FORM 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended October 2, 2010

 

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                          to                         

Commission File No. 001-14704

TYSON FOODS, INC.

(Exact Name of Registrant as specified in its Charter)

 

Delaware   71-0225165

(State or other jurisdiction of

incorporation or organization)

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

 

2200 Don Tyson Parkway, Springdale, Arkansas   72762-6999
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code:   (479) 290-4000

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Each Exchange on Which Registered
Class A Common Stock, Par Value $0.10   New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: Not Applicable

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

Large accelerated filer [X]          Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)          Smaller reporting company [ ]

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

On April 3, 2010, the aggregate market value of the registrant’s Class A Common Stock, $0.10 par value (Class A stock), and Class B Common Stock, $0.10 par value (Class B stock), held by non-affiliates of the registrant was $5,835,078,191 and $412,523, respectively. Class B stock is not publicly listed for trade on any exchange or market system. However, Class B stock is convertible into Class A stock on a share-for-share basis, so the market value was calculated based on the market price of Class A stock.

On October 30, 2010, there were 307,209,339 shares of Class A stock and 70,021,155 shares of Class B stock outstanding.

INCORPORATION BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the registrant’s Annual Meeting of Shareholders to be held February 4, 2011, are incorporated by reference into Part III of this Annual Report on Form 10-K.


Table of Contents

TABLE OF CONTENTS

 

        PAGE   

PART I

     

Item 1.

   Business      3   

Item 1A.

   Risk Factors      7   

Item 1B.

   Unresolved Staff Comments      12   

Item 2.

   Properties      12   

Item 3.

   Legal Proceedings      13   

Item 4.

   Removed and Reserved      14   

PART II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      15   

Item 6.

   Selected Financial Data      17   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      37   

Item 8.

   Financial Statements and Supplementary Data      39   

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      85   

Item 9A.

   Controls and Procedures      85   

Item 9B.

   Other Information      85   

PART III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      86   

Item 11.

   Executive Compensation      86   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      86   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      87   

Item 14.

   Principal Accounting Fees and Services      87   

PART IV

     

Item 15.

   Exhibits, Financial Statement Schedules      87   

 

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PART I

ITEM 1. BUSINESS

GENERAL

Founded in 1935, Tyson Foods, Inc. and its subsidiaries (collectively, “Company,” “we,” “us” or “our”) are one of the world’s largest meat protein companies and the second-largest food production company in the Fortune 500 with one of the most recognized brand names in the food industry. We produce, distribute and market chicken, beef, pork, prepared foods and related allied products. Our operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods. Some of the key factors influencing our business are customer demand for our products; the ability to maintain and grow relationships with customers and introduce new and innovative products to the marketplace; accessibility of international markets; market prices for our products; the cost of live cattle and hogs, raw materials and grain; and operating efficiencies of our facilities.

We operate a fully vertically integrated poultry production process. Our integrated operations consist of breeding stock, contract growers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Through our wholly-owned subsidiary, Cobb-Vantress, Inc. (Cobb), we are one of the leading poultry breeding stock suppliers in the world. Investing in breeding stock research and development allows us to breed into our flocks the characteristics found to be most desirable.

We also process live fed cattle and hogs and fabricate dressed beef and pork carcasses into primal and sub-primal meat cuts, case ready beef and pork and fully-cooked meats. In addition, we derive value from allied products such as hides and variety meats sold to further processors and others.

We produce a wide range of fresh, value-added, frozen and refrigerated food products. Our products are marketed and sold primarily by our sales staff to grocery retailers, grocery wholesalers, meat distributors, warehouse club stores, military commissaries, industrial food processing companies, chain restaurants or their distributors, international export companies and domestic distributors who serve restaurants, foodservice operations such as plant and school cafeterias, convenience stores, hospitals and other vendors. Additionally, sales to the military and a portion of sales to international markets are made through independent brokers and trading companies.

We have been exploring ways to commercialize our supply of poultry litter and animal fats. In June 2007, we announced a 50/50 joint venture with Syntroleum Corporation, called Dynamic Fuels LLC. Dynamic Fuels LLC produces renewable synthetic fuels targeting the renewable diesel and jet fuel markets. Construction of production facilities was completed in late fiscal 2010, and initial production began in October 2010.

FINANCIAL INFORMATION OF SEGMENTS

We operate in four segments: Chicken, Beef, Pork and Prepared Foods. The contribution of each segment to net sales and operating income (loss), and the identifiable assets attributable to each segment, are set forth in Note 20: Segment Reporting of the Notes to Consolidated Financial Statements.

DESCRIPTION OF SEGMENTS

Chicken: Chicken operations include breeding and raising chickens, as well as processing live chickens into fresh, frozen and value-added chicken products and logistics operations to move products through the supply chain. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets. It also includes sales from allied products and our chicken breeding stock subsidiary.

Beef: Beef operations include processing live fed cattle and fabricating dressed beef carcasses into primal and sub-primal meat cuts and case-ready products. This segment also includes sales from allied products such as hides and variety meats, as well as logistics operations to move products through the supply chain. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets. Allied products are marketed to manufacturers of pharmaceuticals and technical products.

 

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Pork: Pork operations include processing live market hogs and fabricating pork carcasses into primal and sub-primal cuts and case-ready products. This segment also includes our live swine group, related allied product processing activities and logistics operations to move products through the supply chain. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets. We sell allied products to pharmaceutical and technical products manufacturers, as well as a limited number of live swine to pork processors.

Prepared Foods: Prepared Foods operations include manufacturing and marketing frozen and refrigerated food products and logistics operations to move products through the supply chain. Products include pepperoni, bacon, beef and pork pizza toppings, pizza crusts, flour and corn tortilla products, appetizers, prepared meals, ethnic foods, soups, sauces, side dishes, meat dishes and processed meats. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets.

RAW MATERIALS AND SOURCES OF SUPPLY

Chicken: The primary raw materials used in our chicken operations are corn and soybean meal used as feed and live chickens raised primarily by independent contract growers. Our vertically-integrated chicken process begins with the grandparent breeder flocks and ends with broilers for processing. Breeder flocks (i.e., grandparents) are raised to maturity in grandparent growing and laying farms where fertile eggs are produced. Fertile eggs are incubated at the grandparent hatchery and produce pullets (i.e., parents). Pullets are sent to breeder houses, and the resulting eggs are sent to our hatcheries. Once chicks have hatched, they are sent to broiler farms. There, contract growers care for and raise the chicks according to our standards, with advice from our technical service personnel, until the broilers reach the desired processing weight. Adult chickens are transported to processing plants, which are slaughtered and converted into finished products, then sent to distribution centers and delivered to customers.

We operate our own feed mills to produce scientifically-formulated feeds. In fiscal 2010, corn and soybean meal were major production costs, representing roughly 42% of our cost of growing a live chicken. In addition to feed ingredients to grow the chickens, we use cooking ingredients, packaging materials and cryogenic agents. We believe our sources of supply for these materials are adequate for our present needs, and we do not anticipate any difficulty in acquiring these materials in the future. While we produce nearly all our inventory of breeder chickens and live broilers, from time-to-time we purchase live, ice-packed or deboned chicken to meet production requirements.

Beef: The primary raw materials used in our beef operations are live cattle. We do not have facilities of our own to raise cattle but employ cattle buyers located throughout cattle producing areas who visit independent feed yards and buy live cattle on the open spot market. These buyers are trained to select high quality animals, and we continually measure their performance. We also enter into various risk-sharing and procurement arrangements with producers to secure a supply of livestock for our facilities. We believe the sources of supply of live cattle are adequate for our present needs.

Pork: The primary raw materials used in our pork operations are live hogs. The majority of our live hog supply is obtained through various procurement relationships with independent producers. We employ buyers who purchase hogs on a daily basis, generally a few days before the animals are processed. These buyers are trained to select high quality animals, and we continually measure their performance. We believe the sources of supply of live hogs are adequate for our present needs. Additionally, we raise a number of weanling swine to sell to independent finishers and supply a minimal amount of live swine for our own processing needs.

Prepared Foods: The primary raw materials used in our prepared foods operations are commodity based raw materials, including chicken, beef, pork, corn, flour and vegetables. Some of these raw materials are provided by our other segments, while others may be purchased from numerous suppliers and manufacturers. We believe the sources of supply of raw materials are adequate for our present needs.

SEASONAL DEMAND

Demand for chicken and beef products generally increases during the spring and summer months and generally decreases during the winter months. Pork and prepared foods products generally experience increased demand during the winter months, primarily due to the holiday season, while demand decreases during the spring and summer months.

CUSTOMERS

Wal-Mart Stores, Inc. accounted for 13.4% of our fiscal 2010 consolidated sales. Sales to Wal-Mart Stores, Inc. were included in the Chicken, Beef, Pork and Prepared Foods segments. Any extended discontinuance of sales to this customer could, if not replaced, have a material impact on our operations. No other single customer or customer group represents more than 10% of fiscal 2010 consolidated sales.

 

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COMPETITION

Our food products compete with those of other food producers and processors and certain prepared food manufacturers. Additionally, our food products compete in markets around the world.

We seek to achieve a leading market position for our products via our principal marketing and competitive strategy, which includes:

  identifying target markets for value-added products;
  concentrating production, sales and marketing efforts to appeal to and enhance demand from those markets; and
  utilizing our national distribution systems and customer support services.

Past efforts indicate customer demand can be increased and sustained through application of our marketing strategy, as supported by our distribution systems. The principal competitive elements are price, product safety and quality, brand identification, breadth and depth of product offerings, availability of products, customer service and credit terms.

INTERNATIONAL

We exported to more than 100 countries in fiscal 2010. Major export markets include Canada, Central America, China, the European Union, Japan, Mexico, the Middle East, Russia, South Korea, Taiwan and Vietnam.

We have the following international operations:

 

  Tyson de Mexico, a Mexican subsidiary, is a vertically-integrated poultry production company;
  Cobb-Vantress, a chicken breeding stock subsidiary, has business interests in Argentina, Brazil, the Dominican Republic, India, Ireland, Japan, the Netherlands, Peru, the Philippines, Russia, Spain, Sri Lanka, the United Kingdom and Venezuela;
  Tyson do Brazil, a Brazilian subsidiary, is a vertically-integrated poultry production company;
  Shandong Tyson Xinchang Foods, joint ventures in China in which we have a majority interest, is a vertically-integrated poultry production company;
  Tyson Dalong, a joint venture in China in which we have a majority interest, is a chicken further processing facility;
  Jiangsu-Tyson, a Chinese poultry breeding company, is building a vertically-integrated poultry operation with production expected to begin in fiscal 2011;
  Godrej Tyson Foods, a joint venture in India in which we have a majority interest, is a poultry processing business; and
  Cactus Argentina, a majority interest in a vertically-integrated beef operation joint venture in Argentina; however, we do not consolidate the entity due to the lack of controlling interest.

We continue to evaluate growth opportunities in foreign countries. Additional information regarding export sales, long-lived assets located in foreign countries and income (loss) from foreign operations is set forth in Note 20: Segment Reporting of the Notes to Consolidated Financial Statements.

RESEARCH AND DEVELOPMENT

We conduct continuous research and development activities to improve product development, to automate manual processes in our processing plants and growout operations, and to improve chicken breeding stock. In 2007, we opened the Discovery Center, which includes 19 research kitchens and a USDA-inspected pilot plant. The Discovery Center brings new market-leading retail and foodservice products to the customer faster and more effectively. Research and development costs totaled $38 million, $33 million and $30 million in fiscal 2010, 2009 and 2008, respectively.

ENVIRONMENTAL REGULATION AND FOOD SAFETY

Our facilities for processing chicken, beef, pork and prepared foods, milling feed and housing live chickens and swine are subject to a variety of federal, state and local environmental laws and regulations, which include provisions relating to the discharge of materials into the environment and generally provide for protection of the environment. We believe we are in substantial compliance with such applicable laws and regulations and are not aware of any violations of such laws and regulations likely to result in material penalties or material increases in compliance costs. The cost of compliance with such laws and regulations has not had a material adverse effect on our capital expenditures, earnings or competitive position, and except as described below, is not anticipated to have a material adverse effect in the future.

Congress and the United States Environmental Protection Agency are considering various options to control greenhouse gas emissions. It is unclear at this time when or if such options will be finalized, or what the final form may be. Due to the uncertainty surrounding this issue, it is premature to speculate on the specific nature of impacts that imposition of greenhouse gas emission controls would have on us, and whether such impacts would have a material adverse effect.

 

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We work to ensure our products meet high standards of food safety and quality. In addition to our own internal Food Safety and Quality Assurance oversight and review, our chicken, beef, pork and prepared foods products are subject to inspection prior to distribution, primarily by the United States Department of Agriculture (USDA) and the United States Food and Drug Administration (FDA). We are also participants in the United States Hazard Analysis Critical Control Point (HACCP) program and are subject to the Sanitation Standard Operating Procedures and the Public Health Security and Bioterrorism Preparedness and Response Act of 2002.

EMPLOYEES AND LABOR RELATIONS

As of October 2, 2010, we employed approximately 115,000 employees. Approximately 97,000 employees were employed in the United States and 18,000 employees were in foreign countries, primarily China, Mexico and Brazil. Approximately 29,000 employees in the United States were subject to collective bargaining agreements with various labor unions, with approximately 19% of those employees included under agreements expiring in fiscal 2011. These agreements expire over periods throughout the next several years. Approximately 7,000 employees in foreign countries were subject to collective bargaining agreements. We believe our overall relations with our workforce are good.

MARKETING AND DISTRIBUTION

Our principal marketing objective is to be the primary provider of chicken, beef, pork and prepared foods products for our customers and consumers. As such, we utilize our national distribution system and customer support services to achieve the leading market position for our products. On an ongoing basis, we identify distinct markets and business opportunities through continuous consumer and market research. In addition to supporting strong regional brands across multiple protein lines, we build the Tyson brand primarily through well-defined product-specific advertising and public relations efforts focused toward key consumer targets with specific needs. These efforts are designed to present key Tyson products as everyday solutions to relevant consumer problems thereby becoming part of regular eating routines. We utilize our national distribution system and customer support services to achieve a leading market position for our products.

We have the ability to produce and ship fresh, frozen and refrigerated products worldwide. Domestically, our distribution system extends to a broad network of food distributors and is supported by our owned or leased cold storage warehouses, public cold storage facilities and our transportation system. Our distribution centers accumulate fresh and frozen products so we can fill and consolidate less-than-truckload orders into full truckloads, thereby decreasing shipping costs while increasing customer service. In addition, we provide our customers a wide selection of products that do not require large volume orders. Our distribution system enables us to supply large or small quantities of products to meet customer requirements anywhere in the continental United States. Internationally, we utilize both rail and truck refrigerated transportation to domestic ports, where consolidations take place to transport to foreign destinations.

PATENTS AND TRADEMARKS

We have filed a number of patents and trademarks relating to our processes and products that either have been approved or are in the process of application. Because we do a significant amount of brand name and product line advertising to promote our products, we consider the protection of our trademarks to be important to our marketing efforts. We also have developed non-public proprietary information regarding our production processes and other product-related matters. We utilize internal procedures and safeguards to protect the confidentiality of such information and, where appropriate, seek patent and/or trademark protection for the technology we utilize.

INDUSTRY PRACTICES

Our agreements with customers are generally short-term, primarily due to the nature of our products, industry practices and fluctuations in supply, demand and price for such products. In certain instances where we are selling further processed products to large customers, we may enter into written agreements whereby we will act as the exclusive or preferred supplier to the customer, with pricing terms that are either fixed or variable. Due to volatility of the cost of raw materials, fixed price contracts are generally limited to three months in duration.

AVAILABILITY OF SEC FILINGS AND CORPORATE GOVERNANCE DOCUMENTS ON INTERNET WEBSITE

We maintain an internet website for investors at http://ir.tyson.com. On this website, we make available, free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to any of those reports, as soon as reasonably practicable after we electronically file such reports with, or furnish to, the Securities and Exchange Commission. Also available on the website for investors are the Corporate Governance Principles, Audit Committee charter, Compensation Committee charter, Governance Committee charter, Nominating Committee charter, Code of Conduct and Whistleblower Policy. Our corporate governance documents are available in print, free of charge to any shareholder who requests them.

