Edgar Filing: TYSON FOODS INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

TSN 2014 Q3 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 June 28, 2014



¨	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.

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 June 28, 2014.



Class		Outstanding Shares
Class A Common Stock, $0.10 Par Value (Class A stock)		281,687,503
Class B Common Stock, $0.10 Par Value (Class B stock)		70,010,805

TYSON FOODS, INC.

INDEX

PART I. FINANCIAL INFORMATION



		PAGE
Item 1.	Financial Statements

	Consolidated Condensed Statements of Income for the Three and Nine Months Ended June 28, 2014, and June 29, 2013	2

	Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended June 28, 2014, and June 29, 2013	3

	Consolidated Condensed Balance Sheets as of June 28, 2014, and September 28, 2013	4

	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 28, 2014, and June 29, 2013	5

	Notes to Consolidated Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION



Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

SIGNATURES		48

Table of Contents

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						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Sales	$	9,682		$	8,731		$	27,475		$	25,480
Cost of Sales	9,045			8,049			25,502			23,791
Gross Profit	637			682			1,973			1,689
Selling, General and Administrative	286			263			849			730
Operating Income	351			419			1,124			959
Other (Income) Expense:
Interest income	(1		)	(2		)	(6		)	(5		)
Interest expense	25			36			78			109
Other, net	17			—			18			(19		)
Total Other (Income) Expense	41			34			90			85
Income from Continuing Operations before Income Taxes	310			385			1,034			874
Income Tax Expense	52			136			314			285
Income from Continuing Operations	258			249			720			589
Loss from Discontinued Operation, Net of Tax	—			(4		)	—			(70		)
Net Income	258			245			720			519
Less: Net Income (Loss) Attributable to Noncontrolling Interests	(2		)	(4		)	(7		)	2
Net Income Attributable to Tyson	$	260		$	249		$	727		$	517
Amounts Attributable to Tyson:
Net Income from Continuing Operations	260			253			727			587
Net Loss from Discontinued Operation	—			(4		)	—			(70		)
Net Income Attributable to Tyson	$	260		$	249		$	727		$	517
Weighted Average Shares Outstanding:
Class A Basic	280			283			275			284
Class B Basic	70			70			70			70
Diluted	356			369			355			366
Net Income Per Share from Continuing Operations Attributable to Tyson:
Class A Basic	$	0.75		$	0.73		$	2.15		$	1.69
Class B Basic	$	0.68		$	0.66		$	1.94		$	1.52
Diluted	$	0.73		$	0.69		$	2.05		$	1.61
Net Loss Per Share from Discontinued Operation Attributable to Tyson:
Class A Basic	$	—		$	(0.01	)	$	—		$	(0.20	)
Class B Basic	$	—		$	(0.02	)	$	—		$	(0.18	)
Diluted	$	—		$	(0.01	)	$	—		$	(0.19	)
Net Income Per Share Attributable to Tyson:
Class A Basic	$	0.75		$	0.72		$	2.15		$	1.49
Class B Basic	$	0.68		$	0.64		$	1.94		$	1.34
Diluted	$	0.73		$	0.68		$	2.05		$	1.42
Dividends Declared Per Share:
Class A	$	0.075		$	0.050		$	0.250		$	0.260
Class B	$	0.068		$	0.045		$	0.226		$	0.234

See accompanying Notes to Consolidated Condensed Financial Statements.

Table of Contents

TYSON FOODS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	Three Months Ended						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Net Income	$	258		$	245		$	720		$	519
Other Comprehensive Income (Loss), Net of Taxes:
Derivatives accounted for as cash flow hedges	(5		)	2			—			(12		)
Investments	—			1			3			(2		)
Currency translation	12			(33		)	7			(49		)
Postretirement benefits	—			1			2			4
Total Other Comprehensive Income (Loss), Net of Taxes	7			(29		)	12			(59		)
Comprehensive Income	265			216			732			460
Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests	(2		)	(4		)	(7		)	2
Comprehensive Income Attributable to Tyson	$	267		$	220		$	739		$	458

See accompanying Notes to Consolidated Condensed Financial Statements.

Table of Contents

TYSON FOODS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions, except share and per share data)

(Unaudited)



	June 28, 2014			September 28, 2013
Assets
Current Assets:
Cash and cash equivalents	$	587		$	1,145
Accounts receivable, net	1,624			1,497
Inventories	3,061			2,817
Other current assets	241			145
Total Current Assets	5,513			5,604
Net Property, Plant and Equipment	3,941			4,053
Goodwill	1,925			1,902
Intangible Assets	151			138
Other Assets	525			480
Total Assets	$	12,055		$	12,177

Liabilities and Shareholders’ Equity
Current Liabilities:
Current debt	$	41		$	513
Accounts payable	1,496			1,359
Other current liabilities	1,075			1,138
Total Current Liabilities	2,612			3,010
Long-Term Debt	1,784			1,895
Deferred Income Taxes	404			479
Other Liabilities	545			560
Commitments and Contingencies (Note 15)
Shareholders’ Equity:
Common stock ($0.10 par value):
Class A-authorized 900 million shares, issued 322 million shares	32			32
Convertible Class B-authorized 900 million shares, issued 70 million shares	7			7
Capital in excess of par value	2,122			2,292
Retained earnings	5,640			4,999
Accumulated other comprehensive loss	(96		)	(108		)
Treasury stock, at cost – 40 million shares at June 28, 2014, and 48 million shares at September 28, 2013	(1,011		)	(1,021		)
Total Tyson Shareholders’ Equity	6,694			6,201
Noncontrolling Interests	16			32
Total Shareholders’ Equity	6,710			6,233
Total Liabilities and Shareholders’ Equity	$	12,055		$	12,177

See accompanying Notes to Consolidated Condensed Financial Statements.

Table of Contents

TYSON FOODS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Nine Months Ended
	June 28, 2014			June 29, 2013
Cash Flows From Operating Activities:
Net income	$	720		$	519
Depreciation and amortization	382			387
Deferred income taxes	(64		)	(21		)
Convertible debt discount	(92		)	—
Other, net	76			80
Net changes in working capital	(479		)	(193		)
Cash Provided by Operating Activities	543			772
Cash Flows From Investing Activities:
Additions to property, plant and equipment	(437		)	(425		)
Purchases of marketable securities	(25		)	(123		)
Proceeds from sale of marketable securities	24			22
Acquisitions, net of cash acquired	(56		)	(106		)
Other, net	44			36
Cash Used for Investing Activities	(450		)	(596		)
Cash Flows From Financing Activities:
Payments on debt	(407		)	(69		)
Net proceeds from borrowings	28			48
Purchases of Tyson Class A common stock	(286		)	(298		)
Dividends	(76		)	(87		)
Stock options exercised	61			93
Other, net	26			13
Cash Used for Financing Activities	(654		)	(300		)
Effect of Exchange Rate Changes on Cash	3			(4		)
Decrease in Cash and Cash Equivalents	(558		)	(128		)
Cash and Cash Equivalents at Beginning of Year	1,145			1,071
Cash and Cash Equivalents at End of Period	$	587		$	943

See accompanying Notes to Consolidated Condensed Financial Statements.

Table of Contents

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 28, 2013. 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 June 28, 2014, and the results of operations for the three and nine months ended June 28, 2014, and June 29, 2013. 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.

SHARE REPURCHASES

A summary of cumulative share repurchases of our Class A stock is as follows (in millions):



	Three Months Ended						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
	Shares	Dollars		Shares	Dollars		Shares	Dollars		Shares	Dollars
Shares repurchased:
Under share repurchase program	—	$	—	4.0	$	100	7.1	$	250	11.2	$	250
To fund certain obligations under equity compensation plans	0.3	11		0.4	10		1.0	36		2.3	48
Total share repurchases	0.3	$	11	4.4	$	110	8.1	$	286	13.5	$	298

On January 30, 2014, our Board of Directors approved an increase of 25 million shares authorized for repurchase under our share repurchase program. As of June 28, 2014, 32.1 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.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In December 2011 and February 2013, the Financial Accounting Standards Board (FASB) issued guidance enhancing disclosures related to offsetting of certain assets and liabilities. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We adopted this guidance in the first quarter of fiscal 2014. The adoption did not have a significant impact on our consolidated condensed financial statements.

In April 2014, the FASB issued guidance changing the criteria for reporting discontinued operations. The guidance also modifies the related disclosure requirements. The guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted and we adopted in the third quarter of fiscal 2014. The adoption did not have a significant impact on our consolidated condensed financial statements.

Table of Contents

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued guidance changing the criteria for recognizing revenue. The guidance also modifies the related disclosure requirements, clarifies guidance for multiple-element arrangements and provides guidance for transactions that were not addressed fully in previous guidance. 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.

NOTE 2: ACQUISITIONS AND DISPOSITIONS

On July 1, 2014, Tyson and HMB Holdings, Inc. (“Merger Sub”), a wholly-owned subsidiary of Tyson, entered into an agreement and plan of merger with The Hillshire Brands Company (“Hillshire”). Additionally, on July 28, 2014, we announced our plan to sell our Tyson de Mexico and Tyson do Brazil operations, for $575 million. For further description of these transactions, refer to Note 16: Subsequent Events.

In June 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. Our obligations pursuant to the guarantee were not released until July 2014; however, as of June 28, 2014, the purchaser had placed in escrow the full value of our guarantee as collateral while it secured a suitable replacement to our guarantee, which was obtained on July 8, 2014. 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, which is reflected in Cost of Sales in our Consolidated Condensed Statements of Income. We will recognize the future contingent payments in income as the required volumes are produced. At September 28, 2013, Dynamic Fuels had $166 million of total assets, of which $142 million was net property, plant and equipment, and $113 million of total liabilities, of which $100 million was long-term debt. The plant has been idled since October 2012.

In June 2014, we recorded an impairment charge of $49 million related to the planned closure of three Prepared Foods plants. The Company’s Cherokee, Iowa, plant is expected to close in September, while the Company’s plants in Buffalo, New York, and Santa Teresa, New Mexico, are expected to cease operations during the first half of calendar 2015. The impairment charges are reflected in the Consolidated Condensed Statements of Income in Cost of Sales.

During the second quarter of fiscal 2014 we acquired one value-added food business as part of our strategic expansion initiative, which is 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.

During fiscal 2013, we acquired two value-added food businesses as part of our strategic expansion initiative, which are included in our Prepared Foods segment. The aggregate purchase price of the acquisitions were $106 million, which included $50 million for property, plant and equipment, $41 million allocated to Intangible Assets and $12 million allocated to Goodwill.

NOTE 3: DISCONTINUED OPERATION

After conducting an assessment during fiscal 2013 of our long-term business strategy in China, we determined our Weifang operation (Weifang), which was previously part of our Chicken segment, was no longer core to the execution of our strategy given the capital investment it required to execute our future business plan. Consequently, we conducted an impairment test and recorded a $56 million impairment charge in the second quarter of fiscal 2013. We subsequently sold Weifang which resulted in reporting it as a discontinued operation. The sale was completed in July 2013 and did not result in a significant gain or loss as its carrying value approximated the sales proceeds at the time of sale. Weifang's prior periods results, including the impairment charge, have been reclassified and presented as a discontinued operation in our Consolidated Condensed Statements of Income. The following is a summary of the discontinued operation's results (in millions):



	Three Months Ended					Nine Months Ended
	June 28, 2014		June 29, 2013			June 28, 2014		June 29, 2013
Sales	$	—	$	36		$	—	$	108

Pretax loss	—		(2		)	—		(68		)
Income tax expense	—		2			—		2
Loss from discontinued operation, net of tax	$	—	$	(4	)	$	—	$	(70	)

Table of Contents

NOTE 4: INVENTORIES

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



	June 28, 2014		September 28, 2013
Processed products:
Weighted-average method – chicken, prepared foods and international	$	837	$	799
First-in, first-out method – beef and pork	721		624
Livestock – first-in, first-out method	1,120		1,002
Supplies and other – weighted-average method	383		392
Total inventory	$	3,061	$	2,817

NOTE 5: PROPERTY, PLANT AND EQUIPMENT

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



	June 28, 2014		September 28, 2013
Land	$	104	$	100
Buildings and leasehold improvements	3,014		2,945
Machinery and equipment	5,680		5,504
Land improvements and other	274		417
Buildings and equipment under construction	245		236
	9,317		9,202
Less accumulated depreciation	5,376		5,149
Net property, plant and equipment	$	3,941	$	4,053

NOTE 6: OTHER CURRENT LIABILITIES

Other current liabilities are as follows (in millions):



	June 28, 2014		September 28, 2013
Accrued salaries, wages and benefits	$	392	$	419
Self-insurance reserves	255		267
Other	428		452
Total other current liabilities	$	1,075	$	1,138

Table of Contents

NOTE 7: DEBT

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



	June 28, 2014			September 28, 2013
Revolving credit facility	$	—		$	—
Senior notes:
3.25% Convertible senior notes due October 2013 (2013 Notes)	—			458
6.60% Senior notes due April 2016 (2016 Notes)	638			638
7.00% Notes due May 2018	120			120
4.50% Senior notes due June 2022 (2022 Notes)	1,000			1,000
7.00% Notes due January 2028	18			18
Discount on senior notes	(5		)	(6		)
GO Zone tax-exempt bonds due October 2033	—			100
Other	54			80
Total debt	1,825			2,408
Less current debt	41			513
Total long-term debt	$	1,784		$	1,895

Revolving Credit Facility

We have a $1.0 billion revolving credit facility that supports short-term funding needs and letters of credit. The facility will mature and the commitments thereunder will terminate in August 2017. After reducing the amount available by outstanding letters of credit issued under this facility, the amount available for borrowing at June 28, 2014, was $959 million. At June 28, 2014, we had outstanding letters of credit issued under this facility totaling $41 million, none of which were drawn upon. We had an additional $145 million of bilateral letters of credit issued separately from the revolving credit facility, none of which were drawn upon. Our letters of credit are issued primarily in support of workers’ compensation insurance programs, derivative activities and Dynamic Fuels’ Gulf Opportunity Zone tax-exempt bonds.

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.

In June 2014, we amended this facility to, among other things, permit the consummation of certain debt financings related to our tender offer to acquire all of the issued and outstanding shares of common stock of Hillshire.

Bridge Facility

In the third quarter of fiscal 2014, we entered into a fully committed 364-day unsecured bridge facility in an aggregate principal amount of $8.2 billion to be available to fund the Hillshire acquisition. The bridge facility commitment was modified in July 2014, which is further described in Note 16: Subsequent Events. As of June 28, 2014, we paid $42 million of costs associated with the bridge facility. These costs were capitalized and we expense them over the facility’s estimated life, which is generally through the date permanent financing is expected and the bridge facility is reduced or eliminated. Accordingly, we recorded $22 million of expense in the third quarter of fiscal 2014, which is reflected in Other, net in the Consolidated Condensed Statements of Income.

2013 Notes

In September 2008, we issued $458 million principal amount 3.25% convertible senior unsecured notes which were due October 15, 2013. In connection with the issuance of the 2013 Notes, we entered into separate call option and warrant transactions with respect to our Class A stock to minimize the potential economic dilution upon conversion of the 2013 Notes. The call options contractually expired upon the maturity of the 2013 Notes. The 2013 Notes matured on October 15, 2013 at which time we paid the $458 million principal value with cash on hand and settled the conversion premium by issuing 11.7 million shares of our Class A stock from available treasury shares. Simultaneously with the settlement of the conversion premium, we received 11.7 million shares of our Class A stock from the call options.

The warrants were settled on various dates from January 2014 through April 2014, resulting in the issuance of 8.9 million shares of Class A stock through March 2014 and 2.8 million shares of Class A stock in April 2014.

Table of Contents

2016 Notes

The 2016 Notes carry an interest rate at issuance of 6.60%, with an interest step up feature dependent on their credit rating. On June 7, 2012, Moody's upgraded the credit rating of the 2016 Notes from "Ba1" to "Baa3." This upgrade decreased the interest rate on the 2016 Notes from 6.85% to 6.60%, effective beginning with the six-month interest payment due October 1, 2012.

On February 11, 2013, S&P upgraded the credit rating of the 2016 Notes from "BBB-" to "BBB." This upgrade did not impact the interest rate on the 2016 Notes.

2022 Notes

In June 2012, we issued $1.0 billion of senior unsecured notes, which will mature in June 2022. The 2022 Notes carry a 4.50% interest rate, with interest payments due semi-annually on June 15 and December 15. After the original issue discount of $5 million, based on an issue price of 99.458%, we received net proceeds of $995 million. In addition, we incurred offering expenses of $9 million.

GO Zone Tax-Exempt Bonds

In October 2008, Dynamic Fuels received $100 million in proceeds from the sale of Gulf Opportunity Zone tax-exempt bonds made available by the federal government to the regions affected by Hurricanes Katrina and Rita in 2005. As further described in Note 2: Acquisitions and Dispositions, in the third quarter of fiscal 2014, we sold our interest in Dynamic Fuels, which resulted in the deconsolidation of its assets and liabilities including these bonds.

Debt Covenants

Our revolving credit facility contains affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens and encumbrances; incur debt; merge, dissolve, liquidate or consolidate; make acquisitions and investments; dispose of or transfer assets; 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 2022 Notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens; engage in certain sale/leaseback transactions; and engage in certain consolidations, mergers and sales of assets.

We were in compliance with all debt covenants at June 28, 2014.

NOTE 8: INCOME TAXES

The effective tax rate for continuing operations was 16.8% and 35.4% for the third quarter of fiscal 2014 and 2013, respectively, and 30.4% and 32.6% for the nine months of fiscal 2014 and 2013, respectively. The effective tax rates for the third quarter and nine months of fiscal 2014 and fiscal 2013 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, a benefit resulting from the expiration of statutes of limitations reduced the effective tax rate for the third quarter and nine months of fiscal 2014 by 12.8% and 3.8%, respectively.

Unrecognized tax benefits were $137 million and $175 million at June 28, 2014, and September 28, 2013, respectively. The amount of unrecognized tax benefits, if recognized, that would impact our effective tax rate was $111 million and $149 million at June 28, 2014, and September 28, 2013, respectively.

We classify interest and penalties on unrecognized tax benefits as income tax expense. At June 28, 2014, and September 28, 2013, before tax benefits, we had $61 million and $63 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 2003 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 by as much as $30 million primarily due to expiration of statutes of limitations in various jurisdictions.

NOTE 9: OTHER INCOME AND CHARGES

During the nine months of fiscal 2014, we recorded $7 million of equity earnings in joint ventures, $4 million in net foreign currency exchange gains, $6 million of other than temporary impairment related to an available-for-sale security and $22 million of costs associated with bridge financing facilities for the Hillshire acquisition, which were recorded in the Consolidated Condensed Statements of Income in Other, net.

During the nine months of fiscal 2013, we recorded a $19 million currency translation adjustment gain recognized in conjunction with the receipt of proceeds constituting the final resolution of our investment in Canada, which was recorded in the Consolidated Condensed Statements of Income in Other, net.

Table of Contents

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						Nine Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Numerator:
Income from continuing operations	$	258		$	249		$	720		$	589
Less: Net income (loss) attributable to noncontrolling interests	(2		)	(4		)	(7		)	2
Net income from continuing operations attributable to Tyson	260			253			727			587
Less dividends declared:
Class A	21			14			69			74
Class B	5			3			16			16
Undistributed earnings	$	234		$	236		$	642		$	497

Class A undistributed earnings	$	190		$	193		$	522		$	406
Class B undistributed earnings	44			43			120			91
Total undistributed earnings	$	234		$	236		$	642		$	497
Denominator:
Denominator for basic earnings per share:
Class A weighted average shares	280			283			275			284
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	6			5			5			5
Convertible 2013 Notes	—			11			—			7
Warrants	—			—			5			—
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions	356			369			355			366

Net Income Per Share from Continuing Operations Attributable to Tyson:
Class A Basic	$	0.75		$	0.73		$	2.15		$	1.69
Class B Basic	$	0.68		$	0.66		$	1.94		$	1.52
Diluted	$	0.73		$	0.69		$	2.05		$	1.61
Net Income Per Share Attributable to Tyson:
Class A Basic	$	0.75		$	0.72		$	2.15		$	1.49
Class B Basic	$	0.68		$	0.64		$	1.94		$	1.34
Diluted	$	0.73		$	0.68		$	2.05		$	1.42

We had no stock-based compensation shares that were antidilutive for both the three months ended June 28, 2014 and June 29, 2013. Approximately 4 million of our stock-based compensation shares were antidilutive for both the nine months ended June 28, 2014 and June 29, 2013. These shares were not included in the dilutive earnings per share calculation.

We have two classes of capital stock, Class A stock and Class B stock. Cash dividends cannot be paid to holders of Class B stock unless they are simultaneously paid to holders of Class A stock. The per share amount of cash dividends paid to holders of Class B stock cannot exceed 90% of the cash dividends paid to holders of Class A stock.

We allocate undistributed earnings based upon a 1 to 0.9 ratio per share to Class A stock and Class B stock, respectively. We allocate undistributed earnings based on this ratio due to historical dividend patterns, voting control of Class B shareholders and contractual limitations of dividends to Class B stock.

Table of Contents

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 June 28, 2014.

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 Other Comprehensive Income (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 nine months ended June 28, 2014, and June 29, 2013.

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	June 28, 2014		September 28, 2013
Commodity:
Corn	Bushels	—		5
Soy meal	Tons	151,200		96,800
Foreign Currency	United States dollar	$	1	$	60

Table of Contents

As of June 28, 2014, the net amounts expected to be reclassified into earnings within the next 12 months are pretax losses of $6 million related to grains. During the three and nine months ended June 28, 2014, and June 29, 2013, we did not reclassify significant pretax gains/losses into earnings as a result of the discontinuance of cash flow hedges due to the probability the original forecasted transaction would not occur by the end of the originally specified time period or within the additional period of time allowed by generally accepted accounting principles.

The following table sets forth the pretax impact of cash flow hedge derivative instruments on the Consolidated Condensed Statements of Income (in millions):



	Gain/(Loss) Recognized in OCI On Derivatives						Consolidated Condensed Statements of Income Classification	Gain/(Loss) Reclassified from OCI to Earnings
	Three Months Ended							Three Months Ended
	June 28, 2014			June 29, 2013				June 28, 2014			June 29, 2013
Cash Flow Hedge – Derivatives designated as hedging instruments:
Commodity contracts	$	(7	)	$	(5	)	Cost of Sales	$	1		$	(2	)
Foreign exchange contracts	—			3			Other Income/Expense	—			(2		)
Total	$	(7	)	$	(2	)		$	1		$	(4	)

	Gain/(Loss) Recognized in OCI On Derivatives						Consolidated Condensed Statements of Income Classification	Gain/(Loss) Reclassified from OCI to Earnings
	Nine Months Ended							Nine Months Ended
	June 28, 2014			June 29, 2013				June 28, 2014			June 29, 2013
Cash Flow Hedge – Derivatives designated as hedging instruments:
Commodity contracts	$	(1	)	$	(28	)	Cost of Sales	$	(2	)	$	(5	)
Foreign exchange contracts	(1		)	(2		)	Other Income/Expense	—			(4		)
Total	$	(2	)	$	(30	)		$	(2	)	$	(9	)

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	June 28, 2014	September 28, 2013
Commodity:
Live Cattle	Pounds	434	209
Lean Hogs	Pounds	348	384

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



											in millions
	Consolidated Condensed Statements of Income Classification	Three Months Ended						Nine Months Ended
	Consolidated Condensed Statements of Income Classification	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Gain/(Loss) on forwards	Cost of Sales	$	(56	)	$	11		$	(96	)	$	26
Gain/(Loss) on purchase contract	Cost of Sales	56			(11		)	96			(26		)

Ineffectiveness related to our fair value hedges was not significant for the three and nine months ended June 28, 2014, and June 29, 2013.

Table of Contents

Undesignated positions

In addition to our designated positions, we also hold forward and option contracts for which we do not apply hedge accounting. These include certain derivative instruments related to commodities price risk, including grains, livestock, energy and foreign currency risk. We mark these positions to fair value through earnings at each reporting date. We generally do not enter into undesignated positions beyond 18 months.

The objective of our undesignated grains, livestock and energy commodity positions is to reduce the variability of cash flows associated with the forecasted purchase of certain grains, energy and livestock inputs to our production processes. We also enter into certain forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs at fixed prices. The fixed price sales contracts lock in the proceeds from a future sale and the fixed cattle and hog purchases lock in the cost. However, the cost of the livestock and the related boxed beef and boxed pork market prices at the time of the sale or purchase could vary from this fixed price. As we enter into fixed forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs, we also enter into the appropriate number of livestock options and futures positions to mitigate a portion of this risk. Changes in market value of the open 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	June 28, 2014		September 28, 2013
Commodity:
Corn	Bushels	3		69
Soy Meal	Tons	82,800		204,600
Soy Oil	Pounds	27		11
Live Cattle	Pounds	109		60
Lean Hogs	Pounds	74		159
Foreign Currency	United States dollars	$	92	$	95

The following table sets forth the pretax impact of the undesignated derivative instruments on the Consolidated Condensed Statements of Income (in millions):



	Consolidated Condensed Statements of Income Classification	Gain/(Loss) Recognized in Earnings						Gain/(Loss) Recognized in Earnings
		Three Months Ended						Nine Months Ended
		June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Derivatives not designated as hedging instruments:
Commodity contracts	Sales	$	25		$	(7	)	$	57		$	(19	)
Commodity contracts	Cost of Sales	(47		)	(8		)	(89		)	(15		)
Foreign exchange contracts	Other Income/Expense	3			(2		)	4			—
Total		$	(19	)	$	(17	)	$	(28	)	$	(34	)

Table of Contents

The following table sets forth the fair value of all derivative instruments outstanding in the Consolidated Condensed Balance Sheets (in millions):



	Fair Value
	June 28, 2014		September 28, 2013
Derivative Assets:
Derivatives designated as hedging instruments:
Commodity contracts	$	5	$	4
Foreign exchange contracts	—		1
Total derivative assets – designated	5		5

Derivatives not designated as hedging instruments:
Commodity contracts	38		25
Foreign exchange contracts	3		2
Total derivative assets – not designated	41		27

Total derivative assets	$	46	$	32
Derivative Liabilities:
Derivatives designated as hedging instruments:
Commodity contracts	$	121	$	29
Foreign exchange contracts	—		—
Total derivative liabilities – designated	121		29
Derivatives not designated as hedging instruments:
Commodity contracts	68		72
Foreign exchange contracts	—		1
Total derivative liabilities – not designated	68		73

Total derivative liabilities	$	189	$	102

Our derivative assets and liabilities are presented in our Consolidated Condensed Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. See Note 12: Fair Value Measurements for a reconciliation to amounts reported in the Consolidated Condensed Balance Sheets in Other current assets and Other current liabilities.

NOTE 12: FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:

Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:


•	Quoted prices for similar assets or liabilities in active markets;


•	Quoted prices for identical or similar assets in non-active markets;


•	Inputs other than quoted prices that are observable for the asset or liability; and


•	Inputs derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

Table of Contents

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):



June 28, 2014	Level 1		Level 2		Level 3		Netting (a)			Total
Assets:
Commodity Derivatives	$	—	$	43	$	—	$	(11	)	$	32
Foreign Exchange Forward Contracts	—		3		—		—			3
Available-for-Sale Securities:
Current	—		2		—		—			2
Non-current	—		28		65		—			93
Deferred Compensation Assets	15		220		—		—			235
Total Assets	$	15	$	296	$	65	$	(11	)	$	365
Liabilities:
Commodity Derivatives	$	—	$	189	$	—	$	(183	)	$	6
Foreign Exchange Forward Contracts	—		—		—		—			—
Total Liabilities	$	—	$	189	$	—	$	(183	)	$	6



September 28, 2013	Level 1		Level 2		Level 3		Netting (a)			Total
Assets:
Commodity Derivatives	$	—	$	29	$	—	$	(21	)	$	8
Foreign Exchange Forward Contracts	—		3		—		(1		)	2
Available-for-Sale Securities:
Current	—		1		—		—			1
Non-current	4		24		65		—			93
Deferred Compensation Assets	23		191		—		—			214
Total Assets	$	27	$	248	$	65	$	(22	)	$	318
Liabilities:
Commodity Derivatives	$	—	$	101	$	—	$	(101	)	$	—
Foreign Exchange Forward Contracts	—		1		—		—			1
Total Liabilities	$	—	$	102	$	—	$	(101	)	$	1

(a)

Our derivative assets and liabilities are presented in our Consolidated Condensed Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral, when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. At June 28, 2014, and September 28, 2013, we had posted with various counterparties $172 million and $79 million, respectively, of cash collateral related to our commodity derivatives and held no cash collateral.

Table of Contents

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):



	Nine Months Ended
	June 28, 2014			June 29, 2013
Balance at beginning of year	$	65		$	86
Total realized and unrealized gains (losses):
Included in earnings	—			1
Included in other comprehensive income (loss)	—			(1		)
Purchases	18			14
Issuances	—			—
Settlements	(18		)	(35		)
Balance at end of period	$	65		$	65
Total gains (losses) for the nine-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.

We have 0.8 million shares of Syntroleum Corporation common stock. At June 28, 2014, we classified the shares as Level 2 as the fair value could be corroborated based on observable market data. At September 28, 2013, we classified the shares as Level 1 as the fair value was based on unadjusted quoted prices available in active markets. We record the shares in Other Assets in the Consolidated Condensed Balance Sheet. Additionally, at September 28, 2013, we had 0.4 million of Syntroleum Corporation warrants. We classified the warrants as Level 2 as the fair value could be corroborated based on observable market data and was recorded in Other Assets in the Consolidated Condensed Balance Sheet.

Table of Contents

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):



	June 28, 2014						September 28, 2013
	Amortized Cost Basis		Fair Value		Unrealized Gain/(Loss)		Amortized Cost Basis		Fair Value		Unrealized Gain/(Loss)
Available-for-Sale Securities:
Debt Securities:
U.S. Treasury and Agency	$	26	$	27	$	1	$	25	$	25	$	—
Corporate and Asset-Backed	65		65		—		64		65		1
Equity Securities:
Common Stock and Warrants (a)	3		3		—		9		4		(5		)


(a)	At June 28, 2014, the amortized cost basis for Equity Securities had been reduced by accumulated other than temporary impairment of approximately $6 million.

Unrealized holding gains (losses), net of tax, are excluded from earnings and reported in OCI until the security is settled or sold. On a quarterly basis, we evaluate whether losses related to our available-for-sale securities are temporary in nature. Losses on equity securities are recognized in earnings if the decline in value is judged to be other than temporary. If losses related to our debt securities are determined to be other than temporary, the loss would be recognized in earnings if we intend, or more likely than not will be required, to sell the security prior to recovery. For debt securities in which we have the intent and ability to hold until maturity, losses determined to be other than temporary would remain in OCI, other than expected credit losses which are recognized in earnings. We consider many factors in determining whether a loss is temporary, including the length of time and extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. We recognized $6 million of other than temporary impairment for the nine months ended June 28, 2014, which is recorded in the Consolidated Condensed Statements of Income in Other, net. No other than temporary losses were deferred in OCI as of June 28, 2014, and September 28, 2013.

Deferred Compensation Assets: We maintain non-qualified deferred compensation plans for certain executives and other highly compensated employees. Investments are maintained within a trust and include money market funds, mutual funds and life insurance policies. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The investments are recorded at fair value based on quoted market prices and are included in Other Assets in the Consolidated Condensed Balance Sheets. We classify the investments which have observable market prices in active markets in Level 1 as these are generally publicly-traded mutual funds. The remaining deferred compensation assets are classified in Level 2, as fair value can be corroborated based on observable market data. Realized and unrealized gains (losses) on deferred compensation are included in earnings.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. During the third quarter of fiscal 2014, we recorded a $49 million impairment charge related to the planned closure of three Prepared Foods plants. Our valuation of these assets incorporated unobservable Level 3 inputs.

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):



	June 28, 2014				September 28, 2013
	Fair Value		Carrying Value		Fair Value		Carrying Value
Total Debt	$	1,963	$	1,825	$	2,541	$	2,408

Table of Contents

NOTE 13: OTHER COMPREHENSIVE INCOME (LOSS)

The before and after tax changes in the components of other comprehensive income (loss) are as follows (in millions):



	Three Months Ended																		Nine Months Ended
	June 28, 2014									June 29, 2013									June 28, 2014									June 29, 2013
	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	)	$	2		$	(1	)	$	1		$	2		$	(1	)	$	1		$	5		$	(2	)	$	3
(Gain) loss reclassified to Other Income/Expense	—			—			—			2			—			2			—			—			—			4			(1		)	3
Unrealized gain (loss)	(7		)	3			(4		)	(2		)	1			(1		)	(2		)	1			(1		)	(30		)	12			(18		)

Investments:
(Gain) loss reclassified to Other Income/Expense	—			—			—			—			—			—			6			(2		)	4			(1		)	—			(1		)
Unrealized gain (loss)	—			—			—			1			—			1			(1		)	—			(1		)	(2		)	1			(1		)

Currency translation:
Translation gain reclassified to Other Income/Expense	—			—			—			—			—			—			—			—			—			(19		)	(1		)	(20		)
Translation adjustment	10			2			12			(33		)	—			(33		)	5			2			7			(29		)	—			(29		)

Postretirement benefits	1			(1		)	—			1			—			1			3			(1		)	2			4			—			4
Total Other Comprehensive Income (Loss)	$	3		$	4		$	7		$	(29	)	$	—		$	(29	)	$	13		$	(1	)	$	12		$	(68	)	$	9		$	(59	)

NOTE 14: SEGMENT REPORTING

We operate in five segments: Chicken, Beef, Pork, Prepared Foods and International. We measure segment profit as operating income (loss).

During the second quarter of fiscal 2014, we began reporting our International operation as a separate segment, which was previously included in our Chicken segment. Our International segment became a separate reportable segment as a result of changes to our internal financial reporting to align with previously announced executive leadership changes. All periods presented have been reclassified to reflect this change. Beef, Pork, Prepared Foods and Other results were not impacted by this change.

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.

Table of Contents

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.

The results from Dynamic Fuels are included in Other. We allocate expenses related to corporate activities to the segments, except for third party acquisition related transaction fees which are included in Other.

Information on segments and a reconciliation to income from continuing operations before income taxes are as follows (in millions):



	Three Months Ended							Nine Months Ended
	June 28, 2014				June 29, 2013			June 28, 2014				June 29, 2013
Sales:
Chicken	$	2,829			$	2,820		$	8,327			$	8,148
Beef	4,189				3,723			11,748				10,655
Pork	1,766				1,332			4,677				4,006
Prepared Foods	901				797			2,669				2,441
International	365				343			1,020				1,001
Other	—				—			—				47
Intersegment Sales	(368		)		(284		)	(966		)		(818		)
Total Sales	$	9,682			$	8,731		$	27,475			$	25,480

Operating Income (Loss):
Chicken	$	195			$	215		$	682			$	471
Beef	101				114			194				134
Pork	128				67			356				264
Prepared Foods	(50		)	(a)	24			(13		)	(a)	85
International	(15		)		5			(73		)		—
Other	(8		)	(b)	(6		)	(22		)	(b)	5
Total Operating Income	351				419			1,124				959

Total Other (Income) Expense	41			(b)	34			90			(b)	85			(c)

Income from Continuing Operations before Income Taxes	$	310			$	385		$	1,034			$	874


(a)	Includes $49 million impairment charge related to the planned closure of three Prepared Foods plants.


(b)	Operating income in Other includes $7 million related to third party transaction fees and Other (Income) Expense includes $22 million related to costs associated with bridge financing facilities, both incurred as part of the Hillshire acquisition.


(c)	Includes $19 million related to the recognized currency translation adjustment gain.

The Chicken segment had sales of $2 million and $5 million in the third quarter of fiscal 2014 and 2013, respectively, and sales of $6 million and $13 million in the nine months of fiscal 2014 and 2013, respectively, from transactions with other operating segments of the Company. The Beef segment had sales of $83 million and $59 million in the third quarter of fiscal 2014 and 2013, respectively, and sales of $213 million and $156 million in the nine months of fiscal 2014 and 2013, respectively, from transactions with other operating segments of the Company. The Pork segment had sales of $283 million and $220 million in the third quarter of fiscal 2014 and 2013, respectively, and sales of $747 million and $649 million in the nine months of fiscal 2014 and 2013, respectively, from transactions with other operating segments of the Company. The aforementioned sales from intersegment transactions, which were at market prices, were included in the segment sales in the above table.

Table of Contents

NOTE 15: COMMITMENTS AND CONTINGENCIES

Commitments

We guarantee obligations of certain outside third parties, consisting primarily of leases and grower loans, which are substantially collateralized by the underlying assets. Terms of the underlying debt cover periods up to ten years, and the maximum potential amount of future payments as of June 28, 2014, was $55 million. We also maintain operating leases for various types of equipment, some of which contain residual value guarantees for the market value of the underlying leased assets at the end of the term of the lease. The remaining terms of the lease maturities cover periods over the next 13 years. The maximum potential amount of the residual value guarantees is