
|
|
$
|
(53
|
)
|
$
|
—
|
|
$
|
338
|
|
||||
|
Cash Flows from Investing Activities:
|
|||||||||||||||||||
|
Additions to property, plant and equipment
|
—
|
|
(25
|
)
|
(157
|
)
|
—
|
|
(182
|
)
|
|||||||||
|
Proceeds from marketable securities, net
|
—
|
|
2
|
|
1
|
|
—
|
|
3
|
|
|||||||||
|
Other, net
|
2
|
|
2
|
|
(1
|
)
|
—
|
|
3
|
|
|||||||||
|
Cash Provided by (Used for) Investing Activities
|
2
|
|
(21
|
)
|
(157
|
)
|
—
|
|
(176
|
)
|
|||||||||
|
Cash Flows from Financing Activities:
|
|||||||||||||||||||
|
Net change in debt
|
(1
|
)
|
—
|
|
21
|
|
—
|
|
20
|
|
|||||||||
|
Purchases of Tyson Class A common stock
|
(50
|
)
|
—
|
|
—
|
|
—
|
|
(50
|
)
|
|||||||||
|
Dividends
|
(15
|
)
|
—
|
|
—
|
|
—
|
|
(15
|
)
|
|||||||||
|
Other, net
|
22
|
|
—
|
|
—
|
|
—
|
|
22
|
|
|||||||||
|
Net change in intercompany balances
|
(18
|
)
|
(310
|
)
|
328
|
|
—
|
|
—
|
|
|||||||||
|
Cash Provided by (Used for) Financing Activities
|
(62
|
)
|
(310
|
)
|
349
|
|
—
|
|
(23
|
)
|
|||||||||
|
Effect of Exchange Rate Change on Cash
|
—
|
|
—
|
|
2
|
|
—
|
|
2
|
|
|||||||||
|
Increase (Decrease) in Cash and Cash Equivalents
|
(1
|
)
|
1
|
|
141
|
|
—
|
|
141
|
|
|||||||||
|
Cash and Cash Equivalents at Beginning of Year
|
1
|
|
1
|
|
714
|
|
—
|
|
716
|
|
|||||||||
|
Cash and Cash Equivalents at End of Period
|
$
|
—
|
|
$
|
2
|
|
$
|
855
|
|
$
|
—
|
|
$
|
857
|
|
||||
28
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
RESULTS OF OPERATIONS
Description of the Company
We are one of the world’s largest meat protein companies 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 feed; and operating efficiencies of our facilities.
Overview
|
•
|
General – As a result of continued focus on internal performance and balancing our supply with customer demand, operating results remained strong in the first quarter of fiscal 2013, despite increased input costs and challenging market conditions across most of our operating segments.
|
|
•
|
We continued to execute our strategy of accelerating growth in international poultry and domestic value-added products, innovating products, processes and analytics and cultivating our team members.
|
|
•
|
We also maintained focus on maximizing our margins through margin management and operational efficiency improvements. Margin management improvements occurred in the areas of mix, export sales, price optimization and value-added products initiatives. The operational efficiencies occurred in areas of yields, chicken live performance, cost reduction and labor management.
|
|
•
|
Market environment – Our Chicken segment experienced increased feed costs but was able to offset the impact with operational, mix and price improvements. Despite reduced domestic demand for beef products and increased costs for fed cattle, our Beef segment remained profitable, primarily as a result of balancing our supply with customer demand. Pork segment results remained strong due to greater availability of live hogs which drove down livestock costs. Our Prepared Foods segment was challenged by product mix and additional costs incurred as we invested in our lunchmeat business.
|
|
•
|
Our total operating margins were
3.6%
in the
first
quarter of fiscal
2013
. The following is a summary of operating margins by segment:
|
|
•
|
Chicken –
3.6%
|
|
•
|
Beef –
1.3%
|
|
•
|
Pork –
9.2%
|
|
•
|
Prepared Foods –
3.9%
|
|
•
|
Debt and Liquidity – During the
first
quarter of fiscal 2013, we generated
$190 million
of operating cash flows. Additionally, we repurchased, as part of our share repurchase program,
5.1 million
shares of our stock for
$100 million
. At
December 29, 2012
, we had approximately
$1.9 billion
of liquidity, which includes availability under our credit facility and
$951 million
of cash and cash equivalents.