 

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CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain information in this report constitutes forward-looking statements. Such forward-looking statements include, but are not limited to, current views and estimates of our outlook for fiscal 2011, other future economic circumstances, industry conditions in domestic and international markets, our performance and financial results, including, without limitation, debt-levels, return on invested capital, value-added product growth, capital expenditures, tax rates, access to foreign markets and dividend policy. These forward-looking statements are subject to a number of factors and uncertainties that could cause our actual results and experiences to differ materially from anticipated results and expectations expressed in such forward-looking statements. We wish to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Among the factors that may cause actual results and experiences to differ from anticipated results and expectations expressed in such forward-looking statements are the following: (i) the effect of, or changes in, general economic conditions; (ii) fluctuations in the cost and availability of inputs and raw materials, such as live cattle, live swine, feed grains (including corn and soybean meal) and energy; (iii) market conditions for finished products, including competition from other global and domestic food processors, supply and pricing of competing products and alternative proteins and demand for alternative proteins; (iv) successful rationalization of existing facilities and operating efficiencies of the facilities; (v) risks associated with our commodity purchasing activities; (vi) access to foreign markets together with foreign economic conditions, including currency fluctuations, import/export restrictions and foreign politics; (vii) outbreak of a livestock disease (such as avian influenza (AI) or bovine spongiform encephalopathy (BSE)), which could have an effect on livestock we own, the availability of livestock we purchase, consumer perception of certain protein products or our ability to access certain domestic and foreign markets; (viii) changes in availability and relative costs of labor and contract growers and our ability to maintain good relationships with employees, labor unions, contract growers and independent producers providing us livestock; (ix) issues related to food safety, including costs resulting from product recalls, regulatory compliance and any related claims or litigation; (x) changes in consumer preference and diets and our ability to identify and react to consumer trends; (xi) significant marketing plan changes by large customers or loss of one or more large customers; (xii) adverse results from litigation; (xiii) risks associated with leverage, including cost increases due to rising interest rates or changes in debt ratings or outlook; (xiv) compliance with and changes to regulations and laws (both domestic and foreign), including changes in accounting standards, tax laws, environmental laws, agricultural laws and occupational, health and safety laws; (xv) our ability to make effective acquisitions or joint ventures and successfully integrate newly acquired businesses into existing operations; (xvi) effectiveness of advertising and marketing programs; and (xvii) those factors listed under Item 1A. “Risk Factors.”

ITEM 1A. RISK FACTORS

These risks, which should be considered carefully with the information provided elsewhere in this report, could materially adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Fluctuations in commodity prices and in the availability of raw materials, especially feed grains, live cattle, live swine and other inputs could negatively impact our earnings.

Our results of operations and financial condition are dependent upon the cost and supply of raw materials such as feed grains, live cattle, live swine, energy and ingredients, as well as the selling prices for our products, many of which are determined by constantly changing market forces of supply and demand over which we have limited or no control. Corn and soybean meal are major production costs for vertically-integrated poultry processors such as us, representing roughly 42% of our cost of growing a chicken in fiscal 2010. As a result, fluctuations in prices for these feed ingredients, which include competing demand for corn and soybean meal for use in the manufacture of renewable energy, can adversely affect our earnings. Production of feed ingredients is affected by, among other things, weather patterns throughout the world, the global level of supply inventories and demand for grains and other feed ingredients, as well as agricultural and energy policies of domestic and foreign governments.

We have cattle under contract at feed yards owned by third parties; however, most of the cattle we process are purchased from independent producers. We have cattle buyers located throughout cattle producing areas who visit feed yards and buy live cattle on the open spot market. We also enter into various risk-sharing and procurement arrangements with producers who help secure a supply of livestock for daily start-up operations at our facilities. The majority of our live swine supply is obtained through procurement arrangements with independent producers. We also employ buyers who purchase hogs on a daily basis, generally a few days before the animals are required for processing. In addition, we raise live swine and sell feeder pigs to independent producers for feeding to processing weight and have contract growers feed a minimal amount of company-owned live swine for our own processing needs. Any decrease in the supply of cattle or swine on the spot market could increase the price of these raw materials and further increase per head cost of production due to lower capacity utilization, which could adversely affect our financial results.

 

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Market demand and the prices we receive for our products may fluctuate due to competition from other food producers and processors.

We face competition from other food producers and processors. Some of the factors on which we compete and which may drive demand for our products include:

 

  price;
  product safety and quality;
  brand identification;
  breadth and depth of product offerings;
  availability of our products;
  customer service; and
  credit terms.

Demand for our products also is affected by competitors’ promotional spending, the effectiveness of our advertising and marketing programs, and the availability or price of competing proteins.

We attempt to obtain prices for our products that reflect, in part, the price we must pay for the raw materials that go into our products. If we are not able to obtain higher prices for our products when the price we pay for raw materials increases, we may be unable to maintain positive margins.

Outbreaks of livestock diseases can adversely impact our ability to conduct our operations and demand for our products.

Demand for our products can be adversely impacted by outbreaks of livestock diseases, which can have a significant impact on our financial results. Efforts are taken to control disease risks by adherence to good production practices and extensive precautionary measures designed to ensure the health of livestock. However, outbreaks of disease and other events, which may be beyond our control, either in our own livestock or cattle and hogs owned by independent producers who sell livestock to us, could significantly affect demand for our products, consumer perceptions of certain protein products, the availability of livestock for purchase by us and our ability to conduct our operations. Moreover, the outbreak of livestock diseases, particularly in our Chicken segment, could have a significant effect on the livestock we own by requiring us to, among other things, destroy any affected livestock. Furthermore, an outbreak of disease could result in governmental restrictions on the import and export of our products to or from our suppliers, facilities or customers. This could also result in negative publicity that may have an adverse effect on our ability to market our products successfully and on our financial results.

We are subject to risks associated with our international operations, which could negatively affect our sales to customers in foreign countries, as well as our operations and assets in such countries.

In fiscal 2010, we exported to more than 100 countries. Major export markets include Canada, Central America, China, the European Union, Japan, Mexico, the Middle East, Russia, South Korea, Taiwan and Vietnam. Our export sales for fiscal 2010 totaled $3.2 billion. In addition, we had approximately $364 million of long-lived assets located in foreign countries, primarily Brazil, China, Mexico and India, at the end of fiscal 2010.

As a result, we are subject to various risks and uncertainties relating to international sales and operations, including:

 

  imposition of tariffs, quotas, trade barriers and other trade protection measures imposed by foreign countries regarding the importation of poultry, beef and pork products, in addition to import or export licensing requirements imposed by various foreign countries;
  closing of borders by foreign countries to the import of poultry, beef and pork products due to animal disease or other perceived health or safety issues;
  impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies, particularly the Canadian dollar, the Chinese renminbi, the Mexican peso, the European euro, the British pound sterling, and the Brazilian real;
  political and economic conditions;
  difficulties and costs associated with complying with, and enforcing remedies under, a wide variety of complex domestic and international laws, treaties and regulations, including, without limitation, the United States’ Foreign Corrupt Practices Act and economic and trade sanctions enforced by the United States Department of the Treasury’s Office of Foreign Assets Control;
  different regulatory structures and unexpected changes in regulatory environments;
  tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation;
  potentially negative consequences from changes in tax laws; and
  distribution costs, disruptions in shipping or reduced availability of freight transportation.

 

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Negative consequences relating to these risks and uncertainties could jeopardize or limit our ability to transact business in one or more of those markets where we operate or in other developing markets and could adversely affect our financial results.

We depend on the availability of, and good relations with, our employees.

We have approximately 115,000 employees, approximately 36,000 of whom are covered by collective bargaining agreements or are members of labor unions. Our operations depend on the availability and relative costs of labor and maintaining good relations with employees and the labor unions. If we fail to maintain good relations with our employees or with the labor unions, we may experience labor strikes or work stoppages, which could adversely affect our financial results.

We depend on contract growers and independent producers to supply us with livestock.

We contract primarily with independent contract growers to raise the live chickens processed in our poultry operations. A majority of our cattle and hogs are purchased from independent producers who sell livestock to us under marketing contracts or on the open market. If we do not attract and maintain contracts with growers or maintain marketing and purchasing relationships with independent producers, our production operations could be negatively affected.

If our products become contaminated, we may be subject to product liability claims and product recalls.

Our products may be subject to contamination by disease-producing organisms or pathogens, such as Listeria monocytogenes, Salmonella and E. coli. These organisms and pathogens are found generally in the environment; therefore, there is a risk that one or more, as a result of food processing, could be present in our products. These organisms and pathogens also can be introduced to our products as a result of improper handling at the further processing, foodservice or consumer level. These risks may be controlled, but may not be eliminated, by adherence to good manufacturing practices and finished product testing. We have little, if any, control over handling procedures once our products have been shipped for distribution. Even an inadvertent shipment of contaminated products may be a violation of law and may lead to increased risk of exposure to product liability claims, product recalls (which may not entirely mitigate the risk of product liability claims), increased scrutiny and penalties, including injunctive relief and plant closings, by federal and state regulatory agencies, and adverse publicity, which could exacerbate the associated negative consumer reaction. Any of these occurrences may have an adverse effect on our financial results.

Our operations are subject to general risks of litigation.

We are involved on an on-going basis in litigation arising in the ordinary course of business or otherwise. Trends in litigation may include class actions involving consumers, shareholders, employees or injured persons, and claims relating to commercial, labor, employment, antitrust, securities or environmental matters. Litigation trends and the outcome of litigation cannot be predicted with certainty and adverse litigation trends and outcomes could adversely affect our financial results.

Our level of indebtedness and the terms of our indebtedness could negatively impact our business and liquidity position.

Our indebtedness, including borrowings under our revolving credit facility, may increase from time to time for various reasons, including fluctuations in operating results, working capital needs, capital expenditures and possible acquisitions, joint ventures or other significant initiatives. Our consolidated indebtedness level could adversely affect our business because:

 

  it may limit or impair our ability to obtain financing in the future;
  our credit rating could restrict or impede our ability to access capital markets at desired interest rates and increase our borrowing costs;
  it may reduce our flexibility to respond to changing business and economic conditions or to take advantage of business opportunities that may arise;
  a portion of our cash flow from operations must be dedicated to interest payments on our indebtedness and is not available for other purposes; and
  it may restrict our ability to pay dividends.

Our revolving credit facility contains affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens and encumbrances; incur debt; merge, dissolve, liquidate or consolidate; make acquisitions and investments; dispose of or transfer assets; pay dividends or make other payments in respect of our capital stock; amend material documents; change the nature of our business; make certain payments of debt; engage in certain transactions with affiliates; and enter into sale/leaseback or hedging transactions, in each case, subject to certain qualifications and exceptions. If availability under this facility is less than the greater of 15% of the commitments and $150 million, we will be required to maintain a minimum fixed charge coverage ratio.

Our 10.50% Senior notes due March 2014 also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: incur additional debt and issue preferred stock; make certain investments and restricted payments; create liens; create restrictions on distributions from restricted subsidiaries; engage in specified sales of assets and subsidiary stock; enter into transactions with affiliates; enter new lines of business; engage in consolidation, mergers and acquisitions; and engage in certain sale/leaseback transactions.

 

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An impairment in the carrying value of goodwill could negatively impact our consolidated results of operations and net worth.

Goodwill is initially recorded at fair value and is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators are present. In assessing the carrying value of goodwill, we make estimates and assumptions about sales, operating margins, growth rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. Goodwill valuations have been calculated using an income approach based on the present value of future cash flows of each reporting unit and are believed to reflect market participant views which would exist in an exit transaction. Under the income approach, we are required to make various judgmental assumptions about appropriate discount rates. Disruptions in global credit and other financial markets and deterioration of economic conditions, could, among other things, cause us to increase the discount rate used in the goodwill valuations. We could be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of our business or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future, which could be substantial. As of October 2, 2010, we had $1.9 billion of goodwill, which represented approximately 17.6% of total assets.

Domestic and international government regulations could impose material costs.

Our operations are subject to extensive federal, state and foreign laws and regulations by authorities that oversee food safety standards and processing, packaging, storage, distribution, advertising, labeling and export of our products. Our facilities for processing chicken, beef, pork, prepared foods and milling feed and for housing live chickens and swine are subject to a variety of international, federal, state and local laws relating to the protection of the environment, including provisions relating to the discharge of materials into the environment, and to the health and safety of our employees. Our chicken, beef and pork processing facilities are participants in the HACCP program and are subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002. In addition, our products are subject to inspection prior to distribution, primarily by the USDA and the FDA. Also, our livestock procurement and poultry growout activities are regulated by the Grain Inspection, Packers and Stockyards Administration (GIPSA), which is part of USDA’s Marketing and Regulatory Programs. Loss of or failure to obtain necessary permits and registrations could delay or prevent us from meeting current product demand, introducing new products, building new facilities or acquiring new businesses and could adversely affect operating results. Additionally, we are routinely subject to new or modified laws, regulations and accounting standards. If we are found to be out of compliance with applicable laws and regulations in these or other areas, we could be subject to civil remedies, including fines, injunctions, recalls or asset seizures, as well as potential criminal sanctions, any of which could have an adverse effect on our financial results.

A material acquisition, joint venture or other significant initiative could affect our operations and financial condition.

We have recently completed acquisitions and entered into joint venture agreements and periodically evaluate potential acquisitions, joint ventures and other initiatives (collectively, “transactions”), and we may seek to expand our business through the acquisition of companies, processing plants, technologies, products and services, which could include material transactions. A material transaction may involve a number of risks, including:

 

  failure to realize the anticipated benefits of the transaction;
  difficulty integrating acquired businesses, technologies, operations and personnel with our existing business;
  diversion of management attention in connection with negotiating transactions and integrating the businesses acquired;
  exposure to unforeseen or undisclosed liabilities of acquired companies; and
  the need to obtain additional debt or equity financing for any transaction.

We may not be able to address these risks and successfully develop these acquired companies or businesses into profitable units. If we are unable to do this, such expansion could adversely affect our financial results.

Market fluctuations could negatively impact our operating results as we hedge certain transactions.

Our business is exposed to fluctuating market conditions. We use derivative financial instruments to reduce our exposure to various market risks including changes in commodity prices, interest rates and foreign exchange rates. We hold certain positions, primarily in grain and livestock futures, that do not qualify as hedges for financial reporting purposes. These positions are marked to fair value, and the unrealized gains and losses are reported in earnings at each reporting date. Therefore, losses on these contracts will adversely affect our reported operating results. While these contracts reduce our exposure to changes in prices for commodity products, the use of such instruments may ultimately limit our ability to benefit from favorable commodity prices.

Deterioration of economic conditions could negatively impact our business.

Our business may be adversely affected by changes in economic conditions, including inflation, interest rates, access to capital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects of governmental initiatives to manage economic conditions. Any such changes could adversely affect the demand for our products, or the cost and availability of our needed raw materials, cooking ingredients and packaging materials, thereby negatively affecting our financial results.

 

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Disruptions in global credit and other financial markets and deterioration of economic conditions, could, among other things:

 

  make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future;
  cause our lenders to depart from prior credit industry practice and make more difficult or expensive the granting of any amendment of, or waivers under, our credit agreement to the extent we may seek them in the future;
  impair the financial condition of some of our customers and suppliers thereby increasing customer bad debts or non-performance by suppliers;
  negatively impact global demand for protein products, which could result in a reduction of sales, operating income and cash flows;
  decrease the value of our investments in equity and debt securities, including our marketable debt securities, company-owned life insurance and pension and other postretirement plan assets;
  negatively impact our commodity purchasing activities if we are required to record losses related to derivative financial instruments; or
  impair the financial viability of our insurers.

Changes in consumer preference could negatively impact our business.

The food industry in general is subject to changing consumer trends, demands and preferences. Trends within the food industry change often, and failure to identify and react to changes in these trends could lead to, among other things, reduced demand and price reductions for our products, and could have an adverse effect on our financial results.

The loss of one or more of our largest customers could negatively impact our business.

Our business could suffer significant setbacks in sales and operating income if our customers’ plans and/or markets change significantly or if we lost one or more of our largest customers, including, for example, Wal-Mart Stores, Inc., which accounted for 13.4% of our sales in fiscal 2010. Many of our agreements with our customers are short-term, primarily due to the nature of our products, industry practice and the fluctuation in demand and price for our products.

The consolidation of customers could negatively impact our business.

Our customers, such as supermarkets, warehouse clubs and food distributors, have consolidated in recent years, and consolidation is expected to continue throughout the United States and in other major markets. These consolidations have produced large, sophisticated customers with increased buying power who are more capable of operating with reduced inventories, opposing price increases, and demanding lower pricing, increased promotional programs and specifically tailored products. These customers also may use shelf space currently used for our products for their own private label products. Because of these trends, our volume growth could slow or we may need to lower prices or increase promotional spending for our products, any of which would adversely affect our financial results.

Extreme factors or forces beyond our control could negatively impact our business.

Natural disasters, fire, bioterrorism, pandemic or extreme weather, including droughts, floods, excessive cold or heat, hurricanes or other storms, could impair the health or growth of livestock or interfere with our operations due to power outages, fuel shortages, damage to our production and processing facilities or disruption of transportation channels, among other things. Any of these factors, as well as disruptions in our information systems, could have an adverse effect on our financial results.

Our renewable energy ventures and other initiatives might not be as successful as we expect.

We have been exploring ways to commercialize animal fats and other by-products from our operations, as well as the poultry litter of our contract growers, to generate energy and other value-added products. For example, in fiscal 2007, we announced the formation of Dynamic Fuels LLC, a joint venture with Syntroleum Corporation. We will continue to explore other ways to commercialize opportunities outside our core business, such as renewable energy and other technologically-advanced platforms. These initiatives might not be as financially successful as we initially announced or would expect due to factors that include, but are not limited to, possible discontinuance of tax credits, competing energy prices, failure to operate at the volumes anticipated, abilities of our joint venture partners and our limited experience in some of these new areas.

Members of the Tyson family can exercise significant control.

