UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________________to_________________
Commission File Number 0-3400
TYSON FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0225165
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2210 West Oaklawn Drive, Springdale, Arkansas 72762-6999
(Address of principal executive offices and zip code)
(501) 290-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding June 27, 1998
- ------------------------------------ -------------------------
Class A Common Stock, $.10 Par Value 128,508,302 Shares
Class B Common Stock, $.10 Par Value 102,645,513 Shares
Page 1
TYSON FOODS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
June 27, 1998 and September 27, 1997 3
Consolidated Condensed Statements of Income
for the Three Months and Nine Months Ended
June 27, 1998 and June 28, 1997 4
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended
June 27, 1998 and June 28, 1997 5
Notes to Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Item 2a. Quantitative and Qualitative Disclosure About
Market Risks 13-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17-18
SIGNATURES 19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TYSON FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions except per share amounts)
(Unaudited)
June 27, September 27,
ASSETS 1998 1997
Current Assets: -------- -------------
Cash and cash equivalents $ 29.6 $ 23.6
Accounts receivable 701.3 617.8
Inventories 1,080.1 886.1
Assets held for sale 12.8 6.2
Other current assets 48.9 38.8
________ ________
Total Current Assets 1,872.7 1,572.5
Net Property, Plant, and Equipment 2,380.4 1,924.8
Excess of Investments over Net Assets Acquired 989.7 731.1
Investments and Other Assets 224.8 182.6
________ ________
Total Assets $5,467.6 $4,411.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 45.1 $ 37.3
Current portion of long-term debt 57.5 94.6
Trade accounts payable 348.8 290.3
Other accrued liabilities 432.6 298.8
________ ________
Total Current Liabilities 884.0 721.0
Long-Term Debt 1,993.6 1,558.2
Deferred Income Taxes 489.2 506.1
Other Liabilities 31.6 4.2
Shareholders' Equity:
Common stock ($.10 par value):
Class A-Authorized 900 million shares;
issued 137.9 million shares at 6-27-98
and 119.5 million shares at 9-27-97 13.8 11.9
Class B-Authorized 900 million shares;
issued 102.7 million shares at 6-27-98
and 102.7 million shares at 9-27-97 10.3 10.3
Capital in excess of par value 740.5 379.1
Retained earnings 1,489.4 1,390.8
Currency translation adjustment (2.5) (2.5)
________ ________
2,251.5 1,789.6
Less treasury stock, at cost-
9.4 million shares at 6-27-98 and
8.8 million shares at 9-27-97 180.0 165.6
Less unamortized deferred compensation 2.3 2.5
________ ________
Total Shareholders' Equity 2,069.2 1,621.5
________ ________
Total Liabilities and Shareholders' Equity $5,467.6 $4,411.0
======== ========
The accompanying notes are an integral part of these financial statements.
3
TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In millions except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
__________________ _________________
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
________ ________ ________ ________
Sales $1,953.6 $1,591.2 $5,345.2 $4,693.4
Cost of Sales 1,645.2 1,323.2 4,507.3 3,914.8
-------- -------- -------- --------
Gross Profit 308.4 268.0 837.9 778.6
Expenses:
Selling 156.0 136.1 436.8 386.4
General and administrative 36.5 25.1 101.4 73.9
Amortization 8.3 6.9 22.5 20.6
-------- -------- -------- --------
Operating Income 107.6 99.9 277.2 297.7
Other Expense (Income):
Interest 37.6 28.1 102.8 83.2
Other (4.0) (7.8) (39.4)
-------- -------- -------- --------
Income Before Taxes on Income 74.0 71.8 182.2 253.9
Provision for Income Taxes 27.4 26.6 67.4 115.9
-------- -------- -------- --------
Net Income $ 46.6 $ 45.2 $ 114.8 $ 138.0
======== ======== ======== ========
Basic Average
Shares Outstanding 231.9 215.5 225.1 216.6
===== ===== ===== =====
Basic Earnings Per Share $0.20 $0.21 $0.51 $0.64
===== ===== ===== =====
Diluted Average
Shares Outstanding 232.5 217.5 226.4 218.6
===== ===== ===== =====
Diluted Earnings Per Share $0.20 $0.21 $0.51 $0.63
===== ===== ===== =====
Cash Dividends Per Share:
Class A $0.0250 $0.0250 $0.0750 $0.070
Class B $0.0225 $0.0225 $0.0675 $0.063
The accompanying notes are an integral part of these financial statements.