|
|
in millions, except per share data
|
Three Months Ended
|
|||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
Net income attributable to Tyson
|
$
|
173
|
|
$
|
156
|
|
||
|
Net income attributable to Tyson – per diluted share
|
0.48
|
|
0.42
|
|
||||
29
Summary of Results
Sales
|
in millions
|
Three Months Ended
|
|||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
Sales
|
$
|
8,402
|
|
$
|
8,329
|
|
||
|
Change in sales volume
|
(3.3
|
)%
|
||||||
|
Change in average sales price
|
4.7
|
%
|
||||||
|
Sales growth
|
0.9
|
%
|
||||||
First
quarter – Fiscal
2013
vs Fiscal
2012
|
•
|
Average Sales Price
– Sales were positively impacted by higher average sales prices, which accounted for an increase of $465 million. The Chicken and Beef segments experienced increased average sales prices, largely due to continued tight domestic availability of protein and increased live and raw material costs, partially offset by decreases in average sales prices in the Pork and Prepared Foods segments which were driven by lower live and raw material costs.
|
|
•
|
Sales Volume
– Sales were negatively impacted by lower sales volume, which accounted for a decrease of $392 million. All segments, with the exception of the Prepared Foods segment, had a decrease in sales volume, with the majority of the decrease in the Beef segment.
|
Cost of Sales
|
in millions
|
Three Months Ended
|
|||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
Cost of sales
|
$
|
7,865
|
|
$
|
7,836
|
|
||
|
Gross margin
|
$
|
537
|
|
$
|
493
|
|
||
|
Cost of sales as a percentage of sales
|
93.6
|
%
|
94.1
|
%
|
||||
First
quarter – Fiscal
2013
vs Fiscal
2012
|
•
|
Cost of sales increased $29 million. Higher input cost per pound increased cost of sales $299 million, while lower sales volume decreased cost of sales $270 million.
|
|
•
|
The $299 million impact of higher input cost per pound was primarily driven by:
|
|
•
|
Increase in live cattle costs of $153 million, partially offset by a decrease in live hog costs of $62 million.
|
|
•
|
Increase in feed costs of $170 million in our Chicken segment.
|
|
•
|
The $270 million impact of lower sales volume was driven by decreases in sales volume in our Chicken, Beef and Pork segments, partially offset by an increase in sales volume in our Prepared Foods segment.
|
Selling, General and Administrative
|
in millions
|
Three Months Ended
|
|||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
Selling, general and administrative expense
|
$
|
237
|
|
$
|
215
|
|
||
|
As a percentage of sales
|
2.8
|
%
|
2.6
|
%
|
||||
First
quarter – Fiscal
2013
vs Fiscal
2012
|
•
|
Increase of $11 million related to employee costs including payroll and stock-based and incentive-based compensation.
|
|
•
|
Increase of $6 million related to reduced investment returns on deferred compensation plans.
|
|
•
|
Increase of $5 million primarily related to advertising, professional fees and sales promotions.
|
30
Interest Expense
|
in millions
|
Three Months Ended
|
|||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
Cash interest expense
|
$
|
30
|
|
$
|
40
|
|
||
|
Non-cash interest expense
|
7
|
|
9
|
|
||||
|
Total Interest Expense
|
$
|
37
|
|
$
|
49
|
|
||
First
quarter – Fiscal
2013
vs Fiscal
2012
|
•
|
Cash interest expense includes interest expense related to the coupon rates for senior notes and commitment/letter of credit fees incurred on our revolving credit facilities. The decrease is due to lower average coupon rates compared to fiscal 2012.
|
|
•
|
Non-cash interest expense primarily includes interest related to the amortization of debt issuance costs and discounts/premiums on note issuances.
|
Other (Income) Expense, net
|
in millions
|
Three Months Ended
|
|||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
$
|
—
|
|
$
|
(12
|
)
|
|||
First
quarter of fiscal
2013
|
•
|
Includes $3 million of equity earnings in joint ventures offset by $3 million in net foreign currency exchange losses.
|
First
quarter of fiscal
2012
|
•
|
Includes $6 million of equity earnings in joint ventures and $5 million in net foreign currency exchange gains.
|
Effective Tax Rate
|
Three Months Ended
|
|||||
|
December 29, 2012
|
December 31, 2011
|
||||
|
36.3
|
%
|
35.8
|
%
|
||
First
quarter of fiscal
2013
– The effective tax rate was impacted by:
|
•
|
state income taxes;
|
|
•
|
the domestic production deduction; and
|
|
•
|
losses in foreign jurisdictions and related valuation allowances.