Members of the Tyson family beneficially own, in the aggregate, 99.97% of our outstanding shares of Class B Common Stock, $0.10 par value (Class B stock) and 2.42% of our outstanding shares of Class A Common Stock, $0.10 par value (Class A stock), giving them control of approximately 70% of the total voting power of our outstanding voting stock. In addition, three members of the Tyson family serve on our Board of Directors. As a result, members of the Tyson family have the ability to exert substantial influence or actual control over our management and affairs and over substantially all matters requiring action by our stockholders, including amendments to our restated certificate of incorporation and by-laws, the election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of ownership may also delay or prevent a change in control otherwise favored by our other stockholders and could depress our stock price. Additionally, as a result of the Tyson family’s significant ownership of our outstanding voting stock, we rely on the “controlled company” exemption from certain corporate governance requirements of the New York Stock Exchange.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

We have production and distribution operations in the following states: Alabama, Arkansas, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, New York, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin. We also have sales offices throughout the United States. Additionally, we, either directly or through our subsidiaries, have sales offices, facilities or participate in joint venture operations in Argentina, Brazil, China, the Dominican Republic, Hong Kong, India, Ireland, Japan, Mexico, the Netherlands, Peru, the Philippines, Russia, South Korea, Spain, Sri Lanka, Taiwan, the United Arab Emirates, the United Kingdom and Venezuela.

 

     Number of Facilities  
      Owned      Leased      Total    

  Chicken Segment:

        

   Processing plants

     61         1         62     

   Rendering plants

     15         -         15     

   Blending mills

     2         -         2     

   Feed mills

     42         1         43     

   Broiler hatcheries

     62         5         67     

   Breeder houses

     493         744         1,237     

   Broiler farm houses

     834         816         1,650     

  Beef Segment Production Facilities

     12         -         12     

  Pork Segment Production Facilities

     9         -         9     

  Prepared Foods Segment Processing Plants

     22         1         23     
        

  Distribution Centers

     14         5         19     

  Cold Storage Facilities

     65         13         78     
             

Capacity(1)

per week at
October 2, 2010

     Fiscal 2010  
Average Capacity  
Utilization  
 

  Chicken Processing Plants

        46 million head         92%     

  Beef Production Facilities

        171,000 head         84%     

  Pork Production Facilities

        443,000 head         88%     

  Prepared Foods Processing Plants

              45 million pounds         89%     

 

  (1) Capacity based on a five day week for Chicken and Prepared Foods, while Beef and Pork are based on a six day week.

Chicken: Chicken processing plants include various phases of slaughtering, dressing, cutting, packaging, deboning and further-processing. We also have 17 pet food operations, which are part of the Chicken processing plants. The blending mills, feed mills and broiler hatcheries have sufficient capacity to meet the needs of the chicken growout operations.

Beef: Beef plants include various phases of slaughtering live cattle and fabricating beef products. Some also treat and tan hides. The Beef segment includes three case-ready operations that share facilities with the Pork segment. One of the beef facilities contains a tallow refinery. Carcass facilities reduce live cattle to dressed carcass form. Processing facilities conduct fabricating operations to produce boxed beef and allied products.

Pork: Pork plants include various phases of slaughtering live hogs and fabricating pork products and allied products. The Pork segment includes three case-ready operations that share facilities with the Beef segment.

Prepared Foods: Prepared Foods plants process fresh and frozen chicken, beef, pork and other raw materials into pizza toppings, branded and processed meats, appetizers, prepared meals, ethnic foods, soups, sauces, side dishes, pizza crusts, flour and corn tortilla products and meat dishes.

Our Dynamic Fuels LLC joint venture produces renewable synthetic fuels targeting the renewable diesel and jet fuel markets. Construction of production facilities was completed in late fiscal 2010, and initial production began in October 2010.

We believe our present facilities are generally adequate and suitable for our current purposes; however, seasonal fluctuations in inventories and production may occur as a reaction to market demands for certain products. We regularly engage in construction and other capital improvement projects intended to expand capacity and improve the efficiency of our processing and support facilities. We also consider the efficiencies of our operations and may from time to time consider changing the number or type of plants we operate to align with our capacity needs.

 

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ITEM 3. LEGAL PROCEEDINGS

Refer to the description of certain matters under Part II, Item 8, Notes to Consolidated Financial Statements, Note 23: Contingencies, which is incorporated herein by reference. Listed below are certain additional legal proceedings involving the Company and/or its subsidiaries.

On October 23, 2001, a putative class action lawsuit styled R. Lynn Thompson, et al. vs. Tyson Foods, Inc. was filed in the District Court for Mayes County, Oklahoma by three property owners on behalf of all owners of lakefront property on Grand Lake O’ the Cherokees. Simmons Foods, Inc. and Peterson Farms, Inc. also are defendants. The plaintiffs allege the defendants’ operations diminished the water quality in the lake thereby interfering with the plaintiffs’ use and enjoyment of their properties. The plaintiffs sought injunctive relief and an unspecified amount of compensatory damages, punitive damages, attorneys’ fees and costs. While the District Court certified a class, on October 4, 2005, the Court of Civil Appeals of the State of Oklahoma reversed, holding the plaintiffs’ claims were not suitable for disposition as a class action. This decision was upheld by the Oklahoma Supreme Court and the case was remanded to the District Court with instructions that the matter proceed only on behalf of the three named plaintiffs. Plaintiffs seek injunctive relief, restitution and compensatory and punitive damages in an unspecified amount in excess of $10,000. We and the other defendants have denied liability and asserted various defenses. The defendants have requested a trial date, but the court has not yet scheduled the matter for trial.

On January 9, 2003, we received a notice of liability letter from Union Pacific Railroad Company (“Union Pacific”) relating to our alleged contributions of waste oil to the Double Eagle Refinery Superfund Site in Oklahoma City, Oklahoma. On August 22, 2006, the United States and the State of Oklahoma filed a lawsuit styled United States of America, et al. v. Union Pacific Railroad Co. in the United States District Court for the Western District of Oklahoma seeking more than $22 million (the amount sought was subsequently increased to more than $30 million) to remediate the Double Eagle site. Certain Tyson entities joined a “potentially responsible parties” group on October 31, 2006. A settlement between the “potentially responsible parties” group, the United States, and the State of Oklahoma was reached and the Tyson entities paid $625,586 into escrow towards the settlement of the matter. In furtherance of finalizing the settlement, the U.S. Department of Justice filed a complaint styled United States of America, et al. v. Albert Investment Co., Inc. et al., and includes the “potentially responsible parties.” A proposed Consent Decree addressing all alleged liability of the Tyson entities for the site was lodged on June 27, 2008. On October 10, 2008, Union Pacific initiated litigation to challenge the proposed Consent Decree by filing a motion to intervene, which the District Court denied. Union Pacific appealed this decision to the United States Court of Appeals for the Tenth Circuit. The “potentially responsible parties” group and other parties filed briefs in the Tenth Circuit, and oral arguments occurred on September 21, 2009. On November 10, 2009, the Tenth Circuit Court of Appeals reversed the District Court’s decision, and Union Pacific was permitted to intervene in the litigation. After negotiations amongst the interested parties, an Amended Consent Decree was lodged with the Court on October 8, 2010. The Amended Consent Decree includes a reopener for certain future response costs. A notice will be published in the Federal Register inviting public comment on the Amended Consent Decree. On October 14, 2010, Union Pacific filed a Notice of Dismissal of Intervention. Assuming the Court approves and enters the Amended Consent Decree, Tyson will be required to make an additional principal payment of $50,669 plus interest. Upon such payment, the matter will be concluded.

In November 2006, the Audit Committee of our Board of Directors engaged outside counsel to conduct a review of certain payments that had been made by one of our subsidiaries in Mexico, including payments to individuals employed by Mexican governmental bodies. The payments were discontinued in November 2006. Although the review process is ongoing, we believe the amount of these payments is immaterial, and we do not expect any material impact to our financial statements. We have contacted the Securities and Exchange Commission and the U.S. Department of Justice to inform them of our review and preliminary findings and are cooperating fully with these governmental authorities.

Since 2003, nine lawsuits have been brought against us and several other poultry companies by approximately 150 plaintiffs in Washington County, Arkansas Circuit Court (Green v. Tyson Foods, Inc., et al., Bible v. Tyson Foods, Inc., Beal v. Tyson Foods, Inc., et al., McWhorter v. Tyson Foods, Inc., et al., McConnell v. Tyson Foods, Inc., et al., Carroll v. Tyson Foods, Inc., et al., Belew v. Tyson Foods, Inc., et al., Gonzalez v. Tyson Foods, Inc., et al., and Rasco v. Tyson Foods, Inc., et al.) alleging that the land application of poultry litter caused arsenic and pathogenic mold and fungi contamination of the air, soil and water in and around Prairie Grove, Arkansas. In addition to the poultry company defendants, plaintiffs sued Alpharma, the manufacturer of a feed ingredient containing an organic arsenic compound that has been used in the broiler industry. Plaintiffs are seeking recovery for several types of personal injuries, including several forms of cancer. On August 2, 2006, the Court granted summary judgment in favor of Tyson and the other poultry company defendants in the first case to go to trial and denied summary judgment as to Alpharma. The case was tried against Alpharma and the jury returned a verdict in favor of Alpharma. Plaintiffs appealed the summary judgment in favor of the poultry company defendants and the Court stayed the remaining eight lawsuits pending the appeal. On May 8, 2008, the Arkansas Supreme Court reversed the summary judgment in favor of the poultry company defendants. The remanded trial in this case against us and the other poultry company defendants was held, and on May 14, 2009, the jury returned a verdict in favor of the defendants. The plaintiffs appealed this verdict to the Arkansas Supreme Court. The parties have submitted briefs in this matter and are awaiting the Arkansas Supreme Court’s ruling.

 

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Other Matters: We have approximately 115,000 employees and, at any time, have various employment practices matters outstanding. In the aggregate, these matters are significant to the Company, and we devote significant resources to managing employment issues. Additionally, we are subject to other lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. While the ultimate results of these matters cannot be determined, they are not expected to have a material adverse effect on our consolidated results of operations or financial position.

ITEM 4. REMOVED AND RESERVED

Not applicable.

EXECUTIVE OFFICERS OF THE COMPANY

Our officers serve one year terms from the date of their election, or until their successors are appointed and qualified. No family relationships exist among these officers. The name, title, age and year of initial election to executive office of our executive officers are listed below:

 

  Name    Title    Age    Year Elected    
Executive Officer    
  Craig J. Hart    Senior Vice President, Controller and Chief Accounting Officer    54    2004    
  Kenneth J. Kimbro    Senior Vice President, Chief Human Resources Officer    57    2009    
  Donnie King    Senior Group Vice President, Poultry and Prepared Foods    48    2009    
  Dennis Leatherby    Executive Vice President and Chief Financial Officer    50    1994    
  James V. Lochner    Chief Operating Officer    58    2005    
  Donnie Smith    President and Chief Executive Officer    51    2008    
  David L. Van Bebber    Executive Vice President and General Counsel    54    2008    
  Jeffrey D. Webster    Group Vice President, Renewable Products Division    49    2008    
  Noel White    Senior Group Vice President, Fresh Meats    52    2009    

Craig J. Hart was appointed Senior Vice President, Controller and Chief Accounting Officer in 2004. Mr. Hart was initially employed by IBP in 1978.

Kenneth J. Kimbro was appointed Senior Vice President, Chief Human Resources Officer in 2007, after serving as Senior Vice President, Human Resources since 2001. Mr. Kimbro was initially employed by IBP in 1995.

Donnie King was appointed Senior Group Vice President, Poultry and Prepared Foods in December 2009, after serving as Group Vice President, Refrigerated and Deli since 2008, Group Vice President, Operations since 2007, Senior Vice President, Consumer Products Operations since 2006 and Senior Vice President, Poultry Operations since 2003. Mr. King was initially employed by Valmac Industries, Inc. in 1982. Valmac Industries, Inc. was acquired by the Company in 1984.

Dennis Leatherby was appointed Executive Vice President and Chief Financial Officer in 2008 after serving as Senior Vice President, Finance and Treasurer since 1998. He also served as Interim Chief Financial Officer from 2004 to 2006. Mr. Leatherby was initially employed by the Company in 1990.

James V. Lochner was appointed Chief Operating Officer in November 2009, after serving as Senior Group Vice President, Fresh Meats since 2007, Senior Group Vice President, Fresh Meats and Margin Optimization since 2006 and Senior Group Vice President, Margin Optimization, Purchasing and Logistics since 2005. Mr. Lochner was initially employed by IBP in 1983.

Donnie Smith was appointed President and Chief Executive Officer in November 2009, after serving as Senior Group Vice President, Poultry and Prepared Foods since January 2009, Group Vice President of Consumer Products since 2008, Group Vice President of Logistics and Operations Services since 2007, Group Vice President Information Systems, Purchasing and Distribution since 2006 and Senior Vice President and Chief Information Officer since 2005. Mr. Smith was initially employed by the Company in 1980.

David L. Van Bebber was appointed Executive Vice President and General Counsel in 2008, after serving as Senior Vice President and Deputy General Counsel since 2004. Mr. Van Bebber was initially employed by Lane Processing in 1982. Lane Processing was acquired by the Company in 1986.

Jeffrey D. Webster was appointed Group Vice President, Renewable Products Division in 2008, after serving as Senior Vice President, Renewable Products Division since 2007, Senior Vice President, Corporate Strategy Development and Renewable Energy since 2006 and Senior Vice President, Strategy and Development since 2005. Mr. Webster was initially employed by the Company in 2004.

Noel White was appointed Senior Group Vice President, Fresh Meats in December 2009, after serving as Senior Vice President, Pork Margin Management since 2007 and Group Vice President, Fresh Meats Operations/Commodity Sales since 2005. Mr. White was initially employed by IBP in 1983.

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

We have issued and outstanding two classes of capital stock, Class A stock and Class B stock. Holders of Class B stock may convert such stock into Class A stock on a share-for-share basis. Holders of Class B stock are entitled to 10 votes per share while holders of Class A stock are entitled to one vote per share on matters submitted to shareholders for approval. As of October 30, 2010, there were approximately 30,000 holders of record of our Class A stock and 10 holders of record of our Class B stock, excluding holders in the security position listings held by nominees.

DIVIDENDS

Cash dividends cannot be paid to holders of Class B stock unless they are simultaneously paid to holders of Class A stock. The per share amount of the cash dividend paid to holders of Class B stock cannot exceed 90% of the cash dividend simultaneously paid to holders of Class A stock. We have paid uninterrupted quarterly dividends on common stock each year since 1977 and expect to continue our cash dividend policy during fiscal 2011. In both fiscal 2010 and 2009, the annual dividend rate for Class A stock was $0.16 per share and the annual dividend rate for Class B stock was $0.144 per share.

MARKET INFORMATION

The Class A stock is traded on the New York Stock Exchange under the symbol “TSN.” No public trading market currently exists for the Class B stock. The high and low closing sales prices of our Class A stock for each quarter of fiscal 2010 and 2009 are represented in the table below.

 

      Fiscal 2010      Fiscal 2009    
      High      Low      High      Low    

  First Quarter

   $ 13.19       $ 12.02       $ 12.87       $ 4.40     

  Second Quarter

     19.50         12.24         9.93         7.59     

  Third Quarter

     20.40         16.25         13.88         9.33     

  Fourth Quarter

     18.06         15.22         13.23         10.95     

ISSUER PURCHASES OF EQUITY SECURITIES

The table below provides information regarding our purchases of Class A stock during the periods indicated.

 

  Period           Total
Number of
Shares
Purchased
     Average
Price Paid
per Share
     Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
     Maximum Number of  
Shares that May Yet Be  
Purchased Under the Plans  
or Programs (1)  
 

  July 4 to July 31, 2010

       112,095         $17.27         -         22,474,439     

  Aug. 1 to Sept. 4, 2010

       134,160         16.12         -         22,474,439     

  Sept. 5 to Oct. 2, 2010

             87,986         17.61         -         22,474,439     

  Total

     (2     344,241         $16.91         -         22,474,439     

 

(1) On February 7, 2003, we announced our board of directors approved a plan to repurchase up to 25 million shares of Class A stock from time to time in open market or privately negotiated transactions. The plan has no fixed or scheduled termination date.
(2) We purchased 344,241 shares during the period that were not made pursuant to our previously announced stock repurchase plan, but were purchased to fund certain Company obligations under our equity compensation plans. These transactions included 319,643 shares purchased in open market transactions and 24,598 shares withheld to cover required tax withholdings on the vesting of restricted stock.

 

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PERFORMANCE GRAPH

The following graph shows a five-year comparison of cumulative total returns for our Class A stock, the Standard & Poor’s (S&P) 500 Index and a group of peer companies described below.

LOGO

 

      Years Ending  
      Base Period
10/1/05
     9/30/06      9/29/07      9/27/08      10/3/09      10/2/10    

  Tyson Foods, Inc.

     100         88.90         100.77         72.38         71.48         95.31     

  S&P 500 Index

     100         110.79         129.01         100.66         93.70         103.22     

  Peer Group

     100         111.25         118.91         120.14         109.23         129.53     

The total cumulative return on investment (change in the year-end stock price plus reinvested dividends), which is based on the stock price or composite index at the end of fiscal 2005, is presented for each of the periods for the Company, the S&P 500 Index and a peer group. The peer group includes: Campbell Soup Company, ConAgra Foods, Inc., General Mills, Inc., H.J. Heinz Co., Hershey Foods Corp., Hormel Foods Corp., Kellogg Co., McCormick & Co., Pilgrim’s Pride Corporation, Sara Lee Corp. and Smithfield Foods, Inc. The graph compares the performance of the Company with that of the S&P 500 Index and peer group, with the investment weighted on market capitalization.

