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 July 1, 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.

 

The number of shares outstanding of each of the issuer’s classes of common stock as of July 1, 2006, is set forth below:

 

Class

Outstanding Shares

Class A common stock, $0.10 Par Value

266,001,929

Class B common stock, $0.10 Par Value

88,872,048

 

 

 



 

 

 

 

TYSON FOODS, INC.

INDEX

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

PAGE

 

 

 

 

 

 

Consolidated Condensed Statements of Operations
for the Three and Nine Months Ended
July 1, 2006, and July 2, 2005

3

 

 

 

 

 

 

Consolidated Condensed Balance Sheets
July 1, 2006, and October 1, 2005

4

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows
for the Three and Nine Months Ended
July 1, 2006, and July 2, 2005

5

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements

6

 

 

 

 

Item 2.

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

24

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

 

Item 3.

Defaults Upon Senior Securities

40

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

41

 

 

 

 

Item 5.

Other Information

41

 

 

 

 

Item 6.

Exhibits

41

 

 

 

 

SIGNATURES

42

 

 

 

 

 

 

 

2

 



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TYSON FOODS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

July 1,

 

 

 

July 2,

 

 

 

July 1,

 

 

 

July 2,

 

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

6,383

 

 

 

$

6,708

 

 

 

$

19,088

 

 

 

$

19,519

 

Cost of Sales

 

 

6,180

 

 

 

 

6,189

 

 

 

 

18,388

 

 

 

 

18,226

 

 

 

 

203

 

 

 

 

519

 

 

 

 

700

 

 

 

 

1,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative

 

 

230

 

 

 

 

220

 

 

 

 

700

 

 

 

 

688

 

Other Charges

 

 

(2

)

 

 

 

43

 

 

 

 

57

 

 

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

(25

)

 

 

 

256

 

 

 

 

(57

)

 

 

 

557

 

Other (Income) Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

(11

)

 

 

 

(2

)

 

 

 

(17

)

 

 

 

(7

)

Interest Expense

 

 

74

 

 

 

 

58

 

 

 

 

189

 

 

 

 

179

 

Other

 

 

(12

)

 

 

 

(1

)

 

 

 

(13

)

 

 

 

(12

)

 

 

 

51

 

 

 

 

55

 

 

 

 

159

 

 

 

 

160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

 

(76

)

 

 

 

201

 

 

 

 

(216

)

 

 

 

397

 

Income Tax Expense (Benefit)

 

 

(24

)

 

 

 

70

 

 

 

 

(76

)

 

 

 

142

 

Net Income (Loss)

 

$

(52

)

 

 

$

131

 

 

 

$

(140

)

 

 

$

255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Basic

 

 

249

 

 

 

 

243

 

 

 

 

246

 

 

 

 

243

 

Class B Basic

 

 

96

 

 

 

 

102

 

 

 

 

99

 

 

 

 

102

 

Diluted

 

 

345

 

 

 

 

358

 

 

 

 

345

 

 

 

 

357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Basic

 

$

(0.15

)

 

 

$

0.39

 

 

 

$

(0.41

)

 

 

$

0.76

 

Class B Basic

 

$

(0.14

)

 

 

$

0.35

 

 

 

$

(0.38

)

 

 

$

0.68

 

Diluted

 

$

(0.15

)

 

 

$

0.36

 

 

 

$

(0.41

)

 

 

$

0.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

$

0.040

 

 

 

$

0.040

 

 

 

$

0.120

 

 

 

$

0.120

 

Class B

 

$

0.036

 

 

 

$

0.036

 

 

 

$

0.108

 

 

 

$

0.108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

 

3

 



 

TYSON FOODS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions, except per share data)

 

 

 

(Unaudited)
July 1, 2006

 

 

 

 

October 1, 2005

 

Assets

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

44

 

 

 

$

40

 

Short-term investment

 

 

760

 

 

 

 

-

 

Accounts receivable, net

 

 

1,209

 

 

 

 

1,214

 

Inventories

 

 

2,095

 

 

 

 

2,062

 

Other current assets

 

 

113

 

 

 

 

169

 

Total Current Assets

 

 

4,221

 

 

 

 

3,485

 

Net Property, Plant and Equipment

 

 

4,040

 

 

 

 

4,007

 

Goodwill

 

 

2,500

 

 

 

 

2,502

 

Net Intangible Assets

 

 

139

 

 

 

 

142

 

Other Assets

 

 

346

 

 

 

 

368

 

Total Assets

 

$

11,246

 

 

 

$

10,504

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Current debt

 

$

1,049

 

 

 

$

126

 

Trade accounts payable

 

 

954

 

 

 

 

961

 

Other current liabilities

 

 

914

 

 

 

 

1,070

 

Total Current Liabilities

 

 

2,917

 

 

 

 

2,157

 

Long-Term Debt

 

 

3,063

 

 

 

 

2,869

 

Deferred Income Taxes

 

 

589

 

 

 

 

638

 

Other Liabilities

 

 

167

 

 

 

 

169

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock ($0.10 par value):

 

 

 

 

 

 

 

 

 

Class A-authorized 900 million shares:

 

 

 

 

 

 

 

 

 

issued 281 million shares at July 1, 2006,

 

 

 

 

 

 

 

 

 

and 268 million shares at October 1, 2005

 

 

28

 

 

 

 

27

 

Class B-authorized 900 million shares:

 

 

 

 

 

 

 

 

 

issued 89 million shares at July 1, 2006,

 

 

 

 

 

 

 

 

 

and 102 million shares at October 1, 2005

 

 

9

 

 

 

 

10

 

Capital in excess of par value

 

 

1,824

 

 

 

 

1,867

 

Retained earnings

 

 

2,851

 

 

 

 

3,032

 

Accumulated other comprehensive income

 

 

28

 

 

 

 

28

 

 

 

 

4,740

 

 

 

 

4,964

 

Less treasury stock, at cost-

 

 

 

 

 

 

 

 

 

15 million shares at July 1, 2006,

 

 

 

 

 

 

 

 

 

and October 1, 2005

 

 

230

 

 

 

 

238

 

Less unamortized deferred compensation

 

 

-

 

 

 

 

55

 

Total Shareholders’ Equity

 

 

4,510

 

 

 

 

4,671

 

Total Liabilities and Shareholders’ Equity

 

$

11,246

 

 

 

$

10,504

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

4

 



 

TYSON FOODS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

July 1,

 

 

 

July 2,

 

 

 

July 1,

 

 

 

July 2,

 

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(52

)

 

 

$

131

 

 

 

$

(140

)

 

 

$

255

 

Depreciation and amortization

 

 

130

 

 

 

 

126

 

 

 

 

383

 

 

 

 

377

 

Plant closing-related charges

 

 

(6

)

 

 

 

8

 

 

 

 

46

 

 

 

 

12

 

Deferred income taxes and other

 

 

10

 

 

 

 

16

 

 

 

 

(111

)

 

 

 

(12

)

Net changes in working capital

 

 

(139

)

 

 

 

183

 

 

 

 

(62

)

 

 

 

289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Provided by (Used for) Operating Activities

 

 

(57

)

 

 

 

464

 

 

 

 

116

 

 

 

 

921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(113

)

 

 

 

(163

)

 

 

 

(470

)

 

 

 

(395

)

Proceeds from sale of assets

 

 

1

 

 

 

 

7

 

 

 

 

14

 

 

 

 

15

 

Proceeds from sale of investments

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

8

 

Purchases of marketable securities

 

 

(51

)

 

 

 

(65

)

 

 

 

(169

)

 

 

 

(482

)

Proceeds from sale of marketable securities

 

 

101

 

 

 

 

57

 

 

 

 

180

 

 

 

 

440

 

Purchase of short-term investment

 

 

-

 

 

 

 

-

 

 

 

 

(750

)

 

 

 

-

 

Other

 

 

1

 

 

 

 

14

 

 

 

 

11

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Used for Investing Activities

 

 

(61

)

 

 

 

(150

)

 

 

 

(1,184

)

 

 

 

(398

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in debt

 

 

126

 

 

 

 

(307

)

 

 

 

125

 

 

 

 

(467

)

Net proceeds from Notes offering

 

 

-

 

 

 

 

-

 

 

 

 

992

 

 

 

 

-

 

Purchases of treasury shares

 

 

(10

)

 

 

 

(9

)

 

 

 

(30

)

 

 

 

(36

)

Dividends

 

 

(14

)

 

 

 

(14

)

 

 

 

(41

)

 

 

 

(41

)

Stock options exercised and other

 

 

12

 

 

 

 

11

 

 

 

 

31

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Provided by (Used for) Financing Activities

 

 

114

 

 

 

 

(319

)

 

 

 

1,077

 

 

 

 

(528

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Exchange Rate Change on Cash

 

 

9

 

 

 

 

2

 

 

 

 

(5

)

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Cash and Cash Equivalents

 

 

5

 

 

 

 

(3

)

 

 

 

4

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

 

39

 

 

 

 

35

 

 

 

 

40

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

$

44

 

 

 

$

32

 

 

 

$

44

 

 

 

$

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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), and are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission. 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/A for the fiscal year ended October 1, 2005. The preparation of consolidated condensed financial statements requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated 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 the financial position as of July 1, 2006, and the results of operations and cash flows for the three and nine months ended July 1, 2006, and July 2, 2005. The results of operations and cash flows for the three and nine months ended July 1, 2006, and July 2, 2005, are not necessarily indicative of the results to be expected for the full year.