4
TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
__________________
June 27, June 28,
1998 1997
_________ _________
Cash Flows from Operating Activities:
Net income $ 114.8 $ 138.0
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 175.3 151.7
Amortization 22.5 20.6
Deferred income taxes (61.3) (10.9)
Gain on dispositions of assets (3.2) (42.0)
Decrease in accounts receivable 20.3 7.7
Decrease in inventories 15.3 27.7
Increase in trade accounts payable 7.9 10.2
Net change in other current assets
and liabilities 61.2 68.2
_______ _______
Cash Provided by Operating Activities 352.8 371.2
Cash Flows from Investing Activities:
Net cash paid for acquisitions (257.4)
Additions to property, plant and equipment (203.1) (219.4)
Proceeds from disposition of net assets 130.6 206.6
Net change in other assets and liabilities (12.9) (44.9)
_______ _______
Cash Used for Investing Activities (342.8) (57.7)
Cash Flows from Financing Activities:
Net change in notes payable (77.2) 41.4
Proceeds from long-term debt 1,091.9 102.4
Repayments of long-term debt (987.9) (401.9)
Purchases of treasury shares (16.4) (41.6)
Other (14.3) (12.7)
_______ _______
Cash Used for Financing Activities (3.9) (312.4)
Effect of Exchange Rate Change on Cash (0.1) 0.1
_______ _______
Increase in Cash and Cash Equivalents 6.0 1.2
Cash and Cash Equivalents at Beginning of Period 23.6 36.6
________ ________
Cash and Cash Equivalents at End of Period $ 29.6 $ 37.8
======== ========
Supplemental Cash Flow Information
Cash paid during the period for:
Interest $119.0 $108.0
Income taxes $ 62.4 $ 94.8
The accompanying notes are an integral part of these financial statements.
5
TYSON FOODS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
The consolidated condensed financial statements have been prepared by Tyson
Foods, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. Although the management of the Company believes that the
disclosures are adequate to make the information presented not misleading,
these consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report for the fiscal year ended
September 27, 1997. The preparation of consolidated condensed financial
statements requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. In the opinion of the management of the
Company, the accompanying consolidated condensed financial statements
contain all adjustments, consisting of normal recurring accruals necessary
to present fairly the financial position as of June 27, 1998 and
September 27, 1997 and the results of operations for the three and nine
months ended June 27, 1998 and June 28, 1997, and cash flows for the nine
months ended June 27, 1998 and June 28, 1997. The results of operations for
the three and nine months ended June 27, 1998 and June 28, 1997, and cash
flows for the nine months ended June 27, 1998 and June 28, 1997, are not
necessarily indicative of the results to be expected for the full year.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Statement 128
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes the dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. Earnings per share amounts for all periods presented have been
restated where necessary to conform to the Statement 128 requirements.
The Notes to Consolidated Financial Statements for the fiscal year
ended September 27, 1997, reflect the significant accounting policies, debt
provisions, borrowing arrangements, dividend restrictions, contingencies
and commitments of the Company. There were no material changes in such
items during the nine months ended June 27, 1998, except as disclosed in
these notes.