|
First
quarter of fiscal
2012
– The effective tax rate was impacted by:
|
•
|
the domestic production deduction; and
|
|
•
|
state income taxes.
|
31
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.
|
in millions
|
Sales
|
|||||||
|
Three Months Ended
|
||||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
Chicken
|
$
|
2,956
|
|
$
|
2,762
|
|
||
|
Beef
|
3,485
|
|
3,467
|
|
||||
|
Pork
|
1,363
|
|
1,475
|
|
||||
|
Prepared Foods
|
841
|
|
861
|
|
||||
|
Other
|
20
|
|
54
|
|
||||
|
Intersegment Sales
|
(263
|
)
|
(290
|
)
|
||||
|
Total
|
$
|
8,402
|
|
$
|
8,329
|
|
||
|
in millions
|
Operating Income (Loss)
|
|||||||
|
Three Months Ended
|
||||||||
|
December 29, 2012
|
December 31, 2011
|
|||||||
|
Chicken
|
$
|
107
|
|
$
|
32
|
|
||
|
Beef
|
46
|
|
31
|
|
||||
|
Pork
|
125
|
|
165
|
|
||||
|
Prepared Foods
|
33
|
|
51
|
|
||||
|
Other
|
(11
|
)
|
(1
|
)
|
||||
|
Total
|
$
|
300
|
|
$
|
278
|
|
||
Chicken Segment Results
|
in millions
|
Three Months Ended
|
|||||||||||
|
December 29, 2012
|
December 31, 2011
|
Change
|
||||||||||
|
Sales
|
$
|
2,956
|
|
$
|
2,762
|
|
$
|
194
|
|
|||
|
Sales Volume Change
|
(1.1
|
)%
|
||||||||||
|
Average Sales Price Change
|
8.2
|
%
|
||||||||||
|
Operating Income
|
$
|
107
|
|
$
|
32
|
|
$
|
75
|
|
|||
|
Operating Margin
|
3.6
|
%
|
1.2
|
%
|
||||||||
First
quarter – Fiscal
2013
vs Fiscal
2012
|
•
|
Sales and Operating Income –
|
|
•
|
Sales Volume – Despite increased domestic and international production, total sales volumes decreased in the first quarter of fiscal 2013 due to reduced open-market meat purchases, planned inventory build to meet forecasted customer demand and mix of rendered product sales.
|
|
•
|
Average Sales Price – The increase in average sales price is primarily due to mix changes and price increases associated with increased input costs. Since many of our sales contracts are formula based or shorter-term in nature, we were able to offset rising input costs through improved pricing and mix.
|
|
•
|
Operating Income – Operating income was positively impacted by increases in average sales price, improved live performance and operational improvements. These increases were partially offset by increased feed costs of $170 million.
|
32
Beef Segment Results
|
in millions
|
Three Months Ended
|
|||||||||||
|
December 29, 2012
|
December 31, 2011
|
Change
|
||||||||||
|
Sales
|
$
|
3,485
|
|
$
|
3,467
|
|
$
|
18
|
|
|||
|
Sales Volume Change
|
(10.0
|
)%
|
||||||||||
|
Average Sales Price Change
|
11.7
|
%
|
||||||||||
|
Operating Income
|
$
|
46
|
|
$
|
31
|
|
$
|
15
|
|
|||
|
Operating Margin
|
1.3
|
%
|
0.9
|
%
|
||||||||
First
quarter – Fiscal
2013
vs Fiscal
2012
|
•
|
Sales and Operating Income –
|
|
•
|
Fed cattle supplies decreased which drove up average sales price and livestock cost. Sales volumes decreased due to a reduction in live cattle processed as a result of soft domestic demand for beef products and outside tallow purchases. Operating income increased in the first quarter of fiscal 2013 as the result of balancing our supply with customer demand partially offset by increased operating costs from reduced production.
|
Pork Segment Results
|
in millions
|
Three Months Ended
|
|||||||||||
|
December 29, 2012
|
December 31, 2011
|
Change
|
||||||||||
|
Sales
|
$
|
1,363
|
|
$
|
1,475
|
|
$
|
(112
|
)
|
|||
|
Sales Volume Change
|
(2.2
|
)%
|
||||||||||
|
Average Sales Price Change
|
(5.5
|
)%
|
||||||||||
|
Operating Income
|
$
|
125
|
|
$
|
165
|
|
$
|
(40
|
)
|
|||
|
Operating Margin
|
9.2
|
%
|
11.2
|
%
|
||||||||
First
quarter – Fiscal
2013
vs Fiscal
2012
|
•
|
Sales and Operating Income –
|
|
•
|
Live hog supplies increased which drove down average sales price and livestock cost. Sales volumes decreased as a result of balancing our supply with customer demand. While reduced compared to prior year, operating income remained strong in the first quarter of fiscal 2013 despite brief periods of imbalance in industry supply and customer demand.
