TYSON FOODS, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended
July 2, 2016
or
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¨
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
001-14704
(Commission File Number)
______________________________________________
TYSON FOODS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________
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Delaware
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71-0225165
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2200 West Don Tyson Parkway, Springdale, Arkansas
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72762-6999
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(Address of principal executive offices)
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(Zip Code)
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(479) 290-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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x
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Accelerated filer
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¨
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
July 2, 2016
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Class
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Outstanding Shares
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Class A Common Stock, $0.10 Par Value (Class A stock)
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297,446,228
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Class B Common Stock, $0.10 Par Value (Class B stock)
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70,010,755
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TYSON FOODS, INC.
INDEX
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PAGE
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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1
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Item 1.
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Financial Statements
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TYSON FOODS, INC.
(In millions, except per share data)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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|||||||||||||
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July 2, 2016
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June 27, 2015
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July 2, 2016
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June 27, 2015
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Sales
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$
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9,403
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$
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10,071
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$
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27,725
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$
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30,867
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Cost of Sales
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8,179
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9,085
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24,117
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27,936
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Gross Profit
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1,224
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986
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3,608
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2,931
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Selling, General and Administrative
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457
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423
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1,361
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1,312
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Operating Income
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767
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563
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2,247
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1,619
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Other (Income) Expense:
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|||||||||||||||
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Interest income
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(2
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)
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(3
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(5
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(6
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)
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Interest expense
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60
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73
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191
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221
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Other, net
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(2
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(25
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)
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(6
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(32
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)
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Total Other (Income) Expense
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56
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45
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180
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183
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Income before Income Taxes
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711
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518
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2,067
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1,436
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Income Tax Expense
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226
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174
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687
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471
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Net Income
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485
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344
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1,380
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965
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Less: Net Income Attributable to Noncontrolling Interests
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1
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1
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3
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3
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Net Income Attributable to Tyson
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$
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484
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$
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343
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$
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1,377
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$
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962
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Weighted Average Shares Outstanding:
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Class A Basic
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312
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335
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318
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335
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Class B Basic
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70
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70
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70
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70
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Diluted
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388
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414
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394
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414
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Net Income Per Share Attributable to Tyson:
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Class A Basic
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$
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1.29
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$
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0.86
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$
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3.61
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$
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2.41
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Class B Basic
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$
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1.17
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$
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0.78
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$
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3.28
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$
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2.20
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Diluted
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$
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1.25
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$
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0.83
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$
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3.50
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$
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2.32
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Dividends Declared Per Share:
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Class A
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$
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0.150
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$
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0.100
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$
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0.500
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$
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0.325
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Class B
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$
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0.135
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$
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0.090
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$
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0.450
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$
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0.293
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See accompanying Notes to Consolidated Condensed Financial Statements.
2
TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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July 2, 2016
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June 27, 2015
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July 2, 2016
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June 27, 2015
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Net Income
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$
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485
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$
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344
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$
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1,380
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$
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965
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Other Comprehensive Income (Loss), Net of Taxes:
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Derivatives accounted for as cash flow hedges
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2
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1
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2
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1
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Investments
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—
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(12
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—
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(1
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Currency translation
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(2
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2
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3
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(17
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Postretirement benefits
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(2
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—
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(5
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7
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Total Other Comprehensive Income (Loss), Net of Taxes
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(2
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(9
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—
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(10
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Comprehensive Income
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483
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335
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1,380
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955
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Less: Comprehensive Income Attributable to Noncontrolling Interests
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1
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1
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3
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3
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Comprehensive Income Attributable to Tyson
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$
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482
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$
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334
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$
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1,377
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$
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952
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See accompanying Notes to Consolidated Condensed Financial Statements.
3
TYSON FOODS, INC.
(In millions, except share and per share data)
(Unaudited)
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July 2, 2016
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October 3, 2015
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Assets
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Current Assets:
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Cash and cash equivalents
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$
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197
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$
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688
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Accounts receivable, net
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1,599
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1,620
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Inventories
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2,918
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2,878
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Other current assets
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167
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195
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Total Current Assets
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4,881
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5,381
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Net Property, Plant and Equipment
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5,157
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5,176
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Goodwill
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6,669
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6,667
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Intangible Assets, net
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5,104
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5,168
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Other Assets
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599
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612
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Total Assets
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$
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22,410
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$
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23,004
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Liabilities and Shareholders’ Equity
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Current Liabilities:
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Current debt
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$
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79
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$
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715
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Accounts payable
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1,466
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1,662
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Other current liabilities
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1,168
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1,158
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Total Current Liabilities
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2,713
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3,535
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Long-Term Debt
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6,099
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6,010
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Deferred Income Taxes
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2,486
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2,449
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Other Liabilities
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1,306
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1,304
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Commitments and Contingencies (Note 16)
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Shareholders’ Equity:
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Common stock ($0.10 par value):
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Class A-authorized 900 million shares, issued 363 million shares
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36
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35
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Convertible Class B-authorized 900 million shares, issued 70 million shares
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7
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7
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Capital in excess of par value
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4,343
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4,307
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Retained earnings
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8,010
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6,813
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Accumulated other comprehensive loss
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(90
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)
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(90
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)
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Treasury stock, at cost – 65 million shares at July 2, 2016, and 47 million shares at October 3, 2015
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(2,515
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)
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(1,381
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)
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Total Tyson Shareholders’ Equity
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9,791
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9,691
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Noncontrolling Interests
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15
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15
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Total Shareholders’ Equity
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9,806
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9,706
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Total Liabilities and Shareholders’ Equity
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$
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22,410
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$
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23,004
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See accompanying Notes to Consolidated Condensed Financial Statements.
4
TYSON FOODS, INC.
(In millions)
(Unaudited)
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Nine Months Ended
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July 2, 2016
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June 27, 2015
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Cash Flows From Operating Activities:
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Net income
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$
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1,380
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$
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965
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Depreciation and amortization
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526
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524
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Deferred income taxes
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61
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16
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Other, net
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45
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57
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Net changes in operating assets and liabilities
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(139
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)
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110
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Cash Provided by Operating Activities
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1,873
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1,672
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Cash Flows From Investing Activities:
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Additions to property, plant and equipment
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(515
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)
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(636
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)
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Purchases of marketable securities
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(30
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(24
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Proceeds from sale of marketable securities
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28
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43
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Proceeds from sale of businesses
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—
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165
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Other, net
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15
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26
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Cash Used for Investing Activities
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(502
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)
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(426
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)
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Cash Flows From Financing Activities:
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Payments on debt
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(694
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)
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(1,485
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)
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Proceeds from issuance of long-term debt
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1
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501
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Borrowings on revolving credit facility
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675
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1,345
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Payments on revolving credit facility
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(525
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)
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(1,345
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)
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Purchases of Tyson Class A common stock
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(1,293
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)
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(197
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)
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Dividends
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(162
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)
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(110
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)
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Stock options exercised
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89
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71
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Other, net
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42
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17
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Cash Used for Financing Activities
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(1,867
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(1,203
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Effect of Exchange Rate Changes on Cash
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5
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(10
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Increase (Decrease) in Cash and Cash Equivalents
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(491
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)
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33
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Cash and Cash Equivalents at Beginning of Year
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688
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438
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Cash and Cash Equivalents at End of Period
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$
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197
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$
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471
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See accompanying Notes to Consolidated Condensed Financial Statements.
5
TYSON FOODS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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
October 3, 2015
. 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
July 2, 2016
, and the results of operations for the
three and nine
months ended
July 2, 2016
, and
June 27, 2015
. 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 March 2016, the Financial Accounting Standards Board ("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. Early adoption is permitted and 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. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In January 2016, the FASB issued guidance that requires most equity investments be measured at fair value, with subsequent 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 November 2015, the FASB issued guidance to simplify the presentation of deferred income taxes. The guidance requires that deferred tax liabilities and assets be classified as non-current in the balance sheet. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018, and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early adoption is permitted. This new guidance is not expected to have a material impact on our consolidated financial statements.
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. Early adoption is permitted and the prospective transition method should be applied. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
6
In May 2015, the FASB issued guidance which removes the requirement to categorize all investments within the fair value hierarchy for which fair values are measured using the net asset value per share practical expedient. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2015, our fiscal 2017. Early adoption is permitted and the retrospective transition method should be applied. This new guidance is not expected to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued guidance on the recognition of fees paid by a customer for cloud computing arrangements. The guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the software license consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2015, our fiscal 2017, and should be applied prospectively or retrospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In April 2015, the FASB issued guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability; however, debt issuance costs related to revolving credit facilities will remain in other assets. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2015, our fiscal 2017. Early adoption is permitted and the retrospective transition method should be applied. This new guidance is not expected to have a material impact on our consolidated financial statements.
In February 2015, the FASB issued guidance changing the analysis procedures that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary determination, and (5) certain investment funds. This guidance is effective for annual reporting periods and interim periods within those annual reporting periods, beginning after December 15, 2015, our fiscal 2017. Early adoption is permitted and the retrospective or modified retrospective transition method should be applied. This new guidance is not expected to have a material impact 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 are currently evaluating the impact this guidance will have on our consolidated financial statements.
In fiscal 2015, we sold the Brazil and Mexico chicken production operations which were included in Other within our segment reporting to JBS SA ("JBS") for a combined
$575 million
in cash, which was subject to certain adjustments. We completed the sale of the Brazil operation in the first quarter of fiscal 2015 and received net proceeds of
$148 million
including working capital, net debt adjustments and cash transferred. The sale did not result in a significant gain or loss as the carrying value of the Brazil operation approximated the sales proceeds at the time of sale.
We completed the sale of the Mexico operation in the fourth quarter of fiscal 2015 and received net proceeds of approximately
$374 million
including working capital, net debt adjustments and cash transferred. As a result of the sale, we recorded a pre-tax gain of
$161 million
in the fourth quarter of fiscal 2015, which was reflected in Cost of Sales in our Consolidated Condensed Statements of Income.
To better align our overall production capacity with then-current cattle supplies, we ceased beef operations at our Denison, Iowa, plant in fiscal 2015. As a result, we recorded
$12 million
in closure and impairment charges during the fourth quarter of fiscal 2015. These charges impacted the Beef segment’s operating income and were reflected in Cost of Sales in our Consolidated Condensed Statements of Income.
In the fourth quarter of fiscal 2015, we recorded a
$59 million
impairment and other related charges associated with a Prepared Foods project designed to optimize the combined Tyson and Hillshire Brands network capacity and to enhance manufacturing efficiencies for the future. These charges were reflected in the Prepared Foods segment’s operating income in the fourth quarter of fiscal 2015, of which
$49 million
was included in the Consolidated Condensed Statements of Income in Cost of Sales and
$10 million
was included in the Consolidated Condensed Statements of Income in Selling, General and Administrative. As a result of this project, we sold our Chicago, Illinois, hospitality plant in June 2016 and closed our Jefferson, Wisconsin, plant in July 2016. The sale of our Chicago, Illinois, plant and closure of our Jefferson, Wisconsin, plant did not have a significant impact on the Company's operating results.
Additionally, in the third quarter of fiscal 2015, as part of our ongoing efforts to increase efficiencies in our Chicken business, we closed our Buena Vista, Georgia, plant. The closure costs did not have a significant impact on the Company's operating results.