6
2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
(In millions)
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
Numerator:
Net Income $46.6 $45.2 $114.8 $138.0
===== ===== ====== ======
Denominator:
Denominator for basic
earnings per share-
weighted average shares 231.9 215.5 225.1 216.6
Effect of dilutive securities:
Employee stock options 0.6 2.0 1.3 2.0
----- ----- ----- -----
Denominator for diluted
earnings per share-
adjusted weighted average
shares and assumed conversions 232.5 217.5 226.4 218.6
===== ===== ===== =====
Basic earnings per share $0.20 $0.21 $0.51 $0.64
===== ===== ===== =====
Diluted earnings per share $0.20 $0.21 $0.51 $0.63
===== ===== ===== =====
3. Inventories
Inventories, valued at the lower of cost (first-in, first-out) or market,
consist of the following:
(In millions)
June 27, September 27,
1998 1997
--------- ------------
Finished and work-in-process $ 500.1 $366.1
Live poultry and hogs 394.9 353.4
Seafood related products 34.5 39.5
Hatchery eggs and feed 68.8 57.8
Supplies 81.8 69.3
________ ______
Total $1,080.1 $886.1
======== ======
4. Acquisitions and Dispositions
On January 9, 1998, the Company completed the acquisition of Hudson Foods,
Inc. ("Hudson") pursuant to which Hudson merged with and into a wholly-
owned subsidiary of the Company (the "Hudson Acquisition"). At the
effective time of merger the Class A and Class B shareholders of Hudson
received an aggregate of approximately 18.4 million shares of the Company's
Class A common stock and approximately $257.4 million in cash. On
January 9, 1998, the Company borrowed $318 million under its commercial
7
paper program to finance the $257.4 million cash portion of the
Hudson Acquisition and repay approximately $61 million under Hudson's
revolving credit facilities. Reference is made to the Company's Current
Report on Form 8-K, dated January 15, 1998 for a more detailed description
of Hudson and the Hudson Acquisition, including certain pro forma financial
information giving effect to the Hudson Acquisition. The Hudson Acquisition
has been accounted for as a purchase and the excess of investment over net
assets acquired is being amortized straight-line over forty years. The
Company's consolidated results of operations include the operations of
Hudson since the acquisition date. The following unaudited pro forma
information shows the results of operations as though the purchase of
Hudson had been made at the beginning of fiscal 1997.
(In millions, except per share data)
Nine Months Ended
June 27, June 28,
1998 1997
--------------------------
Net sales $5,762.1 $5,925.2
Net income 107.0 47.2
Basic Earnings Per Share 0.46 0.52
Diluted Earnings Per Share 0.46 0.52
The unaudited pro forma results are not necessarily indicative of the
actual results of operations that would have occurred had the purchase
actually been made at the beginning of 1997, or the results which may occur
in the future.
On June 9, 1998, Hudson and Pierre Foods, LLC ("Pierre"), a wholly owned
subsidiary of Fresh Foods, Inc. completed an asset purchase agreement for
Pierre to acquire the Pierre Foods division from Hudson. The Pierre Foods
division, based in Cincinnati, Ohio and acquired as part of the Hudson
Acquisition, is primarily engaged in producing and distributing packaged,
precooked food products to the foodservice industry. Under the terms of the
purchase agreement, Pierre paid $122 million in cash and assumed certain
liabilities. The Company recognized no gain or loss on the sale of these
assets. In addition, no pro forma information is provided as the
operations of the Pierre Foods division was not significant to the Company.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL CONDITION
For the nine months ended June 27, 1998, net cash totaling $352.8 million
was provided by all operating activities. Operations provided $248.1
million in cash and $104.7 million was provided by net changes in
receivables, inventories, payables and other items. As a result of a tax
settlement, the Company reclassed $71 million of deferred taxes to current
taxes payable. The Company used cash from operations to fund $203.1
million of property, plant and equipment additions. The expenditures for
property, plant and equipment were related to acquiring new equipment,
upgrading facilities in order to maintain competitive standing and position
the Company for future opportunities.
8
At June 27, 1998, working capital was $988.7 million compared to $851.5
million at 1997 fiscal year-end, an increase of $137.2 million. The
current ratio at June 27, 1998 was 2.1 to 1 compared to 2.2 to 1 at
September 27, 1997. Working capital has increased since year-end primarily
due to increases in accounts receivable and inventories, offset slightly by
increases in notes payable, accounts payable and other current
liabilities, primarily due to the Hudson Acquisition. At June 27, 1998,
total debt was 50.3% of total capitalization compared to 51.0% at
September 27, 1997. The Company's foreseeable cash needs for operations and
capital expenditures will continue to be met through cash flows from
operations and borrowings supported by existing credit facilities as well
as additional credit facilities which the Company believes are available.
The Company has an unsecured revolving credit agreement totaling $1 billion
which supports the Company's commercial paper program. This $1 billion
facility expires in May 2002. At June 27, 1998, $496.4 million was
outstanding under this $1 billion facility consisting of $451.4 million in
commercial paper and $45 million drawn under the revolver. The Company's
$250 million facility was terminated effective May 4, 1998. Additional
outstanding long-term debt at June 27, 1998 consisted of $1,027.4 million
of public debt, $221.6 million of institutional notes, $175.0 million in
leveraged equipment loans and $73.2 million of other indebtedness. On
January 9, 1998, the Company borrowed approximately $318 million under its
commercial paper program, the proceeds of which were used to (i) finance
the $257.4 million cash portion of the Hudson Acquisition and (ii) repay
approximately $61 million under Hudson's revolving credit facilities.
