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Tyson Foods 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. 10-Q
  3. Ex-12
  4. Ex-31
  5. Ex-31
  6. Ex-32
  7. Ex-32
  8. Ex-32

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(X)

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

 

EXCHANGE ACT OF 1934

 

 

For the quarterly period ended December 30, 2006

 

 

 

OR

 

 

(  )

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

 

EXCHANGE ACT OF 1934

 

For the transition period from _________to________

 

001-14704

(Commission File Number)

______________

TYSON FOODS, INC.

(Exact name of registrant as specified in its charter)

______________

 

Delaware

71-0225165

(State or other jurisdiction

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

of incorporation or organization)

 

 

 

2210 West Oaklawn Drive, Springdale, Arkansas

72762-6999

(Address of principal executive offices)

(Zip Code)

 

 

(479) 290-4000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of December 30, 2006.

 

Class

Outstanding Shares

Class A Common Stock, $0.10 par value (Class A stock)

274,420,110

Class B Common Stock, $0.10 par value (Class B stock)

80,883,320

 

 


 

 

 

TYSON FOODS, INC.

INDEX

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

PAGE

 

 

 

 

 

 

Consolidated Condensed Statements of Income
for the Three Months Ended
December 30, 2006, and December 31, 2005

3

 

 

 

 

 

 

Consolidated Condensed Balance Sheets
December 30, 2006, and September 30, 2006

4

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows
for the Three Months Ended
December 30, 2006, and December 31, 2005

5

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements

6

 

 

 

 

Item 2.

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

23

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

 

Item 1A.

Risk Factors

35

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

Item 3.

Defaults Upon Senior Securities

36

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

36

 

 

 

 

Item 5.

Other Information

36

 

 

 

 

Item 6.

Exhibits

37

 

 

 

 

SIGNATURES

38

 

 

 

 

 

 

2

 


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TYSON FOODS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 30,

 

 

 

December 31,

 

 

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

6,558

 

 

 

$

6,454

 

Cost of Sales

 

 

6,221

 

 

 

 

6,110

 

 

 

 

337

 

 

 

 

344

 

 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative

 

 

190

 

 

 

 

234

 

Other Charges

 

 

2

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

145

 

 

 

 

110

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

Interest income

 

 

(2

)

 

 

 

(3

)

Interest expense

 

 

61

 

 

 

 

54

 

Other, net

 

 

-

 

 

 

 

(1

)

 

 

 

59

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

 

86

 

 

 

 

60

 

Provision for Income Taxes

 

 

29

 

 

 

 

21

 

Net Income

 

$

57

 

 

 

$

39

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

 

 

Class A Basic

 

 

264

 

 

 

 

243

 

Class B Basic

 

 

83

 

 

 

 

102

 

Diluted

 

 

353

 

 

 

 

358

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

Class A Basic

 

$

0.17

 

 

 

$

0.12

 

Class B Basic

 

$

0.15

 

 

 

$

0.10

 

Diluted

 

$

0.16

 

 

 

$

0.11

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Per Share:

 

 

 

 

 

 

 

 

 

Class A

 

$

0.040

 

 

 

$

0.040

 

Class B

 

$

0.036

 

 

 

$

0.036

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

3

 


TYSON FOODS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions, except per share data)

 

 

 

(Unaudited)
December 30, 2006

 

 

 

 

September 30, 2006

 

Assets

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45

 

 

 

$

28

 

Short-term investment

 

 

-

 

 

 

 

770

 

Accounts receivable, net

 

 

1,135

 

 

 

 

1,183

 

Inventories

 

 

2,046

 

 

 

 

2,057

 

Other current assets

 

 

139

 

 

 

 

149

 

Total Current Assets

 

 

3,365

 

 

 

 

4,187

 

Net Property, Plant and Equipment

 

 

3,854

 

 

 

 

3,945

 

Goodwill

 

 

2,512

 

 

 

 

2,512

 

Intangible Assets

 

 

135

 

 

 

 

136

 

Other Assets

 

 

331

 

 

 

 

341

 

Total Assets

 

$

10,197

 

 

 

$

11,121

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Current debt

 

$

184

 

 

 

$

992

 

Trade accounts payable

 

 

1,064

 

 

 

 

942

 

Other current liabilities

 

 

770

 

 

 

 

912

 

Total Current Liabilities

 

 

2,018

 

 

 

 

2,846

 

Long-Term Debt

 

 

2,777

 

 

 

 

2,987

 

Deferred Income Taxes

 

