DESCRIPTION OF THE COMPANY
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.
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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.
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.
Margins – Our total operating margin was 7.2% in fiscal 2020. Operating margins by segment were as follows:
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.
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| • | 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. |
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| • | 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. |
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| in millions, except per share data | | | | | | | |
| 2020 | | | | 2019 | | |
| Net income attributable to Tyson | $ | 2,140 | | | $ | 2,022 | |
| Net income attributable to Tyson - per diluted share | 5.86 | | | | 5.52 | | |
2020 – Included the following items:
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| • | $75 million pretax, or ($0.16) per diluted share, of restructuring and related charges. |
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| • | $65 million pretax, or $0.14 per diluted share, related to the additional week in fiscal 2020. |
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| • | $116 million pretax, or $0.24 per diluted share, due to gain from pension plan terminations. |
2019 – Included the following items:
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| • | $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. |
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| • | $41 million pretax, or ($0.08) per diluted share, of restructuring and related charges. |
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| • | $55 million pretax, or $0.11 per diluted share, from gain on sale of an investment. |
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| • | $105 million post tax, or $0.29 per diluted share, from recognition of previously unrecognized tax benefit. |
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| • | $31 million pretax, or ($0.06) per diluted share, of Beef production facility fire costs. |
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| • | $41 million pretax, or ($0.09) per diluted share, from an impairment associated with the planned divestiture of a business. |
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| • | $15 million pretax, or ($0.03) per diluted share, due to a pension plan termination charge. |
SUMMARY OF RESULTS
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| 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 | | % | | | | |
2020 vs. 2019 –
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| • | 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. |
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| • | 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 –
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| • | 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. |
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| • | 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. |
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| • | The above amounts include a net increase of $2,209 million related to the impact of results from acquisitions and divestitures. |
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| 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 –
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| • | 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. |
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| • | 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. |
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| • | The $393 million impact of higher input cost per pound was impacted by: |
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| • | 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. |
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| • | Increase of approximately $500 million of direct incremental expenses related to COVID-19. |
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| • | Increase of approximately $80 million in our Chicken segment related to net increases in feed ingredient costs, growout expenses and outside meat purchases. |
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| • | 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. |
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| • | Increase in incentive-based compensation of approximately $70 million. |
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| • | Decrease in live cattle costs of approximately $530 million in our Beef segment. |
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| • | Decrease in live hog costs of approximately $255 million in our Pork segment. |
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| • | 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 –
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| • | 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. |
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| • | 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. |
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| • | The $445 million impact of higher input cost per pound was impacted by: |
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| • | Increase in live cattle costs of approximately $110 million in our Beef segment. |
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| • | Increase in live hog costs of approximately $100 million in our Pork segment. |
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| • | Increase in raw material and other input costs of approximately $60 million in our Prepared Foods segment. |
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| • | Increase in freight costs of approximately $20 million. |
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| • | Increase due to $31 million of incremental costs associated with a fire at one of our Beef production facilities. |
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| • | Decrease due to one-time cash bonus to front line team members of $108 million in fiscal 2018. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| Selling, General and Administrative | in millions | | | | | | | | | | |
| 2020 | | | | 2019 | | | | 2018 | | |
| Selling, general and administrative | $ | 2,270 | | | $ | 2,195 | | | $ | 2,064 | |
| As a percentage of sales | 5.3 | | % | | 5.2 | | % | | | | |
2020 vs. 2019 –
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| • | Increase of $75 million in selling, general and administrative was primarily driven by: |
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| • | Increase of $83 million in employee costs primarily from incentive-based compensation and the impact of the extra week in fiscal 2020. |
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| • | Increase of $56 million from fiscal 2019 acquisitions not owned by us for all of fiscal 2019. |
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| • | Increase of $40 million from direct incremental expenses associated with COVID-19. |
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| • | Increase of $35 million from technology related costs. |
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| • | Decrease of $55 million in professional fees and merger and integration costs. |
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| • | Decrease of $49 million in marketing, advertising and promotion expenses. |
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| • | Decrease of $26 million in travel and entertainment expenses. |
2019 vs. 2018 –
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| • | Increase of $131 million in selling, general and administrative was primarily driven by: |
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| • | Increase of $87 million related to the Keystone Foods acquisition. |
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| • | Increase of $26 million in team member costs primarily from incentive-based compensation. |
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| • | Increase of $18 million from technology related costs. |
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| • | Increase of $16 million in marketing, advertising, and promotion expenses. |
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| • | Decrease of $18 million from restructuring and related charges. |
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| 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 –
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| • | 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. |
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| • | Non-cash interest expense primarily included interest capitalized, partially offset by the amortization of debt issuance costs and discounts/premiums on note issuances. |
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| 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.
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| Effective Tax Rate | | | | | |
| 2020 | | | 2019 | |
| 22.4 | % | | 16.3 | % |
Our effective income tax rate was 22.4% for fiscal 2020 compared to 16.3% for fiscal 2019. State taxes increased the effective tax rate by 3.0% and 2.9% for fiscal 2020 and 2019, respectively. The effective tax rate for fiscal 2019 includes a 6.6% 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).
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| Sales | | | | | | | | | | | | Operating Income (Loss) | | | | | | | | | | |
| 2020 | | | | 2019 | | | | 2018 | | | | 2020 | | | | 2019 | | | | 2018 | | |
| Beef | $ | 15,742 | | | $ | 15,828 | | | $ | 15,473 | | | $ | 1,686 | | | $ | 1,107 | | | $ | 1,013 | |
| 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 | | | $ | 3,114 | | | $ | 2,827 | | | $ | 3,032 | |
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| 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 | $ | 1,686 | | | $ | 1,107 | | | $ | 579 | | | $ | 1,013 | | | $ | 94 | |
| Operating Margin | 10.7 | | % | | 7.0 | | % | | | | | | 6.5 | | % | | | | |
2020 vs. 2019 –
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| • | 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. |
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| • | Average Sales Price – Average sales price increased as beef demand remained strong amid supply disruptions related to the impact of COVID-19. |
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| • | 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. |
2019 vs. 2018 –
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| • | 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. |
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| • | Average Sales Price – Average sales price increased as demand for our beef products remained strong. |
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| • | 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. |
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| 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 –
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| • | 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. |
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| • | Average Sales Price – Average sales price increased as pork demand remained strong amid supply disruptions related to the impact of COVID-19. |
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| • | 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 –
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| • | Sales Volume – Sales volume increased due to increased domestic availability of live hogs and strong demand for our pork products. |
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| • | Average Sales Price – Average sales price increased associated with higher livestock costs. |
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| • | 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. |
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| 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 –
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| • | 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. |
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| • | Average Sales Price – Average sales price decreased in fiscal 2020 primarily due to weaker chicken pricing as a result of market conditions. |
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| • | 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. |
2019 vs. 2018 –
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| • | Sales Volume – Sales volume increased primarily due to incremental volume from business acquisitions. |
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| • | 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. |
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| • | 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. |
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| 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 –
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| • | 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. |
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| • | 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. |
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| • | 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 –
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| • | Sales Volume – Sales volume decreased primarily from business divestitures. |
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| • | 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. |
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| • | 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. |
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| 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 –
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| • | 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. |
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| • | 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 –
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| • | Sales – Sales increased primarily from the incremental sales from the acquisitions of Keystone Foods and the Thai and European operations. |
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| • | 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. |
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.
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| Cash Flows from Operating Activities | | | | | in millions | | |
| 2020 | | | | 2019 | | |
| Net income | $ | 2,150 | | | $ | 2,035 | |
| Non-cash items in net income: | | | | | | | |
| Depreciation and amortization | 1,192 | | | | 1,098 | | |
| Deferred income taxes | 45 | | | | 92 | | |
| 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 | 474 | | | | (846 | | ) |
| Net cash provided by operating activities | $ | 3,874 | | | $ | 2,513 | |
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| • | Impairment of assets in fiscal 2019 included a $41 million impairment related to the planned sale of a business. |
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| • | Other, net in fiscal 2020 included a $112 million gain related to pension plan terminations. |
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| • | Cash flows associated with changes in operating assets and liabilities: |
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| • | 2020 – Increased primarily due to decreased accounts receivable, 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 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. |
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| • | 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. |
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| 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 | ) |
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| • | 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. |
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| • | 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. |
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| • | Purchases of marketable securities included funding for our deferred compensation plans. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| 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 | |
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| • | Proceeds from issuance of debt and borrowings/payments on revolving credit facility: |
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| • | 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. |
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| • | 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. |
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| • | Payments on debt included: |
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| • | 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. |
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| • | 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. |
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| • | Proceeds from issuance and repayment of short-term debt in the form of commercial paper: |
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| • | 2020 – We had net repayments of $999 million to our unsecured short-term promissory notes ("commercial paper") pursuant to our commercial paper program. |
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| • | 2019 – We had net issuances of $395 million to our commercial paper pursuant to our commercial paper program. |
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| • | Purchases of Tyson Class A common stock included: |
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| • | $150 million for shares repurchased pursuant to our share repurchase program in both fiscal 2020 and fiscal 2019. |
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| • | $57 million and $102 million for shares repurchased to fund certain obligations under our equity compensation plans in fiscal 2020 and 2019, respectively. |
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| • | Dividends paid during fiscal 2020 included a 12% increase to our fiscal 2019 quarterly dividend rate. |
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| Liquidity | | | | | | | | | | | | | | | | in millions | | |
| | Commitments Expiration Date | | Facility Amount | | | | Outstanding Letters of Credit (no draw downs) | | | | Amount Borrowed | | | | Amount Available at October 3, 2020 | | |
| Cash and cash equivalents | | | | | | | | | | | | | | | | $ | 1,420 | |
| Short-term investments | | | | | | | | | | | | | | | | — | | |
| Term loan facility | | March 2022 | | $ | 1,500 | | | $ | — | | | $ | 1,500 | | | — | | |
| Revolving credit facility | | March 2023 | | $ | 1,750 | | | $ | — | | | $ | — | | | 1,750 | | |
| Commercial Paper | | | | | | | | | | | | | | | | — | | |
| Total liquidity | | | | | | | | | | | | | | | | $ | 3,170 | |
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| • | Liquidity includes cash and cash equivalents, short-term investments, and availability under our revolving credit and term loan facilities, less outstanding commercial paper balance. |
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| • | 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. |
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| • | 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. |
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| • | We expect net interest expense will approximate $440 million for fiscal 2021. |
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| • | Our ratio of short-term assets to short-term liabilities ("current ratio") was 1.9 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. |
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| • | 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 2.2x 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.
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.
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| Ratings Level (S&P/Moody's/Fitch) | Borrowing Spread through March 30, 2021 | | Borrowing Spread March 31, 2021 through March 27, 2022 | |
| A-/A3/A- or above | 1.250 | % | 1.500 | % |
| BBB+/Baa1/BBB+ | 1.375 | % | 1.625 | % |
| BBB/Baa2/BBB (current level) | 1.500 | % | 1.750 | % |
| BBB-/Baa3/BBB- | 1.750 | % | 2.000 | % |
| BB+/Ba1/BB+ or lower | 2.000 | % | 2.250 | % |
Revolving Credit Facility
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.
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| 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.
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):
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| 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 | |
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| (1) | In the event of a default on payment, acceleration of the principal payments could occur. |
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| (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. |
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| (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. |
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| (4) | For additional information regarding operating leases, refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 6: Leases. |
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| (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. |
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| (6) | Amounts include estimated amounts to complete buildings and equipment under construction as of October 3, 2020. |
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| (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.
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.
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.
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.
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.
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.
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