 

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ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR FINANCIAL SUMMARY

 

in millions, except per share and ratio data  
            2010            2009            2008            2007            2006  

  Summary of Operations

              

  Sales

     $28,430           $26,704           $26,862           $25,729           $24,589     

  Goodwill impairment

     29           560           -           -           -     

  Operating income (loss)

     1,556           (215)           331           613           (50)     

  Net interest expense

     333           310           206           224           238     

  Income (loss) from continuing operations

     765           (550)           86           268           (174)     

  Loss from discontinued operation

     -           (1)           -           -           (17)     

  Cumulative effect of change in accounting principle

     -           -           -           -           (5)     

  Net income (loss)

     765           (551)           86           268           (196)     

  Net income (loss) attributable to Tyson

     780           (547)           86           268           (196)     

  Diluted earnings (loss) per share attributable to Tyson:

              

   Income (loss) from continuing operations

     2.06           (1.47)           0.24           0.75           (0.51)     

   Loss from discontinued operation

     -           -           -           -           (0.05)     

   Cumulative effect of change in accounting principle

     -           -           -           -           (0.02)     

   Net income (loss)

     2.06           (1.47)           0.24           0.75           (0.58)     

  Dividends per share:

              

   Class A

     0.160           0.160           0.160           0.160           0.160     

   Class B

     0.144           0.144           0.144           0.144           0.144     

  Balance Sheet Data

              

  Cash and cash equivalents

     $978           $1,004           $250           $42           $28     

  Total assets

     10,752           10,595           10,850           10,227           11,121     

  Total debt

     2,536           3,477           2,804           2,779           3,979     

  Shareholders’ equity

     5,201           4,431           5,099           4,735           4,444     

  Other Key Financial Measures

              

  Depreciation and amortization

     $497           $513           $493           $514           $517     

  Capital expenditures

     550           368           425           285           531     

  Return on invested capital

     22.8%           (3.0)%           4.4%           7.7%           (0.6)%     

  Effective tax rate

     36.4%           (1.5)%           44.6%           34.6%           35.0%     

  Book value per share

     $13.78           $11.77           $13.51           $13.32           $12.52     

  Closing stock price high

     20.40           13.88           19.44           24.08           18.70     

  Closing stock price low

     12.02           4.40           12.14           14.20           12.92     

Notes to Five-Year Financial Summary

a. Fiscal 2010 included $61 million related to losses on notes repurchased/redeemed during fiscal 2010, a $29 million non-tax deductible charge related to a full goodwill impairment related to an immaterial Chicken segment reporting unit and a $12 million charge related to the partial impairment of an equity method investment. Additionally, fiscal 2010 included insurance proceeds received of $38 million related to Hurricane Katrina.
b. Fiscal 2009 was a 53-week year, while the other years presented were 52-week years.
c. Fiscal 2009 included a $560 million non-tax deductible charge related to Beef segment goodwill impairment and a $15 million pretax charge related to closing a prepared foods plant.
d. Fiscal 2008 included $76 million of pretax charges related to: restructuring a beef operation; closing a poultry plant; asset impairments for packaging equipment, intangible assets, unimproved real property and software; flood damage; and severance charges. Additionally, fiscal 2008 included an $18 million non-operating gain related to the sale of an investment.
e. Fiscal 2007 included tax expense of $17 million related to a fixed asset tax cost correction, primarily related to a fixed asset system conversion in 1999.
f. Fiscal 2006 included $63 million of pretax charges primarily related to closing one poultry plant, two beef plants and two prepared foods plants.
g. Return on invested capital is calculated by dividing operating income (loss) by the sum of the average of beginning and ending total debt and shareholders’ equity less cash and cash equivalents.
h. In March 2009, we completed the sale of the beef processing, cattle feed yard and fertilizer assets of three of our Alberta, Canada subsidiaries (collectively, Lakeside). Lakeside was reported as a discontinued operation for all periods presented.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DESCRIPTION OF THE COMPANY

We are one of the world’s largest meat protein companies and the second-largest food production company in the Fortune 500 with one of the most recognized brand names in the food industry. We produce, distribute and market chicken, beef, pork, prepared foods and related allied products. Our operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods. Some of the key factors influencing our business are customer demand for our products; the ability to maintain and grow relationships with customers and introduce new and innovative products to the marketplace; accessibility of international markets; market prices for our products; the cost of live cattle and hogs, raw materials and grain; and operating efficiencies of our facilities.

OVERVIEW

 

   

General – We had improved operating results in fiscal 2010 as compared to fiscal 2009, as a result of improved internal performance and a better market environment. The following are a few of the key drivers:

   

We achieved margin management gains and operational efficiency improvements, which were the key drivers that led to the nearly $1.2 billion improvement in operating income, excluding the impact of the $560 million Beef segment goodwill impairment charge recorded in fiscal 2009. Margin management improvements occurred in the areas of mix, export sales, price optimization and value-added products initiatives. The operational efficiencies occurred in the areas of yields, cost reduction, labor management, logistics cost optimization, capacity and live bird operations (including livability, feed conversion, and net to processing improvements).

   

Tyson and the meat industry in general have benefitted from improving domestic market conditions. For the first time in 40 years, industry forecasters predict a reduction in available protein in two consecutive years for 2009/2010. This is a factor of reduced protein production, fewer imports, increased exports and reduced freezer inventories. Poor industry results for 2008 and 2009 led to a reduction in industry capacity and a better balance between overall meat products’ supply and demand. While the recent economic conditions have caused decreased demand at foodservice establishments, most of the lost demand has shifted to retailers as consumers are choosing to eat at home.

   

As a result of improving domestic market conditions and our own operational efficiency and margin management improvements, our operating margins were 5.5% in fiscal 2010 (5.4% after removing $38 million of insurance proceeds received during the year and $29 million related to the goodwill impairment). This is the first time since the acquisition of IBP, inc. in 2001 that annual operating margins have exceeded 5.0%. The following is a summary of operating margins by segment:

   

Chicken – 5.2% (or 5.1% excluding $38 million of insurance proceeds received and $29 million related to a goodwill impairment)

   

Beef – 4.6%

   

Pork – 8.4%

   

Prepared Foods – 4.1%

   

Debt and Liquidity – During fiscal 2010, we generated $1.4 billion of operating cash flows. We used these cash flows, as well as restricted cash, to repurchase, retire or redeem $956 million of senior notes. As a result, our total debt is $2.5 billion, the lowest level since the acquisition of IBP, inc. At October 2, 2010, we had $1.8 billion of liquidity, which includes the availability under our credit facility and $978 million of cash and cash equivalents.

   

Our accounting cycle resulted in a 52-week year for both fiscal 2010 and 2008 and a 53-week year for fiscal 2009.

 

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      in millions, except per share data  
      2010      2009      2008    

  Net income (loss) attributable to Tyson

     $780         $(547)         $86     

  Net income (loss) attributable to Tyson – per diluted share

     2.06         (1.47)         0.24     

2010 – Net income included the following items:

   

$61 million in charges related to losses on notes repurchased during fiscal 2010;

   

$29 million non-cash, non-tax deductible charge related to a full goodwill impairment in an immaterial Chicken segment reporting unit;

   

$12 million non-cash, non-tax deductible charge related to the impairment of an equity method investment; and

   

$38 million gain from insurance proceeds.

2009 – Net loss included the following items:

   

$560 million non-cash, non-tax deductible charge related to a goodwill impairment in our Beef segment; and

   

$15 million charge related to the closing of our Ponca City, Oklahoma, processed meats plant.

2008 – Net income included the following items:

   

$33 million of charges related to asset impairments, including packaging equipment, intangible assets, unimproved real property and software;

   

$17 million charge related to restructuring our Emporia, Kansas, beef operation;

   

$13 million charge related to closing our Wilkesboro, North Carolina, Cooked Products poultry plant;

   

$13 million of charges related to flood damage at our Jefferson, Wisconsin, plant and severance charges related to the FAST initiative; and

   

$18 million non-operating gain related to sale of an investment.

FISCAL 2011 OUTLOOK

In 2011, overall protein (chicken, beef, pork and turkey) production is expected to increase. Because exports are likely to grow as well, we forecast that total domestic availability of protein should be relatively flat compared to 2010. The following is a summary of the fiscal 2011 outlook for each of our segments, as well as an outlook on capital expenditures, net interest expense and debt:

   

Chicken – While we expect chicken production to increase, domestic availability will depend on export volumes. Because of the less than expected yields in global feed grain crop production, current futures prices indicate higher grain costs in fiscal 2011 compared to fiscal 2010. We expect to offset the impact of increased grain costs with operational and pricing improvements.

   

Beef – We expect to see a gradual reduction in cattle supplies of 1-2% in fiscal 2011; however, we do not expect a significant change in the fundamentals of our Beef business as it relates to the previous few quarters. We expect adequate supplies in the regions we operate our plants. We expect beef exports to remain strong in fiscal 2011.

   

Pork – We expect hog supplies in fiscal 2011 will be comparable to fiscal 2010 and we believe we will have adequate supplies in the regions in which we operate. We expect pork exports to remain strong in fiscal 2011.

   

Prepared Foods – We expect operational improvements and increased pricing will more than offset the likely increase in raw material costs in fiscal 2011. While many of our sales contracts are formula based or shorter-term in nature, we are typically able to absorb rising input costs. However, there is a lag time for price increases to take effect, so it is more difficult to absorb rapidly rising raw material costs.

   

Capital Expenditures – Our preliminary capital expenditures plan for fiscal 2011 is approximately $700 million.

   

Net Interest Expense – We expect fiscal 2011 net interest expense will be approximately $245 million, down nearly $90 million compared to fiscal 2010.

   

Debt – We will continue to use our available cash to repurchase notes when available at attractive rates. We do not have any significant maturities of debt coming due over the next three fiscal years, as our 8.25% Notes due October 1, 2011 (2011 Notes) balance was $315 million at October 2, 2010. We plan to retire these notes with current cash on hand and/or cash flows from operations.

 

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SUMMARY OF RESULTS – CONTINUING OPERATIONS

 

  Sales    in millions    
      2010      2009      2008    

  Sales

   $ 28,430       $ 26,704       $ 26,862     

  Change in sales volume

     (0.6)%         4.4%      

  Change in average sales price

     7.1%         (4.8)%      

  Sales growth (decline)

     6.5%         (0.6)%            

2010 vs. 2009 –

   

Average Sales Price – The increase in sales was largely due to an increase in average sales prices, which accounted for an increase of approximately $1.9 billion. While all segments had an increase in average sales prices, the majority of the increase was driven by the Beef and Pork segments.

   

Sales Volume – Sales were negatively impacted by a decrease in sales volume, which accounted for a decrease of approximately $150 million. This was primarily due to an extra week in fiscal 2009 and the decrease in Pork segment sales volume, partially offset by an increase from a fiscal 2009 acquisition in the Chicken segment.

2009 vs. 2008 –

   

Average Sales Price – The decline in sales was largely due to a reduction in average sales prices, which accounted for a decrease of approximately $1.2 billion. While all segments had a reduction in average sales prices, the majority of the decrease was driven by the Beef and Pork segments.

   

Sales Volume – Sales were positively impacted by an increase in sales volume, which accounted for an increase of approximately $1.0 billion. This was primarily due to an extra week in fiscal 2009, increased sales volume in our Chicken segment, which was driven by inventory reductions, and sales volume related to recent acquisitions.

 

  Cost of Sales    in millions    
      2010      2009      2008    

  Cost of sales

     $25,916         $25,501         $25,616     

  Gross margin

     $2,514         $1,203         $1,246     

  Cost of sales as a percentage of sales

     91.2%         95.5%         95.4%     

2010 vs. 2009 –

   

Cost of sales increased $415 million. Higher cost per pound increased cost of sales by $558 million, partially offset by lower sales volume which decreased cost of sales by $143 million.

   

Increase in average live cattle and hog costs of approximately $1.0 billion.

   

Increase due to net losses of $78 million in fiscal 2010, as compared to net gains of $191 million in fiscal 2009, from our commodity risk management activities related to forward futures contracts for live cattle and hogs, and excludes the impact from related physical purchase transactions which impact current and future period operating results.

   

Increase in raw material costs of approximately $218 million in our Prepared Foods segment.

   

Increase in incentive-based compensation of approximately $97 million.

   

Decrease due to net losses of $6 million in fiscal 2010, as compared to net losses of $257 million in fiscal 2009, from our commodity risk management activities related to grain and energy purchases, and excludes the impact from related physical purchase transactions which impact current and future period operating results.

   

Decrease in grain costs in the Chicken segment of approximately $158 million.

   

Decrease in the Chicken segment costs resulting from operational improvements.

2009 vs. 2008 –

   

Cost of sales decreased $115 million. Cost per pound contributed to a $1.1 billion decrease, offset partially by an increase in sales volume increasing cost of sales $987 million.

   

Increase due to net losses of $257 million in fiscal 2009, as compared to net gains of $206 million in fiscal 2008, from our commodity risk management activities related to grain and energy purchases, which exclude the effect from related physical purchase transactions which impact current and future period operating results.

   

Increase due to sales volumes, which included an extra week in fiscal 2009, as well as increased sales volume in our Chicken segment, which was driven by inventory reductions and sales volume related to recent acquisitions.

   

Decrease in average domestic live cattle and hog costs of approximately $1.2 billion.

 

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  Selling, General and Administrative    in millions    
      2010      2009      2008    

  Selling, general and administrative

     $929         $841         $879     

  As a percentage of sales

     3.3%         3.1%         3.3%     

2010 vs. 2009 –

   

Increase of $118 million related to incentive-based compensation.

   

Reductions include decreases resulting from one less week in fiscal 2010 compared to fiscal 2009, as well a $16 million reduction in professional fees, advertising and sales promotions.

2009 vs. 2008 –

   

Decrease of $33 million related to advertising and sales promotions.

   

Decrease of $11 million related to the change in investment returns on company-owned life insurance, which is used to fund non-qualified retirement plans.

   

Other reductions include decreases in our payroll-related expenses and professional fees.

   

Increase of $20 million due to our newly acquired foreign operations.

 

  Goodwill Impairment    in millions    
      2010      2009      2008    
       $29         $560         $-     

We perform our annual goodwill impairment test on the first day of the fourth quarter. We estimate the fair value of our reporting units using a discounted cash flow analysis. This analysis requires us to make various judgmental estimates and assumptions about sales, operating margins, growth rates and discount factors.

2010 – Includes the full impairment of an immaterial Chicken segment reporting unit.

2009 –The disruptions in global credit and other financial markets and deterioration of economic conditions led to an increase in our discount rate in fiscal 2009 as compared to fiscal 2008. The discount rate used in our annual goodwill impairment test increased to 10.1% in fiscal 2009 from 9.3% in fiscal 2008. There were no significant changes in the other key estimates and assumptions. The increased discount rate resulted in the non-cash partial impairment of our beef reporting unit’s goodwill. The impairment has no impact on managements’ estimates of the Beef segment’s long-term profitability or value.

 

  Other Charges    in millions    
      2010      2009      2008    
       $-         $17         $36     

2009 – Included $15 million charge related to closing our Ponca City, Oklahoma, processed meats plant.

2008 –

   

Included $17 million charge related to restructuring our Emporia, Kansas, beef operation.

   

Included $13 million charge related to closing our Wilkesboro, North Carolina, Cooked Products poultry plant.

   

Included $6 million of severance charges related to the FAST initiative.

 

  Interest Income    in millions    
      2010      2009      2008    
       $14         $17         $9     

2010/2009 – Fiscal 2010 and fiscal 2009 increased as compared to fiscal 2008 due primarily to the increase in our cash balance.

 

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  Interest Expense    in millions  
      2010      2009      2008  

Cash interest expense

   $ 245       $ 270       $ 214   

Losses on notes repurchased

     61         3         -   

Non-cash interest expense

     41         54         1   

  Total Interest Expense

   $ 347       $ 327       $ 215   

2010 vs. 2009 –

   

Cash interest expense includes interest expense related to the coupon rates for senior notes and commitment/letter of credit fees incurred on our revolving credit facilities. The decrease is due to lower average weekly indebtedness of approximately 11%, partially offset by an increase in the overall average borrowing rates.

   

Losses on notes repurchased during fiscal 2010 includes the amount paid exceeding the carrying value of the notes repurchased, which primarily includes the repurchases of the 2011 Notes and the 7.35% Senior notes due April 2016 (2016 Notes).

   

Non-cash interest expense primarily includes interest related to the amortization of debt issuance costs and discounts/premiums on note issuances. This includes debt issuance costs incurred on the new credit facility in March 2009 and the 10.50% Senior Notes due 2014 (2014 Notes) issued in March 2009, as well as the accretion of the debt discount on the 3.25% Convertible Senior Notes due 2013 (2013 Notes) and 2014 Notes. Fiscal 2009 also includes expenses related to amendment fees paid in December 2008 on our then existing credit agreements.

2009 vs. 2008 –

   

Cash interest expense includes interest expense related to the coupon rates for senior notes and commitment/letter of credit fees incurred on our revolving credit facilities. The increase was due primarily to higher average weekly indebtedness of approximately 13%. We also had an increase in the overall average borrowing rates.

   

Non-cash interest expense primarily includes interest related to the amortization of debt issuance costs and discounts/premiums on note issuances. The increase was primarily due to debt issuance costs incurred on the new credit facility in fiscal 2009, the 2014 Notes issued in fiscal 2009 and amendment fees paid in December 2008 on our then existing credit agreements. In addition, we had an increase due to the accretion of the debt discount on the 2013 Notes and 2014 Notes. Non-cash interest expense also includes an unrealized loss on our interest rate swap.