7
Processed products, livestock and supplies and other are valued at the lower of cost or market. 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
July 2, 2016
,
62%
of the cost of inventories was determined by first-in, first-out ("FIFO") method as compared to
63%
at October 3, 2015. 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):
|
July 2, 2016
|
October 3, 2015
|
||||||
|
Processed products
|
$
|
1,559
|
|
$
|
1,631
|
|
|
|
Livestock
|
933
|
|
831
|
|
|||
|
Supplies and other
|
426
|
|
416
|
|
|||
|
Total inventory
|
$
|
2,918
|
|
$
|
2,878
|
|
|
The major categories of property, plant and equipment and accumulated depreciation are as follows (in millions):
|
|
July 2, 2016
|
October 3, 2015
|
|||||
|
Land
|
$
|
126
|
|
$
|
122
|
|
|
|
Buildings and leasehold improvements
|
3,640
|
|
3,581
|
|
|||
|
Machinery and equipment
|
6,707
|
|
6,452
|
|
|||
|
Land improvements and other
|
291
|
|
286
|
|
|||
|
Buildings and equipment under construction
|
347
|
|
375
|
|
|||
|
11,111
|
|
10,816
|
|
||||
|
Less accumulated depreciation
|
5,954
|
|
5,640
|
|
|||
|
Net property, plant and equipment
|
$
|
5,157
|
|
$
|
5,176
|
|
|
Other current liabilities are as follows (in millions):
|
July 2, 2016
|
October 3, 2015
|
||||||
|
Accrued salaries, wages and benefits
|
$
|
490
|
|
$
|
478
|
|
|
|
Accrued marketing, advertising and promotion expense
|
202
|
|
192
|
|
|||
|
Other
|
476
|
|
488
|
|
|||
|
Total other current liabilities
|
$
|
1,168
|
|
$
|
1,158
|
|
|
8
The major components of debt are as follows (in millions):
|
July 2, 2016
|
October 3, 2015
|
||||||
|
Revolving credit facility
|
$
|
150
|
|
$
|
—
|
|
|
|
Senior notes:
|
|||||||
|
6.60% Senior notes due April 2016 (2016 Notes)
|
—
|
|
638
|
|
|||
|
7.00% Notes due May 2018
|
120
|
|
120
|
|
|||
|
2.65% Notes due August 2019 (2019 Notes)
|
1,000
|
|
1,000
|
|
|||
|
4.10% Notes due September 2020
|
284
|
|
285
|
|
|||
|
4.50% Senior notes due June 2022 (2022 Notes)
|
1,000
|
|
1,000
|
|
|||
|
3.95% Notes due August 2024 (2024 Notes)
|
1,250
|
|
1,250
|
|
|||
|
7.00% Notes due January 2028
|
18
|
|
18
|
|
|||
|
6.13% Notes due November 2032
|
163
|
|
163
|
|
|||
|
4.88% Notes due August 2034 (2034 Notes)
|
500
|
|
500
|
|
|||
|
5.15% Notes due August 2044 (2044 Notes)
|
500
|
|
500
|
|
|||
|
Discount on senior notes
|
(9
|
)
|
(10
|
)
|
|||
|
Term loans:
|
|||||||
|
Tranche B due April 2019 (1.63% at 7/2/2016)
|
500
|
|
500
|
|
|||
|
Tranche B due August 2019 (2.00% at 7/2/2016)
|
552
|
|
552
|
|
|||
|
Amortizing notes - tangible equity units (see Note 7: Equity)
|
88
|
|
140
|
|
|||
|
Other
|
62
|
|
69
|
|
|||
|
Total debt
|
6,178
|
|
6,725
|
|
|||
|
Less current debt
|
79
|
|
715
|
|
|||
|
Total long-term debt
|
$
|
6,099
|
|
$
|
6,010
|
|
|
Revolving Credit Facility
We have a
$1.25 billion
revolving credit facility that supports short-term funding needs and letters of credit. The facility will mature and the commitments thereunder will terminate in September 2019. After reducing for the amount borrowed and outstanding letters of credit issued under this facility, the amount available for borrowing at
July 2, 2016
, was
$1,093 million
. At
July 2, 2016
, we had outstanding letters of credit issued under this facility totaling
$7 million
, none of which were drawn upon. We had an additional
$91 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 obligations and workers’ compensation insurance programs.
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.
2016 Notes
On March 31, 2016, we repaid the entire outstanding
$638 million
principal balance on the 2016 Notes. Tyson Fresh Meats, Inc. (TFM Parent), our wholly owned subsidiary, fully and unconditionally guaranteed the 2016 Notes, 2019 Notes, 2022 Notes, 2024 Notes, 2034 Notes, 2044 Notes, amortizing notes related to our tangible equity units, Tyson's
$1.25 billion
revolving credit facility and term loans. As a result of the retirement of the 2016 Notes in the second quarter of fiscal 2016, all of TFM Parent's guarantees were released and TFM Parent is no longer required to disclose guarantor financial statements.
Term Loans
On May 5, 2016, we amended our existing
$500 million
tranche B term loan agreement which extended the maturity of the loan from April 2018 to April 2019.
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.
9
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
July 2, 2016
.
Share Repurchases
On February 4, 2016, our Board of Directors approved an increase of
50 million
shares authorized for repurchase under our share repurchase program. As of
July 2, 2016
,
49.1 million
shares remained available for repurchases 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
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
|||||||||||||||||||||||||
|
Shares
|
Dollars
|
Shares
|
Dollars
|
Shares
|
Dollars
|
Shares
|
Dollars
|
|||||||||||||||||||||
|
Shares repurchased:
|
||||||||||||||||||||||||||||
|
Under share repurchase program
|
7.1
|
|
$
|
457
|
|
0.9
|
|
$
|
37
|
|
22.0
|
|
$
|
1,235
|
|
4.2
|
|
$
|
168
|
|
||||||||
|
To fund certain obligations under equity compensation plans
|
0.1
|
|
10
|
|
0.2
|
|
10
|
|
1.2
|
|
58
|
|
0.6
|
|
29
|
|
||||||||||||
|
Total share repurchases
|
7.2
|
|
$
|
467
|
|
1.1
|
|
$
|
47
|
|
23.2
|
|
$
|
1,293
|
|
4.8
|
|
$
|
197
|
|
||||||||
Subsequent to July 2, 2016, through August 5, 2016, we repurchased
$380 million
, or approximately
5.4 million
shares, of our common stock under our share repurchase program.
Tangible Equity Units
In fiscal 2014, we completed the public issuance of
30 million
4.75%
tangible equity units (TEUs). Total proceeds, net of underwriting discounts and other expenses, were
$1,454 million
. Each TEU, which has a stated amount of
$50
, comprises a prepaid stock purchase contract and a senior amortizing note due July 15, 2017. We allocated the proceeds from the issuance of the TEUs to equity and debt based on the relative fair values of the respective components of each TEU. The fair value of the prepaid stock purchase contracts, which was
$1,295 million
, is recorded in Capital in Excess of Par Value, net of issuance costs. The fair value of the senior amortizing notes, which was
$205 million
, was recorded in debt. Issuance costs associated with the TEU debt were recorded as deferred financing costs in the Consolidated Condensed Balance Sheets in Other Assets and are amortized over the term of the instrument to July 15, 2017.
The aggregate values assigned upon issuance of each component of the TEU's, based on the relative fair value of the respective components of each TEU, were as follows (in millions, except price per TEU):
|
Equity Component
|
Debt Component
|
Total
|
|||||||||
|
Price per TEU
|
$
|
43.17
|
|
$
|
6.83
|
|
$
|
50.00
|
|
||
|
Gross proceeds
|
1,295
|
|
205
|
|
1,500
|
|
|||||
|
Issuance cost
|
(40
|
)
|
(6
|
)
|
(46
|
)
|
|||||
|
Net proceeds
|
$
|
1,255
|
|
$
|
199
|
|
$
|
1,454
|
|
||
Each senior amortizing note has an initial principal amount of
$6.83
and bears interest at
1.5%
per annum. On each January 15, April 15, July 15 and October 15, we will pay equal quarterly cash installments of
$0.59
per amortizing note, which cash payment in the aggregate (principal and interest) is equivalent to
4.75%
per year with respect to the
$50
stated amount per TEU. Each installment constitutes a payment of interest and partial repayment of principal. Unless settled earlier at the holder's or the Company's option, each purchase contract will automatically settle on July 15, 2017, subject to postponement in certain limited circumstances.
10
During the first nine months of fiscal 2016, holders settled
16.2 million
purchase contracts and, in exchange, the Company issued
17.2 million
shares of its Class A common stock. Upon early settlement of these purchase contracts, the corresponding amortizing notes remain outstanding and beneficially owned by the holders that settled purchase contracts early. As of July 2, 2016,
13.8 million
TEU's remained outstanding. The remaining TEUs will continue to be held pursuant to their original terms and conditions, including automatic settlement on July 15, 2017, as described above. As a result of the purchase contracts tendered in the first nine months of fiscal 2016, our remaining obligation is to deliver between a minimum of
14.7 million
shares and a maximum of
18.4 million
shares of our Class A stock, subject to adjustment, based upon the Applicable Market Value (as defined below) of our Class A stock as described below:
|
•
|
If the Applicable Market Value is equal to or greater than the conversion price of
$46.95
per share, we will deliver
1.0649
shares of Class A stock per purchase contract, or a minimum of
14.7 million
Class A shares.
|
|
•
|
If the Applicable Market Value is greater than the reference price of
$37.56
but less than the conversion price of
$46.95
per share, we will deliver a number of shares per purchase contract equal to
$50
, divided by the Applicable Market Value.
|
|
•
|
If the Applicable Market Value is less than or equal to the reference price of
$37.56
per share, we will deliver
1.3313
shares of Class A stock per purchase contract, or a maximum of
18.4 million
Class A shares.
|
The "Applicable Market Value" means the average of the closing prices of our Class A stock on each of the
20
consecutive trading days beginning on, and including, the 23rd scheduled trading day immediately preceding July 15, 2017.
On June 15, 2016, we paid our quarterly dividend to shareholders of record at June 1, 2016, equal to
$0.15
per share on our Class A stock. The amount of the distribution exceeded the
$0.075
per share dividend threshold amount. Consequently, the settlement rates, reference price and conversion price were adjusted and are reflected above.
The TEUs have a dilutive effect on our earnings per share. The
14.7 million
minimum shares to be issued are included in the calculation of Class A Basic weighted average shares. The
3.7 million
share difference between the minimum shares and the
18.4 million
maximum shares are potentially dilutive securities, and accordingly, are included in our diluted earnings per share on a pro rata basis to the extent the Applicable Market Value is higher than the reference price but is less than the conversion price at period end.
The effective tax rate was
31.8%
and
33.6%
for the third quarter of fiscal
2016
and
2015
, respectively and
33.2%
and
32.8%
for the first nine months of fiscal 2016 and 2015, respectively. The effective tax rates for the third quarter and first nine months of fiscal 2016 and fiscal 2015 were impacted by such items as the domestic production deduction, state income taxes and losses in foreign jurisdictions for which no benefit is recognized. In addition, changes in tax reserves resulting from the expiration of statutes of limitations and settlements with taxing authorities reduced the effective tax rate for the third quarter of fiscal 2016 by
1.1%
and the first nine months of fiscal 2016 and 2015 by
1.4%
and
2.3%
, respectively.
Unrecognized tax benefits were
$301 million
and
$306 million
at
July 2, 2016
, and
October 3, 2015
, respectively.
We estimate that during the next twelve months it is reasonably possible that unrecognized tax benefits could decrease by as much as
$34 million
primarily due to expiration of statutes of limitations in various jurisdictions.
During the first nine months of fiscal 2016, we recorded
$8 million
of equity earnings in joint ventures and
$3 million
in net foreign currency exchange losses, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
During the first nine months of fiscal 2015, we recorded
$7 million
of equity earnings in joint ventures,
$1 million
in net foreign currency exchange gains and
$21 million
of gains on the sale of equity securities, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
11
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data):
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Numerator:
|
|||||||||||||||
|
Net income
|
$
|
485
|
|
$
|
344
|
|
$
|
1,380
|
|
$
|
965
|
|
|||
|
Less: Net income attributable to noncontrolling interests
|
1
|
|
1
|
|
3
|
|
3
|
|
|||||||
|
Net income attributable to Tyson
|
484
|
|
343
|
|
1,377
|
|
962
|
|
|||||||
|
Less dividends declared:
|
|||||||||||||||
|
Class A
|
45
|
|
30
|
|
149
|
|
99
|
|
|||||||
|
Class B
|
9
|
|
6
|
|
31
|
|
20
|
|
|||||||
|
Undistributed earnings
|
$
|
430
|
|
$
|
307
|
|
$
|
1,197
|
|
$
|
843
|
|
|||
|
Class A undistributed earnings
|
$
|
358
|
|
$
|
258
|
|
$
|
999
|
|
$
|
709
|
|
|||
|
Class B undistributed earnings
|
72
|
|
49
|
|
198
|
|
134
|
|
|||||||
|
Total undistributed earnings
|
$
|
430
|
|
$
|
307
|
|
$
|
1,197
|
|
$
|
843
|
|
|||
|
Denominator:
|
|||||||||||||||
|
Denominator for basic earnings per share:
|
|||||||||||||||
|
Class A weighted average shares
|
312
|
|
335
|
|
318
|
|
335
|
|
|||||||
|
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
|
6
|
|
5
|
|
6
|
|
5
|
|
|||||||
|
Tangible equity units
|
—
|
|
4
|
|
—
|
|
4
|
|
|||||||
|
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
|
388
|
|
414
|
|
394
|
|
414
|
|
|||||||
|
Net income per share attributable to Tyson:
|
|||||||||||||||
|
Class A basic
|
$
|
1.29
|
|
$
|
0.86
|
|
$
|
3.61
|
|
$
|
2.41
|
|
|||
|
Class B basic
|
$
|
1.17
|
|
$
|
0.78
|
|
$
|
3.28
|
|
$
|
2.20
|
|
|||
|
Diluted
|
$
|
1.25
|
|
$
|
0.83
|
|
$
|
3.50
|
|
$
|
2.32
|
|
|||
We had no stock-based compensation shares that were antidilutive for each of the three and nine months ended July 2, 2016. Approximately
5 million
of our stock-based compensation shares were antidilutive for each of the three and nine months ended
June 27, 2015
. 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.
12
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
July 2, 2016
.
We had the following aggregated outstanding notional amounts related to our derivative financial instruments (in millions, except soy meal tons):
|
Metric
|
July 2, 2016
|
October 3, 2015
|
|||||||
|
Commodity:
|
|||||||||
|
Corn
|
Bushels
|
109
|
|
18
|
|
||||
|
Soy meal
|
Tons
|
418,000
|
|
284,900
|
|
||||
|
Live cattle
|
Pounds
|
43
|
|
102
|
|
||||
|
Lean hogs
|
Pounds
|
305
|
|
166
|
|
||||
|
Foreign currency
|
United States dollar
|
$
|
43
|
|
$
|
42
|
|
||
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 nine
months ended
July 2, 2016
, and
June 27, 2015
. As of
July 2, 2016
, the net amounts expected to be reclassified into earnings within the next 12 months are pretax gains of
$1 million
. During the
three and nine
months ended
July 2, 2016
, and
June 27, 2015
, we did not reclassify significant pretax gains/losses into earnings as a result of the discontinuance of cash flow hedges.