 

453

 

 

 

 

495

 

Other Liabilities

 

 

438

 

 

 

 

353

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock ($0.10 par value):

 

 

 

 

 

 

 

 

 

Class A-authorized 900 million shares:

 

 

 

 

 

 

 

 

 

issued 289 million shares at December 30, 2006,

 

 

 

 

 

 

 

 

 

and 284 million shares at September 30, 2006

 

 

29

 

 

 

 

28

 

Class B-authorized 900 million shares:

 

 

 

 

 

 

 

 

 

issued 81 million shares at December 30, 2006,

 

 

 

 

 

 

 

 

 

and 86 million shares at September 30, 2006

 

 

8

 

 

 

 

9

 

Capital in excess of par value

 

 

1,825

 

 

 

 

1,835

 

Retained earnings

 

 

2,824

 

 

 

 

2,781

 

Accumulated other comprehensive income

 

 

47

 

 

 

 

17

 

 

 

 

4,733

 

 

 

 

4,670

 

Less treasury stock, at cost-

 

 

 

 

 

 

 

 

 

14 million shares at December 30, 2006,

 

 

 

 

 

 

 

 

 

and 15 million shares at September 30, 2006

 

 

222

 

 

 

 

230

 

Total Shareholders’ Equity

 

 

4,511

 

 

 

 

4,440

 

Total Liabilities and Shareholders’ Equity

 

$

10,197

 

 

 

$

11,121

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

4

 


TYSON FOODS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 30,

 

 

 

December 31,

 

 

 

2006

 

 

 

2005

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

57

 

 

 

$

39

 

Depreciation and amortization

 

 

128

 

 

 

 

125

 

Plant closing-related and other charges

 

 

(3

)

 

 

 

-

 

Deferred income taxes and other, net

 

 

78

 

 

 

 

(49

)

Net changes in working capital

 

 

65

 

 

 

 

79

 

 

 

 

 

 

 

 

 

 

 

Cash Provided by Operating Activities

 

 

325

 

 

 

 

194

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(43

)

 

 

 

(189

)

Proceeds from sale of assets

 

 

2

 

 

 

 

11

 

Proceeds from sale of short-term investment

 

 

770

 

 

 

 

-

 

Proceeds from sale of marketable securities, net

 

 

4

 

 

 

 

3

 

Other, net

 

 

7

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

Cash Provided by (Used for) Investing Activities

 

 

740

 

 

 

 

(170

)

 

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

 

Net change in debt

 

 

(1,018

)

 

 

 

(7

)

Purchases of treasury shares

 

 

(24

)

 

 

 

(12

)

Dividends

 

 

(14

)

 

 

 

(14

)

Stock options exercised and other

 

 

8

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Cash Used for Financing Activities

 

 

(1,048

)

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

Effect of Exchange Rate Change on Cash

 

 

-

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Cash and Cash Equivalents

 

 

17

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

 

28

 

 

 

 

40

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

$

45

 

 

 

$

30

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

 

5

 


TYSON FOODS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1:  

ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

 

The consolidated condensed financial statements have been prepared by Tyson Foods, Inc. (the Company). 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 management of the Company believes 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 the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2006. Preparation of consolidated condensed financial statements requires management 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.

 

Management believes the accompanying consolidated condensed financial statements contain all adjustments, including normal recurring accruals and adjustments related to plant closings as disclosed in Note 2, necessary to present fairly its financial position as of December 30, 2006, and the results of its operations and cash flows for the three months ended December 30, 2006, and December 31, 2005. Results of operations and cash flows for the three months ended December 30, 2006, and December 31, 2005, are not necessarily indicative of results to be expected for the full year.

 

RECLASSIFICATION

 

In fiscal 2007, the Company reclassified an $11 million change in negative book cash balances for the quarter ended December 31, 2005, from Net Changes in Working Capital reported as Operating Activities to Financing Activities reported as Stock Options Exercised and Other in the Consolidated Condensed Statements of Cash Flows to conform with the current period presentation.

 

INVESTMENTS

 

The Company has investments in marketable debt securities. As of December 30, 2006, and September 30, 2006, $2 million and $0, respectively, were due in one year or less and were classified in Other Current Assets in the Consolidated Condensed Balance Sheets, and $109 million and $115 million, respectively, were classified in Other Assets in the Consolidated Condensed Balance Sheets, with maturities ranging from one to 32 years. The Company has determined its marketable debt securities are available-for-sale investments. These investments are reported at fair value based on quoted market prices as of the balance sheet date, with unrealized gains and losses, net of tax, recorded in other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is recorded in interest income. The cost of securities sold is based on the specific identification method. Realized gains and losses on sale of debt securities and declines in value judged to be other than temporary are recorded on a net basis in other income. Interest and dividends on securities classified as available-for-sale are recorded in interest income.

