10-Q 1 tsn2015q210q.htm TYSON FOODS, INC. FORM 10-Q TSN 2015 Q2 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 28, 2015
or
¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
001-14704
(Commission File Number)
______________________________________________
TYSON FOODS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________
Delaware
 
71-0225165
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
2200 Don Tyson Parkway, Springdale, Arkansas
 
72762-6999
(Address of principal executive offices)
 
(Zip Code)
(479) 290-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 28, 2015.
Class
 
Outstanding Shares
Class A Common Stock, $0.10 Par Value (Class A stock)
 
304,003,272

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




TYSON FOODS, INC.
INDEX
 
 


1


PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements
TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
Sales
$
9,979

 
$
9,032

 
$
20,796

 
$
17,793

Cost of Sales
8,990

 
8,381

 
18,851

 
16,457

Gross Profit
989

 
651

 
1,945

 
1,336

Selling, General and Administrative
442

 
290

 
889

 
563

Operating Income
547

 
361

 
1,056

 
773

Other (Income) Expense:
 
 
 
 
 
 
 
Interest income
(1
)
 
(3
)
 
(3
)
 
(5
)
Interest expense
71

 
25

 
148

 
53

Other, net
(6
)
 
(2
)
 
(7
)
 
1

Total Other (Income) Expense
64

 
20

 
138

 
49

Income before Income Taxes
483

 
341

 
918

 
724

Income Tax Expense
172

 
131

 
297

 
262

Net Income
311

 
210

 
621

 
462

Less: Net Income (Loss) Attributable to Noncontrolling Interests
1

 
(3
)
 
2

 
(5
)
Net Income Attributable to Tyson
$
310

 
$
213

 
$
619

 
$
467

Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
Class A Basic
334

 
273

 
335

 
272

Class B Basic
70

 
70

 
70

 
70

Diluted
415

 
356

 
416

 
355

Net Income Per Share Attributable to Tyson:
 
 
 
 
 
 
 
Class A Basic
$
0.78

 
$
0.64

 
$
1.55

 
$
1.40

Class B Basic
$
0.71

 
$
0.58

 
$
1.42

 
$
1.26

Diluted
$
0.75

 
$
0.60

 
$
1.49

 
$
1.32

Dividends Declared Per Share:
 
 
 
 
 
 
 
Class A
$
0.100

 
$
0.075

 
$
0.225

 
$
0.175

Class B
$
0.090

 
$
0.068

 
$
0.203

 
$
0.158

See accompanying Notes to Consolidated Condensed Financial Statements.

2


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

 
Three Months Ended
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
Net Income
$
311

 
$
210

 
$
621

 
$
462

Other Comprehensive Income (Loss), Net of Taxes:
 
 
 
 
 
 
 
Derivatives accounted for as cash flow hedges
(1
)
 
7

 

 
5

Investments
2

 

 
11

 
3

Currency translation
(25
)
 
6

 
(19
)
 
(5
)
Postretirement benefits

 

 
7

 
2

Total Other Comprehensive Income (Loss), Net of Taxes
(24
)
 
13

 
(1
)
 
5

Comprehensive Income
287

 
223

 
620

 
467

Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests
1

 
(3
)
 
2

 
(5
)
Comprehensive Income Attributable to Tyson
$
286

 
$
226

 
$
618

 
$
472

See accompanying Notes to Consolidated Condensed Financial Statements.


3


TYSON FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share and per share data)
(Unaudited) 
 
March 28, 2015
 
September 27, 2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
223

 
$
438

Accounts receivable, net
1,632

 
1,684

Inventories
3,262

 
3,274

Other current assets
346

 
379

Assets held for sale
205

 
446

Total Current Assets
5,668

 
6,221

Net Property, Plant and Equipment
5,278

 
5,130

Goodwill
6,689

 
6,706

Intangible Assets, net
5,223

 
5,276

Other Assets
668

 
623

Total Assets
$
23,526

 
$
23,956

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Current debt
$
1,236

 
$
643

Accounts payable
1,694

 
1,806

Other current liabilities
1,072

 
1,207

Liabilities held for sale
49

 
141

Total Current Liabilities
4,051

 
3,797

Long-Term Debt
6,438

 
7,535

Deferred Income Taxes
2,452

 
2,450

Other Liabilities
1,215

 
1,270

Commitments and Contingencies (Note 16)

 

Shareholders’ Equity:
 
 
 
Common stock ($0.10 par value):
 
 
 
Class A-authorized 900 million shares, issued 346 million shares
35

 
35

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

 
7

Capital in excess of par value
4,282

 
4,257

Retained earnings
6,285

 
5,748

Accumulated other comprehensive loss
(148
)
 
(147
)
Treasury stock, at cost – 42 million shares at March 28, 2015 and 40 million shares at September 27, 2014
(1,106
)
 
(1,010
)
Total Tyson Shareholders’ Equity
9,355

 
8,890

Noncontrolling Interests
15

 
14

Total Shareholders’ Equity
9,370

 
8,904

Total Liabilities and Shareholders’ Equity
$
23,526

 
$
23,956

See accompanying Notes to Consolidated Condensed Financial Statements.

4


TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) 
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
Cash Flows From Operating Activities:
 
 
 
Net income
$
621

 
$
462

Depreciation and amortization
347

 
254

Deferred income taxes
12

 
(24
)
Convertible debt discount

 
(92
)
Other, net
36

 
32

Net changes in operating assets and liabilities
(208
)
 
(367
)
Cash Provided by Operating Activities
808

 
265

Cash Flows From Investing Activities:
 
 
 
Additions to property, plant and equipment
(435
)
 
(293
)
Purchases of marketable securities
(17
)
 
(21
)
Proceeds from sale of marketable securities
15

 
18

Acquisitions, net of cash acquired

 
(56
)
Proceeds from sale of businesses
142

 

Other, net
4

 
8

Cash Used for Investing Activities
(291
)
 
(344
)
Cash Flows From Financing Activities:
 
 
 
Payments on debt
(715
)
 
(390
)
Proceeds from issuance of long-term debt

 
14

Borrowings on revolving credit facility
1,080

 

Payments on revolving credit facility
(905
)
 

Purchases of Tyson Class A common stock
(150
)
 
(275
)
Dividends
(75
)
 
(50
)
Stock options exercised
34

 
49

Other, net
10

 
19

Cash Used for Financing Activities
(721
)
 
(633
)
Effect of Exchange Rate Changes on Cash
(11
)
 
5

Decrease in Cash and Cash Equivalents
(215
)
 
(707
)
Cash and Cash Equivalents at Beginning of Year
438

 
1,145

Cash and Cash Equivalents at End of Period
$
223

 
$
438

See accompanying Notes to Consolidated Condensed Financial Statements.

5


TYSON FOODS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: ACCOUNTING POLICIES
Basis of Presentation
The consolidated condensed financial statements are unaudited and have been prepared by Tyson Foods, Inc. (“Tyson,” “the Company,” “we,” “us” or “our”). Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations of the United States Securities and Exchange Commission. Although we believe the disclosures contained herein are adequate to make the information presented not misleading, these consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended September 27, 2014. Preparation of consolidated condensed financial statements requires us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We believe the accompanying consolidated condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary to state fairly our financial position as of March 28, 2015, and the results of operations for the three and six months ended March 28, 2015, and March 29, 2014. Results of operations and cash flows for the periods presented are not necessarily indicative of results to be expected for the full year.
Consolidation
The consolidated condensed financial statements include the accounts of all wholly-owned subsidiaries, as well as majority-owned subsidiaries over which we exercise control and, when applicable, entities for which we have a controlling financial interest or variable interest entities for which we are the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance changing the criteria for recognizing revenue. The guidance provides for a single five-step model to be applied to all revenue contracts with customers. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018. Early adoption is not permitted. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
In February 2015, the FASB issued guidance changing the analysis procedures that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary determination, and (5) certain investment funds. This guidance is effective for annual reporting periods and interim periods within those annual reporting periods, beginning after December 15, 2015, our fiscal 2017. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
In April 2015, the FASB issued guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2015, our fiscal 2017. Early adoption is permitted. This new guidance is not expected to have a material impact on our consolidated financial statements.
NOTE 2: ACQUISITIONS AND DISPOSITIONS
Acquisitions
On August 28, 2014, we acquired all of the outstanding stock of The Hillshire Brands Company ("Hillshire Brands") as part of our strategic expansion initiative. The purchase price was equal to $63.00 per share for Hillshire Brands' outstanding common stock, or $8,081 million. In addition, we paid $163 million in cash for breakage costs incurred by Hillshire Brands related to a previously announced acquisition. We funded the acquisition with existing cash on hand, net proceeds from the issuance of new senior notes, Class A common stock (Class A stock), and tangible equity units as well as borrowings under a new term loan facility (refer to Note 6: Debt and Note 7: Equity). Hillshire Brands' results from operations subsequent to the acquisition closing are included in the Prepared Foods segment.

6


The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date. Certain estimated values for the acquisition, including goodwill, intangible assets, property, plant and equipment, and deferred taxes, are not yet finalized and the preliminary purchase price allocations are subject to change as we complete our analysis of the fair value at the date of acquisition. The purchase price was allocated based on information available at the acquisition date. During the first six months of fiscal 2015, we recorded measurement period adjustments, which reduced goodwill by $15 million, after obtaining additional information regarding, among other things, asset valuations and liabilities assumed. The amount was not considered material and therefore prior periods have not been revised.
 
in millions
 
Cash and cash equivalents
 
$
72

Accounts receivable
 
236

Inventories
 
414

Other current assets
 
337

Property, Plant and Equipment
 
1,301

Goodwill
 
4,789

Intangible Assets
 
5,141

Other Assets
 
65

Accounts payable
 
(347
)
Other current liabilities
 
(326
)
Long-Term Debt
 
(869
)
Deferred Income Taxes
 
(2,072
)
Other Liabilities
 
(497
)
Net assets acquired
 
$
8,244

The fair value of identifiable intangible assets is as follows (in millions):
Intangible Asset Category
 
Type
 
Life in Years
 
Fair Value
Brands & trademarks
 
Non-amortizable
 
Indefinite
 
$
4,062

Brands & trademarks
 
Amortizable
 
20 years
 
532

Customer relationships
 
Amortizable
 
Weighted average life of 16 years
 
541

Non-compete agreements
 
Amortizable
 
One year
 
6

Total identifiable intangible assets
 
 
 
 
 
$
5,141

As a result of the acquisition, we recognized a total of $4,789 million of goodwill. The purchase price was assigned to assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition, and any excess was allocated to goodwill, as shown in the table above. Goodwill represents the value we expect to achieve through the implementation of operational synergies and growth opportunities primarily in our Prepared Foods segment. The allocation of goodwill to our reporting units is pending finalization of the expected synergies and the impact of the synergies to our reporting units. The fair value of goodwill is not deductible for U.S. income tax purposes.
We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis, relief-from-royalty and excess earnings valuation approaches, each of which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, we are required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.
The acquisition of Hillshire Brands was accounted for using the acquisition method of accounting, and consequently, the results of operations for Hillshire Brands are reported in our consolidated condensed financial statements from the date of acquisition.
The following pro forma information presents the combined results of operations as if the acquisition of Hillshire Brands had occurred at the beginning of fiscal 2013. Hillshire Brands' pre-acquisition results have been added to our historical results. The pro forma results contained in the following table include adjustments for amortization of acquired intangibles, depreciation expense, interest expense related to the financing and related income taxes. Any potential cost savings or other operational efficiencies that could result from the acquisition are not included in these pro forma results.

7


The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations as they would have been had the acquisition occurred on the assumed date, nor is it necessarily an indication of future operating results. The pro forma results for the six months ended March 29, 2014 include a nonrecurring tax benefit of $46 million recognized by Hillshire Brands primarily related to the release of valuation allowances on state deferred tax assets.
in millions
Three Months Ended
 
Six Months Ended
 
March 29, 2014
 
March 29, 2014
Pro forma sales
$
9,970

 
$
19,787

Pro forma net income from continuing operations attributable to Tyson
$
223

 
$
561

Pro forma net income per diluted share from continuing operations attributable to Tyson
$
0.53

 
$
1.34

Additionally, during the second quarter of fiscal 2014 we acquired a value-added food business as part of our strategic expansion initiative, which is also included in our Prepared Foods segment. The aggregate purchase price of the acquisition was $56 million, which included $12 million for Property, Plant and Equipment, $27 million allocated to Intangible Assets and $18 million allocated to Goodwill.
Dispositions
In fiscal 2014, we announced our plan to sell our Brazil and Mexico operations, which are included in our International segment, to JBS SA ("JBS") for a combined $575 million in cash, subject to certain adjustments. As a result, we conducted an impairment test and recorded a $39 million impairment charge in the fourth quarter of fiscal 2014 related to the Brazil operation. We completed the sale of the Brazil operation in the first quarter of fiscal 2015 for net proceeds of $130 million subject to working capital and net debt adjustments. The sale did not result in a significant gain or loss as the carrying value of the Brazil operation approximated the sales proceeds at the time of sale. In April 2015, we received additional net proceeds of $23 million related to the working capital and net debt adjustments. The additional proceeds did not result in a significant gain or loss. The assets and liabilities associated with the Brazil operation were classified as held for sale on the balance sheet at September 27, 2014. The sale of the Mexico operation is pending the necessary government approvals, and we expect to receive a decision during fiscal 2015. Subject to governmental approval and completion of the sale, we would realize a gain on the sale. The assets and liabilities related to the Mexico operation are classified as held for sale on the balance sheet at March 28, 2015 and September 27, 2014.
The following table summarizes the net assets and liabilities held for sale (in millions):
 
March 28, 2015
 
September 27, 2014
Assets held for sale:
 
 
 
Accounts receivable, net
$
17

 
$
74

Inventories
76

 
141

Other current assets
15

 
72

Net property, plant and equipment
75

 
132

Goodwill
14

 
16

Other assets
8

 
11

Total assets held for sale
$
205

 
$
446

Liabilities held for sale:
 
 
 
Current debt
$

 
$
32

Accounts payable
25

 
61

Other current liabilities
14

 
27

Long-term debt

 
9

Deferred income taxes
10

 
12

Total liabilities held for sale
$
49

 
$
141



8


In fiscal 2014, we sold our 50 percent ownership interest of Dynamic Fuels LLC (Dynamic Fuels) for $30 million cash consideration at closing and up to $35 million in future cash payments contingent on Dynamic Fuels' production volumes over a period of up to 11.5 years. Additionally as part of the terms of the sale, we were released from our guarantee of the $100 million Gulf Opportunity Zone tax-exempt bonds, which were issued in October 2008 to fund a portion of the plant construction costs. Dynamic Fuels previously qualified as a variable interest entity which we consolidated, as we were the primary beneficiary. As a result of the sale, we deconsolidated Dynamic Fuels and recorded a gain of approximately $3 million in the third quarter of fiscal 2014. We will recognize the future contingent payments in income as the required volumes are produced.
In the second quarter of fiscal 2015, as part of our ongoing efforts to increase efficiencies in our Chicken business, we announced the planned closure of our Buena Vista, Georgia plant. Due to a combination of factors that included changing product needs, the age of the facility and the prohibitive cost of its renovation, operations are expected to cease during the third quarter of fiscal 2015. The closure is not expected to have a significant impact on the Company's operating results.
In fiscal 2014, we recorded impairment charges of $52 million related to the planned closure of three Prepared Foods plants. The Company’s Cherokee, Iowa plant closed in September 2014 and the Buffalo, New York and Santa Teresa, New Mexico plants each closed in January 2015. Additionally, in April 2014, Hillshire Brands announced that it would discontinue all production at its Florence, Alabama plant. The plant closed in December 2014 and the closure costs did not have a significant impact on the Company's financial results.
NOTE 3: 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, grower pay and catch and haul costs), labor and manufacturing and production overhead, which are related to the purchase and production of inventories.
At March 28, 2015, 68% of the cost of inventories was determined by the first-in, first-out ("FIFO") method as compared to 66% at September 27, 2014. The remaining cost of inventories for both years is determined by the weighted-average method.
The following table reflects the major components of inventory (in millions):
 
March 28, 2015
 
September 27, 2014
Processed products
$
1,788

 
$
1,794

Livestock
1,060

 
1,066

Supplies and other
414

 
414

Total inventory
$
3,262

 
$
3,274

NOTE 4: PROPERTY, PLANT AND EQUIPMENT
The major categories of property, plant and equipment and accumulated depreciation are as follows (in millions): 

March 28, 2015
 
September 27, 2014
Land
$
128

 
$
126

Buildings and leasehold improvements
3,578

 
3,501

Machinery and equipment
6,322

 
6,144

Land improvements and other
281

 
276

Buildings and equipment under construction
444

 
334

 
10,753

 
10,381

Less accumulated depreciation
5,475

 
5,251

Net property, plant and equipment
$
5,278

 
$
5,130

NOTE 5: OTHER CURRENT LIABILITIES
Other current liabilities are as follows (in millions):
 
March 28, 2015
 
September 27, 2014
Accrued salaries, wages and benefits
$
393

 
$
490

Other
679

 
717

Total other current liabilities
$
1,072

 
$
1,207


9


NOTE 6: DEBT
The major components of debt are as follows (in millions):
 
March 28, 2015
 
September 27, 2014
Revolving credit facility
$
175

 
$

Senior notes:
 
 
 
2.75% Senior notes due September 2015 (2015 Notes)
403

 
407

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

 
638

7.00% Notes due May 2018
120

 
120

2.65% Notes due August 2019 (2019 Notes)
1,000

 
1,000

4.10% Notes due September 2020 (2020 Notes)
286

 
287

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

 
1,000

3.95% Notes due August 2024 (2024 Notes)
1,250

 
1,250

7.00% Notes due January 2028
18

 
18

6.13% Notes due November 2032 (2032 Notes)
164

 
164

4.88% Notes due August 2034 (2034 Notes)
500

 
500

5.15% Notes due August 2044 (2044 Notes)
500

 
500

Discount on senior notes
(10
)
 
(12
)
Term loan facility:
 
 
 
3-year tranche A (1.56% at 03/28/2015)
842

 
1,172

5-year tranche A

 
353

5-year tranche B (1.69% at 03/28/2015)
552

 
552

Amortizing Notes - Tangible Equity Units (see Note 7: Equity)
175

 
205

Other
61

 
24

Total debt
7,674

 
8,178

Less current debt
1,236

 
643

Total long-term debt
$
6,438

 
$
7,535

Revolving Credit Facility
We have a $1.25 billion revolving credit facility that supports short-term funding needs and letters of credit. The facility will mature and the commitments thereunder will terminate in September 2019. After reducing for the amount borrowed and outstanding letters of credit issued under this facility, the amount available for borrowing at March 28, 2015, was $1,069 million. At March 28, 2015, we had outstanding letters of credit issued under this facility totaling $6 million, none of which were drawn upon. We had an additional $95 million of bilateral letters of credit issued separately from the revolving credit facility, none of which were drawn upon. Our letters of credit are issued primarily in support of workers’ compensation insurance programs and derivative activities.
The revolving credit facility is unsecured and is fully guaranteed by Tyson Fresh Meats, Inc. (TFM Parent), our wholly owned subsidiary, until such date TFM Parent is released from all of its guarantees of other material indebtedness. If in the future any of our other subsidiaries shall guarantee any of our material indebtedness, such subsidiary shall also be required to guarantee the indebtedness, obligations and liabilities under this facility.
2019 / 2024 / 2034 / 2044 Notes
In August 2014, we issued senior unsecured notes with an aggregate principal amount of $3,250 million, consisting of $1,000 million due August 2019, $1,250 million due August 2024, $500 million due August 2034, and $500 million due August 2044. The 2019 Notes, 2024 Notes, 2034 Notes, and 2044 Notes carry interest rates of 2.65%, 3.95%, 4.88% and 5.15%, respectively, with interest payments due semi-annually on August 15 and February 15. After the original issue discounts of $7 million, we received net proceeds of $3,243 million. In addition, we incurred offering expenses of $27 million.
Term Loan Facility
In August 2014, we borrowed under an unsecured term loan facility, which provided for total term loans in an aggregate principal amount of $2,300 million, consisting of a $1,202 million 3-year tranche A facility, a $546 million 5-year tranche A facility, and a $552 million 5-year tranche B facility. The principal of the 3-year tranche A facility amortizes at 2.5% per quarter. Interest is reset based on the selected LIBOR interest period plus 1.375% for the 3-year tranche A facility and 1.50% for the 5-year tranche B facility. In addition, we incurred term loan issuance costs of approximately $11 million.


10


On April 7, 2015, we entered into a term loan agreement, which provided total borrowings in an aggregate principal amount of $500 million, the full balance of which was used to prepay outstanding borrowings under the existing 3-year tranche A term loan facility. The new $500 million term loan facility is due April 7, 2018. Interest is reset based on the selected LIBOR interest period plus 1.125%.
2015 / 2020 / 2032 Notes
In August 2014, in connection with our acquisition of Hillshire Brands, we assumed $840 million of Hillshire Brands' debt, which had an estimated fair value of approximately $868 million as of the acquisition date. We recorded the assumed debt at fair value. The fair value adjustment is being amortized and recorded as a reduction of interest expense. The debt assumed is mainly comprised of senior unsecured notes which consist of $400 million due September 2015, $278 million due September 2020, and $152 million due November 2032. The 2015 Notes, 2020 Notes, and the 2032 Notes carry interest rates of 2.75%, 4.10%, and 6.13%, respectively.
Debt Covenants
Our revolving credit and term loan facilities contain 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; change the nature of our business; engage in certain transactions with affiliates; and enter into hedging transactions, in each case, subject to certain qualifications and exceptions. In addition, we are required to maintain minimum interest expense coverage and maximum debt-to-capitalization ratios.
Our senior notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens; engage in certain sale/leaseback transactions; and engage in certain consolidations, mergers and sales of assets.
We were in compliance with all debt covenants at March 28, 2015.
NOTE 7: EQUITY
Share Repurchases
In fiscal 2014, our Board of Directors approved an increase of 25 million shares authorized for repurchase under our share repurchase program. As of March 28, 2015, 28.8 million shares remained available for repurchases under this program. The share repurchase program has no fixed or scheduled termination date and the timing and extent to which we repurchase shares will depend upon, among other things, our working capital needs, markets, industry conditions, liquidity targets, limitations under our debt obligations and regulatory requirements. In addition to the share repurchase program, we purchase shares on the open market to fund certain obligations under our equity compensation plans.
A summary of cumulative share repurchases of our Class A stock is as follows (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
Shares repurchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under share repurchase program
 
1.3

 
$
50

 
2.5

 
$
100

 
3.3

 
$
131

 
7.1

 
$
250

To fund certain obligations under equity compensation plans
 
0.2

 
9

 
0.4

 
16

 
0.4

 
19

 
0.7

 
25

Total share repurchases
 
1.5

 
$
59

 
2.9

 
$
116

 
3.7

 
$
150

 
7.8

 
$
275

Share Issuance
In fiscal 2014, we issued 23.8 million shares of our Class A stock to provide funding for the Hillshire Brands acquisition. Total proceeds, net of underwriting discounts and other offering related fees and expenses were $873 million.
Tangible Equity Units
In fiscal 2014, we completed the public issuance of 30 million 4.75% tangible equity units (TEUs). Total proceeds, net of underwriting discounts and other expenses, were $1,454 million. Each TEU, which has a stated amount of $50, is comprised of a prepaid stock purchase contract and a senior amortizing note due July 15, 2017. We allocated the proceeds from the issuance of the TEUs to equity and debt based on the relative fair values of the respective components of each TEU. The fair value of the prepaid stock purchase contracts, which was $1,295 million, is recorded in Capital in Excess of Par Value, net of issuance costs. The fair value of the senior amortizing notes, which was $205 million, was recorded in debt, of which $65 million was current. Issuance costs associated with the TEU debt were recorded as deferred financing costs in the Consolidated Condensed Balance Sheets in Other Assets and are amortized over the term of the instrument to July 15, 2017.

11


The aggregate values assigned upon issuance of each component of the TEUs, based on the relative fair value of the respective components of each TEU, were as follows (in millions, except price per TEU):
 
Equity Component
 
Debt Component
 
Total
Price per TEU
$
43.17

 
$
6.83

 
$
50.00

Gross Proceeds
1,295

 
205

 
1,500

Issuance cost
(40
)
 
(6
)
 
(46
)
Net proceeds
$
1,255

 
$
199

 
$
1,454

Each senior amortizing note has an initial principal amount of $6.83 and bears interest at 1.5% per annum. On each January 15, April 15, July 15 and October 15, we will pay equal quarterly cash installments of $0.59 per amortizing note, which cash payment in the aggregate (principal and interest) is equivalent to 4.75% per year with respect to the $50 stated amount per TEU. Each installment constitutes a payment of interest and partial repayment of principal. Unless settled earlier at the holder's or the Company's option, each purchase contract will automatically settle on July 15, 2017, subject to postponement in certain limited circumstances. We will deliver between a minimum of 31.8 million shares and a maximum of 39.7 million shares of our Class A stock, subject to adjustment, based upon the Applicable Market Value (as defined below) of our Class A stock as described below:
If the Applicable Market Value is equal to or greater than the conversion price of $47.20 per share, we will deliver 1.0594 shares of Class A stock per purchase contract, or a minimum of 31.8 million Class A shares.
If the Applicable Market Value is greater than the reference price of $37.76 but less than the conversion price of $47.20 per share, we will deliver a number of shares per purchase contract equal to $50, divided by the Applicable Market Value.
If the Applicable Market Value is less than or equal to the reference price of $37.76 per share, we will deliver 1.3244 shares of Class A stock per purchase contract, or a maximum of 39.7 million Class A shares.
The "Applicable Market Value" means the average of the closing prices of our Class A stock on each of the 20 consecutive trading days beginning on, and including, the 23rd scheduled trading day immediately preceding July 15, 2017.
On March 13, 2015, we paid our quarterly dividend to shareholders of record at February 27, 2015 equal to $0.10 per share on our Class A stock. The amount of the distribution exceeded the $0.075 per share dividend threshold amount. Consequently, the settlements rates, reference price and conversion price were adjusted and are reflected above.
The TEUs have a dilutive effect on our earnings per share. The 31.8 million minimum shares to be issued are included in the calculation of Class A Basic weighted average shares. The 7.9 million share difference between the minimum shares and the 39.7 million maximum shares are potentially dilutive securities, and accordingly, are included in our diluted earnings per share on a pro rata basis to the extent the Applicable Market Value is higher than the reference price but is less than the conversion price at period end.
NOTE 8: INCOME TAXES
The effective tax rate was 35.6% and 38.3% for the second quarter of fiscal 2015 and 2014, respectively, and 32.4% and 36.2% for the first six months of fiscal 2015 and 2014, respectively. The effective tax rates for the second quarter and first six months of fiscal 2015 and fiscal 2014 were impacted by such items as the domestic production deduction, state income taxes and losses in foreign jurisdictions for which no benefit is recognized. In addition, changes in tax reserves resulting from the expiration of statutes of limitations reduced the effective tax rate for the first six months of fiscal 2015 by 3.2%.
Unrecognized tax benefits were $229 million and $272 million at March 28, 2015, and September 27, 2014, respectively. The amount of unrecognized tax benefits, if recognized, that would impact our effective tax rate was $200 million and $241 million at March 28, 2015, and September 27, 2014, respectively.
We classify interest and penalties on unrecognized tax benefits as income tax expense. At March 28, 2015, and September 27, 2014, before tax benefits, we had $49 million and $54 million, respectively, of accrued interest and penalties on unrecognized tax benefits.
We are subject to income tax assessments for U.S. federal income taxes for fiscal years 2011 through 2013. We are also subject to income tax assessments by major state and foreign jurisdictions for fiscal years 2005 through 2013 and 2002 through 2013, respectively. We estimate that during the next twelve months it is reasonably possible that unrecognized tax benefits could decrease up to $18 million primarily due to the expiration of statutes of limitations in various jurisdictions.

12


NOTE 9: OTHER INCOME AND CHARGES
During the first six months of fiscal 2015, we recorded $3 million of equity earnings in joint ventures and $1 million in net foreign currency exchange gains, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
During the first six months of fiscal 2014, we recorded $4 million of equity earnings in joint ventures, $1 million in net foreign currency exchange gains and $6 million of other than temporary impairment related to an available-for-sale security, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
NOTE 10: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data): 
 
Three Months Ended
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
Numerator:
 
 
 
 
 
 
 
Net Income
$
311

 
$
210

 
$
621

 
$
462

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

 
(3
)
 
2

 
(5
)
Net income attributable to Tyson
310

 
213

 
619

 
467

Less dividends declared:
 
 
 
 
 
 
 
Class A
31

 
20

 
69

 
48

Class B
6

 
5

 
14

 
11

Undistributed earnings
$
273

 
$
188

 
$
536

 
$
408

 
 
 
 
 
 
 
 
Class A undistributed earnings
$
230

 
$
153

 
$
451

 
$
332

Class B undistributed earnings
43

 
35

 
85

 
76

Total undistributed earnings
$
273

 
$
188

 
$
536

 
$
408

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Class A weighted average shares
334

 
273

 
335

 
272

Class B weighted average shares, and shares under the if-converted method for diluted earnings per share
70

 
70

 
70

 
70

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and restricted stock
5

 
6

 
5

 
5

Tangible Equity Units
6

 

 
6

 

Warrants

 
7

 

 
8

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
415

 
356

 
416

 
355

 
 
 
 
 
 
 
 
Net Income Per Share Attributable to Tyson:
 
 
 
 
 
 
 
Class A Basic
$
0.78

 
$
0.64

 
$
1.55

 
$
1.40

Class B Basic
$
0.71

 
$
0.58

 
$
1.42

 
$
1.26

Diluted
$
0.75

 
$
0.60

 
$
1.49

 
$
1.32

Approximately 5 million of our stock-based compensation shares were antidilutive for the three and six months ended March 28, 2015. Approximately 4 million of our stock-based compensation shares were antidilutive for the three and six months ended March 29, 2014. These shares were not included in the diluted earnings per share calculation.
We have two classes of capital stock, Class A stock and Class B stock. Cash dividends cannot be paid to holders of Class B stock unless they are simultaneously paid to holders of Class A stock. The per share amount of cash dividends paid to holders of Class B stock cannot exceed 90% of the cash dividends paid to holders of Class A stock.
We allocate undistributed earnings based upon a 1 to 0.9 ratio per share to Class A stock and Class B stock, respectively. We allocate undistributed earnings based on this ratio due to historical dividend patterns, voting control of Class B shareholders and contractual limitations of dividends to Class B stock.

13


NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS
Our business operations give rise to certain market risk exposures mostly due to changes in commodity prices, foreign currency exchange rates and interest rates. We manage a portion of these risks through the use of derivative financial instruments, primarily futures and options, to reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Forward contracts on various commodities, including grains, livestock and energy, are primarily entered into to manage the price risk associated with forecasted purchases of these inputs used in our production processes. Foreign exchange forward contracts are entered into to manage the fluctuations in foreign currency exchange rates, primarily as a result of certain receivable and payable balances. We also periodically utilize interest rate swaps to manage interest rate risk associated with our variable-rate borrowings.
Our risk management programs are periodically reviewed by our Board of Directors’ Audit Committee. These programs are monitored by senior management and may be revised as market conditions dictate. Our current risk management programs utilize industry-standard models that take into account the implicit cost of hedging. Risks associated with our market risks and those created by derivative instruments and the fair values are strictly monitored, using Value-at-Risk and stress tests. Credit risks associated with our derivative contracts are not significant as we minimize counterparty concentrations, utilize margin accounts or letters of credit, and deal with credit-worthy counterparties. Additionally, our derivative contracts are mostly short-term in duration and we generally do not make use of credit-risk-related contingent features. No significant concentrations of credit risk existed at March 28, 2015.
We recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Condensed Balance Sheets, with the exception of normal purchases and normal sales expected to result in physical delivery. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged (i.e., cash flow hedge or fair value hedge). We qualify, or designate, a derivative financial instrument as a hedge when contract terms closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. If a derivative instrument is accounted for as a hedge, depending on the nature of the hedge, changes in the fair value of the instrument either will be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or be recognized in other comprehensive income (loss) (OCI) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is recognized in earnings immediately. We designate certain forward contracts as follows:
Cash Flow Hedges - include certain commodity forward and option contracts of forecasted purchases (i.e., grains) and certain foreign exchange forward contracts.
Fair Value Hedges - include certain commodity forward contracts of firm commitments (i.e., livestock).
Cash Flow Hedges
Derivative instruments, such as futures and options, are designated as hedges against changes in the amount of future cash flows related to procurement of certain commodities utilized in our production processes. We do not purchase forward and option commodity contracts in excess of our physical consumption requirements and generally do not hedge forecasted transactions beyond 18 months. The objective of these hedges is to reduce the variability of cash flows associated with the forecasted purchase of those commodities. For the derivative instruments we designate and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses representing hedge ineffectiveness are recognized in earnings in the current period. Ineffectiveness related to our cash flow hedges was not significant for the three and six months ended March 28, 2015, and March 29, 2014.
We had the following aggregated notional values of outstanding forward and option contracts accounted for as cash flow hedges (in millions, except soy meal tons): 
 
Metric
 
March 28, 2015
 
September 27, 2014
Commodity:
 
 
 
 
 
Corn
Bushels
 

 

Soy meal
Tons
 
2,300

 
2,300

Foreign Currency
United States dollar
 
$

 
$
1

As of March 28, 2015, the net amounts expected to be reclassified into earnings within the next 12 months are pretax losses of $2 million related to grains. During the three and six months ended March 28, 2015, and March 29, 2014, we did not reclassify significant pretax gains/losses into earnings as a result of the discontinuance of cash flow hedges due to the probability the original forecasted transaction would not occur by the end of the originally specified time period or within the additional period of time allowed by generally accepted accounting principles.

14


The following table sets forth the pretax impact of cash flow hedge derivative instruments on the Consolidated Condensed Statements of Income (in millions):
 
Gain/(Loss)
Recognized in OCI
On Derivatives
 
 
Consolidated Condensed
Statements of Income
Classification
 
Gain/(Loss)
Reclassified from
OCI to Earnings
 
 
Three Months Ended
 
 
 
Three Months Ended
 
March 28,
2015
 
March 29,
2014
 
 
 
March 28,
2015
 
March 29,
2014
Cash Flow Hedge – Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
(2
)
 
$
8

 
Cost of Sales
 
$
(1
)
 
$
(3
)
Foreign exchange contracts

 

 
Other Income/Expense
 

 

Total
$
(2
)
 
$
8

 
 
 
$
(1
)
 
$
(3
)
 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss)
Recognized in OCI
On Derivatives
 
 
Consolidated Condensed
Statements of Income
Classification
 
Gain/(Loss)
Reclassified from
OCI to Earnings
 
 
Six Months Ended
 
 
 
Six Months Ended
 
March 28,
2015
 
March 29,
2014
 
 
 
March 28,
2015
 
March 29,
2014
Cash Flow Hedge – Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
(2
)
 
$
6

 
Cost of Sales
 
$
(4
)
 
$
(3
)
Foreign exchange contracts

 
(1
)
 
Other Income/Expense
 

 

Total
$
(2
)
 
$
5

 
 
 
$
(4
)
 
$
(3
)
Fair Value Hedges
We designate certain futures contracts as fair value hedges of firm commitments to purchase livestock for slaughter. Our objective of these hedges is to minimize the risk of changes in fair value created by fluctuations in commodity prices associated with fixed price livestock firm commitments. We had the following aggregated notional values of outstanding forward contracts entered into to hedge firm commitments which are accounted for as a fair value hedge (in millions): 
 
Metric
 
March 28, 2015
 
September 27, 2014
Commodity:
 
 
 
 
 
Live Cattle
Pounds
 
359

 
427

Lean Hogs
Pounds
 
122

 
329

For these derivative instruments we designate and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings in the same period. We include the gain or loss on the hedged items (i.e., livestock purchase firm commitments) in the same line item, Cost of Sales, as the offsetting gain or loss on the related livestock forward position. 
 
 
 
 
 
 
 
in millions

 
Consolidated Condensed
Statements of Income
Classification
 
Three Months Ended
 
Six Months Ended
 
 
March 28,
2015
 
March 29,
2014
 
March 28,
2015
 
March 29,
2014
Gain/(Loss) on forwards
Cost of Sales
 
$
32

 
$
(34
)
 
$
(8
)
 
$
(40
)
Gain/(Loss) on purchase contract
Cost of Sales
 
(32
)
 
34

 
8

 
40

Ineffectiveness related to our fair value hedges was not significant for the three and six months ended March 28, 2015, and March 29, 2014.
Undesignated Positions
In addition to our designated positions, we also hold forward and option contracts for which we do not apply hedge accounting. These include certain derivative instruments related to commodities price risk, including grains, livestock, energy and foreign currency risk. We mark these positions to fair value through earnings at each reporting date. We generally do not enter into undesignated positions beyond 18 months.

15


The objective of our undesignated grains, livestock and energy commodity positions is to reduce the variability of cash flows associated with the forecasted purchase of certain grains, energy and livestock inputs to our production processes. We also enter into certain forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs at fixed prices. The fixed price sales contracts lock in the proceeds from a future sale and the fixed cattle and hog purchases lock in the cost. However, the cost of the livestock and the related boxed beef and boxed pork market prices at the time of the sale or purchase could vary from this fixed price. As we enter into fixed forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs, we also enter into the appropriate number of livestock options and futures positions to mitigate a portion of this risk. Changes in market value of the open livestock options and futures positions are marked to market and reported in earnings at each reporting date, even though the economic impact of our fixed prices being above or below the market price is only realized at the time of sale or purchase. These positions generally do not qualify for hedge treatment due to location basis differences between the commodity exchanges and the actual locations when we purchase the commodities.

We have a foreign currency cash flow hedging program to hedge portions of forecasted transactions denominated in foreign currencies, primarily with forward and option contracts, to protect against the reduction in value of forecasted foreign currency cash flows. Our undesignated foreign currency positions generally would qualify for cash flow hedge accounting. However, to reduce earnings volatility, we normally will not elect hedge accounting treatment when the position provides an offset to the underlying related transaction that impacts current earnings.
We had the following aggregate outstanding notional values related to our undesignated positions (in millions, except soy meal tons): 
 
Metric
 
March 28, 2015
 
September 27, 2014
Commodity:
 
 
 
 
 
Corn
Bushels
 
91

 

Soy Meal
Tons
 
247,100

 
195,800

Soy Oil
Pounds
 
5

 
3

Live Cattle
Pounds
 
91

 
22

Lean Hogs
Pounds
 
46

 
22

Foreign Currency
United States dollars
 
$
46

 
$
108

The following table sets forth the pretax impact of the undesignated derivative instruments on the Consolidated Condensed Statements of Income (in millions):
 
Consolidated Condensed
Statements of Income
Classification
 
Gain/(Loss)
Recognized in Earnings
 
 
Gain/(Loss)
Recognized in Earnings
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Sales
 
$
(7
)
 
$
30

 
$
(8
)
 
$
32

Commodity contracts
Cost of Sales
 
(8
)
 
(40
)
 
(34
)
 
(42
)
Foreign exchange contracts
Other Income/Expense
 
(2
)
 
2

 
(4
)
 
1

Total
 
 
$
(17
)
 
$
(8
)
 
$
(46
)
 
$
(9
)

16


The following table sets forth the fair value of all derivative instruments outstanding in the Consolidated Condensed Balance Sheets (in millions):
 
Fair Value
 
March 28, 2015
 
September 27, 2014
Derivative Assets:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Commodity contracts
$
25

 
$
17

Foreign exchange contracts

 

Total derivative assets – designated
25

 
17

 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Commodity contracts
21

 
42

Foreign exchange contracts

 

Total derivative assets – not designated
21

 
42

Total derivative assets
$
46

 
$
59

Derivative Liabilities:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Commodity contracts
$
15

 
$
78

Foreign exchange contracts

 

Total derivative liabilities – designated
15

 
78

Derivatives not designated as hedging instruments:
 
 
 
Commodity contracts
17

 
80

Foreign exchange contracts
2

 
2

Total derivative liabilities – not designated
19

 
82

Total derivative liabilities
$
34

 
$
160

Our derivative assets and liabilities are presented in our Consolidated Condensed Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. See Note 12: Fair Value Measurements for a reconciliation to amounts reported in the Consolidated Condensed Balance Sheets in Other current assets and Other current liabilities.
NOTE 12: FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.
Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets in non-active markets;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs derived principally from or corroborated by other observable market data.
Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

17


The following tables set forth by level within the fair value hierarchy our financial assets and liabilities accounted for at fair value on a recurring basis according to the valuation techniques we used to determine their fair values (in millions): 
March 28, 2015
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Derivatives
$

 
$
46

 
$

 
$
(23
)
 
$
23

Foreign Exchange Forward Contracts

 

 

 

 

Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
Current

 
2

 

 

 
2

Non-current
20

 
29

 
63

 

 
112

Deferred Compensation Assets
9

 
235

 

 

 
244

Total Assets
$
29

 
$
312

 
$
63

 
$
(23
)
 
$
381

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Derivatives
$

 
$
32

 
$

 
$
(32
)
 
$

Foreign Exchange Forward Contracts

 
2

 

 
(1
)
 
1

Total Liabilities
$

 
$
34

 
$

 
$
(33
)
 
$
1

September 27, 2014
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Derivatives
$

 
$
59

 
$

 
$
(50
)
 
$
9

Foreign Exchange Forward Contracts

 

 

 

 

Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
Current

 
1

 

 

 
1

Non-current
1

 
24

 
67

 

 
92

Deferred Compensation Assets
15

 
218

 

 

 
233

Total Assets
$
16

 
$
302

 
$
67

 
$
(50
)
 
$
335

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Derivatives
$

 
$
158

 
$

 
$
(148
)
 
$
10

Foreign Exchange Forward Contracts

 
2

 

 

 
2

Total Liabilities
$

 
$
160

 
$

 
$
(148
)
 
$
12


(a)
Our derivative assets and liabilities are presented in our Consolidated Condensed Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral, when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. At March 28, 2015 and September 27, 2014, we had posted with various counterparties $10 million and $98 million, respectively, of cash collateral related to our commodity derivatives and held no cash collateral.

18


The following table provides a reconciliation between the beginning and ending balance of debt securities measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in millions): 
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
Balance at beginning of year
$
67

 
$
65

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

 

Included in other comprehensive income (loss)

 

Purchases
9

 
15

Issuances

 

Settlements
(13
)
 
(13
)
Balance at end of period
$
63

 
$
67

Total gains (losses) for the six-month period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at end of period
$

 
$

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Assets and Liabilities: Our commodities and foreign exchange forward contracts primarily include exchange-traded and over-the-counter contracts which are further described in Note 11: Derivative Financial Instruments. We record our commodity derivatives at fair value using quoted market prices adjusted for credit and non-performance risk and internal models that use as their basis readily observable market inputs including current and forward commodity market prices. Our foreign exchange forward contracts are recorded at fair value based on quoted prices and spot and forward currency prices adjusted for credit and non-performance risk. We classify these instruments in Level 2 when quoted market prices can be corroborated utilizing observable current and forward commodity market prices on active exchanges or observable market transactions of spot currency rates and forward currency prices.
Available-for-Sale Securities: Our investments in marketable debt securities are classified as available-for-sale and are reported at fair value based on pricing models and quoted market prices adjusted for credit and non-performance risk. Short-term investments with maturities of less than 12 months are included in Other current assets in the Consolidated Condensed Balance Sheets and primarily include certificates of deposit and commercial paper. All other marketable debt securities are included in Other Assets in the Consolidated Condensed Balance Sheets and have maturities ranging up to 35 years. We classify our investments in U.S. government, U.S. agency, certificates of deposit and commercial paper debt securities as Level 2 as fair value is generally estimated using discounted cash flow models that are primarily industry-standard models that consider various assumptions, including time value and yield curve as well as other readily available relevant economic measures. We classify certain corporate, asset-backed and other debt securities as Level 3 as there is limited activity or less observable inputs into valuation models, including current interest rates and estimated prepayment, default and recovery rates on the underlying portfolio or structured investment vehicle. Significant changes to assumptions or unobservable inputs in the valuation of our Level 3 instruments would not have a significant impact to our consolidated condensed financial statements.
The following table sets forth our available-for-sale securities' amortized cost basis, fair value and unrealized gain (loss) by significant investment category (in millions):
 
March 28, 2015
 
September 27, 2014
 
Amortized
Cost Basis

 
Fair
Value

 
Unrealized
Gain/(Loss)

 
Amortized
Cost Basis

 
Fair
Value

 
Unrealized
Gain/(Loss)

Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and Agency
$
31

 
$
31

 
$

 
$
25

 
$
25

 
$

Corporate and Asset-Backed
62

 
63

 
1

 
65

 
67

 
2

Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
Common Stock (a)

 
20

 
20

 
1

 
1

 

 
(a)
At March 28, 2015 and September 27, 2014, the amortized cost basis for Equity Securities had been reduced by accumulated other than temporary impairment of nil and $2 million, respectively.

19


Unrealized holding gains (losses), net of tax, are excluded from earnings and reported in OCI until the security is settled or sold. On a quarterly basis, we evaluate whether losses related to our available-for-sale securities are temporary in nature. Losses on equity securities are recognized in earnings if the decline in value is judged to be other than temporary. If losses related to our debt securities are determined to be other than temporary, the loss would be recognized in earnings if we intend, or more likely than not will be required, to sell the security prior to recovery. For debt securities in which we have the intent and ability to hold until maturity, losses determined to be other than temporary would remain in OCI, other than expected credit losses which are recognized in earnings. We consider many factors in determining whether a loss is temporary, including the length of time and extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. We recognized no other than temporary impairment in earnings for the three and six months ended March 28, 2015 and $6 million for the six months ended March 29, 2014, which was recorded in the Consolidated Condensed Statements of Income in Other, net. No other than temporary losses were deferred in OCI as of March 28, 2015, and September 27, 2014.
Deferred Compensation Assets: We maintain non-qualified deferred compensation plans for certain executives and other highly compensated employees. Investments are maintained within a trust and include money market funds, mutual funds and life insurance policies. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The investments are recorded at fair value based on quoted market prices and are included in Other Assets in the Consolidated Condensed Balance Sheets. We classify the investments which have observable market prices in active markets in Level 1 as these are generally publicly-traded mutual funds. The remaining deferred compensation assets are classified in Level 2, as fair value can be corroborated based on observable market data. Realized and unrealized gains (losses) on deferred compensation are included in earnings.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. We did not have any significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the three and six months ended March 28, 2015 and March 29, 2014.
Other Financial Instruments
Fair value of our debt is principally estimated using Level 2 inputs based on quoted prices for those or similar instruments. Fair value and carrying value for our debt are as follows (in millions):
 
March 28, 2015
 
September 27, 2014
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Total Debt
$
8,057

 
$
7,674

 
$
8,347

 
$
8,178



20


NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of the net periodic cost for the pension and postretirement benefit plans for the three and six months ended March 28, 2015 and March 29, 2014 are as follows (in millions):
 
Pension Plans
 
Three Months Ended
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
 
 
 
 
 
 
 
Service cost
$
4

 
$
1

 
$
8

 
$
3

Interest cost
21

 
2

 
42

 
4

Expected return on plan assets
(25
)
 
(1
)
 
(50
)
 
(2
)
Amortization of:

 

 
 
 
 
   Net actuarial loss
2

 
1

 
3

 
2

Settlement loss

 

 
8

 

Net periodic cost
$
2

 
$
3

 
$
11

 
$
7


 
Postretirement Benefit Plans
 
Three Months Ended
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
2

 
$
1

Interest cost
1

 
1

 
3

 
2

Net periodic cost
$
2

 
$
2

 
$
5

 
$
3

We contributed $6 million and $9 million to our pension plans for the three and six months ended March 28, 2015, respectively. We contributed $3 million and $5 million to our pension plans for the three and six months ended March 29, 2014, respectively. We expect to contribute an additional $6 million during the remainder of fiscal 2015. The amount of contributions made to pension plans in any year is dependent upon a number of factors including minimum funding requirements in the jurisdictions in which we operate. As a result, the actual funding in fiscal 2015 may differ from the current estimate.
NOTE 14: OTHER COMPREHENSIVE INCOME (LOSS)
The before and after tax changes in the components of other comprehensive income (loss) are as follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
Before Tax
Tax
After Tax
 
Before Tax
Tax
After Tax
 
Before Tax
Tax
After Tax
 
Before Tax
Tax
After Tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives accounted for as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Gain) loss reclassified to Cost of Sales
$
1

$

$
1

 
$
3

$
(1
)
$
2

 
$
4

$
(2
)
$
2

 
$
3

$
(1
)
$
2

Unrealized gain (loss)
(2
)

(2
)
 
8

(3
)
5

 
(2
)

(2
)
 
5

(2
)
3

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



 



 



 
6

(2
)
4

Unrealized gain (loss)
4

(2
)
2

 



 
19

(8
)
11

 
(1
)

(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Translation loss reclassified to Cost of Sales (a)



 



 
37

(1
)
36

 



Translation adjustment
(27
)
2

(25
)
 
6


6

 
(64
)
9

(55
)
 
(5
)

(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Postretirement benefits
1

(1
)

 
1

(1
)

 
10

(3
)
7

 
2


2

Total Other Comprehensive Income (Loss)
$
(23
)
$
(1
)
$
(24
)
 
$
18

$
(5
)
$
13

 
$
4

$
(5
)
$
(1
)
 
$
10

$
(5
)
$
5


(a) Translation loss reclassified to Cost of Sales related to disposition of a foreign operation, which is further described in Note 2: Acquisitions and Dispositions.

21


NOTE 15: SEGMENT REPORTING
We operate in five segments: Chicken, Beef, Pork, Prepared Foods and International. We measure segment profit as operating income (loss).
Chicken: Chicken includes our domestic operations related to raising and processing live chickens into fresh, frozen and value-added chicken products, as well as sales from allied products. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets. This segment also includes logistics operations to move products through our domestic supply chain and the global operations of our chicken breeding stock subsidiary.
Beef: Beef includes our operations related to processing live fed cattle and fabricating dressed beef carcasses into primal and sub-primal meat cuts and case-ready products. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets. 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.
Pork: Pork includes our operations related to processing live market hogs and fabricating pork carcasses into primal and sub-primal cuts and case-ready products. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets. This segment also includes our live swine group, related allied product processing activities and logistics operations to move products through the supply chain.
Prepared Foods: Prepared Foods includes our operations related to manufacturing and marketing frozen and refrigerated food products and logistics operations to move products through the supply chain. Products primarily include pepperoni, bacon, sausage, beef and pork pizza toppings, pizza crusts, flour and corn tortilla products, appetizers, prepared meals, ethnic foods, soups, sauces, side dishes, meat dishes, breadsticks and processed meats. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets.
In fiscal 2014, we acquired Hillshire Brands, a manufacturer and marketer of branded, convenient foods which includes brands such as Jimmy Dean®, Ball Park®, Hillshire Farm®, State Fair®, Van's®, Sara Lee® frozen bakery and Chef Pierre® pies as well as artisanal brands Aidells®, Gallo Salame®, and Golden Island® premium jerky. Hillshire Brands' results from operations are included in the Prepared Foods segment.
International: International includes our foreign operations primarily related to raising and processing live chickens into fresh, frozen and value-added chicken products in Brazil, China, India and Mexico. Products are marketed in each respective country to food retailers, foodservice distributors, restaurant operators, hotel chains, noncommercial foodservice establishments and live markets, as well as to other international export markets.
In fiscal 2014, we announced our plan to sell our Brazil and Mexico operations, part of our International segment, to JBS for $575 million in cash, subject to certain adjustments. As further described in Note 2: Acquisitions and Dispositions, we sold the Brazil operation in the first quarter of fiscal 2015. The sale of the Mexico operation is pending the necessary government approvals, and we expect to receive a decision during fiscal 2015. Subject to governmental approval and completion of the sale, we would realize a gain on the sale.

22


The results from Dynamic Fuels are included in Other in fiscal 2014. We allocate expenses related to corporate activities to the segments, except for third-party merger and integration costs of $9 million and $24 million for the three and six months ended March 28, 2015, respectively, which is included in Other.
Information on segments and a reconciliation to income before income taxes are as follows (in millions): 
 
Three Months Ended
 
Six Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
Sales:
 
 
 
 
 
 
 
Chicken
$
2,829

 
$
2,842

 
$
5,609

 
$
5,498

Beef
4,130

 
3,825

 
8,521

 
7,559

Pork
1,204

 
1,487

 
2,744

 
2,911

Prepared Foods
1,871

 
861

 
4,004

 
1,768

International
222

 
328

 
527

 
655

Other