 

  Other (Income) Expense, net    in millions  
      2010      2009      2008  
       $20         $18         $(29)   

2010 – Included $12 million charge related to the impairment of an equity method investment.

2009 – Included $24 million in foreign currency exchange loss.

2008 – Included $18 million non-operating gain related to the sale of an investment.

 

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  Effective Tax Rate        
      2010      2009      2008  
       36.4%           (1.5)%           44.6%     

The effective tax rate on continuing operations was impacted by a number of items which result in a difference between our effective tax rate and the U.S. statutory rate of 35%. The table below reflects significant items impacting the rate as indicated.

2010 –

   

Domestic production activity deduction reduced the rate 2.0%.

   

Decrease in unrecognized tax benefits reduced the rate 1.4%.

   

Decrease in state valuation allowances reduced the rate 1.0%.

   

State income taxes, excluding unrecognized tax benefits, increased the rate 3.4%.

   

Impairment of goodwill, which is not deductible for income tax purposes, increased the rate 0.9%.

2009 –

   

Impairment of goodwill, which is not deductible for income tax purposes, reduced the rate 36.1%.

   

Increase in foreign valuation allowances reduced the rate 3.8%.

   

General business credits increased the rate 2.2%.

   

Tax planning in foreign jurisdictions increased the rate 1.7%.

2008 –

   

Increase in state valuation allowances increased the rate 5.0%.

   

Increase in unrecognized tax benefits increased the rate 4.4%.

   

Net negative return on company-owned life insurance policies, which is not deductible for federal income tax purposes, increased the rate 3.8%.

   

General business credits reduced the rate 3.8%.

SEGMENT RESULTS

We operate in four segments: Chicken, Beef, Pork and Prepared Foods. Beginning in the third quarter of fiscal 2010, we modified the presentation of our segment sales to include the impact of intersegment sales. All periods presented below include this impact. The following table is a summary of sales and operating income (loss), which is how we measure segment income (loss). Segment results exclude the results of our discontinued operation, Lakeside.

 

                              in millions  
      Sales                          Operating Income (Loss)  
      2010      2009      2008      2010      2009      2008  

  Chicken

     $10,062         $9,660         $8,900         $519         $(157)         $(118)   

  Beef

     11,707         10,937         11,806         542         (346)         106   

  Pork

     4,552         3,875         4,104         381         160         280   

  Prepared Foods

     2,999         2,836         2,711         124         133         63   

  Other

     -         -         -         (10)         (5)         -   

  Intersegment Sales

     (890)         (604)         (659)         -         -         -   

  Total

     $28,430         $26,704         $26,862         $1,556         $(215)         $331   

 

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Chicken Segment Results                                    in millions  
      2010      2009      Change 2010
vs. 2009
     2008      Change 2009
vs. 2008
 

  Sales

     $10,062         $9,660         $402         $8,900         $760   

  Sales Volume Change

           2.0%            8.8%   

  Average Sales Price Change

           2.1%            (0.2)%   
              

  Operating Income (Loss)

     $519         $(157)         $676         $(118)         $(39)   

  Operating Margin

     5.2%         (1.6)%                  (1.3)%            

2010 – Operating income included a $38 million gain from insurance proceeds and a $29 million non-cash, non-tax deductible charge related to a full goodwill impairment of an immaterial Chicken segment reporting unit.

2008 – Operating loss included $26 million of charges related to: plant closings; impairments of unimproved real property and software; and severance.

2010 vs. 2009 –

   

Sales Volume – The increase in sales volume for fiscal 2010 was due to sales volume related to a fiscal 2009 acquisition, partially offset by a decrease due to the extra week in fiscal 2009.

   

Average Sales Price – The increase in average sales prices is primarily due to sales mix changes associated with the reduced sales volume of lower price per pound rendered products.

   

Operating Income (Loss) –

   

Operational Improvements – Operating results were positively impacted by operational improvements, which included: yield, mix and live production performance improvements; additional processing flexibility; and reduced interplant product movement.

   

Derivative Activities – Operating results included the following amounts for commodity risk management activities related to grain and energy purchases. These amounts exclude the impact from related physical purchase transactions, which impact current and future period operating results.

 

2010 – Loss

     $(6) million   

2009 – Loss

                 (257) million   
        

Improvement in operating results

     $251 million   

 

   

Grain Costs – Operating results were positively impacted in fiscal 2010 by a decrease in grain costs of $158 million.

   

Operating results included an increase in incentive-based compensation.

2009 vs. 2008 –

   

Sales Volume – The increase in sales volume for fiscal 2009 was due to the extra week in fiscal 2009, as well as inventory reductions and sales volume related to recent acquisitions.

   

Average Sales Price – The inventory reductions and recent acquisitions lowered the average sales price, as most of the inventory reduction related to commodity products shipped internationally and sales volume from recent acquisitions was on lower priced products.

   

Operating Loss –

   

Operational Improvements – Operating results were positively impacted by operational improvements, which included: yield, mix and live production performance improvements; additional processing flexibility; and reduced interplant product movement.

   

Derivative Activities – Operating results included the following amounts for commodity risk management activities related to grain and energy purchases. These amounts exclude the impact from related physical purchase transactions, which impact current and future period operating results.

 

2009 – Loss

     $(257) million   

2008 – Income

                 206 million   
        

Decline in operating results

     $(463) million   

 

   

SG&A Expenses – We reduced our selling, general and administrative expenses during fiscal 2009 by approximately $37 million.

   

Grain Costs – Operating results were positively impacted in fiscal 2009 by a decrease in grain costs of $28 million.

 

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  Beef Segment Results                                    in millions  
      2010      2009      Change 2010
vs. 2009
     2008      Change 2009
vs. 2008
 

  Sales

     $11,707         $10,937         $770         $11,806         $(869)   

  Sales Volume Change

           (1.9)%            0.8%   

  Average Sales Price Change

           9.1%            (8.1)%   
              

  Operating Income (Loss)

     $542         $(346)         $888         $106         $(452)   

  Operating Margin

     4.6%         (3.2)%                  0.9%            

2009 Operating loss included a $560 million non-cash charge related to the partial impairment of goodwill.

2008 Operating income included $35 million of charges related to: plant restructuring, impairments of packaging equipment and intangible assets, and severance.

2010 vs. 2009 –

   

Sales and Operating Income (Loss) –

   

We increased our operating margins by maximizing our revenues relative to the rising live cattle markets, as well as improved our operating costs. In addition, we had an improvement in our export sales. Operating results included an increase in incentive-based compensation.

   

Derivative Activities – Operating results included the following amounts for commodity risk management activities related to forward futures contracts for live cattle. These amounts exclude the impact from related physical sale and purchase transactions, which impact current and future period operating results.

 

2010 – Loss

             $(15) million     

2009 – Income

     102 million     
        

Decline in operating results

     $(117) million     

2009 vs. 2008 –

   

Sales and Operating Income (Loss) –

   

While our average sales prices have decreased as compared to fiscal 2008, we have still maintained a margin as the average live costs decreased in line with the drop in our average sales price.

   

Derivative Activities – Operating results included the following amounts for commodity risk management activities related to forward futures contracts for live cattle. These amounts exclude the impact from related physical sale and purchase transactions, which impact current and future period operating results.

 

2009 – Income

             $102 million     

2008 – Income

     53 million     
        

Improvement in operating results

     $49 million     

 

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  Pork Segment Results                                    in millions  
      2010      2009      Change 2010
vs. 2009
     2008      Change 2009
vs. 2008
 

  Sales

     $4,552         $3,875         $677         $4,104         $(229)   

  Sales Volume Change

           (3.3)%            1.7%   

  Average Sales Price Change

           21.4%            (7.2)%   
              

  Operating Income

     $381         $160         $221         $280         $(120)   

  Operating Margin

     8.4%         4.1%                  6.8%            

2008 – Operating income included $5 million of charges related to impairment of packaging equipment and severance.

2010 vs. 2009 –

   

Sales and Operating Income –

   

We increased our operating margins by maximizing our revenues relative to the rising live hog markets. In addition, we had an improvement in our export sales. Operating results included an increase in incentive-based compensation.

   

Derivative Activities – Operating results included the following amounts for commodity risk management activities related to forward futures contracts for live hogs. These amounts exclude the impact from related physical sale and purchase transactions, which impact current and future period operating results.

 

2010 – Loss

             $(36) million     

2009 – Income

     55 million     
        

Decline in operating results

     ($91) million     

2009 vs. 2008 –

   

Sales and Operating Income –

   

Operating results for fiscal 2009 were strong, but down when compared to the record year we had in fiscal 2008. While sales volume was relatively flat versus fiscal 2008, results were negatively impacted by a decrease in our average sales prices, which were only partially offset by the decrease in average live costs.

   

Derivative Activities – Operating results included the following amounts for commodity risk management activities related to forward futures contracts for live hogs. These amounts exclude the impact from related physical sale and purchase transactions, which impact current and future period operating results.

 

2009 – Income

             $55 million     

2008 – Income

     95 million     
        

Decline in operating results

     ($40) million     

 

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  Prepared Foods Segment Results                              in millions  
      2010      2009      Change 2010
vs. 2009
     2008      Change 2009
vs. 2008
 

  Sales

     $2,999         $2,836         $163         $2,711         $125   

  Sales Volume Change

           0.3%            5.2%   

  Average Sales Price Change

           5.5%            (0.6)%   
              

  Operating Income

     $124         $133         $(9)         $63         $70   

  Operating Margin

     4.1%         4.7%                  2.3%            

2009 – Operating income included a $15 million charge related to closing our Ponca City, Oklahoma, processed meats plant.

2008 – Operating income included $10 million of charges related to flood damage, an intangible asset impairment and severance.

2010 vs. 2009 –

   

Sales and Operating Income – Despite the increase in average sales prices and sales volume, operating income declined in fiscal 2010 as compared to fiscal 2009 due to an increase in raw material costs. However, we made several operational improvements in late fiscal 2009 that allow us to run our plants more efficiently. We also received $8 million in insurance proceeds in fiscal 2010 related to the flood damage at our Jefferson, Wisconsin, plant. Operating results included an increase in incentive-based compensation.

2009 vs. 2008 –

   

Sales and Operating Income – Operating results improved due to an increase in sales volume, as well as a reduction in raw material costs that exceeded the decrease in our average sales prices. In addition, we made several operational improvements in fiscal 2009 that allow us to run our plants more efficiently. We began realizing the majority of these improvements in our operating results during the latter part of fiscal 2009.

LIQUIDITY AND CAPITAL RESOURCES

Our cash needs for working capital, capital expenditures, growth opportunities and the repurchase/redemption of our 2011 Notes are expected to be met with current cash on hand, cash flows provided by operating activities, or short-term borrowings. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may take advantage of opportunities to generate additional liquidity or refinance existing debt through capital market transactions. The amount, nature and timing of any capital market transactions will depend on: our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.

 

  Cash Flows from Operating Activities              in millions  
       2010         2009         2008   

  Net income (loss)

     $765         $(551)         $86   

  Non-cash items in net income (loss):

        

  Depreciation and amortization

     497         513         493   

  Deferred taxes

     18         (33)         35   

  Impairment of goodwill

     29         560         -   

  Impairment of assets

     36         32         57   

  Other, net

     76         72         26   

  Changes in working capital

     11         367         (342)   

  Net cash provided by operating activities

     $1,432         $960         $355   

    Cash flows associated with changes in working capital:

   

2010 Increased due to the increase in accrued salaries, wages and benefits and accounts payable balances, almost entirely offset by the increase in inventory and accounts receivable balances. The increase in accrued salaries, wages and benefits is primarily due to the accruals for incentive-based compensation.

   

2009 – Increased primarily due to a reduction in inventory and accounts receivable balances, partially offset by a reduction in accounts payable. The lower inventory balance was primarily due to the reduction of inventory volumes, as well as a decrease in raw material costs.

   

2008 – Decreased primarily due to higher inventory and accounts receivable balances, partially offset by a higher accounts payable balance. Higher inventory balances were driven by an increase in raw material costs and inventory volume.

 

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  Cash Flows from Investing Activities              in millions  
      2010      2009      2008  

  Additions to property, plant and equipment

     $(550)         $(368)         $(425)   

  Proceeds from sale (purchase) of marketable securities, net

     (4)         19         (3)   

  Change in restricted cash to be used for investing activities

     43         (43)         -   

  Proceeds from sale of discontinued operation

     -         75         -   

  Acquisitions, net of cash acquired

     -         (93)         (17)   

  Other, net

     11         (17)         46   

  Net cash used for investing activities

     $(500)         $(427)         $(399)   

 

   

Additions to property, plant and equipment include acquiring new equipment and upgrading our facilities to maintain competitive standing and position us for future opportunities. In fiscal 2010, our capital spending included: production efficiencies in our operations; Dynamic Fuels LLC’s (Dynamic Fuels) facility; and foreign operations. In fiscal 2009, our capital spending included: improvements made in our prepared foods operations to increase efficiencies; Dynamic Fuels’ facility; and foreign operations. In fiscal 2008, our capital spending included equipment updates in our chicken plants, as well as packaging equipment upgrades in our Fresh Meats case-ready facilities.

   

Capital spending for fiscal 2011 is expected to be approximately $700 million, and includes spending on our operations for production and labor efficiencies, yield improvements and sales channel flexibility, as well as expansion of our foreign operations.

   

Acquisitions – In October 2008, we acquired three vertically integrated poultry companies in southern Brazil. The aggregate purchase price was $67 million. In addition, we had $15 million of contingent purchase price based on production volumes. The joint ventures in China called Shandong Tyson Xinchang Foods received the necessary government approvals during fiscal 2009. The aggregate purchase price for our 60% equity interest was $21 million, which excludes $93 million of cash transferred to the joint venture for future capital needs.

   

Change in restricted cash – In October 2008, Dynamic Fuels received $100 million in proceeds from the sale of Gulf Opportunity Zone tax-exempt bonds made available by the federal government to the regions affected by Hurricanes Katrina and Rita in 2005. The cash received from these bonds was restricted and could only be used towards the construction of the Dynamic Fuels’ facility.

 

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  Cash Flows from Financing Activities              in millions  
      2010      2009      2008  

  Net borrowings (payments) on revolving credit facilities

     $-         $15         $(213)   

  Payments on debt

     (1,034)         (380)         (147)   

  Net proceeds from borrowings

     -         852         449   

  Net proceeds from Class A stock offering

     -         -         274   

  Convertible note hedge transactions

     -         -         (94)   

  Warrant transactions

     -         -         44   

  Purchases of treasury shares

     (48)         (19)         (30)   

  Dividends

     (59)         (60)         (56)   

  Debt issuance costs

     -         (59)         -   

  Change in restricted cash to be used for financing activities

     140         (140)         -   

  Other, net

     42         6         27   

  Net cash provided by (used for) financing activities

     $(959)         $215         $254   

 

   

Net borrowings (payments) on revolving credit facilities primarily include activity related to the accounts receivable securitization facility. With the entry into the new revolving credit facility and issuance of the 2014 Notes in March 2009, we repaid all outstanding borrowings under our accounts receivable securitization facility and terminated the facility.

   

Payments on debt include –

   

2010 – $524 million of 2011 Notes; $222 million of 2016 Notes; $140 million of 7.95% Notes due February 2010 (2010 Notes) (using the restricted cash held in a blocked cash collateral account for the retirement of these notes); $52 million of 7.0% Notes due May 2018; and $61 million related to the premiums on notes repurchased during the year.

   

2009 – $161 million of 2011 Notes; $94 million of 2010 Notes (using the restricted cash held in a blocked cash collateral account for the repurchase of these notes); and $38 million 2016 Notes.

   

2008 – $40 million 2016 Notes and repaid the remaining $25 million outstanding Lakeside term loan.

   

Net proceeds from borrowings include –

   

In fiscal 2009, we issued $810 million of 2014 Notes. After the original issue discount of $59 million, based on an issue price of 92.756% of face value, we received net proceeds of $751 million. We used the net proceeds towards the repayment of our borrowings under our accounts receivable securitization facility and for other general corporate purposes.

   

In fiscal 2009, Dynamic Fuels received $100 million in proceeds from the sale of Gulf Opportunity Zone tax-exempt bonds made available by the Federal government to the regions affected by Hurricanes Katrina and Rita in 2005. These floating rate bonds are due October 1, 2033.

   

In fiscal 2008, we issued $458 million 3.25% Convertible Senior Notes due October 15, 2013. Net proceeds were used for the net cost of the related Convertible Note Hedge and Warrant Transactions, toward the repayment of our borrowings under the accounts receivable securitization facility, and for other general corporate purposes.

   

In fiscal 2008, we issued 22.4 million shares of Class A stock in a public offering. Net proceeds were used toward repayment of our borrowings under the accounts receivable securitization facility and for other general corporate purposes.

   

In conjunction with the entry into our new credit facility and the issuance of the 2014 Notes during fiscal 2009, we paid $48 million for debt issuance costs.