 

In the second quarter of fiscal 2006, the Company issued $1.0 billion of new 6.60% senior unsecured notes, which will mature on April 1, 2016. The Company’s short-term investment at September 30, 2006, included $750 million of proceeds from the new issuance and earnings of $20 million on the investment. These funds were on deposit in an interest bearing account with a trustee. In the first quarter of fiscal 2007, the Company used $750 million of the proceeds for repayment of its outstanding $750 million 7.25% Notes, which were due October 1, 2006, and the remaining proceeds were used for general corporate purposes.

 

6

 


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006; therefore the Company expects to adopt FIN 48 at the beginning of fiscal 2008. The Company is in process of evaluating the potential impact of FIN 48.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This standard also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years; therefore, the Company expects to adopt SFAS No. 157 at the beginning of fiscal 2009. The Company is in process of evaluating the potential impact of SFAS No. 157.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS No. 158). SFAS No. 158 requires companies to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its consolidated balance sheet and to recognize changes in funded status in the year in which the changes occur through other comprehensive income. This standard also requires companies to measure the funded status of a plan as of the date of its annual consolidated balance sheet, with limited exceptions. SFAS No. 158 is effective for financial statements issued for fiscal years ending after December 15, 2006; therefore, the Company expects to adopt SFAS No. 158 at the end of fiscal 2007. Based on the information available at December 30, 2006, the Company expects an increase in assets of $6 million, a decrease in liabilities of $9 million, an increase in deferred income taxes payable of $6 million and an increase of $9 million to accumulated other comprehensive income when it adopts SFAS No. 158.

 

In September 2006, the Securities and Exchange Commission staff published Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006; therefore, the Company expects to adopt SAB 108 at the end of fiscal 2007. The Company is currently in the process of evaluating the potential impact of SAB 108.

 

 

NOTE 2:

OTHER CHARGES

 

In July 2006, the Company announced its decision to implement a $200 million Cost Management Initiative as part of a strategy to return to profitability. The cost reductions include staffing costs, consulting and professional fees, sales and marketing costs and other expenses. In the fourth quarter of fiscal 2006, the Company recorded charges of approximately $9 million for employee termination benefits resulting from the termination of approximately 400 employees. Of these charges, $4 million, $3 million, $1 million and $1 million were included, respectively, in the Chicken, Beef, Pork and Prepared Foods segments’ Operating Income and included in the Consolidated Condensed Statements of Income in Other Charges. In the first quarter of fiscal 2007, the Company recorded an additional $1 million for employee termination benefits. Of these charges, $0.5 million was included in both the Chicken and Beef segments’ Operating Income and included in the Consolidated Condensed Statements of Income in Other Charges. As of December 30, 2006, approximately $6 million of employee termination benefits had been paid. Employee termination benefits are expected to be paid through September 2007. No material adjustments to the accrual are anticipated at this time.

 

7

 


 

NOTE 3:

FINANCIAL INSTRUMENTS

 

The Company purchases certain commodities, such as grains, livestock and natural gas, in the course of normal operations. As part of the Company’s commodity risk management activities, the Company uses derivative financial instruments, primarily futures and swaps, to reduce its exposure to various market risks related to these purchases. Contract terms of a financial instrument qualifying as a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts designated and highly effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument is a hedge, changes in the fair value of the instrument will be offset either against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings as a component of cost of sales.

 

The Company had derivative related balances of $35 million and $11 million recorded in other current assets at December 30, 2006, and September 30, 2006, respectively, and $13 million and $23 million in other current liabilities at December 30, 2006, and September 30, 2006, respectively.

 

Cash flow hedges: The Company uses derivatives to moderate the financial and commodity market risks of its business operations. Derivative products, such as futures and option contracts, are considered to be a hedge against changes in the amount of future cash flows related to commodities procurement. The Company also enters into interest rate swap agreements to adjust the proportion of total long-term debt and leveraged equipment loans subject to variable interest rates. Under these interest rate swaps, the Company agrees to pay a fixed rate of interest on a notional principal amount and to receive in return an amount equal to a specified variable rate of interest for the same notional principal amount. These interest rate swaps are considered to be a hedge against changes in the amount of future cash flows associated with the Company’s variable rate interest payments. The fair value of the interest rate swap agreements was not significant at December 30, 2006.

 

The effective portion of the cumulative gain or loss on the derivative instrument is reported as a component of Accumulated Other Comprehensive Income (Loss) in Shareholders’ Equity and recognized into earnings in the same period or periods during which the hedged transaction affects earnings (for grain commodity hedges, when the chickens that consumed the hedged grain are sold). The remaining cumulative gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows of the hedged item, if any, is recognized in earnings during the period of change. Ineffectiveness related to the Company’s cash flow hedges was not significant during the three months ended December 30, 2006, and December 31, 2005.

 

Derivative products related to grain procurement, such as futures and option contracts that meet the criteria for hedge accounting, are considered cash flow hedges, as they hedge against changes in the amount of future cash flows related to commodities procurement. The Company does not purchase derivative products related to grain procurement in excess of its physical grain consumption requirements. The Company’s grain procurement hedging activities are for the grain commodity purchase price only and do not hedge other components of grain cost such as basis differential and freight costs. The after tax gains, recorded in accumulated other comprehensive income at December 30, 2006, related to cash flow hedges, were $20 million. These gains will be recognized within the next 12 months. Of these gains, the after tax portion resulting from the Company’s open mark-to-market hedge positions was $8 million as of December 30, 2006. The Company generally does not hedge cash flows related to commodities beyond 12 months.

 

Fair value hedges: The Company designates certain futures contracts as fair value hedges of firm commitments to purchase market hogs for slaughter and natural gas for the operation of its plants. From time to time, the Company also enters into foreign currency forward contracts to hedge changes in fair value of receivables and purchase commitments arising from changes in the exchange rates of foreign currencies; however, the fair value of the foreign exchange contracts was not significant as of December 30, 2006. The changes in the fair value of a derivative highly effective and that is designated and qualifies as a fair value hedge, along with the gain or loss on the hedged asset or liability attributable to the hedged risk (including gains or losses on firm commitments), are recorded in current period earnings. Ineffectiveness results when the change in the fair value of the hedge instrument differs from the change in fair value of the hedged item. Ineffectiveness related to the Company’s fair value hedges was not significant during the three months ended December 30, 2006, and December 31, 2005.

 

8

 


During fiscal 2006, the Company discontinued the use of hedge accounting for certain financial instruments in place to hedge forward cattle purchases. Hedge accounting was discontinued to provide a natural offset to the gains and losses resulting from the Company’s derivatives tied to its forward fixed price sales of boxed beef, as this activity does not qualify for hedge accounting.

 

Undesignated positions: The Company holds positions as part of its risk management activities, primarily certain grains, livestock and natural gas futures, for which it does not apply hedge accounting, but instead marks these positions to fair value through earnings at each reporting date. Changes in market value of derivatives used in the Company’s risk management activities surrounding inventories on hand or anticipated purchases of inventories or supplies are recorded in cost of sales. Changes in market value of derivatives used in the Company’s risk management activities surrounding forward sales contracts are recorded in sales. The Company generally does not enter into undesignated positions beyond 18 months. The Company recognized pretax net gains of approximately $41 million and $2 million in cost of sales for the three months ended December 30, 2006, and December 31, 2005, respectively, related to grain positions for which it did not apply hedge accounting.

 

The Company enters into certain forward sales of boxed beef and boxed pork and forward purchases of cattle at fixed prices. The fixed price sales contracts lock in the proceeds from a sale in the future and the fixed cattle purchases lock in the cost of raw material in the future, although the cost of the livestock and the related boxed beef and pork market prices at the time of the sale or purchase will vary from this fixed price. Therefore, as fixed forward sales and forward purchases of cattle are entered into, the Company also enters into the appropriate number of livestock futures positions. Changes in market value of the open livestock futures positions are marked to market and reported in earnings at each reporting date, even though the economic impact of the Company’s fixed prices being above or below the market price is only realized at the time of sale or purchase. In connection with these livestock futures, the Company recorded realized and unrealized net losses of $5 million for the three months ended December 30, 2006, which included an unrealized pretax loss on open mark-to-market futures positions of approximately $7 million as of December 30, 2006. Net realized and unrealized gains and losses recorded for the three months ended December 31, 2005, related to livestock futures positions were not significant.