Subsequent to the Hudson Acquisition, the Company refinanced $269.7 million
in outstanding long-term debt assumed pursuant to the Hudson Acquisition
with commercial paper. On January 21, 1998 the Company issued, in two
separate series, $150 million 6% Notes due January 15, 2003 and $150
million 7% Notes due January 15, 2028. On February 4, 1998, the Company
issued $100 million 6.08% Mandatory Par Put Remarketed SecuritiesSM
("MOPPRSSM") due February 1, 2010 and $50 million Floating Rate MOPPRSSM
due February 1, 2010. On April 28, 1998, the Company issued debt securities
in the form of $240 million 7% Notes due May 1, 2018. The net proceeds from
these debt offerings were used by the Company to repay a portion of the
borrowings under its commercial paper program. The Company may use funds
borrowed under its revolving credit facilities, commercial paper program
or through the issuance of additional debt securities from time to time in
the future to finance acquisitions as opportunities may arise, to refinance
other indebtedness or capital leases of the Company, and for other general
corporate purposes.
RESULTS OF OPERATIONS
The operating results for the third quarter of fiscal 1998 were impacted by
the excess supply of all meat proteins, weakness in the export markets and
the quality of the Hudson Foods sales mix the Company acquired. Sales for
the third quarter of fiscal 1998 increased 22.8% from the same quarter of
fiscal 1997. This increase is mainly due to a 23.5% increase in total
volume slightly offset by a 0.6% decrease in average sales prices. Consumer
poultry sales, excluding turkey, accounted for an increase of 16.0% of
the total change in sales for the third quarter of fiscal 1998 as compared
to the same quarter of fiscal 1997. This increase was due to a 28.6%
increase in tonnage partially offset by a 7.4% decrease in average sales
prices. A significant portion of the increase in total sales and consumer
poultry sales for the third quarter of fiscal 1998 compared to the same
quarter of fiscal 1997 is due to the Hudson Acquisition.
9
Mexican Original, Culinary Foods and Mallards Food sales as a group
accounted for an increase of 0.8% of the total change in sales for the
third quarter of fiscal 1998 as compared to the same quarter of fiscal
1997. This increase was primarily due to a 22.1% increase in average sales
prices slightly offset by a 0.5% decrease in tonnage, largely due to the
acquisition of Mallards Food in August 1997 and new contracts that focus on
higher priced products. Seafood sales accounted for a decrease of 0.2% of
the change in total sales for the third quarter of fiscal 1998 as compared
to the same quarter of fiscal 1997. This decrease was due to a 15.3%
decrease in tonnage mostly offset by a 12.4% increase in average sales
prices. Decreased seafood volume was mainly due to weakness in the surimi
business caused by the Asian economic crisis. However, this is partially
offset by improvements in the analog business. The seafood operations
continue to be affected by the availability of some species of fish as well
as other regulations which limit its source of supply. Sales of live
swine, animal foods, by-products, and other, as a group accounted for an
increase of 6.2% of the change in total sales for the third quarter of
fiscal 1998 as compared to the same quarter of fiscal 1997.
Sales for the first nine months of fiscal 1998 increased 13.9% over the
same period of fiscal 1997. This increase was largely due to consumer
poultry sales, excluding turkey, which accounted for an increase of 9.3% of
the change in total sales for the first nine months of fiscal 1998 as
compared to the same period of fiscal 1997. This increase in consumer
poultry sales was primarily due to an increase in tonnage of 22.4% offset
somewhat by a decrease in average sales prices of 9.2%. A significant
portion of the increase in total sales and consumer poultry sales for the
first nine months of fiscal 1998 compared to the same period of fiscal 1997
is due to the Hudson Acquisition.
Mexican Original, Culinary Foods and Mallards Food sales as a group
accounted for an increase of 0.6% of the change in total sales for the
first nine months of fiscal 1998 as compared to the same period of fiscal
1997. This increase was primarily due to a 18.2% increase in average sales
prices as well as a 0.2% increase in tonnage, largely due to the
acquisition of Mallards Food in August 1997. Seafood sales accounted for a
decrease of 0.9% of the change in total sales for the first nine months of
fiscal 1998 as compared to the same period of fiscal 1997. This decrease
was due to a 26.9% decrease in tonnage partially offset by a 7.0% increase
in average sales prices. Sales of live swine, animal foods, by-products,
and other as a group accounted for an increase of 4.9% of the change in
total sales for the first nine months of fiscal 1998 as compared to the
same period of last year.
The Company recognizes that conducting business in or selling products into
foreign countries, including but not limited to Russia and certain Asian
countries, entails inherent risks including various political, credit,
inventory and currency risks. The Company, however, is continually
monitoring its international business practices and, whenever possible,
will attempt to minimize the Company's financial exposure to these risks.
Cost of goods sold increased 24.3% for the third quarter of fiscal 1998 as
compared to the same quarter of fiscal 1997. This increase is mainly the
result of the increase in sales. Although the cost of ingredients used in
feed for poultry and swine and the ingredients used in Mexican Original
operations during the third quarter of fiscal 1998 decreased in comparison
with the same quarter of fiscal 1997, these benefits will not be realized
10
until future quarters. As a percent of sales, cost of sales was 84.2% for
the third quarter of fiscal 1998 compared to 83.2% in the third quarter of
fiscal 1997.
Cost of goods sold increased 15.1% for the first nine months of fiscal 1998
compared to the same period of fiscal 1997. This increase is mainly the
result of the increase in sales. As a percent of sales, cost of sales
was 84.3% for the first nine months of fiscal 1998 compared to 83.4% in the
same period of fiscal 1997.
Operating expenses increased 19.5% for the third quarter of fiscal 1998
over the same quarter of fiscal 1997 mostly due to the Hudson Acquisition.
Selling expense, as a percent of sales, decreased to 8.0% for the third
quarter of fiscal 1998 as compared to 8.6% for the third quarter of fiscal
1997. General and administrative expense, as a percent of sales, was 1.9%
in the third quarter of fiscal 1998 compared to 1.6% in the same period
last year. Amortization expense, as a percent of sales, was 0.4% in the
third quarter of fiscal 1998 and 1997.
Operating expenses increased 16.6% for the first nine months of fiscal 1998
from the same period of fiscal 1997 mostly due to the Hudson Acquisition.
Selling expense, as a percent of sales, was 8.2% for the first nine months
of fiscal 1998 and fiscal 1997. General and administrative expense, as a
percent of sales, was 1.9% in the first nine months of fiscal 1998 compared
to 1.6% in the same period last year. Amortization expense, as a percent of
sales, was 0.4% in the first nine months of fiscal 1998 and 1997.
Interest expense increased 33.8% for the third quarter of fiscal 1998
compared to the same quarter of fiscal 1997 primarily as a result of a
29.2% increase in the Company's average indebtedness over the same period
last year. The weighted average interest rate of all Company debt
increased to 6.5% compared to 6.3% for the same period last year.
Interest expense increased 23.6% in the first nine months of fiscal 1998
compared to the same period of fiscal 1997. The Company had a higher level
of borrowing which increased the Company's average indebtedness by 15.5%
from the same period last year. The weighted average interest rate of all
Company debt increased to 6.5% compared to 6.1% for the same period last
year.
The effective income tax rate for the third quarter and first nine months
of fiscal 1998 was 37.0% compared to 37.0% and 45.6%, respectively for the
same periods of fiscal 1997. The effective tax rate for the first nine
months of fiscal 1997 was impacted by the taxes on the gain from the sale
of the beef division assets. Certain costs were allocated to the beef
division which are not deductible for tax purposes, resulting in a higher
effective tax rate.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
11
Based on a recent assessment, the Company determined that it will be
required to modify or replace limited portions of its software so that its
computer systems will function properly with respect to dates in the year
2000 and thereafter. The Company presently believes that with modifications
to existing software and conversions to new software, the Year 2000 Issue
will not pose significant operational problems for its computer systems.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 Issues. The Company's total Year 2000
project cost and estimates to complete include the estimated costs and time
associated with the impact of third party Year 2000 Issues based upon
presently available information. However, there can be no guarantee that
the systems of other companies on which the Company's systems rely will be
converted timely or would not have an adverse effect on the Company's
systems.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project by December 31, 1998, which is
prior to any anticipated impact on its operating systems. The total cost of
the Year 2000 project is not expected to have a material effect on the
Company's results of operations.
