TYSON FOODS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations OBJECTIVE The following discussion provides an analysis of the Company’s financial condition, cash flows and results of operations from management's perspective and should be read in conjunction with the consolidated condensed financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and within the Company’s Annual Report on Form 10-K filed for the fiscal year ended October 3, 2020, as amended. Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations. RESULTS OF OPERATIONS Description of the Company We are one of the world’s largest food companies and a recognized leader in protein. Founded in 1935 by John W. Tyson and grown under three generations of family leadership, the Company has a broad portfolio of products and brands like Tyson®, Jimmy Dean®, Hillshire Farm®, Ball Park®, Wright®, Aidells®, ibp® and State Fair®. 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: Beef, Pork, Chicken, and Prepared Foods. We measure segment profit as operating income (loss). International/Other primarily includes our foreign operations in Australia, China, Malaysia, Mexico, the Netherlands, South Korea and Thailand, third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC. 26 Overview COVID-19 We continue to monitor and respond to the evolving nature of the global novel coronavirus pandemic (“COVID-19” or “pandemic”) and its impact to our global business. In addition to our ongoing internal COVID-19 task force formed for the primary purposes of maintaining the health and safety of our team members, ensuring our ability to operate our processing facilities and maintaining the liquidity of our business, we have expanded our medical team with the addition of a chief medical officer during the first quarter of fiscal 2021. We have experienced and continue to experience multiple challenges related to the pandemic. These challenges increased our operating costs for the third quarter and first nine months of fiscal 2021 and are anticipated to continue through at least the remainder of fiscal 2021. Each of our segments experienced a shift in demand from foodservice to retail during fiscal 2020 and are seeing varying levels of foodservice recovery and the return of volumes in fiscal 2021. The long-term impact of COVID-19 remains uncertain and will depend on future developments, including the duration and spread of the pandemic, COVID-19 variants and resurgences, and related actions taken by federal, state and local government officials to prevent and manage disease spread, and effectively distribute and administer vaccinations, all of which contain some level of uncertainty and cannot be easily predicted. Additionally, we continue to assess the potential of more permanent impacts to our businesses. • Team Members – The health and safety of our team members is our top priority. To protect our team members, we implement safety measures recommended by the Centers for Disease Control and Prevention (“CDC”) and the Occupational Safety and Health Administration (“OSHA”) in our facilities and coordinate with other health officials as appropriate. In addition to hiring a chief medical officer, we have added 200 nursing staff and developed an “always-on” testing strategy rooted in contact tracing. In August 2021, we announced all team members are required to be fully vaccinated by November 1, 2021, subject to ongoing discussions with locations represented by unions. Currently, nearly 59,000 of our U.S. employees have been vaccinated at events held onsite at Tyson facilities or through an external source across the country. We have also extended onsite vaccination to family members of employees as well as others living in their homes. • Customers and Production – Our most significant impacts from COVID-19 relate to channel shifts and lower production. We are committed to doing our best to ensure the continuity of our business and the availability of our products to customers. Our production capabilities, including our large scale and geographic proximities, allow us to adapt some of our facilities to the changing demand. In addition, our production facilities experienced varying levels of production impacts, including reduced volumes, due to the implementation of additional worker health precautions and worker absenteeism. • Supply Chain – Our supply chain has stayed largely intact as we have built contingency plans for redundant supply for our production facilities as well as our external suppliers. We have been able to leverage our extensive distribution network and large private transportation fleet to help mitigate the impacts of COVID-19. We have experienced and expect to continue to experience volatility in commodity inputs, which has impacted our input costs, in part due to impacts caused by COVID-19. Since we also export globally, container availability and port capacities have been among the challenges in meeting the global demand for our products. • Insurance and CARES Act – Although we maintain insurance policies for various risks, we do not believe most COVID-19 impacts will be covered by our policies. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), among other things, includes provisions relating to refundable payroll tax credits, deferral of the employer portion of social security payments, and a number of income tax provisions. The provisions related to income tax will not have a significant impact on our financial statements. • Overall Financial Condition – We continue to proactively manage the Company and its operations through the pandemic. The major challenge we face is the availability of team members to operate our production facilities as our production facilities are experiencing varying levels of absenteeism. We will continue to operate our production facilities with team member health and safety as a top priority. However, we cannot predict the ultimate impact that COVID-19 will have on our short- and long-term demand at this time, as it will depend on, among other things, the severity and duration of the COVID-19 pandemic. We generated $2,656 million of operating cash flows during the nine months ended July 3, 2021. At July 3, 2021, we had approximately $3,363 million of liquidity, which included availability under our revolving credit facility and $1,613 million of cash and cash equivalents. We have $1,566 million of current debt. Combined with the cash expected to be generated from the Company’s operations, we anticipate that we will maintain sufficient liquidity to operate our business, make capital expenditures, pay dividends and address other needs including our ability to meet maturing debt obligations. Revision of Previously Issued Financial Statements The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the revision of our previously reported consolidated condensed financial statements for the three and nine months ended June 27, 2020. For additional information and a detailed discussion of the revision, refer to Part I, Item 1, Notes to the Consolidated Condensed Financial Statements, Note 1: Accounting Policies. 