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Tyson
Foods, Inc. (collectively, the “Company,”“we,”“us,”“our,”“Tyson Foods” or “Tyson”) (NYSE: TSN) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment") to our Annual Report on Form 10-K for the fiscal year ended October 3, 2020, which was filed with the Securities and Exchange Commission (“SEC”) on November 16, 2020 (the “Original Form 10-K”) to make certain changes, as described below.
The Company recently completed an investigation relating to one of its cattle suppliers and determined that this supplier made misrepresentations regarding the number of cattle the supplier had purchased on behalf of the
Company's Beef segment. This misappropriation of Company funds by the supplier caused the Company to overstate live cattle inventory in its previously issued annual and interim financial statements. The Company has evaluated the materiality of the misstatements in live cattle inventory and has concluded that they did not, individually or in the aggregate, result in a material misstatement of the Company’s previously issued consolidated financial statements. However, the Company determined it would revise its consolidated financial statements to correct the recording of live cattle inventory in the periods impacted.
Due
to the discovery of the misrepresentations by the supplier, the Company re-evaluated the effectiveness of the Company’s internal control over financial reporting (“ICFR”) and identified a material weakness in the Company’s ICFR. As a result, the Company is filing this Amendment to restate management's assessment of the Company’s ICFR and its disclosure controls and procedures to indicate that they were not effective as of October 3, 2020 because of the identification of a material weakness in ICFR.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”), has also restated its opinion on the Company’s ICFR to state that the Company’s ICFR as of October 3, 2020 was not effective. This Amendment also reflects the revision of our previously issued financial statements for the fiscal years ended 2020, 2019 and 2018, as well as relevant unaudited interim financial information for the quarterly periods in fiscal 2020 and 2019, to correctly state live cattle inventory described above. For a more detailed description of this revision,
refer to the section entitled "Revision" in Part II, Item 8, Notes to the Consolidated Financial Statements, Note 1: Business and Summary of Accounting Policies.
Item 6, Item 7, Item 8 and Item 9A of Part II of the Original Form 10-K are hereby deleted in their entirety and replaced with the Item 6, Item 7, Item 8 and Item 9A included herein. Part IV, Item 15, “Exhibits and Financial Statement Schedules,” also has been amended as required by Rule 12b-15 under the Securities Act of 1934, as amended, to provide new currently dated certifications by the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications are attached to this Amendment as Exhibits 31.1, 31.2, 32.1 and 32.2. In addition, the
Company is filing a new consent of PwC. Accordingly, Item 15 of Part IV of the Original Form 10-K is hereby amended to reflect the filing of the new consent.
Except as described above, this Amendment does not amend, update or change any other items or disclosures in the Original Form 10-K and does not purport to reflect any information or events subsequent to the filing thereof. As such, this Amendment speaks only as of the date the Original Form 10-K was filed, and the Company has not undertaken herein to amend, supplement or update any information contained in the Original Form 10-K to give effect to any subsequent events. Accordingly, this Amendment should be read in conjunction with the Original Form 10-K and any subsequent filings with the SEC.
(Exact name of registrant as specified in its charter)
______________________________________________
iDelaware
i71-0225165
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i2200 West Don Tyson Parkway,
iSpringdale,
iArkansas
i72762-6999
(Address
of principal executive offices)
(Zip Code)
i(479)
i290-4000
(Registrant’s
telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
iClass
A Common Stock
Par Value
$i0.10
iTSN
iNew
York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: Not Applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. iYes☒ No ☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐iNo☒
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. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.i☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐No ☒
On March 28, 2020, the aggregate market value of the registrant’s Class A Common Stock, $0.10 par value (“Class A stock”), and Class B Common Stock, $0.10 par value (“Class B stock”), held by non-affiliates of the registrant was $i16,867,056,474 and $i606,699,
respectively. Class B stock is not publicly listed for trade on any exchange or market system. However, Class B stock is convertible into Class A stock on a share-for-share basis, so the market value was calculated based on the market price of Class A stock.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2020.
Class
Outstanding Shares
Class A Common Stock, $0.10 Par Value (“Class A stock”)
i294,125,924
Class
B Common Stock, $0.10 Par Value (“Class B stock”)
Tyson Foods, Inc. (collectively, the “Company,”“we,”“us,”“our,”“Tyson Foods” or “Tyson”) (NYSE: TSN) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment") to our Annual Report on Form 10-K for the fiscal year ended October 3,
2020, which was filed with the Securities and Exchange Commission (“SEC”) on November 16, 2020 (the “Original Form 10-K”) to make certain changes, as described below.
The Company recently completed an investigation relating to one of its cattle suppliers and determined that this supplier made misrepresentations regarding the number of cattle the supplier had purchased on behalf of the Company's Beef segment. This misappropriation of Company funds by the supplier caused the Company to overstate live cattle inventory in its previously issued annual and interim financial statements. The
Company has evaluated the materiality of the misstatements in live cattle inventory and has concluded that they did not, individually or in the aggregate, result in a material misstatement of the Company’s previously issued consolidated financial statements. However, the Company determined it would revise its consolidated financial statements to correct the recording of live cattle inventory in the periods impacted.
Due to the discovery of the misrepresentations by the supplier, the Company re-evaluated the effectiveness of the Company’s internal control over financial reporting (“ICFR”)
and identified a material weakness in the Company’s ICFR. As a result, the Company is filing this Amendment to restate management's assessment of the Company’s ICFR and its disclosure controls and procedures to indicate that they were not effective as of October 3, 2020 because of the identification of a material weakness in ICFR. The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”), has also restated its opinion on the
Company’s ICFR to state that the Company’s ICFR as of October 3, 2020 was not effective. This Amendment also reflects the revision of our previously issued financial statements for the fiscal years ended 2020, 2019 and 2018, as well as relevant unaudited interim financial information for the quarterly periods in fiscal 2020 and 2019, to correctly state live cattle inventory described above. For a more detailed description of this revision, refer to the section entitled “Revision” in Part II, Item 8, Notes to the Consolidated Financial Statements, Note 1: Business and Summary of Accounting Policies.
Item 6, Item 7, Item 8 and Item 9A of Part II of the Original Form 10-K are hereby deleted in their entirety and replaced with the Item 6, Item 7, Item 8 and Item 9A included herein. Part
IV, Item 15, “Exhibits and Financial Statement Schedules,” also has been amended as required by Rule 12b-15 under the Securities Act of 1934, as amended, to provide new currently dated certifications by the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications are attached to this Amendment as Exhibits 31.1, 31.2, 32.1 and 32.2. In addition, the Company is filing a new consent of PwC. Accordingly, Item 15 of Part IV of the Original Form 10-K is hereby amended to reflect the filing of the new consent.
Except as described above, this Amendment does not amend, update or change any other items or disclosures in the Original Form 10-K and does not purport to reflect
any information or events subsequent to the filing thereof. As such, this Amendment speaks only as of the date the Original Form 10-K was filed, and the Company has not undertaken herein to amend, supplement or update any information contained in the Original Form 10-K to give effect to any subsequent events. Accordingly, this Amendment should be read in conjunction with the Original Form 10-K and any subsequent filings with the SEC.
The selected financial data set forth below as of October 3, 2020 and September 28, 2019 and for the years ended October 3, 2020, September 28, 2019 and September 29, 2018, are derived from our audited consolidated financial statements. This information should be read in conjunction with the consolidated financial statements and the related notes thereto included in Part II, Item 8 of this Amendment and Management’s Discussion and Analysis of Financial Condition and Results of Operations
included in Part II, Item 7 of this Amendment. Such consolidated financial statements have been revised to correct prior period misstatements as discussed in Note 1: “Business and Summary of Significant Accounting Policies" to our consolidated financial statements included in this Amendment. Accordingly, such selected financial data reflects the impact of those revisions. The selected financial data as of September 29, 2018 and September 30, 2017 and for the year ended September 30, 2017 are derived from unaudited consolidated financial statements, which were prepared on the same basis as our audited consolidated financial statements and reflect the revisions to our previously filed financial information. There was no impact to fiscal 2016 financial information as
a result of these prior period misstatements.
FIVE-YEAR FINANCIAL SUMMARY(1)(2)(3)
in millions, except per share, percentage and ratio data
2020
2019
2018
2017
2016
Summary
of Operations
Sales
$
43,185
$
42,405
$
40,052
$
38,260
$
36,881
Operating
income
3,008
2,770
2,969
2,862
2,805
Net interest expense
475
451
343
272
243
Net
income
2,071
1,993
2,973
1,742
1,772
Net income attributable to Tyson
2,061
1,980
2,970
1,738
1,768
Diluted
net income per share attributable to Tyson:
Net
income
5.64
5.40
8.04
4.69
4.53
Dividends declared per share:
Class A
1.725
1.575
1.275
0.975
0.650
Class
B
1.553
1.418
1.148
0.878
0.585
Balance Sheet Data
Cash and cash equivalents
$
1,420
$
484
$
270
$
318
$
349
Total
assets
34,456
32,918
28,987
28,007
22,373
Total gross debt
11,339
11,932
9,873
10,203
6,279
Total
Shareholders’ equity
15,386
14,094
12,721
10,523
9,624
Other Key Financial Measures
Depreciation and amortization
$
1,192
$
1,098
$
943
$
761
$
705
Capital
expenditures
1,199
1,259
1,200
1,069
695
EBITDA
4,317
3,911
3,958
3,589
3,538
Return
on invested capital
11.8
%
11.6
%
13.9
%
15.9
%
17.9
%
Effective tax rate
22.3
%
16.1
%
(10.8)
%
32.2
%
31.8
%
Total
debt to capitalization
42.4
%
45.8
%
43.7
%
49.2
%
39.5
%
Book value per share
$
42.25
$
38.59
$
34.84
$
28.63
$
25.67
(1)
Certain amounts for fiscal years 2020, 2019 and 2018 have been revised as described in Part II, Item 8, Notes to the Consolidated Financial Statements, Note 1: Business and Summary of Accounting Policies.
(2) As of September 29, 2018 total assets have changed from $29,109 million as originally reported to $28,987 million as revised and total shareholders' equity has changed from $12,811 million as originally reported to $12,721 million as revised. Balance sheet information as of September 29, 2018 is unaudited.
(3) As of and for the year ended September 30, 2017, operating income has changed from $2,921 million as originally reported to $2,862 million as revised, net income has changed
from $1,778 million as originally reported to $1,742 as revised, net income attributable to Tyson has changed from $1,774 million as originally reported to $1,738 million as revised and diluted net income per share attributable to Tyson changed from $4.79 as originally reported to $4.69 as revised. The Summary of operations information as of and for the year ended September 30, 2017 is unaudited. As of September 30, 2017, total assets have changed from $28,066 million as originally reported to $28,007 million as revised and total shareholders' equity has changed from $10,559 million as originally reported to $10,523 million as revised. Balance sheet information as of September 30, 2017 is unaudited. As of and for the year ended September 30, 2017, EBITDA has changed from
$3,648 million as originally reported to $3,589 million as revised, return on invested capital has changed from 16.2% as originally reported to 15.9% as revised, effective tax rate has changed from 32.3% as originally reported to 32.2% as revised, total debt to capitalization has changed from 49.1% as originally reported to 49.2% as revised and book value per share has changed from $28.72 as originally reported to $28.63 as revised.
2
Notes to Five-Year Financial Summary:
a.Fiscal 2020 net income included $116 million pretax gain from pension plan terminations, $75 million pretax restructuring and related charges and $65 million pretax income related to our accounting cycle resulting in a 53-week year
in fiscal 2020. Additionally, in fiscal 2020, we adopted new guidance for leasing arrangements using the optional transition method, where prior periods were not restated. For further description, refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 2: Changes in Accounting Principles.
b.Fiscal 2019 net income included $105 million post tax income related to the recognition of previously unrecognized tax benefit, $55 million pretax gain on sale of an investment, $37 million pretax Keystone Foods purchase accounting and acquisition related costs, $41 million pretax impairment charge related to the planned divestiture of a business, $31 million pretax Beef production facility fire costs, $15 million pretax pension plan termination charge and $41 million pretax restructuring and related charges. Additionally, in fiscal 2019, we adopted accounting guidance related to net periodic
pension and postretirement benefits. Accordingly, we retrospectively reduced prior periods operating income.
c.Fiscal 2018 net income included $1,003 million post-tax recognition of tax benefit from remeasurement of net deferred tax liabilities at lower enacted tax rates, $109 million pretax one-time cash bonus to our hourly frontline team members, $68 million pretax impairment charge net of a realized gain related to the divestiture of non-protein businesses and $59 million pretax restructuring and related charges.
d.Fiscal 2017 net income included $103 million pretax expense of AdvancePierre purchase accounting and acquisition related costs, pretax impairment charges of $52 million related to our San Diego Prepared Foods operation, $45 million related to the expected sale of a non-protein business and pretax restructuring and related
charges of $150 million.
e.Fiscal 2016 net income included $53 million post tax related to the recognition of previously unrecognized tax benefits and audit settlements. In fiscal 2016, we adopted new accounting guidance, retrospectively, requiring classification of debt issuance costs as a reduction of the carrying value of the debt. In doing so, $29 million of deferred issuance costs were reclassified from Other Assets to Long-Term Debt in our Consolidated Balance Sheets for fiscal 2016. This change is reflected above in total assets, total debt, total debt to capitalization and return on invested capital ratios.
f.Return on invested capital is calculated by dividing operating income by the sum of the average of beginning and ending total debt and shareholders’ equity less cash and cash equivalents.
g.For
the total debt to capitalization calculation, capitalization is defined as total debt plus total shareholders’ equity.
h.Book value per share is calculated by dividing shareholders’ equity by the sum of Class A and B shares outstanding and for fiscal 2016, the remaining minimum shares that were to be issued from our tangible equity units each period.
i."EBITDA" is a Non-GAAP measure and defined as net income less interest income, plus interest, taxes, depreciation and amortization. A reconciliation of net income to EBITDA immediately follows.
EBITDA RECONCILIATIONS
A reconciliation of net income to EBITDA is as follows(1)(2):
in
millions, except ratio data
2020
2019
2018
2017
2016
Net income
$
2,071
$
1,993
$
2,973
$
1,742
$
1,772
Less:
Interest income
(10)
(11)
(7)
(7)
(6)
Add: Interest expense
485
462
350
279
249
Add:
Income tax expense (benefit)
593
381
(291)
827
826
Add: Depreciation
900
819
723
642
617
Add:
Amortization(3)
278
267
210
106
80
EBITDA
$
4,317
$
3,911
$
3,958
$
3,589
$
3,538
Total
gross debt
$
11,339
$
11,932
$
9,873
$
10,203
$
6,279
Less: Cash and cash equivalents
(1,420)
(484)
(270)
(318)
(349)
Less:
Short-term investments
—
(1)
(1)
(3)
(4)
Total net debt
$
9,919
$
11,447
$
9,602
$
9,882
$
5,926
Ratio
Calculations:
Gross debt/EBITDA
2.6x
3.1x
2.5x
2.8x
1.8x
Net debt/EBITDA
2.3x
2.9x
2.4x
2.8x
1.7x
(1)
Certain amounts for fiscal years 2020, 2019 and 2018 have been revised as described in Part II, Item 8, Notes to the Consolidated Financial Statements, Note 1: Business and Summary of Accounting Policies.
(2) As of and for the year ended September 30, 2017, net income has changed from $1,778 million as originally reported to $1,742 as revised and income tax expense changed from $850 million as originally reported to $827 million as revised.
(3) Excludes the amortization of debt issuance and debt discount expense of $14 million, $12 million, $10 million, $13 million and $8 million for fiscal 2020, 2019, 2018, 2017 and 2016, respectively, as it is included in Interest expense.
3
EBITDA
is defined as net income before interest, income taxes, depreciation and amortization. Net debt to EBITDA represents the ratio of our debt, net of cash and short-term investments, to EBITDA. EBITDA and net debt to EBITDA are presented as supplemental financial measurements in the evaluation of our business. We believe the presentation of these financial measures helps investors to assess our operating performance from period to period, including our ability to generate earnings sufficient to service our debt, enhances understanding of our financial performance and highlights operational trends. These measures are widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies; however, the measurements of EBITDA and net debt to EBITDA may not be comparable to those of other companies, which limits their usefulness as comparative measures. EBITDA and net debt to EBITDA are not measures required by or calculated
in accordance with generally accepted accounting principles ("GAAP") and should not be considered as substitutes for net income or any other measure of financial performance reported in accordance with GAAP or as a measure of operating cash flow or liquidity. EBITDA is a useful tool for assessing, but is not a reliable indicator of, our ability to generate cash to service our debt obligations because certain of the items added to net income to determine EBITDA involve outlays of cash. As a result, actual cash available to service our debt obligations will be different from EBITDA. Investors should rely primarily on our GAAP results, and use non-GAAP financial measures only supplementally, in making investment decisions.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We are one of the world’s largest food companies and a recognized leader in protein. Founded in 1935 by John W. Tyson and grown under three generations of family leadership, the Company has a broad portfolio of products and brands including Tyson®, Jimmy Dean®, Hillshire Farm®, Ball Park®, Wright®, Aidells®, ibp® and State Fair®.
We operate in four reportable segments: Beef, Pork, Chicken and Prepared Foods. International/Other primarily includes our foreign operations in Australia, China, Malaysia, Mexico, the Netherlands, South
Korea and Thailand, third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC. For further description of the business, refer to Part I, Item 1, Business.
OVERVIEW
COVID-19
We continue to monitor and respond to the evolving nature of COVID-19 and its impact to our global business. We formed an internal COVID-19 task force for the primary purposes of maintaining the health and safety of our team members, ensuring our ability to operate our processing facilities and maintaining the liquidity of our business. We have experienced and continue to experience multiple challenges related to the pandemic. These challenges increased our operating costs and negatively impacted our sales volumes for the
back half of fiscal 2020 and are anticipated to continue into fiscal 2021. Operationally, we experienced slowdowns and temporary idling of production facilities due to team member absenteeism and choices we made to ensure team member health and safety. As a result, we have experienced lower levels of productivity and higher costs of production. This will likely continue in the short term until the effects of COVID-19 diminish. Each of our segments has also experienced a shift in demand from foodservice to retail during 2020; however, the volume increases in retail have not been sufficient to offset the decreases in foodservice. These current trends, including the combination of operational challenges and volume impacts, will likely continue into fiscal 2021 and have a negative impact on overall earnings. The ultimate impact of COVID-19 remains uncertain and will depend on future developments, including the duration and spread of the pandemic and related actions taken
by federal, state and local government officials to prevent and manage disease spread, all of which are uncertain and cannot be predicted.
•Team Members – The health and safety of our team members is our top priority. To protect our team members, we have implemented and will continue to implement safety measures recommended by the Centers for Disease Control and Prevention (“CDC”) and the Occupational Safety and Health Administration (“OSHA”) in our facilities and coordinate with other health officials as appropriate, including, but not limited to, checking the temperature of team members as they enter company facilities, restricting visitor access, increasing efforts to deep clean and sanitize facilities, requiring the use of protective face coverings and making protective face coverings and other protective equipment available to team members and encouraging team
members who feel sick to stay at home through relaxed attendance policies and enhanced benefits. We implemented additional ways to promote social distancing in our production facilities by creating additional breakroom space and allowing extra time between shifts to reduce interaction of team members, as well as erecting dividers between workstations or increasing the space between workers on the production floor. For office-based team members, we have encouraged team members capable of working from home to do so, and are prioritizing team member safety as we begin to reintegrate into our offices over time. We paid $1,000 bonuses to approximately 106,000 domestic frontline team members who support the Company’s operations during the pandemic. Additionally, we experienced positive COVID-19 cases and worker absenteeism throughout our production network during the back half of fiscal 2020,
which led to some temporary idling of production facilities. We are currently compensating our team members for sick time and COVID-19 related idling or shift cancellations.
4
•Customers and Production – Our most significant impacts from COVID-19 relate to channel shifts and lower production. We are committed to doing our best to ensure the continuity of our business and the availability of our products to customers. We have seen a shift in demand from our foodservice to our retail sales channels as schools and in-dining restaurants remain closed or continue to operate at reduced capacity across the country. Our production capabilities, including our large scale and geographic proximities, allow us to adapt some of our facilities
to the changing demand by shifting certain amounts of production from foodservice to retail. Not all of our facilities can be adapted and as a result we experienced a net negative impact to our volumes. In addition, our production facilities experienced varying levels of production impacts, including reduced volumes, due to the implementation of additional worker health precautions, worker absenteeism and temporary COVID-19 related idling at some of our production facilities. Additionally, we temporarily idled certain facilities, shifts, and/ or lines that service the foodservice channel as we balanced the shifting demand between foodservice and retail sales channels. On April 28, 2020, the President issued an Executive Order stating the importance of the continued operation of meat and poultry processing facilities and directing the Secretary of Agriculture to issue rules and orders to ensure the continued supply of
meat and poultry, consistent with the guidance for the operations of meat and poultry processing facilities jointly issued by the CDC and OSHA. This order provides clarity on what standards should apply at our meat and poultry processing facilities and we anticipate continuing to work with the United States Department of Agriculture (“USDA”) and other government officials in our efforts to ensure that we are able to operate our facilities safely.
•Supply Chain – Our supply chain has stayed largely intact as we have built contingency plans for redundant supply for our production facilities as well as our external suppliers. We have been able to leverage our extensive distribution network and large private transportation fleet to help mitigate the impacts of COVID-19. We have experienced and expect to continue to experience volatility in commodity inputs, which has impacted
our input costs, in part due to impacts caused by COVID-19. Production facility downtime in the back half of fiscal 2020 impacted all our segments' supply chains. Our Prepared Foods segment depends on adequate supplies of raw materials necessary for its production. High levels of industry pork facility idling during the back half of fiscal 2020 impacted the availability of certain raw materials which temporarily limited production capability and increased formulation costs of various Prepared Foods products. Additionally, our Chicken segment had to divert some of its live production to rendering and suboptimal product mixes, while our Beef and Pork segments had to delay deliveries of live cattle and hogs and also dealt with the impact of heavier harvest weights. Since we also export globally, container availability and port capacities have been among the challenges in meeting the global demand for our products.
•Insurance
and CARES Act – Although we maintain insurance policies for various risks, we do not believe most COVID-19 impacts will be covered by our policies. On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferral of the employer portion of social security payments, and a number of income tax provisions. The provisions related to income tax will not have a significant impact on our financial statements. We began implementing the deferral of the employer portion of social security payments in the back half of the fiscal year, which had a favorable impact on liquidity. This resulted in the deferral of approximately $185 million of payroll taxes in fiscal 2020. We recognized a benefit of approximately $30 million related to the refundable
payroll tax credit provision.
•Liquidity – We generated approximately $3.9 billion of operating cash flows during fiscal 2020. At October 3, 2020, we had $3.2 billion of liquidity, which included availability under our revolving credit facility and $1,420 million of cash and cash equivalents. We have $548 million of current debt. Combined with the cash expected to be generated from the Company’s operations, we anticipate that we will maintain sufficient liquidity to operate our business, make capital expenditures, pay dividends and address other needs including our ability to meet maturing debt obligations. However, we will continue to monitor the impact of COVID-19 on our liquidity and, if necessary, take action to preserve liquidity and ensure
that our business can operate during these uncertain times. This may include temporarily suspending share repurchases, suspending or reducing dividend payments or other cash preservation actions as necessary.
5
•Overall Financial Condition – We continue to proactively manage the Company and its operations through the pandemic. The major challenge we face is the availability of team members to operate our production facilities as our production facilities are experiencing varying levels of absenteeism. We will continue to operate our production facilities with team member health and safety as a top priority. The COVID-19-related slowdowns and
temporary idling drive higher labor and production costs, which we expect to continue until the return of more normal conditions. However, some of the higher labor and other costs may become more permanent in nature. We also experienced COVID-19-related demand shifts away from foodservice and into retail, and we responded to the demand shifts by adjusting parts of our production capacity accordingly. Despite adjusting parts of our operational footprint, higher retail volumes did not fully offset the reduced volumes in foodservice. Additionally, the price and mix of these volume shifts resulted in lower margin realization for portions of the year in our Prepared Foods and Chicken segments. Further, idling of pork facilities could have downstream impacts on the availability of raw material for parts of our Prepared Foods business, which could subsequently impact its ability to produce at normal levels. Consequently, the challenges created by absenteeism and our proactive,
temporary idling of production facilities due to COVID-19, adversely affects our operating costs and reduces what would otherwise be a stronger margin environment. However, we cannot predict the ultimate impact that COVID-19 will have on our short- and long-term demand at this time, as it will depend on, among other things, the severity and duration of the COVID-19 pandemic. Our liquidity is expected to be adequate to continue to run our operations and meet our obligations as they become due.