RESTRUCTURING
The Company has commenced a study of restructuring certain of its
operations. The exact size and composition of the restructuring have not
yet been fully determined. The study is expected to be completed in time to
allow submission of a formal plan to the Company's Board of Directors for
approval at its regular fourth quarter meeting, and, if approved, will
result in certain restructuring and other miscellaneous one-time charges
during the fourth quarter of fiscal 1998. Such charges are currently
expected to aggregate approximately $200 million on a pre-tax basis.
The restructuring is in furtherance of the Company's previously stated
objective to focus on its core business, chicken. The recent acquisition of
Hudson Foods, Inc. and the assimilation of Hudson's facilities and
operations into the Company's business have permitted the Company to review
and rationalize the productive capabilities and cost structure of its core
business. The restructuring contemplates, among other things, the closure
of certain Company plants and resulting work force reductions, the
writedown of goodwill allocated to certain facilities that may be closed
and the reconfiguration of various production facilities. In addition, the
Company plans to divest non-core businesses whose financial results do not
meet management's expectations.
ENVIRONMENTAL MATTERS
The Company has a strong financial commitment to environmental matters.
During the first nine months of fiscal 1998 the Company invested
approximately $32.2 million in water quality facilities, including capital
outlays to build and upgrade facilities and day-to-day operations of waste-
water facilities.
12
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE
PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Company and its representatives may from time to time make written or
oral forward-looking statements with respect to their current views and
estimates of future economic circumstances, industry conditions, company
performance and financial results. These forward-looking statements are
subject to a number of factors and uncertainties, including those related
to the Company's ability to effectively assimilate Hudson, which could
cause the Company's actual results and experiences to differ materially
from the anticipated results and expectations, expressed in such forward-
looking statements. The Company wishes to caution readers not to place
undue reliance on any forward-looking statements, which speak only as of
the date made. Among the factors that may affect the operating results of
the Company are the following: (i) fluctuations in the cost and
availability of raw materials, such as feed grain costs in relation to
historical levels; (ii) changes in the availability and relative costs of
labor and contract growers; (iii) market conditions for finished products,
including the supply and pricing of alternative proteins, all of which may
impact the Company's pricing power; (iv) effectiveness of advertising and
marketing programs; (v) the ability of the Company to make effective
acquisitions and successfully integrate newly acquired businesses,
including Hudson, into existing operations; (vi) risks associated with
leverage, including cost increases due to rising interest rates; (vii)
changes in regulations and laws, including changes in accounting standards,
environmental laws, occupational, health and safety laws, and laws
regulating fishing and seafood processing activities; (viii) access to
foreign markets together with foreign economic conditions, including
currency fluctuations; and (ix) the effect of, or changes in, general
economic conditions.
Item 2a. Quantitative and Qualitative Disclosure About Market Risks
Market risks relating to the Company's operations result primarily from
changes in interest rates, foreign exchange rates and commodity prices, as
well as credit risk concentrations. To address these risks the Company
enters into various hedging transactions as described below. The Company
does not use financial instruments for trading purposes and is not a party
to any leveraged derivatives.
Foreign Currency and Interest Rate Risks
The Company periodically enters into foreign exchange forward contracts and
option contracts to hedge some of its foreign currency exposure. The
Company uses such contracts to hedge exposure to changes in foreign
currency exchange rates, primarily Japanese yen, associated with sales
denominated in foreign currency. Gains and losses on these contracts are
deferred and recognized as an adjustment of the subsequent transaction
when it occurs. Forward and option contracts generally have maturities not
exceeding twelve months.
The Company also hedges exposure to changes in interest rates on certain of
its financial instruments. Under the terms of various leveraged equipment
loans, the Company enters into interest rate swap agreements to effectively
lock in a fixed interest rate for these borrowings. The maturity dates of
these leveraged equipment loans range from 2005 to 2008 with interest rates
ranging from 4.7% to 6.0%.
13
As of June 27, 1998, the stated or notional amounts of the Company's
outstanding foreign currency and interest rate derivative financial
instruments were as follows:
(In millions)
- ------------------------------------------------------------------
June 27,
1998
- ------------------------------------------------------------------
Interest rate swaps $147.1
Foreign currency purchased options to sell 33.6
Foreign currency sold options to sell 37.9
==================================================================
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. The table presents the Company's debt
obligations, principal cash flows and related weighted-average interest
rates by expected maturity dates. For interest rate swaps, the table
presents notional amounts and weighted-average interest rates or strike
rates by contractual maturity dates. Notional amounts are used to calculate
the contractual cash flows to be exchanged under the contract.
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest (Swap) Rate
___________________________________________________________________________
(dollars in millions)1998 1999 2000 2001 2002 There- Total Fair
after Value
6/27/98
___________________________________________________________________________
Liabilities
Long-term Debt, including Current Portion
Fixed Rate $57.5 $223.8 $126.9 $74.4 $178.1 $838.9 $1,499.6 $1,537.8
Average Interest
Rate 8.80% 6.29% 8.30% 9.45% 6.20% 6.83% 7.28%
Variable Rate - - - $496.4 - $54.0 $550.4 $550.4
Average Interest
Rate - - - 5.68% - 3.63% 5.48%
Interest Rate Derivative Financial Instruments Related to Debt
Interest Rate Swaps
Pay Fixed $4.0 $16.0 $17.2 $18.4 $19.6 $71.9 $147.1 $4.0
Average Pay Rate 6.34% 6.71% 6.71% 6.69% 6.73% 6.63%
Average Receive Rate- USD 6 Month Libor.
===========================================================================
The following table summarizes information on instruments and transactions
that are sensitive to foreign currency exchange rates, including foreign
currency forward exchange agreements. For foreign currency forward exchange
agreements, the table presents the notional amounts and weighted-average
exchange rates by expected (contractual) maturity dates. These notional
amounts generally are used to calculate the contractual payments to be
exchanged under the contract.
14
Exposures Related to Derivative Contracts
with United States Dollar Functional Currency
Principal (Notional) Amount by Expected Maturity
Average Forward Foreign Currency Exchange Rate (USD/Foreign Currency)
(dollars in millions)
___________________________________________________________________________
1998 1999 2000 2001 2002 There- Total Fair
after Value
6/27/98
___________________________________________________________________________
Sold Option Contracts to Sell Foreign Currencies for US$
Japanese Yen
Notional Amount $31.4 $6.5 - - - - $37.9 $0
Weighted Average
Strike Price 113.03 109.48 - - - - - -
Purchased Option Contracts to Sell Foreign Currencies for US$
Japanese Yen
Notional Amount $28.0 $5.6 - - - - $33.6 $1.1
Weighted Average
Strike Price 126.84 126.69 - - - - - -
===========================================================================
Commodities Risk
The Company is a purchaser of certain commodities, primarily corn and
soybeans. The Company uses commodity futures and purchased options for
hedging purposes to reduce the effect of changing commodity prices on a
portion of its commodity purchases. The contracts that effectively meet
risk reductions and correlation criteria are recorded using hedge
accounting. Gains and losses on hedge transactions are recorded as a
component of the underlying inventory purchase.
The following table provides information about the Company's corn, soybean
meal and other feed ingredient inventory and futures contracts that are
sensitive to changes in commodity prices. For inventory, the table presents
the carrying amount and fair value at June 27, 1998. For the futures
contracts the table presents the notional amounts in bushels, the weighted
average contract prices, and the total dollar contract amount by expected
maturity dates, the latest of which occurs four months from the reporting
date. Contract amounts are used to calculate the contractual payments and
quantity of corn and soybean meal to be exchanged under the futures
contracts.
15
- ----------------------------------------------------------------------------
(In millions) Carrying amount Fair value
- ----------------------------------------------------------------------------
On Balance Sheet Commodity Position
and Related Derivatives
Corn, Soybean Meal and Other Feed
Ingredient Inventory $32.9 $32.9
Corn Futures Contracts
Contract Volumes
(bushels) 3,795,000
Weighted Average Price
(Per bushel) $2.57 $2.51
Contract Amount
($US in millions) $9.7 $9.5
==========================================================================
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 28, 1997, Hudson received notice from the United States Department
of Justice ("DOJ") that it was prepared to bring an action against Hudson
for the alleged violation of the Clean Water Act at Hudson's Berlin,
Maryland poultry processing facility. The DOJ alleged that over the past
five years, Hudson had repeatedly discharged pollutants in quantities in
excess of its National Pollutant Discharge Elimination System ("NPDES")
permit limits, violated monitoring and sampling requirements of its NPDES
permit and failed to provide notice of NPDES violations. On
September 19, 1997, Hudson entered into an agreement in principle with the
DOJ for the settlement of these claims. On May 8, 1998, a Consent Decree
between the United States, Hudson and the Company was filed with the United
States District Court together with a Complaint alleging these
violations. The thirty (30) day comment period has expired and it is
anticipated that the DOJ will advise the District Court on or before August
14, 1998 of its position regarding said comments. The Consent Decree,
while stating that Hudson denies the violations alleged in the Complaint,
provides for the payment to the United States of $4.0 million and the
expenditure of $2.0 million in supplemental environmental projects (SEP's).
On or about July 23, 1998, the Maryland Department of the Environment
("MDE") filed a Complaint for Injunctive Relief and Civil Penalty (the
"Complaint") against the Company in the Circuit Court of Worcester County,
Maryland for the alleged violation of certain Maryland water pollution
control laws with respect to the Company's land application of sludge to
Company owned agricultural land near Berlin, Maryland. The Company
operates a poultry processing and rendering facility in Berlin that was
acquired by the Company in the Hudson Acquisition. The MDE seeks, in
addition to injunctive and equitable relief, civil penalties of up to
$10,000 per day for each day the Company had allegedly operated in
violation of the Maryland water pollution control laws. The Company has
only recently received the Complaint, is reviewing and researching the
factual matters asserted therein, and intends to vigorously defend against
the same. The Company does not believe any penalties, if imposed, would
have a material adverse effect on the Company's results of operations or
financial condition.
16
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Effective June 29, 1998, the Securities and Exchange Commission amended
Rule 14a-4(c) under the Securities Exchange Act of 1934 (the "1934 Act")
which governs a company's use of discretionary proxy voting authority with
respect to shareholder proposals that are not being included in the
company's proxy solicitation materials pursuant to Rule 14a-8 of the 1934
Act. New Rule 14a-4(c)(1) provides that if a proponent fails to notify
the Company at least 45 days prior to the month and day of mailing of the
prior years' proxy statement (or by an earlier or later date established by
an overriding advance notice provision contained in the company's charter
or bylaws), then the management proxies named in the form of proxy
distributed in connection with the company's proxy statement would be
allowed to use their discretionary voting authority to address the matter
submitted by the proponent, without discussion of the matter in the proxy
statement. The Company's bylaws contain an advance notice provision which
provides that a matter may not be brought before an annual meeting by a
proponent stockholder (the "Proponent") unless the Proponent has provided,
delivered or mailed notice thereof in writing to the Secretary of the
Company (and such notice has been received by the Secretary) at the
principal executive office of the Company), not less than 75 days nor more
than 100 days prior to the date of the annual meeting. For this provision
to be effective, the Company must have provided notice to stockholders or
otherwise publicly disclosed the date of the annual meeting at least 85
days in advance thereof. If no notice or public disclosure is made by the
Company within that time frame, the Proponent's notice, to be timely
received must be received not later than the close of business on the 10th
day following the day on which such actual notice of the meeting was mailed
to stockholders or public disclosure of the meeting date was made. The
Company's 1999 annual meeting is currently scheduled for January 8, 1999.
Accordingly, for any business to be brought before the 1999 Annual Meeting
by a Proponent, written notice thereof must be provided to the Secretary by
October 26, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The exhibits filed with this report are listed in the exhibit index at the
end of this Item 6.
17
(b) Reports on Form 8-K:
On April 27, 1998, the Company filed a Current Report on Form 8-K related
to the Company's Second Quarter and First Six Months of Fiscal 1998
Operating Results.
EXHIBIT INDEX
The following exhibits are filed with this report.
Exhibit No. Page
- ----------- ----
3.1 Certificate of Incorporation of the Company as amended
(previously filed as Exhibit 3(a) to the Company's
Registration Statement on Form S-4 filed with the
Commission on July 8, 1992, Commission File No. 33-49368,
and incorporated herein by reference).
3.2 Amended and Restated Bylaws of the Company (previously
filed as Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 28, 1996,
Commission File No. 0-3400, and incorporated herein by
reference).
12 Ratio of Earnings to Fixed Charges 20
27 Financial Data Schedule
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TYSON FOODS, INC.
Date: August 7, 1998 /s/ Wayne Britt
-------------- ----------------------------
Wayne Britt
Executive Vice President and
Chief Financial Officer
Date: August 7, 1998 /s/ James G. Ennis
-------------- ----------------------------
James G. Ennis
Vice President, Controller and
Chief Accounting Officer
19