|
Prepared Foods Segment Results
|
in millions
|
Three Months Ended
|
|||||||||||
|
December 29, 2012
|
December 31, 2011
|
Change
|
||||||||||
|
Sales
|
$
|
841
|
|
$
|
861
|
|
$
|
(20
|
)
|
|||
|
Sales Volume Change
|
1.8
|
%
|
||||||||||
|
Average Sales Price Change
|
(4.1
|
)%
|
||||||||||
|
Operating Income
|
$
|
33
|
|
$
|
51
|
|
$
|
(18
|
)
|
|||
|
Operating Margin
|
3.9
|
%
|
5.9
|
%
|
||||||||
First
quarter – Fiscal
2013
vs Fiscal
2012
|
•
|
Sales and Operating Income –
|
|
•
|
Operating income decreased in the first quarter of fiscal 2013, despite increased volumes, as the result of lower average sales prices caused by lower raw material costs as well as product mix and additional costs incurred as we invested in our lunchmeat business.
|
33
Outlook
Our continued capital investment in our businesses, strong liquidity and reduced interest expense will help us to maintain strong operating results despite challenging market conditions. In fiscal 2013, we expect overall domestic protein production (chicken, beef, pork and turkey) to decrease approximately 1% from fiscal 2012 levels. The recent drought conditions have reduced expected grain supplies, which will result in higher input costs as well as increased costs for cattle and hog producers. The following is a summary of the fiscal 2013 outlook for each of our segments, as well as an outlook on sales, capital expenditures, net interest expense, debt and liquidity and share repurchases:
|
•
|
Chicken
– Current USDA data shows U.S. chicken production to be relatively flat in fiscal 2013 compared to fiscal 2012. Based on current futures prices, we expect higher feed costs in fiscal 2013 compared to fiscal 2012 of approximately $600 million. The capital investment and significant operational improvements we have made in our Chicken segment have better positioned us to adjust to rising feed costs and remain profitable. Additionally, many of our sales contracts are formula based or shorter-term in nature, which allows us to offset rising input costs through pricing. However, there may be a lag time for price increases to take effect. We anticipate our Chicken segment will return to normalized ranges in the second-half of fiscal 2013.
|
|
•
|
Beef
– We expect to see a reduction of industry fed cattle supplies of 2-3% in fiscal 2013 as compared to fiscal 2012, with the reduction predominately in the second half of fiscal 2013. Although we generally expect adequate supplies in regions we operate our plants, there may be periods of imbalance of fed cattle supply and demand. We anticipate beef exports will remain strong in fiscal 2013. For fiscal 2013, we believe our Beef segment will remain profitable, but could be below our normalized range of 2.5%-4.5%.
|
|
•
|
Pork
– We expect industry hog supplies to be flat compared to fiscal 2012 and pork exports to remain strong in fiscal 2013 but less than fiscal 2012. For fiscal 2013, we believe our Pork segment should remain at or above our normalized range of 6.0%-8.0%.
|
|
•
|
Prepared Foods
– We expect operational improvements and increased pricing to offset increased raw material costs. Because many of our sales contracts are formula based or shorter-term in nature, we are typically able to offset rising input costs through increased pricing. For fiscal 2013, we believe our Prepared Foods segment should be in its normalized range of 4.0%-6.0%.
|
|
•
|
Sales
– We expect fiscal 2013 sales to approximate $35 billion mostly resulting from price increases related to expected decreases in domestic availability of protein and increased raw material costs.
|
|
•
|
Capital Expenditures
– We expect fiscal 2013 capital expenditures will approximate $550 million.
|
|
•
|
Net Interest Expense
– We expect fiscal 2013 net interest expense will approximate $140 million.
|
|
•
|
Debt and Liquidity
– We do not have any significant scheduled maturities of debt due until October 2013 and may use our available cash to repurchase notes when available at attractive rates. Total liquidity at
December 29, 2012
, was
$1.9 billion
, well above our goal to maintain liquidity in excess of $1.2 billion.