Fiscal year
Our accounting cycle resulted in a 53-week year for fiscal 2020 and a 52-week year for fiscal 2019 and 2018.
Revision of Previously Issued Financial Statements
The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the revision of our previously
reported consolidated financial statements for fiscal years 2020, 2019 and 2018. For additional information and a detailed discussion of the revision, refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 1: Business and Summary of Accounting Policies.
General
Sales grew 2% in fiscal 2020 over fiscal 2019 to $43.2 billion, primarily due to the impact of the additional week and increased average sales prices in the Beef, Pork and Prepared Foods segments. Fiscal 2020 operating income increased compared to fiscal 2019, as strong Beef and Pork segment results were partially offset by a decline in operating income in the Chicken and Prepared Foods segments. In fiscal 2020, our results were impacted by $77 million of restructuring and related charges offset by the positive impact of the additional week. In fiscal 2019, our results were impacted by a $41 million impairment
associated with the planned divestiture of a business, $41 million of restructuring and related charges, $37 million related to Keystone Foods purchase accounting and acquisition related costs and $31 million of costs associated with a fire at one of our beef production facilities.
During fiscal 2020, we incurred direct incremental expenses related to COVID-19 totaling approximately $540 million, of which approximately $500 million and $40 million were recorded in Cost of Sales and Selling, General and Administrative, respectively, in our Consolidated Statements of Income. These COVID-19 direct incremental expenses primarily included team member costs associated with worker health and availability and production facility downtime, including direct costs for personal protection equipment, production facility sanitization, COVID-19 testing, donations, product downgrades, rendered product, certain professional fees and $114 million
of thank you bonuses to frontline team members, which was partially offset by the CARES Act credits. Due to the nature of these direct incremental COVID-19 expenses, our segments were primarily impacted based on their relative number of team members, absenteeism and the degree of production disruptions they have experienced, and thus, our Beef and Chicken segments incurred a greater proportion of the total costs. These direct incremental COVID-19 related costs exclude market related impacts that may have been driven in part by COVID-19, including such items as derivatives, deferred compensation investments and other market driven impacts to margin and demand. Other indirect costs associated with COVID-19 are not reflected in these amounts, including costs associated with raw materials, distribution and transportation, plant underutilization and reconfiguration, premiums paid to cattle producers, and pricing discounts.
Market
Environment
According to the USDA, domestic protein production (beef, pork, chicken and turkey) increased approximately 2% in fiscal 2020 compared to fiscal 2019. We continue to monitor recent trade and tariff activity as well as COVID-19 and its potential impacts to exports and input costs across all of our segments. Additionally, all segments experienced increased operating costs in fiscal 2020. We will pursue recovery of these increased costs through pricing. The Beef and Pork segments experienced strong demand but had lower production throughput associated with the impacts of COVID-19 and also experienced lower livestock costs. The Chicken segment experienced volatile market conditions associated with increased domestic availability of supply and lower production throughput associated with COVID-19. The Prepared Foods segment continued to experience growth in the retail channel but faced increased raw material
costs and lower production throughput associated with COVID-19.
6
Margins – Our total operating margin was 7.0% in fiscal 2020. Operating margins by segment were as follows:
•Beef – 10.0%
•Pork – 11.0%
•Chicken – 0.9%
•Prepared Foods – 8.7%
Strategy
Our strategy is to sustainably feed the world with the fastest growing protein brands. We intend to achieve our strategy
as we: grow our business through differentiated capabilities; deliver ongoing financial fitness through continuous improvement; and sustain our company and our world for future generations.
•During fiscal 2019, we acquired two businesses for a total of approximately $2.5 billion, net of cash acquired. These businesses included the Thai and European operations, which consist of vertically integrated chicken and further-processing operations, and Keystone Foods, a major supplier to the growing global foodservice industry. They were acquired in furtherance of our growth strategy and expansion of our value-added protein capabilities in domestic and global markets. For further description refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 3: Acquisitions and Dispositions.
•In
the first quarter of fiscal 2020, the Company approved a restructuring program (the “2020 Program”), which is expected to contribute to the Company’s overall strategy of financial fitness through the elimination of overhead and consolidation of certain enterprise functions. In the fourth quarter of fiscal 2020, the Company extended the 2020 Program as it identified additional opportunities to eliminate overhead by optimizing organizational structures and other activities. As a result of this restructuring program, we expect to realize savings of approximately $140 million and $160 million in fiscal 2021 and fiscal 2022, respectively. We have recognized $60 million of cumulative pretax charges in fiscal 2020 associated
with the 2020 Program consisting of severance and employee related costs. As part of the 2020 Program, we are eliminating positions across several areas and job levels, with eliminated positions originating from the corporate offices in Springdale, Arkansas and Chicago, Illinois, as well as certain production facility and supply chain administrative positions. The majority of the positions have already been or are expected to be eliminated by the end of fiscal 2021. For further description refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 7: Restructuring and Related Charges.
in millions, except per share data
2020
2019
Net
income attributable to Tyson
$
2,061
$
1,980
Net income attributable to Tyson - per diluted share
5.64
5.40
2020 – Included the following items:
•$75 million pretax, or ($0.16) per diluted share, of restructuring and related charges.
•$65
million pretax, or $0.14 per diluted share, related to the additional week in fiscal 2020.
•$116 million pretax, or $0.24 per diluted share, due to gain from pension plan terminations.
2019 – Included the following items:
•$37 million pretax, or ($0.08) per diluted share, of Keystone Foods purchase accounting and acquisition related costs, which included an $11 million purchase accounting adjustment for the amortization of the fair value step-up of inventory and $26 million of acquisition related costs.
•$41 million pretax, or ($0.08) per diluted share, of restructuring and related charges.
•$55 million pretax, or $0.11 per diluted
share, from gain on sale of an investment.
•$105 million post tax, or $0.29 per diluted share, from recognition of previously unrecognized tax benefit.
•$31 million pretax, or ($0.06) per diluted share, of Beef production facility fire costs.
•$41 million pretax, or ($0.09) per diluted share, from an impairment associated with the planned divestiture of a business.
•$15 million pretax, or ($0.03) per diluted share, due to a pension plan termination charge.
SUMMARY OF RESULTS
Sales
in
millions
2020
2019
2018
Sales
$
43,185
$
42,405
$
40,052
Change in sales volume
0.7
%
8.8
%
Change
in average sales price
1.1
%
(3.0)
%
Sales growth
1.8
%
5.9
%
7
2020 vs. 2019 –
•Sales
Volume – Sales were positively impacted by an increase in sales volume, which accounted for an increase of $278 million primarily due to incremental volumes from business acquisitions as well as the impact of an additional week in fiscal 2020, partially offset by decreased volumes in each of our segments in fiscal 2020 due to lower production throughput associated with the impact of COVID-19.
•Average Sales Price – Sales were positively impacted by higher average sales prices, which accounted for an increase of $502 million. The increase in average sales price was primarily attributable to favorable product mix related to robust demand in the retail channel across all of our segments and beef and pork demand remaining strong amid supply disruptions related to COVID-19, partially offset by approximately $45 million of incremental discounted sales in the
Prepared Foods segment.
2019 vs. 2018 –
•Sales Volume – Sales were positively impacted by an increase in sales volume, which accounted for an increase of $3,539 million primarily driven by incremental volumes from business acquisitions which impacted the Chicken segment and International/Other, partially offset by business divestitures in fiscal 2018 in our Prepared Foods segment.
•Average Sales Price – Sales were negatively impacted by lower average sales prices, which accounted for a decrease of $1,186 million. The Chicken segment had a decrease in average sales price as a result of decreased pricing associated with product mix changes from fiscal 2018 acquisitions, partially offset by an increase in average sales price
in the Beef and Prepared Foods segments attributable to strong demand and sales in the Beef segment and a more favorable product mix and higher raw material costs in our Prepared Foods segment.
•The above amounts include a net increase of $2,209 million related to the impact of results from acquisitions and divestitures.
Cost of Sales
in millions
2020
2019
2018
Cost
of sales
$
37,801
$
37,383
$
34,956
Gross profit
5,384
5,022
Cost of sales as a percentage of sales
87.5
%
88.2
%
2020
vs. 2019 –
•Cost of sales increased $418 million. This included a net increase of $667 million primarily related to the impact of results from acquisitions and divestitures.
•For the remaining $249 million decrease, higher input cost per pound increased cost of sales $393 million, offset by lower sales volume, which decreased cost of sales $642 million.
•The $393 million impact of higher input cost per pound was impacted by:
•Increase across all of our segments primarily driven by net impacts on average cost per pound from mix changes as well as production inefficiencies due in part to the impact of COVID-19 in fiscal 2020.
•Increase
of approximately $500 million of direct incremental expenses related to COVID-19.
•Increase of approximately $80 million in our Chicken segment related to net increases in feed ingredient costs, growout expenses and outside meat purchases.
•Increase in raw material and other input costs of approximately $90 million as well as an increase in inventory write downs of approximately $15 million in our Prepared Foods segment.
•Increase in incentive-based compensation of approximately $70 million.
•Decrease in live cattle costs of approximately $530 million in our Beef segment.
•Decrease in live hog costs of approximately $255 million
in our Pork segment.
•The $642 million impact of lower sales volume, excluding the impact of acquisitions, was primarily driven by decreased sales volume in each of our segments due to lower production throughput associated with the impact of COVID-19 in the back half of fiscal 2020 as well as a reduction in live cattle processing capacity from the temporary closure of a production facility in the first quarter of fiscal 2020 as a result of a fire, partially offset by the impact of the additional week in fiscal 2020.
2019 vs. 2018 –
•Cost of sales increased $2,427 million. This included a net increase of $2,120 million primarily related to the impact of results from acquisitions and divestitures.
•For
the remaining $307 million increase, higher input cost per pound increased cost of sales $445 million, offset by lower sales volume, which decreased cost of sales $138 million.
•The $445 million impact of higher input cost per pound was impacted by:
8
•Increase in live cattle costs of approximately $110 million in our Beef segment.
•Increase in live hog costs of approximately $100 million in our Pork segment.
•Increase in raw material and other input costs of approximately $60 million in our Prepared Foods segment.
•Increase
in freight costs of approximately $20 million.
•Increase due to $31 million of incremental costs associated with a fire at one of our Beef production facilities.
•Decrease due to one-time cash bonus to front line team members of $108 million in fiscal 2018.
•Decrease due to impairment charges of $101 million associated with the divestiture of a non-protein business in fiscal 2018, partially offset by a $41 million impairment related to the planned divestiture of a business in fiscal 2019 and a $33 million gain related to a sale of a non-protein business in fiscal 2018.
•Decrease due to net derivative gains of $26 million for fiscal 2019, compared to net derivative losses of $33 million for fiscal
2018 due to our risk management activities. These amounts exclude offsetting impacts from related physical purchase transactions, which are included in the change in live cattle and hog costs and raw material and feed ingredient costs described herein.
•Remaining net change across all of our segments was primarily driven by increased operating costs and impacts on average input cost per pound from mix changes.
•The $138 million impact of lower sales volume, excluding the impact of acquisitions and divestitures, was driven by a decrease in sales volume in our Chicken segment.
Selling,
General and Administrative
in millions
2020
2019
2018
Selling, general and administrative
$
2,376
$
2,252
$
2,127
As a percentage of sales
5.5
%
5.3
%
2020
vs. 2019 –
•Increase of $124 million in selling, general and administrative was primarily driven by:
•Increase of $83 million in employee costs primarily from incentive-based compensation and the impact of the extra week in fiscal 2020.
•Increase of $56 million from fiscal 2019 acquisitions not owned by us for all of fiscal 2019.
•Increase of $49 million from the impact of a cattle supplier’s misappropriation of Company funds.
•Increase of $40 million from direct incremental expenses associated with COVID-19.
•Increase of $35 million from
technology related costs.
•Decrease of $55 million in professional fees and merger and integration costs.
•Decrease of $49 million in marketing, advertising and promotion expenses.
•Decrease of $26 million in travel and entertainment expenses.
2019 vs. 2018 –
•Increase of $125 million in selling, general and administrative was primarily driven by:
•Increase of $87 million related to the Keystone Foods acquisition.
•Increase of $26 million in team member costs primarily from incentive-based compensation.
•Increase
of $18 million from technology related costs.
•Increase of $16 million in marketing, advertising, and promotion expenses.
•Decrease of $18 million from restructuring and related charges.
Interest Expense
in millions
2020
2019
Cash
interest expense
$
497
$
476
Non-cash interest (expense) income
(12)
(14)
Total
Interest Expense
$
485
$
462
2020 / 2019 –
•Cash interest expense primarily included interest expense related to our senior notes, term loans and commercial paper, in addition to commitment fees incurred on our revolving credit facility. The increase in cash interest expense in fiscal 2020 was primarily due to debt issued in fiscal 2019 in connection with business acquisitions and higher interest rates, partially offset by term loans extinguished in fiscal 2020.
9
•Non-cash
interest expense primarily included interest capitalized, partially offset by the amortization of debt issuance costs and discounts/premiums on note issuances.
Other (Income) Expense, net
in millions
2020
2019
$
(131)
$
(55)
2020
– Included $116 million of gains related to pension plan terminations.
2019 – Included $55 million of pretax gain on the sale of an investment, $23 million of insurance proceeds and other income and $20 million of equity earnings in joint ventures, partially offset by $48 million of net periodic pension and postretirement benefit costs and pension plan settlements.
Effective Tax Rate
2020
2019
22.3
%
16.1
%
Our
effective income tax rate was 22.3% for fiscal 2020 compared to 16.1% for fiscal 2019. State taxes increased the effective tax rate by 2.9% and 2.8% for fiscal 2020 and 2019, respectively. The effective tax rate for fiscal 2019 includes a 6.7% benefit due to changes in tax reserves, primarily expirations of federal, state and foreign statutes of limitations.
SEGMENT RESULTS
We operate in four reportable segments: Beef, Pork, Chicken, and Prepared Foods. International/Other primarily includes our foreign operations in Australia, China, Malaysia, Mexico, the Netherlands, South Korea and Thailand, third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC. Additional information regarding the geographic areas of our foreign operations is
set forth in Part II, Item 8, Notes to Consolidated Financial Statements, Note 18: Segment Reporting.
The following table is a summary of segment sales and operating income (loss), which is how we measure segment income (loss).
in millions
Sales
Operating Income (Loss)
2020
2019
2018
2020
2019
2018
Beef
$
15,742
$
15,828
$
15,473
$
1,580
$
1,050
$
950
Pork
5,128
4,932
4,879
565
263
361
Chicken
13,234
13,300
12,044
122
621
866
Prepared
Foods
8,532
8,418
8,668
743
843
845
International/Other
1,856
1,289
305
(2)
(7)
(53)
Intersegment
Sales
(1,307)
(1,362)
(1,317)
—
—
—
Total
$
43,185
$
42,405
$
40,052
$
3,008
$
2,770
$
2,969
Beef
Segment Results
in millions
2020
2019
Change 2020 vs. 2019
2018
Change 2019 vs. 2018
Sales
$
15,742
$
15,828
$
(86)
$
15,473
$
355
Sales
Volume Change
(4.5)
%
(0.1)
%
Average Sales Price Change
4.0
%
2.4
%
Operating
Income
$
1,580
$
1,050
$
530
$
950
$
100
Operating Margin
10.0
%
6.6
%
6.1
%
2020
vs. 2019 –
•Sales Volume – Sales volume decreased primarily due to lower production throughput associated with the impact of COVID-19 during portions of fiscal 2020 and a reduction in live cattle harvest capacity as a result of a fire that caused the temporary closure of a production facility for the majority of the first quarter of fiscal 2020, partially offset by the impact of an additional week in fiscal 2020.
•Average Sales Price –Average sales price increased as beef demand remained strong amid supply disruptions related to the impact of COVID-19.
10
•Operating
Income – Operating income increased primarily due to market conditions, including COVID-19 disruptions, which increased the spread between preexisting contractual agreements and the cost of fed cattle, partially offset by price reductions offered to customers, as well as production inefficiencies and direct incremental expenses related to COVID-19. Additionally, results were impacted by losses of $106 million and $57 million in fiscal years 2020 and 2019, respectively, from a cattle supplier’s misappropriation of Company funds.
2019 vs. 2018 –
•Sales Volume – Sales volume decreased due to a reduction in live cattle processing capacity from the temporary closure of a production facility as a result of a fire.
•Average
Sales Price –Average sales price increased as demand for our beef products remained strong.
•Operating Income – Operating income increased as we continued to maximize our revenues relative to live fed cattle costs, partially offset by increased operating costs and $31 million of net incremental costs from the production facility fire. Additionally, results were impacted by losses of $57 million and $63 million in fiscal years 2019 and 2018, respectively, from a cattle supplier’s misappropriation of Company funds.
Pork
Segment Results
in millions
2020
2019
Change 2020 vs. 2019
2018
Change 2019 vs. 2018
Sales
$
5,128
$
4,932
$
196
$
4,879
$
53
Sales
Volume Change
1.8
%
0.8
%
Average Sales Price Change
2.2
%
0.3
%
Operating
Income
$
565
$
263
$
302
$
361
$
(98)
Operating Margin
11.0
%
5.3
%
7.4
%
2020
vs. 2019 –
•Sales Volume – Sales volume increased primarily due to the impact of the additional week, partially offset by lower production throughput associated with COVID-19 during portions of fiscal 2020 despite strong demand for our pork products and increased domestic availability of live hogs.
•Average Sales Price –Average sales price increased as pork demand remained strong amid supply disruptions related to the impact of COVID-19.
•Operating Income – Operating income increased primarily due to market conditions, including COVID-19 disruptions, which increased the spread between preexisting contractual agreements and
the cost of live hogs, partially offset by production inefficiencies and direct incremental expenses related to COVID-19.
2019 vs. 2018 –
•Sales Volume – Sales volume increased due to increased domestic availability of live hogs and strong demand for our pork products.
•Operating Income – Operating income decreased due to periods of compressed pork margins caused primarily by the combination of increased livestock supplies, excess domestic availability of pork and export constraints, which
drove livestock costs up faster than sales prices.
Chicken Segment Results
in millions
2020
2019
Change 2020
vs. 2019
2018
Change 2019 vs. 2018
Sales
$
13,234
$
13,300
$
(66)
$
12,044
$
1,256
Sales
Volume Change
0.1
%
19.7
%
Average Sales Price Change
(0.6)
%
(9.3)
%
Operating
Income
$
122
$
621
$
(499)
$
866
$
(245)
Operating Margin
0.9
%
4.7
%
7.2
%
2020
vs. 2019 –
•Sales Volume – Sales volume was relatively flat in fiscal 2020 as the impact of the additional week and increased volumes in retail were offset by lower production throughput associated with the impact of COVID-19 and lower foodservice demand.
•Average Sales Price –Average sales price decreased in fiscal 2020 primarily due to weaker chicken pricing as a result of market conditions.
•Operating Income – Operating income decreased in fiscal 2020 primarily from market conditions, unfavorable product mix, as well as production inefficiencies and direct incremental expenses related to COVID-19. Operating income was also
impacted by $34 million in restructuring costs incurred in fiscal 2020.
11
2019 vs. 2018 –
•Sales Volume – Sales volume increased primarily due to incremental volume from business acquisitions.
•Average Sales Price –Average sales price decreased due to market conditions and sales mix primarily associated with the acquisition of a poultry rendering and blending business in the fourth quarter of fiscal 2018.
•Operating Income –
Operating income decreased due to increased operating costs and challenging pricing conditions. Additionally, operating income was impacted in fiscal 2019 by approximately $40 million of net feed ingredient costs and realized and mark-to-market derivative losses.
Prepared Foods Segment Results
in
millions
2020
2019
Change 2020 vs. 2019
2018
Change 2019 vs. 2018
Sales
$
8,532
$
8,418
$
114
$
8,668
$
(250)
Sales
Volume Change
(1.9)
%
(8.3)
%
Average Sales Price Change
3.3
%
5.4
%
Operating
Income
$
743
$
843
$
(100)
$
845
$
(2)
Operating Margin
8.7
%
10.0
%
9.7
%
2020
vs. 2019 –
•Sales Volume – Sales volume decreased as growth in volume across the retail channel was offset by a reduction in the foodservice channel related to reduced demand and lower production throughput due to the impact of COVID-19, partially offset by the impact of an additional week in fiscal 2020.
•Average Sales Price –Average sales price increased due to favorable product mix associated with the surge in retail demand, as well as the pass through of increased raw material costs.
•Operating Income – Operating income decreased primarily due to increased operating costs, including a $105 million increase in net raw
material costs and derivative losses, as well as production inefficiencies and direct incremental expenses related to COVID-19. Additionally, operating income was impacted by $28 million in restructuring costs.
2019 vs. 2018 –
•Sales Volume – Sales volume decreased primarily from business divestitures.
•Average Sales Price –Average sales price increased due to product mix, which was positively impacted by business divestitures, as well as pricing increases in our ongoing business from the pass through of raw material costs.
•Operating Income – Operating income was relatively flat
in fiscal 2019 compared to fiscal 2018 as strong demand for our products and improved product mix was offset by increased raw material and operating costs. Additionally, operating income in fiscal 2019 was impacted by a $41 million impairment from a planned divestiture of a business. Operating income in fiscal 2018 was impacted by a $68 million impairment, net of realized gains, associated with the divestiture of non-protein businesses.
International/Other
Results
in millions
2020
2019
Change 2020 vs. 2019
2018
Change 2019 vs. 2018
Sales
$
1,856
$
1,289
$
567
$
305
$
984
Operating
Loss
(2)
(7)
5
(53)
46
2020 vs. 2019 –
•Sales – Sales increased primarily from the incremental sales from the the first full year of results from the acquisitions of Keystone Foods and the Thai and European operations.
•Operating loss –
Operating results improved due to lower third-party merger and integration costs partially offset by reduced profitability in our international operations primarily from the impacts of COVID-19.
2019 vs. 2018 –
•Sales – Sales increased primarily from the incremental sales from the acquisitions of Keystone Foods and the Thai and European operations.
•Operating loss – Operating loss decreased primarily from better performance in our China operations and inclusion of results of the Keystone Foods acquisition, partially offset by increased third-party merger and integration costs associated with the Keystone Foods acquisition.
12
LIQUIDITY
AND CAPITAL RESOURCES
Our cash needs for working capital, capital expenditures, growth opportunities, repurchases of senior notes, repayment of maturing debt, the payment of dividends and share repurchases are expected to be met with current cash on hand, cash flows provided by operating activities, or short-term borrowings. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may take advantage of opportunities to generate additional liquidity or refinance existing debt through capital market transactions. The amount, nature and timing of any capital market transactions will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions. In addition, we will continue
to monitor the impact of COVID-19 on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times. This may include temporarily suspending share repurchases, suspending or reducing dividend payments or taking other cash preservation actions as necessary.
Cash Flows from Operating Activities
in millions
2020
2019
Net
income
$
2,071
$
1,993
Non-cash items in net income:
Depreciation and amortization
1,192
1,098
Deferred income taxes
18
77
Gain
on dispositions of businesses
—
(17)
Impairment of assets
48
94
Stock-based compensation expense
89
77
Other,
net
(124)
(20)
Net changes in operating assets and liabilities
580
(789)
Net cash provided by operating activities
$
3,874
$
2,513
•Impairment
of assets in fiscal 2019 included a$41 million impairment related to the planned sale of a business.
•Other, net in fiscal 2020 included a $112 million gain related to pension plan terminations.
•Cash flows associated with changes in operating assets and liabilities:
•2020 – Increased primarily due to decreased accounts receivable, decreased inventories, increased accrued salaries, wages & benefits, and increased taxes payable, partially offset by decreased accounts payable. The changes in accounts receivable and accounts payable are largely due to the timing of payments and sales. The decrease in inventories is primarily due to decreased inventory volumes in the Prepared Foods segment. The
increase in accrued salaries, wages and benefits is primarily due to increased incentive-based compensation. The increase in taxes payable is primarily related to timing of payments, in large part due to payroll tax deferrals associated with the CARES Act.
•2019 – Decreased primarily due to increased accounts receivable and inventory and decreased income taxes payable. The increase in accounts receivable is primarily due to the timing of sales and payments. The increase in inventory is primarily due to increased volumes and costs in the Prepared Foods segment. Decreased income taxes payable is primarily due to reduced taxable income, change in federal tax rate and timing of payments related to the sale of non-protein businesses in fiscal 2018.
Cash
Flows from Investing Activities
in millions
2020
2019
Additions to property, plant and equipment
$
(1,199)
$
(1,259)
(Purchases of)/Proceeds from marketable securities, net
(18)
(1)
Acquisitions,
net of cash acquired
—
(2,462)
Proceeds from sale of businesses
29
170
Acquisitions of Equity Investments
(183)
—
Other,
net
(52)
88
Net cash used for investing activities
$
(1,423)
$
(3,464)
•Additions to property, plant and equipment included spending for production growth, safety and animal well-being, in addition to acquiring new equipment, infrastructure replacements and upgrades to maintain competitive standing and position
us for future opportunities.
13
•Capital spending for fiscal 2021 is expected to approximate $1.2 billion to $1.4 billion and will include spending for capacity expansion, growth, safety, animal well-being, infrastructure replacements and upgrades, and operational improvements that are expected to result in production and labor efficiencies, yield improvements and sales channel flexibility.
•Purchases of marketable securities included funding for our deferred compensation plans.
•Acquisitions, net of cash acquired, included the acquisition of two valued-added protein businesses in fiscal 2019. For further description
regarding these acquisitions refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 3: Acquisitions and Dispositions.
•Acquisition of equity investments in fiscal 2020 is related to the purchases of a 40% interest in a vertically integrated Brazilian poultry producer and a 50% interest in a joint venture serving the worldwide fats and oils market.
•Proceeds from sale of businesses related to the proceeds received from sale of a prepared foods business in fiscal 2020 and a chicken further processing facility in fiscal 2019. For further description refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 3: Acquisitions and Dispositions.
•Other, net primarily included deposits for capital expenditures in fiscal 2020 and
primarily related to the net proceeds from the sale of an investment in fiscal 2019.
Cash Flows from Financing Activities
in millions
2020
2019
Proceeds from issuance
of debt
$
1,609
$
4,634
Payments on debt
(1,212)
(3,208)
Borrowings on revolving credit facility
1,210
1,135
Payments
on revolving credit facility
(1,280)
(1,065)
Proceeds from issuance of commercial paper
14,272
17,722
Repayments of commercial paper
(15,271)
(17,327)
Purchases
of Tyson Class A common stock
(207)
(252)
Dividends
(601)
(537)
Stock options exercised
30
99
Other,
net
(18)
(30)
Net cash provided by (used for) financing activities
$
(1,468)
$
1,171
•Proceeds from issuance of debt and borrowings/payments on revolving credit facility:
•2020 – On March
27, 2020, we executed a new $1.5 billion term loan facility to repay our commercial paper, repay outstanding balances under our revolving credit facility and for general liquidity purposes.
•2019 – Proceeds from issuance of debt included $1,800 million proceeds from the issuance of a 364-day term loan for the initial financing of the Keystone Foods acquisition and subsequent issuance of $2,800 million senior unsecured notes which were primarily used to extinguish our 364-day term loan and to repay commercial paper obligations used to fund the Keystone Foods acquisition as well as to fund all or a portion of the purchase price for the acquisition of the Thai and European operations.
•Payments on debt included:
•2020
– We extinguished the $350 million outstanding balance of our senior notes due June 2020, the $400 million outstanding balance of our senior notes due August 2020 and the $278 million outstanding balance of our senior notes due September 2020 using cash on hand.
•2019 – We extinguished the $1,800 million outstanding balance of our 364-day term loan, the $300 million outstanding balance of our May 2019 Notes and the $1,000 million outstanding balance of our August 2019 Notes using proceeds received from the issuance of debt, cash on hand and other liquidity sources.
•Proceeds from issuance and repayment of short-term debt in the form of commercial paper:
•2020 – We had net repayments of $999 million to our unsecured short-term
promissory notes ("commercial paper") pursuant to our commercial paper program.
•2019 – We had net issuances of $395 million to our commercial paper pursuant to our commercial paper program.
•Purchases of Tyson Class A common stock included:
•$150 million for shares repurchased pursuant to our share repurchase program in both fiscal 2020 and fiscal 2019.
•$57 million and $102 million for shares repurchased to fund certain obligations under our equity compensation plans in fiscal 2020 and 2019, respectively.
•Dividends paid during fiscal 2020 included a 12% increase to our fiscal 2019 quarterly dividend
rate.
•Liquidity includes cash and cash equivalents, short-term investments, and availability under our revolving credit and term loan facilities, less outstanding commercial paper balance.
•At October 3, 2020, we had current debt of $548 million, which we intend to repay with cash generated from our operating activities and other existing or new liquidity sources.
•The
revolving credit facility supports our short-term funding needs and also serves to backstop our commercial paper program. Our maximum borrowing under the revolving credit facility during fiscal 2020 was $390 million.
•We expect net interest expense will approximate $440 million for fiscal 2021.
•Our ratio of short-term assets to short-term liabilities ("current ratio") was 1.8 to 1 and 1.3 to 1 at October 3, 2020, and September 28, 2019, respectively. The increase in fiscal 2020 was primarily due to increased cash and reduced current debt.
•At October 3, 2020, $466 million of our cash was held in the international
accounts of our foreign subsidiaries. Generally, we do not rely on the foreign cash as a source of funds to support our ongoing domestic liquidity needs. We manage our worldwide cash requirements by reviewing available funds among our foreign subsidiaries and the cost effectiveness with which those funds can be accessed. We intend to repatriate excess cash (net of applicable withholding taxes) not subject to regulatory requirements and to indefinitely reinvest outside of the United States the remainder of cash held by foreign subsidiaries. We do not expect the regulatory restrictions or taxes on repatriation to have a material effect on our overall liquidity, financial condition or the results of operations
for the foreseeable future.
Capital Resources
Credit and Term Loan Facilities
Cash flows from operating activities and cash on hand are our primary sources of liquidity for funding debt service, capital expenditures, dividends and share repurchases. We also have a revolving credit facility, with a committed capacity of $1.75 billion, to provide additional liquidity for working capital needs and to backstop our commercial paper program. Additionally, we have a $1.5 billion committed term loan facility which was fully drawn as of October 3, 2020.
At October 3, 2020, amounts available for borrowing under our revolving credit and term loan facilities totaled $1.75 billion. Our revolving credit facility is funded
by a syndicate of 39 banks, with commitments ranging from $0.3 million to $123 million per bank. Our term loan facility is funded by a syndicate of 5 banks, with commitments ranging from $200 million to $350 million per bank. The syndicates include bank holding companies that are required to be adequately capitalized under federal bank regulatory agency requirements.
Commercial Paper Program
Our commercial paper program provides a low-cost source of borrowing to fund general corporate purposes including working capital requirements. The maximum borrowing capacity under the commercial paper program is $1 billion. The maturities of the notes may vary, but may not exceed 397 days from the date of issuance. As of October 3, 2020, we had no commercial paper outstanding under this program. Our ability to access commercial paper in the
future may be limited or its costs increased, due to the current market environment which has been impacted in part by COVID-19.
Capitalization
To monitor our credit ratings and our capacity for long-term financing, we consider various qualitative and quantitative factors. We monitor the ratio of our net debt to EBITDA as support for our long-term financing decisions. At October 3, 2020, and September 28, 2019, the ratio of our net debt to EBITDA was 2.3x and 2.9x, respectively. Refer to Part II, Item 6, Selected Financial Data, for an explanation and reconciliation to comparable GAAP measures. The decrease in this ratio for fiscal 2020 is due to a decrease in net debt of $1,528 million and an increase in EBITDA.
15
Credit
Ratings
Term Loan Facility due March 2022
Standard & Poor's Rating Services', a Standard & Poor's Financial Services LLC business ("S&P"), applicable rating is "BBB+."
Moody’s Investor Service, Inc.'s ("Moody's") applicable rating is "Baa2." Fitch Ratings', a wholly owned subsidiary of Fimlac, S.A. ("Fitch"), applicable rating is "BBB." The below table outlines the borrowing spread on the outstanding principal balance of our term loan that corresponds to the applicable ratings levels from S&P, Moody's and Fitch.
S&P's applicable rating is "BBB+." Moody's applicable rating is "Baa2." Fitch's applicable rating is "BBB." The below table outlines the fees paid on the unused portion of the facility ("Facility Fee Rate") and letter of credit fees and borrowings ("All-in Borrowing Spread") that corresponds to the applicable ratings levels from S&P, Moody's and Fitch.
Ratings
Level (S&P/Moody's/Fitch)
Facility Fee Rate
All-in Borrowing Spread
A-/A3/A- or above
0.090
%
1.000
%
BBB+/Baa1/BBB+
0.100
%
1.125
%
BBB/Baa2/BBB (current level)
0.125
%
1.250
%
BBB-/Baa3/BBB-
0.175
%
1.375
%
BB+/Ba1/BB+
or lower
0.225
%
1.625
%
In the event the rating levels are split for either facility, the applicable fees and spread will be based upon the rating level in effect for two of the rating agencies, or, if all three rating agencies have different rating levels, the applicable fees and spread will be based upon the rating level that is between the rating levels of the other two rating agencies.
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 October 3, 2020 and expect that we will maintain compliance.
Pension Plans
As
further described in Part II, Item 8, Notes to Consolidated Financial Statements, Note 16: Pensions and Other Postretirement Benefits, the funded status of our defined benefit pension plans is defined as the amount the projected benefit obligation exceeds the plan assets. The funded status of the plans is an underfunded position of $234 million at the end of fiscal 2020 as compared to an underfunded position of $240 million at the end of fiscal 2019. We expect to contribute approximately $13 million of cash to our pension plans in fiscal 2021 as compared to approximately $19 million in fiscal 2020. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements. As a result, the actual funding in fiscal 2021 may be different from the estimate.
16
OFF-BALANCE
SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements material to our financial position or results of operations. The off-balance sheet arrangements we have are guarantees of obligations related to certain outside third parties, including leases, debt and livestock grower loans, and residual value guarantees covering certain operating leases for various types of equipment. See Part II, Item 8, Notes to Consolidated Financial Statements, Note 21: Commitments and Contingencies for further discussion.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of October 3, 2020 (in millions):
Payments
Due by Period
2021
2022-2023
2024-2025
2026 and thereafter
Total
Debt principal payments (1)
$
550
$
2,974
$
1,281
$
6,628
$
11,433
Interest
payments (2)
448
785
641
3,556
5,430
Guarantees (3)
10
39
35
17
101
Operating
lease obligations (4)
173
217
109
63
562
Purchase obligations (5)
2,371
667
190
152
3,380
Capital
expenditures (6)
956
146
—
—
1,102
Other long-term liabilities (7)
—
—
—
—
867
Total
contractual commitments
$
4,508
$
4,828
$
2,256
$
10,416
$
22,875
(1)In the event of a default on payment, acceleration of the principal payments could occur.
(2)Interest payments include
interest on all outstanding debt. Payments are estimated for variable rate and variable term debt based on effective interest rates at October 3, 2020, and expected payment dates.
(3)Amounts include guarantees of obligations related to certain outside third parties, which consist of leases, debt and livestock grower loans, all of which are substantially collateralized by the underlying assets, as well as residual value guarantees covering certain operating leases for various types of equipment. The amounts included are the maximum potential amount of future payments.
(4)For additional information regarding operating leases, refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 6: Leases.
(5)Amounts
include agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligations amount included items, such as future purchase commitments for grains and livestock purchase contracts, that provide terms that meet the above criteria. For certain grain purchase commitments with a fixed quantity provision, we have assumed the future obligations under the commitment based on available commodity futures prices as published in observable active markets as of October 3, 2020. We have excluded future purchase commitments for contracts
that do not meet these criteria. Purchase orders are not included in the table, as a purchase order is an authorization to purchase and is cancelable. Contracts for goods or services that contain termination clauses without penalty have also been excluded.
(6)Amounts include estimated amounts to complete buildings and equipment under construction as of October 3, 2020.
(7)Other long-term liabilities primarily consist of deferred compensation, deferred income, self-insurance and asset retirement obligations. Amount also consists of $185 million of payroll tax deferrals associated with the CARES Act, which we expect will be paid in fiscal 2022 and fiscal 2023. We are unable to reliably estimate the
amount and timing of the remaining payments beyond fiscal 2020; therefore, we have only included the total liability in the table above. We also have employee benefit obligations consisting of pensions and other postretirement benefits of $297 million that are excluded from the table above. A discussion of the Company's pension and postretirement plans, including funding matters, is included in Part II, Item 8, Notes to Consolidated Financial Statements, Note 16: Pensions and Other Postretirement Benefits.
In addition to the amounts shown above in the table, we have unrecognized tax benefits of $146 million and related interest and penalties of $51 million at October 3, 2020, recorded as liabilities.
The potential maximum contractual obligation associated
with our cash flow assistance programs at October 3, 2020, based on the estimated fair values of the livestock supplier’s net tangible assets on that date, aggregated to approximately $320 million. After analyzing residual credit risks and general market conditions, we had no allowance for these programs' estimated uncollectible receivables at October 3, 2020.
RECENTLY ISSUED/ADOPTED ACCOUNTING PRONOUNCEMENTS
Refer to the discussion under Part II, Item 8, Notes to Consolidated Financial Statements, Note 1: Business and Summary of Significant Accounting Policies and Note 2: Changes in Accounting Principles.
17
CRITICAL
ACCOUNTING ESTIMATES
The preparation of consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have considered the impact of the global COVID-19 pandemic on our consolidated financial statements. In addition to the COVID-19 impacts we have already experienced, and continue to experience, there are likely to be future impacts, the ultimate extent of which is uncertain and largely subject to whether the severity worsens or duration lengthens. These impacts could include but may not be limited to risks and uncertainty related to worker availability, our ability to operate production facilities,
demand-driven production facility closures, shifts in demand between sales channels and market volatility in our supply chain. Consequently, this may subject us to future risk of material goodwill, intangible and long-lived asset impairments, increased reserves for uncollectible accounts, and adjustments for inventory and market volatility for items subject to fair value measurements such as derivatives and investments. The following is a summary of certain accounting estimates we consider critical.
Contingent liabilities
Description: We are subject to lawsuits, investigations and other claims related to wage and hour/labor, antitrust, environmental, product, taxing authorities and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses.
A
determination of the amount of reserves and disclosures required, if any, for these contingencies is made after considerable analysis of each individual issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. We disclose contingent liabilities when the risk of loss is reasonably possible or probable.
Judgments and Uncertainties: Our contingent liabilities contain uncertainties because the eventual outcome will result from future events, and determination of current reserves requires estimates and judgments related to future changes in facts and circumstances, differing interpretations of the law and assessments of the amount of damages, and the effectiveness of strategies or other factors beyond our control.
Effect if Actual Results Differ From Assumptions: We
have not made any material changes in the accounting methodology used to establish our contingent liabilities during the past three fiscal years.
We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our contingent liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.
Revenue Recognition
Description: We recognize revenue for the sale of our product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon shipment or delivery to a customer based on terms of the sale. Revenue is measured by the transaction price, which is defined as the
amount of consideration we expect to receive in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes consumer incentives, trade promotions, and allowances, such as coupons, discounts, rebates, volume-based incentives, cooperative advertising, and other programs. Variable consideration related to these programs is recorded as a reduction to revenue based on amounts we expect to pay.
Judgments and Uncertainties: The transaction price contains estimates of known or expected variable consideration. We base these estimates on current performance, historical utilization, and projected redemption rates of each program. We review and update these estimates regularly until the incentives or product returns are realized and the impact of any adjustments are recognized in the period the adjustments are identified.
Effect
if Actual Results Differ From Assumptions: We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize revenue. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material. We adopted the FASB’s new guidance on revenue recognition in fiscal 2019. The adoption of this standard did not have a material impact on our consolidated financial statements. We have not made any material changes in the accounting methodology used to recognize revenue during the past three fiscal years.
Accrued self-insurance
Description: We are self-insured for certain losses related to health and welfare, workers’ compensation, auto liability and general liability claims. We use an independent third-party actuary
to assist in determining our self-insurance liability. We and the actuary consider a number of factors when estimating our self-insurance liability, including claims experience, demographic factors, severity factors and other actuarial assumptions. We periodically review our estimates and assumptions with our third-party actuary to assist us in determining the adequacy of our self-insurance liability. Our policy is to maintain an accrual at the actuarial estimated median.
18
Judgments and Uncertainties: Our self-insurance liability contains uncertainties due to assumptions required and judgment used.
Costs to settle our obligations, including legal and healthcare
costs, could increase or decrease causing estimates of our self-insurance liability to change. Incident rates, including frequency and severity, could increase or decrease causing estimates in our self-insurance liability to change.
Effect if Actual Results Differ From Assumptions: We have not made any material changes in the accounting methodology used to establish our self-insurance liability during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our self-insurance liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material. A 10% change in the actuarial estimate at October 3, 2020, would not have a significant impact on our liability.
Income
taxes
Description: We estimate total income tax expense based on statutory tax rates and tax planning opportunities available to us in various jurisdictions in which we earn income. Income tax includes an estimate for withholding taxes on earnings of foreign subsidiaries expected to be remitted to the United States but does not include an estimate for taxes on earnings considered to be indefinitely invested in the foreign subsidiary. Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are recorded when it is likely a tax benefit will not be realized for a deferred tax asset. We record unrecognized tax benefit liabilities for
known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due.
Judgments and Uncertainties: Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. Changes in projected future earnings could affect the recorded valuation allowances in the future. Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax regulations across the tax jurisdictions where we operate. Our analysis of unrecognized tax benefits contains uncertainties based on judgment used to apply the more likely than not recognition and measurement thresholds.
Effect if Actual Results Differ From Assumptions: We do not believe there is a reasonable likelihood there will be a material
change in the tax related balances or valuation allowances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. To the extent we prevail in matters for which unrecognized tax benefit liabilities have been established, or are required to pay amounts in excess of our recorded unrecognized tax benefit liabilities, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and generally result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement would generally be recognized as a reduction in our effective tax rate in the period of resolution.
Defined benefit pension plans
Description: We sponsor six defined
benefit pension plans that provide retirement benefits to certain team members. We also participate in multi-employer plans that provide defined benefits to certain team members covered by collective bargaining agreements. Such plans are usually administered by a board of trustees composed of the management of the participating companies and labor representatives. We use independent third-party actuaries to assist us in determining our pension obligations and net periodic benefit cost. We and the actuaries review assumptions that include estimates of the present value of the projected future pension payment to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. We accumulate and amortize the effect of actuarial gains and losses over future periods. Net periodic benefit credit for the defined benefit pension plans was $103 million in fiscal 2020, primarily due to the termination
of two of our defined benefit pension plans during fiscal 2020. The projected benefit obligation was $269 million at the end of fiscal 2020. Unrecognized actuarial loss was $49 million at the end of fiscal 2020. We currently expect net periodic benefit cost for fiscal 2021 to be approximately $11 million. We expect to contribute approximately $13 million of cash to our pension plans in fiscal 2021. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements.
Judgments and Uncertainties: Our defined benefit pension plans contain uncertainties due to assumptions required and judgments used. The key assumptions used in developing the required estimates include such factors as discount rates, expected returns on plan assets, retirement rates, and mortality. These assumptions can have a material impact upon the funded
status and the net periodic benefit cost. The expected liquidation of certain plans has been considered along with these assumptions. The discount rates were determined using a cash flow matching technique whereby the rates of a yield curve, developed from high-quality debt securities, were applied to the benefit obligations to determine the appropriate discount rate. In determining the long-term rate of return on plan assets, we first examined historical rates of return for the various asset classes within the plans. We then determined a long-term projected rate-of-return based on expected returns. Investment, management and other fees paid out of plan assets are factored into the determination of asset return assumptions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality. It is reasonably likely that changes in external factors will result in changes to the assumptions used to measure pension
obligations and net periodic benefit cost in future periods.
19
The risks of participating in multi-employer plans are different from single-employer plans. The net pension cost of the multi-employer plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. Assets contributed to such plans are not segregated or otherwise restricted to provide benefits only to our team members. The future cost of these plans is dependent on a number of factors including the funded status of the plans and the ability of the other participating companies to meet ongoing funding obligations.
Effect if Actual
Results Differ From Assumptions: We have not made any material changes in the accounting methodology used to establish our pension obligations and net periodic benefit cost during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our pension obligations and net periodic benefit cost. However, if actual results are not consistent with our estimates or assumptions, they are accumulated and amortized over future periods and, therefore generally affect the net periodic benefit cost in future periods. A 1% change in the discount rate at October 3, 2020, would not have a significant impact on the projected benefit obligation or net periodic benefit cost. A 1% change in the return on plan assets at October 3, 2020, would not have a significant
impact on net periodic benefit cost. The sensitivities reflect the impact of changing one assumption at a time with the remaining assumptions held constant. Economic factors and conditions often affect multiple assumptions simultaneously and the effect of changes in assumptions are not necessarily linear.
Impairment of goodwill and indefinite life intangible assets
Description: Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, the fair value of the reporting unit may be more likely than not less than its carrying amount or if significant changes to macro-economic factors related to the reporting unit have occurred that could materially impact fair value, a quantitative goodwill impairment test would be required.
The quantitative test compares the fair value of a reporting unit with its carrying amount. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. Upon performing the quantitative test, if the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of goodwill.
For indefinite life intangible assets, a qualitative assessment can also be performed to determine whether the existence of events and circumstances indicates it is more likely than not an intangible asset is impaired. Similar to goodwill, we can also elect to forgo the qualitative test for indefinite life intangible assets and perform the quantitative test. Upon performing the quantitative test, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess.
We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and indefinite life intangible assets. However, we could be required to evaluate the recoverability of goodwill and indefinite life intangible assets outside of the required annual assessment if, among other things, we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of the business or a sustained decline in market capitalization.
Judgments and Uncertainties: We estimate the fair value of our reporting units considering the use of various valuation techniques, with the primary technique being an income approach (discounted cash flow method) and another technique being a market approach (guideline public company method), which use significant unobservable
inputs, or Level 3 inputs, as defined by the fair value hierarchy. We include assumptions about sales, operating margins, growth rates, discount rates and valuation multiples which consider our budgets, business plans, economic projections and marketplace data, and are believed to reflect market participant views which would exist in an exit transaction. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period. Generally, we utilize operating margin assumptions based on future expectations, operating margins historically realized in the reporting units’ industries and industry marketplace valuation multiples.
Our Domestic Chicken reporting unit had goodwill at October 3, 2020 of $3,266 million. We generally assumed operating margins in future years would normalize over time as we believe this is consistent with market
participant views in an exit transaction. Had we assumed future operating margins consistent with those realized in the current fiscal year, we would have failed the quantitative step of the annual impairment test, which may have resulted in a material goodwill impairment loss. The current year Domestic Chicken reporting unit results were not indicative of future market participant expectations in an exit transaction primarily due to unprecedented market disruptions and incremental costs associated with COVID-19, which impacts we expect to be mostly temporary in nature. To pass the first step of the annual impairment test in fiscal 2020, the Domestic Chicken reporting unit’s projected long-term operating margins, utilizing the discounted cash flow method, had to exceed 4% which has been achieved in each of the previous eight fiscal years. An increase in the discount rate of approximately 50 basis points would have caused the carrying value of the Domestic Chicken reporting
unit to exceed its discounted cash flows' fair value.
20
Our International reporting unit, which is presented in International/Other for segment presentation, had goodwill at October 3, 2020 of $392 million. We generally assumed operating margins in future years would increase as we continue to integrate recent acquisitions and implement our international growth strategy, as we believe this is consistent with market participant views in an exit transaction. Had we assumed future operating margins consistent with those realized in the current fiscal year, we would have failed the quantitative step of the annual impairment test, which may have resulted in a material goodwill impairment
loss. The majority of the International reporting unit, including all of its goodwill, originated from acquisitions in fiscal 2019 and fiscal 2018. We are still integrating the recent acquisitions and executing our international and global business strategy, in addition to managing through the temporary impacts of COVID-19. To pass the first step of the annual impairment test in fiscal 2020, the International reporting unit projected long-term operating margins, utilizing the discounted cash flow method, had to exceed 4%. An increase in the discount rate of approximately 150 basis points would have caused the carrying value of the International reporting unit to exceed its discounted cash flows' fair value.
The fair value of our indefinite life intangible assets is calculated principally using multi-period excess earnings and relief-from-royalty valuation approaches, which uses significant unobservable inputs, or Level 3 inputs, as defined
by the fair value hierarchy, and is believed to reflect market participant views which would exist in an exit transaction. 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.
Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions.
Effect if Actual Results Differ From Assumptions: We have not made material changes in the accounting methodology used to evaluate impairment of goodwill and intangible assets during the last three years. During fiscal 2020, 2019 and 2018, all of our material reporting units and indefinite life
intangible assets passed the impairment analysis.
Some of the inherent estimates and assumptions used in determining fair value of the reporting units and indefinite life intangible assets are outside the control of management, including interest rates, cost of capital, tax rates, market EBITDA comparables and credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units and indefinite life intangibles, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in material impairments of our goodwill.
All of our material reporting units’ estimated fair value exceeded their carrying value by more than 20% at the date of their most recent estimated fair value determination, other than the Domestic Chicken
reporting unit. Consequently, other than the Domestic Chicken reporting unit, we do not currently consider any of our other material reporting units at significant risk of impairment.
Our fiscal 2020, 2019, and 2018 indefinite life intangible assets impairment analyses did not result in an impairment charge. All indefinite life intangible assets’ estimated fair value exceeded their carrying value by more than 20% at the date of their most recent estimated fair value determination. Consequently, we do not currently consider any of our material indefinite life intangible assets at significant risk of impairment.
Impairment of long-lived assets and definite life intangibles
Description: Long-lived assets and definite life intangibles are evaluated for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable. Examples include a significant adverse change in the extent or manner in which we use the asset, a change in its physical condition, or an unexpected change in financial performance.
When evaluating long-lived assets and definite life intangibles for impairment, we compare the carrying value of the asset to the asset’s estimated undiscounted future cash flows. An impairment is indicated if the estimated future cash flows are less than the carrying value of the asset. For assets held for sale, we compare the carrying value of the disposal group to fair value. The impairment is the excess of the carrying value over the fair value of the asset.
We recorded impairment charges related to long-lived assets and definite life intangibles of $48 million, $94 million and $175 million, in fiscal 2020, 2019 and 2018, respectively.
Judgments
and Uncertainties: Our impairment analysis contains uncertainties due to judgment in assumptions, including useful lives and intended use of assets, observable market valuations, forecasted sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data that reflects the risk inherent in future cash flows to determine fair value.
21
Effect if Actual Results Differ From Assumptions: We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets or definite life intangibles during the last three fiscal years. We do
not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments or useful lives of long-lived assets or definite life intangibles. However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses that could be material. We periodically conduct projects to strategically evaluate optimization of such items as network capacity, manufacturing efficiencies and business technology. If we have a significant change in strategies, outlook, or a manner in which we plan to use these assets, we may be exposed to future impairments.
Business Combinations
Description: We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100%
of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
We use various models to determine the value of assets acquired and liabilities assumed such as net realizable value to value inventory, cost method and market approach to value property, relief-from-royalty and multi-period excess earnings to value intangibles and discounted cash flow to value goodwill.
For significant acquisitions we may use independent third-party valuation specialists to assist us in determining the fair value of assets acquired and liabilities assumed.
Judgments and Uncertainties: Significant judgment
is often required in estimating the fair value of assets acquired and liabilities assumed, particularly intangible assets. We make estimates and assumptions about projected future cash flows including sales, operating margins, attrition rates, growth rates, and discount rates based on historical results, business plans, expected synergies, perceived risk and marketplace data considering the perspective of marketplace participants.
Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may be considered to have indefinite useful lives.
Effect if Actual Results Differ From Assumptions: While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may
occur, which could affect the accuracy or validity of the estimates and assumptions, which could result in subsequent impairments. We had no material business combinations during fiscal 2020.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reclass
from Accumulated Other Comprehensive Income (Loss), Net of Tax (1)
i—
i—
(i13)
Balance
at end of year
i15,100
i13,655
i12,239
Accumulated
Other Comprehensive Income (Loss), Net of Tax:
Balance at beginning of year
(i117)
(i15)
i16
Other
Comprehensive Income (Loss)
(i62)
(i102)
(i44)
Reclass
to Retained Earnings (1)
i—
i—
i13
Balance
at end of year
(i179)
(i117)
(i15)
Treasury
Stock:
Balance at beginning of year
i82
(i4,011)
i82
(i3,943)
i80
(i3,674)
Purchase
of Class A common stock
i2
(i207)
i4
(i252)
i6
(i427)
Stock-based
compensation
(i1)
i73
(i4)
i184
(i4)
i158
Balance
at end of year
i83
(i4,145)
i82
(i4,011)
i82
(i3,943)
Total
Shareholders’ Equity Attributable to Tyson
$
i15,254
$
i13,950
$
i12,713
Equity
Attributable to Noncontrolling Interests:
Balance at beginning of year
$
i144
$
i8
$
i18
Net
income attributable to noncontrolling interests
i10
i13
i3
Distributions
to noncontrolling interest
(i13)
(i3)
(i3)
Business
combination and other
(i9)
i126
(i10)
Total
Equity Attributable to Noncontrolling Interests
$
i132
$
i144
$
i8
Total
Shareholders’ Equity
$
i15,386
$
i14,094
$
i12,721
(1)
Reclass from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax Act"), following adoption of the applicable new accounting standard for the fiscal year ended September 29, 2018.
Adjustments
to reconcile net income to cash provided by operating activities:
Depreciation
i900
i819
i723
Amortization
i292
i279
i220
Deferred
income taxes
i18
i77
(i874)
Gain
on dispositions of businesses
i—
(i17)
(i42)
Impairment
of assets
i48
i94
i175
Stock-based
compensation expense
i89
i77
i69
Other,
net
(i124)
(i20)
(i58)
(Increase)
decrease in accounts receivable
i191
(i226)
(i2)
(Increase)
decrease in inventories
i86
(i157)
(i144)
Increase
(decrease) in accounts payable
(i64)
(i55)
(i44)
Increase
(decrease) in income taxes payable/receivable
i62
(i254)
i111
Increase
(decrease) in interest payable
(i41)
i47
(i3)
Net
changes in other operating assets and liabilities
i346
(i144)
(i141)
Cash
Provided by Operating Activities
i3,874
i2,513
i2,963
Cash
Flows From Investing Activities:
Additions to property, plant and equipment
(i1,199)
(i1,259)
(i1,200)
Purchases
of marketable securities
(i105)
(i64)
(i42)
Proceeds
from sale of marketable securities
i87
i63
i37
Acquisitions,
net of cash acquired
i—
(i2,462)
(i1,474)
Proceeds
from sale of businesses
i29
i170
i797
Acquisition
of equity investments
(i183)
i—
i—
Other,
net
(i52)
i88
(i24)
Cash
Used for Investing Activities
(i1,423)
(i3,464)
(i1,906)
Cash
Flows From Financing Activities:
Proceeds from issuance of debt
i1,609
i4,634
i1,148
Payments
on debt
(i1,212)
(i3,208)
(i1,307)
Borrowings
on revolving credit facility
i1,210
i1,135
i1,755
Payments
on revolving credit facility
(i1,280)
(i1,065)
(i1,755)
Proceeds
from issuance of commercial paper
i14,272
i17,722
i21,024
Repayments
of commercial paper
(i15,271)
(i17,327)
(i21,197)
Purchases
of Tyson Class A common stock
(i207)
(i252)
(i427)
Dividends
(i601)
(i537)
(i431)
Stock
options exercised
i30
i99
i102
Other,
net
(i18)
(i30)
(i14)
Cash
Provided by (Used for) Financing Activities
(i1,468)
i1,171
(i1,102)
Effect
of Exchange Rate Change on Cash
(i1)
(i6)
(i3)
Increase
(decrease) in Cash and Cash Equivalents and Restricted Cash
i982
i214
(i48)
Cash
and Cash Equivalents and Restricted Cash at Beginning of Year
i484
i270
i318
Cash
and Cash Equivalents and Restricted Cash at End of Year
i1,466
i484
i270
Less:
Restricted Cash at End of Year
i46
i—
i—
Cash
and Cash Equivalents at End of Year
$
i1,420
$
i484
$
i270
See
accompanying notes.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TYSON FOODS, INC.
NOTE 1: iBUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
iDescription of Business: Tyson Foods, Inc. (collectively, “Company,”“we,”“us” or “our”), is one of the world's largest food companies and a recognized leader in protein. Founded in 1935 by John W. Tyson and grown under three generations of family leadership, the Company has a broad portfolio of products and brands including Tyson®, Jimmy Dean®, Hillshire Farm®, Ball Park®,
Wright®, Aidells®, ibp® and State Fair®. We innovate continually to make protein more sustainable, tailor food for everywhere it’s available and raise the world’s expectations for how much good food can do.
iConsolidation: The consolidated 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.
iFiscal Year: We utilize a 52- or 53-week accounting period ending on the Saturday closest to September 30. The Company’s accounting cycle resulted in a 53-week year for fiscal 2020 and a 52-week year for fiscal 2019 and fiscal 2018.
iCash
and Cash Equivalents: Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as part of our cash management activity. The carrying values of these assets approximate their fair values. We primarily utilize a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts where funds are moved to, and several zero-balance disbursement accounts for funding payroll, accounts payable, livestock procurement, livestock grower payments, etc. As a result of our cash management system, checks issued, but not presented to the banks for payment, may result in negative book cash balances. These negative book cash balances are included in accounts payable and other current liabilities. At October 3, 2020, and September 28,
2019, checks outstanding in excess of related book cash balances totaled approximately $i200 million.
iAccounts Receivable: We record
accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and relationships with and economic status of our customers. At October 3, 2020, and September 28, 2019, our allowance for uncollectible accounts was $i26
million and $i21 million, respectively. We generally do not have collateral for our receivables, but we do periodically evaluate the credit worthiness of our customers./
iInventories:
Processed products, livestock and supplies and other are valued at the lower of cost or net realizable value. Cost includes purchased raw materials, live purchase costs, livestock growout costs (primarily feed, livestock grower pay and catch and haul costs), labor and manufacturing and production overhead, which are related to the purchase and production of inventories. In fiscal 2020 and fiscal 2019, the cost of inventories was determined by either the first-in, first-out (“FIFO”) method or the weighted-average method. iThe following table reflects the
major components of inventory at October 3, 2020, and September 28, 2019 (in millions):
2020
2019
Processed products
$
i2,223
$
i2,362
Livestock(1)
i977
i971
Supplies
and other
i659
i596
Total
inventory
$
i3,859
$
i3,929
(1)
As of October 3, 2020 the Livestock amounts have changed from $1,262 million as originally reported to $977 million as revised and as of September 28, 2019 have changed from $1,150 million as originally reported to $971 million as revised as further discussed below in the section “Revision.”
i
Property, Plant and Equipment: Property, plant and equipment are stated at cost and generally depreciated on a straight-line method over the estimated lives for
buildings and leasehold improvements of i10 to i33 years, machinery and equipment of i3
to i12 years and land improvements and other of i3 to i20
years. Major repairs and maintenance costs that significantly extend the useful life of the related assets are capitalized. Normal repairs and maintenance costs are charged to operations.
We review the carrying value of long-lived assets at each balance sheet date if indication of impairment exists. Recoverability is assessed using undiscounted cash flows based on historical results and current projections of earnings before interest, taxes, depreciation and amortization. We measure impairment as the excess of carrying value over the fair value of an asset group. The fair value of an asset group is generally measured using discounted cash flows including market participant assumptions of future operating results and discount rates.
/
28
i
Goodwill
and Intangible Assets: Definite life intangibles are initially recorded at fair value and amortized over the estimated period of benefit. Brands and trademarks are generally amortized using the straight-line method over i20 years or less. Customer relationships and supply arrangements are generally amortized over i7
to i30 years based on the pattern of revenue expected to be generated from the use of the asset. The gross cost and accumulated amortization of intangible assets are removed when the recorded amounts are fully amortized and the asset is no longer in use or the contract has expired. Amortization expense is generally recognized in selling, general, and administrative expense. We review the carrying value of definite life intangibles at each balance sheet date if indication of impairment exists. Recoverability is assessed
using undiscounted cash flows based on historical results and current projections of earnings before interest, taxes, depreciation and amortization. We measure impairment as the excess of carrying value over the fair value of the definite life intangible asset. We use various valuation techniques to estimate fair value, with the primary techniques being discounted cash flows, relief-from-royalty and multi-period excess earnings valuation approaches, 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.
Goodwill and indefinite life intangible assets are initially recorded at fair value and not amortized, but are
reviewed for impairment at least annually or more frequently if impairment indicators arise. Our goodwill is allocated by reporting unit and is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, the fair value of the reporting unit may be more likely than not less than carrying amount, or if significant changes to macro-economic factors related to the reporting unit have occurred that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. The quantitative test is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value, an impairment loss is recognized
in an amount equal to that excess, not to exceed the carrying amount of goodwill.
We estimate the fair value of our reporting units considering the use of various valuation techniques, with the primary technique being an income approach (discounted cash flow method), with another technique being a market approach (guideline public company method), which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. We include assumptions about sales, operating margins, growth rates, discount rates and valuations multiples which consider our budgets, business plans, economic projections and marketplace data, and are believed to reflect market participant views which would exist in an exit transaction. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period. Generally, we utilize operating margin assumptions based on future expectations,
operating margins historically realized in the reporting units' industries and industry marketplace valuation multiples.
Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, market EBITDA comparables and credit ratings. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in additional material impairments of our goodwill.
During fiscal 2020, 2019 and 2018, we determined none of our material reporting units' fair values were below its carrying value. All of our material reporting units’ estimated fair value exceeded
their carrying value by more than i20% at the date of their most recent estimated fair value determination, other than the Domestic Chicken reporting unit, which had $i3,266
million of goodwill at October 3, 2020.
For our indefinite life intangible assets, a qualitative assessment can also be performed to determine whether the existence of events and circumstances indicates it is more likely than not an intangible asset is impaired. Similar to goodwill, we can also elect to forgo the qualitative test for indefinite life intangible assets and perform the quantitative test. Upon performing the quantitative test, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The fair value of our indefinite life intangible assets is calculated principally using multi-period excess earnings and relief-from-royalty valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy,
and is believed to reflect market participant views which would exist in an exit transaction. 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. During fiscal 2020, 2019 and 2018, we determined the fair value of each of our indefinite life intangible assets exceeded its carrying value. All of our indefinite life intangible assets’ estimated fair value exceeded their carrying value by more than i20%
at the date of their most recent estimated fair value determination.
/
29
i
Leases: We determine if an agreement is or contains a lease at its inception by evaluating if an identified asset exists that we control for a period of time. When a lease exists, we classify
it as a finance or operating lease and record a right-of-use (“ROU”) asset and a corresponding lease liability at lease commencement. We have elected to not record leases with a term of 12 months or less in our Consolidated Balance Sheets, and accordingly, lease expense for these short-term leases is recognized on a straight-line basis over the lease term. Finance lease assets are presented within Net Property, Plant and Equipment and finance lease liabilities are presented within Current and Long-Term Debt in our Consolidated Balance Sheets. Finance lease disclosures are omitted as they are deemed immaterial. Operating ROU assets are presented within Other Assets, and operating lease liabilities are recorded within Other current liabilities and Other Liabilities in our Consolidated Balance Sheets. Lease assets are subject to review for impairment within the related long-lived asset group.
ROU
assets are presented in our Consolidated Balance Sheets based on the present value of the corresponding liabilities and are adjusted for any prepayments, lease incentives received or initial direct costs incurred. The measurement of our ROU assets and liabilities includes all fixed payments and any variable payments based on an index or rate. Variable lease payments which do not depend on an index, or where rates are unknown, are excluded from lease payments in the measurement of the ROU asset and lease liability, and accordingly, are recognized as lease expense in the period the obligation for those payments is incurred. The present value of lease payments is based on our incremental borrowing rate according to the lease term and information available at the lease commencement date, as our lease arrangements generally do not provide an implicit interest rate. The incremental borrowing rate is derived using a hypothetically-collateralized borrowing cost, based on our
revolving credit facility, plus a country risk factor, where applicable. We consider our credit rating and the current economic environment in determining the collateralized rate.
Our lease arrangements can include fixed or variable non-lease components, such as common area maintenance, taxes and labor. We account for each lease and any non-lease components associated with that lease as a single lease component for all asset classes, except production and livestock grower asset classes embedded in service and supply agreements, and other asset classes that include significant maintenance or service components. We account for lease and non-lease components of an agreement separately based on relative stand-alone prices either observable or estimated if observable prices are not readily available. For asset classes where an election was made not to separate lease and non-lease components, all costs associated with a lease contract
are disclosed as lease costs. The accounting for some of the Company's leases may require significant judgment when determining whether a contract is or contains a lease, the lease term, and the likelihood of exercising renewal or termination options. Our leases can include options to extend or terminate use of the underlying assets. These options are included in the lease term used to determine ROU assets and corresponding liabilities when we are reasonably certain we will exercise the option. Additionally, certain leases can have residual value guarantees, which are included within our operating lease liabilities when considered probable. Our lease agreements do not include significant restrictions or covenants.
Recognition, measurement and presentation
of expenses and cash flows arising from a lease will depend on classification as a finance or operating lease. Operating lease expense is recognized on a straight-line basis over the lease term, whereas the amortization of finance lease assets is recognized on a straight-line basis over the shorter of the estimated useful life of the underlying asset or the lease term. Operating lease expense and finance lease amortization are presented in Cost of Sales or Selling, General and Administrative in our Consolidated Statements of Income depending on the nature of the leased item. Interest expense on finance lease obligations is recorded over the lease term and is presented in Interest expense, based on the effective interest method. All operating lease cash payments and interest on finance leases are presented within Net cash provided by operating activities and all finance lease principal payments are presented within Net cash used in financing activities
in our Consolidated Statements of Cash Flows.
i
Investments: We have investments in joint ventures and other entities. The equity method of accounting is used for entities in which we exercise significant influence but do not have a controlling interest or a variable interest in which we are the primary beneficiary. Investments not accounted for using the equity method do not have readily determinable fair values and do not qualify for the practical expedient to measure the investment using a net asset value per share. These investments are recorded using the measurement alternative
in which our equity interests are recorded at cost, less impairments, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer. At each reporting period, we assess if these investments continue to qualify for this measurement alternative. An impairment is recorded when there is evidence that the expected fair value of the investment has declined to below the recorded cost. Adjustments to the carrying value are recorded in Other, net in the Consolidated Statements of Income. Investments in joint ventures and other entities are reported in the Consolidated Balance Sheets in Other Assets.
We also have investments in marketable debt securities. We have determined all of our marketable debt securities are available-for-sale investments. These investments are reported at fair value based on quoted market prices as of the balance sheet date, with unrealized gains and losses,
net of tax, recorded in other comprehensive income.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is recorded in interest income. The cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of debt securities and declines in value judged to be other than temporary are recorded on a net basis in other income. Interest and dividends on securities classified as available-for-sale are recorded in interest income.
30
iAccrued
Self-Insurance: We use a combination of insurance and self-insurance mechanisms in an effort to mitigate the potential liabilities for health and welfare, workers’ compensation, auto liability and general liability risks. Liabilities associated with our risks retained are estimated, in part, by considering claims experience, demographic factors, severity factors and other actuarial assumptions.
iDefined
Benefit Plans: We recognize the funded status of defined pension and postretirement plans in the Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of the plan assets and the benefit obligation. We measure our plan assets and liabilities at the end of our fiscal year. For a defined benefit pension plan, the benefit obligation is the projected benefit obligation; for any other defined benefit postretirement plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. Any overfunded status is recognized as an asset and any underfunded status is recognized as a liability. Any transitional asset/liability, prior service cost or actuarial gain/loss that has not yet been recognized as a component of net periodic cost is recognized in accumulated other comprehensive income. Accumulated other comprehensive income will be adjusted as these
amounts are subsequently recognized as a component of net periodic benefit costs in future periods.
iDerivative Financial Instruments: We purchase certain commodities, such as grains and livestock in the course of normal operations. As part of our commodity risk management activities, we use derivative financial instruments, primarily futures and options, to reduce our exposure to various market risks related to these purchases, as well as to changes in foreign currency exchange and interest rates. Contract
terms of a financial instrument qualifying as a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts designated and highly effective at meeting risk reduction and correlation criteria are recorded using hedge accounting. 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) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is recognized immediately. Instruments we hold as part of our risk management activities that do not meet the criteria for hedge accounting are marked to fair value
with unrealized gains or losses reported currently in earnings. Changes in market value of derivatives used in our risk management activities relating to inputs of forward sales contracts are recorded in cost of sales. Changes in market value of derivatives used in our risk management activities surrounding inventories on hand or anticipated purchases of inventories are recorded in cost of sales. Changes in market value of derivatives used in our risk management activities related to interest rates are recorded in interest expense. Changes in the market value of derivatives used in our risk management activities related to foreign exchange contracts are recorded in other, net. We generally do not hedge anticipated transactions beyond i18
months.
iLitigation Reserves: There are a variety of legal proceedings pending or threatened against us. Accruals are recorded when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated based on current law, progress of each case, opinions and views of legal counsel and other advisers, our experience in similar matters and intended response to the litigation. These amounts, which are not discounted and are exclusive of claims against third parties, are adjusted periodically as assessment efforts progress or additional information becomes
available. We expense amounts for administering or litigating claims as incurred. Accruals for legal proceedings are included in Other current liabilities in the Consolidated Balance Sheets.
iRevenue Recognition: We recognize revenue mainly through retail, foodservice, international, industrial and other distribution channels. Our revenues primarily result from contracts with customers and are generally short term
in nature with the delivery of product as the single performance obligation. We recognize revenue for the sale of the product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon shipment or delivery to a customer based on terms of the sale. We elected to account for shipping and handling activities that occur after the customer has obtained control of the product as a fulfillment cost rather than an additional promised service. Our contracts are generally less than one year, and therefore we recognize costs paid to third party brokers to obtain contracts as expenses. Additionally, items that are not material in the context of the contract
are recognized as expense. Any taxes collected on behalf of government authorities are excluded from net revenues.
31
Revenue is measured by the transaction price, which is defined as the amount of consideration we expect to receive in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes consumer incentives, trade promotions, and allowances, such as coupons, discounts, rebates, volume-based incentives, cooperative advertising, and other programs. Variable consideration related to these programs is recorded as a reduction to revenue based on amounts we expect to pay. We base these estimates on current performance, historical utilization, and projected redemption rates
of each program. We review and update these estimates regularly until the incentives or product returns are realized and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established on a regular basis such that most customer arrangements and related incentives have a duration of less than one year. Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time is required before payments are due. Additionally, we do not grant payment financing terms greater than one year. Freight expense associated with products shipped to customers is recognized in cost of sales.
iAdvertising
Expenses: Advertising expense is charged to operations in the period incurred and is recorded as selling, general and administrative expense. Advertising expense totaled $i283 million, $i276
million and $i243 million in fiscal 2020, 2019 and 2018, respectively./
iResearch
and Development: Research and development costs are expensed as incurred. Research and development costs totaled $i98 million, $i97
million and $i114 million in fiscal 2020, 2019 and 2018, respectively./
i
Business
Combinations: We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributable to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses including transaction and integration costs are expensed as incurred.
We use various models to determine the value of assets acquired such as net realizable value to value inventory, cost method and market approach to value property, relief-from-royalty and multi-period excess earnings to value intangibles, and discounted cash flow to value goodwill. We make estimates and assumptions about projected future cash flows including sales, operating
margins, attrition rates, growth rates, and discount rates based on historical results, business plans, expected synergies, perceived risk, and market place data considering the perspective of marketplace participants. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may be considered to have indefinite useful lives.
iUse of Estimates: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require us to
make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Risks and Uncertainties: We have considered the impact of the global novel coronavirus pandemic (“COVID-19” or “pandemic”) on our consolidated financial statements. In addition to the COVID-19 impacts already experienced, there likely will be future impacts, the extent of which is uncertain and largely subject to whether the severity worsens or duration lengthens. These impacts could include but may not be limited to risks and uncertainty related to worker availability, our ability to operate production facilities, demand-driven production facility idling, shifts in demand between sales channels and market volatility in our supply chain. Consequently, this may subject us to future risk of material goodwill,
intangible and long-lived asset impairments, increased reserves for uncollectible accounts, and adjustments for inventory and market volatility for items subject to fair value measurements such as derivatives and investments.
Revision: Subsequent to the filing of the Original Form 10-K on November 16, 2020, the Company discovered information that led to an internal investigation relating to one of its cattle suppliers and determined that this supplier made misrepresentations regarding the number of cattle the supplier purchased on behalf of the Company’s Beef segment. Based upon the recently completed investigation, the
Company determined that the misappropriation of Company funds by the supplier caused the Company to overstate live cattle inventory for fiscal years and interim periods from 2017 through 2020. The resulting loss to the Company and related inventory misstatement is isolated to the Beef segment and is attributable solely to this cattle supplier. The Company concluded that the misrepresentations regarding live cattle inventory did not have a material impact on the Company’s previously issued annual and interim period consolidated financial statements. However, the
Company determined it necessary to revise the accompanying consolidated annual financial statements to correct the misstatement in the periods impacted. The applicable notes to the accompanying financial statements have also been revised to correct for these misstatements. Refer to Note 22: Quarterly Financial Data (Unaudited) for the impact of the misstatements and resulting revision on our unaudited interim quarterly financial information.
32
i
The
following tables reflect the impact of this revision on our consolidated financial statements as of and for the fiscal years indicated:
(a)
Beginning Retained Earnings for the fiscal year ended September 28, 2019 was revised from $i12,329 million to $i12,239 million
to reflect the $90 million misappropriation and resulting overstatement of live cattle inventory that originated prior to fiscal 2019, including $36 million which originated prior to fiscal 2018.
33
i
Recently Issued Accounting Pronouncements:
In August 2020, the Financial Accounting Standards Board (“FASB”) issued guidance that simplifies the accounting for debt
with conversion options, revises the criteria for applying the derivative scope exception for contracts in an entity’s own equity, and improves the consistency for the calculation of earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2021, our fiscal 2023. Early adoption is permitted for annual periods and interim periods within those annual periods beginning after December 15, 2020, our fiscal 2022. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In March 2020, the FASB issued guidance providing optional expedients and exceptions to account for the
effects of reference rate reform to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance, which became effective on March 12, 2020 and can be applied through December 21, 2022, has not impacted our consolidated financial statements. The Company has various contracts that reference LIBOR and is assessing how this standard may be applied to specific contract modifications through December
31, 2022.
In December 2019, the FASB issued guidance that simplifies the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and clarifies other general principles by adding certain requirements to Topic 740. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2020, our fiscal 2022. Early adoption is permitted for periods for which financial statements have not yet been issued, beginning our fiscal 2020. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. The application of the guidance requires various transition methods
depending on the specific amendment. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In June 2016, the FASB issued guidance that provides more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2019, our fiscal 2021. We will adopt this guidance using the modified retrospective and prospective transition methods beginning in the first quarter of fiscal 2021. We do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.
NOTE
2: iCHANGES IN ACCOUNTING PRINCIPLES
In August 2017, the FASB issued guidance that eases certain documentation and assessment requirements of hedge effectiveness and modifies the accounting for components excluded from the assessment. Some of the modifications included the ineffectiveness of derivative gain/loss in highly effective cash flow hedges to be recorded in Other Comprehensive Income, alignment of the recognition and presentation of the effects
related to the hedging instrument and hedged item in the financial statements, and additional disclosures required on the cumulative basis adjustment in fair value hedges and the effect of hedging on financial statement lines for components excluded from the assessment. The amendment also simplified the application of hedge accounting in certain situations to permit new hedging strategies to be eligible for hedge accounting. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. We adopted this guidance in the first quarter of fiscal 2020 using the modified retrospective transition approach, and it did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance that created new accounting and reporting guidelines for
leasing arrangements. The guidance requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on classification as a finance or operating lease. The guidance also requires qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. We adopted this guidance in the first quarter of fiscal 2020 using the optional transition method that allows for a cumulative-effect adjustment in the period of adoption with no restatement of prior periods. We have elected the package of practical expedients available under the transition guidance which allows
us to not reassess prior conclusions related to lease classifications, existing contracts containing leases, and initial direct costs, as well as the practical expedient that allows the continued historical treatment of land easements. We did not elect the practical expedient for the use of hindsight in evaluating the expected lease term of existing leases. The adoption resulted in the recording of operating lease assets and operating lease liabilities of $i549
million and $i546 million, respectively, as of September 29, 2019, with no changes to our finance leases. The difference between the additional lease assets and lease liabilities, represents existing deferred rent and prepaid lease balances that were reclassified on the balance sheet. The adoption did not have a material impact on our Consolidated Statements of Income or our Consolidated Statements of Cash Flows. For further description of our lease policy refer to Note 1: Business and Summary of Significant
Accounting Policies, and for quantitative lease information refer to Note 6: Leases.
34
NOTE 3: iACQUISITIONS AND DISPOSITIONS
Acquisitions
On
June 3, 2019, we acquired the Thai and European operations of BRF S.A. (“Thai and European operations”) for $i326 million, net of cash acquired, subject to certain adjustments, as a part of our growth strategy to expand offerings of value-added protein in global markets. Its results, subsequent to the acquisition closing, are included in International/Other for segment presentation. The purchase price allocation included $i262
million of net working capital, including $i56 million of cash acquired, $i89
million of Property, Plant and Equipment, $i47 million of Goodwill, $i23
million of Intangible Assets, $i24 million of Other Liabilities, $i8
million of Deferred Income Taxes and $i7 million of Noncontrolling Interest. Intangible Assets included customer relationships which will be amortized over a life of i7
years. We do not expect the goodwill to be deductible for income tax purposes. During fiscal 2020, we recorded measurement period adjustments, which increased Goodwill by $i46 million, including a reduction to net working capital of $i45
million, a reduction to Property, Plant and Equipment of $i4 million, and a decrease in Deferred Income Taxes of $i3
million.
On November 30, 2018, we acquired all of the outstanding common stock of MFG (USA) Holdings, Inc. and McKey Luxembourg Holdings S.à.r.l. (“Keystone Foods”) from Marfrig Global Foods (“Marfrig”) for $i2.3 billion in cash, subject to certain adjustments. The acquisition was accounted for using the acquisition method of accounting and the results of Keystone Foods' domestic and international results, subsequent
to the acquisition closing, are included in our Chicken segment and International/Other, respectively.
i
The following table summarizes the purchase price allocation for Keystone Foods and fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Cash
and cash equivalents
$
i186
Accounts receivable
i106
Inventories
i257
Other
current assets
i34
Property, Plant and Equipment
i676
Goodwill
i1,120
Intangible
Assets
i659
Other Assets
i28
Current
debt
(i73)
Accounts payable
(i208)
Other
current liabilities
(i99)
Long-Term Debt
(i113)
Deferred
Income Taxes
(i177)
Other Liabilities
(i8)
Noncontrolling
Interests
(i122)
Net assets acquired
$
i2,266
/
The
fair value of identifiable intangible assets primarily consisted of customer relationships with a weighted average life of i25 years. As a result of the acquisition, we recognized a total of $i1,120
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. We allocated goodwill to our segments using the acquisition method approach. This resulted in $i779 million and $i341
million of goodwill allocated to our Chicken segment and International/Other, respectively. We do not expect the goodwill to be deductible for income tax purposes.
We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow, relief-from-royalty, market pricing multiple and multi-period excess earnings valuation approaches, 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, attrition rates, royalty rates, EBITDA multiples, and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.
35
On
August 20, 2018, we acquired the assets of American Proteins, Inc. and AMPRO Products, Inc. (“American Proteins”), a poultry rendering and blending operation for $i864 million, as part of our strategic expansion and sustainability initiatives. Its results, subsequent to the acquisition closing, are included in our Chicken segment. The purchase price allocation included $i56
million of net working capital, $i152 million of Property, Plant and Equipment, $i361
million of Intangible Assets, $i308 million of Goodwill, and $i13
million of Other liabilities. Intangible Assets primarily included $i310 million assigned to supply network which will be amortized over i14 years and $i51
million assigned to customer relationships which will be amortized over a weighted average of i12 years. All of the goodwill acquired is amortizable for tax purposes. During fiscal 2019, we settled the net-working capital purchase price adjustment reducing the purchase price by $i2
million and recorded measurement period adjustments which increased goodwill by $i66 million, including a reduction to net working capital of $i15
million, a reduction to Property, Plant and Equipment of $i3 million, and a reduction to intangible assets of $i50
million.
On June 4, 2018, we acquired Tecumseh Poultry, LLC (“Tecumseh”), a vertically integrated value-added protein business for $i382 million, net of cash acquired, as part of our strategy to grow in the high quality, branded poultry market. Its results, subsequent to the acquisition closing, are included in our Chicken segment. The purchase price allocation included $i13
million of net working capital, including $i1 million of cash acquired, $i49
million of Property, Plant and Equipment, $i227 million of Intangible Assets and $i94
million of Goodwill. Intangible Assets included $i193 million assigned to brands and trademarks which will be amortized over i20 years. All of the goodwill acquired is amortizable
for tax purposes.
On November 10, 2017, we acquired Original Philly Holdings, Inc. (“Original Philly”), a value-added protein business, for $i226 million, net of cash acquired, as part of our strategic expansion initiative. Its results, subsequent to the acquisition closing, are included in our Prepared Foods and Chicken segments. The purchase price allocation included $i21
million of net working capital, including $i10 million of cash acquired, $i13
million of Property, Plant and Equipment, $i90 million of Intangible Assets and $i111
million of Goodwill. We allocated $i82 million and $i29 million of goodwill to our Prepared Foods and Chicken segments, respectively, using the acquisition method approach. All of the goodwill acquired is amortizable for tax purposes.
On
January 15, 2020, we acquired a i40% minority interest in a vertically-integrated Brazilian poultry producer for $i122
million. On February 7, 2020, we acquired a i50% interest in a joint venture serving the worldwide fats and oils market for $i61
million. We are accounting for both of these investments under the equity method.
Dispositions
On April 24, 2017, we announced our intent to sell three non-protein businesses as part of our strategic focus on protein brands. These businesses, which were all part of our Prepared Foods segment, included Sara Lee® Frozen Bakery, Kettle and Van’s® and produce items such as frozen desserts, waffles, snack bars, and soups, sauces and sides. The sale also included the Chef Pierre®, Bistro Collection®, Kettle Collection™, and Van’s® brands, a license to use the Sara Lee® brand in various channels, as well as our Tarboro, North Carolina, Fort Worth, Texas, and Traverse City, Michigan, prepared foods facilities.
We completed the sale of our Kettle business on December
30, 2017, and received net proceeds of $i125 million including a working capital adjustment. As a result of the sale, we recorded a pretax gain of $i22
million, which is reflected in Cost of Sales in our Consolidated Statement of Income for our fiscal 2018. We utilized the net proceeds to pay down term loan debt.
We completed the sale of our Sara Lee® Frozen Bakery and Van’s® businesses on July 30, 2018 for $i623 million including a working capital adjustment. As a result of the sale, we recorded a pretax gain of $i11
million, which is reflected in Cost of Sales in our Consolidated Statement of Income for our fiscal 2018. We utilized the net proceeds to repay commercial paper.
Previously in fiscal 2018, we recorded a pretax impairment charge for these businesses of $i101 million due to revised estimates of the businesses' fair value based on expected net sales proceeds at the time of the impairment. This charge was recorded in Cost of Sales in our Consolidated Statement of Income, and primarily consisted of goodwill previously classified within
assets held for sale.
In the first quarter of fiscal 2018, we made the decision to sell TNT Crust, our pizza crust business, which was also included in our Prepared Foods segment, as part of our strategic focus on protein brands. We completed the sale of this business on September 2, 2018, for $i57 million net of adjustments. As a result of the sale, we recorded a pretax gain of $i9
million, which is reflected in Cost of Sales in our Consolidated Statement of Income for our fiscal 2018. We utilized the net proceeds to repay commercial paper.
We completed the sale of a chicken further processing facility acquired during the Keystone Foods acquisition on August 31, 2019 for $i170 million net proceeds, which did not result in a significant gain or loss.
36
NOTE
4: iPROPERTY, PLANT AND EQUIPMENT
iThe following table reflects major categories of property, plant and equipment and accumulated depreciation at October 3,
2020, and September 28, 2019 (in millions):
2020
2019
Land
$
i196
$
i198
Building
and leasehold improvements
i4,961
i4,747
Machinery
and equipment
i9,013
i8,607
Land
improvements and other
i420
i385
Buildings
and equipment under construction
i991
i713
i15,581
i14,650
Less
accumulated depreciation
i7,985
i7,368
Net
property, plant and equipment
$
i7,596
$
i7,282
/
Approximately
$i1,102 million will be necessary to complete buildings and equipment under construction at October 3, 2020.
NOTE 5: iGOODWILL
AND INTANGIBLE ASSETS
i
The following table reflects goodwill activity for fiscal 2020 and 2019 (in millions):
Amortization
expense of $i278 million, $i267 million and $i210
million was recognized during fiscal 2020, 2019 and 2018, respectively. We estimate amortization expense on intangible assets for the next five fiscal years subsequent to October 3, 2020, will be: 2021 - $i261 million; 2022 - $i247
million; 2023 - $i228 million; 2024 - $i223
million; 2025 - $i214 million.
NOTE 6: iLEASES
We
lease certain equipment, buildings and land related to transportation, distribution, storage, production, livestock grower assets and office activities. These lease arrangements can be structured as a standard lease agreement or embedded in a service or supply agreement and are primarily classified as operating leases. For further description of our lease accounting policy, refer to Note 1: Business and Summary of Significant Accounting Policies. iOperating lease ROU assets and liabilities presented
in our Consolidated Balance Sheets were as follows (in millions):
Operating cash outflows from operating leases (in millions)
$
i211
ROU assets obtained in exchange for new operating lease liabilities (in millions)
$
i167
Weighted-average
remaining lease term
i5 years
Weighted-average discount rate
i3
%
/
38
i
At
October 3, 2020, future maturities of operating leases were as follows (in millions):
Operating Lease Commitments
2021
$
i173
2022
i129
2023
i88
2024
i64
2025
i45
2026
and beyond
i63
Total undiscounted operating lease payments
$
i562
Less:
Imputed interest
i33
Present value of total operating lease liabilities
$
i529
/
At
October 3, 2020, our leases that had not yet commenced were not significant.
Prior Year Lease Disclosures
The following pertains to previously disclosed information set forth in the Company's 2019 Form 10-K, Part II, Item 8, Notes to the Consolidated Financial Statements, Note 20: Commitments and Contingencies.
We lease equipment, properties and certain farms for which total rentals approximated $i220
million and $i200 million, in fiscal 2019 and 2018, respectively. Most leases have initial terms of up to seven years, some with varying renewal periods. iMinimum
lease commitments under non-cancelable leases at September 28, 2019 were (in millions):
Operating Lease Commitments
2020
$
i159
2021
i113
2022
i74
2023
i49
2024
i40
2025
and beyond
i54
Total
$
i489
We
enter into agreements with livestock growers that can have fixed and variable payment structures, but are generally cancelable and based on flocks placed with growers. iLivestock grower fixed or estimable non-cancelable commitments at September 28, 2019 were (in millions):
Livestock
Grower Commitments
2020
$
i253
2021
i131
2022
i86
2023
i58
2024
i49
2025
and beyond
i122
Total
$
i699
NOTE
7: iRESTRUCTURING AND RELATED CHARGES
In the first quarter of fiscal 2020, the Company approved a restructuring program (the “2020 Program”), which is expected to contribute to the Company’s overall strategy of financial fitness through the elimination of overhead and consolidation of certain enterprise functions. In
the fourth quarter of fiscal 2020, the Company extended the 2020 Program as it identified additional opportunities to eliminate overhead by optimizing organizational structures and other activities. We have recognized $i60 million of cumulative pretax charges in fiscal 2020 associated with the 2020 Program consisting of severance and employee related costs. As part of the 2020 Program, we are eliminating positions across several areas and job levels, with
eliminated positions originating from the corporate offices in Springdale, Arkansas and Chicago, Illinois, as well as certain production facility and supply chain administrative positions. The majority of the positions have already been or are expected to be eliminated by the end of fiscal 2021.
39
In the fourth quarter of fiscal 2017, our Board of Directors approved a multi-year restructuring program (the “2017 Program”), which contributed to the Company’s overall strategy of financial fitness through increased operational effectiveness and overhead reduction. The 2017 Program resulted in cumulative pretax charges of $i267
million which consisted of $i117 million incremental costs to implement new technology and accelerated depreciation of technology assets, $i53
million severance and employee related costs, $i72 million technology impairment, and $i25
million for contract termination costs. The 2017 Program concluded in fiscal 2020.
We recognized restructuring and related charges of $i77 million during fiscal 2020, consisting of $i60
million of severance and team member related costs from the 2020 Program and $i17 million of incremental costs to implement new technology from the 2017 Program. For fiscal 2020, we recorded $i17
million in Cost of Sales from the 2020 Program, and we recorded $i60 million in Selling, General and Administrative in our Consolidated Statements of Income, of which $i43
million is related to the 2020 Program and $i17 million is related to the 2017 Program.
For fiscal 2019 and 2018 the restructuring and related charges related to the 2017 Program consisted of $i41
million and $i59 million, respectively, of incremental costs to implement new technology and accelerated depreciation of technology assets. These costs were recorded in Selling, General and Administrative in our Consolidated Statements of Income.
i
The
following table reflects the pretax impact of restructuring and related charges during fiscal 2020, 2019 and 2018 and the charges to date, by reportable segment (in millions):
2018
2019
2020
Total charges to date
Beef
$
i4
$
i1
$
i9
$
i22
Pork
i1
i1
i3
i8
Chicken
i30
i21
i34
i141
Prepared
Foods
i24
i18
i28
i152
International/Other
i—
i—
i3
i4
Total
restructuring and related charges, pretax
$
i59
$
i41
$
i77
$
i327
/
We
do not anticipate future costs of the 2020 Program to be significant, however, as the Company continues to evaluate its business strategies and long-term growth targets, additional restructuring activities may occur.
Our restructuring liability was $i37 million at October 3, 2020 and we had ino restructuring
liability at September 28, 2019. The change in the restructuring liability was due to additional charges of $i77 million, net of $i40
million primarily consisting of payments, during fiscal 2020.
Term loan facility due March 2022 (1.69% at October 3, 2020)
i1,500
i—
Other
i216
i216
Unamortized
debt issuance costs
(i60)
(i65)
Total
debt
i11,339
i11,932
Less
current debt
i548
i2,102
Total long-term
debt
$
i10,791
$
i9,830
/
Annual maturities of debt for the five fiscal years subsequent to October 3, 2020 are: 2021 - $i550 million; 2022 - $i2,543
million; 2023 - $i431 million; 2024 - $i1,269
million; 2025 - $i12 million.
Revolving Credit Facility and Letters of Credit
We have a $i1.75
billion revolving credit facility that supports short-term funding needs and serves as a backstop to our commercial paper program. The facility will mature and the commitments thereunder will terminate in March 2023. Amounts available for borrowing under this facility totaled $i1.75 billion at October 3, 2020. At October 3, 2020, we had ino
borrowings and ino outstanding letters of credit issued under this facility. At October 3, 2020 we had $i101
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 other legal obligations. In the future, if any of our subsidiaries shall guarantee any of our material indebtedness, such subsidiary shall be required to guarantee the indebtedness, obligations and liabilities under this facility.
Commercial Paper Program
We have a commercial paper program under which we may issue unsecured short-term promissory notes (“commercial paper”) up to an aggregate maximum principal amount of $i1
billion. As of October 3, 2020, we had ino commercial paper outstanding. On April 1, 2020, we repaid the outstanding balance of the commercial paper using proceeds from the Term Loan Facility due March 2022.Our ability to access commercial paper in the future may be limited or its costs increased, due to market conditions which have been impacted in part by COVID-19.
41
2020
Notes
During fiscal 2020, we extinguished the $i350 million outstanding balance of the senior notes due June 2020, the $i400
million outstanding balance of the senior notes due August 2020 and the $i278 million outstanding balance of the senior notes due September 2020 using cash on hand and other liquidity sources.
Term Loan Facility due March 2022
On March 27, 2020, we executed a new $i1.5
billion term loan facility to refinance our commercial paper program, repay outstanding balances under our revolving credit facility and for general liquidity purposes. The term loan facility expires on March 27, 2022 and is subject to prepayment under certain conditions. Additionally, the term loan facility contains covenants that are similar to those contained in the revolving credit facility.
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 October 3, 2020.
NOTE 9: iEQUITY
Capital Stock
We have itwo classes of capital stock, Class A Common stock, $i0.10
par value (“Class A stock”) and Class B Common Stock, $i0.10 par value (“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 i10
votes per share, while holders of Class A stock are entitled to ione vote per share on matters submitted to shareholders for approval. As of October 3, 2020, Tyson Limited Partnership (the “TLP”) owned i99.985%
of the outstanding shares of Class B stock and the TLP and members of the Tyson family owned, in the aggregate, i2.23% of the outstanding shares of Class A stock, giving them, collectively, control of approximately i71.06% of the
total voting power of the outstanding voting stock.
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 for each class of stock, plus the amount of allocated undistributed earnings (losses) computed using the participation percentage, which reflects the dividend rights of each class of stock. Basic earnings per share were 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 were computed assuming the conversion of the Class B shares into Class A shares as of the beginning of each period.
Dividends
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 i90% of the cash dividend simultaneously paid to holders of Class A stock. We pay quarterly cash dividends to Class A and Class B shareholders. We paid Class A dividends per share of $i1.68,
$i1.50, and $i1.20 in fiscal 2020, 2019, and 2018, respectively. We paid Class B dividends per share of $i1.51,
$i1.35, and $i1.08 in fiscal 2020, 2019, and 2018, respectively. Effective November 13, 2020, the Board of Directors
increased the quarterly dividend previously declared on August 6, 2020, to $i0.445 per share on our Class A stock and $i0.4005
per share on our Class B stock. The increased quarterly dividend is payable on December 15, 2020, to shareholders of record at the close of business on December 1, 2020.
Share Repurchases
As of October 3, 2020, i18.9 million shares remained available
for repurchase under the Company's share repurchase program. The 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.
42
iA
summary of cumulative share repurchases of our Class A stock for fiscal 2020, 2019 and 2018 is as follows (in millions):
To
fund certain obligations under equity compensation plans
i0.7
i57
i1.4
i102
i1.0
i77
Total
share repurchases
i2.5
$
i207
i3.7
$
i252
i5.9
$
i427
/
NOTE
10: iINCOME TAXES
iDetail of the provision (benefit) for income taxes from continuing operations consists of the following (in millions):
2020
2019
2018
Federal
$
i477
$
i314
$
(i431)
State
i98
i38
i114
Foreign
i18
i29
i26
$
i593
$
i381
$
(i291)
Current
$
i575
$
i304
$
i583
Deferred
i18
i77
(i874)
$
i593
$
i381
$
(i291)
/
iThe
reasons for the difference between the statutory federal income tax rate and our effective income tax rate from continuing operations are as follows:
2020
2019
2018
Federal income tax rate
i21.0
%
i21.0
%
i24.5
%
State
income taxes
i2.9
i2.8
i3.2
Unrecognized
tax benefits, net
(i0.1)
(i6.7)
(i0.1)
Impact
of the Tax Act
i—
i—
(i38.4)
Domestic
production deduction
i—
i—
(i1.7)
Impairment
and sale of non-protein businesses
i—
i—
i3.2
Other
(i1.5)
(i1.0)
(i1.5)
i22.3
%
i16.1
%
(i10.8)
%
/
During
fiscal 2020, state tax expense, net of federal benefit, was $i78 million.
During fiscal 2019, changes in unrecognized tax benefits decreased tax expense by $i160
million, and state tax expense, excluding changes in unrecognized tax benefits and net of federal tax benefit, was $i66 million.
During fiscal 2018, the domestic production deduction decreased tax expense by $i46
million, and state tax expense, net of federal tax benefit, was $i86 million. The change in federal tax rate from the Tax Act resulted in a tax benefit of $i996
million related to deferred tax remeasurement. Additionally, favorable timing differences deductible in fiscal 2018 at the i24.5% blended tax rate but reversing in future years at i21%
resulted in a $i33 million tax benefit. The impacts of the non-deductible impairment and sale of certain assets in our non-protein businesses increased the effective tax rate by i3.2%.
Approximately
$i2,605 million, $i2,275
million and $i2,637 million of income from continuing operations before income taxes for fiscal 2020, 2019 and 2018, respectively, were from our operations based in the United States.
On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act made significant changes to the U.S. tax code including, but not limited to, (1) reducing the corporate federal income tax rate from 35%
to 21% effective January 1, 2018, (2) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (3) the repeal of the domestic production activity deduction beginning with our fiscal 2019, and (4) new provisions designed to tax global intangible low-taxed income and to allow a deduction for foreign-derived intangible income beginning with our fiscal 2019.
43
Under generally accepted accounting principles (“U.S. GAAP”), specifically ASC Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized
in the period in which the law is enacted, or December 22, 2017, for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were remeasured based upon the new tax rates. The change in deferred taxes was recorded as an adjustment to our fiscal 2018 deferred tax provision.
We recognize deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
iThe tax effects of major items recorded as deferred tax assets and liabilities as of October 3, 2020, and September 28, 2019, are as follows (in millions):
2020
2019
Assets
Liabilities
Assets
Liabilities
Property,
plant and equipment
$
i—
$
i923
$
i—
$
i891
Intangible
assets
i—
i1,591
i—
i1,624
ROU
assets
i—
i154
i—
i—
Accrued
expenses
i341
i—
i297
i—
Lease
liabilities
i129
i—
i—
i—
Net
operating loss and other carryforwards
i137
—
i99
—
Other
i149
i265
i131
i231
$
i756
$
i2,933
$
i527
$
i2,746
Valuation
allowance
$
(i127)
$
(i86)
Net
deferred tax liability
$
i2,304
$
i2,305
/
At
October 3, 2020, our gross state tax net operating loss carryforwards approximated $i799 million, of which $i747 million expire
in fiscal years 2021 through 2039, and the remainder has no expiration. Gross foreign net operating loss carryforwards approximated $i238 million, of which $i104 million expire
in fiscal years 2021 through 2032, and the remainder has no expiration. We also have tax credit carryforwards of approximately $i48 million, of which $i46 million expire
in fiscal years 2021 through 2034, and the remainder has no expiration.
We have accumulated undistributed earnings of foreign subsidiaries aggregating approximately $i318 million and $i252
million at October 3, 2020, and September 28, 2019, respectively. The Tax Act generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries after December 31, 2017. As a result, our intention is that excess cash held by our foreign subsidiaries that is not subject to regulatory restrictions will be repatriated net of applicable withholding taxes which are expected to be immaterial. The remainder of accumulated undistributed earnings are expected to be indefinitely reinvested outside of the United States. If these earnings were distributed in the form of dividends or otherwise, we could be subject to state income taxes
and withholding taxes payable to various foreign countries. Due to the uncertainty of the manner in which the undistributed earnings would be brought back to the United States and the tax laws in effect at that time, it is not currently practicable to estimate the tax liability that might be payable on the repatriation of these foreign earnings; however, we do not expect any tax due to be material.
Reductions
related to expirations of statutes of limitations
(i18)
(i154)
(i9)
Balance
as of the end of the year
$
i165
$
i169
$
i308
/
The
amount of unrecognized tax benefits, if recognized, that would impact our effective tax rate was $i118 million at October 3, 2020 and $i116
million at September 28, 2019. We classify interest and penalties on unrecognized tax benefits as income tax expense. At October 3, 2020, and September 28, 2019, before tax benefits, we had $i51 million and $i46
million, respectively, of accrued interest and penalties on unrecognized tax benefits.
44
As of October 3, 2020, certain United States federal income tax returns are subject to examination for fiscal years 2013 through 2019. We are also subject to income tax examinations by major state and foreign jurisdictions for fiscal years 2015 through 2019. We do not expect material changes to our unrecognized tax benefits during the next twelve months.
NOTE 11: iOTHER
INCOME AND CHARGES
During fiscal 2019, we recognized $i48 million of net periodic pension and postretirement benefit cost, excluding the service cost component, and pension plan settlements which were recorded in the Consolidated Statements of Income in Other, net. We recognized $i20
million of equity earnings in joint ventures which was also recorded in the Consolidated Statements of Income in Other, net. Additionally, we sold an investment for $i79 million in net proceeds resulting in a pretax gain of $i55
million, which was recorded in the Consolidated Statements of Income in Other, net.
During fiscal 2018, we recognized a one-time cash bonus to our hourly frontline team members of $i109 million using incremental cash savings from the Tax Act, which was predominantly recorded in the Consolidated Statements of Income in Cost of Sales. Additionally, we recorded $i11
million of insurance proceeds, $i21 million of equity earnings in joint ventures and $i1 million in
net foreign currency exchange gains, which were recognized in the Consolidated Statements of Income in Other, net.
Additionally, in accordance with recently adopted accounting guidance, we have retrospectively recognized $i23 million of net periodic pension and postretirement benefit credit, excluding the service cost component for fiscal 2018, and recorded the amount in the Consolidated Statements of Income in Other, net.
45
NOTE
12: iEARNINGS PER SHARE
iThe earnings and weighted average common shares used in the computation of basic and diluted earnings per share are as follows:
in millions, except per share data
2020
2019
2018
Numerator:
Net
income
$
i2,071
$
i1,993
$
i2,973
Less:
Net income attributable to noncontrolling interests
i10
i13
i3
Net
income attributable to Tyson
i2,061
i1,980
i2,970
Less
dividends declared:
Class A
i508
i465
i378
Class
B
i108
i99
i80
Undistributed
earnings
$
i1,445
$
i1,416
$
i2,512
Class A
undistributed earnings
$
i1,189
$
i1,166
$
i2,070
Class
B undistributed earnings
i256
i250
i442
Total
undistributed earnings
$
i1,445
$
i1,416
$
i2,512
Denominator:
Denominator
for basic earnings per share:
Class A weighted average shares
i293
i293
i295
Class
B weighted average shares, and shares under if-converted method for diluted earnings per share
i70
i70
i70
Effect
of dilutive securities:
Stock options and restricted stock
i2
i3
i4
Denominator
for diluted earnings per share – adjusted weighted average shares and assumed conversions
i365
i366
i369
Net
Income Per Share Attributable to Tyson:
Class A Basic
$
i5.79
$
i5.56
$
i8.29
Class
B Basic
$
i5.21
$
i4.99
$
i7.46
Diluted
$
i5.64
$
i5.40
$
i8.04
Dividends
Declared Per Share:
Class A
$
i1.725
$
i1.575
$
i1.275
Class
B
$
i1.553
$
i1.418
$
i1.148
/
Approximately
i2 million of our stock-based compensation shares were antidilutive for fiscal 2020 and approximately i1
million for fiscal 2019 and 2018. These shares were not included in the dilutive earnings per share calculation.
We have itwo 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 i90%
of the cash dividends paid to holders of Class A stock.
We allocate undistributed earnings based upon a i1 to i0.9
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.
46
NOTE 13: iDERIVATIVE
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 to reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Our risk management programs are periodically reviewed by our Board of Directors' Audit Committee. These programs and risks are monitored by senior management and may be revised as market conditions dictate. Our current risk management programs utilize various industry-standard models that take into account the implicit cost of hedging. Credit risks associated with our derivative contracts are not significant as we minimize counterparty exposure by dealing with credit-worthy
counterparties and utilizing exchange traded instruments, margin accounts or letters of credit. 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 October 3, 2020.
iWe had the following aggregated outstanding notional amounts related to our derivative financial instruments:
We
recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets, with the exception of normal purchases and normal sales expected to result in physical delivery. 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 designate certain forward contracts as follows:
•Cash Flow Hedges – include certain commodity forward and option contracts of forecasted purchases (i.e., grains), interest rate swaps and locks, 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 are designated as hedges against changes in the amount of future cash flows related to procurement of certain commodities utilized in our production processes as well as interest rates to our variable rate debt. 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 during fiscal 2020, 2019 and 2018. As of October 3, 2020, we have net pretax losses of $i1 million for our commodity contracts, which are expected to be reclassified into earnings within the next 12 months. Additionally, we have $i16
million of realized losses related to treasury rate locks in connection with the issuance of the 2026, 2029 and 2048 Notes, which will be reclassified to earnings over the lives of these notes. During fiscal 2020, 2019 and 2018, we did not reclassify significant pretax gains or losses into earnings as a result of the discontinuance of cash flow hedges. iThe following table sets forth the pretax impact of cash flow hedge derivative instruments in Other Comprehensive Income
(in millions):
Gain (Loss) Recognized in OCI on Derivatives
2020
2019
2018
Cash Flow Hedge – Derivatives designated as hedging instruments:
We designate certain derivative contracts as fair value hedges of firm commitments to purchase livestock for harvest. 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. 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. Ineffectiveness related to our fair value hedges was not significant during fiscal 2020,
2019 and 2018. iThe carrying amount of fair value hedge (assets) liabilities as of fiscal 2020, 2019 and 2018 were as follows (in millions):
Consolidated
Balance Sheets Classification
2020
2019
2018
Inventory
i6
(i19)
i4
Undesignated
positions
In addition to our designated positions, we also hold derivative 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.
Reclassification to Earnings
i
The
following table sets forth the total amounts of each income and expense line item presented in the Consolidated Statements of Income in which the effects of hedges are recorded (in millions):
Consolidated Statements of Income Classification
2020
2019
2018
Cost
of Sales
$
i37,801
$
i37,383
$
i34,956
Interest
Expense
i485
i462
i350
Other,
net
(i131)
(i55)
(i56)
/i
The
following table sets forth the pretax impact of the cash flow, fair value and undesignated derivative instruments in the Consolidated Statements of Income (in millions):
Consolidated Statements of Income Classification
2020
2019
2018
Sales
Gain
(Loss) on derivatives not designated as hedging instruments:
(a) Amounts
represent gains/(losses) on commodity contracts designated as fair value hedges of firm commitments that were realized during the period presented, which were offset by a corresponding gain/(loss) on the underlying hedged inventory. Gains or losses related to changes in the fair value of unrealized commodity contracts, along with the offsetting gain or loss on the hedged inventory, are also marked-to-market through earnings with no impact on a net basis.
The fair value of all outstanding derivative instruments in the Consolidated Balance Sheets are included in Note 14: Fair Value Measurements.
48
NOTE
14: iFAIR 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.
i
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):
(a) Our
derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. Additionally, at October 3, 2020, and September 28, 2019, we had $i16 million and $i95
million, respectively, of net cash collateral posted with various counterparties where master netting arrangements exist and held no cash collateral.
iThe following table provides a reconciliation between the beginning and ending balance of marketable debt securities measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in millions):
The
following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Assets and Liabilities: Our derivative financial instruments primarily include exchange-traded and over-the-counter contracts which are further described in Note 13: Derivative Financial Instruments. We record our derivative financial instruments at fair value using quoted market prices, adjusted where necessary for credit and non-performance risk and internal models that use readily observable market inputs as their basis, including current and forward market prices and rates. 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.
50
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 i12 months are included in Other current assets in the Consolidated Balance Sheets and primarily include certificates of deposit and commercial paper. All other marketable debt securities are included in Other Assets in the Consolidated Balance Sheets and have maturities ranging up to i40
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 financial statements.
iThe
following table sets forth our available-for-sale securities' amortized cost basis, fair value and unrealized gain (loss) by significant investment category (in millions):
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 ino other than temporary impairment in earnings for fiscal 2020 and fiscal 2019. iNo
other than temporary losses were deferred in OCI as of October 3, 2020, and September 28, 2019.
Deferred Compensation Assets: We maintain non-qualified deferred compensation plans for certain executives and other highly compensated team members. Investments are generally 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 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.
In fiscal 2019, we recorded a $i41
million impairment charge related to a Prepared Foods business held for sale, due to our estimate of the business' fair value based on current expected net sales proceeds. The impairment charge was recorded in Cost of Sales in our Consolidated Statement of Income for fiscal 2019. Our valuation included unobservable Level 3 inputs and was based on expected sales proceeds from a competitive bidding process and ongoing discussions with potential buyers.
In fiscal 2018, we recorded $i101 million of impairment charges related to the
expected sale of non-protein businesses held for sale, due to revised estimates of the businesses' fair value based on current expected net sales proceeds at the time of the impairment. These charges were recorded in Cost of Sales in our Consolidated Statement of Income, and primarily consisted of Goodwill previously classified within Assets held for sale. Our valuation included unobservable Level 3 inputs and was based on expected sales proceeds from a competitive bidding process and ongoing discussions with potential buyers.
51
Other Financial Instruments
iFair
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):
Our financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Our 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. We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. At October 3, 2020, and September 28, 2019, i16.5%
and i16.2%, respectively, of our net accounts receivable balance was due from Walmart Inc. No other single customer or customer group represented greater than 10% of net accounts receivable.
NOTE 15: iSTOCK-BASED
COMPENSATION
We issue shares under our stock-based compensation plans by issuing Class A stock from treasury. The total number of shares available for future grant under the Tyson Foods, Inc. 2000 Stock Incentive Plan (“Incentive Plan”) was i9,979,081 at October 3, 2020.
Stock
Options
Shareholders approved the Incentive Plan in January 2001. The Incentive Plan is administered by the Compensation and Leadership Development Committee of the Board of Directors (“Compensation Committee”). The Incentive Plan includes provisions for granting incentive stock options for shares of Class A stock at a price not less than the fair value at the date of grant. Nonqualified stock options may be granted at a price equal to or more than the fair value of Class A stock on the date the option is granted. Stock options under the Incentive Plan generally become exercisable ratably over ithree
years from the date of grant and must be exercised within i10 years from the date of grant. Our policy is to recognize compensation expense on a straight-line basis over the requisite service period for the entire award. Forfeitures are recognized as they occur.
i
Shares Under Option
Weighted Average Exercise Price Per Share
Weighted Average
Remaining Contractual Life (in Years)
The
weighted average grant-date fair value of options granted in fiscal 2020, 2019 and 2018 was $i16.77, $i11.35
and $i18.31, respectively. The fair value of each option grant is established on the date of grant using a binomial lattice method. We use historical volatility for a period of time comparable to the expected life of the option to determine volatility assumptions. Expected life is calculated based on the contractual term of each grant and takes into account the historical exercise and termination
behavior of participants. Risk-free interest rates are based on the five-year Treasury bond rate. iAssumptions used in the fair value calculation are as of the grant dates and are outlined in the following table.
2020
2019
2018
Expected
life (in years)
i4.3
i4.3
i5.9
Risk-free
interest rate
i1.6
%
i2.8
%
i2.1
%
Expected
volatility
i25.7
%
i25.4
%
i23.5
%
Expected
dividend yield
i2.0
%
i2.5
%
i1.5
%
We
recognized stock-based compensation expense related to stock options, net of income taxes, of $i16 million, $i16
million and $i13 million for fiscal 2020, 2019 and 2018, respectively. The related tax benefit for fiscal 2020, 2019 and 2018 was $i4
million, $i3 million and $i6
million, respectively. We had i1.3 million, i1.2
million and i2.2 million options vest in fiscal 2020, 2019 and 2018, respectively, with a grant date fair value of $i17
million, $i18 million and $i27
million, respectively.
52
In fiscal 2020, 2019 and 2018, we received cash of $i30 million, $i99
million and $i102 million, respectively, for the exercise of stock options. Shares are issued from treasury for stock option exercises. The related tax benefit realized from stock options exercised during fiscal 2020, 2019 and 2018, was $i6
million, $i21 million and $i30
million, respectively. The total intrinsic value of options exercised in fiscal 2020, 2019 and 2018, was $i21 million, $i79
million and $i103 million, respectively. Cash flows resulting from tax deductions in excess of the compensation cost of those options (excess tax deductions) are classified as financing cash flows. We realized $i4
million, $i14 million and $i20
million related to excess tax deductions during fiscal 2020, 2019 and 2018, respectively.
As of October 3, 2020, we had $i21 million of total unrecognized compensation cost related to stock option plans that will be recognized over a weighted average period of i1.3
years.
Restricted Stock
We issue restricted stock at the market value as of the date of grant, with restrictions expiring over periods through fiscal 2023. Unearned compensation is recognized over the vesting period for the particular grant using a straight-line method.
i
Number of Shares
Weighted Average Grant- Date Fair Value Per
Share
Weighted Average Remaining Contractual Life (in Years)
As
of October 3, 2020, we had $i49 million of total unrecognized compensation cost related to restricted stock awards that will be recognized over a weighted average period of i1.8
years.
We recognized stock-based compensation expense related to restricted stock, net of income taxes, of $i36 million, $i26
million and $i22 million for fiscal 2020, 2019 and 2018, respectively. The related tax benefit for fiscal 2020, 2019 and 2018 was $i9
million, $i8 million and $i9
million, respectively. We had i0.6 million, i0.5
million and i0.6 million restricted stock awards vest in fiscal 2020, 2019 and 2018, respectively, with a grant date fair value of $i34
million, $i29 million and $i27
million, respectively.
Performance-Based Shares
We award performance-based shares of our Class A stock to certain team members. These awards are typically granted once a year. Performance-based shares vest based upon the passage of time and the achievement of performance or market performance criteria, ranging from i0% to i200%,
as determined by the Compensation Committee prior to the date of the award. Vesting periods for these awards are ithree years. We review progress toward the attainment of the performance criteria each quarter during the vesting period. When it is probable the minimum performance criteria for an award will be achieved, we begin recognizing the expense equal to the proportionate share of the total fair value of the Class A stock price on the grant date. The total expense recognized over the duration of performance
awards will equal the Class A stock price on the date of grant multiplied by the number of shares ultimately awarded based on the level of attainment of the performance criteria. For grants with market performance criteria, the fair value is determined on the grant date and is calculated using the same inputs for expected volatility, expected dividend yield, and risk-free rate as stock options, noted above, with a duration of ithree years. The total expense recognized over the duration of the award will equal the
fair value, regardless if the market performance criteria is met.
i
The following table summarizes the performance-based shares at the maximum award amounts based upon the respective performance share agreements. Actual shares that will vest depend on the level of attainment of the performance-based criteria.
Number of Shares
Weighted Average Grant- Date Fair Value Per
Share
Weighted Average Remaining Contractual Life (in Years)
We
recognized stock-based compensation expense related to performance shares, net of income taxes, of $i18 million, $i16
million and $i12 million for fiscal 2020, 2019 and 2018, respectively. The related tax benefit for fiscal 2020, 2019 and 2018 was $i4
million, $i4 million and $i5
million, respectively. As of October 3, 2020, we had $i33 million of total unrecognized compensation based upon our progress toward the attainment of criteria related to performance-based share awards that will be recognized over a weighted average period of i1.9
years.
NOTE 16: iPENSIONS AND OTHER POSTRETIREMENT BENEFITS
At October 3, 2020, we had isix
defined benefit pension plans consisting of itwo frozen and noncontributory funded qualified plans and ifour
unfunded non-qualified plans. Additionally, we have itwo plans that were terminated during fiscal 2020, which have residual plan assets of $i27
million and ino benefit obligations as of October 3, 2020. The benefits provided under these plans are based on a formula using years of service and either a specified benefit rate or compensation level. The non-qualified defined benefit plans are for certain contracted officers and use a formula based on years of service and final average salary. We also have other postretirement benefit plans for which substantially all of our team members may receive benefits if they satisfy applicable eligibility
criteria. The postretirement healthcare plans are contributory with participants’ contributions adjusted when deemed necessary.
We have defined contribution retirement programs for various groups of team members. We recognized expenses of $i103 million, $i97
million and $i84 million in fiscal 2020, 2019 and 2018, respectively.
We use a fiscal year end measurement date for our defined benefit plans and other postretirement plans. We recognize the effect of actuarial gains and losses into earnings immediately for other postretirement plans rather than amortizing the effect over future periods. Other postretirement benefits include postretirement medical costs and life insurance.
During fiscal 2017, we issued
a notice of intent to terminate itwo of our qualified pension plans with a termination date of April 30, 2017. The settlements of the terminated plans occurred during fiscal 2019, through purchased annuities, and we incurred a $i19
million settlement charge at final liquidation.
During fiscal 2019, we issued a notice of intent to terminate ithree other qualified pension plans. The settlements of the terminated plans occurred during fiscal 2020, through purchased annuities, and we incurred settlement gains of approximately $i112
million related to the plan terminations. No significant contributions to purchase annuities at the time of settlement were necessary. Due to favorable annuity pricing at the time of settlement, approximately $i52 million in residual plan assets remained in the plan following the annuity purchase. A portion of these funds have been transferred to a qualified replacement plan during fiscal 2020, with the remaining funds to be transferred in fiscal 2021.
54
Benefit
Obligations and Funded Status
iThe following table provides a reconciliation of the changes in the plans’ benefit obligations, assets and funded status at October 3, 2020, and September 28, 2019 (in millions):
Pension
Benefits
Other Postretirement
Qualified
Non-Qualified
Benefits
2020
2019
2020
2019
2020
2019
Change
in benefit obligation
Benefit obligation at beginning of year
$
i1,478
$
i1,392
$
i239
$
i220
$
i77
$
i28
Service
cost
i—
i—
i—
i1
i2
i2
Interest
cost
i14
i56
i8
i9
i1
i1
Plan
amendments
i—
i—
i—
i—
(i6)
i4
Actuarial
(gain)/loss
i—
i154
i5
i17
i4
i6
Benefits
paid
(i38)
(i77)
(i14)
(i12)
(i4)
(i4)
Business
Acquisition
i—
i2
i—
i4
i—
i13
Plan
Terminations
(i1,423)
(i49)
i—
i—
i—
i—
Other
i—
i—
i—
i—
i—
i27
Benefit
obligation at end of year
i31
i1,478
i238
i239
i74
i77
Change
in plan assets
Fair value of plan assets at beginning of year
i1,477
i1,450
i—
i—
i—
i—
Actual
return on plan assets
(i14)
i146
i—
i—
i—
i—
Employer
contributions
i7
i1
i12
i12
i4
i4
Benefits
paid
(i38)
(i77)
(i12)
(i12)
(i4)
(i4)
Business
Acquisition
i—
i2
i—
i—
i—
i—
Plan
Terminations
(i1,397)
(i45)
i—
i—
i—
i—
Fair
value of plan assets at end of year
i35
i1,477
i—
i—
i—
i—
Funded
status
$
i4
$
(i1)
$
(i238)
$
(i239)
$
(i74)
$
(i77)
/
iAmounts
recognized in the Consolidated Balance Sheets consist of (in millions):
Pension
Benefits
Other Postretirement
Qualified
Non-Qualified
Benefits
2020
2019
2020
2019
2020
2019
Other
assets
$
i4
$
i16
$
i—
$
i—
$
i—
$
i—
Other
current liabilities
i—
i—
(i12)
(i12)
(i3)
(i3)
Other
liabilities
i—
(i17)
(i226)
(i227)
(i71)
(i74)
Total
assets (liabilities)
$
i4
$
(i1)
$
(i238)
$
(i239)
$
(i74)
$
(i77)
/
iAmounts
recognized in Accumulated Other Comprehensive Income consist of (in millions):
Pension
Benefits
Other Postretirement
Qualified
Non-Qualified
Benefits
2020
2019
2020
2019
2020
2019
Accumulated
other comprehensive (income)/loss:
Actuarial (gain) loss
$
i4
$
(i53)
$
i45
$
i46
$
i24
$
i27
Prior
service (credit) cost
i—
i—
i3
i4
(i37)
(i42)
Total
accumulated other comprehensive (income)/loss:
$
i4
$
(i53)
$
i48
$
i50
$
(i13)
$
(i15)
/
55
We
had ifour pension plans at October 3, 2020 and ifive
pension plans at September 28, 2019, that had an accumulated benefit obligation in excess of plan assets. iPlans with accumulated benefit obligations in excess of plan assets are as follows (in millions):
Pension
Benefits
Qualified
Non-Qualified
2020
2019
2020
2019
Projected benefit obligation
$
i—
$
i381
$
i238
$
i239
Accumulated
benefit obligation
i—
i381
i238
i239
Fair
value of plan assets
i—
i364
i—
i—
The
accumulated benefit obligation for all qualified pension plans was $i31 million and $i1,478
million at October 3, 2020, and September 28, 2019, respectively.
Net Periodic Benefit Cost (Credit)
iComponents of net periodic benefit cost (credit) for pension and postretirement benefit plans recognized in the Consolidated Statements of Income are as follows (in millions):
Pension
Benefits
Other Postretirement
Qualified
Non-Qualified
Benefits
2020
2019
2018
2020
2019
2018
2020
2019
2018
Service
cost
$
i—
$
i—
$
i—
$
i—
$
i1
$
i7
$
i2
$
i2
$
i1
Interest
cost
i14
i56
i55
i8
i9
i8
i1
i1
i1
Expected
return on plan assets
(i17)
(i57)
(i62)
i—
i—
i—
i—
i—
i—
Amortization
of prior service cost
i—
i—
i1
i1
i1
i1
(i6)
(i2)
(i25)
Recognized
actuarial loss (gain), net
i—
(i1)
i—
i3
i2
i3
i4
i5
(i5)
Recognized
settlement loss (gain)
(i112)
i19
i—
i—
i—
i—
i—
i—
i—
Net
periodic benefit cost (credit)
$
(i115)
$
i17
$
(i6)
$
i12
$
i13
$
i19
$
i1
$
i6
$
(i28)
/
Each
of the components other than the service cost component were recorded in the Consolidated Statements of Income in Other, net. As of October 3, 2020, we expect ino amounts to be reclassified into earnings within the next 12 months related to net periodic benefit cost (credit) for the qualified pension plans, excluding pending settlements. As of October 3, 2020, the amounts expected to be reclassified into earnings
within the next 12 months related to net periodic benefit cost (credit) for the non-qualified pension plans and the other postretirement benefit plans are not significant.
Assumptions
iWeighted average assumptions are as follows:
Pension
Benefits
Other Postretirement
Qualified
Non-Qualified
Benefits
2020
2019
2018
2020
2019
2018
2020
2019
2018
Discount
rate to determine net periodic benefit cost
i3.23
%
i4.26
%
i3.85
%
i3.19
%
i4.31
%
i3.88
%
i2.68
%
i3.99
%
i3.39
%
Discount
rate to determine benefit obligations
i1.70
%
i3.23
%
i4.26
%
i2.63
%
i3.16
%
i4.31
%
i1.95
%
i2.68
%
i4.11
%
Rate
of compensation increase
n/a
n/a
n/a
n/a
n/a
i2.53
%
n/a
n/a
n/a
Expected
return on plan assets
i3.50
%
i3.50
%
i4.20
%
n/a
n/a
n/a
n/a
n/a
n/a
/
To
determine the expected return on plan assets assumption, we first examined historical rates of return for the various asset classes within the plans. We then determined a long-term projected rate-of-return based on expected returns. Our discount rate assumptions used to account for pension and other postretirement benefit plans reflect the rates at which the benefit obligations could be effectively settled. The discount rates for two of our plans that were settled in fiscal 2020 were determined using a composite rate comprised of an annuity purchase rate and a lump sum conversion discount rate based on the portions of the populations that were purchased under the annuity contract with the insurance company versus those who elected lump sums, respectively. The discount rates for our other plans were determined using a cash flow matching technique whereby the rates of a yield curve,
developed from high-quality debt securities, were applied to the benefit obligations to determine the appropriate discount rate. For all periods presented, all pension and other postretirement benefit plans used the RP-2014 mortality tables.
56
We have ieight other postretirement benefit plans, of which ifive
are healthcare and life insurance related. iTwo of these plans, with benefit obligations totaling $i16 million at October 3,
2020, were not impacted by healthcare cost trend rates as ione consists of fixed annual payments and ione is life insurance related. iOne
of the healthcare plans, with benefit obligations less than $i1 million at October 3, 2020, was not impacted by healthcare cost trend rates due to previous plan amendments. The remaining itwo
plans, with benefit obligations totaling $i8 million and $i3 million, at October 3, 2020,
utilized assumed healthcare cost trend rates of i7.0% and i6.8%,
respectively. The healthcare cost trend rates will be grading down to an ultimate rate of i4.5% and i5.0%, respectively in
2027. A one-percentage-point change in assumed health-care cost trend rates would not have a significant effect on the postretirement benefit obligation.
Plan Assets
The asset allocation for domestic pension plan assets at October 3, 2020 was i100% cash due to the intent to terminate the remaining domestic qualified pension plan in the next year. Additionally, ione
of our foreign subsidiary pension plans had $i32 million in plan assets held in an insurance trust at October 3, 2020.
At October 3, 2020, i7%
of plan assets were held in cash and cash equivalents (Level 1) and i93% were held in an insurance trust (Level 3). At September 28, 2019, i36%
of plan assets were held in cash and cash equivalents (Level 1), i61% in corporate and municipal bonds (Level 2) and i3% were held in an
insurance trust (Level 3).
Contributions
Our policy is to fund at least the minimum contribution required to meet applicable federal employee benefit and local tax laws. In our sole discretion, we may from time to time fund additional amounts. Expected contributions to pension plans for fiscal 2021 are approximately $i13 million. For fiscal 2020, 2019 and 2018, we funded $i19
million, $i13 million and $i29 million, respectively, to pension plans.
Estimated
Future Benefit Payments
i
The following benefit payments are expected to be paid (in millions):
Pension
Benefits
Other Postretirement
Qualified
Non-Qualified
Benefits
2021
$
i—
$
i12
$
i4
2022
i—
i12
i3
2023
i—
i13
i3
2024
i2
i13
i3
2025
i1
i13
i3
2026-2030
i3
i63
i10
The
above benefit payments for other postretirement benefit plans are not expected to be offset by Medicare Part D subsidies in fiscal 2021.
/
Multi-Employer Plans
Additionally, we participate in ithree multi-employer plans that provide defined benefits to certain team members covered by collective bargaining agreements. Such plans are
usually administered by a board of trustees composed of the management of the participating companies and labor representatives.
The risks of participating in multi-employer plans are different from single-employer plans. Assets contributed to the multi-employer plan by one employer may be used to provide benefits to team members of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligation of the plan may be borne by the remaining participating employers. If we stop participating in a plan, we may be required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The net pension cost of the plans is equal to the annual contributions determined in accordance with the provisions of negotiated labor contracts.
Contributions to the plans were $i1 million in fiscal 2020 and $i2 million in fiscal 2019.
Assets contributed to such plans are not segregated or otherwise restricted to provide benefits only to our team members. The future cost of the plans is dependent on a number of factors including the funded status of the plans and the ability of the other participating companies to meet ongoing funding obligations.
57
Our participation in these multi-employer plans for fiscal 2020 is outlined below. The EIN/Pension Plan Number column provides the Employer Identification Number (“EI”) and the three-digit plan number. Unless otherwise noted, the most recent Pension Protection Act (“PPA”) zone status available in fiscal 2020 and fiscal 2019 is for the plan's year beginning January 1, 2020, and 2019,
respectively. The zone status is based on information that we have received from the plan and is certified by the plan's actuaries. Among other factors, plans in the red zone are generally less than 65 percent funded. Plans that are critical and declining status are projected to have an accumulated funding deficiency. The FIP/RP Status column indicates plans for which a financial improvement plan (“FIP”) or rehabilitation plan (“RP”) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreements to which the plan is subject. During fiscal 2019, as part of our acquisition of Keystone Foods, we acquired an interest in four multi-employer plans. Our interest in two of these plans was subsequently disposed of in conjunction with the divestiture of a chicken further processing facility acquired during the Keystone Foods acquisition. See Note 3: Acquisitions and Divestitures for additional information
on these transactions. Additionally, during fiscal 2019, we initiated our withdrawal from the Retail, Wholesale and Department Store International Union and Industry Pension Fund (“RWDSU Fund”). As a result of our withdrawal from the RWDSU Fund, we recorded a $i15 million termination liability. We received the withdrawal letter from the RWDSU fund during fiscal 2020 and reduced the termination liability accordingly to $i10
million. Subsequently during fiscal 2020, we initiated our withdrawal from the Pension Fund of Local 227. As a result of our withdrawal from the Pension Fund of Local 227, we recorded a $i1 million termination liability.
i
In
addition to regular contributions, we could be obligated to pay additional contributions (known as complete or partial withdrawal liabilities) if it has unfunded vested benefits.
PPA
Zone Status
FIP/RP Status
Contributions (in millions)
Surcharge Imposed
Pension Fund Plan Name
EIN/Pension Plan Number
2020
2019
Implemented
2020
2019
2018
2020
Expiration
Date of Collective Bargaining Agreement(a)
Bakery and Confectionery Union and Industry International Pension Fund
52-6118572/001
Red
Red
Nov 2012
$i1
$i1
$i2
i10%
i2015-10-10
Pension
Fund of Local 227
61-6054018/001
Green
Green
n/a
$i—
$i0.2
n/a
None
i2023-11-08
Retail,
Wholesale and Department Store International Union and Industry Pension Fund
63-0708442/001
Red
Red
Nov 2015
$i—
$i0.5
n/a
i9%
i2021-11-07
(a) Renewal
negotiations for the Bakery and Confectionery Union and Industry International Pension Fund are in progress.
/
NOTE 17: iCOMPREHENSIVE INCOME (LOSS)
iThe
components of accumulated other comprehensive loss are as follows (in millions):
2020
2019
Accumulated other comprehensive income (loss), net of taxes:
Unrealized net hedging loss
$
(i15)
$
(i24)
Unrealized
net gain (loss) on investments
i2
i1
Currency
translation adjustment
(i136)
(i107)
Postretirement
benefits reserve adjustments
(i30)
i13
Total
accumulated other comprehensive income (loss)
$
(i179)
$
(i117)
/
58
i
The
before and after tax changes in the components of other comprehensive income (loss) are as follows (in millions):
2020
2019
2018
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 interest expense
$
i6
$
(i2)
$
i4
$
i1
$
i—
$
i1
$
i—
$
i—
$
i—
(Gain)
loss reclassified to cost of sales
i24
(i7)
i17
i18
(i5)
i13
i12
(i4)
i8
Unrealized
gain (loss)
(i17)
i5
(i12)
(i39)
i10
(i29)
(i20)
i5
(i15)
Investments:
Unrealized
gain (loss)
i1
i—
i1
i3
(i1)
i2
(i2)
i1
(i1)
Currency
translation:
Translation adjustment
(i29)
i—
(i29)
(i23)
i—
(i23)
(i38)
i2
(i36)
Translation
loss reclassified to cost of sales
i—
i—
i—
i—
i—
i—
i7
i—
i7
Postretirement
benefits:
Unrealized gain (loss)
i1
i—
i1
(i114)
i31
(i83)
(i8)
i1
(i7)
Pension
settlement reclassified to other (income) expense
(i58)
i14
(i44)
i23
(i6)
i17
i—
i—
i—
Total
other comprehensive income (loss)
$
(i72)
$
i10
$
(i62)
$
(i131)
$
i29
$
(i102)
$
(i49)
$
i5
$
(i44)
/
NOTE
18: iSEGMENT REPORTING
We operate in ifour reportable segments: Beef, Pork, Chicken, and Prepared Foods. We measure
segment profit as operating income (loss). International/Other primarily includes our foreign operations in Australia, China, Malaysia, Mexico, the Netherlands, South Korea and Thailand, third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC.
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 specialty 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 specialty product processing activities and logistics operations to move products through the supply chain.
Chicken: Chicken includes our domestic operations related to raising and processing live chickens into, and purchasing raw materials for fresh, frozen and value-added chicken products, as well as sales from specialty products. Our value-added chicken products primarily include breaded
chicken strips, nuggets, patties and other ready-to-fix or fully cooked chicken parts. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, convenience stores, 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.
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. This segment includes brands such as Jimmy Dean®, Hillshire Farm®, Ball Park®, Wright®, State Fair®, as well as artisanal brands Aidells® and Gallo Salame®.
Products primarily include ready-to-eat sandwiches, sandwich components such as flame-grilled hamburgers and Philly steaks, pepperoni, bacon, breakfast sausage, turkey, lunchmeat, hot dogs, flour and corn tortilla products, appetizers, snacks, prepared meals, ethnic foods, 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, convenience stores, healthcare facilities, the military and other food processors, as well as to international export markets.
We allocate expenses related to corporate activities to the segments, except for third-party merger and integration costs of $i5
million, $i36 million, and $i26 million in fiscal 2020, 2019 and 2018, respectively, which
are included in International/Other. Assets and additions to property, plant and equipment relating to corporate activities remain in International/Other. Additionally, as of September 28, 2019, we allocated approximately $i342 million of goodwill to International/Other as a result of our Keystone Foods and Thai and European operations acquisitions. Refer to Note 5: Goodwill and Intangible Assets for further description.
59
iInformation
on segments and a reconciliation to income from continuing operations before income taxes are as follows (in millions):
Beef
Pork
Chicken
Prepared Foods
International/Other
Intersegment Sales
Consolidated
Fiscal
2020
Sales
$
i15,742
$
i5,128
$
i13,234
$
i8,532
$
i1,856
$
(i1,307)
$
i43,185
Operating
Income (Loss)
i1,580
i565
i122
i743
(i2)
i3,008
Total
Other (Income) Expense
i344
Income
before Income Taxes
i2,664
Depreciation
and amortization
i106
i56
i553
i398
i65
i1,178
Total
Assets
i3,223
i1,516
i11,028
i14,883
i3,806
i34,456
Additions
to property, plant and equipment
i219
i117
i577
i211
i75
i1,199
Fiscal
2019
Sales
$
i15,828
$
i4,932
$
i13,300
$
i8,418
$
i1,289
$
(i1,362)
$
i42,405
Operating
Income (Loss)
i1,050
i263
i621
i843
(i7)
i2,770
Total
Other (Income) Expense
i396
Income before
Income Taxes
i2,374
Depreciation
and amortization
i97
i47
i513
i397
i32
i1,086
Total
Assets
i2,958
i1,372
i10,807
i15,138
i2,643
i32,918
Additions
to property, plant and equipment
i133
i128
i637
i246
i115
i1,259
Fiscal
2018
Sales
$
i15,473
$
i4,879
$
i12,044
$
i8,668
$
i305
$
(i1,317)
$
i40,052
Operating
Income (Loss)
i950
i361
i866
i845
(i53)
i2,969
Total
Other (Income) Expense
i287
Income
before Income Taxes
i2,682
Depreciation
and amortization
i103
i42
i368
i410
i10
i933
Total
Assets
i2,939
i1,265
i8,794
i15,063
i926
i28,987
Additions
to property, plant and equipment
i107
i150
i570
i228
i145
i1,200
/
The
Beef segment had sales of $i390 million, $i411 million and $i420
million for fiscal 2020, 2019 and 2018, respectively, from transactions with other operating segments. The Pork segment had sales of $i865 million, $i893 million and $i817
million for fiscal 2020, 2019 and 2018, respectively, from transactions with other operating segments. The Chicken segment had sales of $i52 million, $i58 million and $i80
million for fiscal 2020, 2019 and 2018, respectively, from transactions with other operating segments. The aforementioned sales from intersegment transactions, which were at market prices, were included in the segment sales in the above table.
Our largest customer, Walmart Inc., accounted for i18.7%, i16.9%
and i17.3% of consolidated sales in fiscal 2020, 2019 and 2018, respectively. Sales to Walmart Inc. were included in all the segments. Any extended discontinuance of sales to this customer could, if not replaced, have a material impact on our operations.
The majority of our operations are domiciled in the United States. Approximately i95%,
i96% and i99% of sales to external customers for fiscal 2020, 2019 and 2018, respectively, were sourced from the United States. Approximately $i25.6
billion and $i24.8 billion of long-lived assets were located in the United States at October 3, 2020, and September 28, 2019, respectively. Excluding goodwill and intangible assets, long-lived assets located in the United States totaled approximately $i8.5
billion and $i7.5 billion at October 3, 2020, and September 28, 2019, respectively. Approximately $i1,287 million and $i1,107
million of long-lived assets were located in foreign locations, primarily Brazil, China, the European Union, New Zealand and Thailand at October 3, 2020, and September 28, 2019, respectively. Excluding goodwill and intangible assets, long-lived assets in foreign countries totaled approximately $i648 million and $i506
million at October 3, 2020, and September 28, 2019, respectively.
We sell certain products in foreign markets, primarily Australia, Canada, Central America, Chile, China, the European Union, the United Kingdom, Japan, Mexico, Malaysia, the Middle East, South Korea, Taiwan and Thailand. Our export sales from the United States totaled $i4.0 billion, $i4.1
billion and $i4.2 billion for fiscal 2020, 2019 and 2018, respectively. Substantially all of our export sales are facilitated through unaffiliated brokers, marketing associations and foreign sales staffs. Sales of products produced in a country other than the United States were less than 10% of consolidated sales for each of fiscal 2020, 2019 and 2018.
60
i
The
following tables further disaggregate our sales to customers by major distribution channels (in millions):
(a)
Includes sales to consumer products and food retailers, such as grocery retailers, warehouse club stores, and internet-based retailers.
(b) Includes sales to foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, convenience stores, healthcare facilities and the military.
(c) Includes sales to international markets related to internationally produced products or export sales of domestically produced products.
/
(d) Includes sales to industrial food processing companies that further process our product to sell to end consumers and any remaining sales not included in the Retail, Foodservice or International categories.
NOTE
19: iSUPPLEMENTAL CASH FLOWS INFORMATION
iThe following table summarizes cash payments for interest and income taxes (in millions):
2020
2019
2018
Interest,
net of amounts capitalized
$
i536
$
i419
$
i368
Income
taxes, net of refunds
i511
i557
i470
/
NOTE
20: iTRANSACTIONS WITH RELATED PARTIES
We have related party leases for itwo
wastewater facilities with an entity owned by the Donald J. Tyson Revocable Trust (for which Mr. John Tyson, Chairman of the Company, is a trustee), Berry Street Waste Water Treatment Plant, LP (i90% of which is owned by the Tyson Limited Partnership), and the sisters of Mr. Tyson. Prior to the third quarter of fiscal 2020, these leases were both classified as short-term operating leases. Based on the assessment of the renewal of these leases,
as of October 3, 2020, one lease was classified as a finance lease with a debt balance of $i7 million which is primarily recognized as Long-term debt in our Consolidated Balance Sheet. Total payments of approximately $i1
million in each of fiscal 2020, 2019 and 2018 were paid to lease the facilities.
As of October 3, 2020, the TLP, of which John Tyson and director Barbara Tyson are general partners, owned i70 million shares, or i99.985%
of our outstanding Class B stock and, along with the members of the Tyson family, owned i6.6 million shares of Class A stock, giving it control of approximately i71.06% of the total voting power of our outstanding voting
stock.
In August 2017, the Company committed to invest $i5 million for a i17.5%
equity interest in Buchan Ltd., a Mauritian private holding company of poultry operations in sub-Saharan Africa. Acacia Foods, B.V. is committed to invest $i9 million in Buchan Ltd. Donnie Smith, who during the first quarter of fiscal year 2017 was Chief Executive Officer of the Company, serves as the Chairman of Acacia Foods, B.V. and as a director of Buchan Ltd. John Randal Tyson (son of John Tyson and Chief
Sustainability Officer) serves as a director of Buchan Ltd. for the Company. We completed our funding commitment in fiscal 2018.
In fiscal 2020, 2019 and 2018, the Company provided administrative services to the Tyson Limited Partnership, the beneficial owner of i70 million shares of Class B stock, and the Tyson Limited Partnership, through TLP Investment, L.P., reimbursed the
Company $i0.2 million in fiscal 2020 and $i0.3 million in both fiscal 2019
and fiscal 2018.
61
NOTE 21: iCOMMITMENTS AND CONTINGENCIES
Commitments
We guarantee obligations of certain outside third parties, consisting primarily of
grower loans, which are substantially collateralized by the underlying assets. The remaining terms of the underlying obligations cover periods up to i10 years, and the maximum potential amount of future payments as of October 3, 2020, was $i13
million. The likelihood of material payments under these guarantees is not considered probable. At October 3, 2020, and September 28, 2019, ino significant liabilities for guarantees were recorded.
We have cash flow assistance programs in which certain livestock suppliers participate. Under these programs, we pay an amount for livestock equivalent to a standard cost to grow such livestock during periods
of low market sales prices. The amounts of such payments that are in excess of the market sales price are recorded as receivables and accrue interest. Participating suppliers are obligated to repay these receivables balances when market sales prices exceed this standard cost, or upon termination of the agreement. Our potential maximum obligation associated with these programs is limited to the fair value of each participating livestock supplier’s net tangible assets. The potential maximum obligation as of October 3, 2020, was approximately $i320
million. The total receivables under these programs were $i29 million and $i5 million at October 3,
2020 and September 28, 2019, respectively. These receivables are included, net of allowance for uncollectible amounts, in Accounts Receivable in our Consolidated Balance Sheets. Even though these programs are limited to the net tangible assets of the participating livestock suppliers, we also manage a portion of our credit risk associated with these programs by obtaining security interests in livestock suppliers’ assets. After analyzing residual credit risks and general market conditions, we had ino
allowance for these programs' estimated uncollectible receivables at October 3, 2020, and September 28, 2019.
When constructing new facilities or making major enhancements to existing facilities, we will occasionally enter into incentive agreements with local government agencies in order to reduce certain state and local tax expenditures. These funds are generally considered restricted cash, which is reported in the Consolidated Balance Sheets in Other Assets, and totaled $i46
million and $i0 at October 3, 2020 and September 28, 2019, respectively. Additionally, under certain agreements, we transfer the related assets to various local government entities and receive Industrial Revenue Bonds. We immediately lease the facilities from the local government entities and have an option to re-purchase the facilities for a nominal amount upon tendering the Industrial Revenue Bonds to the local government entities at various predetermined dates. The Industrial Revenue Bonds and the associated obligations for the leases
of the facilities offset, and the underlying assets remain in property, plant and equipment. At October 3, 2020, total amounts under these types of arrangements totaled $i573 million.
i
Additionally,
we enter into other purchase commitments for various items such as grains, livestock contracts and variable livestock grower commitments that are estimable, which at October 3, 2020 were (in millions):
Purchase Obligations
2021
$
i2,371
2022
i414
2023
i253
2024
i111
2025
i79
2026
and beyond
i152
Total
$
i3,380
/
Contingencies
We
are involved in various claims and legal proceedings. We routinely assess the likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. We record accruals in the Company's Consolidated Financial Statements for matters to the extent that we conclude a loss is probable and the financial impact, should an adverse outcome occur, is reasonably estimable. Additionally, for matters in which losses are reasonably possible, no reasonable estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because, among other reasons: (i) the proceedings are in preliminary stages; (ii) specific damages have not been sought; (iii) damage claims are unsupported and/or unreasonable; (iv) there is uncertainty as to the outcome of pending appeals or motions;
(v) there are significant factual issues to be resolved; or (vi) novel legal issues or unsettled legal theories are being asserted. In our opinion, we have made appropriate and adequate accruals for these matters. While these accruals reflect the Company’s best estimate of the probable loss for those matters as of the dates of those accruals, the recorded amounts may differ materially from the actual amount of the losses for those matters. Listed below are certain claims made against the Company and/or our subsidiaries for which the potential exposure is considered material to the
Company’s Consolidated Financial Statements. We believe we have substantial defenses to the claims made and intend to vigorously defend these matters.
62
On September 2, 2016, Maplevale Farms, Inc., acting on its own behalf and on behalf of a putative class of direct purchasers of poultry products, filed a class action complaint against us and certain of our poultry subsidiaries, as well as several other poultry processing companies, in the Northern District of Illinois. Subsequent to the filing of this initial complaint, additional lawsuits making similar claims on behalf of putative classes
of direct and indirect purchasers were filed in the United States District Court for the Northern District of Illinois. The court consolidated the complaints, for pre-trial purposes, into actions on behalf of three different putative classes: direct purchasers, indirect purchasers/consumers and commercial/institutional indirect purchasers. The consolidated actions are styled In re Broiler Chicken Antitrust Litigation. Since the original filing, certain putative class members have opted out of the matter and are proceeding with individual direct actions making similar claims, and others may do so in the future. All opt out complaints have been filed in, or transferred to, the Northern District of Illinois and are proceeding on a coordinated pre-trial basis with the consolidated actions. The operative complaints, which have been amended throughout the litigation, allege, among other things, that beginning in January 2008
the defendants conspired and combined to fix, raise, maintain, and stabilize the price of broiler chickens in violation of United States antitrust laws. The complaints on behalf of the putative classes of indirect purchasers also include causes of action under various state unfair competition laws, consumer protection laws, and unjust enrichment common laws. The plaintiffs also allege that defendants “manipulated and artificially inflated a widely used Broiler price index, the Georgia Dock.” The plaintiffs further allege that the defendants concealed this conduct from the plaintiffs and the members of the putative classes. The plaintiffs seek treble damages, injunctive relief, pre- and post-judgment interest, costs, and attorneys’ fees on behalf of the putative classes. Decisions on class certification and summary judgment motions likely to be filed by defendants are currently expected in late calendar year 2020 and 2021. If necessary, trial will occur after rulings
on class certification and any summary judgment motions in calendar year 2022. On April 26, 2019, the plaintiffs notified us that the U.S. Department of Justice ("DOJ") Antitrust Division issued a grand jury subpoena to them requesting discovery produced by all parties in the civil case. On June 21, 2019, the DOJ filed a motion to intervene and sought a limited stay of discovery in the civil action, which the court granted in part. Subsequently, we received a grand jury subpoena from the DOJ seeking additional documents and information related to the chicken industry. On June 2, 2020 a grand jury for the District of Colorado returned an indictment against four individual executives employed by two other poultry processing companies charging a conspiracy to engage in bid-rigging in violation
of federal antitrust laws. On June 10, 2020, we announced that we uncovered information in connection with the grand jury subpoena that we had previously self-reported to the DOJ and have been fully cooperating with the DOJ as part of our application for leniency under the DOJ's Corporate Leniency Program. On October 7, 2020, the DOJ announced a superseding indictment adding charges against six more individuals to charge a total of 10 executives and employees at poultry processing companies for a conspiracy to fix prices and rig bids for broiler chicken products from at least 2012 until at least early 2019. The partial stay previously granted by the court in the civil action was lifted and discovery is continuing. Plaintiffs in the civil action filed complaints expressly referencing the conduct in the DOJ’s indictments or motions arguing that bid-rigging conduct was encompassed
by prior complaints. On September 22, 2020, the court ruled that bid-rigging claims will be consolidated into the existing action but bifurcated from the original supply reduction and Georgia Dock claims. The original claims will proceed on their current schedule and the bid-rigging claims, including any related discovery, are stayed until the supply reduction and Georgia Dock claims are resolved.
The Commonwealth of Puerto Rico, on behalf of its citizens, has also initiated a civil lawsuit against us, certain of our subsidiaries, and several other poultry processing companies alleging activities in violation of the Puerto Rican antitrust laws. This lawsuit has been transferred to the Northern District of Illinois for coordinated pre-trial proceedings. On July
15, 2020, the court ruled that Puerto Rico could pursue claims based on direct purchases from defendants, but dismissed all claims based on indirect purchases or Puerto Rico’s parens patriae status. On August 26, 2020, Puerto Rico filed a notice of voluntary dismissal without prejudice and withdrew all claims against defendants. On September 1, 2020, the Office of the Attorney General of the State of New Mexico filed a complaint against us and certain of our poultry subsidiaries, as well as several other poultry processing companies and Agri Stats, Inc., in Santa Fe County, New Mexico. The complaint alleges violations of New Mexico’s antitrust, unfair trade practice, and unjust enrichment laws based on allegations
of conspiracies to manipulate the Georgia Dock, exchange information and reduce the supply of broiler chickens.
On March 1, 2017, we received a civil investigative demand (“CID”) from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida. The Florida CID requests information primarily related to possible anticompetitive conduct in connection with the Georgia Dock, a chicken products pricing index formerly published by the Georgia Department of Agriculture. We have been cooperating with the Florida Attorney General’s office. In July 2019, the Attorney General issued a subpoena to the In re Broiler Chicken Antitrust Litigation plaintiffs requesting all information provided to the DOJ.
On August 18, 2019,
we were advised that the In re Broiler Chicken Antitrust Litigation plaintiffs had received a CID from the Louisiana Department of Justice Office of the Attorney General Public Protection Division. The Louisiana CID requests all deposition transcripts related to the In re Broiler Chicken Antitrust Litigation.
On August 6, 2020, we received a CID from the Office of the Attorney General of the State of Washington. The Washington CID requests information primarily related to possible anticompetitive conduct or violations of state consumer protection laws in connection with the broiler chicken market. We have been cooperating with the Washington’s Attorney General’s office.
63
On
June 18, 2018, a group of plaintiffs acting on their own behalf and on behalf of a putative class of all persons and entities who indirectly purchased pork, filed a class action complaint against us and certain of our pork subsidiaries, as well as several other pork processing companies, in the United States District Court for the District of Minnesota. Subsequent to the filing of the initial complaint, additional lawsuits making similar claims on behalf of putative classes of direct and indirect purchasers were also filed in the same court. The court consolidated the complaints, for pre-trial purposes, into actions on behalf of three different putative classes: direct purchasers, indirect purchasers/consumers and commercial/institutional indirect purchasers. The consolidated actions are styled In re Pork
Antitrust Litigation. Since the original filing, a putative class member is proceeding with an individual direct action making similar claims, and others may do so in the future. The individual complaint has been filed in the District of Minnesota and is proceeding on a coordinated pre-trial basis with the consolidated actions. The complaints allege, among other things, that beginning in January 2009 the defendants conspired and combined to fix, raise, maintain, and stabilize the price of pork and pork products in violation of United States antitrust laws. The complaints on behalf of the putative classes of indirect purchasers also include causes of action under various state unfair competition laws, consumer protection laws, and unjust enrichment common laws. The plaintiffs seek treble damages, injunctive relief, pre- and post-judgment interest, costs, and attorneys’ fees on behalf of the putative classes. On August
8, 2019, this matter was dismissed without prejudice. The plaintiffs filed amended complaints on November 6, 2019, in which the plaintiffs again have alleged that the defendants conspired and combined to fix, raise, maintain, and stabilize the price of pork and pork products in violation of state and federal antitrust, consumer protection, and unjust enrichment common laws, and the plaintiffs again are seeking treble damages, injunctive relief, pre- and post-judgment interest, costs, and attorneys’ fees on behalf of the putative classes. The Commonwealth of Puerto Rico, on behalf of its citizens, has also initiated a civil lawsuit against us, certain of our subsidiaries, and several other pork processing companies alleging activities in violation of the Puerto Rican antitrust laws. This lawsuit was transferred
to the District of Minnesota and an amended complaint was filed on December 6, 2019. We moved to dismiss the amended complaints, and on October 16, 2020, the court granted the motion with respect to certain state law claims but denied the motion with respect to the plaintiffs’ federal antitrust claims.
On April 23, 2019, a group of plaintiffs, acting on behalf of themselves and on behalf of a putative class of all persons and entities who directly sold to the named defendants any fed cattle for slaughter and all persons who transacted in live cattle futures and/or options traded on the Chicago Mercantile Exchange or another U.S. exchange, filed a class action complaint against us and our beef and pork subsidiary, Tyson Fresh Meats, Inc., as well as other beef packer defendants,
in the United States District Court for the Northern District of Illinois. The plaintiffs allege that the defendants engaged in a conspiracy from January 2015 to the present to reduce fed cattle prices in violation of federal antitrust laws, the Grain Inspection, Packers and Stockyards Act of 1921, and the Commodities Exchange Act by periodically reducing their slaughter volumes so as to reduce demand for fed cattle, curtailing their purchases and slaughters of cash-purchased cattle during those same periods, coordinating their procurement practices for fed cattle settled on a cash basis, importing foreign cattle at a loss so as to reduce domestic demand, and closing and idling plants. In addition, the plaintiffs also allege the defendants colluded to manipulate live cattle futures and options traded on the Chicago Mercantile Exchange. The plaintiffs seek, among other things, treble monetary damages, punitive damages, restitution, and pre- and post-judgment interest,
as well as declaratory and injunctive relief. This complaint was subsequently voluntarily dismissed and re-filed in the United States District Court for the District of Minnesota. Other similar lawsuits were filed by ranchers in other district courts. All actions seeking relief by ranchers and futures traders have now been transferred to the United States District Court for the District of Minnesota action and are consolidated for pre-trial proceedings as In Re Cattle Antitrust Litigation. Following the filing of defendants’ motion to dismiss this matter, the plaintiffs filed a second amended complaint on October 4, 2019. We moved to dismiss the second amended complaint, which the court granted on September 28, 2020. The dismissal is without prejudice, and the plaintiffs are permitted to amend their
complaint by December 28, 2020.
On April 26, 2019, a group of plaintiffs, acting on behalf of themselves and on behalf of a putative class of indirect purchasers of beef for personal use filed a class action complaint against us, other beef packers, and Agri Stats, Inc., an information services provider, in the United States District Court for the District of Minnesota. The plaintiffs allege that the packer defendants conspired to reduce slaughter capacity by closing or idling plants, limiting their purchases of cash cattle, coordinating their procurement of cash cattle, and reducing their slaughter numbers so as to reduce beef output, all in order to artificially raise prices of beef. The plaintiffs seek, among other things, damages under state antitrust and consumer protection statutes and the common law of approximately
30 states, as well as injunctive relief. The plaintiffs filed a first amended complaint in which the claims against Agri Stats were dismissed and subsequently filed a second amended complaint on November 22, 2019. We moved to dismiss the second amended complaint. The indirect consumer purchaser litigation is styled as Peterson v. JBS USA Food Company Holdings, et al. Additional complaints have been filed on behalf of a putative class of direct purchasers of beef alleging violations of Section 1 of the Sherman Act based on an alleged conspiracy to artificially fix, raise, and stabilize the wholesale price for beef, as well as on behalf of a putative class of commercial and institutional indirect purchasers of beef alleging violations of Section 1 of the Sherman Act, various state antitrust laws and unjust enrichment based on an alleged conspiracy to artificially inflate the
price for beef. On September 28, 2020, the court granted our motion to dismiss the second amended complaint. The dismissal is without prejudice, and the plaintiffs are permitted to amend their complaint by December 28, 2020.
On May 22, 2020, we received a CID from DOJ's Antitrust Division. The CID requests information related to the fed cattle and beef packing markets. We have been cooperating with the DOJ's Antitrust Division with respect to the CID.
64
On August 30, 2019, Judy Jien, Kieo Jibidi and Elaisa Clement, acting on their
own behalf and a putative class of non-supervisory production and maintenance employees at chicken processing plants in the continental United States, filed a class action complaint against us and certain of our subsidiaries, as well as several other poultry processing companies, in the United States District Court for the District of Maryland. An additional complaint making similar allegations was also filed by Emily Earnest. The plaintiffs allege that the defendants directly and through a wage survey and benchmarking service exchanged information regarding labor rates in an effort to depress and fix the rates of wages for non-supervisory production and maintenance workers in violation of federal antitrust laws. The plaintiffs seek, among other things, treble monetary damages, punitive damages, restitution, and pre- and post-judgment interest, as well as declaratory and injunctive
relief. The court consolidated the Jien and Earnest cases for coordinated pretrial proceedings. Following the consolidation, two additional lawsuits were filed by individuals making similar allegations. The plaintiffs filed an amended consolidated complaint containing additional allegations concerning turkey processing plants and named additional defendants. We moved to dismiss the amended consolidated complaint. On September 16, 2020, the court dismissed claims against Tyson and certain other defendants without prejudice because the complaint improperly grouped together corporate subsidiaries. The court otherwise denied the defendants’ motions to dismiss and sustained claims based on alleged conspiracies to fix
wages and exchange information against five other defendants. The court granted the plaintiffs leave to file an amended complaint to address the impermissible group pleading. On October 16, 2020, the plaintiffs filed a second amended complaint reasserting their claims.
Our subsidiary, The Hillshire Brands Company (formerly named Sara Lee Corporation), is a party to a consolidation of cases filed by individual complainants with the Republic of the Philippines, Department of Labor and Employment and the National Labor Relations Commission ("NLRC") from 1998 through July 1999. The complaint was filed against Aris Philippines, Inc., Sara Lee Corporation, Sara Lee Philippines, Inc., Fashion Accessories Philippines, Inc., and Attorney Cesar C. Cruz (collectively, the “respondents”). The complaint alleges, among other things, that the respondents engaged in unfair labor
practices in connection with the termination of manufacturing operations in the Philippines in 1995 by Aris Philippines, Inc., a former subsidiary of The Hillshire Brands Company. In late 2004, a labor arbiter ruled against the respondents and awarded the complainants PHPi3,453,664,710 (approximately U.S. $i71
million) in damages and fees. The respondents appealed the labor arbiter's ruling, and it was subsequently set aside by the NLRC in December 2006. Subsequent to the NLRC’s decision, the parties filed numerous appeals, motions for reconsideration and petitions for review, certain of which remained outstanding for several years. While various of those appeals, motions and/or petitions were pending, The Hillshire Brands Company, on June 23, 2014, without admitting liability, filed a settlement motion requesting that the Supreme Court of the Philippines order dismissal with prejudice of all claims against it and certain other respondents in exchange for payments allocated by the court among the complainants in an amount not to exceed PHPi342,287,800
(approximately U.S. $i7 million). Based in part on its finding that the consideration to be paid to the complainants as part of such settlement was insufficient, the Supreme Court of the Philippines denied the respondents’ settlement motion and all motions for reconsideration thereof. The Supreme Court of the Philippines also set aside as premature the NLRC’s December 2006 ruling. As a result, the cases were remanded back before the NLRC to rule on the merits of the case. On December 15, 2016, we
learned that the NLRC rendered its decision on November 29, 2016, regarding the respondents’ appeals regarding the labor arbiter’s 2004 ruling in favor of the complainants. The NLRC increased the award for i4,922 of the total i5,984
complainants to PHPi14,858,495,937 (approximately U.S. $i306 million). However, the NLRC approved a prior settlement reached
with the group comprising approximately i18% of the class of i5,984 complainants, pursuant to which The Hillshire Brands Company agreed to pay
each settling complainant PHPi68,000 (approximately U.S. $i1,400).
The settlement payment was made on December 21, 2016, to the NLRC, which is responsible for distributing the funds to each settling complainant. On December 27, 2016, the respondents filed motions for reconsideration with the NLRC asking that the award be set aside. The NLRC denied respondents' motions for reconsideration in a resolution received on May 5, 2017 and entered a judgment on the award on July 24, 2017. Each of Aris Philippines, Inc., Sara Lee Corporation and Sara Lee Philippines, Inc. appealed this award and sought an injunction to preclude enforcement of the award to the Philippines Court of Appeals. On November 23, 2017, the Court of Appeals granted a writ of preliminary injunction that precluded execution of
the NLRC award during the pendency of the appeal. The Court of Appeals subsequently vacated the NLRC’s award on April 12, 2018. Complainants have filed motions for reconsideration with the Court of Appeals. On November 14, 2018, the Court of Appeals denied claimants’ motions for reconsideration and granted defendants’ motion to release and discharge the preliminary injunction bond. Claimants have since filed petitions for writ of certiorari with the Supreme Court of the Philippines. The Supreme Court has accepted the case for review. We continue to maintain an accrual for this matter.
Various claims have been asserted against the Company, its subsidiaries,
and its officers and agents by, and on behalf of, team members who claim to have contracted COVID-19 in our facilities.
65
NOTE 22: iQUARTERLY FINANCIAL DATA (UNAUDITED)
Revision of Previously Issued
Unaudited Consolidated Condensed Financial Statements
As described in Note 1: Business and Summary of Significant Accounting Policies, the Company determined it necessary to revise the accompanying consolidated annual and interim quarterly financial information to correct the misstatement in the periods impacted.
The following tables represent revisions to our unaudited consolidated condensed financial information for quarter-to-date interim periods in fiscal 2020 and 2019:
First
quarter fiscal 2020 net income also included $i52 million pretax restructuring and related charges and $i16 million pretax
Beef production facility fire costs, net of insurance proceeds.
First quarter fiscal 2019 net income included $i26 million pretax Keystone Foods purchase accounting and acquisition related costs, which included an $i11 million
purchase accounting adjustment for the amortization of the fair value step-up of inventory and $i15 million of acquisition related costs, and $i8 million
pretax restructuring and related charges.
Second
quarter fiscal 2020 net income included $i110 million pretax gain from pension plan terminations.
Second quarter fiscal 2019 net income included $i11 million
pretax Keystone Foods acquisition related costs and $i8 million pretax restructuring and related charges.
Third
quarter fiscal 2020 net income included $i15 million pretax Beef production facility fire insurance proceeds, net of costs and $i6 million
pretax gain from pension plan terminations.
Third quarter fiscal 2019 net income included $i105 million post tax recognition of previously unrecognized tax benefit, $i55 million
pretax gain on sale of an investment and $i15 million pretax restructuring and related charges.
Fourth
quarter fiscal 2020 net income included $i23 million pretax restructuring and related charges and $i65 million pretax
income related to our accounting cycle resulting in a 53-week year in fiscal 2020.
Fourth quarter fiscal 2019 net income included $i31 million pretax Beef production facility fire costs, a $i41 million
pretax impairment charge related to the divestiture of a business, $i15 million pretax pension plan termination charge and $i10 million pretax restructuring
and related charges.
The revisions set forth above did not impact total cash flows provided by operating activities and for each period presented above, the impacts of the misstatements on individual line items within cash flows provided by operating activities were not material, including net income, change in inventories for the impact of the misstatement, and deferred income taxes for the tax impact of the misstatement.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Tyson Foods, Inc.
Opinions
on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tyson Foods, Inc. and its subsidiaries(the “Company”) as of October 3, 2020 and September 28, 2019,and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended October 3, 2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended October
3, 2020 appearing under Item 15 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of October 3, 2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the
Company as ofOctober 3, 2020 and September 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 3, 2020in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of October 3, 2020, based on criteria established in Internal Control - Integrated Framework (2013)issued
by the COSO because a material weakness in internal control over financial reporting existed as of that date related to the Company not designing and maintaining effective controls over the existence of live cattle inventory.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal 2020 consolidated financial statements, and our opinion
regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidatedfinancial statements.
Restatement of Management’s Conclusion Regarding Internal Control over Financial Reporting
Management and we previously concluded that the Company maintained effective internal control over financial reporting as of October 3, 2020. However, management has subsequently determined that a material weakness in internal control over financial reporting related to its management failing to design and maintain effective controls over the existence of live cattle inventory
as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of September 29, 2019.
Basis for Opinions
The Company's management is responsible for these consolidatedfinancial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
70
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A
company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical
audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessments – Domestic Chicken and International Reporting Units
As described in Notes 1 and 5 to the consolidated financial statements, the
Company’s consolidated goodwill balance was $10,899 million as of October 3, 2020, which included $3,266 million and $392 million for the Domestic Chicken and International reporting units, respectively. As disclosed by management, a goodwill impairment test is conducted as of the first day of the fourth quarter each year, or more frequently if impairment indicators arise. Management estimates the fair value of reporting units considering the use of various valuation techniques, with the primary technique being an income approach (discounted cash flow method) and another technique being a market approach (guideline public company method). The determination of fair value using these techniques includes assumptions about sales, operating margins, growth rates, discount rates and valuation multiples based on budgets, business plans, economic projections and marketplace data.
The
principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Domestic Chicken and International reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value measurements of the reporting units, (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s anticipated future cash flows and significant assumptions related to sales, operating margins, growth rates, discount rates and valuation multiples, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
71
Addressing the matter involved
performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s Domestic Chicken and International reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates of the Domestic Chicken and International reporting units; evaluating the appropriateness of the income and market valuation approaches; testing the completeness and accuracy of underlying data used in the fair value estimates; and evaluating management’s cash flow projections and significant assumptions related to sales, operating margins, growth rates, discount rates and valuation multiples. Evaluating management’s
assumptions related to sales, operating margins, growth rates, discount rates and valuation multiples involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance associated with the related reporting units, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s valuation methods and the sales, operating margins, growth rates, discount rates and valuation multiples significant assumptions.
November 16, 2020, except for the effects of the revision discussed in Note 1 to the consolidated financial statements and the matter discussed in the penultimate paragraph of Management’s Annual Report on Internal Control Over Financial Reporting, as to which the date is February 11, 2021.
We have served as the Company’s auditor since 2009.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
An evaluation was performed, under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “1934 Act”). At the time that the Original Form 10-K was filed on November 16, 2020, our CEO and CFO concluded that our disclosure controls and procedures were effective as of October 3, 2020. Subsequent to this evaluation, the Company’s CEO and CFO concluded that our disclosure controls and procedures were not effective as of October
3, 2020, solely due to the material weakness in internal control over financial reporting described below.
Management’s Annual Report on Internal Control Over Financial Reporting (Restated)
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of October 3, 2020. In making this assessment, we used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013).
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We did not design
and maintain effective controls over the existence of live cattle inventory. Specifically, we did not design and maintain effective controls to verify the existence of Company inventory in the custody of third-party live cattle suppliers and appropriately perform the live cattle inventory reconciliation and review at the designed level of precision. These deficiencies resulted in a revision related to the overstatement of inventory by approximately $285 million and $179 million as of October 3, 2020 and September 28, 2019, respectively, which also had the effect of understating selling, general and administrative expenses by approximately $106 million, $57 million, and $63 million for the years ended October 3, 2020, September 28, 2019 and September
29, 2018, respectively. Additionally, these deficiencies could result in a misstatement of the above-referenced account balances or disclosures that would result in a material misstatement to the annual or interim consolidated statements that would not be prevented or detected.
In Management's Annual Report on Internal Control Over Financial Reporting included in the Original Form 10-K, management, including our CEO and CFO, concluded our internal control over financial reporting was effective as of October 3, 2020. Management subsequently concluded that the material weakness described above existed as of October 3, 2020. As a result, management has concluded that we did not maintain effective internal control over financial reporting as of October 3, 2020 based on the criteria
in Internal Control-Integrated Framework (2013 version) issued by COSO. Accordingly, management has restated its report on internal control over financial reporting.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, who audited the fiscal 2020, 2019 and 2018 financial statements included in this Amendment, has also audited the effectiveness of the Company’s internal control over financial reporting as of October 3, 2020 as stated in its report which appears in Part II, Item 8 of this Amendment.
Remediation
Plan
As part of our commitment to strengthening our internal control over financial reporting, we are implementing remedial actions under the oversight of the Audit Committee of our Board of Directors to address these deficiencies, including:
•Implementing a control requiring inspection and physical verification of live cattle on third-party feedyards; and
•Training on the execution of the Company’s key control regarding the reconciliation and review of live cattle inventory, including sufficient review based on defined thresholds.
We will continue to monitor the design and effectiveness of these and other processes, procedures and controls and make any further changes management
determines appropriate.
Changes in Internal Control Over Financial Reporting
In the quarter ended October 3, 2020, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
During fiscal 2019, we implemented the primary phase of a new Enterprise Resource Planning system (“ERP”). The implementation will continue in additional phases into fiscal 2021. We concluded, as part of our evaluation, that the implementation of the ERP has not materially affected our internal control
over financial reporting.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)The following documents are filed as a part of this report:
(1) Consolidated Financial Statements
Consolidated Statements of Income for the three years ended October 3, 2020
Consolidated Statements of Comprehensive Income for the three years ended October 3, 2020
Indenture dated October 2, 1990, between Sara Lee Corporation and Continental Bank, N.A., as Trustee (the “Sara Lee Indenture”) (previously filed as Exhibit 4.1 to Amendment No. 1 to Registration Statement No. 33-33603 on Form S-3 by Sara Lee Corporation, predecessor in interest to The Hillshire Brands Company,
filed with the Commission on October 5, 1990, and incorporated herein by reference).
The following financial information from our Annual Report on Form 10-K/A for the year ended October 3, 2020, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) the Notes to Consolidated Financial Statements, and (vii) Financial Statement Schedule.
104
Cover
Page Interactive Data File formatted in iXBRL.
*
Indicates a management contract or compensatory plan or arrangement.
Inventory
Lower of Cost or Net Realizable Value Allowance:
2020
$
i34
$
i102
$
i—
$
(i109)
$
i27
2019
i25
i61
i—
(i52)
i34
2018
i3
i68
i—
(i46)
i25
Valuation
Allowance on Deferred Tax Assets:
2020
$
i86
$
i35
$
i13
$
(i7)
$
i127
2019
i79
i13
i6
(i12)
i86
2018
i75
i12
i—
(i8)
i79
/
82
SIGNATURES
Pursuant
to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)
83
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
