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Tyson Foods 10-Q 2014
TSN 2014 Q1 10Q

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 28, 2013
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
001-14704
(Commission File Number)
______________________________________________
TYSON FOODS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________
Delaware
 
71-0225165
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
2200 Don Tyson Parkway, Springdale, Arkansas
 
72762-6999
(Address of principal executive offices)
 
(Zip Code)
(479) 290-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ¨
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.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of December 28, 2013.
Class
 
Outstanding Shares
Class A Common Stock, $0.10 Par Value (Class A stock)
 
270,275,107

Class B Common Stock, $0.10 Par Value (Class B stock)
 
70,010,805




TYSON FOODS, INC.
INDEX
 
 


1


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 28, 2013
 
December 29, 2012
Sales
$
8,761

 
$
8,366

Cost of Sales
8,076

 
7,827

Gross Profit
685

 
539

Selling, General and Administrative
273

 
235

Operating Income
412

 
304

Other (Income) Expense:
 
 
 
Interest income
(2
)
 
(1
)
Interest expense
28

 
37

Other, net
3

 

Total Other (Income) Expense
29

 
36

Income from Continuing Operations before Income Taxes
383

 
268

Income Tax Expense
131

 
96

Income from Continuing Operations
252

 
172

Loss from Discontinued Operation, Net of Tax

 
(4
)
Net Income
252

 
168

Less: Net Loss Attributable to Noncontrolling Interests
(2
)
 
(5
)
Net Income Attributable to Tyson
$
254

 
$
173

Amounts Attributable to Tyson:
 
 
 
Net Income from Continuing Operations
254

 
177

Net Loss from Discontinued Operation

 
(4
)
Net Income Attributable to Tyson
$
254

 
$
173

Weighted Average Shares Outstanding:
 
 
 
Class A Basic
271

 
285

Class B Basic
70

 
70

Diluted
354

 
362

Net Income Per Share from Continuing Operations Attributable to Tyson:
 
 
 
Class A Basic
$
0.76

 
$
0.51

Class B Basic
$
0.68

 
$
0.46

Diluted
$
0.72

 
$
0.49

Net Loss Per Share from Discontinued Operation Attributable to Tyson:
 
 
 
Class A Basic
$

 
$
(0.01
)
Class B Basic
$

 
$
(0.01
)
Diluted
$

 
$
(0.01
)
Net Income Per Share Attributable to Tyson:
 
 
 
Class A Basic
$
0.76

 
$
0.50

Class B Basic
$
0.68

 
$
0.45

Diluted
$
0.72

 
$
0.48

Dividends Declared Per Share:
 
 
 
Class A
$
0.100

 
$
0.160

Class B
$
0.090

 
$
0.144

See accompanying Notes to Consolidated Condensed Financial Statements.

2



TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited) 

 
Three Months Ended
 
December 28, 2013
 
December 29, 2012
Net Income
$
252

 
$
168

Other Comprehensive Income (Loss), Net of Taxes:
 
 
 
Derivatives accounted for as cash flow hedges
(2
)
 
(9
)
Investments
3

 
(2
)
Currency translation
(11
)
 
(1
)
Postretirement benefits
2

 
1

Total Other Comprehensive Income (Loss), Net of Taxes
(8
)
 
(11
)
Comprehensive Income
244

 
157

Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests
(2
)
 
(5
)
Comprehensive Income Attributable to Tyson
$
246

 
$
162

See accompanying Notes to Consolidated Condensed Financial Statements.


3


TYSON FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share and per share data)
(Unaudited) 
 
December 28, 2013
 
September 28, 2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
825

 
$
1,145

Accounts receivable, net
1,497

 
1,497

Inventories
2,778

 
2,817

Other current assets
130

 
145

Total Current Assets
5,230

 
5,604

Net Property, Plant and Equipment
4,072

 
4,053

Goodwill
1,907

 
1,902

Intangible Assets
133

 
138

Other Assets
502

 
480

Total Assets
$
11,844

 
$
12,177

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Current debt
$
52

 
$
513

Accounts payable
1,477

 
1,359

Other current liabilities
1,077

 
1,138

Total Current Liabilities
2,606

 
3,010

Long-Term Debt
1,890

 
1,895

Deferred Income Taxes
450

 
479

Other Liabilities
582

 
560

Commitments and Contingencies (Note 15)