 

INVESTMENTS

 

The Company has investments in marketable debt securities. As of July 1, 2006, and October 1, 2005, $13 million and $5 million, respectively, were due in one year or less and were classified in other current assets in the Consolidated Condensed Balance Sheets and $113 million and $133 million, respectively, were classified in other assets in the Consolidated Condensed Balance Sheets, with maturities ranging from one to 30 years. The Company has applied Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS No. 115), and has determined all of its marketable debt securities are to be classified as available-for-sale investments. These investments are reported at fair value based on quoted market prices as of the balance sheet date, with unrealized gains and losses, net of tax, recorded in other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is recorded in interest income. The cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of debt securities and declines in value judged to be other than temporary are recorded on a net basis in other income. Interest and dividends on securities classified as available-for-sale are recorded in interest income.

 

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 will use $750 million of the proceeds for the repayment of its outstanding $750 million principal amount of 7.25% Notes due October 1, 2006, and the remaining proceeds were used for general corporate purposes. The Company’s short-term investment at July 1, 2006, includes $750 million of proceeds from the new issuance and earnings on the investment. These funds are on deposit in an interest bearing account with a trustee. The Company has applied SFAS No. 115 and has determined the investment is to be classified as available-for-sale.

 

 

 

6

 



 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143 (FIN 47). Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), was issued in June 2001 and requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset that resulted from the acquisition, construction, development and (or) the normal operation of a long-lived asset. The associated asset costs are capitalized as part of the carrying amount of the long-lived asset. FIN 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. SFAS No. 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for the end of fiscal years ending after December 15, 2005; therefore, the Company will adopt FIN 47 as of September 30, 2006. The Company is currently in the process of evaluating any potential effects of FIN 47, but does not believe its adoption will have a material impact on its consolidated condensed financial statements.

 

In September 2005, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” The issues were the circumstances under which two or more inventory purchase and sales transactions with the same counterparty should be viewed as a single exchange transaction within the scope of Accounting Principles Board Opinion 29, “Accounting for Nonmonetary Transactions” and circumstances under which nonmonetary exchanges of inventory within the same line of business should be recognized at fair value. The Company adopted EITF Issue No. 04-13 in the third quarter of fiscal 2006. The adoption of this Issue did not have a material impact on the Company’s consolidated condensed financial statements.

 

In June 2006, the 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 has not yet determined the impact of this accounting standard.

 

RECLASSIFICATIONS

 

Certain reclassifications related to the classification of items on the Consolidated Condensed Statements of Operations have been made to conform to current presentations. The effect of the reclassifications was not material to the Company’s consolidated condensed financial statements.

 

NOTE 2:

OTHER CHARGES

 

In February 2006, the Company announced its decision to close its Norfolk, Nebraska beef processing plant and its West Point, Nebraska beef slaughtering plant. These facilities closed in February 2006. Production from these facilities was shifted primarily to the Company’s beef complex in Dakota City, Nebraska. Combined, these two facilities employed approximately 1,665 team members. In the second quarter of fiscal 2006, the Company recorded charges of $36 million for estimated impairment charges and $9 million of other closing costs. Other closing costs included $8 million for employee termination benefits and $1 million in other plant closing related liabilities. In the third quarter of fiscal 2006, the Company recorded an additional $2 million related to other plant closing related liabilities and reversed approximately $3 million related to employee termination benefits. These amounts were reflected in the Beef segment as a change to operating income (loss) and included in the Consolidated Condensed Statements of Operations in other charges. The Company accounted for the closing of these facilities in accordance with

 

7

 



Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144) and Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146). As of July 1, 2006, approximately $5 million in employee termination benefits and $3 million of other plant closing related costs had been paid. No material adjustments to the total accrual are anticipated at this time.

 

In January 2006, the Company announced its decision to close two of its processed meats facilities in northeast Iowa. The Independence and Oelwein plants, which produced chopped ham and sliced luncheon meats, closed in March 2006. Combined, these two facilities employed approximately 400 team members. Equipment from these facilities was removed and either sold or used at other Tyson locations, while the plants and related property are currently offered for sale. In the second quarter of fiscal 2006, the Company recorded charges of $12 million for estimated impairment charges and $2 million for employee termination benefits. In the third quarter of fiscal 2006, the Company reversed approximately $1 million related to employee termination benefits. These amounts were reflected in the Prepared Foods segment as a change to operating income and included in the Consolidated Condensed Statements of Operations in other charges. The Company accounted for the closing of these facilities in accordance with SFAS No. 144 and SFAS No. 146. As of July 1, 2006, approximately $1 million in employee termination benefits had been paid. No material adjustments to the total accrual are anticipated at this time.

 

During fiscal 2002, the Company recorded $26 million of costs related to the restructuring of its live swine operations that consisted of $21 million of estimated liabilities for resolution of Company obligations under producer contracts and $5 million of other related costs associated with this restructuring, including lagoon and pit closure costs and employee termination benefits. In the fourth quarter of 2004, the Company recorded an additional reserve of $6 million related to lagoon and pit closure costs. These amounts were reflected in the Company’s Pork segment as a reduction of operating income and included in the Consolidated Condensed Statements of Operations in other charges. The Company is accounting for the restructuring of its live swine operations in accordance with Emerging Issues Task Force No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” and SFAS No. 144. In July 2005, the Company announced it agreed to settle a lawsuit which resulted from the restructuring of its live swine operations. The settlement resulted in the Company recording an additional $33 million of costs in the third quarter of fiscal 2005. These additional costs were reflected in the Company’s Pork segment as a reduction of operating income and included in the Consolidated Condensed Statements of Operations in other charges. As of July 1, 2006, $49 million in payments to former producers and $14 million of other related costs have been paid. No material adjustments to the total accrual are anticipated at this time.

 

In July 2005, the Company announced its decision to make improvements to one of its Forest, Mississippi, facilities, which includes more product lines, enabling the plant to increase production of processed and marinated chicken. The improvements were made at the former Choctaw Maid Farms location, which the Company acquired in fiscal 2003. The Company’s Cleveland Street Forest, Mississippi, poultry operation ceased operations in March 2006. The Company transferred the production and team members to the newly upgraded facilities. The Cleveland Street Forest operation employed approximately 900 team members. As a result of this decision, the Company recorded total costs of $9 million for estimated impairment charges in fiscal 2005. This amount was reflected in the Chicken segment as a reduction of operating income and included in the Consolidated Condensed Statements of Operations in other charges. The Company accounted for the closing of the Cleveland Street Forest operation in accordance with SFAS No. 144 and SFAS No. 146. No material adjustments to the total accrual are anticipated at this time.

 

In July 2005, the Company announced its decision to close its Bentonville, Arkansas, facility. The Bentonville operation employed approximately 320 team members and produced raw and partially fried breaded chicken tenders, fillets, livers and gizzards. The plant ceased operations in November 2005. The production from this facility was transferred to the Company’s Russellville, Arkansas, poultry plant, where an expansion enabled the facility to absorb the Bentonville facility’s production. As a result of this decision, the Company recorded total costs of $1 million for estimated impairment charges and $1 million for employee termination benefits in fiscal 2005. These amounts were reflected in the Chicken segment as a reduction to operating income and included in the Consolidated Condensed Statements of Operations in other charges. The Company accounted for the closing of the Bentonville operation in accordance with SFAS No. 144 and SFAS No. 146. As of July 1, 2006, approximately $1 million of employee termination benefits had been paid. No material adjustments to the total accrual are anticipated at this time.

 

 

8

 



 

In December 2004, the Company announced its decision to close its Portland, Maine, facility. The Portland operation employed approximately 285 team members and produced sliced meats and cooked roast beef. The plant ceased operations February 4, 2005, and production from this facility was transferred to other locations. As a result of the decision, the Company recorded total costs of $4 million ($3 million and $1 million in the first and second quarters, respectively, of fiscal 2005) that included $2 million of estimated impairment charges and $2 million of employee termination benefits. In the fourth quarter of fiscal 2005, the Company reversed approximately $1 million of closing related liabilities. In the first quarter of fiscal 2006, the Company reversed approximately $1 million related to employee termination benefits. These amounts were reflected in the Prepared Foods segment as a change to operating income and included in the Consolidated Condensed Statements of Operations in other charges. The Company accounted for the closing of the Portland operation in accordance with SFAS No. 144 and SFAS No. 146. As of July 1, 2006, $1 million of employee termination benefits had been paid. No material adjustments to the total accrual are anticipated at this time.

