NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: ACCOUNTING POLICIES
Basis of Presentation
The consolidated condensed financial statements are unaudited and have been prepared by Tyson Foods, Inc. (“Tyson,” “the Company,” “we,” “us” or “our”). Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations of the United States Securities and Exchange Commission. Although we believe the disclosures contained herein are adequate to make the information presented not misleading, these consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2017
. Preparation of consolidated condensed financial statements requires us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We believe the accompanying consolidated condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary to state fairly our financial position as of
March 31, 2018
, and the results of operations for the
three and six
months ended
March 31, 2018
, and
April 1, 2017
. Results of operations and cash flows for the periods presented are not necessarily indicative of results to be expected for the full year.
Consolidation
The consolidated condensed financial statements include the accounts of all wholly-owned subsidiaries, as well as majority-owned subsidiaries over which we exercise control and, when applicable, entities for which we have a controlling financial interest or variable interest entities for which we are the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Recently Issued Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the "Tax Cuts and Jobs Act" (the "Tax Act"). The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and entities will have the choice to apply either in the period of adoption or retrospectively to each period in which the effect of the change in the federal income tax rate in the Tax Act. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In August 2017, the FASB issued guidance that eases certain documentation and assessment requirements of hedge effectiveness and modifies the accounting for components excluded from the assessment. Some of the modifications include the ineffectiveness of derivative gain/loss in highly effective cash flow hedge to be recorded in Other Comprehensive Income, the change in fair value of derivative to be recorded in the same income statement line as the hedged item, and additional disclosures required on the cumulative basis adjustment in fair value hedges and the effect of hedging on financial statement lines for components excluded from the assessment. The amendment also simplifies the application of hedge accounting in certain situations to permit new hedging strategies to be eligible for hedge accounting. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and the modified retrospective transition method should be applied. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In May 2017, the FASB issued guidance that clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted and the prospective transition method should be applied to awards modified on or after the adoption date. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In March 2017, the FASB issued guidance which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and the modified retrospective transition method should be applied. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In March 2017, the FASB issued guidance which will change the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Service cost will be included within the same income statement line item as other compensation costs arising from services rendered during the period, while other components of net periodic benefit pension cost will be presented separately outside of operating income. Additionally, only the service cost component will be eligible for capitalization when applicable. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted and the retrospective transition method should be applied for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement, and the prospective transition method should be applied, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We plan to adopt this guidance beginning in the first quarter of fiscal 2019. We do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.
In November 2016, the FASB issued guidance which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted and the retrospective transition method should be applied. We do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.
In October 2016, the FASB issued guidance which requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted and the modified retrospective transition method should be applied. We do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.
In August 2016, the FASB issued guidance which aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted and the retrospective transition method should be applied. We do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2016, the FASB issued guidance that provides more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. The application of the guidance requires various transition methods depending on the specific amendment. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued guidance which created new accounting and reporting guidelines for leasing arrangements. The guidance requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on classification as a finance or operating lease. The guidance also requires qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and the modified retrospective method should be applied. While we are still evaluating the impact this guidance will have on our consolidated financial statements and related disclosures, we have completed our initial scoping reviews and have made progress in our assessment phase as we continue to identify our leasing processes that will be impacted by the new standard. We have also made progress in developing the policy elections we will make upon adoption and we are implementing software to meet the reporting requirements of this standard. We expect our financial statement disclosures will be expanded to present additional details of our leasing arrangements. At this time, we are unable to reasonably estimate the expected increase in assets and liabilities on our consolidated balance sheets or the impacts to our consolidated financial statements upon adoption.
In January 2016, the FASB issued guidance that requires most equity investments be measured at fair value, with subsequent other changes in fair value recognized in net income. The guidance also impacts financial liabilities under the fair value option and the presentation and disclosure requirements on the classification and measurement of financial instruments. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. It should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, unless equity securities do not have readily determinable fair values, in which case the amendments should be applied prospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued guidance changing the criteria for recognizing revenue. The guidance provides for a single five-step model to be applied to all revenue contracts with customers. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted for fiscal years beginning after December 15, 2016, our fiscal 2018. We plan to adopt this guidance using the modified retrospective transition method beginning in the first quarter of fiscal 2019. We continue to evaluate the impact of the adoption of this guidance, but currently, do not expect the new guidance to materially impact our consolidated financial statements other than additional disclosure requirements.
Changes in Accounting Principles
In March 2018, the FASB issued guidance which clarifies application of Topic 740 in regards to the Tax Act enacted December 22, 2017. The guidance requires provisional amounts to be reported within the reporting period in which the Tax Act was enacted if a reasonable estimate can be determined or within the measurement period not to exceed one year from the enactment date by which accounting is required to be completed in accordance with Topic 740. Any provisional amounts or adjustments to provisional amounts reported in the measurement period should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined. The guidance was effective immediately and we adopted this guidance in the first quarter of fiscal 2018. The impact of adoption had a material impact to our financial statements (see Note 9: Income Taxes).
In March 2016, the FASB issued guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows and impact on earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018. We adopted this guidance in the first quarter of fiscal 2018. The guidance requires all income tax effects of share-based payment awards to be recognized in the consolidated statements of income when the awards vest or are settled, which is a change from the current guidance that requires such activity to be recorded in capital in excess of par value within stockholders' equity. We adopted this guidance prospectively which may create volatility in our effective tax rate when adopted depending largely on future events and other factors, which may include our stock price, timing of stock option exercises, and the value realized upon vesting or exercise of shares compared to the grant date fair value of those shares. For the
three and six
months ended
March 31, 2018
, the recorded tax benefit was not material. In addition, when calculating potential common shares used to determine diluted earnings per share this guidance requires that assumed proceeds under the treasury stock method be modified to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital. These changes were applied on a prospective basis which did not have a material impact to diluted earnings per share for the
three and six
months ended
March 31, 2018
. Under the new guidance, companies can also make an accounting policy election to either estimate forfeitures each period or to account for forfeitures as they occur. We changed our accounting policy to account for forfeitures as they occur using the modified retrospective transition method which did not have a material impact on our consolidated financial statements. The guidance changes the presentation of excess tax benefits from a financing activity to an operating activity in the consolidated statements of cash flows. We applied this change prospectively, and thus, prior periods have not been adjusted. This guidance also requires the presentation related to cash paid to a taxing authority when shares are withheld to satisfy the statutory income tax withholding obligation to a financing activity in the consolidated statements of cash flows. The adoption of this standard did not have a material impact on our consolidated statements of cash flows.
In July 2015, the FASB issued guidance which requires management to evaluate inventory at the lower of cost and net realizable value. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018. The prospective transition method was applied. We adopted this guidance in the first quarter of fiscal 2018 and it did not have a material impact on our consolidated financial statements.
NOTE 2: ACQUISITIONS AND DISPOSITIONS
Acquisitions
On November 10, 2017, we acquired a value-added protein business for
$226 million
, net of cash acquired, as part of our strategic expansion initiative. Its results, subsequent to the acquisition closing, are included in our Prepared Foods and Chicken segments. The preliminary purchase price allocation included
$21 million
of net working capital, including
$10 million
of cash acquired,
$13 million
of Property, Plant and Equipment,
$90 million
of Intangible Assets and
$112 million
of Goodwill. During the second quarter of fiscal 2018, we recorded measurement period adjustments, which decreased goodwill by
$1 million
, after obtaining additional information regarding, among other things, asset valuations and liabilities assumed. We completed the allocation of goodwill to our segments in the second quarter of fiscal 2018 using the acquisition method approach. This resulted in
$82 million
and
$29 million
of goodwill allocated to our Prepared Foods and Chicken segments, respectively. All of the goodwill acquired is deductible for tax purposes. Certain estimated values for the acquisition, including goodwill, intangible assets, and property, plant and equipment, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed.
On June 7, 2017, we acquired all of the outstanding common stock of AdvancePierre Foods Holdings, Inc. ("AdvancePierre") as part of our strategy to sustainably feed the world with the fastest growing portfolio of protein brands. The purchase price was equal to
$40.25
per share for AdvancePierre's outstanding common stock, or approximately
$3.2 billion
. We funded the acquisition with existing cash on hand, net proceeds from the issuance of new senior notes and a new term loan facility, as well as borrowings under our commercial paper program. AdvancePierre's results from operations subsequent to the acquisition closing are included in the Prepared Foods and Chicken segments.
The following table summarizes the purchase price allocation and fair values of the assets acquired and liabilities assumed at the acquisition date of AdvancePierre. Certain estimated values for the acquisition, including goodwill, intangible assets, property, plant and equipment, and deferred income taxes, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed. The purchase price was allocated based on information available at acquisition date. During the first quarter of fiscal
2018
, we recorded measurement period adjustments which decreased goodwill by
$2 million
, primarily related to updated information related to income taxes.
|
|
|
|
|
|
|
in millions
|
|
Cash and cash equivalents
|
|
$
|
126
|
|
Accounts receivable
|
|
80
|
|
Inventories
|
|
272
|
|
Other current assets
|
|
5
|
|
Property, Plant and Equipment
|
|
302
|
|
Goodwill
|
|
2,980
|
|
Intangible Assets
|
|
1,515
|
|
Current debt
|
|
(1,148
|
)
|
Accounts payable
|
|
(114
|
)
|
Other current liabilities
|
|
(97
|
)
|
Tax receivable agreement ("TRA") due to former shareholders
|
|
(223
|
)
|
Long-Term Debt
|
|
(33
|
)
|
Deferred Income Taxes
|
|
(455
|
)
|
Other Liabilities
|
|
(3
|
)
|
Net assets acquired
|
|
$
|
3,207
|
|
The fair value of identifiable intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
Intangible Asset Category
|
|
Type
|
|
Life in Years
|
|
Fair Value
|
Brands & Trademarks
|
|
Amortizable
|
|
Weighted Average of 15 years
|
|
$
|
390
|
|
Customer Relationships
|
|
Amortizable
|
|
Weighted Average of 15 years
|
|
1,125
|
|
Total identifiable intangible assets
|
|
|
|
|
|
$
|
1,515
|
|
As a result of the acquisition, we recognized a total of
$2,980 million
of goodwill. The purchase price was assigned to assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition, and any excess was allocated to goodwill, as shown in the table above. Goodwill represents the value we expect to achieve through the implementation of operational synergies and growth opportunities. We completed the allocation of goodwill to our segments in the first quarter of fiscal 2018 using the with-and-without approach of the estimated operating results and synergy impact to fair value of our reporting units. This resulted in
$2,412 million
and
$568 million
of goodwill allocated to our Prepared Foods and Chicken segments, respectively. Of the goodwill acquired,
$163 million
related to previous AdvancePierre acquisitions is expected to be deductible for tax purposes.
We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis, relief-from-royalty, and multi-period excess earnings valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, we are required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.
The acquisition of AdvancePierre was accounted for using the acquisition method of accounting, and consequently, the results of operations for AdvancePierre are reported in our consolidated financial statements from the date of acquisition.
The following unaudited pro forma information presents the combined results of operations as if the acquisition of AdvancePierre had occurred at the beginning of fiscal 2016. AdvancePierre's pre-acquisition results have been added to our historical results. The pro forma results contained in the table below include adjustments for amortization of acquired intangibles, depreciation expense, interest expense related to the financing and related income taxes. Any potential cost savings or other operational efficiencies that could result from the acquisition are not included in these pro forma results.
These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed dates, nor is it necessarily an indication of future operating results.
|
|
|
|
|
|
|
|
|
in millions (unaudited)
|
Three Months Ended
|
|
Six Months Ended
|
|
April 1, 2017
|
|
April 1, 2017
|
Pro forma sales
|
$
|
9,481
|
|
|
$
|
19,068
|
|
Pro forma net income attributable to Tyson
|
341
|
|
|
940
|
|
Pro forma net income per diluted share attributable to Tyson
|
$
|
0.92
|
|
|
$
|
2.53
|
|
Dispositions
On April 24, 2017, we announced our intent to sell three non-protein businesses as part of our strategic focus on protein brands. These businesses, which are all part of our Prepared Foods segment, included Sara Lee® Frozen Bakery, Kettle and Van’s® and produce items such as frozen desserts, waffles, snack bars, and soups, sauces and sides. The sale is also expected to include the Chef Pierre®, Bistro Collection®, Kettle Collection™, and Van’s® brands, a license to use the Sara Lee® brand in various channels, as well as our Tarboro, North Carolina, Fort Worth, Texas, and Traverse City, Michigan, prepared foods facilities. In the first quarter of fiscal 2018, we made the decision to sell our pizza crust business, which is also included in our Prepared Foods segment, as part of our strategic focus on protein brands.
We completed the sale of our Kettle business on December 30, 2017, and received net proceeds of
$125 million
including a working capital adjustment. As a result of the sale, we recorded a pretax gain of
$22 million
, which is reflected in Cost of Sales in our Consolidated Condensed Statement of Income for the
six
months ended
March 31, 2018
. We utilized the net proceeds to pay down term loan debt.
We anticipate we will close on the sale of the Sara Lee® Frozen Bakery, Van’s®, and pizza crust businesses in the back half of fiscal 2018. We recorded pretax impairment charges totaling
$75 million
and
$101 million
for the three and six months ended March 31, 2018, respectively, due to revised estimates of the businesses' fair value based on current expected net sales proceeds. The impairment charges were recorded in Cost of Sales in our Consolidated Condensed Statement of Income, and primarily consisted of goodwill previously classified within assets held for sale.
We have reclassified the assets and liabilities related to these businesses, including allocated goodwill, to assets and liabilities held for sale in our Consolidated Condensed Balance Sheets. The amounts of assets and liabilities held for sale will change in future periods due to such items as normal business operations, timing of closing of the sale, as well as final negotiated deal terms.
The Company concluded the businesses were not significant disposal groups and did not represent a strategic shift, and therefore were not classified as discontinued operations for any of the periods presented.
The following table summarizes the net assets and liabilities held for sale:
|
|
|
|
|
|
|
|
|
|
in millions
|
|
|
March 31, 2018
|
September 30, 2017
|
Assets held for sale:
|
|
|
Accounts receivable, net
|
$
|
2
|
|
$
|
2
|
|
Inventories
|
75
|
|
109
|
|
Net Property, Plant and Equipment
|
180
|
|
192
|
|
Other current assets
|
1
|
|
1
|
|
Goodwill
|
193
|
|
312
|
|
Intangible Assets, net
|
191
|
|
191
|
|
Total assets held for sale
|
$
|
642
|
|
$
|
807
|
|
Liabilities held for sale:
|
|
|
Accounts payable
|
$
|
2
|
|
$
|
1
|
|
Other current liabilities
|
6
|
|
3
|
|
Total liabilities held for sale
|
$
|
8
|
|
$
|
4
|
|
NOTE 3: INVENTORIES
Processed products, livestock and supplies and other are valued at the lower of cost and net realizable value. Cost includes purchased raw materials, live purchase costs, growout costs (primarily feed, grower pay and catch and haul costs), labor and manufacturing and production overhead, which are related to the purchase and production of inventories.
At
March 31, 2018
,
64%
of the cost of inventories was determined by the first-in, first-out ("FIFO") method as compared to 63% at
September 30, 2017
. The remaining cost of inventories for both periods is determined by the weighted-average method.
The following table reflects the major components of inventory (in millions):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
September 30, 2017
|
Processed products
|
$
|
1,960
|
|
|
$
|
1,947
|
|
Livestock
|
930
|
|
|
874
|
|
Supplies and other
|
438
|
|
|
418
|
|
Total inventory
|
$
|
3,328
|
|
|
$
|
3,239
|
|
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
The major categories of property, plant and equipment and accumulated depreciation are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
September 30, 2017
|
Land
|
$
|
141
|
|
|
$
|
138
|
|
Buildings and leasehold improvements
|
4,010
|
|
|
3,878
|
|
Machinery and equipment
|
7,284
|
|
|
7,111
|
|
Land improvements and other
|
343
|
|
|
323
|
|
Buildings and equipment under construction
|
618
|
|
|
492
|
|
|
12,396
|
|
|
11,942
|
|
Less accumulated depreciation
|
6,641
|
|
|
6,374
|
|
Net property, plant and equipment
|
$
|
5,755
|
|
|
$
|
5,568
|
|
NOTE 5: RESTRUCTURING AND RELATED CHARGES
In the fourth quarter of fiscal 2017, our Board of Directors approved a multi-year restructuring program (the “Financial Fitness Program”), which is expected to contribute to the Company’s overall strategy of financial fitness through increased operational effectiveness and overhead reduction. The Company currently anticipates the Financial Fitness Program will result in cumulative pretax charges, once implemented, of approximately
$253 million
which consist primarily of severance and employee related costs, impairments and accelerated depreciation of technology assets, incremental costs to implement new technology, and contract termination costs. In the second quarter of fiscal 2018, we increased the total cumulative pretax charge estimate by
$35 million
due to revisions in scope and timing related to implementation of new technology. The majority of this increase is expected to be incurred in fiscal 2019. As part of this program, we anticipate eliminating approximately
550
positions across several areas and job levels with most of the eliminated positions originating from the corporate offices in Springdale, Arkansas; Chicago, Illinois; and Cincinnati, Ohio. For the
three and six
months ended
March 31, 2018
, the Company recognized restructuring and related charges of
$12 million
and
$31 million
associated with the Financial Fitness Program, respectively.
The following table reflects the pretax impact of restructuring and related charges in our Consolidated Condensed Statements of Income:
|
|
|
|
|
|
|
|
|
in millions
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
March 31, 2018
|
|
March 31, 2018
|
Cost of Sales
|
$
|
—
|
|
|
$
|
—
|
|
Selling, General and Administrative expenses
|
12
|
|
|
31
|
|
Total restructuring and related charges, pretax
|
$
|
12
|
|
|
$
|
31
|
|
The following table reflects the pretax impact of restructuring and related charges incurred in the three and
six
months ended
March 31, 2018
, the program charges to date and the total estimated program charges, by our reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
|
Three Months Ended
|
Six Months Ended
|
Financial Fitness Program charges to date
|
|
|
March 31, 2018
|
March 31, 2018
|
March 31, 2018
|
Total estimated Financial Fitness Program charges
|
|
Beef
|
$
|
1
|
|
$
|
2
|
|
$
|
10
|
|
$
|
18
|
|
Pork
|
—
|
|
1
|
|
4
|
|
7
|
|
Chicken
|
6
|
|
15
|
|
71
|
|
102
|
|
Prepared Foods
|
5
|
|
13
|
|
95
|
|
125
|
|
Other
|
—
|
|
—
|
|
1
|
|
1
|
|
Total restructuring and related charges, pretax
|
$
|
12
|
|
$
|
31
|
|
$
|
181
|
|
$
|
253
|
|
For the
three and six
months ended
March 31, 2018
, the restructuring and related charges consisted of
$1 million
and
$4 million
of severance and employee related costs, respectively, and
$11 million
and
$27 million
of technology related costs, respectively. The majority of the remaining estimated charges are related to incremental costs to implement new technology and accelerated depreciation of technology assets.
The following table reflects our liability related to restructuring charges which were recognized in other current liabilities in our Consolidated Condensed Balance Sheets as of
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
|
Liability as of September 30, 2017
|
Restructuring charges
|
Payments
|
Other
|
Liability as of March 31, 2018
|
Severance and employee related costs
|
$
|
47
|
|
$
|
4
|
|
$
|
24
|
|
$
|
—
|
|
$
|
27
|
|
Contract termination
|
22
|
|
—
|
|
19
|
|
—
|
|
3
|
|
Total
|
$
|
69
|
|
$
|
4
|
|
$
|
43
|
|
$
|
—
|
|
$
|
30
|
|
NOTE 6: OTHER CURRENT LIABILITIES
Other current liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
September 30, 2017
|
Accrued salaries, wages and benefits
|
$
|
497
|
|
|
$
|
673
|
|
Other
|
720
|
|
|
751
|
|
Total other current liabilities
|
$
|
1,217
|
|
|
$
|
1,424
|
|
NOTE 7: DEBT
The major components of debt are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
September 30, 2017
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
Commercial paper
|
1,000
|
|
|
778
|
|
Senior notes:
|
|
|
|
7.00% Notes due May 2018
|
120
|
|
|
120
|
|
Notes due May 2019 (2.43% at 3/31/2018)
|
300
|
|
|
300
|
|
2.65% Notes due August 2019
|
1,000
|
|
|
1,000
|
|
Notes due June 2020 (2.57% at 3/31/2018)
|
350
|
|
|
350
|
|
Notes due August 2020 (2.34% at 3/31/2018)
|
400
|
|
|
400
|
|
4.10% Notes due September 2020
|
282
|
|
|
282
|
|
2.25% Notes due August 2021
|
500
|
|
|
500
|
|
4.50% Senior notes due June 2022
|
1,000
|
|
|
1,000
|
|
3.95% Notes due August 2024
|
1,250
|
|
|
1,250
|
|
3.55% Notes due June 2027
|
1,350
|
|
|
1,350
|
|
7.00% Notes due January 2028
|
18
|
|
|
18
|
|
6.13% Notes due November 2032
|
162
|
|
|
162
|
|
4.88% Notes due August 2034
|
500
|
|
|
500
|
|
5.15% Notes due August 2044
|
500
|
|
|
500
|
|
4.55% Notes due June 2047
|
750
|
|
|
750
|
|
Discount on senior notes
|
(14
|
)
|
|
(15
|
)
|
Term loans:
|
|
|
|
Tranche B due August 2019
|
—
|
|
|
427
|
|
Tranche B due August 2020 (2.74% at 3/31/2018)
|
500
|
|
|
500
|
|
Other
|
77
|
|
|
81
|
|
Unamortized debt issuance costs
|
(45
|
)
|
|
(50
|
)
|
Total debt
|
10,000
|
|
|
10,203
|
|
Less current debt
|
1,128
|
|
|
906
|
|
Total long-term debt
|
$
|
8,872
|
|
|
$
|
9,297
|
|
Revolving Credit Facility
In March 2018, we amended our existing credit facility which, among other things, increased our line of credit from
$1.5 billion
to
$1.75 billion
. This facility supports short-term funding needs and letters of credit and will mature and the commitments thereunder will terminate in March 2023. Amounts available for borrowing under this facility totaled
$1.75 billion
at
March 31, 2018
, net of outstanding letters of credit and outstanding borrowings. At
March 31, 2018
, we had no outstanding letters of credit issued under this facility. At
March 31, 2018
, we had an additional
$106 million
of bilateral letters of credit issued separately from the revolving credit facility, none of which were drawn upon. Our letters of credit are issued primarily in support of leasing and workers’ compensation insurance programs and other legal obligations.
If in the future any of our subsidiaries shall guarantee any of our material indebtedness, such subsidiary shall be required to guarantee the indebtedness, obligations and liabilities under this facility.
Commercial Paper Program
We have a commercial paper program under which we may issue unsecured short-term promissory notes ("commercial paper") up to an aggregate maximum principal amount of
$1 billion
as of
March 31, 2018
. As of
March 31, 2018
, we had
$1 billion
of commercial paper outstanding at a weighted average interest rate of
2.28%
with maturities of less than
105
days
.
Term Loan Tranche B due August 2019
During the first quarter of fiscal 2018, we extinguished the
$427 million
outstanding balance of the Term Loan Tranche B due in August 2019 using cash on hand and proceeds received from the sale of a non-protein business.
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
March 31, 2018
.
NOTE 8: EQUITY
Share Repurchases
As of
March 31, 2018
,
25.5 million
shares remained available for repurchase under our share repurchase program. The share repurchase program has no fixed or scheduled termination date and the timing and extent to which we repurchase shares will depend upon, among other things, our working capital needs, markets, industry conditions, liquidity targets, limitations under our debt obligations and regulatory requirements. In addition to the share repurchase program, we purchase shares on the open market to fund certain obligations under our equity compensation plans.
A summary of share repurchases of our Class A stock is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
March 31, 2018
|
|
April 1, 2017
|
|
March 31, 2018
|
|
April 1, 2017
|
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
Shares repurchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under share repurchase program
|
|
0.8
|
|
|
$
|
60
|
|
|
2.6
|
|
|
$
|
167
|
|
|
2.3
|
|
|
$
|
180
|
|
|
11.2
|
|
|
$
|
717
|
|
To fund certain obligations under equity compensation plans
|
|
0.2
|
|
|
13
|
|
|
0.2
|
|
|
15
|
|
|
0.8
|
|
|
57
|
|
|
0.6
|
|
|
41
|
|
Total share repurchases
|
|
1.0
|
|
|
$
|
73
|
|
|
2.8
|
|
|
$
|
182
|
|
|
3.1
|
|
|
$
|
237
|
|
|
11.8
|
|
|
$
|
758
|
|
NOTE 9: INCOME TAXES
On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act includes significant changes to the U.S. tax code that will affect our fiscal year ending September 29, 2018, and future periods. Changes include, but are not limited to, (1) reducing the corporate federal income tax rate from
35%
to
21%
, (2) bonus depreciation that will allow for full expensing of qualified property in the year placed in service, and (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries. Section 15 of the Internal Revenue Code (the "Code") stipulates that our fiscal year ending September 29, 2018, will have a blended corporate tax rate of
24.5%
, which is based on the applicable tax rates before and after the Tax Act and the number of days in the year. Additionally, the Tax Act includes the repeal of the domestic production activity deduction, a new provision designed to tax global intangible low-taxed income ("GILTI"), a new provision which allows a deduction for foreign-derived intangible income ("FDII"), and a new provision which institutes a base erosion and anti-abuse tax ("BEAT"), beginning with our fiscal year 2019. We are still evaluating these new international provisions; however, we do not expect them to have a material impact to our financial statements.
Changes in the Code from the Tax Act had a material impact on our financial statements in the six months ended March 31, 2018. Under generally accepted accounting principles ("U.S. GAAP") specifically ASC Topic 740,
Income Taxes,
the tax effects of changes in tax laws must be recognized in the period in which the law is enacted, or December 22, 2017, for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rates. The change in deferred taxes is recorded as an adjustment to our deferred tax provision.
The staff of the U.S. Securities and Exchange Commission has recognized the complexity of reflecting the impacts of the Tax Act and issued guidance in Staff Accounting Bulletin 118 ("SAB 118"), which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the "measurement period"). SAB 118 describes three scenarios (or "buckets") associated with a company’s status of accounting for income tax reform: (1) a company is complete with its
accounting for certain effects of tax reform, (2) a company is able to determine a
reasonable estimate for certain effects of tax reform and records that estimate as a
provisional amount, or (3) a company is not able to determine a reasonable estimate and
therefore continues to apply ASC 740, based on the provisions of the tax
laws that were in effect immediately prior to the Tax Act being enacted. The FASB has also issued guidance that essentially adopts the SEC guidance (see Note 1: Accounting Policies).
Our accounting for the Tax Act was incomplete at December 30, 2017 and remains incomplete. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
Corporate Tax Rate Reduction
: The Tax Act reduced the corporate tax rate from
35%
to
21%
, effective January 1, 2018. This results in a blended corporate tax rate of
24.5%
in fiscal year 2018 and
21%
thereafter. We analyzed our domestic deferred tax balances to estimate which of those balances are expected to reverse in fiscal 2018 or thereafter, and we re-measured the deferred taxes at
24.5%
or
21%
accordingly. In the three months ended December 30, 2017, we recorded a discrete net deferred income tax benefit of
$994 million
with a corresponding provisional reduction to our net deferred income tax liability. In the three months ended March 31, 2018, we recorded an additional
$9 million
discrete deferred income tax benefit with a corresponding provisional reduction to our net deferred income tax liability. Remeasurement may change as we receive additional information about the timing of deferred income tax reversals.
Transition Tax
: The Tax Act requires a one-time Deemed Repatriation Transition Tax on previously untaxed net accumulated and current earnings and profits of our foreign subsidiaries. Based on our analysis of our foreign earnings and profits, net of deficits and foreign tax credits, we do not expect any transition tax to be due for the Company.
Our accounting for the following element of the Tax Act is incomplete, and we were not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustments were recorded.
GILTI
: The Tax Act creates a new requirement in tax years beginning after December 31, 2017, that certain income (i.e., GILTI) earned by controlled foreign corporations ("CFCs") must be included currently in the gross income of the CFCs’ U.S. shareholder. Because of the complexity of the new GILTI tax rules, we continue to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Since future U.S. inclusions in taxable income related to GILTI depend on not only our current ownership structure and estimated future results of global operations but also our intent and ability to modify such structure and/or our business, we are not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimates, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the impacts.
Our effective tax rate was
25.3%
and
34.3%
for the
second
quarter of fiscal
2018
and
2017
, respectively, and
(54.0)%
and
34.7%
for the
six
months of fiscal 2018 and 2017, respectively. The remeasurement of deferred income taxes at newly enacted tax rates resulted in a
$9 million
and
$1,003 million
income tax benefit, or a
(2.2)%
and
(79.3)%
impact on the effective tax rate in the second quarter and six months of fiscal 2018, respectively. The newly enacted tax legislation results in a
24.5%
statutory federal income tax rate for fiscal
2018
. The non-deductible impairment related to the anticipated sale of non-protein businesses held for sale increased the effective tax rate for the second quarter and six months of fiscal 2018 by
4.4%
and
1.9%
, respectively. Additionally, the effective tax rates for the second quarter and six months of fiscal 2018 and fiscal 2017 were impacted by such items as the domestic production deduction, excess tax benefits associated with share-based payments to employees and state income taxes.
Unrecognized tax benefits were
$305 million
and
$316 million
at
March 31, 2018
, and
September 30, 2017
, respectively.
We estimate that during the next twelve months it is reasonably possible that unrecognized tax benefits could decrease by as much as
$16 million
primarily due to expiration of statutes of limitations in various jurisdictions.
As of September 30, 2017, we had accumulated undistributed earnings of foreign subsidiaries aggregating approximately
$182 million
. The Tax Act generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries after December 31, 2017.
As a result, our intention is that excess cash held by our foreign subsidiaries that is not subject to regulatory restrictions is expected to be repatriated net of applicable withholding taxes which are expected to be immaterial. The remainder of accumulated undistributed earnings are expected to be indefinitely reinvested outside of the United States.
NOTE 10: OTHER INCOME AND CHARGES
During the
second
quarter of fiscal
2018
, we recognized a one-time cash bonus to our hourly frontline employees of
$109 million
using incremental cash savings from the Tax Act, which was predominantly recorded in the Consolidated Condensed Statements of Income in Cost of Sales.
The second quarter of fiscal 2018 included
$6 million
of equity earnings in joint ventures and
$1 million
in net foreign currency exchange gains, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
During the
six
months of fiscal
2018
, we recorded
$9 million
of equity earnings in joint ventures and
$2 million
in net foreign currency exchange losses, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
During the second quarter of fiscal 2017, we recorded a
$52 million
impairment charge related to our San Diego Prepared Foods operation. The impairment was comprised of
$43 million
of property, plant and equipment,
$8 million
of definite lived intangible assets and
$1 million
of other assets. This charge, of which
$44 million
was included in the Consolidated Condensed Statements of Income in Cost of Sales and
$8 million
was included in the Consolidated Condensed Statements of Income in Selling, General and Administrative, was triggered by a change in a co-manufacturing contract and ongoing losses.
During the
six
months of fiscal
2017
, we recorded
$16 million
of legal cost related to a 1995 plant closure of an apparel manufacturing facility operated by a former subsidiary of The Hillshire Brands Company, which we acquired in fiscal 2014,
$6 million
of equity earnings in joint ventures and
$1 million
in net foreign currency exchange losses, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
NOTE 11: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
March 31, 2018
|
|
April 1, 2017
|
|
March 31, 2018
|
|
April 1, 2017
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
316
|
|
|
$
|
341
|
|
|
$
|
1,948
|
|
|
$
|
935
|
|
Less: Net income attributable to noncontrolling interests
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Net income attributable to Tyson
|
315
|
|
|
340
|
|
|
1,946
|
|
|
933
|
|
Less dividends declared:
|
|
|
|
|
|
|
|
Class A
|
90
|
|
|
65
|
|
|
201
|
|
|
151
|
|
Class B
|
18
|
|
|
14
|
|
|
42
|
|
|
33
|
|
Undistributed earnings
|
$
|
207
|
|
|
$
|
261
|
|
|
$
|
1,703
|
|
|
$
|
749
|
|
|
|
|
|
|
|
|
|
|
|
Class A undistributed earnings
|
$
|
171
|
|
|
$
|
215
|
|
|
$
|
1,404
|
|
|
$
|
618
|
|
Class B undistributed earnings
|
36
|
|
|
46
|
|
|
299
|
|
|
131
|
|
Total undistributed earnings
|
$
|
207
|
|
|
$
|
261
|
|
|
$
|
1,703
|
|
|
$
|
749
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
Class A weighted average shares
|
296
|
|
|
295
|
|
|
296
|
|
|
296
|
|
Class B weighted average shares, and shares under the if-converted method for diluted earnings per share
|
70
|
|
|
70
|
|
|
70
|
|
|
70
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options, restricted stock and performance units
|
4
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
|
370
|
|
|
370
|
|
|
371
|
|
|
371
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Tyson:
|
|
|
|
|
|
|
|
Class A basic
|
$
|
0.88
|
|
|
$
|
0.95
|
|
|
$
|
5.42
|
|
|
$
|
2.59
|
|
Class B basic
|
$
|
0.78
|
|
|
$
|
0.86
|
|
|
$
|
4.87
|
|
|
$
|
2.35
|
|
Diluted
|
$
|
0.85
|
|
|
$
|
0.92
|
|
|
$
|
5.25
|
|
|
$
|
2.51
|
|
Approximately
1 million
of our stock-based compensation shares were antidilutive for the three and six months ended
March 31, 2018
and approximately
2 million
for the three and six months ended
April 1, 2017
. These shares were not included in the diluted earnings per share calculation.
We have
two
classes of capital stock, Class A stock and Class B stock. Cash dividends cannot be paid to holders of Class B stock unless they are simultaneously paid to holders of Class A stock. The per share amount of cash dividends paid to holders of Class B stock cannot exceed
90%
of the cash dividends paid to holders of Class A stock.
We allocate undistributed earnings based upon a
1
to
0.9
ratio per share to Class A stock and Class B stock, respectively. We allocate undistributed earnings based on this ratio due to historical dividend patterns, voting control of Class B shareholders and contractual limitations of dividends to Class B stock.
NOTE 12: DERIVATIVE FINANCIAL INSTRUMENTS
Our business operations give rise to certain market risk exposures mostly due to changes in commodity prices, foreign currency exchange rates and interest rates. We manage a portion of these risks through the use of derivative financial instruments to reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Our risk management programs are periodically reviewed by our Board of Directors' Audit Committee. These programs are monitored by senior management and may be revised as market conditions dictate. Our current risk management programs utilize industry-standard models that take into account the implicit cost of hedging. Risks associated with our market risks and those created by derivative instruments and the fair values are strictly monitored, using value-at-risk and stress tests. Credit risks associated with our derivative contracts are not significant as we minimize counterparty concentrations, utilize margin accounts or letters of credit, and deal with credit worthy counterparties. Additionally, our derivative contracts are mostly short-term in duration and we generally do not make use of credit-risk-related contingent features. No significant concentrations of credit risk existed at
March 31, 2018
.
We had the following aggregated outstanding notional amounts related to our derivative financial instruments (in millions, except soy meal tons):
|
|
|
|
|
|
|
|
|
|
|
|
Metric
|
|
March 31, 2018
|
|
September 30, 2017
|
Commodity:
|
|
|
|
|
|
Corn
|
Bushels
|
|
79
|
|
|
55
|
|
Soy meal
|
Tons
|
|
278,600
|
|
|
475,200
|
|
Live cattle
|
Pounds
|
|
124
|
|
|
211
|
|
Lean hogs
|
Pounds
|
|
37
|
|
|
240
|
|
Foreign currency
|
United States dollar
|
|
$
|
74
|
|
|
$
|
58
|
|
We recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Condensed Balance Sheets, with the exception of normal purchases and normal sales expected to result in physical delivery. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged (i.e., cash flow hedge or fair value hedge). We designate certain forward contracts as follows:
|
|
•
|
Cash Flow Hedges – include certain commodity forward and option contracts of forecasted purchases (i.e., grains) and certain foreign exchange forward contracts.
|
|
|
•
|
Fair Value Hedges – include certain commodity forward contracts of firm commitments (i.e., livestock).
|
Cash Flow Hedges
Derivative instruments are designated as hedges against changes in the amount of future cash flows related to procurement of certain commodities utilized in our production processes. For the derivative instruments we designate and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses representing hedge ineffectiveness are recognized in earnings in the current period. Ineffectiveness related to our cash flow hedges was not significant for the
three and six
months ended
March 31, 2018
, and
April 1, 2017
. As of
March 31, 2018
, the net amounts expected to be reclassified into earnings within the next 12 months are pretax gains of
$1 million
. During the three and
six
months ended
March 31, 2018
, and
April 1, 2017
, we did not reclassify significant pretax gains/losses into earnings as a result of the discontinuance of cash flow hedges.
The following table sets forth the pretax impact of cash flow hedge derivative instruments on the Consolidated Condensed Statements of Income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized in OCI
On Derivatives
|
|
|
Consolidated Condensed
Statements of Income
Classification
|
|
Gain (Loss)
Reclassified from
OCI to Earnings
|
|
|
Three Months Ended
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
April 1, 2017
|
|
|
|
March 31, 2018
|
|
April 1, 2017
|
Cash flow hedge – derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
Cost of sales
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
Foreign exchange contracts
|
—
|
|
|
—
|
|
|
Other income/expense
|
|
—
|
|
|
—
|
|
Total
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized in OCI
On Derivatives
|
|
|
Consolidated Condensed
Statements of Income
Classification
|
|
Gain (Loss)
Reclassified from
OCI to Earnings
|
|
|
Six Months Ended
|
|
|
|
Six Months Ended
|
|
March 31, 2018
|
|
April 1, 2017
|
|
|
|
March 31, 2018
|
|
April 1, 2017
|
Cash flow hedge – derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
Cost of sales
|
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
Foreign exchange contracts
|
—
|
|
|
—
|
|
|
Other income/expense
|
|
—
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
Fair Value Hedges
We designate certain derivative contracts as fair value hedges of firm commitments to purchase livestock for harvest. Our objective of these hedges is to minimize the risk of changes in fair value created by fluctuations in commodity prices associated with fixed price livestock firm commitments. For these derivative instruments we designate and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings in the same period. We include the gain or loss on the hedged items (i.e., livestock purchase firm commitments) in the same line item, Cost of Sales, as the offsetting gain or loss on the related livestock forward position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
|
Consolidated Condensed
Statements of Income
Classification
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
March 31, 2018
|
|
April 1, 2017
|
|
March 31, 2018
|
|
April 1, 2017
|
Gain (Loss) on forwards
|
Cost of sales
|
|
$
|
1
|
|
|
$
|
(12
|
)
|
|
$
|
(6
|
)
|
|
$
|
(16
|
)
|
Gain (Loss) on purchase contract
|
Cost of sales
|
|
(1
|
)
|
|
12
|
|
|
6
|
|
|
16
|
|
Ineffectiveness related to our fair value hedges was not significant for the
three and six
months ended
March 31, 2018
, and
April 1, 2017
.
Undesignated Positions
In addition to our designated positions, we also hold derivative contracts for which we do not apply hedge accounting. These include certain derivative instruments related to commodities price risk, including grains, livestock, energy and foreign currency risk. We mark these positions to fair value through earnings at each reporting date.
The following table sets forth the pretax impact of the undesignated derivative instruments in the Consolidated Condensed Statements of Income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Condensed
Statements of Income
Classification
|
|
Gain (Loss)
Recognized in Earnings
|
|
|
Gain (Loss)
Recognized in Earnings
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
March 31, 2018
|
|
April 1, 2017
|
|
March 31, 2018
|
|
April 1, 2017
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Sales
|
|
$
|
(30
|
)
|
|
$
|
25
|
|
|
$
|
(21
|
)
|
|
$
|
76
|
|
Commodity contracts
|
Cost of sales
|
|
68
|
|
|
(45
|
)
|
|
46
|
|
|
(46
|
)
|
Foreign exchange contracts
|
Other income/expense
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Total
|
|
|
$
|
36
|
|
|
$
|
(20
|
)
|
|
$
|
23
|
|
|
$
|
30
|
|
The fair value of all outstanding derivative instruments in the Consolidated Condensed Balance Sheets are included in Note 13: Fair Value Measurements.
NOTE 13: FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
Level 1
— Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.
Level 2
— Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
|
|
•
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
•
|
Quoted prices for identical or similar assets in non-active markets;
|
|
|
•
|
Inputs other than quoted prices that are observable for the asset or liability; and
|
|
|
•
|
Inputs derived principally from or corroborated by other observable market data.
|
Level 3 —
Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities accounted for at fair value on a recurring basis according to the valuation techniques we used to determine their fair values (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting (a)
|
|
Total
|
Other Current Assets:
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
Designated as hedges
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
10
|
|
Undesignated
|
—
|
|
|
47
|
|
|
—
|
|
|
(29
|
)
|
|
18
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Current
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
2
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Non-current
|
—
|
|
|
45
|
|
|
51
|
|
|
—
|
|
|
96
|
|
Deferred compensation assets
|
13
|
|
|
288
|
|
|
—
|
|
|
—
|
|
|
301
|
|
Total assets
|
$
|
13
|
|
|
$
|
406
|
|
|
$
|
52
|
|
|
$
|
(44
|
)
|
|
$
|
427
|
|
Other Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
Designated as hedges
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Undesignated
|
—
|
|
|
29
|
|
|
—
|
|
|
(28
|
)
|
|
1
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
(28
|
)
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting (a)
|
|
Total
|
Other Current Assets:
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
Designated as hedges
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
9
|
|
Undesignated
|
—
|
|
|
24
|
|
|
—
|
|
|
(3
|
)
|
|
21
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Current
|
—
|
|
|
2
|
|
|
1
|
|
|
—
|
|
|
3
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Non-current
|
—
|
|
|
45
|
|
|
50
|
|
|
—
|
|
|
95
|
|
Deferred compensation assets
|
23
|
|
|
272
|
|
|
—
|
|
|
—
|
|
|
295
|
|
Total assets
|
$
|
23
|
|
|
$
|
353
|
|
|
$
|
51
|
|
|
$
|
(4
|
)
|
|
$
|
423
|
|
Other Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
Designated as hedges
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
Undesignated
|
—
|
|
|
21
|
|
|
—
|
|
|
(17
|
)
|
|
4
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
4
|
|
(a) Our derivative assets and liabilities are presented in our Consolidated Condensed Balance Sheets on a net basis when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. Additionally, at
March 31, 2018
, and
September 30, 2017
, we had
$2 million
and
$22 million
, respectively, of cash collateral posted with various counterparties where master netting arrangements exist and held
$18 million
in cash collateral at March 31, 2018.
The following table provides a reconciliation between the beginning and ending balance of marketable debt securities measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in millions):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
March 31, 2018
|
|
April 1, 2017
|
Balance at beginning of year
|
$
|
51
|
|
|
$
|
57
|
|
Total realized and unrealized gains (losses):
|
|
|
|
Included in earnings
|
—
|
|
|
—
|
|
Included in other comprehensive income (loss)
|
—
|
|
|
—
|
|
Purchases
|
10
|
|
|
10
|
|
Issuances
|
—
|
|
|
—
|
|
Settlements
|
(9
|
)
|
|
(11
|
)
|
Balance at end of period
|
$
|
52
|
|
|
$
|
56
|
|
Total gains (losses) for the six-month period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at end of period
|
$
|
—
|
|
|
$
|
—
|
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Assets and Liabilities:
Our derivative financial instruments primarily include exchange-traded and over-the-counter contracts which are further described in Note 12: Derivative Financial Instruments. We record our derivative financial instruments at fair value using quoted market prices adjusted for credit and non-performance risk and internal models that use as their basis readily observable market inputs including current and forward market prices. We classify these instruments in Level 2 when quoted market prices can be corroborated utilizing observable current and forward commodity market prices on active exchanges or observable market transactions.
Available-for-Sale Securities:
Our investments in marketable debt securities are classified as available-for-sale and are reported at fair value based on pricing models and quoted market prices adjusted for credit and non-performance risk. Short-term investments with maturities of less than
12
months are included in Other current assets in the Consolidated Condensed Balance Sheets and primarily include certificates of deposit and commercial paper. All other marketable debt securities are included in Other Assets in the Consolidated Condensed Balance Sheets and have maturities ranging up to 33 years. We classify our investments in U.S. government, U.S. agency, certificates of deposit and commercial paper debt securities as Level 2 as fair value is generally estimated using discounted cash flow models that are primarily industry-standard models that consider various assumptions, including time value and yield curve as well as other readily available relevant economic measures. We classify certain corporate, asset-backed and other debt securities as Level 3 as there is limited activity or less observable inputs into valuation models, including current interest rates and estimated prepayment, default and recovery rates on the underlying portfolio or structured investment vehicle. Significant changes to assumptions or unobservable inputs in the valuation of our Level 3 instruments would not have a significant impact to our consolidated condensed financial statements.
The following table sets forth our available-for-sale securities' amortized cost basis, fair value and unrealized gain (loss) by significant investment category (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
September 30, 2017
|
|
Amortized
Cost Basis
|
|
|
Fair
Value
|
|
|
Unrealized
Gain (Loss)
|
|
|
Amortized
Cost Basis
|
|
|
Fair
Value
|
|
|
Unrealized
Gain (Loss)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and agency
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
47
|
|
|
$
|
47
|
|
|
$
|
—
|
|
Corporate and asset-backed
|
52
|
|
|
52
|
|
|
—
|
|
|
51
|
|
|
51
|
|
|
—
|
|
Unrealized holding gains (losses), net of tax, are excluded from earnings and reported in OCI until the security is settled or sold. On a quarterly basis, we evaluate whether losses related to our available-for-sale securities are temporary in nature. Losses on equity securities are recognized in earnings if the decline in value is judged to be other than temporary. If losses related to our debt securities are determined to be other than temporary, the loss would be recognized in earnings if we intend, or will more likely than not be required, to sell the security prior to recovery. For debt securities in which we have the intent and ability to hold until maturity, losses determined to be other than temporary would remain in OCI, other than expected credit losses which are recognized in earnings. We consider many factors in determining whether a loss is temporary, including the length of time and extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. We recognized no other than temporary impairment in earnings for the
three and six
months ended
March 31, 2018
, and
April 1, 2017
. No other than temporary losses were deferred in OCI as of
March 31, 2018
, and
September 30, 2017
.
Deferred Compensation Assets:
We maintain non-qualified deferred compensation plans for certain executives and other highly compensated employees. Investments are maintained within a trust and include money market funds, mutual funds and life insurance policies. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The investments are recorded at fair value based on quoted market prices and are included in Other Assets in the Consolidated Condensed Balance Sheets. We classify the investments which have observable market prices in active markets in Level 1 as these are generally publicly-traded mutual funds. The remaining deferred compensation assets are classified in Level 2, as fair value can be corroborated based on observable market data. Realized and unrealized gains (losses) on deferred compensation are included in earnings.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges.
In the three and six months ended March 31, 2018, we recorded
$75 million
and
$101 million
impairment charges, respectively, related to the expected sale of non-protein businesses held for sale, due to revised estimates of the businesses' fair value based on current expected net sales proceeds. The impairment charges were recorded in Cost of Sales in our Consolidated Condensed Statement of Income, and primarily consisted of Goodwill previously classified within Assets held for sale. Our valuation included unobservable Level 3 inputs and was based on expected sales proceeds from a competitive bidding process and ongoing discussions with potential buyers.
In the second quarter of fiscal 2017, we recorded a
$52 million
impairment charge related to our San Diego Prepared Foods operation. The impairment was comprised of
$43 million
of property, plant and equipment,
$8 million
of definite lived intangibles assets and
$1 million
of other assets. This charge, of which
$44 million
was included in the Consolidated Condensed Statements of Income in Cost of Sales and
$8 million
was included in the Consolidated Condensed Statements of Income in Selling, General and Administrative, was triggered by a change in a co-manufacturing contract and ongoing losses. Our valuation of these assets was primarily based on discounted cash flows and relief-from-royalty models, which included unobservable Level 3 inputs.
Other Financial Instruments
Fair value of our debt is principally estimated using Level 2 inputs based on quoted prices for those or similar instruments. Fair value and carrying value for our debt are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
September 30, 2017
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
Total debt
|
$
|
10,050
|
|
|
$
|
10,000
|
|
|
$
|
10,591
|
|
|
$
|
10,203
|
|
NOTE 14: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of the net periodic cost for the pension and postretirement benefit plans for the
three and six
months ended
March 31, 2018
, and
April 1, 2017
, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Three Months Ended
|
|
Six Months Ended
|
|
March 31, 2018
|
|
April 1, 2017
|
|
March 31, 2018
|
|
April 1, 2017
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
6
|
|
Interest cost
|
16
|
|
|
16
|
|
|
32
|
|
|
32
|
|
Expected return on plan assets
|
(15
|
)
|
|
(14
|
)
|
|
(31
|
)
|
|
(29
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
Net actuarial loss
|
1
|
|
|
2
|
|
|
2
|
|
|
4
|
|
Settlement (gain) loss
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Net periodic cost
|
$
|
4
|
|
|
$
|
9
|
|
|
$
|
7
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plans
|
|
Three Months Ended
|
|
Six Months Ended
|
|
March 31, 2018
|
|
April 1, 2017
|
|
March 31, 2018
|
|
April 1, 2017
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service credit
|
(6
|
)
|
|
(6
|
)
|
|
(12
|
)
|
|
(12
|
)
|
Net periodic cost (credit)
|
$
|
(5
|
)
|
|
$
|
(5
|
)
|
|
$
|
(11
|
)
|
|
$
|
(11
|
)
|
We made lump-sum settlement payments of
$4 million
and
$5 million
for the
six
months ended
March 31, 2018
and
April 1, 2017
, respectively, to certain deferred vested participants within our respective non-qualified and qualified pension plans.
We contributed
$8 million
and
$13 million
to our pension plans for the three months ended
March 31, 2018
, and
April 1, 2017
, respectively. We contributed
$13 million
and
$22 million
to our pension plans for the
six
months ended
March 31, 2018
, and
April 1, 2017
, respectively. We expect to contribute an additional
$43 million
during the remainder of fiscal
2018
. The amount of contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which we operate. As a result, the actual funding in fiscal 2018 may differ from the current estimate.
NOTE 15: OTHER COMPREHENSIVE INCOME (LOSS)
The before and after tax changes in the components of other comprehensive income (loss) are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
March 31, 2018
|
|
April 1, 2017
|
|
March 31, 2018
|
|
April 1, 2017
|
|
Before Tax
|
Tax
|
After Tax
|
|
Before Tax
|
Tax
|
After Tax
|
|
Before Tax
|
Tax
|
After Tax
|
|
Before Tax
|
Tax
|
After Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives accounted for as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss reclassified to cost of sales
|
$
|
2
|
|
$
|
—
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
$
|
1
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
$
|
(1
|
)
|
$
|
2
|
|
|
$
|
1
|
|
$
|
(1
|
)
|
$
|
—
|
|
Unrealized gain (loss)
|
2
|
|
(1
|
)
|
1
|
|
|
(1
|
)
|
—
|
|
(1
|
)
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss)
|
1
|
|
(1
|
)
|
—
|
|
|
1
|
|
—
|
|
1
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
5
|
|
—
|
|
5
|
|
|
9
|
|
—
|
|
9
|
|
|
6
|
|
—
|
|
6
|
|
|
(5
|
)
|
—
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits
|
(6
|
)
|
—
|
|
(6
|
)
|
|
1
|
|
1
|
|
2
|
|
|
(4
|
)
|
—
|
|
(4
|
)
|
|
(3
|
)
|
2
|
|
(1
|
)
|
Total other comprehensive income (loss)
|
$
|
4
|
|
$
|
(2
|
)
|
$
|
2
|
|
|
$
|
7
|
|
$
|
2
|
|
$
|
9
|
|
|
$
|
5
|
|
$
|
(1
|
)
|
$
|
4
|
|
|
$
|
(7
|
)
|
$
|
1
|
|
$
|
(6
|
)
|
NOTE 16: SEGMENT REPORTING
We operate in
four
reportable segments: Beef, Pork, Chicken, and Prepared Foods. We measure segment profit as operating income (loss). Other primarily includes our foreign chicken production operations in China and India, third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC.
On June 7, 2017, we acquired AdvancePierre, a producer and distributor of value-added, convenient, ready-to-eat sandwiches, sandwich components and other entrées and snacks. On November 10, 2017, we acquired a value-added protein business. The results from operations subsequent to the acquisition closings are included in the Prepared Foods and Chicken segments.
Beef:
Beef includes our operations related to processing live fed cattle and fabricating dressed beef carcasses into primal and sub-primal meat cuts and case-ready products. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets. This segment also includes sales from allied products such as hides and variety meats, as well as logistics operations to move products through the supply chain.
Pork:
Pork includes our operations related to processing live market hogs and fabricating pork carcasses into primal and sub-primal cuts and case-ready products. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets. This segment also includes our live swine group, related allied product processing activities and logistics operations to move products through the supply chain.
Chicken:
Chicken includes our domestic operations related to raising and processing live chickens into, and purchasing raw materials for, fresh, frozen and value-added chicken products, as well as sales from allied products. Our value-added chicken products primarily include breaded chicken strips, nuggets, patties and other ready-to-fix or fully cooked chicken parts. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets. This segment also includes logistics operations to move products through our domestic supply chain and the global operations of our chicken breeding stock subsidiary.
Prepared Foods:
Prepared Foods includes our operations related to manufacturing and marketing frozen and refrigerated food products and logistics operations to move products through the supply chain. This segment includes brands such as Jimmy Dean®, Hillshire Farm®, Ball Park®, Wright®, State Fair®, Van's®, Sara Lee® and Chef Pierre®, as well as artisanal brands Aidells®, Gallo Salame®, and Golden Island®. Products primarily include ready-to-eat sandwiches, sandwich components such as flame-grilled hamburgers and Philly steaks, pepperoni, bacon, breakfast sausage, turkey, lunchmeat, hot dogs, pizza crusts and toppings, flour and corn tortilla products, desserts, appetizers, snacks, prepared meals, ethnic foods, side dishes, meat dishes, breadsticks and processed meats. Products are marketed domestically to food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets.
We allocate expenses related to corporate activities to the segments, except for third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC, which are included in Other.
Information on segments and a reconciliation to income before income taxes are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
March 31, 2018
|
|
April 1, 2017
|
|
March 31, 2018
|
|
April 1, 2017
|
|
Sales:
|
|
|
|
|
|
|
|
|
Beef
|
$
|
3,681
|
|
|
$
|
3,487
|
|
|
$
|
7,567
|
|
|
$
|
7,015
|
|
|
Pork
|
1,265
|
|
|
1,302
|
|
|
2,548
|
|
|
2,554
|
|
|
Chicken
|
2,959
|
|
|
2,798
|
|
|
5,956
|
|
|
5,504
|
|
|
Prepared Foods
|
2,147
|
|
|
1,751
|
|
|
4,439
|
|
|
3,646
|
|
|
Other
|
82
|
|
|
82
|
|
|
170
|
|
|
172
|
|
|
Intersegment sales
|
(361
|
)
|
|
(337
|
)
|
|
(678
|
)
|
|
(626
|
)
|
|
Total sales
|
$
|
9,773
|
|
|
$
|
9,083
|
|
|
$
|
20,002
|
|
|
$
|
18,265
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Beef
|
$
|
92
|
|
|
$
|
126
|
|
|
$
|
348
|
|
|
$
|
425
|
|
|
Pork
|
67
|
|
|
141
|
|
|
218
|
|
|
388
|
|
|
Chicken
|
231
|
|
|
233
|
|
|
503
|
|
|
496
|
|
|
Prepared Foods
|
123
|
|
(a)
|
87
|
|
(b)
|
384
|
|
(a)
|
277
|
|
(b)
|
Other
|
(15
|
)
|
(c)
|
(16
|
)
|
(c)
|
(28
|
)
|
(c)
|
(33
|
)
|
(c)
|
Total operating income
|
498
|
|
|
571
|
|
|
1,425
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense
|
75
|
|
|
52
|
|
|
160
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
$
|
423
|
|
|
$
|
519
|
|
|
$
|
1,265
|
|
|
$
|
1,431
|
|
|
(a) Includes a
$75 million
impairment associated with the divestiture of non-protein business and
$79 million
impairment net of a realized gain associated with the divestiture of non-protein businesses for the three and six months ended March 31, 2018, respectively (see Note 2: Acquisitions and Dispositions).
(b) Includes a
$52 million
impairment charge related to our San Diego Prepared Foods operation (see Note 10: Other Income and Charges).
(c) Other operating loss includes third-party merger and integration costs and corporate overhead of Tyson New Ventures, LLC of
$4 million
and
$6 million
for the three months ended
March 31, 2018
, and
April 1, 2017
, respectively, and
$8 million
and
$13 million
for the
six
months ended
March 31, 2018
, and
April 1, 2017
, respectively.
The Beef segment had sales of
$105 million
and
$88 million
in the
second
quarter of fiscal
2018
and
2017
, respectively, and sales of
$199 million
and
$160 million
in the six months of fiscal 2018 and 2017, respectively, from transactions with other operating segments of the Company. The Pork segment had sales of
$231 million
and
$240 million
in the
second
quarter of fiscal
2018
and
2017
, respectively, and sales of
$432 million
and
$450 million
in the six months of fiscal 2018 and 2017, respectively, from transactions with other operating segments of the Company. The Chicken segment had sales of
$25 million
and
$9 million
in the
second
quarter of fiscal
2018
and
2017
, respectively, and sales of
$47 million
and
$16 million
in the six months of fiscal 2018 and 2017, respectively, from transactions with other operating segments of the Company. The aforementioned sales from intersegment transactions, which were at market prices, were included in the segment sales in the above table.
NOTE 17: COMMITMENTS AND CONTINGENCIES
Commitments
We guarantee obligations of certain outside third parties, consisting primarily of leases, debt and grower loans, which are substantially collateralized by the underlying assets. The remaining terms of the underlying debt cover periods up to
10
years, and the maximum potential amount of future payments as of
March 31, 2018
, was
$20 million
. We also maintain operating leases for various types of equipment, some of which contain residual value guarantees for the market value of the underlying leased assets at the end of the term of the lease. The remaining terms of the lease maturities cover periods over the next
10
years. The maximum potential amount of the residual value guarantees is
$104 million
, of which
$94 million
could be recoverable through various recourse provisions and an additional undeterminable recoverable amount based on the fair value of the underlying leased assets. The likelihood of material payments under these guarantees is not considered probable. At
March 31, 2018
, and
September 30, 2017
, no material liabilities for guarantees were recorded.
We have cash flow assistance programs in which certain livestock suppliers participate. Under these programs, we pay an amount for livestock equivalent to a standard cost to grow such livestock during periods of low market sales prices. The amounts of such payments that are in excess of the market sales price are recorded as receivables and accrue interest. Participating suppliers are obligated to repay these receivables balances when market sales prices exceed this standard cost, or upon termination of the agreement. Our maximum commitment associated with these programs is limited to the fair value of each participating livestock supplier’s net tangible assets. The potential maximum commitment as of
March 31, 2018
, was approximately
$330 million
. We had no receivables under this program at
March 31, 2018
, and
September 30, 2017
. These receivables are included, net of allowance for uncollectible amounts, in Accounts Receivable in our Consolidated Condensed Balance Sheets. Even though these programs are limited to the net tangible assets of the participating livestock suppliers, we also manage a portion of our credit risk associated with these programs by obtaining security interests in livestock suppliers’ assets. After analyzing residual credit risks and general market conditions, we have no allowance for these programs’ estimated uncollectible receivables at
March 31, 2018
, and
September 30, 2017
.
When constructing new facilities or making major enhancements to existing facilities, we will occasionally enter into incentive agreements with local government agencies in order to reduce certain state and local tax expenditures. Under these agreements, we transfer the related assets to various local government entities and receive Industrial Revenue Bonds. We immediately lease the facilities from the local government entities and have an option to re-purchase the facilities for a nominal amount upon tendering the Industrial Revenue Bonds to the local government entities at various predetermined dates. The Industrial Revenue Bonds and the associated obligations for the leases of the facilities offset, and the underlying assets remain in property, plant and equipment. At
March 31, 2018
, total amount under these types of arrangements totaled
$643 million
.
Contingencies
We are involved in various claims and legal proceedings. We routinely assess the likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. We record accruals for such matters to the extent that we conclude a loss is probable and the financial impact, should an adverse outcome occur, is reasonably estimable. Such accruals are reflected in the Company’s consolidated condensed financial statements. In our opinion, we have made appropriate and adequate accruals for these matters. Unless noted otherwise below, we believe the probability of a material loss beyond the amounts accrued to be remote; however, the ultimate liability for these matters is uncertain, and if accruals are not adequate, an adverse outcome could have a material effect on the consolidated financial condition or results of operations. Listed below are certain claims made against the Company and/or our subsidiaries for which the potential exposure is considered material to the Company’s consolidated condensed financial statements. We believe we have substantial defenses to the claims made and intend to vigorously defend these matters.
On September 2, 2016, Maplevale Farms, Inc., acting on behalf of itself and a putative class of direct purchasers of poultry products, filed a class action complaint against us and certain of our poultry subsidiaries, as well as several other poultry processing companies, in the Northern District of Illinois. Subsequent to the filing of this initial complaint, additional lawsuits making similar claims on behalf of putative classes of direct and indirect purchasers were filed in the United States District Court for the Northern District of Illinois. The court consolidated the complaints, for pre-trial purposes, into actions on behalf of three different putative classes: direct purchasers, indirect purchasers/consumers and commercial/institutional indirect purchasers. These three actions are styled In re Broiler Chicken Antitrust Litigation. Several amended and consolidated complaints have been filed on behalf of each putative class. The currently operative complaints allege, among other things, that beginning in January 2008 the defendants conspired and combined to fix, raise, maintain, and stabilize the price of broiler chickens in violation of United States antitrust laws. The complaints on behalf of the putative classes of indirect purchasers also include causes of action under various state unfair competition laws, consumer protection laws, and unjust enrichment common laws. The complaints also allege that defendants “manipulated and artificially inflated a widely used Broiler price index, the Georgia Dock.” It is further alleged that the defendants concealed this conduct from the plaintiffs and the members of the putative classes. The plaintiffs are seeking treble damages, injunctive relief, pre- and post-judgment interest, costs, and attorneys’ fees on behalf of the putative classes. The court issued a ruling on November 20, 2017 denying all defendants’ motions to dismiss. The litigation is currently in a discovery phase.
Decisions on class certification and summary judgment motions likely to be filed by defendants are not expected before the latter part of calendar year 2020 under the scheduling order currently governing the case. Scheduling for trial, if necessary, will occur after rulings on class certification and any summary judgment motions. Certain putative class members have opted out of this matter and are proceeding separately, and others may do so in the future.
On October 17, 2016, William Huser, acting on behalf of himself and a putative class of persons who purchased shares of Tyson Foods' stock between November 23, 2015, and October 7, 2016, filed a class action complaint against Tyson Foods, Inc., Donnie Smith and Dennis Leatherby in the Central District of California. The complaint alleged, among other things, that our periodic filings contained materially false and misleading statements by failing to disclose that the Company has colluded with other producers to manipulate the supply of broiler chickens in order to keep supply artificially low, as alleged in In re Broiler Chicken Antitrust Litigation. Subsequent to the filing of this initial complaint, additional lawsuits making similar claims were filed in the United States District Courts for the Southern District of New York, the Western District of Arkansas, and the Southern District of Ohio. Each of those cases has now been transferred to the United States District Court for the Western District of Arkansas and consolidated, and lead plaintiffs have been appointed. A consolidated complaint was filed on March 22, 2017 (which also named additional individual defendants). The consolidated complaint seeks damages, pre- and post-judgment interest, costs, and attorneys’ fees. The court granted our motion to dismiss this complaint. The plaintiffs filed a motion to amend or alter the judgment and to submit an amended complaint, which was denied. The court’s dismissal was with prejudice.
On March 1, 2017, we received a civil investigative demand ("CID") from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida. The CID requests information primarily related to possible anticompetitive conduct in connection with the Georgia Dock, a chicken products pricing index formerly published by the Georgia Department of Agriculture. We are cooperating with the Attorney General’s office.
Our subsidiary, The Hillshire Brands Company (formerly named Sara Lee Corporation), is a party to a consolidation of cases filed by individual complainants with the Republic of the Philippines, Department of Labor and Employment and the National Labor Relations Commission ("NLRC") from 1998 through July 1999. The complaint was filed against Aris Philippines, Inc., Sara Lee Corporation, Sara Lee Philippines, Inc., Fashion Accessories Philippines, Inc., and Attorney Cesar C. Cruz (collectively, the “respondents”). The complaint alleges, among other things, that the respondents engaged in unfair labor practices in connection with the termination of manufacturing operations in the Philippines in 1995 by Aris Philippines, Inc., a former subsidiary of The Hillshire Brands Company. In late 2004, a labor arbiter ruled against the respondents and awarded the complainants PHP
3,453,664,710
(approximately US
$66 million
) in damages and fees. The respondents appealed the labor arbiter's ruling, and it was subsequently set aside by the NLRC in December 2006. Subsequent to the NLRC’s decision, the parties filed numerous appeals, motions for reconsideration and petitions for review, certain of which remained outstanding for several years. While various of those appeals, motions and/or petitions were pending, The Hillshire Brands Company, on June 23, 2014, without admitting liability, filed a settlement motion requesting that the Supreme Court of the Philippines order dismissal with prejudice of all claims against it and certain other respondents in exchange for payments allocated by the court among the complainants in an amount not to exceed PHP
342,287,800
(approximately US
$6.6 million
). Based in part on its finding that the consideration to be paid to the complainants as part of such settlement was insufficient, the Supreme Court of the Philippines denied the respondents’ settlement motion and all motions for reconsideration thereof. The Supreme Court of the Philippines also set aside as premature the NLRC’s December 2006 ruling. As a result, the cases were remanded back before the NLRC to rule on the merits of the case. On December 15, 2016, we learned that the NLRC rendered its decision on November 29, 2016, regarding the respondents’ appeals regarding the labor arbiter’s 2004 ruling in favor of the complainants. The NLRC increased the award for
4,922
of the total
5,984
complainants to PHP
14,858,495,937
(approximately US
$284 million
). However, the NLRC approved a prior settlement reached with the group comprising approximately
18%
of the class of
5,984
complainants, pursuant to which The Hillshire Brands Company agreed to pay each settling complainant PHP
68,000
(approximately US
$1,300
). The settlement payment was made on December 21, 2016, to the NLRC, which is responsible for distributing the funds to each settling complainant. On December 27, 2016, the respondents filed motions for reconsideration with the NLRC asking that the award be set aside. The NLRC denied respondents' motions for reconsideration in a resolution received on May 5, 2017, and entered a judgment on the award on July 24, 2017. Each of Aris Philippines, Inc., Sara Lee Corporation and Sara Lee Philippines, Inc. appealed this award and sought an injunction to preclude enforcement of the award to the Philippines Court of Appeals. On November 23, 2017, the Court of Appeals granted a writ of preliminary injunction that precluded execution of the NLRC award during the pendency of the appeal. The Court of Appeals subsequently vacated the NLRC’s award on April 12, 2018. We continue to maintain an accrual for this matter. The Court of Appeals' decision remains subject to appeal.
The Hillshire Brands Company was named as a defendant in an asbestos exposure case filed by Mark Lopez in May 2014 in the Superior Court of Alameda County, California. Mr. Lopez was diagnosed with mesothelioma in January 2014 and is now deceased. Mr. Lopez’s family members asserted negligence, premises liability and strict liability claims related to Mr. Lopez’s alleged asbestos exposure from 1954-1986 from the Union Sugar plant in Betteravia, California. The plant, which was sold in 1986, was owned by entities that were predecessors-in-interest to The Hillshire Brands Company. In August 2017, the jury returned a verdict of approximately
$13 million
in favor of the plaintiffs, and a judgment was entered. We have appealed the judgment.