 

Shareholders’ Equity:
 
 
 
Common stock ($0.10 par value):
 
 
 
Class A-authorized 900 million shares, issued 322 million shares
32

 
32

Convertible Class B-authorized 900 million shares, issued 70 million shares
7

 
7

Capital in excess of par value
2,388

 
2,292

Retained earnings
5,219

 
4,999

Accumulated other comprehensive loss
(116
)
 
(108
)
Treasury stock, at cost – 52 million shares at December 28, 2013, and 48 million shares at September 28, 2013
(1,245
)
 
(1,021
)
Total Tyson Shareholders’ Equity
6,285

 
6,201

Noncontrolling Interests
31

 
32

Total Shareholders’ Equity
6,316

 
6,233

Total Liabilities and Shareholders’ Equity
$
11,844

 
$
12,177

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 28, 2013
 
December 29, 2012
Cash Flows From Operating Activities:
 
 
 
Net income
$
252

 
$
168

Depreciation and amortization
127

 
130

Deferred income taxes
(15
)
 
(9
)
Convertible debt discount
(92
)
 

Other, net
22

 
23

Net changes in working capital
67

 
(122
)
Cash Provided by Operating Activities
361

 
190

Cash Flows From Investing Activities:
 
 
 
Additions to property, plant and equipment
(140
)
 
(157
)
Purchases of marketable securities
(10
)
 
(7
)
Proceeds from sale of marketable securities
9

 
8

Other, net
(3
)
 
4

Cash Used for Investing Activities
(144
)
 
(152
)
Cash Flows From Financing Activities:
 
 
 
Payments on debt
(379
)
 
(35
)
Net proceeds from borrowings
6

 
24

Purchases of Tyson Class A common stock
(159
)
 
(115
)
Dividends
(25
)
 
(53
)
Stock options exercised
12

 
19

Other, net
5

 
2

Cash Used for Financing Activities
(540
)
 
(158
)
Effect of Exchange Rate Changes on Cash
3

 

Decrease in Cash and Cash Equivalents
(320
)
 
(120
)
Cash and Cash Equivalents at Beginning of Year
1,145

 
1,071

Cash and Cash Equivalents at End of Period
$
825

 
$
951

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. (“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 28, 2013. 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 28, 2013, and the results of operations for the three months ended December 28, 2013, and December 29, 2012. 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 28, 2013, Dynamic Fuels had $160 million of total assets, of which $138 million was net property, plant and equipment, and $113 million of total liabilities, of which $100 million was long-term debt. At September 28, 2013, Dynamic Fuels had $166 million of total assets, of which $142 million was net property, plant and equipment, and $113 million of total liabilities, of which $100 million was long-term debt.
SHARE REPURCHASES
A summary of cumulative share repurchases of our Class A stock is as follows (in millions):
 
 
Three Months Ended
 
 
December 28, 2013
 
December 29, 2012
 
 
Shares
 
Dollars
 
Shares
 
Dollars
Shares repurchased:
 
 
 
 
 
 
 
 
Under share repurchase program
 
4.6

 
$
150

 
5.1

 
$
100

To fund certain obligations under equity compensation plans
 
0.3

 
9

 
0.8

 
15

Total share repurchases
 
4.9

 
$
159

 
5.9

 
$
115

As of December 28, 2013, 9.6 million shares remained available for repurchase. On January 30, 2014, our Board of Directors approved an increase of 25 million shares authorized 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, markets, industry conditions, liquidity targets, limitations under 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.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2011 and February 2013, the Financial Accounting Standards Board (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 adopted this guidance in the first quarter of fiscal 2014. The adoption did not have a significant impact on our consolidated condensed financial statements.