 

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  Liquidity                                            in millions    
     

Commitments

Expiration
Date

    

Facility

Amount

     Borrowing
Base
Adjustment
     Outstanding Letters of
Credit under Revolving
Credit Facility (no
draw downs)
     Amount
Borrowed
     Amount  
Available  
 

  Cash and cash equivalents

                    $978     

  Revolving credit facility

     March 2012         $1,000         $-         $175         $-         $825     

  Total liquidity

                                                  $1,803     

 

   

The revolving credit facility supports our short-term funding needs and letters of credit. Letters of credit are issued primarily in support of workers’ compensation insurance programs, derivative activities and Dynamic Fuels’ Gulf Opportunity Zone tax-exempt bonds.

   

Borrowing Base Adjustment – Availability under this facility, up to $1.0 billion, is based on a percentage of certain eligible accounts receivable and eligible inventory and is reduced by certain reserves. At October 2, 2010, the entire $1.0 billion was eligible for borrowing and issuing letters of credit.

   

Our 2013 Notes may be converted early during any fiscal quarter in the event our Class A stock trades at or above $21.96 for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. In this event, the note holders may require us to pay outstanding principal in cash, which totaled $458 million at October 2, 2010. Any conversion premium would be paid in shares of Class A stock. The conditions for early conversion were not met in our fourth fiscal quarter of fiscal 2010, and thus, the notes may not be converted in our first quarter fiscal 2011. Should the conditions for early conversion be satisfied in future quarters, and the holders exercised their early conversion option, we would use current cash on hand and cash flow from operations for principal payments.

   

At October 2, 2010, we had $315 million of 2011 Notes outstanding. We plan presently to use current cash on hand and cash flows from operations for payment on the remaining 2011 Notes due on October 1, 2011.

   

Our current ratio was 1.81 to 1 and 2.20 to 1 at October 2, 2010, and October 3, 2009, respectively.

Deterioration of Credit and Capital Markets

Credit market conditions deteriorated rapidly during our fourth quarter of fiscal 2008 and although they have improved, they have not returned to pre-2008 levels. Several major banks and financial institutions failed or were forced to seek assistance through distressed sales or emergency government measures. While not all-inclusive, the following summarizes some of the impacts to our business:

Credit Facility

Cash flows from operating activities and current cash on hand are our primary source of liquidity for funding debt service and capital expenditures. We also have a revolving credit facility, with a committed maximum capacity of $1.0 billion, to provide additional liquidity for working capital needs, letters of credit, and as a source of financing for growth opportunities. As of October 2, 2010, we had outstanding letters of credit totaling $175 million, none of which were drawn upon, which left $825 million available for borrowing. Our revolving credit facility is funded by a syndicate of 19 banks, with commitments ranging from $6 million to $115 million per bank. The syndicate includes bank holding companies that are required to be adequately capitalized under federal bank regulatory agency requirements. If any of the banks in the syndicate are unable to perform on their commitments to fund the facility, our liquidity could be impaired, which could reduce our ability to fund working capital needs, support letters of credit or finance our growth opportunities.

Customers/Suppliers

The financial condition of some of our customers and suppliers could also be impaired by current market conditions. Although we have not experienced a material increase in customer bad debts or non-performance by suppliers, current market conditions increase the probability we could experience losses from customer or supplier defaults. Should credit and capital market conditions result in a prolonged economic downturn in the United States and abroad, demand for protein products could be reduced, which could result in a reduction of sales, operating income and cash flows. In addition, we rely on livestock producers throughout the country to supply our live cattle and hogs. If these producers are adversely impacted by the current economic conditions and terminate their production, our livestock supply for processing could be significantly impacted.

 

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Additionally, we have cash flow assistance programs in which certain livestock suppliers participate. Under these programs, we pay an amount for livestock equivalent to a standard cost to grow such livestock during periods of low market sales prices. The amounts of such payments that are in excess of the market sales price are recorded as receivables and accrue interest. Participating suppliers are obligated to repay these receivables balances when market sales prices exceed this standard cost, or upon termination of the agreement. Our maximum obligation associated with these programs is limited to the fair value of each participating livestock supplier’s net tangible assets. Although we believe the aggregate maximum obligation under the program is unlikely to ever be reached, the potential maximum obligation as of October 2, 2010, was approximately $215 million. The total receivables under these programs were $51 million and $72 million at October 2, 2010 and October 3, 2009, respectively. Even though these programs are limited to the net tangible assets of the participating livestock suppliers, we also manage a portion of our credit risk associated with these programs by obtaining security interests in livestock suppliers’ assets. After analyzing residual credit risks and general market conditions, we have recorded an allowance for these programs’ estimated uncollectible receivables of $15 million and $20 million at October 2, 2010, and October 3, 2009, respectively.

Investments

The value of our investments in equity and debt securities, including our marketable debt securities, company-owned life insurance and pension and other postretirement plan assets, are impacted by market volatility. These instruments were recorded at fair value as of October 2, 2010. We did not have a significant change in fair value of these instruments during fiscal 2010.

We currently oversee two domestic and one foreign subsidiary non-contributory qualified defined benefit pension plans. All three pension plans are frozen to new participants and no additional benefits will accrue for participants. Based on our 2010 actuarial valuation, we anticipate contributions of $5 million to these plans for fiscal 2011. We also have one domestic unfunded defined benefit plan. Based on our 2010 actuarial valuation, we anticipate contributions of $2 million to this plan in fiscal 2011.

Financial Instruments

As part of our commodity risk management activities, we use derivative financial instruments, primarily futures and options, to reduce our exposure to various market risks related to commodity purchases. Similar to the capital markets, the commodities markets have been volatile over the past few years. Grain and some energy prices remain volatile after reaching an all-time high during our fourth quarter of fiscal 2008 before falling sharply. While the reduction in grain and energy prices benefit us long-term, we recorded losses related to these financial instruments in fiscal 2009 of $257 million. We have implemented policies to reduce our earnings volatility associated with mark-to-market derivative activities, including more use of normal physical purchases and normal physical sales which are not required to be marked to market.

Insurance

We rely on insurers as a protection against liability claims, property damage and various other risks. Our primary insurers maintain an A.M. Best Financial Strength Rating of A or better. Nevertheless, we continue to monitor this situation as insurers have been and are expected to continue to be impacted by the current capital market environment.

 

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Credit Ratings

2016 Notes

On September 4, 2008, Standard & Poor’s (S&P) downgraded the credit rating from “BBB-” to “BB.” This downgrade increased the interest rate on the 2016 Notes from 6.85% to 7.35%, effective beginning with the six-month interest payment due October 1, 2008.

On November 13, 2008, Moody’s Investors Services, Inc. (Moody’s) downgraded the credit rating from “Ba1” to “Ba3.” This downgrade increased the interest rate on the 2016 Notes from 7.35% to 7.85%, effective beginning with the six-month interest payment due April 1, 2009.

On August 19, 2010, S&P upgraded the credit rating from “BB” to “BB+.” On September 2, 2010, Moody’s upgraded the credit rating from “Ba3” to “Ba2.” These upgrades decreased the interest rate on the 2016 Notes from 7.85% to 7.35%, effective beginning with the six-month interest payment due October 1, 2010.

A further one-notch upgrade by either ratings agency would decrease the interest rates on the 2016 Notes by 0.25%, while a one-notch downgrade by either ratings agency would increase the interest rates on the 2016 Notes by 0.25%.

Revolving Credit Facility

S&P’s corporate credit rating for Tyson Foods, Inc. is “BB+.” Moody’s corporate credit rating for Tyson Foods, Inc. is “Ba2.” If Moody’s were to upgrade our credit rating to “Ba1” or higher, while our S&P credit rating remained at “BB+” or higher, our letter of credit fees would decrease by 0.25%.

If S&P were to downgrade our corporate credit rating to “B+” or lower or Moody’s were to downgrade our corporate credit rating to “B1” or lower, our letter of credit fees would increase by an additional 0.25%.

Debt Covenants

Our revolving credit facility contains affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens and encumbrances; incur debt; merge, dissolve, liquidate or consolidate; make acquisitions and investments; dispose of or transfer assets; pay dividends or make other payments in respect of our capital stock; amend material documents; change the nature of our business; make certain payments of debt; engage in certain transactions with affiliates; and enter into sale/leaseback or hedging transactions, in each case, subject to certain qualifications and exceptions. If availability under this facility is less than the greater of 15% of the commitments and $150 million, we will be required to maintain a minimum fixed charge coverage ratio.

Our 2014 Notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: incur additional debt and issue preferred stock; make certain investments and restricted payments; create liens; create restrictions on distributions from subsidiaries; engage in specified sales of assets and subsidiary stock; enter into transactions with affiliates; enter new lines of business; engage in consolidation, mergers and acquisitions; and engage in certain sale/leaseback transactions.

We were in compliance with all covenants at October 2, 2010.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements material to our financial position or results of operations. The off-balance sheet arrangements we have are guarantees of debt of outside third parties, including a lease and grower loans, and residual value guarantees covering certain operating leases for various types of equipment. See Note 10: Commitments of the Notes to Consolidated Financial Statements for further discussion.

 

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CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations as of October 2, 2010:

 

in millions  
      Payments Due by Period  
      2011      2012-2013      2014-2015      2016 and
thereafter
     Total  

  Debt and capital lease obligations:

              

   Principal payments (1)

     $401         $15         $1,277         $948         $2,641   

   Interest payments (2)

     209         305         199         72         785   

   Guarantees (3)

     18         40         44         12         114   

  Operating lease obligations (4)

     91         122         49         55         317   

  Purchase obligations (5)

     829         55         24         36         944   

  Capital expenditures (6)

     371         17         0         0         388   

  Other long-term liabilities (7)

     12         5         4         28         49   

  Total contractual commitments

     $1,931         $559         $1,597         $1,151         $5,238   

 

  (1) In the event of a default on payment, acceleration of the principal payments could occur.
  (2) Interest payments include interest on all outstanding debt. Payments are estimated for variable rate and variable term debt based on effective rates at October 2, 2010, and expected payment dates.
  (3) Amounts include guarantees of debt of outside third parties, which consist of a lease and grower loans, all of which are substantially collateralized by the underlying assets, as well as residual value guarantees covering certain operating leases for various types of equipment. The amounts included are the maximum potential amount of future payments.
  (4) Amounts include minimum lease payments under lease agreements.
  (5) Amounts include agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligations amount included items, such as future purchase commitments for grains, livestock contracts and fixed grower fees that provide terms that meet the above criteria. We have excluded future purchase commitments for contracts that do not meet these criteria. Purchase orders have not been included in the table, as a purchase order is an authorization to purchase and may not be considered an enforceable and legally binding contract. Contracts for goods or services that contain termination clauses without penalty have also been excluded.
  (6) Amounts include estimated amounts to complete buildings and equipment under construction as of October 2, 2010.
  (7) Amounts include items that meet the definition of a purchase obligation and are recorded in the Consolidated Balance Sheets.

In addition to the amounts shown above in the table, we have unrecognized tax benefits of $184 million and related interest and penalties of $64 million at October 2, 2010, recorded as liabilities. During fiscal 2011, tax audit resolutions could potentially reduce these amounts by approximately $20 million, either because tax positions are sustained on audit or because we agree to their disallowance.

The maximum contractual obligation associated with our cash flow assistance programs at October 2, 2010, based on the estimated fair values of the livestock supplier’s net tangible assets on that date, aggregated to approximately $215 million, or approximately $164 million remaining maximum commitment after netting the cash flow assistance related receivables.

The minority partner in our Shandong Tyson Xinchang Foods joint ventures in China has the right to exercise put options to require us to purchase its entire 40% equity interest at a price equal to the minority partner’s contributed capital plus (minus) its pro-rata share of the joint venture’s accumulated and undistributed net earnings (losses). The put options are exercisable for a five-year term commencing April 2011. At October 2, 2010, the put options, if they had been exercisable, would have resulted in a purchase price of approximately $67 million for the minority partner’s entire equity interest.

RECENTLY ISSUED/ADOPTED ACCOUNTING PRONOUNCEMENTS

Refer to the discussion under Part II, Item 8, Notes to Consolidated Financial Statements, Note 1: Business and Summary of Significant Accounting Policies for recently issued accounting pronouncements and Note 2: Change in Accounting Principles for recently adopted accounting pronouncements.

 

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CRITICAL ACCOUNTING ESTIMATES

The preparation of consolidated financial statements requires us 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of certain accounting estimates we consider critical.

 

Description   Judgments and Uncertainties   Effect if Actual Results Differ From
Assumptions

Contingent liabilities

   

We are subject to lawsuits, investigations and other claims related to wage and hour/labor, environmental, product, taxing authorities and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses.

 

A determination of the amount of reserves and disclosures required, if any, for these contingencies are made after considerable analysis of each individual issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. We disclose contingent liabilities when the risk of loss is reasonably possible or probable.

  Our contingent liabilities contain uncertainties because the eventual outcome will result from future events, and determination of current reserves requires estimates and judgments related to future changes in facts and circumstances, differing interpretations of the law and assessments of the amount of damages, and the effectiveness of strategies or other factors beyond our control.  

We have not made any material changes in the accounting methodology used to establish our contingent liabilities during the past three fiscal years.

 

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our contingent liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.

Marketing and advertising costs    

We incur advertising, retailer incentive and consumer incentive costs to promote products through marketing programs. These programs include cooperative advertising, volume discounts, in-store display incentives, coupons and other programs.

 

Marketing and advertising costs are charged in the period incurred. We accrue costs based on the estimated performance, historical utilization and redemption of each program.

 

Cash consideration given to customers is considered a reduction in the price of our products, thus recorded as a reduction to sales. The remainder of marketing and advertising costs is recorded as a selling, general and administrative expense.

 

Recognition of the costs related to these programs contains uncertainties due to judgment required in estimating the potential performance and redemption of each program.

 

These estimates are based on many factors, including experience of similar promotional programs.

 

We have not made any material changes in the accounting methodology used to establish our marketing accruals during the past three fiscal years.

 

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our marketing accruals. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.

 

A 10% change in our marketing accruals at October 2, 2010, would impact pretax earnings by approximately $11 million.

 

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Description   Judgments and Uncertainties   Effect if Actual Results Differ From
Assumptions

Accrued self insurance

   

We are self insured for certain losses related to health and welfare, workers’ compensation, auto liability and general liability claims.

 

We use an independent third-party actuary to assist in determining our self-insurance liability. We and the actuary consider a number of factors when estimating our self-insurance liability, including claims experience, demographic factors, severity factors and other actuarial assumptions.

 

We periodically review our estimates and assumptions with our third-party actuary to assist us in determining the adequacy of our self-insurance liability. Our policy is to maintain an accrual within the central to high point of the actuarial range.

 

Our self-insurance liability contains uncertainties due to assumptions required and judgment used.

 

Costs to settle our obligations, including legal and healthcare costs, could increase or decrease causing estimates of our self-insurance liability to change.

 

Incident rates, including frequency and severity, could increase or decrease causing estimates in our self-insurance liability to change.

 

We have not made any material changes in the accounting methodology used to establish our self-insurance liability during the past three fiscal years.

 

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our self-insurance liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.

 

A 10% increase in the actuarial range at October 2, 2010, would result in an increase in the amount we recorded for our self-insurance liability of approximately $24 million. A 10% decrease in the actuarial range at October 2, 2010, would not result in a material change in the amount we recorded for our self-insurance liability.

Impairment of long-lived assets    

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Examples include a significant adverse change in the extent or manner in which we use a long-lived asset or a change in its physical condition.

 

When evaluating long-lived assets for impairment, we compare the carrying value of the asset to the asset’s estimated undiscounted future cash flows. An impairment is indicated if the estimated future cash flows are less than the carrying value of the asset. The impairment is the excess of the carrying value over the fair value of the long-lived asset.

 

We recorded impairment charges related to long-lived assets of $19 million, $25 million, and $52 million, respectively, in fiscal years 2010, 2009, and 2008.

  Our impairment analysis contains uncertainties due to judgment in assumptions and estimates surrounding undiscounted future cash flows of the long-lived asset, including forecasting useful lives of assets and selecting the discount rate that reflects the risk inherent in future cash flows to determine fair value.  

We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets during the last three fiscal years.

 

We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments of long-lived assets. However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses that could be material. Additionally, we continue to evaluate our future international business strategies, which may expose us to future impairment losses.

 

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Description   Judgments and Uncertainties   Effect if Actual Results Differ From
Assumptions

Impairment of goodwill and other intangible assets

 

Goodwill impairment is determined using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.

 

The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

 

The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit).

 

For other intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

 

We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and other intangible assets. However, we could be required to evaluate the recoverability of goodwill and other intangible assets prior to the required annual assessment if, among other things, we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of the business or a sustained decline in market capitalization.

 

We estimate the fair value of our reporting units, generally our operating segments, using various valuation techniques, with the primary technique being a discounted cash flow analysis, which uses significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, growth rates and discount rates.

 

Generally, we utilize normalized operating margin assumptions based on long-term expectations and operating margins historically realized in the reporting units’ industries. We include assumptions about sales, operating margins and growth rates which consider our budgets, business plans and economic projections, and are believed to reflect market participant views which would exist in an exit transaction. For our fiscal 2010 impairment test, none of our material reporting units operating margin assumptions were in excess of the annual margins realized in the most recent year.

 

Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period.

 

Other intangible asset fair values have been calculated for trademarks using a royalty rate method. Assumptions about royalty rates are based on the rates at which similar brands and trademarks are licensed in the marketplace.

 

Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions.

 

We have not made any material changes in the accounting methodology used to evaluate impairment of goodwill and other intangible assets during the last three years.

 

The discount rate used in our annual goodwill impairment test decreased to an average of 8.4% in fiscal 2010 from 10.1% in fiscal 2009. There were no significant changes in the other key estimates and assumptions.

 

Other than the Beef reporting unit in 2009, no other material reporting units failed the first step of the annual goodwill impairment analysis in fiscal 2010, 2009 and 2008 and therefore, the second step was not necessary. In fiscal 2009, we recorded a $560 million partial impairment of our Beef reporting unit’s goodwill, which was driven by an increase in our discount rate used in the 2009 annual goodwill impairment analysis as a result of disruptions in global credit and other financial markets and deterioration of economic conditions. In fiscal 2010, we recorded a non-cash $29 million full impairment of an immaterial Chicken segment reporting unit’s goodwill.

 

All material reporting units’ estimated fair value exceeded their carrying value by more than 20%. Consequently, we currently do not consider any of our material reporting units at significant risk of failing the first step of the annual goodwill impairment test.

 

Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, and our credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units and other intangible assets, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, we may be required to perform the second step which could result in additional material impairments of our goodwill.

 

Our fiscal 2010 other intangible asset impairment analysis did not result in a material impairment charge. A hypothetical 10% decrease in the fair value of intangible assets would not result in a material impairment.

 

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Description   Judgments and Uncertainties   Effect if Actual Results Differ From
Assumptions

Income taxes

   

We estimate total income tax expense based on statutory tax rates and tax planning opportunities available to us in various jurisdictions in which we earn income.

 

Federal income tax includes an estimate for taxes on earnings of foreign subsidiaries expected to be remitted to the United States and be taxable, but not for earnings considered indefinitely invested in the foreign subsidiary.

 

Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse.

 

Valuation allowances are recorded when it is likely a tax benefit will not be realized for a deferred tax asset.

 

We record unrecognized tax benefit liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due.

 

Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.

 

Changes in projected future earnings could affect the recorded valuation allowances in the future.

 

Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax regulations across the tax jurisdictions where we operate.

 

Our analysis of unrecognized tax benefits contains uncertainties based on judgment used to apply the more likely than not recognition and measurement thresholds.

 

We do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

 

To the extent we prevail in matters for which unrecognized tax benefit liabilities have been established, or are required to pay amounts in excess of our recorded unrecognized tax benefit liabilities, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the period of resolution.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

Market risk relating to our operations results primarily from changes in commodity prices, interest rates and foreign exchange rates, as well as credit risk concentrations. To address certain of these risks, we enter into various derivative transactions as described below. If a derivative instrument is accounted for as a hedge, depending on the nature of the hedge, changes in the fair value of the instrument either will be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or be recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is recognized immediately. Additionally, we hold certain positions, primarily in grain and livestock futures that either do not meet the criteria for hedge accounting or are not designated as hedges. With the exception of normal purchases and normal sales that are expected to result in physical delivery, we record these positions at fair value, and the unrealized gains and losses are reported in earnings at each reporting date. Changes in market value of derivatives used in our risk management activities relating to forward sales contracts are recorded in sales. Changes in market value of derivatives used in our risk management activities surrounding inventories on hand or anticipated purchases of inventories are recorded in cost of sales.

The sensitivity analyses presented below are the measures of potential losses of fair value resulting from hypothetical changes in market prices related to commodities. Sensitivity analyses do not consider the actions we may take to mitigate our exposure to changes, nor do they consider the effects such hypothetical adverse changes may have on overall economic activity. Actual changes in market prices may differ from hypothetical changes.

 

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Commodities Risk: We purchase certain commodities, such as grains and livestock, in the course of normal operations. As part of our commodity risk management activities, we use derivative financial instruments, primarily futures and options, to reduce the effect of changing prices and as a mechanism to procure the underlying commodity. However, as the commodities underlying our derivative financial instruments can experience significant price fluctuations, any requirement to mark-to-market the positions that have not been designated or do not qualify as hedges could result in volatility in our results of operations. Contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation. Contracts designated and highly effective at meeting this risk reduction and correlation criteria are recorded using hedge accounting. The following table presents a sensitivity analysis resulting from a hypothetical change of 10% in market prices as of October 2, 2010, and October 3, 2009, on the fair value of open positions. The fair value of such positions is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures prices. The market risk exposure analysis includes hedge and non-hedge derivative financial instruments.

 

  Effect of 10% change in fair value            in millions  
      2010      2009  

  Livestock:

     

   Cattle

     $39         $20   

   Hogs

     42         12   
     

  Grain

     10         1   

Interest Rate Risk: At October 2, 2010, we had variable rate debt of $212 million with a weighted average interest rate of 4.5%. A hypothetical 10% increase in interest rates effective at October 2, 2010, and October 3, 2009, would have a minimal effect on interest expense.

Additionally, changes in interest rates impact the fair value of our fixed-rate debt. At October 2, 2010, we had fixed-rate debt of $2.3 billion with a weighted average interest rate of 9.2%. Market risk for fixed-rate debt is estimated as the potential increase in fair value, resulting from a hypothetical 10% decrease in interest rates. A hypothetical 10% decrease in interest rates would have increased the fair value of our fixed-rate debt by approximately $9 million at October 2, 2010, and $32 million at October 3, 2009. The fair values of our debt were estimated based on quoted market prices and/or published interest rates.

Foreign Currency Risk: We have foreign exchange gain/loss exposure from fluctuations in foreign currency exchange rates primarily as a result of certain receivable and payable balances. The primary currency exchanges we have exposure to are the Canadian dollar, the Chinese renminbi, the Mexican peso, the European euro, the British pound sterling and the Brazilian real. We periodically enter into foreign exchange forward contracts to hedge some portion of our foreign currency exposure. A hypothetical 10% change in foreign exchange rates effective at October 2, 2010, and October 3, 2009, related to the foreign exchange forward contracts would have a $17 million and $15 million, respectively, impact on pretax income. In the future, we may enter into more foreign exchange forward contracts as a result of our international growth strategy.

Concentrations of Credit Risk: Our financial instruments exposed to concentrations of credit risk consist primarily of cash equivalents and trade receivables. Our cash equivalents are in high quality securities placed with major banks and financial institutions. Concentrations of credit risk with respect to receivables are limited due to our large number of customers and their dispersion across geographic areas. We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. At October 2, 2010, and October 3, 2009, 15.3% and 13.0%, respectively, of our net accounts receivable balance was due from Wal-Mart Stores, Inc. No other single customer or customer group represents greater than 10% of net accounts receivable.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME

 

     Three years ended October 2, 2010  
     in millions, except per share data  
        
      2010      2009      2008  

  Sales

     $28,430         $26,704         $26,862   

  Cost of Sales

     25,916         25,501         25,616   

  Gross Profit

     2,514         1,203         1,246   

  Operating Expenses:

        

   Selling, general and administrative

     929         841         879   

   Goodwill impairment

     29         560         0   

   Other charges

     0         17         36   

  Operating Income (Loss)

     1,556         (215)         331   

  Other (Income) Expense:

        

   Interest income

     (14)         (17)         (9)   

   Interest expense

     347         327         215   

   Other, net

     20         18         (29)   

  Total Other (Income) Expense

     353         328         177   
        

  Income (Loss) from Continuing Operations before Income Taxes

     1,203         (543)         154   

  Income Tax Expense

     438         7         68   

  Income (Loss) from Continuing Operations

     765         (550)         86   

  Loss from Discontinued Operation, Net of Tax

     0         (1)         0   

  Net Income (Loss)

     765         (551)         86   

  Less: Net Loss Attributable to Noncontrolling Interest

     (15)         (4)         0   

  Net Income (Loss) Attributable to Tyson

     $780         $(547)         $86   
        

  Weighted Average Shares Outstanding:

        

   Class A Basic

     303         302         281   

   Class B Basic

     70         70         70   

   Diluted

     379         372         356   

  Earnings (Loss) Per Share from Continuing Operations Attributable to Tyson:

        

   Class A Basic

     $2.13         $(1.49)         $0.25   

   Class B Basic

     $1.91         $(1.35)         $0.22   

   Diluted

     $2.06         $(1.47)         $0.24   

  Loss Per Share from Discontinued Operation Attributable to Tyson:

        

   Class A Basic

     $0.00         $0.00         $0.00   

   Class B Basic

     $0.00         $0.00         $0.00   

   Diluted

     $0.00         $0.00         $0.00   

  Net Earnings (Loss) per Share Attributable to Tyson:

        

   Class A Basic

     $2.13         $(1.49)         $0.25   

   Class B Basic

     $1.91         $(1.35)         $0.22   

   Diluted

     $2.06         $(1.47)         $0.24   

  See accompanying notes.

 

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CONSOLIDATED BALANCE SHEETS

 

October 2, 2010, and October 3, 2009  
in millions, except share and per share data  
               
                  2010                  2009  

  Assets

     

  Current Assets:

     

   Cash and cash equivalents

     $978         $1,004   

   Restricted cash

     0         140   

   Accounts receivable, net

     1,198         1,100   

   Inventories, net

     2,274         2,009   

   Other current assets

     168         122   

  Total Current Assets

     4,618         4,375   

  Restricted Cash

     0         43   

  Net Property, Plant and Equipment

     3,674         3,576   

  Goodwill

     1,893         1,917   

  Intangible Assets

     166         187   

  Other Assets

     401         497   

  Total Assets

     $10,752         $10,595   
     

  Liabilities and Shareholders’ Equity

     

  Current Liabilities:

     

   Current debt

     $401         $219   

   Accounts payable

     1,110         1,013   

   Other current liabilities

     1,034         761   

  Total Current Liabilities

     2,545         1,993   

  Long-Term Debt

     2,135         3,258   

  Deferred Income Taxes

     321         309   

  Other Liabilities

     486         539   

  Redeemable Noncontrolling Interest

     64         65   

  Shareholders’ Equity:

     

   Common stock ($0.10 par value):

     

  Class A-authorized 900 million shares:

     

   issued 322 million shares in both 2010 and 2009

     32         32   

  Convertible Class B-authorized 900 million shares:

     

   issued 70 million shares in both 2010 and 2009

     7         7   

   Capital in excess of par value

     2,243         2,236   

   Retained earnings

     3,113         2,399   

   Accumulated other comprehensive income

     0         (34)   

   Treasury stock, at cost-

       15 million shares in 2010 and 16 million shares in 2009

     (229)         (242)   

  Total Tyson Shareholders’ Equity

     5,166         4,398   

  Noncontrolling Interest

     35         33   

  Total Shareholders’ Equity

     5,201         4,431   

  Total Liabilities and Shareholders’ Equity

     $10,752         $10,595   

  See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

                          Three years ended October 2, 2010  
                          in millions  
                 
     October 2, 2010      October 3, 2009      September 27, 2008  
            Shares            Amount            Shares            Amount            Shares            Amount  
                 

  Class A Common Stock:

                 

        Balance at beginning of year

     322         $32         322         $32         300         $30   

            Issuance of Class A Common Stock

     0         0         0         0         22         2   

        Balance at end of year

     322         32         322         32         322         32   
                 

  Class B Common Stock:

                                                     

        Balance at beginning and end of year

     70         7         70         7         70         7   
                 

  Capital in Excess of Par Value:

                 

        Balance at beginning of year

        2,236            2,217            1,877   

            Issuance of Class A Common Stock

        0            0            272   

            Convertible note hedge transactions

        0            0            (58)   

            Warrant transactions

        0            0            44   

            Issuance of convertible debt

        0            0            56   

            Stock-based compensation

        7            19            21   

            Other

              0                  0                  5   

        Balance at end of year

              2,243                  2,236                  2,217   
                 

  Retained Earnings:

                 

        Balance at beginning of year

        2,399            3,006            2,993   

            Cumulative effect for adoption of new accounting guidance for
            uncertainty in income taxes

        0            0            (17)   

            Net income (loss) attributable to Tyson

        780            (547)            86   

            Dividends paid

        (59)            (60)            (56)   

            Redeemable noncontrolling interest accretion

              (7)                  0                  0   

        Balance at end of year

              3,113                  2,399                  3,006   
                 

  Accumulated Other Comprehensive Income (Loss), Net of Tax:

                 

        Balance at beginning of year

        (34)            41            50   

            Hedge accounting

        12            6            (2)   

            Investment accounting

        0            10            (1)   

            Currency translation adjustments

        27            (81)            (2)   

            Net change in postretirement liabilities

              (5)                  (10)                  (4)   

        Balance at end of year

              0                  (34)                  41   
                 

  Treasury Stock:

                 

        Balance at beginning of year

     16         (242)         15         (233)         14         (226)   

            Purchase of treasury shares

     3         (48)         2         (19)         2         (30)   

            Stock-based compensation

     (4)         61         (1)         10         (1)         23   

        Balance at end of year

     15         (229)         16         (242)         15         (233)   
                 

  Total Shareholders’ Equity Attributable to Tyson

              $5,166                  $4,398                  $5,070   
                 

  Equity Attributable to Noncontrolling Interests

                 

        Balance at beginning of year

        $33            $29            $4   

            Net income (loss) attributable to noncontrolling interests (1)

        (6)            (4)            0   

            Contributions by (distributions to) noncontrolling interest

        10            9            25   

            Net foreign currency translation adjustment and other

        (2)            (1)            0   

  Total Equity Attributable to Noncontrolling Interests

              $35                  $33                  $29   
                 

  Total Shareholders’ Equity

              $5,201                  $4,431                  $5,099   
                 

  Comprehensive Income (Loss):

                 

         Net income (loss)

        $765            $(551)            $86   

         Other comprehensive income (loss), net of tax

              34                  (75)                  (9)   

  Total Comprehensive Income (Loss)

        799            (626)            77   

  Comprehensive Income (Loss) attributable to noncontrolling interest

              (6)                  (4)                  0   

  Total Comprehensive Income (Loss) attributable to Tyson

              $805                  $(622)                  $77   

  See accompanying notes.

 

  (1) Excludes income (loss) related to redeemable noncontrolling interest of $(9) million, $0 and $0, for fiscal 2010, 2009 and 2008, respectively.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Three years ended October 2, 2010  
     in millions   
  
                  2010                  2009                  2008  

  Cash Flows From Operating Activities:

        

Net income (loss)

     $765         $(551)         $86   

Adjustments to reconcile net income (loss) to cash provided by operating activities:

        

Depreciation

     416         445         468   

Amortization

     81         68         25   

Deferred income taxes

     18         (33)         35   

Impairment of goodwill

     29         560         0   

Impairment of assets

     36         32         57   

Other, net

     76         72         26   

(Increase) decrease in accounts receivable

     (79)         137         (59)   

(Increase) decrease in inventories

     (239)         493         (376)   

Increase (decrease) in accounts payable

     101         (216)         165   

Increase (decrease) in income taxes payable/receivable

     (53)         33         (22)   

Decrease in interest payable

     (4)         (60)         0   

Net change in other current assets and liabilities

     285         (20)         (50)   

  Cash Provided by Operating Activities

     1,432         960         355   

  Cash Flows From Investing Activities:

        

Additions to property, plant and equipment

     (550)         (368)         (425)   

Purchases of marketable securities

     (53)         (37)         (115)   

Proceeds from sale of marketable securities

     49         56         112   

Change in restricted cash to be used for investing activities

     43         (43)         0   

Proceeds from sale of discontinued operation

     0         75         0   

Acquisitions, net of cash acquired

     0         (93)         (17)   

Other, net

     11         (17)         46   

  Cash Used for Investing Activities

     (500)         (427)         (399)   

  Cash Flows From Financing Activities:

        

Net borrowings (payments) on revolving credit facilities

     0         15         (213)   

Payments of debt

     (1,034)         (380)         (147)   

Net proceeds from borrowings

     0         852         449   

Net proceeds from Class A stock offering

     0         0         274   

Convertible note hedge transactions

     0         0         (94)   

Warrant transactions

     0         0         44   

Purchase of treasury shares

     (48)         (19)         (30)   

Dividends

     (59)         (60)         (56)   

Debt issuance costs

     0         (59)         0   

Change in restricted cash to be used for financing activities

     140         (140)         0   

Other, net

     42         6         27   

  Cash Provided by (Used for) Financing Activities

     (959)         215         254   

  Effect of Exchange Rate Change on Cash

     1         6         (2)   

  Increase (Decrease) in Cash and Cash Equivalents

     (26)         754         208   

  Cash and Cash Equivalents at Beginning of Year

     1,004         250         42   

  Cash and Cash Equivalents at End of Year

     $978         $1,004         $250   

  See accompanying notes.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business: Tyson Foods, Inc. (collectively, “Company,” “we,” “us” or “our”), founded in 1935 with world headquarters in Springdale, Arkansas, is one of the world’s largest meat protein companies and the second-largest food production company in the Fortune 500. We produce a wide variety of brand name protein-based and prepared food products marketed in the United States and approximately 100 countries around the world.

Consolidation: The consolidated financial statements include the accounts of all wholly-owned subsidiaries, as well as majority-owned subsidiaries for which we have a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation.

We have an investment in a joint venture, Dynamic Fuels LLC (Dynamic Fuels), in which we have a 50 percent ownership interest. Dynamic Fuels qualifies as a variable interest entity. Effective June 30, 2008, we began consolidating Dynamic Fuels since we are the primary beneficiary. At October 2, 2010, Dynamic Fuels had $154 million of total assets, of which $145 million was property, plant and equipment, and $107 million of total liabilities, of which $100 million was long-term debt. At October 3, 2009, Dynamic Fuels had $144 million of total assets, of which $64 million was property, plant and equipment, and $108 million of total liabilities, of which $100 million was long-term debt.

Fiscal Year: We utilize a 52- or 53-week accounting period ending on the Saturday closest to September 30. The Company’s accounting cycle resulted in a 52-week year for fiscal years 2010 and 2008 and a 53-week year for fiscal year 2009.

Reclassification: In the fiscal 2010 Consolidated Statements of Cash Flows, we reclassified ($65 million) and $67 million, respectively, for fiscal 2009 and fiscal 2008, of changes in negative book cash balances from Financing Activities to Operating Activities (included in Increase (decrease) in accounts payable) to conform with the current period presentation.

Discontinued Operation: On March 13, 2009, we completed the sale of the beef processing, cattle feed yard and fertilizer assets of three of our Alberta, Canada subsidiaries (collectively, Lakeside), which were part of our Beef segment, and related inventories. The financial statements report Lakeside as a discontinued operation. See Note 4: Discontinued Operation in the Notes to Consolidated Financial Statements for further information.

Cash and Cash Equivalents: Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as part of our cash management activity. The carrying values of these assets approximate their fair values. We primarily utilize a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts where funds are moved to, and several zero-balance disbursement accounts for funding payroll, accounts payable, livestock procurement, grower payments, etc. As a result of our cash management system, checks issued, but not presented to the banks for payment, may result in negative book cash balances. These negative book cash balances are included in accounts payable and other current liabilities. At October 2, 2010, and October 3, 2009, checks outstanding in excess of related book cash balances totaled approximately $267 million and $254 million, respectively.

Accounts Receivable: We record accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and relationships with and economic status of our customers. At October 2, 2010, and October 3, 2009, our allowance for uncollectible accounts was $32 million and $33 million, respectively. We generally do not have collateral for our receivables, but we do periodically evaluate the credit worthiness of our customers.

Inventories: Processed products, livestock and supplies and other are valued at the lower of cost or market. Cost includes purchased raw materials, live purchase costs, growout costs (primarily feed, contract grower pay and catch and haul costs), labor and manufacturing and production overhead, which are related to the purchase and production of inventories.

 

                  in millions  
      2010      2009  

  Processed products:

     

        Weighted-average method – chicken and prepared foods

     $721         $629   

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

     462         414   

  Livestock – first-in, first-out method

     759         631   

  Supplies and other – weighted-average method

     332         335   

  Total inventory, net

     $2,274         $2,009   

 

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Property, Plant and Equipment: Property, plant and equipment are stated at cost and depreciated on a straight-line method, using estimated lives for buildings and leasehold improvements of 10 to 33 years, machinery and equipment of three to 12 years and land improvements and other of three to 20 years. Major repairs and maintenance costs that significantly extend the useful life of the related assets are capitalized. Normal repairs and maintenance costs are charged to operations.

We review the carrying value of long-lived assets at each balance sheet date if indication of impairment exists. Recoverability is assessed using undiscounted cash flows based on historical results and current projections of earnings before interest and taxes. We measure impairment as the excess of carrying cost over the fair value of an asset. The fair value of an asset is measured using discounted cash flows including market participant assumptions of future operating results and discount rates.

Goodwill and Other Intangible Assets: Goodwill and indefinite life intangible assets are initially recorded at fair value and not amortized, but are reviewed for impairment at least annually or more frequently if impairment indicators arise. Our goodwill is allocated by reporting unit, and we follow a two-step process to evaluate if a potential impairment exists. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit). We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and other indefinite life intangible assets.

We have estimated the fair value of our reporting units using a discounted cash flow analysis, which uses significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. This analysis requires us to make various judgmental estimates and assumptions about sales, operating margins, growth rates and discount factors and are believed to reflect market participant views which would exist in an exit transaction. Generally, we utilize normalized operating margin assumptions based on long-term expectations and operating margins historically realized in the reporting units’ industries. For our fiscal 2010 impairment test, none of our material reporting units’ operating margin assumptions were in excess of the annual margins realized in the most recent year. Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, and credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, we may be required to perform the second step in future years, which could result in material impairments of our goodwill.

During fiscal 2010, 2009 and 2008, all of our reporting units passed the first step of the goodwill impairment analysis, with the exception of an immaterial Chicken segment reporting unit in fiscal 2010 and the Beef reporting unit in fiscal 2009. In fiscal 2010, we recorded a non-cash $29 million full impairment of an immaterial Chicken segment reporting unit’s goodwill. In fiscal 2009, we recorded a $560 million partial impairment of our Beef reporting unit’s goodwill, which was driven by an increase in our discount rate used in the 2009 annual goodwill impairment analysis as a result of disruptions in global credit and other financial markets and deterioration of economic conditions.

For our other indefinite life intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The fair value of trademarks is determined using a royalty rate method based on expected revenues by trademark.

Investments: We have investments in joint ventures and other entities. We use the cost method of accounting when our voting interests are less than 20 percent. We use the equity method of accounting when our voting interests are in excess of 20 percent and we do not have a controlling interest or a variable interest in which we are the primary beneficiary. Investments in joint ventures and other entities are reported in the Consolidated Balance Sheets in Other Assets.

We also have investments in marketable debt securities. We have determined all of our marketable debt securities are available-for-sale investments. These investments are reported at fair value based on quoted market prices as of the balance sheet date, with unrealized gains and losses, net of tax, recorded in other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is recorded in interest income. The cost of securities sold is based on the specific identification method. Realized gains and losses on 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.

 

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Accrued Self Insurance: We use a combination of insurance and self-insurance mechanisms in an effort to mitigate the potential liabilities for health and welfare, workers’ compensation, auto liability and general liability risks. Liabilities associated with our risks retained are estimated, in part, by considering claims experience, demographic factors, severity factors and other actuarial assumptions.

Capital Stock: We have two classes of capital stock, Class A Common Stock, $0.10 par value (Class A stock) and Class B Common Stock, $0.10 par value (Class B stock). Holders of Class B stock may convert such stock into Class A stock on a share-for-share basis. Holders of Class B stock are entitled to 10 votes per share, while holders of Class A stock are entitled to one vote per share on matters submitted to shareholders for approval. As of October 2, 2010, members of the Tyson family beneficially own, in the aggregate, 99.97% of the outstanding shares of Class B stock and 2.42% of the outstanding shares of Class A stock, giving the Tyson family control of approximately 70% of the total voting power of the outstanding voting stock. Cash dividends cannot be paid to holders of Class B stock unless they are simultaneously paid to holders of Class A stock. The per share amount of the cash dividend paid to holders of Class B stock cannot exceed 90% of the cash dividend simultaneously paid to holders of Class A stock. We pay quarterly cash dividends to Class A and Class B shareholders. We paid Class A dividends per share of $0.16 and Class B dividends per share of $0.144 in each of fiscal years 2010, 2009 and 2008.

The Class B stock is considered a participating security requiring the use of the two-class method for the computation of basic earnings per share. The two-class computation method for each period reflects the cash dividends paid for each class of stock, plus the amount of allocated undistributed earnings (losses) computed using the participation percentage, which reflects the dividend rights of each class of stock. Basic earnings per share were computed using the two-class method for all periods presented. The shares of Class B stock are considered to be participating convertible securities since the shares of Class B stock are convertible on a share-for-share basis into shares of Class A stock. Diluted earnings per share were computed assuming the conversion of the Class B shares into Class A shares as of the beginning of each period.

Financial Instruments: We purchase certain commodities, such as grains and livestock in the course of normal operations. As part of our commodity risk management activities, we use derivative financial instruments, primarily futures and options, to reduce our exposure to various market risks related to these purchases, as well as to changes in foreign currency exchange rates. Contract terms of a financial instrument qualifying as a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts designated and highly effective at meeting risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument is accounted for as a hedge, changes in the fair value of the instrument will be offset either against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is immediately recognized in earnings as a component of cost of sales. Instruments we hold as part of our risk management activities that do not meet the criteria for hedge accounting are marked to fair value with unrealized gains or losses reported currently in earnings. Changes in market value of derivatives used in our risk management activities relating to forward sales contracts are recorded in sales, while changes surrounding inventories on hand or anticipated purchases of inventories or supplies are recorded in cost of sales. We generally do not hedge anticipated transactions beyond 18 months.

Revenue Recognition: We recognize revenue when title and risk of loss are transferred to customers, which is generally on delivery based on terms of sale. Revenue is recognized as the net amount estimated to be received after deducting estimated amounts for discounts, trade allowances and product terms.

Litigation Reserves: There are a variety of legal proceedings pending or threatened against us. Accruals are recorded when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated based on current law, progress of each case, opinions and views of legal counsel and other advisers, our experience in similar matters and intended response to the litigation. These amounts, which are not discounted and are exclusive of claims against third parties, are adjusted periodically as assessment efforts progress or additional information becomes available. We expense amounts for administering or litigating claims as incurred. Accruals for legal proceedings are included in Other current liabilities in the Consolidated Balance Sheets.

Freight Expense: Freight expense associated with products shipped to customers is recognized in cost of sales.

Advertising and Promotion Expenses: Advertising and promotion expenses are charged to operations in the period incurred. Customer incentive and trade promotion activities are recorded as a reduction to sales based on amounts estimated as being due to customers, based primarily on historical utilization and redemption rates, while other advertising and promotional activities are recorded as selling, general and administrative expenses. Advertising and promotion expenses for fiscal years 2010, 2009 and 2008 were $505 million, $491 million and $495 million, respectively.

Research and Development: Research and development costs are expensed as incurred. Research and development costs totaled $38 million, $33 million and $30 million in fiscal 2010, 2009 and 2008, respectively.

 

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Use of Estimates: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements: In June 2009, the Financial Accounting Standards Board (FASB) issued guidance removing the concept of a qualifying special-purpose entity (QSPE). This guidance also clarifies the requirements for isolation and limitations on portions of financial assets eligible for sale accounting. This guidance is effective for fiscal years beginning after November 15, 2009. Accordingly, we will adopt this guidance at the beginning of fiscal year 2011 and do not expect the adoption will have a material impact.

In June 2009 and December 2009, the FASB issued guidance requiring an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This guidance requires an ongoing assessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This guidance is effective for fiscal years beginning after November 15, 2009. Accordingly, we will adopt this guidance at the beginning of fiscal year 2011 and do not expect the adoption will have a material impact.

NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES

In December 2007, the FASB issued guidance establishing principles and requirements for how an acquirer in a business combination: 1) recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; 2) recognizes and measures goodwill acquired in a business combination or a gain from a bargain purchase; and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. This guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008; therefore, we adopted this guidance at the beginning of fiscal 2010. The initial adoption did not have a significant impact on our consolidated financial statements.

In December 2007, the FASB issued guidance to establish accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and may be reported as equity in the consolidated financial statements, rather than in the liability or mezzanine section between liabilities and equity. This guidance also requires consolidated net income be reported at amounts that include the net income attributable to both Tyson (the parent) and the noncontrolling interest. We adopted the presentation and disclosure requirements retrospectively at the beginning of fiscal 2010. Accordingly, “attributable to Tyson” refers to operating results exclusive of any noncontrolling interest. In conjunction with this adoption, we also adopted guidance applicable for all noncontrolling interests in which we are or may be required to repurchase an interest in a consolidated subsidiary from the noncontrolling interest holder under a put option or other contractual redemption requirement. Because we have certain redeemable noncontrolling interests, noncontrolling interests are presented in both the equity section and the mezzanine section of the balance sheet between liabilities and equity.

In May 2008, the FASB issued guidance which specifies issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The amount allocated to the equity component represents a discount to the debt, which is amortized into interest expense using the effective interest method over the life of the debt. We adopted this guidance in the first quarter of fiscal 2010 and applied it retrospectively. Upon retrospective adoption, our effective interest rate on our 3.25% Convertible Senior Notes due 2013 issued in September 2008 was determined to be 8.26%, which resulted in the recognition of a $92 million discount to these notes with the offsetting after tax amount of $56 million recorded to capital in excess of par value. This discount will be accreted over the five-year term of the convertible notes at the effective interest rate. The impact to our previously reported fiscal 2008 interest expense was not significant, while the impact increased fiscal 2009 non-cash interest expense by $17 million.

In December 2008, the FASB issued guidance requiring additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. This guidance is effective for fiscal years ending after December 15, 2009, with early adoption permitted. We adopted the disclosure requirements in fiscal 2010. See Note 15: Pensions and Other Postretirement Benefits for required disclosures.

 

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The following table presents the effects of the retrospective application of new accounting guidance on our consolidated financial statements (in millions, except per share data):

 

      Previously
Reported
     Adjustments:
Convertible
Debt
     Adjustments:
Noncontrolling
Interest
     As
Adjusted
 

  September 27, 2008 – Income Statement:

           

      Interest Expense

     $215         $0         $0         $215   

      Income (Loss) from Continuing Operations before Income Taxes

     154         0         0         154   

      Income Tax Expense

     68         0         0         68   

      Income (Loss) from Continuing Operations

     86         0         0         86   

      Minority Interest

     0         0         0         0   

      Net Income (Loss)

     86         0         0         86   

      Less: Net Loss Attributable to Noncontrolling Interest

     0         0         0         0   

      Net Income (Loss) Attributable to Tyson

     0         0         0         86   
           

 Earnings (Loss) Per Share from Continuing Operations Attributable to Tyson:

           

Class A Basic

     $0.25         $0.00         $0.00         $0.25   

Class B Basic

     $0.22         $0.00         $0.00         $0.22   

Diluted

     $0.24         $0.00         $0.00         $0.24   

      Net Income (Loss) Per Share Attributable to Tyson:

           

Class A Basic

     $0.25         $0.00         $0.00         $0.25   

Class B Basic

     $0.22         $0.00         $0.00         $0.22   

Diluted

     $0.24         $0.00         $0.00         $0.24   
           

  October 3, 2009 – Income Statement:

           

      Interest Expense

     $310         $17         $0         $327   

      Income (Loss) from Continuing Operations before Income Taxes

     (526)         (17)         0         (543)   

      Income Tax Expense

     14         (7)         0         7   

      Income (Loss) from Continuing Operations

     (540)         (10)         0         (550)   

      Minority Interest

     (4)         0         4         0   

      Net Income (Loss)

     (537)         (10)         (4)         (551)   

      Less: Net Loss Attributable to Noncontrolling Interest

     0         0         (4)         (4)   

      Net Income (Loss) Attributable to Tyson

     0         0         0         (547)   
           

 Earnings (Loss) Per Share from Continuing Operations Attributable to Tyson:

           

Class A Basic

     $(1.47)         $(0.02)         $0.00         $(1.49)   

Class B Basic

     $(1.32)         $(0.03)         $0.00         $(1.35)   

Diluted

     $(1.44)         $(0.03)         $0.00         $(1.47)   

      Net Income (Loss) Per Share Attributable to Tyson:

           

Class A Basic

     $(1.47)         $(0.02)         $0.00         $(1.49)   

Class B Basic

     $(1.32)         $(0.03)         $0.00         $(1.35)   

Diluted

     $(1.44)         $(0.03)         $0.00         $(1.47)   
           

  October 3, 2009 – Balance Sheet:

           

      Long-Term Debt

     $3,333         $(75)         $0         $3,258   

      Deferred Income Taxes

     280         29         0         309   

      Minority Interest

     98         0         (98)         0   

      Redeemable Noncontrolling Interest

     0         0         65         65   

      Capital in Excess of Par Value

     2,180         56         0         2,236   

      Retained Earnings

     2,409         (10)         0         2,399   

      Total Tyson Shareholders’ Equity

     4,352         46         0         4,398   

      Noncontrolling Interest

     0         0         33         33   

      Total Shareholders’ Equity

     4,352         46         33         4,431   

 

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NOTE 3: ACQUISITIONS

In August 2009, we completed the establishment of related joint ventures in China referred to as Shandong Tyson Xinchang Foods. The aggregate purchase price for our 60% equity interest was $21 million, which excludes $93 million of cash transferred to the joint venture for future capital needs. The purchase price included $29 million allocated to Intangible Assets and $19 million allocated to Goodwill, as well as the assumption of $76 million of Current and Long-Term Debt.

In October 2008, we acquired three vertically integrated poultry companies in southern Brazil: Macedo Agroindustrial, Avicola Itaiopolis and Frangobras. The aggregate purchase price was $67 million. In addition, we had $15 million of contingent purchase price based on production volumes payable through fiscal 2011. The purchase price included $23 million allocated to Goodwill and $19 million allocated to Intangible Assets.

NOTE 4: DISCONTINUED OPERATION

On March 13, 2009, we completed the sale of the beef processing, cattle feed yard and fertilizer assets of three of our Alberta, Canada subsidiaries (collectively, Lakeside), which were part of our Beef segment, and related inventories for total consideration of $145 million, based on exchange rates then in effect. This included (a) cash received at closing of $43 million, (b) $78 million of collateralized notes receivable from either XL Foods or an affiliated entity to be collected throughout the two years following closing, and (c) $24 million of XL Foods Preferred Stock to be redeemed over five years.

We recorded a pretax loss on sale of Lakeside of $10 million in fiscal 2009, which included an allocation of beef reporting unit goodwill of $59 million and cumulative currency translation adjustment gains of $41 million.

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

 

          2010          2009          2008  

  Sales

     $0         $461         $1,268   
   </