 

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. Generally, 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 that are designated and highly effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting, as defined by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), as amended. If a derivative instrument is a hedge, as defined by SFAS No. 133, changes in the fair value of the instrument will be either offset 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 $20 million and $117 million recorded in other current assets at July 1, 2006, and October 1, 2005, respectively, and $42 million and $125 million in other current liabilities at July 1, 2006, and October 1, 2005, 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 times a notional principal amount and to receive in return an amount equal to a specified variable rate of interest times 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 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 recorded related to the Company’s cash flow hedges was not significant during the three and nine months ended July 1, 2006, and July 2, 2005.

 

Derivative products related to grain procurement, such as futures and option contracts that meet the criteria for SFAS No. 133 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 applies SFAS No. 133 hedge accounting to derivative products related to grain procurement that are hedging physical grain contracts that have previously been purchased. 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, net of losses, recorded in accumulated other comprehensive income

 

9

 



(loss) at July 1, 2006, related to cash flow hedges, were $2 million. These gains will be recognized within the next 12 months. The Company generally does not hedge cash flows related to commodities beyond 12 months. Of these gains, the portion resulting from the Company’s open mark-to-market SFAS No. 133 hedge positions was not significant as of July 1, 2006.

 

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 Company has not entered into any material contracts during the three and nine months ended July 1, 2006, and July 2, 2005. The changes in the fair value of a derivative that is 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 that is 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 recorded related to the Company’s fair value hedges was not significant during the three and nine months ended July 1, 2006, and July 2, 2005.

 

During the second quarter of fiscal 2006, the Company removed the fair value designation on certain financial instruments that were in place to hedge forward cattle purchases. These designations were removed 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 SFAS No. 133 hedge accounting. The Company recorded net gains of approximately $28 million in the second quarter of fiscal 2006 associated with the financial instruments that were previously designated as fair value hedges. These gains are included in the Consolidated Condensed Statements of Operations in cost of sales.

 

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 SFAS No. 133 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 12 months.

 

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, creating basis risk. 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 $14 million and $28 million for the three and nine months ended July 1, 2006, respectively, which included an unrealized pretax loss on open mark-to-market futures positions of approximately $17 million as of July 1, 2006. Included in the net losses for the nine months ended July 1, 2006, are net gains of $28 million subsequent to the removal of certain fair value designations described above. For the three and nine months ended July 2, 2005, the Company recorded realized and unrealized net losses of $13 million and net gains of $7 million, respectively, related to livestock futures positions.

 

 

 

10

 



 

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, live chicken and live 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):

 

 

 

 

July 1,

 

October 1,

 

 

 

 

2006

 

2005

 

Processed products

 

 

$

1,210

 

$

1,210

 

Livestock

 

 

 

562

 

 

537

 

Supplies and other

 

 

 

323

 

 

315

 

Total inventory

 

 

$

2,095

 

$

2,062

 

 

NOTE 5:  

PROPERTY, PLANT AND EQUIPMENT

 

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

 

 

 

 

July 1,

 

October 1,

 

 

 

 

2006

 

2005

 

Land

 

 

$

112

 

$

113

 

Buildings and leasehold improvements

 

 

 

2,390

 

 

2,339

 

Machinery and equipment

 

 

 

4,214

 

 

4,015

 

Land improvements and other

 

 

 

198

 

 

195

 

Buildings and equipment under construction

 

 

 

435

 

 

407

 

 

 

 

 

7,349

 

 

7,069

 

Less accumulated depreciation

 

 

 

3,309

 

 

3,062

 

Net property, plant and equipment

 

 

$

4,040

 

$

4,007

 

 

NOTE 6:  

OTHER CURRENT LIABILITIES

 

Other current liabilities are as follows (in millions):

 

 

 

 

July 1,

 

October 1,

 

 

 

 

2006

 

2005

 

Accrued salaries, wages and benefits

 

 

$

265

 

$

269

 

Self-insurance reserves

 

 

 

250

 

 

252

 

Income taxes payable

 

 

 

69

 

 

183

 

Other

 

 

 

330

 

 

366

 

Total other current liabilities

 

 

$

914

 

$

1,070

 

 

 

11

 



 

NOTE 7:  

LONG-TERM DEBT

 

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

 

 

 

 

 

July 1,

 

October 1,

 

 

 

Maturity

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

2010

 

$

-

 

$

-

 

Senior Notes (rates ranging from 6.13% to 8.25%)

 

2006–2028

 

 

3,417

 

 

2,529

 

Term Loan (6.09% effective rate at 7/1/06 and

 

 

 

 

 

 

 

 

 

4.44% effective rate at 10/1/05)

 

2008

 

 

345

 

 

345

 

Accounts Receivable Securitization (5.77% effective rate at 7/1/06)

 

2006, 2008

 

 

246

 

 

-

 

Institutional Notes

 

 

 

 

 

 

 

 

 

(10.84% effective rate at 7/1/06 and 10/1/05)

 

2006

 

 

10

 

 

10

 

Leveraged equipment loans

 

 

 

 

 

 

 

 

 

(rates ranging from 4.67% to 5.99%)

 

2006–2009

 

 

44

 

 

64

 

Other

 

Various

 

 

50

 

 

47

 

Total debt

 

 

 

 

4,112

 

 

2,995

 

Less current debt

 

 

 

 

1,049

 

 

126

 

Total long-term debt

 

 

 

$

3,063

 

$

2,869

 

 

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. The notes carried an initial 6.60% interest rate, with interest payments due semi-annually on April 1 and October 1. The Company will use $750 million of the proceeds for the repayment of its outstanding $750 million principal amount of 7.25% Notes due October 1, 2006. The remaining proceeds were used for general corporate purposes. The Company’s short-term investment at July 1, 2006, includes $750 million of proceeds from this new issuance and earnings on the investment. The $750 million was deposited in an interest bearing account with a trustee.

 

The revolving credit facility, senior notes, term loan and accounts receivable securitization contain various covenants, the more restrictive of which contain maximum allowed leverage ratios and a minimum required interest coverage ratio. At the time the Company completed the initial draft of its third quarter interim financial statements, the Company determined it would not have been in compliance with the maximum allowed leverage ratios with respect to the revolving credit facility and the term loan as of July 1, 2006. The Company obtained a waiver for such covenants it would not have been in compliance with and negotiated less restrictive debt covenants during the fourth quarter of fiscal 2006. See Note 17: Subsequent Events, for further discussion on the waiver, revised debt covenants and the classification of the debt as long-term.

 

The Company has an unsecured revolving credit facility totaling $1.0 billion that supports the Company’s short-term funding needs and letters of credit. The facility expires in September 2010. At July 1, 2006, the Company had outstanding letters of credit totaling approximately $148 million issued primarily in support of workers’ compensation insurance programs and derivative activities. There were no draw downs under these letters of credit at July 1, 2006. At July 1, 2006, and October 1, 2005, there were no amounts drawn under the revolving credit facility; however, the outstanding letters of credit and outstanding borrowings related to its commercial paper program reduce the amount available under the revolving credit facility. See Note 17: Subsequent Events, for further discussion regarding a decrease in the availability under the Company’s unsecured revolving credit facility.

 

At July 1, 2006, the Company had a receivables purchase agreement with three co-purchasers to sell up to $750 million of trade receivables that consisted of $375 million expiring in August 2006 and $375 million expiring in August 2008. On August 8, 2006, the Company extended the expiration dates under the receivables purchase agreement to provide that $375 million in commitments under the agreement expire in August 2007 and the other $375 million in commitments expire in August 2009. The receivables

 

12

 



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 separate creditors that are 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 July 1, 2006, there was $123 million outstanding of the commitments under the agreement expiring in August 2006 and $123 million outstanding of the commitments under the agreement expiring in August 2008, while at October 1, 2005, there were no amounts drawn under the receivables purchase agreement.

 

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 two to nine years and the maximum potential amount of future payments as of July 1, 2006, was $78 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 $110 million, of which, approximately $27 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 July 1, 2006, and October 1, 2005, no liabilities for guarantees were recorded.

 

The Company has fully and unconditionally guaranteed $384 million of senior notes issued by Tyson Fresh Meats, Inc., a wholly-owned subsidiary of the Company. Additionally, the Company has fully and unconditionally guaranteed $345 million related to a term loan facility borrowed by Lakeside Farm Industries, Ltd., a wholly-owned subsidiary of the Company.

 

NOTE 8:  

CONTINGENCIES

 

Listed below are certain claims made against the Company and its subsidiaries. In the Company’s opinion, it has made appropriate and adequate reserves, accruals and disclosures where necessary and the Company believes 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 and reserves are not adequate, an adverse outcome could have a material effect on the consolidated financial condition or results of operations of the Company. The Company believes it has substantial defenses to the claims made and intends to vigorously defend these cases.