6


NOTE 2: ACQUISITIONS
During fiscal 2013, we acquired two value-added food businesses as part of our strategic expansion initiative, which are included in our Prepared Foods segment. The aggregate purchase price of the acquisitions was $106 million, which included $50 million for property, plant and equipment, $41 million allocated to Intangible Assets and $12 million allocated to Goodwill.
NOTE 3: DISCONTINUED OPERATION
After conducting an assessment during fiscal 2013 of our long-term business strategy in China, we determined our Weifang operation (Weifang), which was part of our Chicken segment, was no longer core to the execution of our strategy given the capital investment it required to execute our future business plan. Consequently, we conducted an impairment test and recorded a $56 million impairment charge in the second quarter of fiscal 2013. We subsequently sold Weifang which resulted in reporting it as a discontinued operation. The sale was completed in July 2013 and did not result in a significant gain or loss as its carrying value approximated the sales proceeds at the time of sale. Weifang's prior periods results, including the impairment charge, have been reclassified and presented as a discontinued operation in our Consolidated Condensed Statements of Income. The following is a summary of the discontinued operation's results (in millions):
 
 
Three Months Ended
 
 
December 28, 2013
 
December 29, 2012
Sales
 
$

 
$
36

 
 


 
 
Pretax loss
 

 
4

Income tax expense
 

 

Loss from discontinued operation, net of tax
 
$

 
$
4

NOTE 4: INVENTORIES
Processed products, livestock and supplies and other are valued at the lower of cost or market. Cost includes purchased raw materials, live purchase costs, growout costs (primarily feed, contract grower pay and catch and haul costs), labor and manufacturing and production overhead, which are related to the purchase and production of inventories. Total inventory consists of the following (in millions):
 
December 28, 2013
 
September 28, 2013
Processed products:
 
 
 
Weighted-average method – chicken and prepared foods
$
780

 
$
799

First-in, first-out method – beef and pork
622

 
624

Livestock – first-in, first-out method
982

 
1,002

Supplies and other – weighted-average method
394

 
392

Total inventory
$
2,778

 
$
2,817

NOTE 5: PROPERTY, PLANT AND EQUIPMENT
The major categories of property, plant and equipment and accumulated depreciation are as follows (in millions): 
 
December 28, 2013
 
September 28, 2013
Land
$
99

 
$
100

Buildings and leasehold improvements
2,958

 
2,945

Machinery and equipment
5,535

 
5,504

Land improvements and other
421

 
417

Buildings and equipment under construction
292

 
236

 
9,305

 
9,202

Less accumulated depreciation
5,233

 
5,149

Net property, plant and equipment
$
4,072

 
$
4,053


7


NOTE 6: OTHER CURRENT LIABILITIES
Other current liabilities are as follows (in millions):
 
December 28, 2013
 
September 28, 2013
Accrued salaries, wages and benefits
$
293

 
$
419

Self-insurance reserves
268

 
267

Income taxes payable
143

 
111

Other
373

 
341

Total other current liabilities
$
1,077

 
$
1,138

NOTE 7: DEBT
The major components of debt are as follows (in millions):
 
December 28, 2013
 
September 28, 2013
Revolving credit facility
$

 
$

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

 
458

6.60% Senior notes due April 2016 (2016 Notes)
638

 
638

7.00% Notes due May 2018
120

 
120

4.50% Senior notes due June 2022 (2022 Notes)
1,000

 
1,000

7.00% Notes due January 2028
18

 
18

Discount on senior notes
(5
)
 
(6
)
GO Zone tax-exempt bonds due October 2033 (0.05% at 12/28/2013)
100

 
100

Other
71

 
80

Total debt
1,942

 
2,408

Less current debt
52

 
513

Total long-term debt
$
1,890

 
$
1,895

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 28, 2013, was $964 million. At December 28, 2013, we had outstanding letters of credit issued under this facility totaling $36 million, none of which were drawn upon. We had an additional $146 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.

8


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.
2013 Notes
In September 2008, we issued $458 million principal amount 3.25% convertible senior unsecured notes which were due October 15, 2013. In connection with the issuance of the 2013 Notes, we entered into separate call option and warrant transactions with respect to our Class A stock to minimize the potential economic dilution upon conversion of the 2013 Notes. The call options contractually expired upon the maturity of the 2013 Notes. The 2013 Notes matured on October 15, 2013 at which time we paid the $458 million principal value with cash on hand, and settled the conversion premium by issuing 11.7 million shares of our Class A stock from available treasury shares. Simultaneous to the settlement of the conversion premium, we received 11.7 million shares of our Class A stock from the call options.
The warrants permit the purchasers to acquire up to approximately 27 million shares of our Class A stock at the current exercise price of $22.13 per share, subject to adjustment. The warrants are exercisable on various dates from January 2014 through April 2014. A 10% increase in our share price above the $22.13 warrant exercise price would result in the issuance of 2.5 million incremental shares. At $33.47, our closing share price on December 28, 2013, the incremental shares we would be required to issue upon exercise of the warrants would have resulted in 9.2 million shares.
2016 Notes
The 2016 Notes carry 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 the 2016 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.
On February 11, 2013, S&P upgraded the credit rating of the 2016 Notes from "BBB-" to "BBB." This upgrade did not impact the interest rate on the 2016 Notes.
2022 Notes
In June 2012, we issued $1.0 billion of senior unsecured notes, which will mature in June 2022. The 2022 Notes carry a 4.50% interest rate, with interest payments due semi-annually on June 15 and December 15. After the original issue discount of $5 million, based on an issue price of 99.458%, we received net proceeds of $995 million. In addition, we incurred offering expenses of $9 million.
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. We issued a letter of credit to effectively guarantee the bond issuance. If any amounts are disbursed related to this guarantee, we would seek recovery of 50% (up to $50 million) from Syntroleum Corporation, our joint venture partner, 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 28, 2013.

9


NOTE 8: INCOME TAXES
The effective tax rate for continuing operations was 34.3% and 35.8% for the first quarter of fiscal 2014 and 2013, respectively. The effective tax rate for the first quarter of fiscal 2014 was impacted by such items as the domestic production deduction, state income taxes and losses in foreign jurisdictions for which no benefit is recognized.
Unrecognized tax benefits were $169 million and $175 million at December 28, 2013, and September 28, 2013, respectively. The amount of unrecognized tax benefits, if recognized, that would impact our effective tax rate was $144 million and $149 million at December 28, 2013, and September 28, 2013, respectively.
We classify interest and penalties on unrecognized tax benefits as income tax expense. At December 28, 2013, and September 28, 2013, before tax benefits, we had $69 million and $63 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 2007 through 2012. We are also subject to income tax examinations by major state and foreign jurisdictions for fiscal years 2003 through 2012 and 2002 through 2012, respectively. We estimate that during the next twelve months it is reasonably possible that unrecognized tax benefits could decrease by as much as $41 million primarily due to expiration of statutes of limitations in various jurisdictions and settlements with taxing authorities.
NOTE 9: OTHER INCOME AND CHARGES
During the first quarter of fiscal 2014, we recorded $2 million of equity earnings in joint ventures, $1 million in net foreign currency exchange gains and $6 million of other than temporary impairment related to an available-for-sale security, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
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.

10


NOTE 10: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data): 
 
Three Months Ended
 
December 28, 2013
 
December 29, 2012
Numerator:
 
 
 
Income from continuing operations
$
252

 
$
172

Less: Net loss attributable to noncontrolling interests
(2
)
 
(5
)
Net income from continuing operations attributable to Tyson
254

 
177

Less dividends declared:
 
 
 
Class A
28

 
46

Class B
6

 
10

Undistributed earnings
$
220

 
$
121

 
 
 
 
Class A undistributed earnings
$
179

 
$
99

Class B undistributed earnings
41

 
22

Total undistributed earnings
$
220

 
$
121

Denominator:
 
 
 
Denominator for basic earnings per share:
 
 
 
Class A weighted average shares
271

 
285

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

Warrants
8

 

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
354

 
362

 
 
 
 
Net Income Per Share from Continuing Operations Attributable to Tyson:
 
 
Class A Basic
$
0.76

 
$
0.51

Class B Basic
$
0.68

 
$
0.46

Diluted
$
0.72

 
$
0.49

Net Income Per Share Attributable to Tyson:
 
 
 
Class A Basic
$
0.76

 
$
0.50

Class B Basic
$
0.68

 
$
0.45

Diluted
$
0.72

 
$
0.48

Approximately 5 million and 8 million of our stock-based compensation shares were antidilutive for the three months ended December 28, 2013 and December 29, 2012, 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.

11


NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS
Our business operations give rise to certain market risk exposures mostly due to changes in commodity prices, foreign currency exchange rates and interest rates. We manage a portion of these risks through the use of derivative financial instruments, primarily futures and options, to reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Forward contracts on various commodities, including grains, livestock and energy, are primarily entered into to manage the price risk associated with forecasted purchases of these inputs used in our production processes. Foreign exchange forward contracts are entered into to manage the fluctuations in foreign currency exchange rates, primarily as a result of certain receivable and payable balances. We also periodically utilize interest rate swaps to manage interest rate risk associated with our variable-rate borrowings.
Our risk management programs are 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 28, 2013.
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., cash flow hedge or fair value hedge). 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 of firm commitments (i.e., livestock).
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 28, 2013, and December 29, 2012.
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 28, 2013
 
September 28, 2013
Commodity:
 
 
 
 
 
Corn
Bushels
 
8

 
5

Soy meal
Tons
 
126,700

 
96,800

Foreign Currency
United States dollar
 
$
29

 
$
60


12


As of December 28, 2013, the net amounts expected to be reclassified into earnings within the next 12 months are pretax losses of $9 million related to grains. During the three months ended December 28, 2013, and December 29, 2012, 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.
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 28,
2013
 
December 29,
2012
 
 
 
December 28,
2013
 
December 29,
2012
Cash Flow Hedge – Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
(2
)
 
$
(13
)
 
Cost of Sales
 
$

 
$
4

Foreign exchange contracts
(1
)
 

 
Other Income/Expense
 

 
(2
)
Total
$
(3
)
 
$
(13
)
 
 
 
$

 
$
2

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 firm commitments which are accounted for as a fair value hedge (in millions): 
 
Metric
 
December 28, 2013
 
September 28, 2013
Commodity:
 
 
 
 
 
Live Cattle
Pounds
 
233

 
209

Lean Hogs
Pounds
 
368

 
384

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 28,
2013
 
December 29,
2012
Gain/(Loss) on forwards
Cost of Sales
 
$
(6
)
 
$
4

Gain/(Loss) on purchase contract
Cost of Sales
 
6

 
(4
)
Ineffectiveness related to our fair value hedges was not significant for the three months ended December 28, 2013, and December 29, 2012.
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 and foreign currency 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

13


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.
We had the following aggregate outstanding notional values related to our undesignated positions (in millions, except soy meal tons): 
 
Metric
 
December 28, 2013
 
September 28, 2013
Commodity:
 
 
 
 
 
Corn
Bushels
 
28

 
69

Soy Meal
Tons
 
219,800

 
204,600

Soy Oil
Pounds
 

 
11

Live Cattle
Pounds
 
28

 
60

Lean Hogs
Pounds
 
75

 
159

Foreign Currency
United States dollars
 
$
203

 
$
95

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 28, 2013
 
December 29, 2012
Derivatives not designated as hedging instruments:
 
 
 
 
 
Commodity contracts
Sales
 
$
2

 
$
11

Commodity contracts
Cost of Sales
 
(2
)
 
(7
)
Foreign exchange contracts
Other Income/Expense
 
(1
)
 
1

Total
 
 
$
(1
)
 
$
5


14


The following table sets forth the fair value of all derivative instruments outstanding in the Consolidated Condensed Balance Sheets (in millions):
 
Fair Value
 
December 28, 2013
 
September 28, 2013
Derivative Assets:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Commodity contracts
$
8

 
$
4

Foreign exchange contracts

 
1

Total derivative assets – designated
8

 
5

 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Commodity contracts
18

 
25

Foreign exchange contracts
1

 
2

Total derivative assets – not designated
19

 
27

 
 
 
 
Total derivative assets
$
27

 
$
32

Derivative Liabilities:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Commodity contracts
$
29

 
$
29

Foreign exchange contracts

 

Total derivative liabilities – designated
29

 
29

Derivatives not designated as hedging instruments:
 
 
 
Commodity contracts
26

 
72

Foreign exchange contracts
2

 
1

Total derivative liabilities – not designated
28

 
73

 
 
 
 
Total derivative liabilities
$
57

 
$
102

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 12: Fair Value Measurements for a reconciliation to amounts reported in the Consolidated Condensed Balance Sheets in Other current assets and Other current liabilities.
NOTE 12: FAIR VALUE MEASUREMENTS
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.

15


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 28, 2013
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Derivatives
$

 
$
26

 
$

 
$
(19
)
 
$
7

Foreign Exchange Forward Contracts

 
1

 

 

 
1

Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
Current

 
1

 

 

 
1

Non-current
3

 
26

 
64

 

 
93

Deferred Compensation Assets
13

 
208

 

 

 
221

Total Assets
$
16

 
$
262

 
$
64

 
$
(19
)
 
$
323

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Derivatives
$

 
$
55

 
$

 
$
(53
)
 
$
2

Foreign Exchange Forward Contracts

 
2

 

 
(1
)
 
1

Total Liabilities
$

 
$
57

 
$

 
$
(54
)
 
$
3

September 28, 2013
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Derivatives
$

 
$
29

 
$

 
$
(21
)
 
$
8

Foreign Exchange Forward Contracts

 
3

 

 
(1
)
 
2

Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
Current

 
1

 

 

 
1

Non-current
4

 
24

 
65

 

 
93

Deferred Compensation Assets
23

 
191

 

 

 
214

Total Assets
$
27

 
$
248

 
$
65

 
$
(22
)
 
$
318

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Derivatives
$

 
$
101

 
$

 
$
(101
)
 
$

Foreign Exchange Forward Contracts

 
1

 

 

 
1

Total Liabilities
$

 
$
102

 
$

 
$
(101
)
 
$
1


(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 28, 2013, and September 28, 2013, we had posted with various counterparties $35 million and $79 million, respectively, of cash collateral related to our commodity derivatives and held no cash collateral.

16


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 28, 2013
 
December 29, 2012
Balance at beginning of year
$
65

 
$
86

Total realized and unrealized gains (losses):
 
 
 
Included in earnings

 

Included in other comprehensive income (loss)

 

Purchases
7

 
3

Issuances

 

Settlements
(8
)
 
(4
)
Balance at end of period
$
64

 
$
85

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 commodities and foreign exchange forward contracts primarily include exchange-traded and over-the-counter contracts which are further described in Note 11: 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. 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 or observable market transactions of spot currency rates and forward currency prices.
Available-for-Sale Securities: Our investments in marketable debt securities are classified as available-for-sale and are reported at fair value based on pricing models and quoted market prices adjusted for credit and non-performance risk. Short-term investments with maturities of less than 12 months are included in Other current assets in the Consolidated Condensed Balance Sheets and primarily include certificates of deposit and commercial paper. All other marketable debt securities are included in Other Assets in the Consolidated Condensed Balance Sheets and have maturities ranging up to 35 years. We classify our investments in U.S. government, U.S. agency, certificates of deposit and commercial paper 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. Significant changes to assumptions or unobservable inputs in the valuation of our Level 3 instruments would not have a significant impact to our consolidated condensed financial statements.
Additionally, we have 0.8 million shares of Syntroleum Corporation common stock and 0.4 million warrants, which expire in June 2015, to purchase an equivalent amount of Syntroleum Corporation common stock at an average price of $28.70. 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.

17


The following table sets forth our available-for-sale securities' amortized cost basis, fair value and unrealized gain (loss) by significant investment category (in millions):
 
December 28, 2013
 
September 28, 2013
 
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
$
27

 
$
27

 
$

 
$
25

 
$
25

 
$

Corporate and Asset-Backed
63

 
64

 
1

 
64

 
65

 
1

Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
Common Stock and Warrants (a)
3

 
3

 

 
9

 
4

 
(5
)
 
(a)
At December 28, 2013, the amortized cost basis for Equity Securities had been reduced by accumulated other than temporary impairment of approximately $6 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 $6 million of other than temporary impairment for the three months ended December 28, 2013, which is recorded in the Consolidated Condensed Statements of Income in Other, net. No other than temporary losses were deferred in OCI as of December 28, 2013, and September 28, 2013.
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 28, 2013 and December 29, 2012.
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 28, 2013
 
September 28, 2013
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Total Debt
$
2,058

 
$
1,942

 
$
2,541

 
$
2,408



18


NOTE 13: OTHER COMPREHENSIVE INCOME (LOSS)
The before and after tax changes in the components of other comprehensive income (loss) are as follows (in millions):
 
Three Months Ended
 
December 28, 2013
 
December 29, 2012
 
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
)
(Gain) loss reclassified to Other Income/Expense



 
2

(1
)
1

Unrealized gain (loss)
(3
)
1

(2
)
 
(13
)
5

(8
)
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
(Gain) loss reclassified to Other Income/Expense
6

(2
)
4

 



Unrealized gain (loss)
(1
)

(1
)
 
(4
)
2

(2
)
 
 
 
 
 
 
 
 
Currency translation:
 
 
 
 
 
 
 
Translation adjustment
(11
)

(11
)
 
(1
)

(1
)
 
 
 
 
 
 
 
 
Postretirement benefits
1

1

2

 
1


1

Total Other Comprehensive Income (Loss)
$
(8
)
$

$
(8
)
 
$
(19
)
$
8

$
(11
)

NOTE 14: SEGMENT REPORTING
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.
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.
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.

19


Information on segments and a reconciliation to income from continuing operations before income taxes are as follows (in millions): 
 
Three Months Ended
 
December 28, 2013
 
December 29, 2012
Sales:
 
 
 
Chicken
$
2,981

 
$
2,920

Beef
3,734

 
3,485

Pork
1,424

 
1,363

Prepared Foods
907

 
841

Other

 
20

Intersegment Sales
(285
)
 
(263
)
Total Sales
$
8,761

 
$
8,366

 
 
 
 
Operating Income (Loss):
 
 
 
Chicken
$
225

 
$
111

Beef
58

 
46

Pork
121

 
125

Prepared Foods
16

 
33

Other
(8
)
 
(11
)
Total Operating Income
412

 
304

 
 
 
 
Total Other (Income) Expense
29


36

 
 
 
 
Income from Continuing Operations before Income Taxes
$
383

 
$
268

The Beef segment had sales of $63 million and $43 million in the first quarter of fiscal 2014 and 2013, respectively, from transactions with other operating segments of the Company. The Pork segment had sales of $222 million and $220 million in the first quarter of fiscal 2014 and 2013, 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.
NOTE 15: COMMITMENTS AND CONTINGENCIES
Commitments
We guarantee obligations of certain outside third parties primarily consisting of 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 28, 2013, was $54 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 14 years. The maximum potential amount of the residual value guarantees is $49 million, of which $43 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 28, 2013, and September 28, 2013, 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 28, 2013, was approximately $310 million. The total receivables under these programs were $42 million and $44 million at December 28, 2013, and September 28, 2013, respectively, and are included, net of allowance for uncollectible amounts, in Accounts Receivable 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 $14 million and $15 million at December 28, 2013, and September 28, 2013, respectively.

20


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 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.
There are eleven lawsuits against our beef and pork subsidiary, Tyson Fresh Meats Inc., in which certain present and past employees allege that we failed to compensate them 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 Fair Labor Standards Act (FLSA) and various state laws. These lawsuits involve employees from our plants in Garden City, 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); Madison, Nebraska (Acosta, et al. v Tyson Foods, Inc. d.b.a Tyson Fresh Meats, Inc., D. Nebraska, February 29, 2008); Dakota City, Nebraska (Gomez, et al. v. Tyson Foods, Inc., D. Nebraska, January 16, 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); Logansport, Indiana (Carter, et al. v. Tyson Foods, Inc. and Tyson Fresh Meats, Inc., N.D. Indiana, April 29, 2008); Goodlettsville, Tennessee (Abadeer v. Tyson Foods, Inc., and Tyson Fresh Meats, Inc., M.D. Tennessee, February 6, 2009); Emporia, Kansas (Abdiaziz, et al. v. Tyson Foods, Inc., Tyson Fresh Meats, Inc., D. Kansas, September 30, 2011); and 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). 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 involves our Garden City, Kansas beef plant, 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' counsel's application and awarded a total of $3,609,723. We appealed the jury’s verdict and trial court’s award to the Tenth Circuit Court of Appeals, and oral arguments were held on November 18, 2013.
A jury trial was held in the Bouaphakeo case, which involves our Storm Lake, Iowa pork plant, which 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. The plaintiffs' counsel has also filed an application for attorneys' fees and expenses in the amount of $2,692,145. We have appealed the jury's verdict and trial court's award to the Eighth Circuit Court of Appeals.
A jury trial was held in the Guyton case, which involves our Columbus Junction, Iowa pork plant, which resulted in a jury verdict in favor of Tyson on April 25, 2012. The plaintiffs have appealed to the Eighth Circuit Court of Appeals.
A bench trial was held in the Acosta case, which involves our Madison, Nebraska pork plant, in January 2013. In May 2013 the trial court awarded the plaintiffs $5,733,943 for unpaid overtime wages. Subsequently, the court ordered the class of plaintiffs expanded, and the plaintiffs submitted an updated calculation of $6,258,330 for unpaid overtime wages as reflected by payroll data through May 2013. On January 30, 2014, the trial court entered judgment in favor of the plaintiffs in the amount of $18,774,989. We intend to file a post-trial motion to modify the district court's findings and conclusions prior to any appeal.
A jury trial in the Gomez case, which involves our Dakota City, Nebraska beef plant, was held, and the jury found in favor of the plaintiffs on April 3, 2013. On October 2, 2013, the trial court denied the parties’ post-trial motions and entered judgment awarding unpaid overtime wages, liquidated damages, and penalties totaling $4,960,787. We have appealed the jury’s verdict and trial court’s award to the Eighth Circuit Court of Appeals.
The trial court in the Edwards case, which involves our Perry and Waterloo, Iowa pork plants, decertified the state law class and granted other pre-trial motions that resulted in judgment in our favor with respect to the plaintiffs’ claims. The plaintiffs have filed a motion to modify this judgment.
The parties in the Carter case, which involves our Logansport, Indiana pork plant, agreed to settle all claims for $950,000. The parties filed a joint motion for approval of the settlement, but the plaintiffs subsequently filed a motion to certify a class of plaintiffs while the joint motion for approval of the settlement was pending. On October 30, 2013 we filed a motion with the court to enforce the settlement.

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The trial court in the Abadeer case, which involves the Goodlettsville, Tennessee plant, granted the plaintiffs’ motion for summary judgment in part, finding that certain pre- and post-shift activities were compensable and our non-payment for those activities was willful and not in good faith. The trial for the remaining issues, including damages, is scheduled to begin April 15, 2014.
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 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 August 1, 2013, the appeals court reversed and remanded the case to the trial court, concluding that the applicable activities at this plant are compensable, subject to certain defenses. We have petitioned the Wisconsin Supreme Court for further review, and the petition was accepted on December 16, 2013.
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.

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NOTE 16: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
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.
 
 
 
 
 
 
 
 
 
 
Condensed Consolidating Statement of Income and Comprehensive Income for the three months ended December 28, 2013
 
in millions

 
TFI
Parent
 
TFM
Parent
 
Non-
Guarantors
 
Eliminations
 
Total
Sales
$
167

 
$
5,048

 
$
3,987

 
$
(441
)
 
$
8,761

Cost of Sales
17

 
4,826

 
3,674

 
(441
)
 
8,076

Gross Profit
150

 
222

 
313

 

 
685

Selling, General and Administrative
23

 
55

 
195

 

 
273

Operating Income
127

 
167

 
118

 

 
412

Other (Income) Expense:
 
 
 
 
 
 
 
 
 
Interest expense, net
5

 
15

 
6

 

 
26

Other, net
6

 
(1
)
 
(2
)
 

 
3

Equity in net earnings of subsidiaries
(175
)
 
(6
)
 

 
181

 

Total Other (Income) Expense
(164
)
 
8

 
4

 
181

 
29

Income from Continuing Operations before Income Taxes
291

 
159

 
114

 
(181