13
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
|
||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||||
|
Cash flow hedge – derivatives designated as hedging instruments:
|
|||||||||||||||||
|
Commodity contracts
|
$
|
2
|
|
$
|
(1
|
)
|
Cost of sales
|
$
|
(1
|
)
|
$
|
(1
|
)
|
||||
|
Foreign exchange contracts
|
—
|
|
—
|
|
Other income/expense
|
—
|
|
—
|
|
||||||||
|
Total
|
$
|
2
|
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
|||||
|
Gain (Loss)
Recognized in OCI On Derivatives |
Consolidated Condensed
Statements of Income
Classification
|
Gain (Loss)
Reclassified from OCI to Earnings |
|||||||||||||||
|
Nine Months Ended
|
Nine Months Ended
|
||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||||
|
Cash flow hedge – derivatives designated as hedging instruments:
|
|||||||||||||||||
|
Commodity contracts
|
$
|
—
|
|
$
|
(3
|
)
|
Cost of sales
|
$
|
(3
|
)
|
$
|
(5
|
)
|
||||
|
Foreign exchange contracts
|
—
|
|
—
|
|
Other income/expense
|
—
|
|
—
|
|
||||||||
|
Total
|
$
|
—
|
|
$
|
(3
|
)
|
$
|
(3
|
)
|
$
|
(5
|
)
|
|||||
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
|
Nine Months Ended
|
|||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||||
|
Gain (Loss) on forwards
|
Cost of sales
|
$
|
19
|
|
$
|
9
|
|
$
|
58
|
|
$
|
1
|
|
||||
|
Gain (Loss) on purchase contract
|
Cost of sales
|
(19
|
)
|
(9
|
)
|
(58
|
)
|
(1
|
)
|
||||||||
Ineffectiveness related to our fair value hedges was not significant for the
three and nine
months ended
July 2, 2016
, and
June 27, 2015
.
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.
14
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
|
Nine Months Ended
|
||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||||
|
Derivatives not designated as hedging instruments:
|
|||||||||||||||||
|
Commodity contracts
|
Sales
|
$
|
(20
|
)
|
$
|
(2
|
)
|
$
|
(27
|
)
|
$
|
(10
|
)
|
||||
|
Commodity contracts
|
Cost of sales
|
44
|
|
—
|
|
36
|
|
(34
|
)
|
||||||||
|
Foreign exchange contracts
|
Other income/expense
|
—
|
|
1
|
|
1
|
|
(3
|
)
|
||||||||
|
Total
|
$
|
24
|
|
$
|
(1
|
)
|
$
|
10
|
|
$
|
(47
|
)
|
|||||
The fair value of all outstanding derivative instruments in the Consolidated Condensed Balance Sheets are included in Note 12: 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.
15
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):
|
July 2, 2016
|
Level 1
|
Level 2
|
Level 3
|
Netting (a)
|
Total
|
||||||||||||||
|
Assets:
|
|||||||||||||||||||
|
Derivative financial instruments:
|
|||||||||||||||||||
|
Designated as hedges
|
$
|
—
|
|
$
|
25
|
|
$
|
—
|
|
$
|
(3
|
)
|
$
|
22
|
|
||||
|
Undesignated
|
—
|
|
46
|
|
—
|
|
(28
|
)
|
18
|
|
|||||||||
|
Available-for-sale securities:
|
|||||||||||||||||||
|
Current
|
—
|
|
2
|
|
2
|
|
—
|
|
4
|
|
|||||||||
|
Non-current
|
—
|
|
36
|
|
57
|
|
—
|
|
93
|
|
|||||||||
|
Deferred compensation assets
|
8
|
|
234
|
|
—
|
|
—
|
|
242
|
|
|||||||||
|
Total assets
|
$
|
8
|
|
$
|
343
|
|
$
|
59
|
|
$
|
(31
|
)
|
$
|
379
|
|
||||
|
Liabilities:
|
|||||||||||||||||||
|
Derivative financial instruments:
|
|||||||||||||||||||
|
Designated as hedges
|
$
|
—
|
|
$
|
7
|
|
$
|
—
|
|
$
|
(7
|
)
|
$
|
—
|
|
||||
|
Undesignated
|
—
|
|
52
|
|
—
|
|
(52
|
)
|
—
|
|
|||||||||
|
Total liabilities
|
$
|
—
|
|
$
|
59
|
|
$
|
—
|
|
$
|
(59
|
)
|
$
|
—
|
|
||||
|
October 3, 2015
|
Level 1
|
Level 2
|
Level 3
|
Netting (a)
|
Total
|
||||||||||||||
|
Assets:
|
|||||||||||||||||||
|
Derivative financial instruments:
|
|||||||||||||||||||
|
Designated as hedges
|
$
|
—
|
|
$
|
52
|
|
$
|
—
|
|
$
|
(35
|
)
|
$
|
17
|
|
||||
|
Undesignated
|
—
|
|
9
|
|
—
|
|
(9
|
)
|
—
|
|
|||||||||
|
Available-for-sale securities:
|
|||||||||||||||||||
|
Current
|
—
|
|
1
|
|
1
|
|
—
|
|
2
|
|
|||||||||
|
Non-current
|
—
|
|
33
|
|
60
|
|
—
|
|
93
|
|
|||||||||
|
Deferred compensation assets
|
9
|
|
222
|
|
—
|
|
—
|
|
231
|
|
|||||||||
|
Total assets
|
$
|
9
|
|
$
|
317
|
|
$
|
61
|
|
$
|
(44
|
)
|
$
|
343
|
|
||||
|
Liabilities:
|
|||||||||||||||||||
|
Derivative financial instruments:
|
|||||||||||||||||||
|
Designated as hedges
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
—
|
|
||||
|
Undesignated
|
—
|
|
49
|
|
—
|
|
(47
|
)
|
2
|
|
|||||||||
|
Total liabilities
|
$
|
—
|
|
$
|
51
|
|
$
|
—
|
|
$
|
(49
|
)
|
$
|
2
|
|
||||
|
(a)
|
Our derivative assets and liabilities are presented in our Consolidated Condensed Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral, when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. At
July 2, 2016
, and
October 3, 2015
, we had posted with various counterparties
$28 million
and
$5 million
, respectively, of cash collateral related to our commodity derivatives and held no cash collateral.
|
16
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):
|
Nine Months Ended
|
|||||||
|
July 2, 2016
|
June 27, 2015
|
||||||
|
Balance at beginning of year
|
$
|
61
|
|
$
|
67
|
|
|
|
Total realized and unrealized gains (losses):
|
|||||||
|
Included in earnings
|
—
|
|
—
|
|
|||
|
Included in other comprehensive income (loss)
|
—
|
|
—
|
|
|||
|
Purchases
|
12
|
|
13
|
|
|||
|
Issuances
|
—
|
|
—
|
|
|||
|
Settlements
|
(14
|
)
|
(19
|
)
|
|||
|
Balance at end of period
|
$
|
59
|
|
$
|
61
|
|
|
|
Total gains (losses) for the nine-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 11: 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
32
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):
|
July 2, 2016
|
October 3, 2015
|
||||||||||||||||||||||
|
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
|
$
|
38
|
|
$
|
38
|
|
$
|
—
|
|
$
|
33
|
|
$
|
34
|
|
$
|
1
|
|
|||||
|
Corporate and asset-backed
|
58
|
|
59
|
|
1
|
|
60
|
|
61
|
|
1
|
|
|||||||||||
17
Unrealized holding gains (losses), net of tax, are excluded from earnings and reported in OCI until the security is settled or sold. On a quarterly basis, we evaluate whether losses related to our available-for-sale securities are temporary in nature. Losses on equity securities are recognized in earnings if the decline in value is judged to be other than temporary. If losses related to our debt securities are determined to be other than temporary, the loss would be recognized in earnings if we intend, or more likely than not will be required, to sell the security prior to recovery. For debt securities in which we have the intent and ability to hold until maturity, losses determined to be other than temporary would remain in OCI, other than expected credit losses which are recognized in earnings. We consider many factors in determining whether a loss is temporary, including the length of time and extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. We recognized no other than temporary impairment in earnings for the three and nine months ended
July 2, 2016
, and
June 27, 2015
. No other than temporary losses were deferred in OCI as of
July 2, 2016
, and
October 3, 2015
.
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. We did not have any significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the three or nine months ended
July 2, 2016
, and
June 27, 2015
.
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):
|
July 2, 2016
|
October 3, 2015
|
||||||||||||||
|
Fair Value
|
Carrying Value
|
Fair Value
|
Carrying Value
|
||||||||||||
|
Total debt
|
$
|
6,560
|
|
$
|
6,178
|
|
$
|
6,900
|
|
$
|
6,725
|
|
|||
The components of the net periodic cost for the pension and postretirement benefit plans for the
three and nine
months ended
July 2, 2016
, and
June 27, 2015
, are as follows (in millions):
|
Pension Plans
|
|||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Service cost
|
$
|
4
|
|
$
|
5
|
|
$
|
11
|
|
$
|
13
|
|
|||
|
Interest cost
|
18
|
|
21
|
|
56
|
|
63
|
|
|||||||
|
Expected return on plan assets
|
(16
|
)
|
(25
|
)
|
(49
|
)
|
(75
|
)
|
|||||||
|
Amortization of:
|
|||||||||||||||
|
Net actuarial loss
|
2
|
|
1
|
|
5
|
|
4
|
|
|||||||
|
Settlement (gain) loss (a)
|
—
|
|
—
|
|
(12
|
)
|
8
|
|
|||||||
|
Net periodic cost
|
$
|
8
|
|
$
|
2
|
|
$
|
11
|
|
$
|
13
|
|
|||
18
|
Postretirement Benefit Plans
|
|||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Service cost
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
$
|
4
|
|
|||
|
Interest cost
|
1
|
|
2
|
|
3
|
|
5
|
|
|||||||
|
Amortization of:
|
|||||||||||||||
|
Net actuarial (gain) loss
|
(5
|
)
|
6
|
|
(14
|
)
|
6
|
|
|||||||
|
Prior service credit
|
(4
|
)
|
—
|
|
(13
|
)
|
—
|
|
|||||||
|
Net periodic cost (credit)
|
$
|
(8
|
)
|
$
|
10
|
|
$
|
(24
|
)
|
$
|
15
|
|
|||
(a) We made lump-sum settlement payments using plan assets of
$265 million
and
$18 million
for the nine months ended
July 2, 2016
, and
June 27, 2015
, respectively, to certain deferred vested participants within our qualified pension plans.
We contributed
$1 million
and
$3 million
to our pension plans for the three months ended
July 2, 2016
, and
June 27, 2015
, respectively. We contributed
$54 million
and
$12 million
to our pension plans for the nine months ended
July 2, 2016
, and
June 27, 2015
, respectively. We expect to contribute an additional
$9 million
during the remainder of fiscal 2016. 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 2016 may differ from the current estimate.
The before and after tax changes in the components of other comprehensive income (loss) are as follows (in millions):
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||||||||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||||||||||||||||||||||||||
|
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
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
3
|
|
$
|
(1
|
)
|
$
|
2
|
|
$
|
5
|
|
$
|
(2
|
)
|
$
|
3
|
|
|||
|
Unrealized gain (loss)
|
2
|
|
(1
|
)
|
1
|
|
(1
|
)
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(3
|
)
|
1
|
|
(2
|
)
|
|||||||||||||||
|
Investments:
|
|||||||||||||||||||||||||||||||||||||||
|
(Gain) loss reclassified to other income/expense
|
—
|
|
—
|
|
—
|
|
(21
|
)
|
8
|
|
(13
|
)
|
—
|
|
—
|
|
—
|
|
(21
|
)
|
8
|
|
(13
|
)
|
|||||||||||||||
|
Unrealized gain (loss)
|
(1
|
)
|
1
|
|
—
|
|
1
|
|
—
|
|
1
|
|
(1
|
)
|
1
|
|
—
|
|
20
|
|
(8
|
)
|
12
|
|
|||||||||||||||
|
Currency translation:
|
|||||||||||||||||||||||||||||||||||||||
|
Translation loss reclassified to cost of sales (a)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
37
|
|
(1
|
)
|
36
|
|
|||||||||||||||
|
Translation adjustment
|
(2
|
)
|
—
|
|
(2
|
)
|
1
|
|
1
|
|
2
|
|
3
|
|
—
|
|
3
|
|
(63
|
)
|
10
|
|
(53
|
)
|
|||||||||||||||
|
Postretirement benefits
|
(3
|
)
|
1
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
(9
|
)
|
4
|
|
(5
|
)
|
10
|
|
(3
|
)
|
7
|
|
|||||||||||||||
|
Total other comprehensive income (loss)
|
$
|
(3
|
)
|
$
|
1
|
|
$
|
(2
|
)
|
$
|
(19
|
)
|
$
|
10
|
|
$
|
(9
|
)
|
$
|
(4
|
)
|
$
|
4
|
|
$
|
—
|
|
$
|
(15
|
)
|
$
|
5
|
|
$
|
(10
|
)
|
|||
(a) Translation loss reclassified to Cost of Sales related to disposition of a foreign operation, which is further described in Note 2: Dispositions.