|
|
•
|
Share Repurchases
– We expect to continue repurchasing shares under our share repurchase program. As of
December 29, 2012
,
30.1 million
shares remain authorized for repurchases. The timing and extent to which we repurchase shares will depend upon, among other things, our working capital needs, market conditions, liquidity targets, our debt obligations and regulatory requirements.
|
34
LIQUIDITY AND CAPITAL RESOURCES
Our cash needs for working capital, capital expenditures, growth opportunities, the repurchases of senior notes and share repurchases 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 existing debt 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
|
Three Months Ended
|
||||||
|
December 29, 2012
|
December 31, 2011
|
||||||
|
Net income
|
$
|
168
|
|
$
|
156
|
|
|
|
Non-cash items in net income:
|
|||||||
|
Depreciation and amortization
|
130
|
|
122
|
|
|||
|
Deferred income taxes
|
(9
|
)
|
24
|
|
|||
|
Other, net
|
23
|
|
27
|
|
|||
|
Changes in working capital
|
(122
|
)
|
9
|
|
|||
|
Net cash provided by operating activities
|
$
|
190
|
|
$
|
338
|
|
|
|
•
|
Cash flows associated with changes in working capital for the
three
months ended:
|
|
•
|
December 29, 2012
– Decreased primarily due to a higher inventory balance and decreases in accrued salaries, wages and benefits, partially offset by increases in accounts payable and income taxes payable balances. The increase in inventory balance is largely due to increased raw material costs and planned build to meet forecasted customer demand.
|
|
•
|
December 31, 2011
– Increased primarily due to a decrease in accounts receivable balance and increases in accounts payable and income taxes payable balances, almost entirely offset by an increase in inventory balance and decreases in accrued salaries, wages and benefits balances.
|
Cash Flows from Investing Activities
|
in millions
|
Three Months Ended
|
||||||
|
December 29, 2012
|
December 31, 2011
|
||||||
|
Additions to property, plant and equipment
|
$
|
(157
|
)
|
$
|
(182
|
)
|
|
|
(Purchases of)/Proceeds from marketable securities, net
|
1
|
|
3
|
|
|||
|
Other, net
|
4
|
|
3
|
|
|||
|
Net cash used for investing activities
|
$
|
(152
|
)
|
$
|
(176
|
)
|
|
|
•
|
Additions to property, plant and equipment include acquiring new equipment, upgrading our facilities to maintain competitive standing and positioning us for future opportunities.
|
|
•
|
Capital spending for fiscal
2013
is expected to approximate $550 million, and includes spending on our operations for production and labor efficiencies, yield improvements and sales channel flexibility, as well as expansion of our foreign operations.
|
35
Cash Flows from Financing Activities
|
in millions
|
Three Months Ended
|
||||||
|
December 29, 2012
|
December 31, 2011
|
||||||
|
Payments on debt
|
$
|
(35
|
)
|
$
|
(25
|
)
|
|
|
Net proceeds from borrowings
|
24
|
|
45
|
|
|||
|
Purchases of Tyson Class A common stock
|
(115
|
)
|
(50
|
)
|
|||
|
Dividends
|
(53
|
)
|
(15
|
)
|
|||
|
Other, net
|
21
|
|
22
|
|
|||
|
Net cash used for financing activities
|
$
|
(158
|
)
|
$
|
(23
|
)
|
|
|
•
|
During the first quarter of fiscal 2013, we received proceeds of $22 million and paid $33 million related to borrowings at our foreign operations. Total debt related to our foreign operations was $91 million at December 29, 2012 ($58 million current, $33 million long-term).
|
|
•
|
Purchases of Tyson Class A common stock include:
|
|
•
|
$100 million
and
$35 million
for shares repurchased pursuant to our share repurchase program during the first quarters of fiscal 2013 and 2012, respectively; and
|
|
•
|
$15 million
for shares repurchased to fund certain obligations under our equity compensation plans during the first quarters of both fiscal 2013 and 2012.
|
|
•
|
Dividends during first quarter of fiscal 2013 include a 25% increase to our quarterly dividend rate. Additionally, we declared and paid special dividends per share of $0.10 and $0.09 to holders of Class A stock and Class B stock, respectively, during the first quarter of fiscal 2013.