 

 

NOTE 4:  

INVENTORIES

 

Processed products, livestock (excluding breeders) and supplies and other are valued at the lower of cost (first-in, first-out) or market. Livestock includes live cattle, chicken and swine. 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. Live chicken consists of broilers and breeders. Breeders are stated at cost less amortization. The costs associated with breeders, including breeder chicks, feed and medicine, are accumulated up to the production stage and amortized to broiler inventory over the productive life of the flock using a standard unit of production. Total inventory consists of the following (in millions):

 

 

 

 

December 30,

 

September 30,

 

 

 

 

2006

 

2006

 

Processed products

 

 

$

1,151

 

$

1,192

 

Livestock

 

 

 

576

 

 

571

 

Supplies and other

 

 

 

319

 

 

294

 

Total inventory

 

 

$

2,046

 

$

2,057

 

 

 

9

 


 

NOTE 5:  

PROPERTY, PLANT AND EQUIPMENT

 

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

 

 

 

 

December 30,

 

September 30,

 

 

 

 

2006

 

2006

 

Land

 

 

$

109

 

$

114

 

Buildings and leasehold improvements

 

 

 

2,465

 

 

2,453

 

Machinery and equipment

 

 

 

4,270

 

 

4,270

 

Land improvements and other

 

 

 

202

 

 

202

 

Buildings and equipment under construction

 

 

 

256

 

 

279

 

 

 

 

 

7,302

 

 

7,318

 

Less accumulated depreciation

 

 

 

3,448

 

 

3,373

 

Net property, plant and equipment

 

 

$

3,854

 

$

3,945

 

 

 

NOTE 6:  

OTHER CURRENT LIABILITIES

 

Other current liabilities are as follows (in millions):

 

 

 

 

December 30,

 

September 30,

 

 

 

 

2006

 

2006

 

Accrued salaries, wages and benefits

 

 

$

212

 

$

280

 

Self-insurance reserves

 

 

 

260

 

 

265

 

Other

 

 

 

298

 

 

367

 

Total other current liabilities

 

 

$

770

 

$

912

 

 

 

10

 


 

NOTE 7:  

LONG-TERM DEBT

 

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

 

 

 

 

 

December 30,

 

September 30,

 

 

 

Maturity

 

2006

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

2010

 

$

-

 

$

-

 

Senior notes and Notes

 

 

 

 

 

 

 

 

 

(rates ranging from 6.13% to 8.25%)

 

2007–2028

 

 

2,639

 

 

3,388

 

Lakeside Term Loan (6.36% effective rate)

 

2008

 

 

195

 

 

345

 

Accounts Receivable Securitization (6.00% effective rate

 

 

 

 

 

 

 

 

 

at 12/30/06 and 5.98% effective rate at 9/30/06)

 

2007, 2009

 

 

51

 

 

159

 

Leveraged equipment loans

 

 

 

 

 

 

 

 

 

(rates ranging from 4.67% to 5.36%)

 

2007–2009

 

 

28

 

 

38

 

Other

 

Various

 

 

48

 

 

49

 

Total debt

 

 

 

 

2,961

 

 

3,979

 

Less current debt

 

 

 

 

184

 

 

992

 

Total long-term debt

 

 

 

$

2,777

 

$

2,987

 

 

The Company has an unsecured revolving credit facility, which expires in September 2010, totaling $1.0 billion that supports the Company’s short-term funding needs and letters of credit. On July 27, 2006, the unsecured revolving credit facility was amended to allow for maximum availability under the revolving credit facility of 50% of inventory, reduced by letters of credit issued and amounts outstanding under its term loan. The reduction of the availability is scheduled to lapse in the third quarter of fiscal 2007 and return to $1.0 billion less outstanding letters of credit. At December 30, 2006, the Company had outstanding letters of credit totaling approximately $299 million issued primarily in support of workers’ compensation insurance programs and derivative activities. There were no draw downs under these letters of credit at December 30, 2006. At December 30, 2006, and September 30, 2006, there were no amounts drawn under the revolving credit facilities. The amount available as of December 30, 2006, was $529 million.

 

Lakeside Farm Industries, Ltd. (Lakeside), a wholly-owned subsidiary of the Company, has an unsecured three-year term agreement (Lakeside Term Loan) with the principal balance due September 2008. The agreement provides for interest rates ranging from LIBOR plus 0.4 percent to LIBOR plus one percent depending on the Company’s debt rating. Interest payments are made at least quarterly. In the first quarter of fiscal 2007, the Company paid down the Lakeside Term Loan by $150 million.

 

The Company has a receivables purchase agreement with three co-purchasers to sell up to $750 million of trade receivables consisting of $375 million expiring in August 2007 and $375 million expiring in August 2009. The receivables purchase agreement has been accounted for as a borrowing and has an interest rate based on commercial paper issued by the co-purchasers. Under this agreement, substantially all of the Company’s accounts receivable are sold to a special purpose entity, Tyson Receivables Corporation (TRC), which is a wholly-owned consolidated subsidiary of the Company. TRC has its own creditors entitled to be satisfied out of all of the assets of TRC prior to any value becoming available to the Company as TRC’s equity holder. At December 30, 2006, there was $25.5 million outstanding under the receivables purchase agreement expiring in August 2007 and $25.5 million under the agreement expiring in August 2009, while at September 30, 2006, there was $79.5 million outstanding under the receivables purchase agreement expiring in August 2007 and $79.5 under the agreement expiring in August 2009.

 

In the second quarter of fiscal 2006, the Company issued $1.0 billion of new senior unsecured notes, which will mature on April 1, 2016 (2016 Notes). The 2016 Notes carried an initial 6.60% interest rate, with interest payments due semi-annually on April 1 and

 

11

 


October 1. In the first quarter of fiscal 2007, the Company used $750 million of the proceeds for the repayment of its outstanding $750 million 7.25% Notes due October 1, 2006.

 

As previously disclosed in the Company’s 2006 Annual Report on Form 10-K (Form 10-K), on July 24, 2006, Moody’s Investors Services, Inc. (Moody’s) downgraded the Company’s credit rating applicable to its 2016 Notes from “Baa3” to “Ba1.” This downgrade increased the interest rate on the 2016 Notes from 6.60% to 6.85%, effective on the first day of the interest period during which the rating change required an adjustment to the interest rate (i.e., the issuance of the 2016 Notes). This downgrade will increase annual interest expense and related fees by approximately $5 million, including $2.5 million related to the 2016 Notes. Additionally, on July 31, 2006, Standard & Poor’s (S&P) downgraded the Company’s credit rating applicable to the 2016 Notes from “BBB” to “BBB-.” This downgrade did not result in an increase in the interest rate on the 2016 Notes, nor did it result in an increase in interest expense or related fees for other debt.

 

Also as disclosed in the Form 10-K, on September 18, 2006, TFM, a wholly-owned subsidiary of the Company, guaranteed the 2016 Notes. This guarantee does not extend to the other unsecured senior notes of the Company. Moody’s and S&P did not change the July 2006 credit ratings applicable to the 2016 Notes. However, Moody’s issued a new credit rating of “Ba2,” and S&P issued a new credit rating of “BB+” related to the other unsecured senior notes not guaranteed by TFM. These new ratings did not impact the interest rate applicable to the 2016 Notes. However, other interest expense and related fees for other debt will increase by less than $3 million per year.

 

The revolving credit facility, senior notes, term loan and accounts receivable securitization contain various covenants, the most restrictive of which contain maximum allowed leverage ratios and a minimum required interest coverage ratio.

 

On July 27, 2006, the Company entered into a third amendment to its five-year credit revolving facility and the three-year Lakeside Term Loan. These amendments modified the minimum required interest coverage ratio, temporarily suspended the maximum allowed leverage ratios and implemented temporary minimum consolidated EBITDA requirements. The Company was in compliance with all covenants at December 30, 2006.

 

The Company guarantees debt of outside third parties, which include a lease and grower loans, all of which are substantially collateralized by the underlying assets. Terms of the underlying debt range from one to ten years and the maximum potential amount of future payments as of December 30, 2006, was $79 million. The Company also maintains operating leases for various types of equipment, some of which contain residual value guarantees for the market value for assets at the end of the term of the lease. The terms of the lease maturities range from one to seven years. The maximum potential amount of the residual value guarantees is approximately $96 million, of which, approximately $23 million would be recoverable through various recourse provisions and an undeterminable recoverable amount based on the fair market value of the underlying leased assets. The likelihood of payments under these guarantees is not considered to be probable. At December 30, 2006, and September 30, 2006, no liabilities for guarantees were recorded.

 

The Company has fully and unconditionally guaranteed $374 million of senior notes issued by TFM, a wholly-owned subsidiary of the Company. Additionally, the Company has fully and unconditionally guaranteed $195 million related to the Lakeside Term Loan.

 

TFM, a wholly-owned subsidiary of the Company, has fully and unconditionally guaranteed the Company’s 2016 Notes. The following condensed consolidating financial information is provided for the Company, as issuer, and for TFM, as guarantor, as an alternative to providing separate financial statements for the guarantor.

 

The following financial information presents condensed consolidating financial statements, which include Tyson Foods, Inc. (TFI Parent); Tyson Fresh Meats, Inc. (TFM Parent); the Non-Guarantor Subsidiaries on a combined basis; the elimination entries necessary to consolidate the TFI Parent, TFM Parent and the Non-Guarantor Subsidiaries; and Tyson Foods, Inc. on a consolidated basis.

 

12

 


 

Condensed Consolidating Statement of Income for the three months ended December 30, 2006

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Net Sales

 

 

$

11

 

 

$

3,738

 

 

$

3,011

 

$

(202)

 

 

$

6,558 

 

Cost of Sales

 

 

(31

)

 

3,683

 

 

2,771

 

(202)

 

 

6,221 

 

 

 

 

42

 

 

55

 

 

240

 

 

 

337 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

23

 

 

39

 

 

128

 

 

 

190 

 

Other charges

 

 

1

 

 

1

 

 

-

 

 

 

 

Operating Income

 

 

18

 

 

15

 

 

112

 

 

 

145 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

47

 

 

8

 

 

4

 

 

 

59 

 

Other, net

 

 

-

 

 

(19

)

 

19

 

 

 

 

Equity in net earnings of subsidiaries

 

 

(76

)

 

(7

)

 

-

 

83 

 

 

 

 

 

 

(29

)

 

(18

)

 

23

 

83 

 

 

59 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

 

47

 

 

33

 

 

89

 

(83)

 

 

86 

 

Income Tax Expense (Benefit)

 

 

(10

)

 

9

 

 

30

 

 

 

29 

 

Net Income

 

 

$

57

 

 

$

24

 

 

$

59

 

$

(83)

 

 

$

57 

 

 

 

 

Condensed Consolidating Statement of Income for the three months ended December 31, 2005

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Net Sales

 

 

$

21

 

 

$

3,599

 

 

$

3,041

 

$

(207)

 

 

$

6,454 

 

Cost of Sales

 

 

5

 

 

3,599

 

 

2,713

 

(207)

 

 

6,110 

 

 

 

 

16

 

 

-

 

 

328

 

 

 

344 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

36

 

 

47

 

 

151

 

 

 

234 

 

Other charges

 

 

-

 

 

-

 

 

-

 

 

 

 

Operating Income (Loss)

 

 

(20

)

 

(47

)

 

177

 

 

 

110 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

40

 

 

10

 

 

1

 

 

 

51 

 

Other, net

 

 

(5

)

 

1

 

 

3

 

 

 

(1)

 

Equity in net earnings of subsidiaries

 

 

(75

)

 

(10

)

 

-

 

85 

 

 

 

 

 

 

(40

)

 

1

 

 

4

 

85 

 

 

50 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) before Income Taxes

 

 

20

 

 

(48

)

 

173

 

(85)

 

 

60 

 

Income Tax Expense (Benefit)

 

 

(19

)

 

(20

)

 

60

 

 

 

21 

 

Net Income (Loss)

 

 

$

39

 

 

$

(28

)

 

$

113

 

$

(85)

 

 

$

39 

 

 

 

13

 


 

Condensed Consolidating Balance Sheet as of December 30, 2006

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

6

 

 

$

1

 

 

$

38

 

$

 

 

$

45

 

Accounts receivable, net

 

 

27

 

 

633

 

 

1,412

 

(937)

 

 

1,135

 

Inventories

 

 

-

 

 

577

 

 

1,469

 

 

 

2,046

 

Other current assets

 

 

80

 

 

44

 

 

52

 

(37)

 

 

139

 

Total Current Assets

 

 

113

 

 

1,255

 

 

2,971

 

(974)

 

 

3,365

 

Net Property, Plant and Equipment

 

 

52

 

 

1,091

 

 

2,711

 

 

 

3,854

 

Goodwill

 

 

-

 

 

1,526

 

 

986

 

 

 

2,512

 

Intangible Assets

 

 

-

 

 

59

 

 

76

 

 

 

135

 

Other Assets

 

 

125

 

 

104

 

 

138

 

(36)

 

 

331

 

Investment in subsidiaries

 

 

7,982

 

 

952

 

 

-

 

(8,934)

 

 

-

 

Total Assets

 

 

$

8,272

 

 

$

4,987

 

 

$

6,882

 

$

(9,944)

 

 

$

10,197

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current debt

 

 

$

42

 

 

$

125

 

 

$

17

 

$

 

 

$

184

 

Trade accounts payable

 

 

12

 

 

614

 

 

438

 

 

 

1,064

 

Other current liabilities

 

 

1,114

 

 

113

 

 

517

 

(974)

 

 

770

 

Total Current Liabilities

 

 

1,168

 

 

852

 

 

972

 

(974)

 

 

2,018

 

Long-Term Debt

 

 

2,312

 

 

257

 

 

208

 

 

 

2,777

 

Deferred Income Taxes

 

 

-

 

 

164

 

 

325

 

(36)

 

 

453

 

Other Liabilities

 

 

281

 

 

93

 

 

64

 

 

 

438

 

Shareholders’ Equity

 

 

4,511

 

 

3,621

 

 

5,313

 

(8,934)

 

 

4,511

 

Total Liabilities and Shareholders’ Equity

 

 

$

8,272

 

 

$

4,987

 

 

$

6,882

 

$

(9,944)

 

 

$

10,197

 

 

 

14

 


 

Condensed Consolidating Balance Sheet as of September 30, 2006

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

2

 

 

$

1

 

 

$

25

 

$

 

 

$

28

 

Short-term investment

 

 

770

 

 

-

 

 

-

 

 

 

770

 

Accounts receivable, net

 

 

3

 

 

391

 

 

1,562

 

(773)

 

 

1,183

 

Inventories

 

 

-

 

 

611

 

 

1,446

 

 

 

2,057

 

Other current assets

 

 

37

 

 

79

 

 

84

 

(51)

 

 

149

 

Total Current Assets

 

 

812

 

 

1,082

 

 

3,117

 

(824)

 

 

4,187

 

Net Property, Plant and Equipment

 

 

93

 

 

1,120

 

 

2,732

 

-

 

 

3,945

 

Goodwill

 

 

-

 

 

1,526

 

 

986

 

-

 

 

2,512

 

Intangible Assets

 

 

-

 

 

60

 

 

76

 

-

 

 

136

 

Other Assets

 

 

177

 

 

129

 

 

116

 

(81)

 

 

341

 

Investment in subsidiaries

 

 

7,899

 

 

944

 

 

-

 

(8,843)

 

 

-

 

Total Assets

 

 

$

8,981

 

 

$

4,861

 

 

$

7,027

 

$

(9,748)

 

 

$

11,121

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current debt

 

 

$

851

 

 

$

125

 

 

$

16

 

$

 

 

$

992

 

Trade accounts payable

 

 

28

 

 

475

 

 

439

 

 

 

942

 

Other current liabilities

 

 

1,084

 

 

153

 

 

499

 

(824)

 

 

912

 

Total Current Liabilities

 

 

1,963

 

 

753

 

 

954

 

(824)

 

 

2,846

 

Long-Term Debt

 

 

2,371

 

 

257

 

 

359

 

 

 

2,987

 

Deferred Income Taxes

 

 

-

 

 

178

 

 

398

 

(81)

 

 

495

 

Other Liabilities

 

 

207

 

 

80

 

 

66

 

-

 

 

353

 

Shareholders’ Equity

 

 

4,440

 

 

3,593

 

 

5,250

 

(8,843)

 

 

4,440

 

Total Liabilities and Shareholders’ Equity

 

 

$

8,981

 

 

$

4,861

 

 

$

7,027

 

$

(9,748)

 

 

$

11,121

 

 

 

15

 


 

Condensed Consolidating Statement of Cash Flows for the three months ended December 30, 2006

in millions

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

 

 

 

 

 

 

TFI Parent

 

TFM Parent

 

Subsidiaries

 

Eliminations

 

Total

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

57

 

 

$

24

 

 

$

59

 

$

(83)

 

 

$

57 

 

Depreciation and amortization

 

 

7

 

 

34

 

 

87

 

 

 

128 

 

Plant closing-related and other charges

 

 

(3

)

 

-

 

 

-

 

 

 

(3)

 

Equity in net earnings of subsidiaries

 

 

(76

)

 

(7

)

 

-

 

83 

 

 

 

Deferred taxes and other, net

 

 

66

 

 

24

 

 

(12

)

 

 

78 

 

Net changes in working capital

 

 

(142

)

 

135

 

 

72

 

 

 

65 

 

Cash Provided by (Used for) Operating Activities

 

 

(91

)

 

210

 

 

206

 

 

 

325 

 

Cash Flows From Investing Activities: