Tyson Foods 2003 Annual Report Download - page 32

30 Tyson Foods, Inc.
management’s discussion and analysis
TYSON FOODS, INC. 2003 ANNUAL REPORT
Commodities Risk The Company is a purchaser of certain
commodities, such as corn, soybeans, livestock and
natural gas in the course of normal operations. The
Company uses commodity futures and options for hedg-
ing purposes to reduce the effect of changing prices and
as a mechanism to procure the underlying commodity.
Generally, contract terms of a hedge instrument closely
mirror those of the hedged item providing a high degree
of risk reduction and correlation. Contracts that are
highly effective at meeting this risk reduction and corre-
lation criteria are recorded using hedge accounting. The
following table presents a sensitivity analysis resulting
from a hypothetical change of 10% in market prices as of
September 27, 2003, and September 28, 2002, respec-
tively, on fair value of open positions. The fair value of
such positions is a summation of the fair values calcu-
lated for each commodity by valuing each net position at
quoted futures prices. The market risk exposure analysis
includes hedge and non-hedge positions. The underlying
commodities hedged have a correlation to price changes
of the derivative positions such that the values of the
commodities hedged based on differences between
commitment prices and market prices and the value of
the derivative positions used to hedge these commodity
obligations are inversely correlated. The following sensi-
tivity analysis reflects an inverse impact on earnings for
changes in the fair value of open positions for livestock
and natural gas and a direct impact on earnings for
changes in the fair value of open positions for grain.
Effect of 10% change in fair value
in millions 2003 2002
Livestock:
Cattle $28 $12
Hogs 12 5
Grain $26 $14
Natural Gas $11 $ –
Interest Rate Risk The Company has exposure to changes
in interest rates on its fixed-rate, long-term debt. Market
risk for fixed-rate, long-term debt is estimated as the
potential increase in fair value, resulting from a hypotheti-
cal 10% decrease in interest rates, and amounts to approxi-
mately $62 million at September 27, 2003. The fair values
of the Company’s long-term debt were estimated based
upon quoted market prices and or published interest rates.
The Company hedges exposure to changes in interest
rates on certain of its financial instruments. Under the
terms of various leveraged equipment loans, the
Company enters into interest rate swap agreements to
effectively lock in a fixed interest rate for these borrow-
ings. The maturity dates of these leveraged equipment
loans range from 2005 to 2008 with interest rates ranging
from 4.7% to 6.0%. Because of the positions taken with
respect to these swap agreements, an increase in interest
rates would have a minimal effect on the fair value for
fiscal years 2003 and 2002.
Foreign Currency Risk The Company also periodically
enters into foreign exchange forward contracts to hedge
some of its foreign currency exposure. The Company
enters into forward contracts to hedge exposure to U.S.
currency fluctuations inherent in its receivables and
purchase commitments. There were no such contracts
outstanding at September 27, 2003, and the fair value of
forward contracts at September 28, 2002, was not signifi-
cant. Foreign forward contracts generally have maturities
or expirations not exceeding 12 months. A 10% change
in the exchange rate of the currencies hedged at
September 28, 2002, would have changed the fair value
of the contracts by $4 million.
Concentrations of Credit Risk The Company’s financial
instruments that are exposed to concentrations of credit
risk consist primarily of cash equivalents and trade
receivables. The Company’s cash equivalents are in high-
quality securities placed with major banks and financial
institutions. Concentrations of credit risk with respect
to receivables are limited due to the large number of
customers and their dispersion across geographic areas.
The Company performs periodic credit evaluations of its
customers’ financial condition and generally does not
require collateral. At September 27, 2003, approximately
10.3% of the Company’s net accounts receivable balance
was due from one customer. No other single customer
or customer group represents greater than 10% of net
accounts receivable.