|
Liquidity
|
in millions
|
|||||||||||||||||
|
Commitments
Expiration Date
|
Facility
Amount
|
|
Outstanding
Letters of
Credit
(no draw downs)
|
|
Amount
Borrowed
|
|
Amount
Available
|
|
|||||||||
|
Cash and cash equivalents
|
$
|
951
|
|
||||||||||||||
|
Revolving credit facility
|
August 2017
|
$
|
1,000
|
|
$
|
38
|
|
$
|
—
|
|
$
|
962
|
|
||||
|
Total liquidity
|
$
|
1,913
|
|
||||||||||||||
|
•
|
The revolving credit facility supports our short-term funding needs and letters of credit. The letters of credit issued under this facility are primarily in support of workers’ compensation insurance programs and derivative activities.
|
|
•
|
Our 3.25% Convertible Senior Notes due 2013 (2013 Notes) may currently be converted to Class A stock early during any fiscal quarter in the event our Class A stock trades at or above $21.84 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. In this event, any note holders electing early conversion would be paid the outstanding principal in cash, which totaled
$458 million
at
December 29, 2012
. Any conversion premium would be paid in shares of Class A stock. The conditions for early conversion were not met in our
first
quarter of fiscal
2013
, and thus, the notes may not be converted in our second quarter of fiscal
2013
. On and after July 15, 2013, until the close of business on the second scheduled trading day immediately preceding the maturity date, which is October 15, 2013, holders may convert their notes at any time, regardless of the foregoing circumstances. Should the holders exercise their early conversion option, we would use current cash on hand and/or cash flow from operations for principal payments. We presently plan to use current cash on hand and/or cash flows from operations for payment on the 2013 Notes not converted early upon maturity.
|
|
•
|
At
December 29, 2012
, approximately
30%
of our cash is held in the international accounts of our foreign subsidiaries. Generally, we do not rely on the foreign cash as a source of funds to support our ongoing domestic liquidity needs, but rather we manage our worldwide cash requirements by reviewing available funds among our foreign subsidiaries and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to regulatory capital requirements; however, those balances are generally available without legal restrictions to fund ordinary business operations. Our U.S. income taxes, net of applicable foreign tax credits, have not been provided on undistributed earnings of foreign subsidiaries. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so.
|
|
•
|
Our current ratio was
1.89
to 1 and
1.91
to 1 at
December 29, 2012
, and
September 29, 2012
, respectively.
|
36
Capital Resources
Revolving Credit Facility
Cash flows from operating activities and current cash on hand are our primary sources of liquidity for funding debt service, capital expenditures, dividends and share repurchases. We also have a revolving credit facility, with a committed maximum capacity of $1.0 billion, to provide additional liquidity for working capital needs, letters of credit and a source of financing for growth opportunities. As of
December 29, 2012
, we had outstanding letters of credit totaling
$38 million
issued under this facility, none of which were drawn upon, which left
$962 million
available for borrowing. Our revolving credit facility is funded by a syndicate of 43 banks, with commitments ranging from $0.3 million to $90 million per bank. The syndicate includes bank holding companies that are required to be adequately capitalized under federal bank regulatory agency requirements.
Capitalization
To monitor our credit ratings and our capacity for long-term financing, we consider various qualitative and quantitative factors. We monitor the ratio of our debt to our total capitalization as support for our long-term financing decisions. At
December 29, 2012
, and
September 29, 2012
, the ratio of our debt-to-total capitalization was
28.6%
and
28.7%
, respectively. For the purpose of this calculation, debt is defined as the sum of current and long-term debt. Total capitalization is defined as debt plus Total Shareholders’ Equity.
Credit Ratings
2016 Notes
On June 7, 2012, Moody's Investors Service, Inc. (Moody's) upgraded the credit rating of these notes from "Ba1" to "Baa3." This upgrade decreased the interest rate on the 2016 Notes from
6.85%
to
6.60%
, effective beginning with the six-month interest payment due October 1, 2012.
A one-notch downgrade by either Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. (S&P) or Moody's would increase the interest rates on the 2016 Notes by 0.25%.
Revolving Credit Facility
S&P's corporate credit rating for Tyson Foods, Inc. is "BBB-." Moody’s senior, unsecured, subsidiary guaranteed long-term debt rating for Tyson Foods, Inc. is "Baa3." Fitch Ratings', a wholly owned subsidiary of Fimalac, S.A. (Fitch), issuer default rating for Tyson Foods, Inc. is "BBB." The below table outlines the fees paid on the unused portion of the facility (facility fee rate) and letter of credit fees (undrawn letter of credit fee and borrowing spread) depending on the rating levels of Tyson Foods, Inc. from S&P, Moody's and Fitch.
|
Ratings Level (S&P/Moody's/Fitch)
|
Facility Fee
Rate
|
|
Undrawn Letter of
Credit Fee and
Borrowing Spread
|
|
|
BBB+/Baa1/BBB+ or above
|
0.150
|
%
|
1.125
|
%
|
|
BBB/Baa2/BBB
|
0.175
|
%
|
1.375
|
%
|
|
BBB-/Baa3/BBB- (current level)
|
0.225
|
%
|
1.625
|
%
|
|
BB+/Ba1/BB+
|
0.275
|
%
|
1.875
|
%
|
|
BB/Ba2/BB or lower or unrated
|
0.325
|
%
|
2.125
|
%
|
In the event the rating levels are split, the applicable fees and spread will be based upon the rating level in effect for two of the rating agencies, or, if all three rating agencies have different rating levels, the applicable fees and spread will be based upon the rating level that is between the rating levels of the other two rating agencies.
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. In addition, we are required to maintain minimum interest expense coverage and maximum debt-to-capitalization ratios.
Our 2022 Notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens; engage in certain sale/leaseback transactions; and engage in certain consolidations, mergers and sales of assets.
We were in compliance with all debt covenants at
December 29, 2012
.
37
RECENTLY ADOPTED/ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to the discussion of recently adopted/issued accounting pronouncements under Part I, Item 1, Notes to Consolidated Condensed Financial Statements, Note 1: Accounting Policies.
CRITICAL ACCOUNTING ESTIMATES
We consider accounting policies related to: contingent liabilities; marketing and advertising costs; accrued self insurance; impairment of long-lived assets; impairment of goodwill and other intangible assets; and income taxes to be critical policies. These policies are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended
September 29, 2012
.
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 our outlook for fiscal
2013
, other future economic circumstances, industry conditions in domestic and international markets, our performance and financial results (e.g., 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 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 purchasing 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 adverse 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, agricultural 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” included in our Annual Report filed on Form 10-K for the year ended
September 29, 2012
.
38
|
Item 3.
|
Quantitative and Qualitative Disclosures About 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
December 29, 2012
, and
September 29, 2012
, 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
|
|
|||||
|
December 29, 2012
|
September 29, 2012
|
||||||
|
Livestock:
|
|||||||
|
Cattle
|
$
|
31
|
|
$
|
42
|
|
|
|
Hogs
|
45
|
|
37
|
|
|||
|
Grain
|
10
|
|
30
|
|
|||
Interest Rate Risk:
At
December 29, 2012
, we had variable rate debt of $207 million with a weighted average interest rate of 3.9%. A hypothetical 10% increase in interest rates effective at
December 29, 2012
, and
September 29, 2012
, would have a minimal effect on interest expense.
Additionally, changes in interest rates impact the fair value of our fixed-rate debt. At
December 29, 2012
, we had fixed-rate debt of $2.2 billion with a weighted average interest rate of 5.9%. 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 $18 million at
December 29, 2012
, and $16 million at
September 29, 2012
. The fair values of our debt were estimated based on quoted market prices and/or published interest rates.
Foreign Currency Risk:
We have foreign exchange exposure from fluctuations in foreign currency exchange rates primarily as a result of certain receivable and payable balances. The primary currencies we have exposure to are the Brazilian real, the British pound sterling, the Canadian dollar, the Chinese renminbi, the European euro and the Mexican peso. We periodically enter into foreign exchange forward and option contracts to hedge some portion of our foreign currency exposure. A hypothetical 10% change in foreign exchange rates effective at both
December 29, 2012
, and
September 29, 2012
, related to the foreign exchange forward and option contracts would have a $21 million impact on pretax income. In the future, we may enter into more foreign exchange forward and option contracts as a result of our international growth strategy.
Concentration of Credit Risk:
Refer to our market risk disclosures set forth in the
2012
Annual Report filed on Form 10-K for a detailed discussion of quantitative and qualitative disclosures about concentration of credit risks, as these risk disclosures have not changed significantly from the
2012
Annual Report.
39
|
Item 4.
|
Controls and Procedures
|
An evaluation was performed, under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, management, including the CEO and CFO, has concluded that, as of
December 29, 2012
, our disclosure controls and procedures were effective.
In the
first
quarter ended
December 29, 2012
, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
40
|
Item 1.
|
Legal Proceedings
|
Refer to the description of certain legal proceedings pending against us under Part I, Item 1, Notes to Consolidated Condensed Financial Statements, Note 13: Commitments and Contingencies, which discussion is incorporated herein by reference. Listed below are certain additional legal proceedings involving the Company and/or its subsidiaries.
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. The defendants have requested a trial date, but the court has not yet scheduled the matter for trial.
Since 2003, nine lawsuits have been brought against us 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 and 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, which the plaintiffs appealed, and the trial court stayed the remaining eight lawsuits pending the appeal. On May 8, 2008, the Arkansas Supreme Court reversed the summary judgment and remanded for a new trial. The remanded trial was held and the jury returned a verdict in our favor. The plaintiffs appealed this verdict to the Arkansas Supreme Court, which affirmed the verdict and denied the plaintiffs’ petition for rehearing. The parties subsequently settled the remaining eight cases.
Other Matters:
We currently have approximately 115,000 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 1A.
|
Risk Factors
|
There have been no material changes to the risk factors listed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended
September 29, 2012
. These risk factors should be considered carefully with the information provided elsewhere in this report, which could materially adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known or we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
41
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
The table below provides information regarding our purchases of Class A stock during the periods indicated.
|
Period
|
Total
Number of
Shares
Purchased
|
|
Average
Price Paid
per Share
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
Maximum Number of
Shares that May Yet Be
Purchased Under the Plans
or Programs
(1)
|
|
|||
|
Sept. 30, 2012 to Oct. 27, 2012
|
204,783
|
|
$
|
16.21
|
|
—
|
|
35,247,684
|
|
||
|
Oct. 28, 2012 to Dec. 1, 2012
|
961,561
|
|
18.71
|
|
537,100
|
|
34,710,584
|
|
|||
|
Dec. 2, 2012 to Dec. 29, 2012
|
4,775,026
|
|
19.60
|
|
4,577,200
|
|
30,133,384
|
|
|||
|
Total
|
5,941,370
|
|
(2)
|
$
|
19.34
|
|
5,114,300
|
|
(3)
|
30,133,384
|
|
|
(1)
|
On February 7, 2003, we announced our Board of Directors approved a program to repurchase up to 25 million shares of Class A common stock from time to time in open market or privately negotiated transactions. The program has no fixed or scheduled termination date. On May 3, 2012, our Board of Directors approved an increase of 35 million shares authorized for repurchase under this program.
|
|
(2)
|
We purchased 827,070 shares during the period that were not made pursuant to our previously announced stock repurchase program, but were purchased to fund certain Company obligations under our equity compensation plans. These transactions included 515,955 shares purchased in open market transactions and 311,115 shares withheld to cover required tax withholdings on the vesting of restricted stock.
|
|
(3)
|
These shares were purchased during the period pursuant to our previously announced stock repurchase program.
|
|
Item 3.
|
Defaults Upon Senior Securities
|
None
|
Item 4.
|
Mine Safety Disclosures
|
Not Applicable
|
Item 5.
|
Other Information
|
None
42
|
Item 6.
|
Exhibits
|
The following exhibits are filed with this report.
|
Exhibit
No.
|
Exhibit Description
|
||
|
10.1
|
Employment Agreement, dated November 25, 2012, by and between the Company and John Tyson.
|
||
|
12.1
|
Ratio of Earnings to Fixed Charges
|
||
|
31.1
|
Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
|
31.2
|
Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
|
101
|
The following financial information from our Quarterly Report on Form 10-Q for the quarter ended December 29, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements.
|
||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
TYSON FOODS, INC.
|
|||
|
Date: February 1, 2013
|
/s/ Dennis Leatherby
|
||
|
Dennis Leatherby
|
|||
|
Executive Vice President and Chief Financial Officer
|
|||
|
Date: February 1, 2013
|
/s/ Curt T. Calaway
|
||
|
Curt T. Calaway
|
|||
|
Senior Vice President, Controller and Chief Accounting Officer
|
|||
43
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1: Accounting PoliciesNote 2: InventoriesNote 3: Property, Plant and EquipmentNote 4: Other Current LiabilitiesNote 5: DebtNote 6: Income TaxesNote 7: Other Income and ChargesNote 8: Earnings Per ShareNote 9: Derivative Financial InstrumentsNote 10: Fair Value MeasurementsNote 11: Other Comprehensive IncomeNote 12: Segment ReportingNote 13: Commitments and ContingenciesNote 14: Condensed Consolidating Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits