Tyson Foods 2005 Annual Report Download - page 39

>> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TYSON FOODS, INC. 2005 ANNUAL REPORT
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Tyson Foods, Inc. >> 37
Accrued Self Insurance: The Company uses a combination of insur-
ance and self-insurance mechanisms to provide for the potential
liabilities for health and welfare, workers’ compensation, auto
liability and general liability risks. Liabilities associated with the
risks that are retained by the Company are estimated, in part, by
considering historical claims experience, demographic factors,
severity factors and other actuarial assumptions.
Capital Stock: The Company has two classes of capital stock,
Class A common stock (Class A stock) and Class B common stock
(Class B stock). Holders of Class B stock may convert such stock into
Class A stock on a share-for-share basis. Holders of Class B stock are
entitled to 10 votes per share while holders of Class A stock are
entitled to one vote per share on matters submitted to share-
holders for approval. Cash dividends cannot be paid to holders
of Class B stock unless they are simultaneously paid to holders of
Class A stock. The per share amount of the cash dividend paid to
holders of Class B stock cannot exceed 90% of the cash dividend
simultaneously paid to holders of Class A stock. The Company pays
quarterly cash dividends to Class A and Class B shareholders. The
Company paid Class A dividends per share of $0.16 and Class B divi-
dends per share of $0.144 in fiscal years 2005, 2004 and 2003.
According to the Emerging Issues Task Force Issue No. 03-6,
“Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earnings per Share” (EITF Issue No. 03-6), the
Class B stock is considered a participating security requiring the use
of the two-class method for the computation of basic earnings per
share. The two-class computation method for each period reflects
the cash dividends paid per share for each class of stock, plus the
amount of allocated undistributed earnings per share computed
using the participation percentage which reflects the dividend
rights of each class of stock. Basic earnings per share reflect the
application of EITF Issue No. 03-6 and was computed using the two-
class method for all periods presented. The shares of Class B stock
are considered to be participating convertible securities since the
shares of Class B stock are convertible on a share-for-share basis
into shares of Class A stock. Diluted earnings per share have been
computed assuming the conversion of the Class B shares into
Class A shares as of the beginning of each period.
Stock Compensation: On December 29, 2002, the Company adopted
Statement of Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation –Transition and Disclosure”
(SFAS No. 148). SFAS No. 148, which amended Financial Accounting
Standards Board (FASB) Statement No. 123, “Accounting for Stock-
Based Compensation,” does not require use of the fair value
method of accounting for stock-based employee compensation.
The Company applies Accounting Principles Board Opinion No. 25
and related interpretations in accounting for its employee stock
compensation plans. Accordingly, no compensation expense was
recognized for its stock option issuances as stock options are
issued with an exercise price equal to the closing price at the date
of the grant. The Company does issue restricted stock and records
the fair value of such awards as deferred compensation amortized
over the vesting period. Had compensation expense for the
employee stock compensation plans been determined based on
the fair value method of accounting for the Company’s stock
compensation plans, the tax-effected impact would be as follows:
in millions, except per share data 2005 2004 2003
Net income, as reported $ 353 $ 403 $ 337
Stock-based employee compensation
expense included in net income,
net of tax 16 10 10
Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax (23) (16) (14)
Pro forma net income $ 346 $ 397 $ 333
Earnings per share
As reported
Class A Basic $1.05 $1.20 $1.00
Class B Basic $0.95 $1.08 $0.90
Diluted $0.99 $1.13 $0.96
Pro forma
Class A Basic $1.03 $1.18 $0.99
Class B Basic $0.93 $1.06 $0.89
Diluted $0.97 $1.11 $0.95
The pro forma disclosures may not be representative of the effects
on net income for future years.
Financial Instruments: 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 derivative
financial instruments to reduce its exposure to various market risks.
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 designated and highly effective
at meeting the risk reduction and correlation criteria are recorded
using hedge accounting, as defined by Statement of Financial
Accounting Standards No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (SFAS No. 133), as amended. If a derivative
instrument is a hedge, as defined by SFAS No. 133, depending on the
nature of the hedge, changes in the fair value of the instrument will
either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in