27 Strategy Our strategy is to sustainably feed the world with the fastest growing protein brands. We intend to achieve our strategy as we: grow our business by delivering superior value to consumers and customers; deliver fuel for growth and returns through commercial, operational and financial excellence; and sustain our Company and our world for future generations. • Disposition – In the second quarter of fiscal 2021, we initiated a plan to sell our pet treats business, which is included in our Prepared Foods segment. In the third quarter of fiscal 2021, we entered into a definitive agreement to sell the business for $1.2 billion in cash, subject to certain adjustments. The business had a net carrying value of approximately $411 million as of July 3, 2021, which included approximately $44 million of working capital consisting of inventory, accounts receivable and accounts payable, $17 million of property, plant and equipment and $350 million of goodwill. The transaction closed on July 6, 2021 and we anticipate recognizing a gain from the sale of this business in the fourth quarter of fiscal 2021. General Sales grew 25% in the third quarter and 8% in the first nine months of fiscal 2021 compared to the third quarter and first nine months of fiscal 2020, respectively, due to sales growth across each of our segments in the first nine months of fiscal 2021, partially offset by $225 million and $545 million in legal contingency accruals recognized as a reduction to Sales in the third quarter and first nine months of fiscal 2021, respectively. Our operating income of $2,487 million was up 22% for the first nine months of fiscal 2021 as strong results in our Beef and Prepared Foods segments were offset by a decline in the results of our Pork and Chicken segments. Operating income of $1,062 million for the third quarter of fiscal 2021 was up 37% as strong results in our Beef segment were offset by a decline in the results of our Chicken and Pork segments. In the nine months ended July 3, 2021, our results were impacted by $23 million of charges related to the relocation of a production facility in China. Results in the third quarter of fiscal 2021 were also impacted by $306 million of charges related to legal contingency accruals. In the nine months ended June 27, 2020, our results were impacted by $54 million of restructuring and related charges. During the third quarter and first nine months of fiscal 2021, we incurred direct incremental expenses related to COVID-19 totaling approximately $55 million and $270 million, respectively, which were recorded in Cost of Sales in our Consolidated Condensed Statements of Income. During the third quarter of fiscal 2020, we incurred direct incremental expenses related to COVID-19 totaling approximately $340 million, of which approximately $315 million and $25 million were recorded in Cost of Sales and Selling, General and Administrative, respectively, in our Consolidated Condensed Statements of Income. These COVID-19 direct incremental expenses primarily included team member costs associated with worker health and availability, including direct costs for personal protection equipment, production facility sanitization, COVID-19 testing and vaccinations, donations, product downgrades, rendered product and certain professional fees, which was partially offset by the CARES Act credits. Due to the nature of these direct incremental COVID-19 expenses, our segments were primarily impacted based on their relative number of team members and the degree of production and worker availability disruptions they have experienced, and thus, our Beef segment incurred a greater proportion of the total costs. These direct incremental COVID-19 related costs exclude market related impacts that may have been driven in part by COVID-19, including such items as derivatives, deferred compensation investments, livestock lower-of-cost-or-net-realizable-value (“LCNRV”) adjustments and other market driven impacts to margin and demand. These costs also exclude incremental operating costs that have become part of our permanent cost structure as we continue to invest in our team members and their health and safety. Other indirect costs associated with COVID-19 are not reflected in these amounts, including costs associated with raw materials, distribution and transportation, plant underutilization and reconfiguration, premiums paid to cattle producers, and pricing discounts. Market Environment According to the United States Department of Agriculture (“USDA”), domestic protein production (beef, pork, chicken and turkey) increased 6% in the third quarter of fiscal 2021 compared to the same period in fiscal 2020, which was impacted heavily by the global pandemic. Each of our segments is experiencing improved foodservice demand and continued strength in our retail channels. We continue to monitor recent trade and tariff activity as well as COVID-19 and its potential impact to exports and input costs across all our segments. All segments experienced inflation in operating costs, especially in labor, freight and certain materials, and we expect this trend to continue through the remainder of fiscal 2021. Additionally, grain and feed ingredient costs have increased substantially, which impacts all of our segments. We pursue recovery of these increased costs through pricing. The Beef segment experienced strong global demand and ample supply of market-ready cattle. The Pork segment experienced strong global demand during the third quarter of fiscal 2021. The Chicken segment experienced strong demand relative to supply. The Prepared Foods segment experienced growth, but faced increased costs partially due to the impact of an inflationary environment and challenging labor and supply conditions during the third quarter of fiscal 2021. Margins Our total operating margin was 8.5% in the third quarter of fiscal 2021. Operating margins by segment were as follows: • Beef – 22.6% • Pork – 3.9% • Chicken – (8.0)% • Prepared Foods – 6.5% 28 in millions, except per share data Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Net income attributable to Tyson $ 749 $ 526 $ 1,692 $ 1,407 Net income attributable to Tyson – per diluted share 2.05 1.44 4.63 3.85 Third quarter – Fiscal 2021 – Net income attributable to Tyson included the following items: • $306 million pretax, or ($0.64) per diluted share, related to the recognition of legal contingency accruals. • $4 million pretax, or ($0.01) per diluted share, related to the relocation of a production facility in China. Nine months – Fiscal 2021 – Net income attributable to Tyson included the following items: • $626 million pretax, or ($1.31) per diluted share, related to the recognition of legal contingency accruals. • $6 million pretax, or $0.01 per diluted share, of Beef production facility fire insurance proceeds, net of costs incurred. • $23 million pretax, or ($0.05) per diluted share, related to the relocation of a production facility in China. Third quarter – Fiscal 2020 – Net income attributable to Tyson included the following items: • $6 million pretax, or $0.01 per diluted share, due to a gain from pension plan termination. • $15 million pretax, or $0.03 per diluted share, of Beef production facility fire insurance proceeds, net of costs incurred. Nine months – Fiscal 2020 – Net income attributable to Tyson included the following items: • $52 million pretax, or ($0.11) per diluted share, of restructuring and related charges. • $116 million pretax, or $0.24 per diluted share, due to gains from pension plan terminations. Summary of Results Sales in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Sales $ 12,478 $ 10,022 $ 34,238 $ 31,725 Change in sales volume 9.7 % 0.1 % Change in average sales price 17.1 % 9.5 % Sales growth 24.5 % 7.9 % Third quarter – Fiscal 2021 vs Fiscal 2020 • Sales Volume – Sales were positively impacted by an increase in sales volume, which accounted for an increase of $925 million, driven by increased volumes in each of our segments primarily due to improved production throughput compared to the lower production throughput associated with the impact of COVID-19 during the comparable period in fiscal 2020. • Average Sales Price – Sales were positively impacted by higher average sales prices, which accounted for an increase of $1,756 million. The increase in average sales price was primarily attributable to favorable product mix and the pass through of increased raw material costs. • The above change in average sales price for the third quarter of fiscal 2021 excludes a $225 million reduction of Sales from the recognition of legal contingency accruals. Nine months – Fiscal 2021 vs Fiscal 2020 • Sales Volume - Sales were positively impacted by an increase in sales volume, which accounted for an increase of $40 million, from increased volumes in the third quarter of fiscal 2021 due to improved production throughput compared to lower production throughput associated with the impact of COVID-19 during the comparable period in fiscal 2020. Sales were further impacted by increased volumes in our Beef segment during the first quarter of fiscal 2021 compared to the reduction in production capacity as a result of a fire that caused the temporary closure of a production facility for the majority of the first quarter of fiscal 2020, which was partially offset by severe weather in the second quarter of fiscal 2021. • Average Sales Price - Sales were positively impacted by higher average sales prices, which accounted for an increase of $3,018 million. The increase in average sales price was primarily attributable to favorable product mix and the pass through of increased raw material costs. • The above change in average sales price for the nine months ended July 3, 2021 excludes a $545 million reduction of Sales from the recognition of legal contingency accruals. 29 Cost of Sales in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Cost of sales $ 10,858 $ 8,709 $ 30,188 $ 27,951 Gross profit $ 1,620 $ 1,313 $ 4,050 $ 3,774 Cost of sales as a percentage of sales 87.0 % 86.9 % 88.2 % 88.1 % Third quarter – Fiscal 2021 vs Fiscal 2020 • Cost of sales increased $2,149 million. Higher sales volume increased cost of sales $821 million while higher input cost per pound increased cost of sales $1,328 million. • The $1,328 million impact of higher input cost per pound was impacted by: • Increase in live hog costs of approximately $390 million in our Pork segment. • Increase of approximately $380 million in our Chicken segment related to net increases in feed ingredient costs, growout expenses and outside meat purchases. • Increase in raw material and other input costs of approximately $160 million in our Prepared Foods segment. • Increase in freight and transportation costs of approximately $120 million. • Increase of approximately $81 million in our Chicken segment related to the recognition of legal contingency accruals. • Increase in live cattle costs of approximately $70 million in our Beef segment. • Increase of approximately $15 million in our Beef segment in the third quarter of fiscal 2020 related to insurance proceeds net of costs related to the fire at our production facility. • Decrease of $285 million due to reduction in direct incremental expenses related to COVID-19. • Decrease due to net derivative gains of $41 million in the third quarter of fiscal 2021, compared to net derivative losses of $12 million in the third quarter of fiscal 2020 due to our risk management activities. These amounts exclude offsetting impacts from related physical purchase transactions, which are included in the change in live cattle and hog costs and raw material and feed ingredient costs described herein. • Remaining increase in costs across all of our segments primarily driven by net impacts on average cost per pound from mix changes. • The $821 million impact of higher sales volume was primarily driven by reduced sales volume in each of our segments due to lower production throughput associated with the impact of COVID-19 in the third quarter of fiscal 2020. Nine months – Fiscal 2021 vs Fiscal 2020 • Cost of sales increased $2,237 million. Higher sales volume increased cost of sales $36 million while higher input cost per pound increased cost of sales $2,201 million. • The $2,201 million impact of higher input cost per pound was impacted by: • Increase in live hog costs of approximately $525 million in our Pork segment. • Increase of approximately $620 million in our Chicken segment related to net increases in feed ingredient costs, growout expenses and outside meat purchases. • Increase in raw material and other input costs of approximately $265 million in our Prepared Foods segment. • Increase in freight and transportation costs of approximately $200 million. • Increase of approximately $81 million in our Chicken segment related to the recognition of legal contingency accruals. • Decrease in live cattle costs of approximately $270 million in our Beef segment. • Decrease due to net derivative gains of $121 million for the first nine months of fiscal 2021, compared to net derivative losses of $69 million for the first nine months of fiscal 2020 due to our risk management activities. These amounts exclude offsetting impacts from related physical purchase transactions, which are included in the change in live cattle and hog costs and raw material and feed ingredient costs described herein. • Decrease of $70 million due to reduction in direct incremental expenses related to COVID-19. • Remaining increase in costs across all of our segments primarily driven by net impacts on average cost per pound from mix changes as well as production inefficiencies due in part to the impact of COVID-19 in the first nine months of fiscal 2021. 30 • The $36 million impact of higher sales volume was primarily driven by increased volume in each of our segments in the third quarter of fiscal 2021 partially offset by decreased sales volume in each of our segments due to lower production throughput associated with the impact of COVID-19 in the first half of fiscal 2021 and severe weather in the second quarter of fiscal 2021. Selling, General and Administrative in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Selling, general and administrative expense $ 558 $ 540 $ 1,563 $ 1,728 As a percentage of sales 4.5 % 5.4 % 4.6 % 5.4 % Third quarter – Fiscal 2021 vs Fiscal 2020 • Increase of $18 million in selling, general and administrative was primarily driven by: • Increase of $20 million in marketing, advertising and promotion expenses. • Increase of $10 million in professional fees. • Decrease of $12 million in employee costs primarily from incentive-based compensation. Nine months – Fiscal 2021 vs Fiscal 2020 • Decrease of $165 million in selling, general and administrative was primarily driven by: • Decrease of $111 million from the change in the impact of a cattle supplier’s misappropriation of Company funds, resulting from a $55 million gain related to the recovery of cattle inventory in the nine months ended July 3, 2021 as compared to a $56 million loss recognized in the nine months ended June 27, 2020. • Decrease of $66 million in marketing, advertising and promotion expenses. • Decrease of $48 million from restructuring and related charges. • Decrease of $25 million in donations. • Decrease of $12 million in travel and entertainment expenses. • Decrease of $10 million in commission and brokerage fees. • Increase of $52 million in professional fees. • Increase of $42 million in employee costs primarily from incentive-based compensation. • Increase of $25 million in technology related costs. Interest Expense in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Cash interest expense $ 111 $ 127 $ 338 $ 372 Non-cash interest expense (6) (5) (13) (11) Total interest expense $ 105 $ 122 $ 325 $ 361 Third quarter and nine months – Fiscal 2021 vs Fiscal 2020 • Cash interest expense primarily included interest expense related to our senior notes and term loans, in addition to commitment fees incurred on our revolving credit facility. The decrease in cash interest expense in fiscal 2021 was primarily due to the change in outstanding commercial paper and $1 billion reduction in the Term Loan balance in fiscal 2021 as well as the settlement of the 2020 notes during fiscal 2020. Effective Tax Rate Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 22.1 % 20.9 % 22.9 % 22.6 % Third quarter and nine months – Fiscal 2021 vs Fiscal 2020 • Our effective income tax rate was 22.1% for the third quarter of fiscal 2021 compared to 20.9% for the same period of fiscal 2020, and the effective income tax rates for the first nine months of fiscal 2021 and 2020 were 22.9% and 22.6%, respectively. The effective tax rates for the third quarter and first nine months of fiscal 2021 and 2020 were increased by state taxes and decreased by various tax benefits. 31 Segment Results We operate in four segments: Beef, Pork, Chicken, and Prepared Foods. The following table is a summary of sales and operating income (loss), which is how we measure segment profit. in millions Sales Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Beef $ 4,954 $ 3,653 $ 12,987 $ 11,470 Pork 1,715 1,115 4,631 3,760 Chicken 3,476 3,112 9,860 9,801 Prepared Foods 2,323 2,035 6,600 6,255 International/Other 488 402 1,444 1,365 Intersegment sales (478) (295) (1,284) (926) Total $ 12,478 $ 10,022 $ 34,238 $ 31,725 in millions Operating Income (Loss) Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Beef $ 1,120 $ 649 $ 2,093 $ 1,114 Pork 67 107 250 391 Chicken (279) (120) (489) 36 Prepared Foods 150 145 633 494 International/Other 4 (8) — 11 Total $ 1,062 $ 773 $ 2,487 $ 2,046 Beef Segment Results in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 Change July 3, 2021 June 27, 2020 Change Sales $ 4,954 $ 3,653 $ 1,301 $ 12,987 $ 11,470 $ 1,517 Sales volume change 24.0 % 6.6 % Average sales price change 11.6 % 6.6 % Operating income $ 1,120 $ 649 $ 471 $ 2,093 $ 1,114 $ 979 Operating margin 22.6 % 17.8 % 16.1 % 9.7 % Third quarter and nine months – Fiscal 2021 vs Fiscal 2020 • Sales Volume – Sales volume increased during the third quarter of fiscal 2021 due to strong global demand and reduced production inefficiencies associated with COVID-19 compared to the third quarter of fiscal 2020. Sales volume increased for the first nine months of fiscal 2021 due to strong global demand and increased cattle processed in the third quarter of fiscal 2021 as compared to fiscal 2020, partially offset by the impacts associated with severe weather in the second quarter of fiscal 2021 and a challenging labor environment. Additionally, sales volume for the first nine months of fiscal 2021 was impacted by a fire, which caused the temporary closure of a production facility for the majority of the first quarter of fiscal 2020. • Average Sales Price – Average sales price increased in the third quarter and first nine months of fiscal 2021 as demand for our beef products remained strong. • Operating Income – Operating income increased in the third quarter and first nine months of fiscal 2021 due to strong demand as we continued to optimize revenues relative to live cattle supply, partially offset by production inefficiencies and a net increase in direct incremental expenses related to COVID-19 in the first nine months of fiscal 2021. Additionally, operating income in the first nine months of fiscal 2021 was impacted by a cattle supplier's misappropriation of Company funds, which resulted in a $55 million gain related to the recovery of cattle inventory as compared to a $56 million loss recognized in the first nine months of fiscal 2020. 32 Pork Segment Results in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 Change July 3, 2021 June 27, 2020 Change Sales $ 1,715 $ 1,115 $ 600 $ 4,631 $ 3,760 $ 871 Sales volume change 14.5 % 2.9 % Average sales price change 39.3 % 20.3 % Operating income $ 67 $ 107 $ (40) $ 250 $ 391 $ (141) Operating margin 3.9 % 9.6 % 5.4 % 10.4 % Third quarter and nine months – Fiscal 2021 vs Fiscal 2020 • Sales Volume – Sales volume increased during the third quarter of fiscal 2021 due to strong global demand and reduced production inefficiencies associated with COVID-19 compared to the third quarter of fiscal 2020. Sales volume increased for the first nine months of fiscal 2021 due to strong global demand and increased live hogs processed in the third quarter of fiscal 2021 as compared to fiscal 2020, partially offset by the impacts of a challenging labor environment. • Average Sales Price – Average sales price increased in the third quarter and first nine months of fiscal 2021 due to strong demand. • Operating Income – Operating income decreased in the third quarter and first nine months of fiscal 2021 primarily due to lower hog supplies relative to industry capacity as well as production inefficiencies related to COVID-19 and a challenging labor environment, partially offset by a reduction in direct incremental expenses related to COVID-19 in the third quarter of fiscal 2021 as compared to fiscal 2020. Additionally, operating income in the third quarter and first nine months of fiscal 2021 was impacted by approximately $45 million and $115 million, respectively, of incremental net derivative losses as compared to the third quarter and first nine months of fiscal 2020. Chicken Segment Results in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 Change July 3, 2021 June 27, 2020 Change Sales $ 3,476 $ 3,112 $ 364 $ 9,860 $ 9,801 $ 59 Sales volume change 3.3 % (2.4) % Average sales price change 15.6 % 8.5 % Operating income (loss) $ (279) $ (120) $ (159) $ (489) $ 36 $ (525) Operating margin (8.0) % (3.9) % (5.0) % 0.4 % Third quarter and nine months – Fiscal 2021 vs Fiscal 2020 • Sales Volume – Sales volume increased during the third quarter of fiscal 2021 primarily due to increased demand in the foodservice channel and reduced production inefficiencies associated with COVID-19 compared to the third quarter of fiscal 2020. Sales volume decreased during the first nine months of fiscal 2021 from the impact of lower production throughput associated with COVID-19, disruptions due to severe weather in the second quarter of fiscal 2021, decline in hatch rate and a challenging labor environment, partially offset by increased demand. • Average Sales Price – Average sales price increased in the third quarter and first nine months of fiscal 2021 due to favorable sales mix and inflationary market conditions. The change in average sales price for the three and nine months ended July 3, 2021 excludes a $225 million and $545 million reduction of Sales, respectively, from the recognition of legal contingency accruals. • Operating Income (Loss) – Operating loss increased during the third quarter of fiscal 2021 primarily due to a $306 million loss from the recognition of legal contingency accruals and $270 million of higher feed ingredient costs, partially offset by $125 million of incremental net derivative gains as compared to the third quarter of fiscal 2020. Operating income decreased during the first nine months of fiscal 2021 primarily due to a $626 million loss from the recognition of legal contingency accruals, $410 million of higher feed ingredient costs as compared to fiscal 2020, production inefficiencies related to COVID-19, decline in hatch rate and disruptions due to severe weather, partially offset by reduced direct incremental expense associated with COVID-19 and $235 million of incremental net derivative gains as compared to the first nine months of fiscal 2020. 33 Prepared Foods Segment Results in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 Change July 3, 2021 June 27, 2020 Change Sales $ 2,323 $ 2,035 $ 288 $ 6,600 $ 6,255 $ 345 Sales volume change 4.5 % (3.0) % Average sales price change 9.7 % 8.5 % Operating income $ 150 $ 145 $ 5 $ 633 $ 494 $ 139 Operating margin 6.5 % 7.1 % 9.6 % 7.9 % Third quarter and nine months – Fiscal 2021 vs Fiscal 2020 • Sales Volume – Sales volume increased during the third quarter of fiscal 2021 primarily due to increased demand in the foodservice channel and sustained retail demand as well as reduced production throughput disruptions associated with COVID-19 compared to the third quarter of fiscal 2020. Sales volume decreased during the first nine months of fiscal 2021 driven by reduced foodservice demand in the first half of fiscal 2021, lower production throughput partially associated with a challenging labor and supply environment and the impact of severe weather in the second quarter of fiscal 2021, partially offset by strong demand in the retail sales channel. • Average Sales Price – Average sales price increased in the third quarter and first nine months of fiscal 2021 due to favorable product mix and the passthrough of increased raw material costs. • Operating Income – Operating income increased slightly in the third quarter of fiscal 2021 primarily due to favorable pricing and product mix and the reduction of direct incremental expenses related to COVID-19 compared to the third quarter of fiscal 2020, which was offset by $160 million of increased raw materials costs as compared to the third quarter of fiscal 2020. Operating income increased during the first nine months of fiscal 2021 due to lower commercial spend as well as favorable pricing and product mix partially offset by increased operating costs, including a $265 million increase in raw material costs during the first nine months of fiscal 2021, as well as production inefficiencies due in part to the impact of a challenging labor and supply environment along with the impact of severe weather in the second quarter of fiscal 2021. Additionally, operating income in the third quarter and first nine months of fiscal 2021 was impacted by $15 million and $60 million, respectively, of incremental net derivative gains as compared to the third quarter and first nine months of fiscal 2020. International/Other Results in millions Three Months Ended Nine Months Ended July 3, 2021 June 27, 2020 Change July 3, 2021 June 27, 2020 Change Sales $ 488 $ 402 $ 86 $ 1,444 $ 1,365 $ 79 Operating income (loss) 4 (8) 12 $ — $ 11 $ (11) Third quarter and nine months – Fiscal 2021 vs Fiscal 2020 • Sales – Sales increased during the third quarter and first nine months of fiscal 2021 due to increased pricing from favorable product mix. • Operating Income (Loss) – Operating income increased during the third quarter of fiscal 2021 primarily due to reduced raw materials costs. Operating income decreased in the first nine months of fiscal 2021 primarily due to a $23 million charge related to the relocation of a production facility in China. LIQUIDITY AND CAPITAL RESOURCES Our cash needs for working capital, capital expenditures, growth opportunities, repurchases of senior notes, repayment of maturing debt, the payment of dividends and share repurchases are expected to be met with current cash on hand, cash flows provided by operating activities or short-term borrowings. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may take advantage of opportunities to generate additional liquidity or refinance existing debt through capital market transactions. The amount, nature and timing of any capital market transactions will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions. 34 Cash Flows from Operating Activities in millions Nine Months Ended July 3, 2021 June 27, 2020 Net income $ 1,702 $ 1,414 Non-cash items in net income: Depreciation and amortization 906 876 Deferred income taxes (3) 12 Other, net 72 (7) Net changes in operating assets and liabilities (21) 413 Net cash provided by operating activities $ 2,656 $ 2,708 • Cash flows associated with net changes in operating assets and liabilities for the nine months ended: • July 3, 2021 – Decreased primarily from increased accounts receivable and inventories, offset by increased accounts payable and legal accruals . The increase in accounts receivable is largely due to the timing of sales. The increase in inventory is primarily due to increased raw material and grain costs. The increase in accounts payable is due to the timing of payments. The increase in legal accruals is due primarily to legal contingencies recorded during fiscal 2021. • June 27, 2020 – Increased primarily from decreased inventory and accounts receivable and increased taxes payable, partially offset by decreased accounts payable. The changes in the inventory, accounts receivable and accounts payable are largely due to timing of payments and sales. The increase in taxes payable is primarily due to timing of payments, in large part as a result of the extension of tax payment due dates in response to COVID-19. Cash Flows from Investing Activities in millions Nine Months Ended July 3, 2021 June 27, 2020 Additions to property, plant and equipment $ (859) $ (907) Proceeds from sale of (purchases of) marketable securities, net (2) (18) Proceeds from sale of business — 29 Acquisition of equity investments (44) (183) Other, net 122 (64) Net cash used for investing activities $ (783) $ (1,143) • Additions to property, plant and equipment included spending for production growth, safety and animal well-being, acquiring new equipment, infrastructure replacements and upgrades to maintain competitive standing and position us for future opportunities. We expect capital spending for fiscal 2021 to be approximately $1.3 billion. • Acquisition of equity investments for fiscal 2021 related to the purchase of a 49% minority interest in a Malaysian producer of feed and poultry products, and for fiscal 2020, included the purchases of a 40% interest in a vertically integrated Brazilian poultry producer and a 50% interest in a joint venture serving the worldwide fats and oils market. • Other, net for the first nine months of fiscal 2021 and the first nine months of fiscal 2020 primarily included changes in deposits for capital expenditures and the receipt of $69 million related to split-dollar life insurance proceeds. Cash Flows from Financing Activities in millions Nine Months Ended July 3, 2021 June 27, 2020 Proceeds from issuance of debt $ 573 $ 1,589 Payments on debt (1,608) (485) Borrowings on revolving credit facility — 1,210 Payments on revolving credit facility — (1,280) Proceeds from issuance of commercial paper — 14,318 Repayments of commercial paper — (15,317) Purchases of Tyson Class A common stock (50) (200) Dividends (477) (451) Stock options exercised 33 29 Other, net (13) (7) Net cash used for financing activities $ (1,542) $ (594) 35 • During the first nine months of fiscal 2021, proceeds of $573 million from issuance of debt included $500 million of proceeds from the issuance of a term loan facility due March 2023. • On March 27, 2020, we executed a $1.5 billion term loan facility to repay our commercial paper, repay outstanding balances under our revolving credit facility and for general liquidity purposes. On April 1, 2020, we borrowed the full $1.5 billion available under the term loan facility and used it to repay the $1.0 billion of outstanding commercial paper obligations and to repay the $200 million outstanding balance under the revolving credit facility. During the first nine months of fiscal 2021, we extinguished the $1.5 billion outstanding balance of our term loan facility using proceeds received from the issuance of debt and cash on hand. • On July 23, 2021, subsequent to the end of our third quarter of fiscal 2021, we redeemed all of our 2.25% Senior Notes due August 2021 using cash on hand at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest as of the redemption date. At July 3, 2021, the outstanding principal amount was $500 million. • During the first nine months of fiscal 2020, we extinguished the $350 million outstanding balance of our senior notes due June 2020 using cash on hand. • During the first nine months of fiscal 2020, the net impact from our commercial paper activity was not significant. • Purchases of Tyson Class A stock included $150 million of shares repurchased pursuant to our share repurchase program during the nine months ended June 27, 2020 and $50 million of shares repurchased to fund certain obligations under our equity compensation programs during each of the nine months ended July 3, 2021, and June 27, 2020. • Dividends paid during the nine months ended July 3, 2021 reflected a 6% increase to our fiscal 2020 quarterly dividend rate. Liquidity in millions Commitments Expiration Date Facility Amount Outstanding Letters of Credit (no draw downs) Amount Borrowed Amount Available at July 3, 2021 Cash and cash equivalents $ 1,613 Short-term investments — Term loan facility March 2023 $ 500 $ — $ 500 — Revolving credit facility March 2023 $ 1,750 $ — $ — 1,750 Commercial paper — Total liquidity $ 3,363 • Liquidity includes cash and cash equivalents, short-term investments and availability under our revolving credit and term loan facilities, less outstanding commercial paper balance. • At July 3, 2021, we had current debt and accrued legal contingencies of $1,566 million and $652 million, respectively, which we intend to pay with cash generated from our operating activities and other existing or new liquidity sources. • The revolving credit facility supports our short-term funding needs and also serves to backstop our commercial paper program. We had no borrowings under the revolving credit facility during the nine months ended July 3, 2021. • We expect net interest expense to approximate $420 million for fiscal 2021. • Our current ratio was 1.5 to 1 at July 3, 2021 and 1.8 to 1 at October 3, 2020. • At July 3, 2021, approximately $380 million of our cash was held in the accounts of our foreign subsidiaries. Generally, we do not rely on the foreign cash as a source of funds to support our ongoing domestic liquidity needs. We manage our worldwide cash requirements by reviewing available funds among our foreign subsidiaries and the cost effectiveness with which those funds can be accessed. We intend to repatriate excess cash (net of applicable withholding taxes) not subject to regulatory requirements and to indefinitely reinvest outside of the United States the remainder of cash held by foreign subsidiaries. We do not expect the regulatory restrictions or taxes on repatriation to have a material effect on our overall liquidity, financial condition or the results of operations for the foreseeable future. • Subsequent to the third quarter of fiscal 2021, a fire impacted operations at our Hanceville, Alabama rendering facility. Although we currently do not believe the fire will have a material impact on our consolidated condensed financial statements or our liquidity, we continue to evaluate its impact. 36 Capital Resources Credit and Term Loan Facilities Cash flows from operating activities and cash on hand are our primary sources of liquidity for funding debt service, capital expenditures, dividends and share repurchases. We also have a revolving credit facility, with a committed capacity of $1.75 billion, to provide additional liquidity for working capital needs and to backstop our commercial paper program. Additionally, we have a $500 million committed term loan facility which was fully drawn as of July 3, 2021. At July 3, 2021, amounts available for borrowing under our revolving credit and term loan facilities totaled $1.75 billion. Our revolving credit facility is funded by a syndicate of 20 banks, with commitments ranging from $30 million to $204 million per bank. Commercial Paper Program Our commercial paper program provides a low-cost source of borrowing to fund general corporate purposes including working capital requirements. The maximum borrowing capacity under the commercial paper program is $1 billion. The maturities of the notes may vary, but may not exceed 397 days from the date of issuance. As of July 3, 2021, we had no commercial paper outstanding under this program. Our ability to access commercial paper in the future may be limited or its costs increased. 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 3, 2021, and October 3, 2020, the ratio of our net debt to EBITDA was 1.9x and 2.3x, respectively. Refer to Part I, Item 3, EBITDA Reconciliations, for an explanation and reconciliation to comparable Generally Accepted Accounting Principles (“GAAP ” ) measures. Credit Ratings Revolving Credit Facility Standard & Poor's Rating Services', a Standard & Poor's Financial Services LLC business (“S&P”), applicable rating is “BBB+”. Moody’s Investor Service, Inc.'s (“Moody's”) applicable rating is “Baa2”. Fitch Ratings', a wholly owned subsidiary of Fimlac, S.A. (“Fitch”), applicable rating is “BBB”. The below table outlines the fees paid on the unused portion of the facility (“Facility Fee Rate ” ) and letter of credit fees and borrowings (“All-in Borrowing Spread ” ) that corresponds to the applicable ratings levels from S&P, Moody's and Fitch. Ratings Level (S&P/Moody's/Fitch) Facility Fee Rate All-in Borrowing Spread A-/A3/A- or above 0.090 % 1.000 % BBB+/Baa1/BBB+ 0.100 % 1.125 % BBB/Baa2/BBB (current level) 0.125 % 1.250 % BBB-/Baa3/BBB- 0.175 % 1.375 % BB+/Ba1/BB+ or lower 0.225 % 1.625 % In the event the rating levels are split, 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 3, 2021 and we expect that we will maintain compliance for the foreseeable future. RECENTLY ISSUED/ADOPTED ACCOUNTING PRONOUNCEMENTS Refer to the discussion of recently issued/adopted accounting pronouncements under Part I, Item 1, Notes to Consolidated Condensed Financial Statements, Note 1: Accounting Policies. 37 CRITICAL ACCOUNTING ESTIMATES We consider accounting policies related to: contingent liabilities; revenue recognition; accrued self-insurance; defined benefit pension plans; impairment of long-lived assets and definite life intangibles; impairment of goodwill and indefinite life intangible assets; business combinations; 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 fiscal year ended October 3, 2020, as amended. Refer to Part I, Item 1, Notes to Consolidated Condensed Financial Statements, Note 1: Accounting Policies, for updates to our significant accounting policies during the nine months ended July 3, 2021. These critical accounting policies require us to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. We have considered the impact of the global COVID-19 pandemic on our consolidated condensed financial statements. In addition to the COVID-19 impacts we have already experienced, and continue to experience, there are likely to be future impacts, the extent of which is uncertain and largely subject to whether the severity worsens or duration lengthens. These impacts could include but may not be limited to risks and uncertainty related to worker availability, our ability to operate production facilities, demand-driven production facility closures, shifts in demand between sales channels and market volatility in our supply chain. Consequently, this may subject us to future risk of material goodwill, intangible and long-lived asset impairments, increased reserves for uncollectible accounts, and adjustments for inventory and market volatility for items subject to fair value measurements such as derivatives and investments. 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. These statements are intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, current views and estimates of our outlook for fiscal 2021, 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). Words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “forecast,” “target,” “outlook,” “may,” “should,” “could,” and similar expressions, as well as statements written in the future tense, identify forward-looking statements. 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 are expressly qualified in their entirety by this cautionary statement and 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. 38 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 COVID-19 global pandemic and associated responses thereto have had an adverse impact on our business and operations, and the extent that the COVID-19 pandemic continues to impact us will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the speed and effectiveness of vaccine and treatment developments and their deployment, and public adoption rates of COVID-19 vaccines and their effectiveness against emerging variants of COVID-19, including the Delta variant; (ii) our ability to make effective acquisitions or joint ventures and successfully integrate newly acquired businesses into existing operations; (iii) the effectiveness of our financial fitness program; (iv) the implementation of an enterprise resource planning system; (v) access to foreign markets together with foreign economic conditions, including currency fluctuations, import/export restrictions and foreign politics; (vi) cyber incidents, security breaches or other disruptions of our information technology systems; (vii) risks associated with our failure to consummate favorable acquisition transactions or integrate certain acquisitions' operations; (viii) the Tyson Limited Partnership’s ability to exercise significant control over the Company; (ix) 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; (x) 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; (xi) outbreak of a livestock disease (such as African swine fever (ASF), 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; (xii) changes in consumer preference and diets and our ability to identify and react to consumer trends; (xiii) effectiveness of advertising and marketing programs; (xiv) significant marketing plan changes by large customers or loss of one or more large customers; (xv) our ability to leverage brand value propositions; (xvi) changes in availability and relative costs of labor and contract farmers and our ability to maintain good relationships with team members, labor unions, contract farmers and independent producers providing us livestock; (xvii) issues related to food safety, including costs resulting from product recalls, regulatory compliance and any related claims or litigation; (xviii) 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; (xix) adverse results from litigation; (xx) risks associated with leverage, including cost increases due to rising interest rates or changes in debt ratings or outlook; (xxi) impairment in the carrying value of our goodwill or indefinite life intangible assets; (xxii) our participation in multiemployer pension plans; (xxiii) volatility in capital markets or interest rates; (xxiv) risks associated with our commodity purchasing activities; (xxv) the effect of, or changes in, general economic conditions; (xxvi) impacts on our operations caused by factors and forces beyond our control, such as natural disasters, fire, bioterrorism, pandemics or extreme weather; (xxvii) failure to maximize or assert our intellectual property rights; (xxviii) effects related to changes in tax rates, valuation of deferred tax assets and liabilities, or tax laws and their interpretation; (xxix) the effectiveness of our internal control over financial reporting, including identification of additional material weaknesses; and (xxx) those factors discussed within Item 1, Item 1A and Item 7 of our Annual Report on Form 10-K for the year ended October 3, 2020, as amended, and our other periodic filings with the SEC.