 

Wage and Hour/ Labor Matters:  In 2000, the Wage and Hour Division of the U.S. Department of Labor (DOL) conducted an industry-wide investigation of poultry producers, including the Company, to ascertain compliance with various wage and hour issues. As part of this investigation, the DOL inspected 14 of the Company's processing facilities. On May 9, 2002, a civil complaint was filed against the Company in the U.S. District Court for the Northern District of Alabama, Elaine L. Chao, Secretary of Labor, United States Department of Labor v. Tyson Foods, Inc. The complaint alleges that the Company violated the overtime provisions of the federal Fair Labor Standards Act (FLSA) at the Company's chicken-processing facility in Blountsville, Alabama. The complaint does not contain a definite statement of what acts constituted alleged violations of the statute, although the Secretary of Labor has indicated in discovery that the case seeks to require the Company to compensate all hourly chicken processing workers for pre- and post-shift clothes changing, washing and related activities and for one of two unpaid 30-minute meal periods. The Secretary of Labor seeks unspecified back wages for all employees at the Blountsville facility for a period of two years prior to the date of the filing of the complaint, an additional amount in unspecified liquidated damages, and an injunction against future violations at that facility and all other chicken processing facilities operated by the Company. Discovery is in process and set to close on September 18, 2006. No trial date has been set.

 

On June 22, 1999, 11 current and former employees of the Company filed the case of M.H. Fox, et al. v. Tyson Foods, Inc. (Fox) in the U.S. District Court for the Northern District of Alabama claiming the Company violated requirements of the FLSA. The suit alleges the Company failed to pay employees for all hours worked and/or improperly paid them for overtime hours. The suit specifically alleges that (1) employees should be paid for time taken to put on and take off certain working supplies at the beginning and end of their shifts and breaks and (2) the use of "mastercard" or "line" time fails to pay employees for all time actually worked. Plaintiffs seek to represent themselves and all similarly situated current and former employees of the Company,

 

13

 



and plaintiffs seek reimbursement for an unspecified amount of unpaid wages, liquidated damages, attorney fees and costs. To date, approximately 5,100 consents have been filed with the District Court. Plaintiff’s filed their Renewed Motion for Court Supervised Notice to Potential Collective Action Members on April 18, 2006, to which the Company filed their response on June 27, 2006. It is anticipated that Plaintiffs will file a reply no later than August 9, 2006. No trial date has been set.

 

On August 22, 2000, seven employees of the Company filed the case of De Asencio v. Tyson Foods, Inc. in the U.S. District Court for the Eastern District of Pennsylvania. This lawsuit is similar to Fox in that the employees claim violations of the FLSA for allegedly failing to pay for time taken to put on, take off and sanitize certain working supplies, and violations of the Pennsylvania Wage Payment and Collection Law. Plaintiffs sought to represent themselves and all similarly situated current and former employees of the poultry processing plant in New Holland, Pennsylvania, and plaintiffs sought reimbursement for an unspecified amount of unpaid wages, liquidated damages, attorney fees and costs. Approximately 560 additional current or former employees filed consents to join the lawsuit. A two week jury trial beginning on June 5, 2006 ended with a verdict in Tyson’s favor. Final judgment was entered on June 22, 2006 and the Plaintiffs filed their notice of appeal on July 21, 2006.

 

On November 5, 2001, Maria Chavez, et al. v. IBP, Lasso Acquisition Corporation and Tyson Foods, Inc. (Chavez) was filed in the U.S. District Court for the Eastern District of Washington by employees of TFM’s Pasco, Washington beef slaughter, processing and hides facilities, alleging violations of the FLSA, 29 U.S.C. Sections 201 - 219, as well as violations of the Washington State Minimum Wage Act, RCW chapter 49.46, Industrial Welfare Act, RCW chapter 49.12, and the Wage Deductions-Contribution-Rebates Act, RCW chapter 49.52. The Chavez lawsuit alleges TFM and/or the Company required employees to perform unpaid work related to the donning and doffing of certain personal protective clothing and equipment, both prior to and after their shifts, as well as during meal periods. Plaintiffs further allege the holdings in Alvarez, et al. v. IBP support a claim of collateral estoppel and/or res judicata as to many of the issues raised in this litigation. On July 20, 2005, judgment was entered for $11.4 million, exclusive of costs and attorney fees. Attorneys for the Chavez plaintiffs have indicated to the Company their intention to file a follow-on suit to Chavez for different potential claimants alleging similar violations to those raised in Chavez. On November 28, 2005, the District Court awarded the attorneys for the Chavez plaintiffs approximately $1.9 million in fees and expenses. On December 12, 2005, the District Court awarded additional costs of $19,651. On December 8, 2005, the Company filed a notice of appeal with the Ninth Circuit Court of Appeals. The parties later met and reached an agreement that will resolve Chavez and certain post-Chavez claims for $10.2 million. On May 19, 2006, a Settlement Agreement and a Joint Motion to Approve Class Action Settlement was filed by the parties. The district court will hold a Final Approval Hearing on September 26, 2006, at which time it will consider the terms of settlement.

 

On November 21, 2002, a lawsuit entitled Emily D. Jordan, et al. v. IBP, inc. and Tyson Foods, Inc., was filed in the U.S. District Court for the Middle District of Tennessee. Ten current and former hourly employees of Tyson Fresh Meat's (TFM) case-ready facility in Goodlettsville, Tennessee, filed a complaint on behalf of themselves and other unspecified, allegedly "similarly situated" employees, claiming the defendants violated the overtime provisions of the FLSA. The suit alleges the defendants failed to pay employees for all hours worked from the plant's commencement of operations in April 2001. In particular, the suit alleges employees should be paid for the time it takes to collect, assemble and put on, take off and wash their health, safety and production gear at the beginning and end of their shifts and during their meal period. The suit also alleges the Company deducts 30 minutes per day from employees' paychecks regardless of whether employees obtain a full 30-minute period for their meal. Plaintiffs are seeking a declaration that the defendants did not comply with the FLSA, and an award for an unspecified amount of back pay compensation and benefits, unpaid entitlements, liquidated damages, prejudgment and post-judgment interest, attorney fees and costs. On November 17, 2003, the District Court conditionally certified a collective action composed of similarly situated current and former employees at the Goodlettsville facility based upon clothes changing and washing activities and unpaid production work during meal periods, since the plant operations began in April 2001. Class Notices to approximately 4,500 prospective class members were mailed on January 21, 2004. Approximately 525 current and former employees opted into the class. A second, opt-in class notice was mailed to 1,996 current and former team members who were hired after December 16, 2003. In late March 2006, Plaintiffs reported a total of 48 additional persons who opted into the class. Discovery will conclude on December 31, 2006, after which the District Court will hold a status conference to discuss the need for dispositive motions and trial.

 

 

 

14

 



 

NOTE 9:

STOCK-BASED COMPENSATION

 

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R). The pronouncement requires companies to measure and recognize compensation expense for all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares, in the financial statements based on the fair value at the date of the grant. In the first quarter of fiscal 2006, the Company adopted SFAS No. 123R using the modified prospective method. Under the modified prospective method, compensation cost will be recognized for all share-based payments granted after the adoption of SFAS No. 123R and for all awards granted to employees prior to the adoption date of SFAS No. 123R that remain unvested on the adoption date. Accordingly, no restatements were made to prior periods.

 

Prior to the adoption of SFAS No. 123R, the Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for its employee stock compensation plans. Accordingly, no compensation expense was recognized for its stock option issuances as stock options are issued with an exercise price equal to the closing price at the date of grant. Also, prior to the adoption of SFAS No. 123R, the Company issued restricted stock and recorded the fair value of such awards as deferred compensation amortized over the vesting period. Had compensation expense for the employee stock compensation plans been determined based on the fair value method of accounting for the Company’s stock compensation plans according to FASB Statement No. 123, “Accounting for Stock-Based Compensation,” the tax-effected impact would be as follows (in millions, except per share data):

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

July 2, 2005

 

 

 

July 2, 2005

 

 

 

 

 

 

 

 

 

 

Net income as reported

 

$

131

 

 

$

255

 

Stock-based employee compensation expense

 

 

 

 

 

 

 

 

 

included in net income, net of tax

 

 

5

 

 

 

12

 

Total stock-based employee compensation

 

 

 

 

 

 

 

 

 

expense determined under fair value

 

 

 

 

 

 

 

 

 

based method for all awards, net of tax

 

 

(7

)

 

 

(18

)

Pro forma net income

 

$

129

 

 

$

249

 

Earnings per share

 

 

 

 

 

 

 

 

As reported

 

 

 

 

 

 

 

 

 

Class A Basic

 

$

0.39

 

 

$

0.76

 

 

Class B Basic

 

 

0.35

 

 

 

0.68

 

 

Diluted

 

 

0.36

 

 

 

0.71

 

Pro forma

 

 

 

 

 

 

 

 

 

Class A Basic

 

$

0.38

 

 

$

0.74

 

 

Class B Basic

 

 

0.35

 

 

 

0.67

 

 

Diluted

 

 

0.36

 

 

 

0.70

 

 

The Company issues shares under its stock-based compensation plans by issuing Class A common stock from treasury. The total number of shares available for future grant under the Tyson Foods, Inc. 2000 Stock Incentive Plan (Incentive Plan) was 11,460,043 at July 1, 2006.

 

Stock Options

Shareholders approved the Incentive Plan in January 2001. The Incentive Plan is administered by the Compensation Committee of the Board of Directors (Compensation Committee). The Incentive Plan includes provisions for granting incentive stock options for shares of Class A stock at a price not less than the fair market value at the date of grant. Nonqualified stock options may be granted at a price equal to, less than or more than the fair market value of Class A stock on the date the option is granted.  Stock options

 

15

 



under the Incentive Plan generally become exercisable ratably over two to five years from the date of grant and must be exercised within 10 years from the date of grant. The Company’s policy is to recognize compensation expense on a straight line basis over the requisite service period for the entire award.

 

 

 

 

 

 

Weighted Average

 

Aggregate

 

 

 

 

Weighted Average

 

Remaining

 

Intrinsic

 

 

Shares Under

 

Exercise Price

 

Contractual

 

Value

 

 

Option

 

Per Share

 

Life (in Years)

 

(in millions)

 

Outstanding, October 1, 2005

 

17,343,294

 

$

12.93

 

 

 

 

 

 

 

Exercised

 

(1,561,259

)

 

10.94

 

 

 

 

 

 

 

Canceled

 

(713,764

)

 

14.59

 

 

 

 

 

 

 

Granted

 

3,695,728

 

 

16.35

 

 

 

 

 

 

 

Outstanding, July 1, 2006

 

18,763,999

 

 

13.68

 

 

6.2

 

 

$37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable, July 1, 2006

 

8,862,926

 

$

12.52

 

 

3.9

 

 

$27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The weighted-average grant-date fair value of options granted during the first quarter of fiscal 2006 was $6.86. No options were granted during the second or third quarters of fiscal 2006. The fair value of each option grant is established on the date of grant using the Black-Scholes option-pricing model for grants awarded prior to October 1, 2005, and a binomial lattice method for grants awarded subsequent to October 1, 2005. The change to the binomial lattice method was made to better reflect the exercise behavior of top management. The Company uses historical volatility for a period of time that is comparable to the expected life of the option to determine volatility assumptions. Risk free interest rates are based on the five year Treasury bond rate. Weighted average assumptions as of July 1, 2006, used in the fair value calculation are outlined in the following table.

 

Weighted average expected life

 

5.6 years

 

Weighted average risk-free interest rate

 

3.52%

 

Range of risk-free interest rates

 

2.6-4.8%

 

Weighted average expected volatility

 

35.90%

 

Range of expected volatility

 

35.2-40.1%

 

Expected dividend yield

 

1.17%

 

 

The Company recognized stock-based compensation expense related to stock options, net of income taxes, of $3 million and $7 million during the three months and nine months ended July 1, 2006, respectively. This included a tax benefit of $1 million and $4 million for the three and nine months ended July 1, 2006, respectively. There were no options vested during the third quarter of fiscal year 2006. The fair value of options vested was $5 million for the nine months ended July 1, 2006.

 

The Company received cash from the exercise of stock options of $5 million and $19 million for the three and nine months ended July 1, 2006, respectively. The related tax benefit realized from stock options exercised during the three and nine months ended July 1, 2006, was $1 million and $4 million, respectively. The total intrinsic value of options exercised in the three months and nine months ended July 1, 2006, was $2 million and $7 million, respectively. Prior to the adoption of SFAS No. 123R, the Company classified the tax benefits of deductions resulting from the exercise of stock options as cash flows from operating activities in the Consolidated Condensed Statements of Cash Flows. SFAS No. 123R requires the cash flows resulting from tax deductions in excess of the compensation cost of those options (excess tax deductions) to be classified as financing cash flows. The Company did not realize any excess tax deductions during the three and nine months ending July 1, 2006. As of July 1, 2006, the Company had $41 million of total unrecognized compensation cost related to stock option plans that will be recognized over a weighted average period of 2.5 years.

 

 

16

 



 

Restricted Stock

The Company issues restricted stock at the market value as of the date of grant, with restrictions expiring over periods through July 1, 2020. Unearned compensation is recognized over the vesting period for the particular grant using a straight-line method.

 

 

 

 

 

 

Weighted Average

 

Aggregate

 

 

 

 

Weighted Average

 

Remaining

 

Intrinsic

 

 

Number of

 

Grant-Date Fair

 

Contractual

 

Value

 

 

Shares

 

Value Per Share

 

Life (in Years)

 

(in millions)

 

Nonvested, October 1, 2005

 

9,126,656

 

$

12.42

 

 

 

 

 

 

 

Granted

 

757,410

 

 

16.08

 

 

 

 

 

 

 

Dividends

 

76,173

 

 

14.60

 

 

 

 

 

 

 

Vested

 

(264,997

)

 

12.24

 

 

 

 

 

 

 

Forfeited

 

(204,400

)

 

13.72

 

 

 

 

 

 

 

Nonvested, July 1, 2006

 

9,490,842

 

$

12.70

 

 

1.7

 

 

$141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of July 1, 2006, the Company had $46 million of total unrecognized compensation cost related to restricted stock awards that will be recognized over a weighted-average period of 1.7 years.

 

The Company recognized stock-based compensation expense related to restricted stock, net of income taxes, of $4 million and $11 million for the three and nine months ended July 1, 2006, respectively. The related tax benefit for the three and nine months ended July 1, 2006, was $3 million and $7 million, respectively.

 

Performance-based Shares

In July 2003, the Compensation Committee authorized the Company to award performance-based shares of the Company’s Class A stock to certain senior executive officers on the first business day of each of the Company’s 2004, 2005 and 2006 fiscal years having an initial maximum aggregate value of $4 million on the date of each award. In August 2005 and September 2004, the Compensation Committee authorized the expansion of the fiscal 2006 and fiscal 2005 awards to include additional senior officers. The expansions increased the initial maximum aggregate value by $3 million and $2 million for the 2006 and 2005 grants, respectively. The vesting of the performance-based shares for the 2004 and 2005 awards is over three years, and the vesting of the 2006 award is over two and one-half to three years (the Vesting Period), each award being subject to the attainment of Company goals determined by the Compensation Committee prior to the date of the award. The Company reviews progress towards the attainment of Company goals each quarter during the Vesting Period. The attainment of Company goals can be finally determined only at the end of the Vesting Period. If the shares vest, the ultimate cost to the Company will be equal to the Class A stock price on the date the shares vest times the number of shares awarded for all performance grants with other than market criteria. For grants with market performance criteria, the ultimate cost will be the fair value of the probable shares to vest regardless if the shares actually vest. In the first quarter of fiscal 2006, the Company began accounting for performance-based shares in accordance with SFAS No. 123R. Total expenses recorded under SFAS No. 123R related to performance-based shares were not significant in the three and nine months ended July 1, 2006.

 

 

17

 



 

NOTE 10:

PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

Components of net periodic benefit cost for the pension and other postretirement benefit plans that were recognized in the Consolidated Condensed Statements of Operations are as follows (in millions):

 

 

 

Pension Benefits

 

 

 

Other Postretirement Benefits

 

 

 

Three Months Ended

 

 

 

Three Months Ended

 

 

 

July 1,

 

 

 

July 2,

 

 

 

July 1,

 

 

 

July 2,

 

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

Service cost

 

$

1

 

 

 

$

2

 

 

 

$

1

 

 

 

$

-

 

Interest cost

 

 

2

 

 

 

 

1

 

 

 

 

1

 

 

 

 

1

 

Amortization of prior service cost

 

 

1

 

 

 

 

-

 

 

 

 

(1

)

 

 

 

-

 

Expected return on plan assets

 

 

(2

)

 

 

 

(1

)

 

 

 

-

 

 

 

 

-

 

Net periodic benefit cost

 

$

2

 

 

 

$

2

 

 

 

$

1

 

 

 

$

1

 

 

 

 

Pension Benefits

 

 

 

Other Postretirement Benefits

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

July 1,

 

 

 

July 2,

 

 

 

July 1,

 

 

 

July 2,

 

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

Service cost

 

$

4

 

 

 

$

5

 

 

 

$

1

 

 

 

$

-

 

Interest cost

 

 

5

 

 

 

 

4

 

 

 

 

3

 

 

 

 

3

 

Amortization of prior service cost

 

 

1

 

 

 

 

1

 

 

 

 

(2

)

 

 

 

(1

)

Expected return on plan assets

 

 

(5

)

 

 

 

(4

)

 

 

 

-

 

 

 

 

-

 

Net periodic benefit cost

 

$

5

 

 

 

$

6

 

 

 

$

2

 

 

 

$

2

 

 

As of July 1, 2006, the Company changed its previous plans to contribute $9 million to the pension plans and will now not make any contributions during fiscal year 2006. During the first nine months of fiscal year 2006, the Company contributed $10 million to its other postretirement benefit plans. Additional contributions of $3 million are expected throughout the remainder of fiscal year 2006.

 

NOTE 11:

INCOME TAXES

 

The effective tax rate for the third quarter and nine months of fiscal 2006 was 32.4% and 35.3%, respectively, as compared to 35.2% and 35.9% for the same periods of fiscal 2005. The income tax benefit for the third quarter of fiscal 2006 was increased by such items as the estimated Extraterritorial Income Exclusion (ETI) benefit and general business credits, and was reduced by certain nondeductible expense items. On October 11, 2004, the Senate passed the American Jobs Creation Act of 2004, which was signed into law by the President on October 22, 2004. This new law provides for the repeal of the ETI deduction and the replacement with a domestic production deduction. The phase out of the ETI deduction for fiscal 2006 will allow the Company to take 80% of the prior law allowable deduction for transactions occurring in the first quarter of fiscal 2006 and 60% of the prior allowable law deduction for transactions in the remainder of the year. In addition, the Company’s production income qualifies for the domestic production deduction which was applicable to the Company beginning with the first quarter of fiscal 2006. This provision will be phased in from fiscal 2006 through fiscal 2011 and provides for a deduction of between 3% and 9% of qualifying domestic production income over that period. For fiscal 2006, the deduction will be 3% of qualified income. However, due to income limitations of the provision, no benefit from the production deduction is included in the year-to-date effective rate.

 

 

18

 



 

In connection with the Company’s renewal of certain leases, it noted differences in deferred tax liabilities related to temporary book to tax basis differences. At this time, the tax effect of the aggregate basis differences related to the leases is an understatement of approximately $22 million.

 

The Company initiated a review process to assess the adequacy of tax liabilities recorded for basis differences and all of its tax account balances, not just those related to its lease agreements. As this process continues, additional information, including additional temporary differences, positive or negative, may be discovered which could materially impact the preliminary differences indicated above. However, management does not believe this will have a material impact on the results of operations for the nine months ended July 1, 2006, or July 2, 2005. Once the review is completed, which is currently expected to be by October 31, 2006, the Company will make a final determination as to what, if any, adjustments should be recorded in the Company’s financial statements and in which period any such adjustments should be recorded.

 

 

 

19

 



 

NOTE 12:  

EARNINGS (LOSS) PER SHARE

 

The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions, except per share data):

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

July 1,

 

 

 

July 2,

 

 

 

July 1,

 

 

 

July 2,

 

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(52

)

 

 

$

131

 

 

 

$

(140

)

 

 

$

255

 

Less Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A ($0.040/share/quarter)

 

 

11

 

 

 

 

10

 

 

 

 

31

 

 

 

 

30

 

Class B ($0.036/share/quarter)

 

 

4

 

 

 

 

4

 

 

 

 

11

 

 

 

 

11

 

Undistributed earnings (losses)

 

$

(67

)

 

 

$

117

 

 

 

$

(182

)

 

 

$

214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A undistributed earnings (losses)

 

 

(49

)

 

 

 

85

 

 

 

 

(134

)

 

 

 

155

 

Class B undistributed earnings (losses)

 

 

(18

)

 

 

 

32

 

 

 

 

(48

)

 

 

 

59

 

Total undistributed earnings (losses)

 

$

(67

)

 

 

$

117

 

 

 

$

(182

)

 

 

$

214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A weighted average shares

 

 

249

 

 

 

 

243

 

 

 

 

246

 

 

 

 

243

 

Class B weighted average shares, and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shares under if-converted method for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

diluted earnings per share

 

 

96

 

 

 

 

102

 

 

 

 

99

 

 

 

 

102

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

 

-

 

 

 

 

13

 

 

 

 

-

 

 

 

 

12

 

Denominator for diluted earnings per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share – adjusted weighted average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shares and assumed conversions

 

 

345

 

 

 

 

358

 

 

 

 

345

 

 

 

 

357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Basic earnings (loss) per share

 

$

(0.15

)

 

 

$

0.39

 

 

 

$

(0.41

)

 

 

$

0.76

 

Class B Basic earnings (loss) per share

 

$

(0.14

)

 

 

$

0.35

 

 

 

$

(0.38

)

 

 

$

0.68

 

Diluted earnings (loss) per share

 

$

(0.15

)

 

 

$

0.36

 

 

 

$

(0.41

)

 

 

$

0.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company uses the two-class method, as defined in Emerging Issues Task Force Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share,” to compute basic earnings (loss) per share. The two-class method is an earnings allocation method under which earnings per share is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period. Diluted earnings (loss) per share have been computed assuming the conversion of the Class B shares as of the beginning of the period as Class A and Class B shares participate equally in earnings and losses on a per share basis, except the payment of dividends for Class B shares which are limited to no more than 90% of any dividends paid on Class A shares.

 

 

20

 



 

Approximately 29 million of the Company’s option shares were antidilutive for both the three and nine months ended July 1, 2006, respectively, and two million were antidilutive for both the three and nine months ended July 2, 2005. These shares were not included in the dilutive earnings per share calculation.

 

NOTE 13:  

COMPREHENSIVE INCOME (LOSS)

 

The components of comprehensive income (loss) are as follows (in millions):

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

July 1,

 

 

 

July 2,

 

 

 

July 1,

 

 

 

July 2,

 

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(52

)

 

 

$

131

 

 

 

$

(140

)

 

 

$

255

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

(6

)

 

 

 

9

 

 

 

 

(9

)

 

 

 

16

 

Pension unrealized loss

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(5

)

Investments unrealized loss

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(1

)

Derivative gain

 

 

-

 

 

 

 

4

 

 

 

 

3

 

 

 

 

5

 

Derivative loss reclassified to income statement

 

 

1

 

 

 

 

1

 

 

 

 

6

 

 

 

 

24

 

Total comprehensive income (loss)

 

$

(57

)

 

 

$

145

 

 

 

$

(140

)

 

 

$

294

 

 

The related tax effects allocated to the components of comprehensive income (loss) are as follows (in millions):

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

July 1,

 

 

 

July 2,

 

 

 

July 1,

 

 

 

July 2,

 

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

Income tax benefit (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension unrealized loss

 

$

-

 

 

 

$

-

 

 

 

$

-

 

 

 

$

2

 

Derivative gain

 

 

-

 

 

 

 

(2

)

 

 

 

(2

)

 

 

 

(3

)

Derivative loss reclassified to income statement

 

 

-

 

 

 

 

(1

)

 

 

 

(3

)

 

 

 

(15

)

Total income tax benefit (expense)

 

$

-

 

 

 

$

(3

)

 

 

$

(5

)

 

 

$

(16

)

 

NOTE 14:  

SUPPLEMENTAL CASH FLOW INFORMATION

 

The following non-cash transaction was excluded from the Consolidated Condensed Statements of Cash Flows for the third quarter and nine months of fiscal 2005. A $26 million change in goodwill in the third quarter of fiscal 2005 from the April 2, 2005 balance and a corresponding change in other current liabilities was due to an adjustment of pre-acquisition tax liabilities assumed as part of the TFM acquisition. During the third quarter of fiscal 2005, it was determined this accrual of $26 million of pre-acquisition tax liability was no longer needed due to the closing of an IRS examination. As a result, the current liability and the goodwill were adjusted in the third quarter of fiscal 2005.

 

 

 

 

21

 



 

NOTE 15:  

SEGMENT REPORTING

 

The Company operates in five business segments: Chicken, Beef, Pork, Prepared Foods and Other. The Company measures segment profit as operating income.

 

Chicken segment is involved primarily in the processing of live chickens into fresh, frozen and value-added chicken products. The Chicken segment markets its products domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets throughout the world. The Chicken segment also includes sales from allied products and the Company’s chicken breeding stock subsidiary.

 

Beef segment is involved primarily in the processing of live fed cattle and fabrication of dressed beef carcasses into primal and sub-primal meat cuts and case-ready products. It also involves deriving value from allied products such as hides and variety meats for sale to further processors and others. The Beef segment markets its products domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets throughout the world. Allied products are also marketed to manufacturers of pharmaceuticals and technical products.

 

Pork segment is involved primarily in the processing of live market hogs and fabrication of pork carcasses into primal and sub-primal cuts and case-ready products. This segment also represents the Company's live swine group and related allied product processing activities. The Pork segment markets its products domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets throughout the world. It also sells allied products to pharmaceutical and technical products manufacturers, as well as live swine to pork processors.

 

Prepared Foods segment includes the Company's operations that manufacture and market frozen and refrigerated food products. Products include pepperoni, 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. The Prepared Foods segment markets its products domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets throughout the world.

 

Other segment includes the logistics group and other miscellaneous adjustments.

 

 

22

 



 

Information on segments and a reconciliation to income (loss) before taxes on income are as follows, (in millions):

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

 

July 1,

 

 

 

July 2,

 

 

 

July 1,

 

 

 

July 2,

 

 

 

 

 

2006

 

 

 

2005

 

 

 

2006

 

 

 

2005

 

 

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chicken

 

$

1,922

 

 

 

$

2,085

 

 

 

$

5,968

 

 

 

$

6,207

 

 

 

Beef

 

 

3,032

 

 

 

 

3,102

 

 

 

 

8,804

 

 

 

 

8,671

 

 

 

Pork

 

 

754

 

 

 

 

811

 

 

 

 

2,275

 

 

 

 

2,484

 

 

 

Prepared Foods

 

 

661

 

 

 

 

696

 

 

 

 

1,995

 

 

 

 

2,119

 

 

 

Other

 

 

14

 

 

 

 

14

 

 

 

 

46

 

 

 

 

38

 

 

 

Total Sales

 

$

6,383

 

 

 

$

6,708

 

 

 

$

19,088

 

 

 

$

19,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chicken

 

$

(59

)

 

 

$

198

 

(a)

 

$

73

 

 

 

$

445

 

(e)

 

Beef

 

 

(10

)

 

 

 

36

 

 

 

 

(262

)

(c)

 

 

1

 

(f)

 

Pork

 

 

12

 

 

 

 

(19

)

(b)

 

 

32

 

 

 

 

15

 

(g)

 

Prepared Foods

 

 

13

 

 

 

 

28

 

 

 

 

46

 

(d)

 

 

60

 

(h)

 

Other

 

 

19

 

 

 

 

13

 

 

 

 

54

 

 

 

 

36

 

 

 

Total Operating Income (Loss)

 

 

(25

)

 

 

 

256

 

 

 

 

(57

)

 

 

 

557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Expense

 

 

51

 

 

 

 

55

 

 

 

 

159

 

 

 

 

160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

$

(76

)

 

 

$

201

 

 

 

$

(216

)

 

 

$

397

 

 

 

 

a.

Includes $10 million of pretax charges related to the closing of the Cleveland Street Forest, Mississippi, and Bentonville, Arkansas, poultry operations.

b.

Includes $33 million of pretax charges related to a legal settlement involving the Company’s live swine operation.

 

c.

Includes $45 million of pretax charges related to the closings of the Norfolk, Nebraska and West Point, Nebraska facilities.

d.

Includes $14 million of pretax charges related to the closings of the Independence, Iowa and Oelwein, Iowa facilities.

 

e. Includes $12 million of pretax charges primarily related to the closing of the Cleveland Street Forest, Mississippi, and Bentonville, Arkansas, poultry operations.

f.

Includes $10 million of pretax gains related to vitamin antitrust litigation.

g.

Includes $33 million of pretax charges related to a legal settlement involving the Company’s live swine operations and $2 million of pretax gains related to vitamin antitrust litigation.

h.

Includes $3 million of pretax charges primarily related to the closing of the Portland, Maine, facility.

 

The Beef segment had sales of $28 million and $26 million in the third quarter of fiscal years 2006 and 2005, respectively, and sales of $69 million and $62 million in the nine months of fiscal years 2006 and 2005, respectively, from transactions with other operating segments of the Company. The Pork segment had sales of $112 million and $109 million in the third quarter of fiscal years 2006 and 2005, respectively, and sales of $344 million and $386 million in the nine months of fiscal years 2006 and 2005, respectively, from transactions with other operating segments of the Company. The aforementioned sales from intersegment transactions, which were at market prices, were excluded from the segment sales in the above table.

 

 

23

 



 

NOTE 16:  

CAPITAL STRUCTURE

 

During the third quarter of fiscal 2006, Tyson Limited Partnership converted 10,000,000 shares of Class B Common Stock to Class A Common Stock (on a one for one basis).

 

During the second quarter of fiscal 2006, Don Tyson, a director of the Company, converted 750,000 shares of Class B Common Stock to Class A Common Stock (on a one for one basis). Additionally, Tyson Limited Partnership converted 2,000,000 shares of Class B Common Stock to Class A Common Stock (on a one for one basis).

 

NOTE 17: SUBSEQUENT EVENTS

 

On July 24, 2006, Moody’s Investors Services, Inc. downgraded the Company’s credit rating applicable to its senior notes from “Baa3” to “Ba1.” This downgrade increased the interest rate on the $1.0 billion senior unsecured notes issued in the second quarter of fiscal 2006 from 6.60% to 6.85%, effective since the last interest payment made (i.e. the issuance of the new notes). Accordingly, in the fourth quarter, the Company will record an additional $0.7 million for the interest period from March 22, 2006 to July 1, 2006. This downgrade will increase annual interest expense and related fees by approximately $5 million, including $2.5 million related to the $1.0 billion senior unsecured notes issued in the second quarter of fiscal 2006.

 

On July 31, 2006, Standard & Poor’s downgraded the Company’s credit rating applicable to its senior notes from “BBB” to

“BBB-.” This downgrade did not result in an increase in the interest rate on the $1.0 billion senior unsecured notes issued in the second quarter of fiscal 2006.

 

On July 27, 2006, the Company entered into a third amendment to its five-year revolving credit facility and the three-year term loan facility of its subsidiary, Lakeside Farm Industries, Ltd. These amendments modified the minimum required interest coverage ratio, temporarily suspended the maximum allowed leverage ratios and implemented temporary minimum consolidated EBITDA requirements. At the time the Company completed the initial draft of its third quarter interim financial statements, the Company determined it would not have been in compliance with the maximum allowed leverage ratios with respect to the revolving credit facility and term loan as of July 1, 2006. The Company obtained a waiver for such covenants it would not have been in compliance with and negotiated less restrictive debt covenants during the fourth quarter of fiscal 2006. The Company is in compliance with the new covenant requirements as of July 1, 2006. Accordingly, the Company has classified the debt as long-term in accordance with its terms.

 

In connection with these amendments, the Company’s availability under its unsecured revolving credit facility has decreased and if the Company’s credit rating is further downgraded, prior to the end of the second quarter of fiscal 2007, the Company is required to have certain of its subsidiaries guarantee the revolving credit facility and term loan. The amended agreement allows for a 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 amount available as of August 4, 2006, was $554 million.

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

RESULTS OF OPERATIONS

 

Overview

 

Tyson Foods is the world’s largest protein company and the second largest publicly traded food company in the Fortune 500 with one of the most recognized brand names in the food industry. Tyson produces, distributes and markets chicken, beef, pork, prepared foods and related allied products. The Company’s primary operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods. Some of the key factors that influence the Company’s business are customer demand for the Company’s products, protein supplies, the ability to maintain and grow relationships with customers and introduce new and innovative products to the marketplace, accessibility of international markets, market prices for the Company’s chicken, beef and pork products, the cost of live cattle and hogs, raw materials and grain and operating efficiencies of the Company’s facilities.

 

24

 



 

Net loss for the third quarter of fiscal 2006 was $52 million, or $0.15 per diluted share, compared to earnings of $131 million, or $0.36 per diluted share, for the third quarter of fiscal 2005. Pretax earnings for the third quarter of fiscal 2005 included $33 million of costs related to a legal settlement involving the Company’s live swine operations and $10 million related to poultry plant closings.

 

Net loss for the nine months of fiscal 2006 was $140 million, or $0.41 per diluted share, compared to earnings of $255 million, or $0.71 per diluted share, for the nine months of fiscal 2005. Pretax loss for the nine months of fiscal 2006 included $45 million of costs related to beef plant closings and $14 million related to prepared foods plant closings. Pretax earnings for the nine months of fiscal 2005 included $33 million of costs related to a legal settlement involving the Company’s live swine operations and $15 million of costs related to poultry and prepared foods plant closings, partially offset by $12 million received in connection with vitamin antitrust litigation and a gain of $8 million from the sale of the Company’s remaining interest in Specialty Brands, Inc.

 

The Company’s Beef, Pork and Prepared Foods segments’ operating results for the third quarter of fiscal 2006 improved $126 million over the second quarter, excluding plant closing charges of $59 million recorded in the second quarter of fiscal 2006. However, as anticipated, the Company continued to face challenging operating conditions in the third quarter of fiscal 2006. The oversupply of proteins, as well as higher energy costs, negatively impacted the operating results of each of the Company’s segments.

 

Chicken and Beef sales volumes increased 7.0% and 6.3%, respectively, as compared to the same quarter last year, however, these improvements were more than offset by lower average sales prices, resulting in decreased sales and operating losses for both segments. The Chicken segment continued to be negatively impacted by low leg quarter pricing and increased grain costs. Domestically, Beef margins improved, but the Company’s Lakeside operation was adversely effected by tighter cattle supplies, operational inefficiencies and the stronger Canadian dollar value against the U.S. dollar.

 

Management’s primary goal during this difficult operating environment is to return the Company to profitability. One of the measures being taken to achieve this goal is to manage and reduce costs. In May 2006, the Company embarked on a plan to reduce costs by approximately $110 million. After reviewing all aspects of the Company’s business, as well as suggestions from team members, approximately $200 million of cost reduction initiatives were identified, exceeding the Company’s original goal. About half of that is expected to be divided equally among consulting and professional fees, sales and marketing. The remaining $100 million is expected to be divided equally between staffing costs and other expenses. Virtually all of the cost reduction initiatives should be in place by the end of the calendar year, with savings beginning principally in fiscal 2007.

 

Although returning the Company to profitability is its primary short-term goal, management also remains focused on the following primary elements of its long-term strategy: creating more value-added products, improving operational efficiencies and expanding internationally.

 

Tax Account Balance Review

In connection with the Company’s renewal of certain leases, it noted differences in deferred tax liabilities related to temporary book to tax basis differences. At this time, the tax effect of the aggregate basis differences related to the leases is an understatement of approximately $22 million.

 

The Company initiated a review process to assess the adequacy of tax liabilities recorded for basis differences and all of its tax account balances, not just those related to its lease agreements. As this process continues, additional information, including additional temporary differences, positive or negative, may be discovered which could materially impact the preliminary differences indicated above. However, management does not believe this will have a material impact on the results of operations for the nine months ended July 1, 2006, or July 2, 2005. Once the review is completed, which is currently expected to be by October 31, 2006, the Company will make a final determination as to what, if any, adjustments should be recorded in the Company’s financial statements and in which period any such adjustments should be recorded.

 

 

25

 



 

Goodwill

The Company tests goodwill for impairment by reporting unit on an annual basis during the fourth quarter each fiscal year. During the second quarter of fiscal 2006, in accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” the Company reviewed goodwill for impairment related to its Beef reporting unit. The review resulted from the significant adverse changes in the business climate of the Company’s Beef segment.

 

The Company forecasted cash flows to estimate the fair value of the Beef segment reporting unit based on reasonable and supportable assumptions. The forecast reflected improved results from current Beef reporting unit levels, which resulted in the fair value of the Beef reporting unit exceeding the carrying value. Therefore, the goodwill of the Beef reporting unit was not impaired. The improved forecasted results were mainly due to the expectations that beef export restrictions would abate, cattle supplies would increase and the overabundance of chicken and pork in the marketplace would lessen.

 

Although the Beef segment realized an operating loss in the third quarter of fiscal 2006, results improved significantly from the second quarter, therefore the Company did not review goodwill for impairment related to its Beef reporting unit in the third quarter of fiscal 2006, as it believed its second quarter analysis continued to be its best estimate of the value of goodwill and did not believe new impairment indicators were present. The Company will perform its annual testing of goodwill by reporting unit in the fourth quarter of fiscal 2006.

 

SFAS No. 123R

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R). The pronouncement requires companies to measure and recognize compensation expense for all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares, in the financial statements based on the fair value at the date of the grant. In the first quarter of fiscal 2006, the Company adopted SFAS No. 123R using the modified prospective method. Under the modified prospective method, compensation cost will be recognized for all share-based payments granted after the adoption of SFAS No. 123R and for all awards granted to employees prior to the adoption date of SFAS No. 123R that remain unvested on the adoption date. Accordingly, no restatements were made to prior periods.

 

Prior to the adoption of SFAS No. 123R, the Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for its employee stock compensation plans. Accordingly, no compensation expense was recognized for its stock option issuances as stock options are issued with an exercise price equal to the closing price at the date of grant. Also, prior to the adoption of SFAS No. 123R, the Company issued restricted stock and recorded the fair value of such awards as deferred compensation amortized over the vesting period.

 

The fair value of each option grant is established on the date of grant using the Black-Scholes option-pricing model for grants awarded prior to October 1, 2005, and a binomial lattice method for grants awarded subsequent to October 1, 2005. The change to the binomial lattice method was made to better reflect the exercise behavior of top management.

 

The Company recognized compensation expense (net of tax) in the third quarter and nine months of fiscal 2006 of $3 million and $7 million, respectively, related to stock options.

 

As of July 1, 2006, the Company had $41 million of total unrecognized compensation cost related to stock option plans that will be recognized over a weighted average period of 2.5 years and $46 million of total unrecognized compensation cost related to restricted stock awards that will be recognized over a weighted-average period of 1.7 years.

 

Outlook

 

Although management believes the fourth quarter will continue to be difficult, improvements are anticipated in the Chicken, Beef and Prepared Foods segments. Pork segment results are expected to remain flat. Chicken segment operating results are expected to be positive in the fourth quarter of fiscal 2006, as the Company realizes the effects of reduced inventories and improved leg quarter pricing. Additionally, if cattle supplies increase as anticipated, Beef operating margins are expected to slightly improve.

 

26

 



Based on the Company’s outlook for fiscal year 2006, including its view of all the various markets, the Company now estimates its fiscal 2006 diluted loss per share to be in the range of $0.41 to $0.51.

 

Third Quarter of Fiscal 2006 vs. Third Quarter of Fiscal 2005

 

Sales decreased $325 million, or 4.8%, compared to the same period last year, with a 9.3% decrease in average sales price and a 4.9% increase in volume. The oversupply of proteins led to decreased average sales prices in all segments. Chicken segment sales were negatively impacted by decreases in market prices due primarily to the oversupply of leg quarters. Additionally, third quarter fiscal 2006 sales were positively impacted by realized and unrealized net gains of $42 million, as compared to net losses of $16 million recorded in the same period last year from the Company’s commodity risk management activities related to its fixed forward boxed beef and pork sales.

 

Cost of sales decreased $9 million compared to the same period last year. As a percent of sales, cost of sales increased from 92.3% to 96.8%. The increase as a percentage of sales was primarily due to the decrease in average sales prices, while average live prices and production costs did not decrease at the same rate. Additionally, energy costs increased in all protein segments by approximately $25 million as compared to the same period last year. The third quarter of fiscal 2006 includes $55 million of realized and unrealized net losses related to the Company’s forward futures contracts for live cattle and hog purchases, as compared to $3 million of realized and unrealized gains recorded in the same period last year.

 

Selling, general and administrative expenses increased $10 million, or 4.5%. As a percent of sales, selling, general and administrative expenses increased from 3.3% to 3.6%. The increase was primarily due to insurance proceeds received in the third quarter of fiscal 2005.

 

Other charges decreased $45 million. The third quarter of fiscal 2005 included charges of $33 million related to a legal settlement involving the Company’s live swine operations and $10 million in plant closing costs, primarily related to the closings of the Company’s Cleveland Street Forest, Mississippi, and Bentonville, Arkansas, poultry operations.

 

Interest income increased $9 million, which was due primarily to the interest earned on the $750 million short-term investment held on deposit with a trustee that will be used for the repayment of the 7.25% Notes maturing on October 1, 2006.

 

Interest expense increased $16 million, or 27.6%. The increase was due primarily to the increase in average total debt of 29.9%. However, the average total debt increased by approximately 6.4% when adjusted for the $750 million short-term investment.

 

Other income and expense improved $11 million. The improvement is primarily due to a gain recorded on the write-off of a capital lease obligation related to a legal settlement of approximately $7 million and foreign exchange gain/loss activity related to the Company’s Canadian operations.

 

The effective tax rate for the third quarter of fiscal 2006 was 32.4%, compared to 35.2% in the third quarter of fiscal 2005. The income tax benefit for the third quarter of fiscal 2006 was increased by such items as the estimated Extraterritorial Income Exclusion (ETI) benefit and general business credits, and was reduced by certain nondeductible expense items. The American Jobs Creation Act of 2004 provides for the repeal of the ETI deduction and the replacement with a domestic production deduction. The phase out of the ETI deduction for fiscal 2006 allows the Company to take 60% of the prior law allowable deduction for transactions in the third quarter of fiscal 2006.

 

 

27

 



 

Segment Results

 

Information on segments is as follows (in millions):

 

 

 

Three Months Ended

 

 

 

Sales
July 1,
2006

 

 

 

Sales
July 2,
2005

 

 

 

Sales
Change

 

 

 

Volume
Change

 

 

 

Average
Sales Price
Change

 

Chicken

 

$

1,922

 

 

 

$

2,085

 

 

 

$

(163

)

 

 

7.0

%

 

 

(13.9

)%

Beef

 

 

3,032

 

 

 

 

3,102

 

 

 

 

(70

)

 

 

6.3

%

 

 

(8.0

)%

Pork

 

 

754

 

 

 

 

811

 

 

 

 

(57

)

 

 

(1.9

)%

 

 

(5.2

)%

Prepared Foods

 

 

661

 

 

 

 

696

 

 

 

 

(35

)

 

 

0.9

%

 

 

(5.7

)%

Other

 

 

14

 

 

 

 

14

 

 

 

 

-

 

 

 

n/a

 

 

 

n/a

 

Total

 

$

6,383

 

 

 

$

6,708

 

 

 

$

(325

)

 

 

4.9

%

 

 

(9.3

)%

 

 

 

 

Three Months Ended

 

 

 

Operating
Income (Loss)
July 1,
2006

 

 

 

Operating
Income (Loss)
July 2,
2005

 

 

 

Operating
Incom