We operate in
four
reportable segments: Chicken, Beef, Pork, and Prepared Foods. We measure segment profit as operating income (loss).
Following the sale of our Mexico and Brazil chicken production operations in fiscal 2015 (see Note 2: Dispositions), we began reporting our international operation, which was previously reported as the International segment, in Other. Other now includes our foreign chicken production operations in China and India and third-party merger and integration costs. All periods presented have been reclassified to reflect this change. Chicken, Beef, Pork and Prepared Foods results were not impacted by this change.
Chicken:
Chicken includes our domestic operations related to raising and processing live chickens into fresh, frozen and value-added chicken products, as well as sales from allied 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 logistics operations to move products through our domestic supply chain and the global operations of our chicken breeding stock subsidiary.
19
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.
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® pies, as well as artisanal brands Aidells®, Gallo Salame®, and Golden Island® premium jerky. Products primarily include pepperoni, bacon, breakfast sausage, turkey, lunchmeat, hot dogs, pizza crusts and toppings, flour and corn tortilla products, desserts, appetizers, prepared meals, ethnic foods, soups, sauces, 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 which are included in Other.
Information on segments and a reconciliation to income before income taxes are as follows (in millions):
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
|||||||||||||
|
Sales:
|
||||||||||||||||
|
Chicken
|
$
|
2,743
|
|
$
|
2,757
|
|
$
|
8,116
|
|
$
|
8,366
|
|
||||
|
Beef
|
3,783
|
|
4,305
|
|
11,036
|
|
12,826
|
|
||||||||
|
Pork
|
1,271
|
|
1,207
|
|
3,674
|
|
3,951
|
|
||||||||
|
Prepared Foods
|
1,809
|
|
1,810
|
|
5,509
|
|
5,814
|
|
||||||||
|
Other
|
99
|
|
244
|
|
284
|
|
771
|
|
||||||||
|
Intersegment sales
|
(302
|
)
|
(252
|
)
|
(894
|
)
|
(861
|
)
|
||||||||
|
Total sales
|
$
|
9,403
|
|
$
|
10,071
|
|
$
|
27,725
|
|
$
|
30,867
|
|
||||
|
Operating income (loss):
|
||||||||||||||||
|
Chicken
|
$
|
380
|
|
$
|
313
|
|
$
|
1,085
|
|
$
|
996
|
|
||||
|
Beef
|
91
|
|
(7
|
)
|
208
|
|
(33
|
)
|
||||||||
|
Pork
|
122
|
|
64
|
|
420
|
|
285
|
|
||||||||
|
Prepared Foods
|
197
|
|
207
|
|
(a)
|
601
|
|
438
|
|
(a)
|
||||||
|
Other
|
(23
|
)
|
(b)
|
(14
|
)
|
(b)
|
(67
|
)
|
(b)
|
(67
|
)
|
(b)
|
||||
|
Total operating income
|
767
|
|
563
|
|
2,247
|
|
1,619
|
|
||||||||
|
Total other (income) expense
|
56
|
|
|
45
|
|
(c)
|
180
|
|
183
|
|
(c)
|
|||||
|
Income before income taxes
|
$
|
711
|
|
$
|
518
|
|
$
|
2,067
|
|
$
|
1,436
|
|
||||
(a) Includes merger and integration costs of
$1 million
and
$10 million
for the three and nine months ended June 27, 2015, respectively, and
$11 million
net proceeds and
$17 million
net costs related to a legacy Hillshire Brands plant fire for the three and nine months ended June 27, 2015, respectively.
(b) Other includes third-party merger and integration costs of
$11 million
and
$15 million
for the three months ended July 2, 2016, and
June 27, 2015
, respectively, and
$29 million
and
$39 million
for the nine months ended July 2, 2016, and June 27, 2015, respectively.
(c) Other (income) expense includes a $21 million gain on the sale of equity securities for the three and nine months ended June 27, 2015.
20
The Chicken segment had sales of
$8 million
and
$6 million
in the
third
quarter of fiscal 2016 and
2015
, respectively, and sales of
$15 million
and
$13 million
in the first nine months of fiscal 2016 and 2015, respectively, from transactions with other operating segments of the Company. The Beef segment had sales of
$90 million
and
$93 million
in the
third
quarter of fiscal 2016 and
2015
, respectively, and sales of
$240 million
and
$248 million
in the first nine months of fiscal 2016 and 2015, respectively, from transactions with other operating segments of the Company. The Pork segment had sales of
$204 million
and
$153 million
in the
third
quarter of fiscal 2016 and
2015
, respectively, and sales of
$639 million
and
$600 million
in the first nine months of fiscal 2016 and 2015, 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.
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. Terms of the underlying debt cover periods up to
10
years, and the maximum potential amount of future payments as of
July 2, 2016
, was
$42 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
12
years. The maximum potential amount of the residual value guarantees is
$91 million
, of which
$84 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
July 2, 2016
, and
October 3, 2015
, 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
July 2, 2016
, was approximately
$380 million
. The total receivables under these programs were
$2 million
at
July 2, 2016
. There were no receivables under these programs at
October 3, 2015
. 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
July 2, 2016
, and
October 3, 2015
.
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 July 2, 2016, total amounts under these type of arrangements totaled
$528 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 and 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.
Below are the details of
six
lawsuits involving our beef, pork and prepared foods plants in which certain present and past employees allege that we failed to compensate them for the time it takes to engage in pre- and post-shift activities, such as changing into and out of protective and sanitary clothing and walking to and from the changing area, work areas and break areas in violation of the Fair Labor Standards Act and various state laws. The plaintiffs seek back wages, liquidated damages, pre- and post-judgment interest, attorneys’ fees and costs. Each case is proceeding in its jurisdiction.
21
|
•
|
Bouaphakeo (f/k/a Sharp), et al. v. Tyson Foods, Inc., N.D. Iowa, February 6, 2007
- A jury trial was held involving our Storm Lake, Iowa pork plant which resulted in a jury verdict in favor of the plaintiffs for violations of federal and state laws for pre- and post-shift work activities. The trial court also awarded the plaintiffs liquidated damages, resulting in total damages awarded in the amount of
$5,784,758
. The plaintiffs' counsel has also filed an application for attorneys' fees and expenses in the amount of
$2,692,145
. We appealed the jury's verdict and trial court's award to the Eighth Circuit Court of Appeals. The appellate court affirmed the jury verdict and judgment on August 25, 2014, and we filed a petition for rehearing on September 22, 2014, which was denied. We filed a petition for a writ of certiorari with the United States Supreme Court, which was granted on June 8, 2015, and oral arguments before the Supreme Court occurred on November 10, 2015. On March 22, 2016, the Supreme Court affirmed the appellate court’s rulings and remanded to the trial court to allocate the lump sum award among the class participants.
|
|
•
|
Edwards, et al. v. Tyson Foods, Inc. d.b.a. Tyson Fresh Meats, Inc., S.D. Iowa, March 20, 2008
- The trial court in this case, which involves our Perry and Waterloo, Iowa pork plants, decertified the state law class and granted other pre-trial motions that resulted in judgment in our favor with respect to the plaintiffs’ claims. The plaintiffs have filed a motion to modify this judgment.
|
|
•
|
Murray, et al. v. Tyson Foods, Inc., C.D. Illinois, January 2, 2008
; and
DeVoss v. Tyson Foods, Inc. d.b.a. Tyson Fresh Meats, C.D. Illinois, March 2, 2011
- these cases involve our Joslin, Illinois beef plant and are in their preliminary stages.
|
|
•
|
Dozier, Southerland, et al. v. The Hillshire Brands Company, E.D. North Carolina, September 2, 2014
- This case involves our Tarboro, North Carolina prepared foods plant. On March 25, 2016, the parties filed a joint motion for settlement totaling
$425,000
, which includes all of the plaintiffs’ attorneys’ fees and costs.
|
|
•
|
Awad, et al. v. Tyson Foods, Inc. and Tyson Fresh Meats, Inc., M.D. Tennessee, February 12, 2015
- This case involves our Goodlettsville, Tennessee case ready beef plant and is in its preliminary stages.
|
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 is 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 by Aris Philippines, Inc., a former subsidiary of The Hillshire Brands Company. In 2006, an labor arbiter ruled against the respondents and awarded the complainants PHP
3,453,664,710
(approximately US
$73 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
$7.3 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 are now back before the NLRC, which will once again rule on the respondents’ appeals regarding the labor arbiter’s 2006 ruling in favor of the complainants. In the meantime, the respondents reached a settlement with a group comprising approximately
18%
of the class of
5,984
complainants, pursuant to which The Hillshire Brands Company would pay each settling complainant PHP
68,000
(approximately US
$1,440
). The settlement was approved by the NLRC on or around April 8, 2016, and certain motions for reconsideration relating thereto were resolved on June 30, 2016. If there are no further appeals or motions for reconsideration, The Hillshire Brands Company will make the payments associated with the settlement. In the meantime, The Hillshire Brands Company awaits the NLRC’s decision on the pending appeal with respect to all non-settling complainants.
22
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
RESULTS OF OPERATIONS
Description of the Company
We are one of the world's largest food companies with leading brands such as Tyson®, Jimmy Dean®, Hillshire Farm®, Sara Lee®, Ball Park®, Wright®, Aidells® and State Fair®. We are a recognized market leader in chicken, beef and pork, as well as prepared foods, including bacon, breakfast sausage, turkey, lunchmeat, hot dogs, pizza crusts and toppings, tortillas and desserts. Some of the key factors influencing our business are customer demand for our products; the ability to maintain and grow relationships with customers and introduce new and innovative products to the marketplace; accessibility of international markets; market prices for our products; the cost and availability of live cattle and hogs, raw materials, and feed ingredients; and operating efficiencies of our facilities.
We operate in four reportable segments: Chicken, Beef, Pork and Prepared Foods. Following the sale of our Mexico and Brazil chicken production operations in fiscal 2015, we began reporting our international operation, which was previously reported as the International segment, in Other. Other now includes our foreign chicken production operations in China and India and third-party merger and integration costs. All periods presented have been reclassified to reflect this change. Chicken, Beef, Pork and Prepared Foods results were not impacted by this change.
Overview
|
•
|
General – Our operating income grew 36% in the third quarter of fiscal 2016, which was led by the Beef segment's $98 million improvement in operating income and record earnings in our Chicken segment, as well as continued strong performance in the Prepared Foods and Pork segments. Sales decreased 7% in the third quarter of fiscal 2016 primarily due to declining beef prices, in addition to the sale of our Mexico chicken production operation in fiscal 2015. Sales volume increased 0.3% in the third quarter of fiscal 2016 when excluding the impact of the sale of our Mexico chicken production operation. We continued to execute our strategy of accelerating growth in domestic value-added chicken sales, prepared food sales, innovating products, services and customer insights and cultivating our talent development to support Tyson's growth for the future.
|
|
•
|
Integration – We continue to maintain focus on the integration of The Hillshire Brands Company ("Hillshire Brands") and synergy capture. As we continue to execute our Prepared Foods strategy, we estimate the impact of the Hillshire Brands synergies, along with the profit improvement plan related to our legacy Prepared Foods business, will have a positive impact of approximately $700 million in fiscal 2017. The majority of these benefits are expected to be realized in the Prepared Foods segment. We will continue to invest a portion of the synergies in innovation, new product launches and supporting the growth of our brands. In the third quarter of fiscal 2016, we captured an incremental $63 million of synergies above the $87 million realized in the third quarter of fiscal 2015, for a total of $150 million of synergies and profit improvement initiatives. For the first nine months of fiscal 2016, we captured $191 million of incremental synergies above the $224 million captured for the first nine months of fiscal 2015, for a total of $415 million of synergies realized in fiscal 2016.
|
|
•
|
Market Environment – Domestic protein production (chicken, beef, pork, and turkey) increased approximately 3% in the third quarter of fiscal 2016 over the same period in fiscal 2015, and we expect it to be up 2-3% for the full fiscal year. Export market conditions continue to be challenged. Our Chicken segment delivered record results in the third quarter driven by favorable demand for our products, improved operational execution and lower feed costs. The Beef segment earnings improved as it experienced higher domestic availability of beef supplies, which drove down livestock costs. The Pork segment’s operating margin was above its normalized range as domestic market conditions were favorable as we were able to maximize our revenues relative to the live hog markets. Our Prepared Foods segment delivered strong operating income as we continued to realize synergies and lower input costs, partially offset with higher promotional spending.
|
|
•
|
Margins – Our total operating margin was
8.2%
in the
third
quarter of fiscal
2016
. Operating margins by segment were as follows:
|
|
•
|
Chicken
–
13.9%
|
|
•
|
Beef
–
2.4%
|
|
•
|
Pork
–
9.6%
|
|
•
|
Prepared Foods
–
10.9%
|
|
•
|
Liquidity – We generated $1.9 billion of operating cash flows for the first nine months of fiscal
2016
. At
July 2, 2016
, we had approximately
$1.3 billion
of liquidity, which includes availability under our revolving credit facility and
$197 million
of cash and cash equivalents.
|
23
|
in millions, except per share data
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Net income attributable to Tyson
|
$
|
484
|
|
$
|
343
|
|
$
|
1,377
|
|
$
|
962
|
|
|||
|
Net income attributable to Tyson – per diluted share
|
1.25
|
|
0.83
|
|
3.50
|
|
2.32
|
|
|||||||
Third
quarter – Fiscal
2016
–
Net income attributable to Tyson included the following item:
|
•
|
$15 million, or $0.04 per diluted share, related to recognition of previously unrecognized tax benefits and audit settlement.
|
Nine months – Fiscal
2016
–
Net income attributable to Tyson included the following item:
|
•
|
$27 million, or $0.07 per diluted share, related to recognition of previously unrecognized tax benefits and audit settlement.
|
Third
quarter – Fiscal
2015
–
Net income attributable to Tyson included the following items:
|
•
|
$21 million, or $0.03 per diluted share, related to a gain on sale of equity securities.
|
|
•
|
$16 million, or ($0.02) per diluted share, related to the Hillshire Brands merger and integration costs.
|
|
•
|
$11 million, or $0.02 per diluted share, of net insurance proceeds (net of costs) related to a legacy Hillshire Brands plant fire
|
Nine months – Fiscal
2015
–
Net income attributable to Tyson included the following items:
|
•
|
$49 million, or ($0.07) per diluted share, related to the Hillshire Brands merger and integration costs.
|
|
•
|
$26 million, or $0.06 per diluted share, related to recognition of previously unrecognized tax benefits.
|
|
•
|
$21 million, or $0.03 per diluted share, related to a gain on sale of equity securities.
|
|
•
|
$17 million, or ($0.02) per diluted share, of net costs (net of insurance proceeds) related to a legacy Hillshire Brands plant fire.
|
Summary of Results
Sales
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Sales
|
$
|
9,403
|
|
$
|
10,071
|
|
$
|
27,725
|
|
$
|
30,867
|
|
|||
|
Change in sales volume
|
(2.7
|
)%
|
3.4
|
%
|
(3.6
|
)%
|
4.5
|
%
|
|||||||
|
Change in average sales price
|
(4.1
|
)%
|
0.6
|
%
|
(6.9
|
)%
|
7.6
|
%
|
|||||||
|
Sales growth
|
(6.6
|
)%
|
4.0
|
%
|
(10.2
|
)%
|
12.3
|
%
|
|||||||
Third
quarter – Fiscal
2016
vs Fiscal
2015
|
•
|
Sales Volume
– Sales were negatively impacted by lower sales volume, which accounted for a decrease of $265 million primarily due to the sale of our Mexico chicken production operation in fiscal 2015. Excluding this impact, total company sales volume increased 0.3%. The Beef and Prepared Foods segments each had an increase in sales volume, while sales volume decreased in the Chicken and Pork segments.
|
|
•
|
Average Sales Price
– Sales were negatively impacted by lower average sales prices, which accounted for a decrease of $403 million. The decrease in average sales price is primarily due to lower beef prices in the Beef segment along with slightly lower pricing in the Prepared Foods segment. The Chicken and Pork segments each had an increase in average sales price during the third quarter of fiscal 2016.
|
Nine months – Fiscal 2016 vs Fiscal 2015
|
•
|
Sales Volume
– Sales were negatively impacted by lower sales volume, which accounted for a decrease of $1,103 million due to the sale of our Brazil and Mexico chicken production operations in fiscal 2015 along with the divestiture of our Heinold Hog Markets business in the first quarter of fiscal 2015. Excluding these impacts, total company sales volume increased 0.3%.
|
|
•
|
Average Sales Price
– Sales were negatively impacted by lower average sales prices, which accounted for a decrease of $2,039 million. Each segment had a decrease in average sales price largely due to decreased pricing associated with lower beef, pork and chicken prices.
|
24
Cost of Sales
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Cost of sales
|
$
|
8,179
|
|
$
|
9,085
|
|
$
|
24,117
|
|
$
|
27,936
|
|
|||
|
Gross profit
|
$
|
1,224
|
|
$
|
986
|
|
$
|
3,608
|
|
$
|
2,931
|
|
|||
|
Cost of sales as a percentage of sales
|
87.0
|
%
|
90.2
|
%
|
87.0
|
%
|
90.5
|
%
|
|||||||
Third
quarter – Fiscal
2016
vs Fiscal
2015
|
•
|
Cost of sales decreased $906 million. Lower input cost per pound decreased cost of sales $668 million and lower sales volume decreased cost of sales $238 million.
|
|
•
|
The $668 million impact of lower input cost per pound was primarily driven by:
|
|
•
|
Decrease in live cattle costs of approximately $640 million in our Beef segment.
|
|
•
|
Increase in live hog costs of approximately $20 million in our Pork segment.
|
|
•
|
Decrease in feed costs of approximately $50 million in our Chicken segment.
|
|
•
|
Decrease due to net realized derivative gains of $46 million in the third quarter of fiscal 2016, compared to net realized derivative gains of $2 million in the third quarter of fiscal 2015 due to our risk management activities. These amounts exclude offsetting impacts from related physical purchase transactions, which are included in the change in live cattle and hog costs and feed costs described above.
|
|
•
|
The $238 million impact of lower sales volume was primarily due to the sale of our Mexico chicken production operation in fiscal 2015.
|
Nine months – Fiscal 2016 vs Fiscal 2015
|
•
|
Cost of sales decreased $3.8 billion. Lower input cost per pound decreased cost of sales $2.8 billion and lower sales volume decreased cost of sales $998 million.
|
|
•
|
The $2.8 billion impact of lower input cost per pound was primarily driven by:
|
|
•
|
Decrease in live cattle cost of approximately $2.0 billion in our Beef segment.
|
|
•
|
Decrease in live hog costs of approximately $320 million in our Pork segment.
|
|
•
|
Decrease in raw material and other input costs of approximately $215 million in our Prepared Foods segment.
|
|
•
|
Decrease in feed costs of approximately $190 million in our Chicken segment.
|
|
•
|
Decrease due to net realized derivative gains of $85 million in the first nine months of fiscal 2016, compared to net realized derivative losses of $106 million in the first nine months of fiscal 2015 due to our risk management activities. These amounts exclude offsetting impacts from related physical purchase transactions, which are included in the change in live cattle and hog costs and raw material and feed costs described above. Additionally, increase due to net unrealized gains of $5 million in the first nine months of fiscal 2016, compared to net unrealized gains of $66 million in the first nine months of fiscal 2015, primarily due to our Chicken, Beef and Pork segment commodity risk management activities.
|
|
•
|
The $998 million impact of lower sales volume was due to the sale of our Brazil and Mexico chicken production operations in fiscal 2015.
|
Selling, General and Administrative
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Selling, general and administrative expense
|
$
|
457
|
|
$
|
423
|
|
$
|
1,361
|
|
$
|
1,312
|
|
|||
|
As a percentage of sales
|
4.9
|
%
|
4.2
|
%
|
4.9
|
%
|
4.3
|
%
|
|||||||
Third
quarter – Fiscal
2016
vs Fiscal
2015
|
•
|
Increase of $31 million of employee costs including payroll and stock-based and incentive-based compensation.
|
|
•
|
Increase of $28 million related to planned advertising and sales promotion to drive growth.
|
|
•
|
Decrease of $7 million related to fiscal 2015 sale of our chicken production operation in Mexico.
|
|
•
|
Decrease of $18 million in all other primarily related to professional fees and commissions.
|
25
Nine months – Fiscal 2016 vs Fiscal 2015
|
•
|
Increase of $71 million of employee costs including payroll and stock-based and incentive-based compensation.
|
|
•
|
Increase of $63 million related to planned advertising and sales promotion to drive growth.
|
|
•
|
Decrease of $25 million related to fiscal 2015 sale of our chicken production operations in Brazil and Mexico.
|
|
•
|
Decrease of $19 million of merger and integration costs.
|
|
•
|
Decrease of $13 million due to a reduction in amortization and other expense related to our intangible assets.
|
|
•
|
Decrease of $28 million in all other primarily related to professional fees and commissions.
|
Interest Expense
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Cash interest expense
|
$
|
59
|
|
$
|
73
|
|
$
|
190
|
|
$
|
220
|
|
|||
|
Non-cash interest expense
|
1
|
|
—
|
|
1
|
|
1
|
|
|||||||
|
Total interest expense
|
$
|
60
|
|
$
|
73
|
|
$
|
191
|
|
$
|
221
|
|
|||
Third
quarter and nine months – Fiscal
2016
vs Fiscal
2015
|
•
|
Cash interest expense primarily included interest expense related to the coupon rates for senior notes and term loans and commitment/letter of credit fees incurred on our revolving credit facilities. The decrease in cash interest expense in the third quarter and first nine months of fiscal 2016 was primarily due to a reduction of our debt.
|
|
•
|
Non-cash interest expense primarily included amounts related to the amortization of debt issuance costs and discounts/premiums on note issuances, offset by interest capitalized.
|
Other (Income) Expense, net
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Total other (income) expense, net
|
$
|
(2
|
)
|
$
|
(25
|
)
|
$
|
(6
|
)
|
$
|
(32
|
)
|
|||
Nine months – Fiscal
2016
|
•
|
Included $8 million of equity earnings in joint ventures and $3 million in net foreign currency exchange losses.
|
Nine months – Fiscal 2015
|
•
|
Included $7 million of equity earnings in joint ventures, $1 million in net foreign currency exchange gains, and $21 million of gains on the sale of equity securities.
|
Effective Tax Rate
|
Three Months Ended
|
Nine Months Ended
|
||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||
|
31.8
|
%
|
33.6
|
%
|
33.2
|
%
|
32.8
|
%
|
||||
Third
quarter and nine months – Fiscal
2016
– The effective tax rate was impacted by:
|
•
|
state income taxes;
|
|
•
|
the domestic production deduction; and
|
|
•
|
decrease in tax reserves due to the expiration of statutes of limitations and settlements with taxing authorities.
|
Third
quarter and nine months – Fiscal
2015
– The effective tax rate was impacted by:
|
•
|
state income taxes;
|
|
•
|
the domestic production deduction;
|
|
•
|
losses in foreign jurisdictions for which no benefit is recognized; and
|
|
•
|
decrease in tax reserves due to the expiration of statutes of limitations and settlements with taxing authorities.
|
26
Segment Results
We operate in four segments: Chicken, Beef, Pork, and Prepared Foods. The following table is a summary of sales and operating income (loss), which is how we measure segment income.
|
in millions
|
Sales
|
||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Chicken
|
$
|
2,743
|
|
$
|
2,757
|
|
$
|
8,116
|
|
$
|
8,366
|
|
|||
|
Beef
|
3,783
|
|
4,305
|
|
11,036
|
|
12,826
|
|
|||||||
|
Pork
|
1,271
|
|
1,207
|
|
3,674
|
|
3,951
|
|
|||||||
|
Prepared Foods
|
1,809
|
|
1,810
|
|
5,509
|
|
5,814
|
|
|||||||
|
Other
|
99
|
|
244
|
|
284
|
|
771
|
|
|||||||
|
Intersegment sales
|
(302
|
)
|
(252
|
)
|
(894
|
)
|
(861
|
)
|
|||||||
|
Total
|
$
|
9,403
|
|
$
|
10,071
|
|
$
|
27,725
|
|
$
|
30,867
|
|
|||
|
in millions
|
Operating Income (Loss)
|
||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
July 2, 2016
|
June 27, 2015
|
||||||||||||
|
Chicken
|
$
|
380
|
|
$
|
313
|
|
$
|
1,085
|
|
$
|
996
|
|
|||
|
Beef
|
91
|
|
(7
|
)
|
208
|
|
(33
|
)
|
|||||||
|
Pork
|
122
|
|
64
|
|
420
|
|
285
|
|
|||||||
|
Prepared Foods
|
197
|
|
207
|
|
601
|
|
438
|
|
|||||||
|
Other
|
(23
|
)
|
(14
|
)
|
(67
|
)
|
(67
|
)
|
|||||||
|
Total
|
$
|
767
|
|
$
|
563
|
|
$
|
2,247
|
|
$
|
1,619
|
|
|||
Third quarter – Fiscal 2015 –
Operating income included the following items:
|
•
|
Operating income was increased by $10 million in the Prepared Foods segment due to $11 million of net insurance proceeds related to a legacy Hillshire Brands plant fire, offset by $1 million of merger and integration costs.
|
|
•
|
Operating income was reduced by $15 million in Other for third-party merger and integration costs.
|
Nine months – Fiscal
2015
–
Operating income included the following items:
|
•
|
Operating income was reduced by $27 million in the Prepared Foods segment due to $17 million of costs (net of insurance proceeds) related to a legacy Hillshire Brands plant fire and $10 million of merger and integration costs.
|
|
•
|
Operating income was reduced by $39 million in Other for third-party merger and integration costs.
|
Chicken Segment Results
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
Change
|
July 2, 2016
|
June 27, 2015
|
Change
|
||||||||||||||||||
|
Sales
|
$
|
2,743
|
|
$
|
2,757
|
|
$
|
(14
|
)
|
$
|
8,116
|
|
$
|
8,366
|
|
$
|
(250
|
)
|
|||||
|
Sales volume change
|
(0.9
|
)%
|
(0.3
|
)%
|
|||||||||||||||||||
|
Average sales price change
|
0.4
|
%
|
(2.7
|
)%
|
|||||||||||||||||||
|
Operating income
|
$
|
380
|
|
$
|
313
|
|
$
|
67
|
|
$
|
1,085
|
|
$
|
996
|
|
$
|
89
|
|
|||||
|
Operating margin
|
13.9
|
%
|
11.4
|
%
|
13.4
|
%
|
11.9
|
%
|
|||||||||||||||
Third
quarter and nine months – Fiscal
2016
vs Fiscal
2015
|
•
|
Sales Volume
– Sales volume decreased in the third quarter and nine months of fiscal 2016 as a result of optimizing our mix and our buy versus grow strategy.
|
|
•
|
Average Sales Price
– Average sales price increased slightly in the third quarter of fiscal 2016 as a result of sales mix changes. Average sales price decreased for the nine months of fiscal 2016 as feed ingredient costs declined, partially offset by mix changes.
|
|
•
|
Operating Income
– Operating income increased due to improved operational execution and lower feed ingredient costs. Feed costs decreased $50 million and $190 million during the third quarter and nine months of fiscal 2016, respectively.
|
27
Beef Segment Results
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
Change
|
July 2, 2016
|
June 27, 2015
|
Change
|
||||||||||||||||||
|
Sales
|
$
|
3,783
|
|
$
|
4,305
|
|
$
|
(522
|
)
|
$
|
11,036
|
|
$
|
12,826
|
|
$
|
(1,790
|
)
|
|||||
|
Sales volume change
|
2.9
|
%
|
1.2
|
%
|
|||||||||||||||||||
|
Average sales price change
|
(14.6
|
)%
|
(15.0
|
)%
|
|||||||||||||||||||
|
Operating income
|
$
|
91
|
|
$
|
(7
|
)
|
$
|
98
|
|
$
|
208
|
|
$
|
(33
|
)
|
$
|
241
|
|
|||||
|
Operating margin
|
2.4
|
%
|
(0.2
|
)%
|
1.9
|
%
|
(0.3
|
)%
|
|||||||||||||||
Third
quarter and nine months – Fiscal
2016
vs Fiscal
2015
|
•
|
Sales Volume
– Sales volume increased in the third quarter of fiscal 2016 due to an increase in live cattle processed as a result of higher fed cattle supplies. Sales volume increased for the nine months of fiscal 2016 due to better demand for beef products despite a reduction in live cattle processing capacity due to the closure of our Denison, Iowa, facility in the fourth quarter of fiscal 2015.
|
|
•
|
Average Sales Price
– Average sales price decreased due to higher domestic availability of beef supplies, which drove down livestock costs.
|
|
•
|
Operating Income
– Operating income increased due to more favorable market conditions associated with an increase in cattle supply which resulted in lower fed cattle costs.
|
Pork Segment Results
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
Change
|
July 2, 2016
|
June 27, 2015
|
Change
|
||||||||||||||||||
|
Sales
|
$
|
1,271
|
|
$
|
1,207
|
|
$
|
64
|
|
$
|
3,674
|
|
$
|
3,951
|
|
$
|
(277
|
)
|
|||||
|
Sales volume change
|
(1.7
|
)%
|
(1.0
|
)%
|
|||||||||||||||||||
|
Average sales price change
|
7.2
|
%
|
(6.0
|
)%
|
|||||||||||||||||||
|
Operating income
|
$
|
122
|
|
$
|
64
|
|
$
|
58
|
|
$
|
420
|
|
$
|
285
|
|
$
|
135
|
|
|||||
|
Operating margin
|
9.6
|
%
|
5.3
|
%
|
11.4
|
%
|
7.2
|
%
|
|||||||||||||||
Third
quarter and nine months – Fiscal
2016
vs Fiscal
2015
|
•
|
Sales Volume
– Sales volume decreased in the third quarter of fiscal 2016, despite increased production, due to reduced inventory levels as well as the result of mix changes related to internally sourcing more hogs from our live operation. Sales volume decreased for the nine months of fiscal 2016 due to the divestiture of our Heinold Hog Markets business in the first quarter of fiscal 2015. Excluding the impact of the divestiture, our sales volume grew 1.5% driven by better demand for pork products.
|
|
•
|
Average Sales Price
– Average sales price increased in the third quarter of fiscal 2016 as demand for our pork products outpaced the slight increase in live hog supplies, which drove up average sales price. For the nine months of fiscal 2016, live hog supplies increased, which drove down livestock cost and average sales price.
|
|
•
|
Operating Income
– Operating income increased for the third quarter and nine months of fiscal 2016 due to better plant utilization associated with higher volumes.
|
28
Prepared Foods Segment Results
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
Change
|
July 2, 2016
|
June 27, 2015
|
Change
|
||||||||||||||||||
|
Sales
|
$
|
1,809
|
|
$
|
1,810
|
|
$
|
(1
|
)
|
$
|
5,509
|
|
$
|
5,814
|
|
$
|
(305
|
)
|
|||||
|
Sales volume change
|
1.9
|
%
|
(2.1
|
)%
|
|||||||||||||||||||
|
Average sales price change
|
(1.9
|
)%
|
(3.2
|
)%
|
|||||||||||||||||||
|
Operating income
|
$
|
197
|
|
$
|
207
|
|
$
|
(10
|
)
|
$
|
601
|
|
$
|
438
|
|
$
|
163
|
|
|||||
|
Operating margin
|
10.9
|
%
|
11.4
|
%
|
10.9
|
%
|
7.5
|
%
|
|||||||||||||||
Third
quarter and nine months – Fiscal
2016
vs Fiscal
2015
|
•
|
Sales Volume
– Sales volume increased in the third quarter of fiscal 2016 as a result of improved demand for our prepared foods products. Sales volume decreased for the nine months of fiscal 2016, despite increased sales volume in the third quarter, as a result of lower sales volume in the first six months of fiscal 2016 due to changes in sales mix as well as the carryover effect of the 2015 turkey avian influenza occurrence into the first half of fiscal 2016.
|
|
•
|
Average Sales Price
– Average sales price decreased primarily due to a decline in input costs, partially offset by a change in product mix.
|
|
•
|
Operating Income
– Operating income remained strong in the third quarter of fiscal 2016 as a result of strong demand for our products partially offset with higher promotional spending. Operating income increased due to mix changes as well as lower input costs of approximately $215 million for the nine months of fiscal 2016. Additionally, Prepared Foods operating income was positively impacted by $116 million in synergies, of which $37 million was incremental synergies in the third quarter of fiscal 2016 above the $79 million of synergies realized in the third quarter of fiscal 2015. For the nine months of fiscal 2016, Prepared Foods was positively impacted by $322 million in synergies, of which $118 million was incremental synergies in fiscal 2016 above the $204 million of synergies realized in the nine months of fiscal 2015. The positive impact of these synergies to operating income was partially offset with heavy investments in innovation, new product launches and supporting the growth of our brands.
|
Other Results
|
in millions
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||
|
July 2, 2016
|
June 27, 2015
|
Change
|
July 2, 2016
|
June 27, 2015
|
Change
|
||||||||||||||||||
|
Sales
|
$
|
99
|
|
$
|
244
|
|
$
|
(145
|
)
|
$
|
284
|
|
$
|
771
|
|
$
|
(487
|
)
|
|||||
|
Operating loss
|
$
|
(23
|
)
|
$
|
(14
|
)
|
$
|
(9
|
)
|
$
|
(67
|
)
|
$
|
(67
|
)
|
$
|
—
|
|
|||||
Third
quarter and nine months – Fiscal
2016
vs Fiscal
2015
|
•
|
Sales
– Sales decreased in the third quarter of fiscal 2016 due to the sale of our Mexico chicken production operation in fiscal 2015 and decreased for the nine months of fiscal 2016 due to the sale of our Brazil and Mexico chicken production operations in fiscal 2015.
|
|
•
|
Operating Loss
– Operating loss increased in the third quarter of fiscal 2016 due to the sale of our Mexico chicken production operation in fiscal 2015, partially offset by improved performance in our China operation. Operating loss was flat for the nine months of fiscal 2016 due to better performance at our China operation and reduced third-party merger and integration costs offset by the sale of our Mexico chicken production operation.
|
29
LIQUIDITY AND CAPITAL RESOURCES
Our cash needs for working capital, capital expenditures, growth opportunities, the repurchases of senior notes, repayment of term loans and share repurchases are expected to be met with current cash on hand, cash flows provided by operating activities, or short-term borrowings. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may take advantage of opportunities to generate additional liquidity or refinance existing debt through capital market transactions. The amount, nature and timing of any capital market transactions will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
Cash Flows from Operating Activities
|
in millions
|
Nine Months Ended
|
||||||
|
July 2, 2016
|
June 27, 2015
|
||||||
|
Net income
|
$
|
1,380
|
|
$
|
965
|
|
|
|
Non-cash items in net income:
|
|||||||
|
Depreciation and amortization
|
526
|
|
524
|
|
|||
|
Deferred income taxes
|
61
|
|
16
|
|
|||
|
Other, net
|
45
|
|
57
|
|
|||
|
Net changes in operating assets and liabilities
|
(139
|
)
|
110
|
|
|||
|
Net cash provided by operating activities
|
$
|
1,873
|
|
$
|
1,672
|
|
|
|
•
|
Cash flows associated with net changes in operating assets and liabilities for the nine months ended:
|
|
•
|
July 2, 2016
– Decreased primarily due to lower accounts payable which is largely due to decreased raw material costs and timing of payments.
|
|
•
|
June 27, 2015
– Increased primarily due to lower inventory and accounts receivable balances and an increase in taxes payable, partially offset by a decrease in accounts payable. The decreased inventory, accounts receivable and accounts payable balances were largely due to decreased raw material costs and timing of sales and payments.
|
Cash Flows from Investing Activities
|
in millions
|
Nine Months Ended
|
||||||
|
July 2, 2016
|
June 27, 2015
|
||||||
|
Additions to property, plant and equipment
|
$
|
(515
|
)
|
$
|
(636
|
)
|
|
|
(Purchases of)/Proceeds from marketable securities, net
|
(2
|
)
|
19
|
|
|||
|
Proceeds from sale of businesses
|
—
|
|
165
|
|
|||
|
Other, net
|
15
|
|
26
|
|
|||
|
Net cash used for investing activities
|
$
|
(502
|
)
|
$
|
(426
|
)
|
|
|
•
|
Additions to property, plant and equipment include acquiring new equipment and upgrading our facilities to maintain competitive standing and position us for future opportunities.
|
|
•
|
Capital spending for fiscal
2016
is expected to be approximately $725 million, and will include spending on our operations for production and labor efficiencies, yield improvements and sales channel flexibility.
|
|
•
|
Proceeds from sale of businesses primarily include proceeds, net of cash transferred, from the sale of the Brazil operation in the first quarter of fiscal 2015.
|
30
Cash Flows from Financing Activities
|
in millions
|
Nine Months Ended
|
||||||
|
July 2, 2016
|
June 27, 2015
|
||||||
|
Payments on debt
|
$
|
(694
|
)
|
$
|
(1,485
|
)
|
|
|
Proceeds from issuance of long-term debt
|
1
|
|
501
|
|
|||
|
Borrowings on revolving credit facility
|
675
|
|
1,345
|
|
|||
|
Payments on revolving credit facility
|
(525
|
)
|
(1,345
|
)
|
|||
|
Purchases of Tyson Class A common stock
|
(1,293
|
)
|
(197
|
)
|
|||
|
Dividends
|
(162
|
)
|
(110
|
)
|
|||
|
Stock options exercised
|
89
|
|
71
|
|
|||
|
Other, net
|
42
|
|
17
|
|
|||
|
Net cash used for financing activities
|
(1,867
|
)
|
(1,203
|
)
|
|||
|
•
|
During the first nine months of fiscal 2016, we repaid the outstanding $638 million principal balance on our 2016 Notes. Additionally, we had net borrowings on our revolver, which for the first nine months of fiscal 2016 totaled $150 million. We utilized our revolving credit facility to balance our cash position with the retirement of the 2016 Notes and changes in working capital.
|
|
•
|
During the first nine months of fiscal 2015, we retired the 5-year tranche A term loan facility for $353 million and paid down the 3-year tranche A term loan facility by $1,080 million. We entered into a term loan agreement, which provided total proceeds of $500 million, the full balance of which was used to prepay outstanding borrowings under the 3-year tranche A term loan facility. We utilized our revolving credit facility to balance our cash position with term loan deleveraging and changes in working capital.
|
|
•
|
Purchases of Tyson Class A stock included:
|
|
•
|
$1,235 million
and
$168 million
of shares repurchased pursuant to our share repurchase program during the nine months ended
July 2, 2016
, and
June 27, 2015
, respectively.
|
|
•
|
$58 million
and
$29 million
of shares repurchased to fund certain obligations under our equity compensation programs during the nine months ended
July 2, 2016
, and
June 27, 2015
, respectively.
|
|
•
|
We expect to continue repurchasing shares under our share repurchase program. As of
July 2, 2016
,
49.1 million
shares remain authorized for repurchases. 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.
|
|
•
|
Subsequent to July 2, 2016, through August 5, 2016, we have repurchased $380 million, or approximately 5.4 million
shares, of our common stock under our share repurchase program.
|
|
•
|
Dividends paid during the first nine months of fiscal 2016 included a 50% increase to our fiscal 2015 quarterly dividend rate.
|
Liquidity
|
in millions
|
|||||||||||||||||
|
Commitments
Expiration Date
|
Facility
Amount
|
|
Outstanding
Letters of Credit
(no draw downs)
|
|
Amount
Borrowed
|
|
Amount
Available
|
|
|||||||||
|
Cash and cash equivalents
|
$
|
197
|
|
||||||||||||||
|
Short-term investments
|
4
|
|
|||||||||||||||
|
Revolving credit facility
|
September 2019
|
$
|
1,250
|
|
$
|
7
|
|
$
|
150
|
|
1,093
|
|
|||||
|
Total liquidity
|
$
|
1,294
|
|
||||||||||||||
|
•
|
The revolving credit facility supports our short-term funding needs and letters of credit. The letters of credit issued under this facility are primarily in support of leasing obligations and workers’ compensation insurance programs. Our maximum borrowing under the revolving credit facility during the first nine months of fiscal 2016 was $335 million.
|
|
•
|
On May 5, 2016, we amended our existing $500 million tranche B term loan agreement which extended the maturity of the loan from April 2018 to April 2019.
|
|
•
|
We expect net interest expense will approximate $245 million for fiscal 2016.
|
31
|
•
|
At
July 2, 2016
, approximately $180 million of our cash was held in the international accounts of our foreign subsidiaries. Generally, we do not rely on the foreign cash as a source of funds to support our ongoing domestic liquidity needs. Rather, we manage our worldwide cash requirements by reviewing available funds among our foreign subsidiaries and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our foreign subsidiaries could have adverse tax consequences or be subject to regulatory capital requirements; however, those balances are generally available without legal restrictions to fund ordinary business operations. United States income taxes, net of applicable foreign tax credits, have not been provided on undistributed earnings of foreign subsidiaries. Our intention is to reinvest the cash held by foreign subsidiaries permanently or to repatriate the cash only when it is tax efficient to do so.
|
|
•
|
Our current ratio was
1.80
to 1 and
1.52
to 1 at
July 2, 2016
, and
October 3, 2015
, respectively.
|
Capital Resources
Credit Facility
Cash flows from operating activities and cash on hand are our primary sources of liquidity for funding debt service, capital expenditures, dividends and share repurchases. We also have a revolving credit facility, with a committed capacity of $1.25 billion, to provide additional liquidity for working capital needs, letters of credit and a source of financing for growth opportunities.
As of
July 2, 2016
, we had $150 million borrowed and
$7 million
of outstanding letters of credit issued under this facility, none of which were drawn upon, which left
$1,093 million
available for borrowing. Our revolving credit facility is funded by a syndicate of 42 banks, with commitments ranging from $0.3 million to $85 million per bank. The syndicate includes bank holding companies that are required to be adequately capitalized under federal bank regulatory agency requirements.
Capitalization
To monitor our credit ratings and our capacity for long-term financing, we consider various qualitative and quantitative factors. We monitor the ratio of our net debt to EBITDA as support for our long-term financing decisions. At
July 2, 2016
, and
October 3, 2015
, the ratio of our net debt to EBITDA was 1.7x and 2.1x, respectively. Refer to Part I, Item 3, EBITDA Reconciliations, for an explanation and reconciliation to comparable GAAP measures. The decrease in this ratio at
July 2, 2016
, was mainly due to increased EBITDA during the first nine months of fiscal 2016.
Credit Ratings
Revolving Credit Facility
Standard & Poor's Rating Services, a Standard & Poor's Financial Services LLC business (S&P), credit rating for Tyson Foods, Inc.'s senior unsecured long-term debt is "BBB." Moody’s Investor Service, Inc. (Moody's) senior unsecured, long-term debt rating for Tyson Foods, Inc. is "Baa3." Fitch Ratings, a wholly owned subsidiary of Fimalac, S.A. (Fitch), senior unsecured long-term debt rating for Tyson Foods, Inc. is "BBB." The below table outlines the fees paid on the unused portion of the facility (Facility Fee Rate) and letter of credit fees (Undrawn Letter of Credit Fee and Borrowing Spread) depending on the rating levels of Tyson Foods, Inc. from S&P, Moody's and Fitch.
|
Ratings Level (S&P/Moody's/Fitch)
|
Facility Fee
Rate
|
|
Undrawn Letter of
Credit Fee and
Borrowing Spread
|
|
|
A-/A3/A- or above
|
0.100
|
%
|
1.000
|
%
|
|
BBB+/Baa1/BBB+
|
0.125
|
%
|
1.125
|
%
|
|
BBB/Baa2/BBB (current level)
|
0.150
|
%
|
1.250
|
%
|
|
BBB-/Baa3/BBB-
|
0.200
|
%
|
1.500
|
%
|
|
BB+/Ba1/BB+ or lower
|
0.250
|
%
|
1.750
|
%
|
In the event the rating levels are split, the applicable fees and spread will be based upon the rating level in effect for two of the rating agencies, or, if all three rating agencies have different rating levels, the applicable fees and spread will be based upon the rating level that is between the rating levels of the other two rating agencies.
Debt Covenants
Our revolving credit and term loan facilities contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens and encumbrances; incur debt; merge, dissolve, liquidate or consolidate; make acquisitions and investments; dispose of or transfer assets; change the nature of our business; engage in certain transactions with affiliates; and enter into hedging transactions, in each case, subject to certain qualifications and exceptions. In addition, we are required to maintain minimum interest expense coverage and maximum debt-to-capitalization ratios.
Our senior notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens; engage in certain sale/leaseback transactions; and engage in certain consolidations, mergers and sales of assets.
We were in compliance with all debt covenants at
July 2, 2016
.
32
RECENTLY ADOPTED/ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to the discussion of recently adopted/issued accounting pronouncements under Part I, Item 1, Notes to Consolidated Condensed Financial Statements, Note 1: Accounting Policies.
CRITICAL ACCOUNTING ESTIMATES
We consider accounting policies related to: contingent liabilities; marketing and advertising costs; accrued self-insurance; defined benefit pension plans; impairment of long-lived assets and definite life intangibles; impairment of goodwill and indefinite life intangible assets; and income taxes to be critical accounting estimates. These policies are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended
October 3, 2015
.
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain information in this report constitutes forward-looking statements. Such forward-looking statements include, but are not limited to, current views and estimates of our outlook for fiscal
2016
, other future economic circumstances, industry conditions in domestic and international markets, our performance and financial results (e.g., debt levels, return on invested capital, value-added product growth, capital expenditures, tax rates, access to foreign markets and dividend policy). These forward-looking statements are subject to a number of factors and uncertainties that could cause our actual results and experiences to differ materially from anticipated results and expectations expressed in such forward-looking statements. We wish to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Among the factors that may cause actual results and experiences to differ from anticipated results and expectations expressed in such forward-looking statements are the following: (i) the effect of, or changes in, general economic conditions; (ii) fluctuations in the cost and availability of inputs and raw materials, such as live cattle, live swine, feed grains (including corn and soybean meal) and energy; (iii) market conditions for finished products, including competition from other global and domestic food processors, supply and pricing of competing products and alternative proteins and demand for alternative proteins; (iv) successful rationalization of existing facilities and operating efficiencies of the facilities; (v) risks associated with our commodity purchasing activities; (vi) access to foreign markets together with foreign economic conditions, including currency fluctuations, import/export restrictions and foreign politics; (vii) outbreak of a livestock disease (such as avian influenza (AI) or bovine spongiform encephalopathy (BSE)), which could have an adverse effect on livestock we own, the availability of livestock we purchase, consumer perception of certain protein products or our ability to access certain domestic and foreign markets; (viii) changes in availability and relative costs of labor and contract growers and our ability to maintain good relationships with employees, labor unions, contract growers and independent producers providing us livestock; (ix) issues related to food safety, including costs resulting from product recalls, regulatory compliance and any related claims or litigation; (x) changes in consumer preference and diets and our ability to identify and react to consumer trends; (xi) significant marketing plan changes by large customers or loss of one or more large customers; (xii) adverse results from litigation; (xiii) impacts on our operations caused by factors and forces beyond our control, such as natural disasters, fire, bioterrorism, pandemic or extreme weather; (xiv) risks associated with leverage, including cost increases due to rising interest rates or changes in debt ratings or outlook; (xv) compliance with and changes to regulations and laws (both domestic and foreign), including changes in accounting standards, tax laws, environmental laws, agricultural laws and occupational, health and safety laws; (xvi) our ability to make effective acquisitions or joint ventures and successfully integrate newly acquired businesses into existing operations; (xvii) failures or security breaches of our information technology systems; (xviii) effectiveness of advertising and marketing programs; and (xix) those factors listed under Item 1A. “Risk Factors” included in our Annual Report filed on Form 10-K for the year ended
October 3, 2015
.
33
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Market risk relating to our operations results primarily from changes in commodity prices, interest rates and foreign exchange rates, as well as credit risk concentrations. To address certain of these risks, we enter into various derivative transactions as described below. If a derivative instrument is accounted for as a hedge, depending on the nature of the hedge, changes in the fair value of the instrument either will be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or be recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is recognized immediately. Additionally, we hold certain positions, primarily in grain and livestock futures that either do not meet the criteria for hedge accounting or are not designated as hedges. With the exception of normal purchases and normal sales that are expected to result in physical delivery, we record these positions at fair value, and the unrealized gains and losses are reported in earnings at each reporting date. Changes in market value of derivatives used in our risk management activities relating to forward sales contracts are recorded in sales. Changes in market value of derivatives used in our risk management activities surrounding inventories on hand or anticipated purchases of inventories are recorded in cost of sales.
The sensitivity analyses presented below are the measures of potential losses of fair value resulting from hypothetical changes in market prices related to commodities. Sensitivity analyses do not consider the actions we may take to mitigate our exposure to changes, nor do they consider the effects such hypothetical adverse changes may have on overall economic activity. Actual changes in market prices may differ from hypothetical changes.
Commodities Risk:
We purchase certain commodities, such as grains and livestock in the course of normal operations. As part of our commodity risk management activities, we use derivative financial instruments, primarily futures and options, to reduce the effect of changing prices and as a mechanism to procure the underlying commodity. However, as the commodities underlying our derivative financial instruments can experience significant price fluctuations, any requirement to mark-to-market the positions that have not been designated or do not qualify as hedges could result in volatility in our results of operations. Contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation. Contracts designated and highly effective at meeting this risk reduction and correlation criteria are recorded using hedge accounting. The following table presents a sensitivity analysis resulting from a hypothetical change of 10% in market prices as of
July 2, 2016
, and
October 3, 2015
, on the fair value of open positions. The fair value of such positions is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures prices. The market risk exposure analysis included hedge and non-hedge derivative financial instruments.
|
Effect of 10% change in fair value
|
in millions
|
|
|||||
|
July 2, 2016
|
October 3, 2015
|
||||||
|
Livestock:
|
|||||||
|
Cattle
|
$
|
7
|
|
$
|
13
|
|
|
|
Hogs
|
21
|
|
12
|
|
|||
|
Grain
|
10
|
|
3
|
|
|||
Interest Rate Risk:
At
July 2, 2016
, we had variable rate debt of
$1,206 million
with a weighted average interest rate of
1.8%
. A hypothetical 10% increase in interest rates effective at
July 2, 2016
, and
October 3, 2015
, would have a minimal effect on interest expense.
Additionally, changes in interest rates impact the fair value of our fixed-rate debt. At
July 2, 2016
, we had fixed-rate debt of
$4,972
million with a weighted average interest rate of
4.2%
. Market risk for fixed-rate debt is estimated as the potential increase in fair value, resulting from a hypothetical 10% decrease in interest rates. A hypothetical 10% decrease in interest rates would have increased the fair value of our fixed-rate debt by approximately $
67 million
at
July 2, 2016
, and $87 million at
October 3, 2015
. The fair values of our debt were estimated based on quoted market prices and/or published interest rates.
We have interest rate risk associated with our pension and post-retirement benefit obligations. Changes in interest rates impact the liabilities associated with these benefit plans as well as the amount of income or expense recognized for these plans. Declines in the value of the plan assets could diminish the funded status of the pension plans and potentially increase the requirements to make cash contributions to these plans. See Part II, Item 8, Notes to Consolidated Financial Statements, Note 15: Pensions and Other Postretirement Benefits in the Annual Report on Form 10-K for the year ended
October 3, 2015
, for additional information.
Foreign Currency Risk:
We have foreign exchange exposure from fluctuations in foreign currency exchange rates primarily as a result of certain receivable and payable balances. The primary currencies we have exposure to are the Brazilian real, the British pound sterling, the Canadian dollar, the Chinese renminbi, the European euro, the Japanese yen and the Mexican peso. We periodically enter into foreign exchange forward and option contracts to hedge some portion of our foreign currency exposure. A hypothetical 10% change in foreign exchange rates effective at
July 2, 2016
, and
October 3, 2015
, related to the foreign exchange forward and option contracts would have a
$4 million
and
$3 million
impact, respectively, on pretax income.
34
Concentration of Credit Risk:
Refer to our market risk disclosures set forth in the
2015
Annual Report filed on Form 10-K for a detailed discussion of quantitative and qualitative disclosures about concentration of credit risks, as these risk disclosures have not changed significantly from the
2015
Annual Report.
EBITDA Reconciliations
A reconciliation of net income to EBITDA is as follows (in millions, except ratio data):
|
Nine Months Ended
|
Fiscal Year Ended
|
Twelve Months Ended
|
||||||||||||
|
July 2, 2016
|
June 27, 2015
|
October 3, 2015
|
July 2, 2016
|
|||||||||||
|
Net income
|
$
|
1,380
|
|
$
|
965
|
|
$
|
1,224
|
|
$
|
1,639
|
|
||
|
Less: Interest income
|
(5
|
)
|
(6
|
)
|
(9
|
)
|
(8
|
)
|
||||||
|
Add: Interest expense
|
191
|
|
221
|
|
293
|
|
263
|
|
||||||
|
Add: Income tax expense
|
687
|
|
471
|
|
697
|
|
913
|
|
||||||
|
Add: Depreciation
|
460
|
|
447
|
|
609
|
|
622
|
|
||||||
|
Add: Amortization (a)
|
60
|
|
69
|
|
92
|
|
83
|
|
||||||
|
EBITDA
|
$
|
2,773
|
|
$
|
2,167
|
|
$
|
2,906
|
|
$
|
3,512
|
|
||
|
Total gross debt
|
$
|
6,725
|
|
$
|
6,178
|
|
||||||||
|
Less: Cash and cash equivalents
|
(688
|
)
|
(197
|
)
|
||||||||||
|
Less: Short-term investments
|
(2
|
)
|
(4
|
)
|
||||||||||
|
Total net debt
|
$
|
6,035
|
|
$
|
5,977
|
|
||||||||
|
Ratio Calculations:
|
||||||||||||||
|
Gross debt/EBITDA
|
2.3x
|
|
1.8x
|
|
||||||||||
|
Net debt/EBITDA
|
2.1x
|
|
1.7x
|
|
||||||||||
|
(a)
|
Excludes the amortization of debt discount expense of
$6 million
and
$8 million
for the
nine
months ended
July 2, 2016
, and
June 27, 2015
, respectively, $10 million for the fiscal year ended October 3, 2015, and
$8 million
for the twelve months ended
July 2, 2016
, as it is included in Interest expense.
|
EBITDA represents net income, net of interest, income tax and depreciation and amortization. Net debt to EBITDA represents the ratio of our debt, net of cash and short-term investments, to EBITDA. EBITDA and net debt to EBITDA are presented as supplemental financial measurements in the evaluation of our business. We believe the presentation of these financial measures helps investors to assess our operating performance from period to period, including our ability to generate earnings sufficient to service our debt, and enhances understanding of our financial performance and highlights operational trends. These measures are widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies; however, the measurements of EBITDA and net debt to EBITDA may not be comparable to those of other companies, which limits their usefulness as comparative measures. EBITDA and net debt to EBITDA are not measures required by or calculated in accordance with generally accepted accounting principles (GAAP) and should not be considered as substitutes for net income or any other measure of financial performance reported in accordance with GAAP or as a measure of operating cash flow or liquidity. EBITDA is a useful tool for assessing, but is not a reliable indicator of, our ability to generate cash to service our debt obligations because certain of the items added to net income to determine EBITDA involve outlays of cash. As a result, actual cash available to service our debt obligations will be different from EBITDA. Investors should rely primarily on our GAAP results, and use non-GAAP financial measures only supplementally, in making investment decisions.
|
Item 4.
|
Controls and Procedures
|
An evaluation was performed, under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, management, including the CEO and CFO, has concluded that, as of
July 2, 2016
, our disclosure controls and procedures were effective.
In the
third
quarter ended
July 2, 2016
, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
35
|
Item 1.
|
Legal Proceedings
|
Refer to the description of certain legal proceedings pending against us under Part I, Item 1, Notes to Consolidated Condensed Financial Statements, Note 16: Commitments and Contingencies, which discussion is incorporated herein by reference. Listed below are certain additional legal proceedings involving the Company and/or its subsidiaries.
On April 23, 2015, the United States Environmental Protection Agency issued a Finding and Notice of Violation (the “NOV”) to Tyson Foods, Inc. and our subsidiary, Southwest Products, LLC, alleging violations of the California Truck and Bus Regulation. The NOV alleges that certain diesel-powered trucks operated by us in California did not comply with California’s emission requirements for in-use trucks and that we did not verify the compliance status of independent carriers hired to carry products in California. In January 2016, the Environmental Protection Agency proposed that we pay a civil penalty of $283,990 to resolve these allegations. We are cooperating with the Environmental Protection Agency and believe that we have defenses to the allegations of the NOV.
On June 17, 2014, the Missouri attorney general filed a civil lawsuit against us in the circuit court of Barry County, Missouri, concerning an incident that occurred in May 2014 in which some feed supplement was discharged from our plant in Monett, Missouri, to the City of Monett’s wastewater treatment plant allegedly leading to a fish kill in a local stream and odor issues around the plant. That lawsuit alleges six violations stemming from the incident and seeks penalties against us, compensation for damage to the stream, and reimbursement for the State of Missouri’s costs in investigating the matter. In January 2015, a consent judgment was entered that resolved the lawsuit. The judgment required payment of $540,000, which includes amounts for penalties, cost recovery and supplemental environmental projects. The United States Environmental Protection Agency has also indicated to us that it has begun a criminal investigation into the incident. If we become subject to criminal charges, we may be subject to a fine and other relief, as well as government contract suspension and debarment. We are cooperating with the Environmental Protection Agency but cannot predict the outcome of its investigation at this time. It is also possible that other regulatory agencies may commence investigations and allege additional violations.
On June 19, 2005, the Attorney General and the Secretary of the Environment of the State of Oklahoma filed a complaint in the United States District Court for the Northern District of Oklahoma against Tyson Foods, Inc., three subsidiaries and six other poultry integrators. The complaint, which was subsequently amended, asserts a number of state and federal causes of action including, but not limited to, counts under the Comprehensive Environmental Response, Compensation, and Liability Act, Resource Conservation and Recovery Act, and state-law public nuisance theories. Oklahoma alleges that the defendants and certain contract growers who were not joined in the lawsuit polluted the surface waters, groundwater and associated drinking water supplies of the Illinois River Watershed through the land application of poultry litter. Oklahoma’s claims were narrowed through various rulings issued before and during trial and its claims for natural resource damages were dismissed by the district court in a ruling issued on July 22, 2009, which was subsequently affirmed on appeal by the Tenth Circuit Court of Appeals. A non-jury trial of the remaining claims including Oklahoma’s request for injunctive relief began on September 24, 2009. Closing arguments were held on February 11, 2010. The district court has not yet rendered its decision from the trial.
Other Matters:
As of October 3, 2015, we had approximately 113,000 employees and, at any time, have various employment practices matters outstanding. In the aggregate, these matters are significant to the Company, and we devote significant resources to managing employment issues. Additionally, we are subject to other lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. While the ultimate results of these matters cannot be determined, they are not expected to have a material adverse effect on our consolidated results of operations or financial position.
|
Item 1A.
|
Risk Factors
|
There have been no material changes to the risk factors listed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended
October 3, 2015
. These risk factors should be considered carefully with the information provided elsewhere in this report, which could materially adversely affect our business, financial condition or results of operations.
36
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
The table below provides information regarding our purchases of Class A stock during the periods indicated.
|
Period
|
Total
Number of
Shares
Purchased
|
|
Average
Price Paid
per Share
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
Maximum Number of
Shares that May Yet Be
Purchased Under the Plans
or Programs
(1)
|
|
|||
|
Apr. 3, 2016 to Apr. 30, 2016
|
3,052,000
|
|
$
|
65.34
|
|
2,985,645
|
|
53,169,763
|
|
||
|
May 1, 2016 to June 4, 2016
|
2,796,310
|
|
66.02
|
|
2,745,085
|
|
50,424,678
|
|
|||
|
June 5, 2016 to July 2, 2016
|
1,361,305
|
|
60.65
|
|
1,337,244
|
|
49,087,434
|
|
|||
|
Total
|
7,209,615
|
|
(2)
|
7,067,974
|
|
(3)
|
49,087,434
|
|
|||
|
(1)
|
On February 7, 2003, we announced our Board of Directors approved a program to repurchase up to 25 million shares of Class A common stock from time to time in open market or privately negotiated transactions. On May 3, 2012, our Board of Directors approved an increase of 35 million shares, on January 30, 2014, our Board of Directors approved an increase of 25 million shares and, on February 4, 2016, our Board of Directors approved an increase of 50 million shares, authorized for repurchase under our share repurchase program. The program has no fixed or scheduled termination date.
|
|
(2)
|
We purchased 141,641 shares during the period that were not made pursuant to our previously announced stock repurchase program, but were purchased to fund certain Company obligations under our equity compensation plans. These transactions included 140,272 shares purchased in open market transactions and 1,369 shares withheld to cover required tax withholdings on the vesting of restricted stock.
|
|
(3)
|
These shares were purchased during the period pursuant to our previously announced stock repurchase program.
|
|
Item 3.
|
Defaults Upon Senior Securities
|
None
|
Item 4.
|
Mine Safety Disclosures
|
Not Applicable
|
Item 5.
|
Other Information
|
None
37
|
Item 6.
|
Exhibits
|
The following exhibits are filed with this report.
|
Exhibit
No. |
Exhibit Description
|
||
|
10.1
|
Amendment No. 1 to Term Loan Agreement, dated as of May 5, 2016, by and between the Company and Bank of America, N.A. as lender (previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended April 2, 2016, Commission File No. 001-14704, and incorporated herein by reference).
|
||
|
10.2
|
Amended and Restated Employment Agreement dated as of June 13, 2016, entered into between the Company and Tom Hayes (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 14, 2016, Commission File No. 001-14704, and incorporated herein by reference).
|
||
|
10.3
|
Letter Agreement dated as of June 13, 2016, between the Company and Donnie Smith (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 14, 2016, Commission File No. 001-14704, and incorporated herein by reference).
|
||
|
12.1
|
Ratio of Earnings to Fixed Charges
|
||
|
31.1
|
Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
|
31.2
|
Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
|
101
|
The following financial information from our Quarterly Report on Form 10-Q for the quarter ended July 2, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Statements of Income, (ii) Consolidated Condensed Statements of Comprehensive Income, (iii) Consolidated Condensed Balance Sheets, (iv) Consolidated Condensed Statements of Cash Flows, and (v) the Notes to Consolidated Condensed Financial Statements.
|
||
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
TYSON FOODS, INC.
|
|||
|
Date: August 8, 2016
|
/s/ Dennis Leatherby
|
||
|
Dennis Leatherby
|
|||
|
Executive Vice President and Chief Financial Officer
|
|||
|
Date: August 8, 2016
|
/s/ Curt T. Calaway
|
||
|
Curt T. Calaway
|
|||
|
Senior Vice President, Controller and Chief Accounting Officer
|
|||
39
EXHIBIT INDEX
|
Exhibit
No. |
Exhibit Description
|
||
|
10.1
|
Amendment No. 1 to Term Loan Agreement, dated as of May 5, 2016, by and between the Company and Bank of America, N.A. as lender (previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended April 2, 2016, Commission File No. 001-14704, and incorporated herein by reference).
|
||
|
10.2
|
Amended and Restated Employment Agreement dated as of June 13, 2016, entered into between the Company and Tom Hayes (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 14, 2016, Commission File No. 001-14704, and incorporated herein by reference).
|
||
|
10.3
|
Letter Agreement dated as of June 13, 2016, between the Company and Donnie Smith (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 14, 2016, Commission File No. 001-14704, and incorporated herein by reference).
|
||
|
12.1
|
Ratio of Earnings to Fixed Charges
|
||
|
31.1
|
Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
|
31.2
|
Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
|
101
|
The following financial information from our Quarterly Report on Form 10-Q for the quarter ended July 2, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Statements of Income, (ii) Consolidated Condensed Statements of Comprehensive Income, (iii) Consolidated Condensed Balance Sheets, (iv) Consolidated Condensed Statements of Cash Flows, and (v) the Notes to Consolidated Condensed Financial Statements.
|
||
40
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1: Accounting PoliciesNote 2: DispositionsNote 3: InventoriesNote 4: Property, Plant and EquipmentNote 5: Other Current LiabilitiesNote 6: DebtNote 7: EquityNote 8: Income TaxesNote 9: Other Income and ChargesNote 10: Earnings Per ShareNote 11: Derivative Financial InstrumentsNote 12: Fair Value MeasurementsNote 13: Pension and Other Postretirement Benefit PlansNote 14: Other Comprehensive Income (loss)Note 15: Segment ReportingNote 16: Commitments and ContingenciesItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits