TYSON FOODS, INC. 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 financial statements and notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. 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. Refer to the Company's Annual Report on Form 10-K for the fiscal year endedOctober 3, 2020 for additional information related to fiscal 2020. DESCRIPTION OF THE COMPANY We are one of the world's largest food companies and a recognized leader in protein. Founded in 1935 byJohn W. Tyson and grown under four generations of family leadership, the Company has a broad portfolio of products and brands including Tyson®, Jimmy Dean®, Hillshire Farm®, Ball Park®, Wright®, Aidells®, ibp® and State Fair®. We operate in four reportable segments: Beef, Pork,Chicken and Prepared Foods . We measure segment profit as operating income (loss). International/Other primarily includes our foreign operations inAustralia ,China ,Malaysia ,Mexico ,the Netherlands ,South Korea andThailand , third-party merger and integration costs and corporate overhead related toTyson New Ventures, LLC . For further description of the business, refer to Part I, Item 1, Business.
OVERVIEW
Fiscal year The Company's accounting cycle resulted in a 52-week year for fiscal 2022 and fiscal 2021 and a 53-week year for fiscal 2020.
General
Sales grew 13% in fiscal 2022 over fiscal 2021 to$53.3 billion largely due to increased sales growth across each of our segments primarily due to higher average sales prices combined with$545 million in legal contingency accruals recognized as a reduction to sales in fiscal 2021. The higher average sales prices were primarily due to the current inflationary environment and recovery of rapidly rising costs, such as labor, freight and transportation, livestock, feed ingredients and other input costs. Operating income of$4,410 million in fiscal 2022 was up slightly compared to fiscal 2021, as improved Chicken results were offset by a decline in operating income in the Beef,Pork and Prepared Foods segments. In fiscal 2022, our operating income was impacted by$66 million of restructuring and related charges and$62 million of insurance proceeds, net of costs incurred, related to fires at our production facilities. In fiscal 2021, our operating income was impacted by$626 million of charges related to legal contingency accruals,$27 million of charges related to the relocation of a production facility inChina ,$23 million of production facilities fire costs, net of insurance proceeds and a$784 million gain on the sale of our pet treats business. 24 -------------------------------------------------------------------------------- Market Environment According to theUSDA , domestic protein production (beef, pork, chicken and turkey) was relatively flat in fiscal 2022 compared to fiscal 2021. All segments experienced inflation in operating costs, especially in labor, freight and transportation and certain materials, and we expect these trends to continue through fiscal 2023. Additionally, grain and feed ingredient costs have increased substantially, which impacts all of our segments. We pursue recovery of these increased costs through pricing. TheFederal Reserve recently increased interest rates, and it is anticipated that interest rates will continue to rise in the near term. Our direct exposure to rising interest rates is somewhat tempered given our strong liquidity position in addition to our current debt structure in which nearly all of our borrowings have fixed interest rates. AtOctober 1, 2022 , we had$3.3 billion of liquidity and our current debt was$459 million . Should we need to issue additional debt or borrow under our existing revolving credit facility, we may be exposed to higher interest rates than our current outstanding borrowings. The Beef segment experienced strong demand, sufficient supply of market-ready cattle and increased live cattle costs. The Pork segment experienced reduced domestic availability of live hogs. The Chicken segment experienced strong demand and increased feed ingredient and other input costs.The Prepared Foods segment experienced increased costs largely due to the impacts of an inflationary environment. Additionally, the conflict betweenUkraine andRussia has led to economic sanctions againstRussia and certain regions ofUkraine andBelarus . As ofOctober 1, 2022 , the impact of this conflict has not had a material direct impact on our consolidated financial performance. However, the conflict is still ongoing and there are many risks and uncertainties in relation to the conflict that are outside of our control. If the conflict escalates further or if additional countries join the conflict and additional economic sanctions are imposed, it could have a material impact on our business operations and financial performance.
COVID-19
We continue to proactively monitor and respond to the evolving nature of the COVID-19 pandemic and its impact to our global business. Our ongoing COVID-19 task force was 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 experienced and continue to experience multiple challenges related to the pandemic. The most significant challenge we face is the availability of team members to operate our production facilities as our production facilities continue to experience varying levels of absenteeism. The health and safety of our team members remains our top priority, and we continue to provide a variety of health and safety resources and services to team members and their family members. Additionally, we have experienced some challenges in our supply chain such as volatility of inputs, availability of shipping containers and port congestion. These challenges impacted our operating costs, but generally, we experienced lower direct incremental costs associated with COVID-19 in fiscal 2022 as compared to fiscal 2021. The long-term impacts of COVID-19 remain 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.
Margins
Our total operating margin was 8.3% in fiscal 2022. Operating margins by segment were as follows: •Beef - 12.6% •Pork - 3.0% •Chicken - 5.6% •Prepared Foods - 7.7% Strategy Our strategy is to sustainably feed the world with the fastest growing protein brands. We intend to achieve our strategy as we: grow our business 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. •In the second quarter of fiscal 2021, we initiated a plan to sell our pet treats business, which was included in ourPrepared 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 ofJuly 6, 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 onJuly 6, 2021 , and we recognized a gain of$784 million from the sale of this business, which is reflected in cost of sales in our Consolidated Statement of Income for fiscal 2021. 25 -------------------------------------------------------------------------------- •Beginning in fiscal 2022, we launched a new productivity program, which is designed to drive a better, faster and more agile organization that is supported by a culture of continuous improvement and faster decision-making. We were targeting$1 billion in productivity savings by the end of fiscal 2024, which included more than$400 million in fiscal 2022, relative to a fiscal 2021 cost baseline. The execution of this program is supported by a program management office that ensures delivery of key project milestones and reports on savings achievements connected with the three pillars of the program. The first pillar is operational and functional excellence, which includes functional efficiency efforts in Finance, HR and Procurement focused on applying best practices to reduce costs. The second pillar is the use of new digital solutions like artificial intelligence and predictive analytics to drive efficiency in operations, supply chain planning, logistics and warehousing. The third pillar is automation, which will leverage automation and robotics technologies to automate difficult and higher turnover positions. We expect the productivity savings to be recognized in each of our reportable segments as they benefit from the achievements connected with the three pillars of the program. At this time, we do not anticipate costs associated with this program to be material and capital expenditures associated with automation and other activities are included in our capital expenditure expectations. We realized more than$700 million of productivity savings in fiscal 2022, which partially offset the impacts of inflationary market conditions, and we now believe we will exceed our$1 billion target in fiscal 2023. •In the fourth quarter of fiscal 2022, the Company approved a restructuring program, the 2022 Program, which is expected to improve business performance, increase collaboration, enhance team member agility, enable faster decision-making and reduce redundancies. In conjunction with the 2022 Program, the Company plans to bring together all its corporate team members from theChicago ,Downers Grove andDakota Dunes area corporate locations to its world headquarters inSpringdale, Arkansas , through a phased relocation commencing in early calendar year 2023. We have recognized$66 million of pretax charges in fiscal 2022 associated with the 2022 Program consisting of severance related costs. The Company currently anticipates the 2022 Program will result in cumulative pretax charges of approximately$293 million , which consists primarily of severance costs, relocation and related costs, accelerated depreciation, contract and lease terminations and professional and other fees. The following tables set forth the pretax impact of restructuring and related charges incurred in fiscal 2022 in the Consolidated Statements of Income and the pretax impact by our reportable segments. For further description refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 7: Restructuring and Related Charges. in millions 2022 Cost of Sales$ 18 Selling, General and Administrative 48
Total Restructuring and related charges, pretax
in millions
Total estimated
2022 charges Estimated future charges 2022 Program charges
Beef $ 16 $ 58 $ 74
Pork 5 25 30
Chicken 6 2 8
Prepared Foods 36 135 171
International/Other 3 7 10
Total Restructuring and related charges,
pretax $ 66 $ 227 $ 293
SUMMARY OF RESULTS
Sales in millions
2022 2021 2020
Sales $ 53,282 $ 47,049 $ 43,185
Change in sales volume (0.3) % (2.8) %
Change in average sales price 12.3 % 13.0 %
Sales growth 13.2 % 8.9 %
26--------------------------------------------------------------------------------
2022 vs. 2021 -
•Sales Volume - Sales were negatively impacted by a decrease in sales volume, which accounted for a decrease of$121 million , driven by decreased volumes in ourPork and Prepared Foods segments and impacts associated with the challenging labor environment and continued supply chain constraints, partially offset by an increase in sales volume in our Chicken segment. •Average Sales Price - Sales were positively impacted by higher average sales prices, which accounted for an increase of$5,809 million . The increase in average sales price was primarily due to the current inflationary environment and recovery of rapidly rising costs.
•The above change in average sales price for fiscal 2022 excludes the impact of
a
2021 vs. 2020 -
•Sales Volume - Sales were negatively impacted by a decrease in sales volume across each of our segments, which accounted for a decrease of$1,190 million , due in part to the impacts of a challenging labor environment as well as the impact of an additional week in fiscal 2020. •Average Sales Price - Sales were positively impacted by higher average sales prices, which accounted for an increase of$5,599 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 fiscal 2021 excludes a
Cost of Sales in millions
2022 2021 2020
Cost of sales $ 46,614 $ 40,523 $ 37,801
Gross profit 6,668 6,526Cost of sales as a percentage of sales 87.5 % 86.1 %
2022 vs. 2021 -
•Cost of sales increased$6,091 million . Lower sales volume decreased cost of sales$104 million while higher input cost per pound increased cost of sales$6,195 million .
•The
•Increase in live cattle costs of approximately
•Increase of approximately$635 million in our Chicken segment related to the net impact of increased feed ingredient costs and growout expenses, partially offset by a reduction in outside meat purchases.
•Increase in raw material and other input costs of approximately
•Increase in live hog costs of approximately
•Increase in freight and transportation costs of approximately
•Increase of approximately
•Increase due to the recognition of a
•Decrease due to net derivative gains of$225 million in fiscal 2022, compared to net derivative gains of$14 million in fiscal 2021 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 approximately
•Decrease of approximately
•Decrease of approximately$27 million in our Beef segment related to insurance proceeds related to the fire at our production facility in the fourth quarter of fiscal 2019. •Remaining increase in costs across all of our segments primarily driven by net impacts on average cost per pound from mix changes, the impact of the inflationary environment on our labor and other input costs and restructuring and related charges, partially offset by savings from our productivity program.
•The
27
--------------------------------------------------------------------------------2021 vs. 2020 -
•Cost of sales increased$2,722 million . Lower sales volume decreased cost of sales$1,041 million while higher input cost per pound increased cost of sales$3,763 million .
•The
•Increase in live hog costs of approximately
•Increase of approximately
•Increase in raw material and other input costs of approximately
•Increase in freight and transportation costs of approximately
•Increase of approximately
•Increase in live cattle costs of approximately
•Decrease due to the recognition of a
•Decrease of
•Remaining increase in costs across all of our segments was primarily driven by net impacts on average cost per pound from mix changes, as well as, production inefficiencies, increased labor costs due in part to the impacts associated with a challenging labor environment and COVID-19 in fiscal 2021 as compared to fiscal 2020.
•The
Selling, General and Administrative in millions
2022 2021 2020
Selling, general and administrative
As a percentage of sales 4.2 % 4.5 %
2022 vs. 2021 -
•Increase of
•Increase of
•Increase of
•Increase of
•Increase of
•Increase of
•Increase of
•Decrease of
•Decrease of
•Decrease of$16 million from the change in the impact of a cattle supplier's misappropriation of Company funds, resulting from a$71 million gain related to the recovery of cattle inventory in the fiscal year endedOctober 1, 2022 as compared to a$55 million gain recognized in the fiscal year endedOctober 2, 2021 . 2021 vs. 2020 -
•Decrease of
•Decrease of$161 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 fiscal year endedOctober 2, 2021 as compared to a$106 million loss recognized in the fiscal year endedOctober 3, 2020 .
•Decrease of
•Decrease of
•Decrease of
•Decrease of
•Decrease of
•Increase of
28
--------------------------------------------------------------------------------
•Increase of
Interest Expense in millions
2022 2021
$ 365 $ 428
2022 / 2021 -
•Interest expense primarily included interest expense related to our senior
notes and commitment fees incurred on our revolving credit facility less
capitalized interest. The decrease in interest expense in fiscal 2022 was
primarily due to the redemption of senior notes in fiscal 2022 and repayments of
term loans and the redemption of the August 2021 Notes in fiscal 2021.
Other (Income) Expense, net in millions
2022 2021
$ (87) $ (65)
2022 - Included $58 million of foreign exchange losses, $52 million of
production facilities fires insurance proceeds, $45 million of joint venture
earnings and $37 million of gains on equity investments due to observable price
changes in fiscal 2022.
2021 - Included
Effective Tax Rate
2022 2021
21.7 % 24.3 %
•Our effective income tax rate was 21.7% for fiscal 2022 compared to 24.3% for
fiscal 2021. The fiscal 2022 effective tax rate includes a $36 million benefit
from the remeasurement of deferred income taxes, primarily due to legislation
decreasing state tax rates enacted in fiscal 2022. The non-deductible goodwill
associated with the sale of our pet treats business unfavorably impacted the
effective tax rate for fiscal 2021 by 1.8%.
Net Income Attributable to Tyson in millions, except per share data
2022 2021
Net income attributable to Tyson $ 3,238 $ 3,047
Net income attributable to Tyson - per diluted share 8.92 8.34
2022 - Included the following items:
•$114 million pretax, or $0.23 per diluted share, of production facilities fire
insurance proceeds, net of costs incurred.
•$66 million pretax, or ($0.14 ) per diluted share, of restructuring and related
charges.
•$36 million post tax, or $0.10 per diluted share, from remeasurement of net
deferred tax liabilities at lower enacted state tax rates.
2021 - Included the following items:
•$626 million pretax, or ($1.31 ) per diluted share, related to the recognition
of legal contingency accruals.
•$784 million pretax, or $1.40 per diluted share, related to the gain on the
sale of our pet treats business.
•$34 million pretax, or $0.07 per diluted share, from a defined benefit plan
gain.
•$17 million pretax, or ($0.04 ) per diluted share, of production facilities fire
costs, net of insurance proceeds.
•$27 million pretax, or ($0.06 ) per diluted share, related to the relocation of
a production facility in China .
29
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SEGMENT RESULTS
We operate in four reportable segments: Beef, Pork, Chicken, and Prepared Foods .
International/Other primarily includes our foreign operations in Australia ,
China , Malaysia , Mexico , the Netherlands , South Korea and Thailand , third-party
merger and integration costs and corporate overhead related to Tyson New
Ventures, LLC . Additional information regarding the geographic areas of our
foreign operations is set forth in Part II, Item 8, Notes to Consolidated
Financial Statements, Note 17: Segment Reporting. The following table is a
summary of segment sales and operating income (loss), which is how we measure
segment income (loss):
in millions
Sales Operating Income (Loss)
2022 2021 2020 2022 2021 2020
Beef $ 19,854 $ 17,999 $ 15,742 $ 2,502 $ 3,240 $ 1,580
Pork 6,414 6,277 5,128 193 328 565
Chicken 16,961 13,733 13,234 955 (625) 122
Prepared Foods 9,689 8,853 8,532 746 1,456 743
International/Other 2,355 1,990 1,856 14 (3) (2)
Intersegment Sales (1,991) (1,803) (1,307) - - -
Total $ 53,282 $ 47,049 $ 43,185 $ 4,410 $ 4,396 $ 3,008
Beef Segment Results in millions
Change 2022 vs. Change 2021 vs.
2022 2021 2021 2020 2020
Sales $ 19,854 $ 17,999 $ 1,855 $ 15,742 $ 2,257
Sales Volume Change 0.1 % 0.3 %
Average Sales Price Change 10.2 % 14.0 %
Operating Income $ 2,502 $ 3,240 $ (738) $ 1,580 $ 1,660
Operating Margin 12.6 % 18.0 % 10.0 %
2022 vs. 2021 -
•Sales Volume - Sales volume was relatively flat in fiscal 2022.
•Average Sales Price - Average sales price increased as input costs such as live
cattle, labor and freight and transportation costs increased and demand for our
beef products remained strong in the first half of the fiscal year.
•Operating Income - Operating income decreased as margins compressed from
historically high levels, paired with continued increased operating costs as a
result of inflationary market environment. Operating income benefited from a $71
million gain due to a settlement in fiscal 2022, compared to a $55 million gain
from the recovery of cattle inventory in fiscal 2021, related to a cattle
supplier's misappropriation of Company funds. Additionally, operating income in
fiscal 2022 benefited from $27 million of insurance proceeds related to a fire
at a production facility in the fourth quarter of fiscal 2019, partially offset
by $16 million of restructuring and related charges.
2021 vs. 2020 -
•Sales Volume - Sales volume was relatively flat due to strong global demand,
partially offset by the impacts associated with a challenging labor environment,
severe weather in the second quarter of fiscal 2021 and the additional week in
fiscal 2020.
•Average Sales Price - Average sales price increased as our input costs such as
live cattle, labor and freight and transportation costs, increased and demand
for our beef products remained strong.
•Operating Income - Operating income increased due to strong demand as we
continued to optimize revenues relative to live cattle supply, partially offset
by production inefficiencies due to labor challenges. Additionally, operating
income in 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 $106 million loss recognized in fiscal 2020.
Pork Segment Results in millions
Change 2022 vs. Change 2021 vs.
2022 2021 2021 2020 2020
Sales $ 6,414 $ 6,277 $ 137 $ 5,128 $ 1,149
Sales Volume Change (1.9) % (2.7) %
Average Sales Price Change 4.1 % 25.1 %
Operating Income $ 193 $ 328 $ (135) $ 565 $ (237)
Operating Margin 3.0 % 5.2 % 11.0 %
30-------------------------------------------------------------------------------- 2022 vs. 2021 - •Sales Volume - Sales volume decreased due to reduced domestic availability of live hogs. •Average Sales Price - Average sales price increased as input costs such as live hogs, labor, freight and transportation costs increased, partially offset by unfavorable mix associated with labor shortages. •Operating Income - Operating income decreased due to periods of compressed pork margins and increased operating costs as a result of the inflationary market environment. Additionally, volatile market conditions resulted in net derivative gains of$10 million in fiscal 2022 and net derivative losses of$90 million in fiscal 2021, which excludes the impacts of related physical purchase transactions. 2021 vs. 2020 - •Sales Volume - Sales volume decreased despite strong global demand in fiscal 2021 primarily due to the impacts of an additional week in fiscal 2020 and the impacts of lower hog supplies and a challenging labor environment in fiscal 2021. •Average Sales Price - Average sales price increased as live hog costs increased and demand for our pork products remained strong. •Operating Income - Operating income decreased 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 fiscal 2021 as compared to fiscal 2020. Additionally, volatile market conditions resulted in net derivative losses of$90 million in fiscal 2021 and net derivative gains of$70 million in fiscal 2020, which were offset by the impacts of related physical purchase transactions. Chicken Segment Results in millions Change 2022 vs. Change 2021 vs. 2022 2021 2021 2020 2020 Sales$ 16,961 $ 13,733 $ 3,228 $ 13,234 $ 499 Sales Volume Change 0.7 % (3.3) % Average Sales Price Change 18.1 % 11.2 % Operating Income (Loss)$ 955 $ (625) $ 1,580 $ 122 $ (747) Operating Margin 5.6 % (4.6) % 0.9 % 2022 vs. 2021 - •Sales Volume - Sales volume increased primarily due to improved domestic production partially offset by inventory growth and strategic initiative mix impacts. •Average Sales Price - Average sales price increased primarily due to the effects of pricing initiatives in an inflationary cost environment. •Operating Income (Loss) - Operating income increased in fiscal 2022 primarily due to higher average sales prices and increased sales volume, partially offset by the impacts of inflationary market conditions including increased supply chain and labor costs. Operating income in fiscal 2022 was impacted by$595 million of higher feed ingredient costs, offset by$195 million of net derivative gains as compared to$65 million of net derivative gains in fiscal 2021. Additionally, operating income in fiscal 2022 benefited from$35 million of insurance proceeds, net of costs incurred related to a fire at a production facility. Operating income in fiscal 2021 was impacted by$626 million of losses from the recognition of legal contingency accruals and$23 million of expenses related to a fire at a production facility. 2021 vs. 2020 - •Sales Volume - Sales volume decreased from the impacts associated with a decline in hatch rate, a challenging labor environment, disruptions due to severe weather in the second quarter of fiscal 2021 and an additional week in fiscal 2020. •Average Sales Price - Average sales price increased due to favorable sales mix and inflationary market conditions. The change in average sales price for fiscal 2021 excludes a$545 million reduction of Sales from the recognition of legal contingency accruals. •Operating Income (Loss) - Operating income decreased primarily due to a$626 million loss from the recognition of legal contingency accruals,$735 million of higher feed ingredient costs as compared to fiscal 2020, increased supply chain costs,$23 million of expenses related to a fire at a production facility, decline in hatch rate and disruptions due to severe weather, partially offset by favorable product mix, reduced direct incremental expense associated with COVID-19 and$65 million of net derivative gains in fiscal 2021 as compared to$50 million of net derivative losses in fiscal 2020. 31 -------------------------------------------------------------------------------- Prepared Foods Segment Results in millions Change 2022 vs. Change 2021 vs. 2022 2021 2021 2020 2020 Sales$ 9,689 $ 8,853 $ 836 $ 8,532 $ 321 Sales Volume Change (4.1) % (5.4) % Average Sales Price Change 13.5 % 9.2 % Operating Income$ 746 $ 1,456 $ (710) $ 743 $ 713 Operating Margin 7.7 % 16.4 % 8.7 % 2022 vs. 2021 - •Sales Volume - Sales volume decreased in fiscal 2022 due to the impacts of uneven foodservice recovery, the divestiture of our pet treats business in the fourth quarter of fiscal 2021, increased pricing and a challenging supply environment impacting the first half of fiscal 2022. •Average Sales Price - Average sales price increased due to the effects of revenue management in an inflationary cost environment. •Operating Income - Operating income decreased in fiscal 2022 due to the recognition of a$784 million gain on the sale of our pet treats business in the fourth quarter of fiscal 2021. Higher average sales prices were offset by the impacts of inflationary market conditions, including$615 million of increased raw materials and other input costs in fiscal 2022 in addition to increased supply chain and labor costs. Additionally, operating income in fiscal 2022 was impacted by$36 million of restructuring and related charges. 2021 vs. 2020 - •Sales Volume - Sales volume decreased driven by lower production throughput primarily associated with a challenging labor and supply environment, reduced foodservice demand in the first half of fiscal 2021 and the impact of an additional week in fiscal 2020. •Average Sales Price - Average sales price increased due to favorable product mix and inflation-justified pricing. •Operating Income - Operating income increased due to the recognition of a$784 million gain on the sale of our pet treats business, lower commercial spend as well as favorable pricing and product mix. These impacts were partially offset by the impact of inflationary market conditions including a$520 million increase in raw material and other input costs during fiscal 2021, increased supply chain costs and a challenging labor environment. International/Other Results in millions Change 2022 Change 2021 2022 2021 vs. 2021 2020 vs. 2020 Sales$ 2,355 $ 1,990 $ 365 $ 1,856 $ 134 Operating Income (Loss) 14 (3) 17 (2) (1) 2022 vs. 2021 - •Sales - Sales increased due to volume growth and higher pricing in an inflationary cost environment. •Operating Loss - Operating income increased primarily due to$27 million of charges incurred in 2021 related to the relocation of a production facility inChina which did not recur in fiscal 2022, partially offset by the impacts of global inflationary market conditions. 2021 vs. 2020 - •Sales - Sales increased due to increased pricing from favorable product mix. •Operating Loss - Operating loss increased slightly due to a$27 million charge related to the relocation of a production facility inChina , partially offset by improved results in our international operations in fiscal 2021. LIQUIDITY AND CAPITAL RESOURCES Our cash needs for working capital, capital expenditures, growth opportunities, repurchases of senior notes, repayment of maturing debt, the payment of dividends and share repurchases are expected to be met with current cash on hand, cash flows provided by operating activities or short-term borrowings. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may take advantage of opportunities to generate additional liquidity or refinance existing debt through capital market transactions. The amount, nature and timing of any capital market transactions will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions. 32 -------------------------------------------------------------------------------- Cash Flows from Operating Activities in millions 2022 2021 Net income$ 3,249 $ 3,060 Non-cash items in net income: Depreciation and amortization 1,202 1,214 Deferred income taxes 264 (125) Gain on disposition of business -
(784)
Impairment of assets 34
60
Stock-based compensation expense 93
91
Other, net (51)
(57)
Net changes in operating assets and liabilities (2,104)
381
Net cash provided by operating activities
•Gain on disposition of business related to the sale of our pet treats business in fiscal 2021. For further description, refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 3: Acquisitions and Dispositions. •The remaining decrease in net cash provided by operating activities was due to higher payments related to income taxes, legal accruals and deferred payroll tax liabilities under the CARES Act and an increase in inventory primarily due to increased finished inventory, partially offset by a decrease in accounts receivable and higher earnings as a result of strong operations in fiscal 2022. •In fiscal 2023, we anticipate a net cash outflow related to changes in our operating assets and liabilities as we grow our business in addition to inflationary market conditions. Cash Flows from Investing Activities
in millions
2022 2021
Additions to property, plant and equipment$ (1,887) $
(1,209)
(Purchases of)/Proceeds from marketable securities, net (1)
(2)
Proceeds from sale of businesses -
1,188
Acquisition of equity investments (177)
(44)
Other, net 130
125
Net cash provided by (used for) investing activities
58
•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. •Approximately$2.4 billion will be necessary to complete buildings and equipment under construction atOctober 1, 2022 . •Capital spending for fiscal 2023 is expected to approximate$2.5 billion and will include spending for capacity expansion and utilization, automation to alleviate labor challenges and brand and product innovation. •Proceeds from sale of businesses related to the proceeds received from sale of our pet treats business in fiscal 2021. For further description refer to Part II, Item 8, notes to the Consolidated Financial Statements, Note 3: Acquisitions and Dispositions. •Acquisition of equity investments for fiscal 2022 included the purchase of 35% minority interest in a South American-based fully integrated poultry company. •Other, net for fiscal 2022 primarily included insurance proceeds received related to fires at our production facilities, proceeds from the disposition of assets and changes in deposits for capital expenditures. Other, net for fiscal 2021 primarily included changes in deposits for capital expenditures. Cash Flows from Financing Activities in millions 2022 2021 Proceeds from issuance of debt$ 103 $ 585 Payments on debt (1,191) (2,632) Purchases of Tyson Class A common stock (702) (67) Dividends (653) (636) Stock options exercised 126 41 Other, net (6) (22)
Net cash used for financing activities
33
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•During fiscal 2021, proceeds of $585 million from issuance of debt included
$500 million of proceeds from the issuance of a term loan facility due March
2023 .
•Payments on debt included:
•2022 - In March 2022 , we extinguished the $1 billion outstanding balance of our
senior notes due June 2022 .
•2021 - During 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 , we redeemed the $500 million outstanding balance
of the Senior Notes due August 2021 using cash on hand. On September 30, 2021 ,
we used cash on hand to repay in full the $500 million term loan facility due
March 2023 .
•Purchases of Tyson Class A common stock included:
•$587 million of cash paid for shares repurchased pursuant to our share
repurchase program in fiscal 2022.
•$115 million and $67 million for shares repurchased to fund certain obligations
under our equity compensation plans in fiscal 2022 and 2021, respectively.
•Dividends paid during fiscal 2022 included a 3% increase to our fiscal 2021
quarterly dividend rate.
Liquidity in millions
Outstanding
Letters of
Commitments Facility Credit (no draw Amount Amount Available at
Expiration Date Amount downs) Borrowed October 1, 2022
Cash and cash equivalents $ 1,031
Short-term investments 1
Revolving credit facility September 2026 $ 2,250 $ - $ - 2,250
Commercial Paper -
Total liquidity $ 3,282
•Liquidity includes cash and cash equivalents, short-term investments, and
availability under our revolving credit facility, less outstanding commercial
paper balance.
•At October 1, 2022 , we had current debt of $459 million , 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 fiscal 2022. Under the terms of the facility,
we have the option to establish incremental commitment increases of up to $500
million if certain conditions are met.
•We expect net interest expense will approximate $320 million for fiscal 2023.
•Our ratio of short-term assets to short-term liabilities ("current ratio") was
1.8 to 1 and 1.6 to 1 at October 1, 2022 , and October 2, 2021 , respectively. The
increase in fiscal 2022 was primarily due to increased accounts receivable and
inventories and decreased current debt and legal contingency accruals, partially
offset by decreased cash and cash equivalents and increased accounts payable.
•At October 1, 2022 , $465 million of our cash was held in the international
accounts of our foreign subsidiaries. Generally, we do not rely on the foreign
cash as a source of funds to support our ongoing domestic liquidity needs. We
manage our worldwide cash requirements by reviewing available funds among our
foreign subsidiaries and the cost effectiveness with which those funds can be
accessed. We intend to repatriate any excess cash (net of applicable withholding
taxes) not subject to regulatory requirements and to indefinitely reinvest
outside of the United States the remainder of cash held by foreign subsidiaries.
We do not expect the regulatory restrictions or taxes on repatriation to have a
material effect on our overall liquidity, financial condition or the results of
operations for the foreseeable future.
Capital Resources
Credit 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$2.25 billion , to provide additional liquidity for working capital needs and to backstop our commercial paper program. AtOctober 1, 2022 , amounts available for borrowing under our revolving credit facility totaled$2.25 billion . Our revolving credit facility is funded by a syndicate of 20 banks, with commitments ranging from$35 million to$175 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$1.5 billion . The maturities of the notes may vary, but may not exceed 397 days from the date of issuance. As ofOctober 1, 2022 , 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. 34 --------------------------------------------------------------------------------
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. AtOctober 1, 2022 , andOctober 2, 2021 , the ratio of our net debt to EBITDA was 1.3x and 1.2x, respectively. Refer to Other Key Financial Measures below for an explanation and reconciliation to comparable Generally Accepted Accounting Principles ("GAAP") measures.
Credit Ratings
Revolving Credit Facility
S&P's applicable rating is "BBB+." Moody's applicable rating is "Baa2." 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
and Moody's.
Ratings Level (S&P/Moody's) Facility Fee Rate All-in Borrowing Spread
A2/A or above 0.700 % 0.875 %
A3/A- 0.090 % 1.000 %
Baal/BBB+ (current level) 0.100 % 1.125 %
Baa2/BBB 0.125 % 1.250 %
Baa3/BBB or lower 0.175 % 1.375 %
In the event the ratings fall within different levels, the applicable rate will
be based upon the higher of the two Levels or, if there is more than a one-notch
split between the two Levels, then the Applicable Rate will be based upon the
Level that is one Level below the higher Level.
Debt Covenants
Our revolving credit facility contains 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 a minimum interest expense
coverage ratio.
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
Pension Plans As further described in Part II, Item 8, Notes to Consolidated Financial Statements, Note 15: Pensions and Other Postretirement Benefits, the funded status of our defined benefit pension plans is defined as the amount the projected benefit obligation exceeds the plan assets. The funded status of the plans is an underfunded position of$159 million at the end of fiscal 2022 as compared to an underfunded position of$215 million at the end of fiscal 2021. We contributed$13 million in fiscal 2022 and expect to contribute approximately$13 million of cash to our pension plans in fiscal 2023. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements. As a result, the actual funding in fiscal 2023 may be different from the estimate. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements material to our financial position or results of operations. The off-balance sheet arrangements we have are guarantees of obligations related to certain outside third parties, including leases, debt and livestock grower loans, and residual value guarantees covering certain operating leases for various types of equipment. See Part II, Item 8, Notes to Consolidated Financial Statements, Note 20: Commitments and Contingencies for further discussion. 35 -------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations as ofOctober 1, 2022 (in millions): Payments Due by Period 2028 and 2023 2024-2025 2026-2027 thereafter Total Debt principal payments (1)$ 467 $ 1,302 $ 2,166 $ 4,468 $ 8,403 Interest payments (2) 364 646 545 3,014 4,569 Guarantees (3) 3 36 16 26 81 Operating lease obligations (4) 154 213 107 53 527 Purchase obligations (5) 342 364 115 109 930 Capital expenditures (6) 1,724 679 - - 2,403 Other long-term liabilities (7) - - - - 645 Total contractual commitments$ 3,054 $ 3,240 $ 2,949 $ 7,670 $ 17,558 (1)In the event of a default on payment, acceleration of the principal payments could occur. (2)Interest payments include interest on all outstanding debt. Payments are estimated for variable rate and variable term debt based on effective interest rates atOctober 1, 2022 , and expected payment dates. (3)Amounts include guarantees of obligations related to certain outside third parties, which consist of leases, debt and livestock grower loans, all of which are substantially collateralized by the underlying assets, as well as residual value guarantees covering certain operating leases for various types of equipment. The amounts included are the maximum potential amount of future payments. (4)For additional information regarding operating leases, refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 6: Leases. (5)Amounts include agreements with a remaining term in excess of one year to purchase goods or services that are enforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligations amount included items, such as future purchase commitments for grains and livestock purchase contracts, that provide terms that meet the above criteria. For certain grain purchase commitments with a fixed quantity provision, we have assumed the future obligations under the commitment based on available commodity futures prices as published in observable active markets as ofOctober 1, 2022 . We have excluded future purchase commitments for contracts that do not meet these criteria. Purchase orders are not included in the table, as a purchase order is an authorization to purchase and is cancellable. Contracts for goods or services that contain termination clauses without penalty have also been excluded. (6)Amounts include estimated amounts to complete buildings and equipment under construction as ofOctober 1, 2022 . (7)Other long-term liabilities primarily consist of deferred compensation, deferred income, self-insurance and asset retirement obligations. We are unable to reliably estimate the amount and timing of the remaining payments beyond fiscal 2022; therefore, we have only included the total liability in the table above. We also have employee benefit obligations consisting of pensions and other postretirement benefits of$205 million that are excluded from the table above. A discussion of the Company's pension and postretirement plans, including funding matters, is included in Part II, Item 8, Notes to Consolidated Financial Statements, Note 15: Pensions and Other Postretirement Benefits. In addition to the amounts shown above in the table, we have unrecognized tax benefits of$130 million and related interest and penalties of$47 million atOctober 1, 2022 , recorded in Other long-term liabilities. The potential maximum contractual obligation associated with our cash flow assistance programs atOctober 1, 2022 , based on the estimated fair values of the livestock supplier's net tangible assets on that date, aggregated to approximately$290 million . After analyzing residual credit risks and general market conditions, we had no allowance for these programs' estimated credit losses atOctober 1, 2022 . 36 -------------------------------------------------------------------------------- OTHER KEY FINANCIAL MEASURES The following are other key financial measures used by the Company for the purposes of assessing performance and highlighting operational trends as well as our ability to generate earnings sufficient to service out debt: in millions, except ratio data 2022 2021 2020 Net income$ 3,249 $ 3,060 $ 2,071 Less: Interest income (17) (8) (10) Add: Interest expense 365 428 485 Add: Income tax expense 900 981 593 Add: Depreciation 945 934 900 Add: Amortization (a) 246 261 278 EBITDA$ 5,688 $ 5,656 $ 4,317 Total gross debt$ 8,321 $ 9,348 $ 11,339 Less: Cash and cash equivalents (1,031) (2,507) (1,420) Less: Short-term investments (1) - - Total net debt$ 7,289 $ 6,841 $ 9,919 Ratio Calculations: Gross debt/EBITDA 1.5x 1.7x 2.6x Net debt/EBITDA 1.3x 1.2x 2.3x
Return on invested capital (b) 13.4 % 13.3 % 9.2 % Total debt to capitalization (c) 29.6 % 34.4 % 42.4 % Book value per share (d)
$ 55.04 $ 48.95 $ 42.25 (a)Excludes the amortization of debt issuance and debt discount expense of$11 million ,$19 million ,$14 million for fiscal 2022, 2021 and 2020, respectively, as it is included in Interest expense.
(b)Return on invested capital is calculated by dividing after-tax operating income, calculated by applying the Company's effective tax rate to operating income, by the average of beginning and ending total debt and shareholders' equity less cash and cash equivalents.
(c)For the total debt to capitalization calculation, capitalization is defined as total debt plus total shareholders' equity.
(d)Book value per share is calculated by dividing shareholders' equity by the sum of Class A and B shares outstanding.
EBITDA is defined as net income before interest, income taxes, depreciation and
amortization. Net debt to EBITDA represents the ratio of our debt, net of cash
and short-term investments, to EBITDA. EBITDA and net debt to EBITDA are
presented as supplemental financial measurements in the evaluation of our
business. We believe the presentation of these financial measures helps
investors to assess our operating performance from period to period, including
our ability to generate earnings sufficient to service our debt, enhances
understanding of our financial performance and highlights operational trends.
These measures are widely used by investors and rating agencies in the
valuation, comparison, rating and investment recommendations of companies;
however, the measurements of EBITDA and net debt to EBITDA may not be comparable
to those of other companies, which limits their usefulness as comparative
measures. EBITDA and net debt to EBITDA are not measures required by or
calculated in accordance with generally accepted accounting principles ("GAAP")
and should not be considered as substitutes for net income or any other measure
of financial performance reported in accordance with GAAP or as a measure of
operating cash flow or liquidity. EBITDA is a useful tool for assessing, but is
not a reliable indicator of, our ability to generate cash to service our debt
obligations because certain of the items added to net income to determine EBITDA
involve outlays of cash. As a result, actual cash available to service our debt
obligations will be different from EBITDA. Investors should rely primarily on
our GAAP results, and use non-GAAP financial measures only supplementally, in
making investment decisions.
RECENTLY ISSUED/ADOPTED ACCOUNTING PRONOUNCEMENTS
Refer to the discussion under Part II, Item 8, Notes to Consolidated Financial
Statements, Note 1: Business and Summary of Significant Accounting Policies and
Note 2: Changes in Accounting Principles.
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CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements requires us to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The following is a summary of certain
accounting estimates we consider critical. These estimates require levels of
subjectivity and judgment, which could result in actual results differing from
our estimates.
Contingent liabilities
Description
We are subject to lawsuits, investigations and other claims related to wage and
hour/labor, antitrust, environmental, product, taxing authorities and other
matters, and are required to assess the likelihood of any adverse judgments or
outcomes to these matters, as well as potential ranges of probable losses.
A determination of the amount of reserves and disclosures required, if any, for
these contingencies is made after considerable analysis of each individual
issue. We accrue for contingent liabilities when an assessment of the risk of
loss is probable and can be reasonably estimated. We disclose contingent
liabilities when the risk of loss is reasonably possible or probable.
Judgments and Uncertainties
Our contingent liabilities contain uncertainties because the eventual outcome
will result from future events, and determination of current reserves requires
estimates and judgments related to future changes in facts and circumstances,
differing interpretations of the law and assessments of the amount of damages,
and the effectiveness of strategies or other factors beyond our control.
Effect if Actual Results Differ From Assumptions
We have not made any material changes in the accounting methodology used to
establish our contingent liabilities during the past three fiscal years. As set
forth in Part II, Item 8, Notes to the Consolidated Financial Statements, Note
20: Commitments and Contingencies, we recognized $626 million of charges in
fiscal 2021 from legal accruals related to our broiler antitrust civil
litigation, broiler chicken grower litigation, and wage rate litigation based on
our assessment of the likelihood and amount of probable losses. We do not
believe there is a reasonable likelihood there will be a material change in the
estimates or assumptions used to calculate our contingent liabilities. However,
if actual results are not consistent with our estimates or assumptions, we may
be exposed to gains or losses that could be material.
Revenue recognition
Description
We recognize revenue for the sale of our product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon shipment or delivery to a customer based on terms of the sale. Revenue is measured by the transaction price, which is defined as the amount of consideration we expect to receive in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes consumer incentives, trade promotions, and allowances, such as coupons, discounts, rebates, volume-based incentives, cooperative advertising, and other programs. Variable consideration related to these programs is recorded as a reduction to revenue based on amounts we expect to pay. Judgments and Uncertainties The transaction price contains estimates of known or expected variable consideration. We base these estimates on current performance, historical utilization, and projected redemption rates of each program. We review and update these estimates regularly until the incentives or product returns are realized and the impact of any adjustments are recognized in the period the adjustments are identified. Effect if Actual Results Differ From Assumptions We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize revenue. As noted above, estimates are made based on historical experience and other factors. Typically, programs that are offered have a short duration, and historically, the difference between actual experience compared to estimated redemptions and performance has not been significant to the quarterly or annual financial statements. However, if the level of redemption rates or performance were to vary significantly from estimates, we may be exposed to gains or losses that could be material. We have not made any material changes in the accounting methodology used to recognize revenue during the past three fiscal years.
Accrued self-insurance
Description
We are self-insured for certain losses related to health and welfare, workers'
compensation, auto liability and general liability claims. We use an independent
third-party actuary to assist in determining our self-insurance liability. We
and the actuary consider a number of factors when estimating our self-insurance
liability, including claims experience, demographic factors, severity factors
and other actuarial assumptions. We periodically review our estimates and
assumptions with our third-party actuary to assist us in determining the
adequacy of our self-insurance liability. Our policy is to maintain an accrual
at the actuarial estimated median.
38
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Judgments and Uncertainties
Our self-insurance liability contains uncertainties due to assumptions required
and judgments used. Costs to settle our obligations, including legal and
healthcare costs, could increase or decrease causing estimates of our
self-insurance liability to change. Incident rates, including frequency and
severity, could increase or decrease causing estimates in our self-insurance
liability to change.
Effect if Actual Results Differ From Assumptions
We have not made any material changes in the accounting methodology used to
establish our self-insurance liability during the past three fiscal years. We do
not believe there is a reasonable likelihood there will be a material change in
the estimates or assumptions used to calculate our self-insurance liability.
However, if actual results are not consistent with our estimates or assumptions,
we may be exposed to gains or losses that could be material. A 10% change in the
actuarial estimate at October 1, 2022 , would not have a significant impact on
our liability.
Income taxes
Description
We estimate total income tax expense based on statutory tax rates and tax
planning opportunities available to us in various jurisdictions in which we earn
income. Income tax includes an estimate for withholding taxes on earnings of
foreign subsidiaries expected to be remitted to the United States but does not
include an estimate for taxes on earnings considered to be indefinitely invested
in the foreign subsidiary. Deferred income taxes are recognized for the future
tax effects of temporary differences between financial and income tax reporting
using tax rates in effect for the years in which the differences are expected to
reverse. Valuation allowances are recorded when it is likely a tax benefit will
not be realized for a deferred tax asset. We record unrecognized tax benefit
liabilities for known or anticipated tax issues based on our analysis of
whether, and the extent to which, additional taxes will be due.
Judgments and Uncertainties
Changes in projected future earnings could affect the recorded valuation
allowances in the future. Our calculations related to income taxes contain
uncertainties due to judgment used to calculate tax liabilities in the
application of complex tax regulations across the tax jurisdictions where we
operate. Our analysis of unrecognized tax benefits contains uncertainties based
on judgment used to apply the more likely than not recognition and measurement
thresholds.
Effect if Actual Results Differ From Assumptions
Due to the complexity of some of these judgments and uncertainties, the ultimate
resolution may result in a payment that is materially different from the current
estimate of the tax liabilities. To the extent we prevail in matters for which
unrecognized tax benefit liabilities have been established, or are required to
pay amounts in excess of our recorded unrecognized tax benefit liabilities, our
effective tax rate in a given financial statement period could be materially
affected. An unfavorable tax settlement would require use of our cash and
generally result in an increase in our effective tax rate in the period of
resolution. A favorable tax settlement would generally be recognized as a
reduction in our effective tax rate in the period of resolution. Changes in tax
laws and rates could affect recorded deferred tax assets and liabilities in the
future. Other than those potential impacts, we do not believe there is a
reasonable likelihood there will be a material change in the tax related
balances or valuation allowances.
Defined benefit pension plans
Description
We sponsor four defined benefit pension plans that provide retirement benefits to certain team members. We also participate in a multi-employer plan that provides defined benefits to certain team members covered by collective bargaining agreements. Such plans are usually administered by a board of trustees composed of the management of the participating companies and labor representatives. We use independent third-party actuaries to assist us in determining our pension obligations and net periodic benefit cost. We and the actuaries review assumptions that include estimates of the present value of the projected future pension payment to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. We accumulate and amortize the effect of actuarial gains and losses over future periods. Net periodic benefit cost for the defined benefit pension plans was$10 million in fiscal 2022. The projected benefit obligation was$183 million at the end of fiscal 2022. Unrecognized actuarial gain was$13 million at the end of fiscal 2022. We currently expect net periodic benefit cost associated with our pension plans to be approximately$6 million in fiscal 2023. We expect to contribute approximately$13 million of cash to our pension plans in fiscal 2023. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements. 39 -------------------------------------------------------------------------------- Judgments and Uncertainties Our defined benefit pension plans contain uncertainties due to assumptions required and judgments used. The key assumptions used in developing the required estimates include such factors as discount rates, expected returns on plan assets, retirement rates, and mortality. These assumptions can have a material impact upon the funded status and the net periodic benefit cost. The expected liquidation of certain plans has been considered along with these assumptions. The discount rates were determined using a cash flow matching technique whereby the rates of a yield curve, developed from high-quality debt securities, were applied to the benefit obligations to determine the appropriate discount rate. In determining the long-term rate of return on plan assets, we first examined historical rates of return for the various asset classes within the plans. We then determined a long-term projected rate-of-return based on expected returns. Investment, management and other fees paid out of plan assets are factored into the determination of asset return assumptions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality. It is reasonably likely that changes in external factors will result in changes to the assumptions used to measure pension obligations and net periodic benefit cost in future periods. The risks of participating in multi-employer plans are different from single-employer plans. The net pension cost of the multi-employer plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. Assets contributed to such plans are not segregated or otherwise restricted to provide benefits only to our team members. The future cost of these plans is dependent on a number of factors including the funded status of the plans and the ability of the other participating companies to meet ongoing funding obligations. Effect if Actual Results Differ From Assumptions We have not made any material changes in the accounting methodology used to establish our pension obligations and net periodic benefit cost during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate our pension obligations and net periodic benefit cost. However, if actual results are not consistent with our estimates or assumptions, they are accumulated and amortized over future periods and, therefore generally affect the net periodic benefit cost in future periods. A 1% change in the discount rate atOctober 1, 2022 , would not have a significant impact on the projected benefit obligation or net periodic benefit cost. A 1% change in the return on plan assets atOctober 1, 2022 , would not have a significant impact on net periodic benefit cost. The sensitivities reflect the impact of changing one assumption at a time with the remaining assumptions held constant. Economic factors and conditions often affect multiple assumptions simultaneously and the effect of changes in assumptions are not necessarily linear.
Impairment of goodwill and indefinite life intangible assets
Description
Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, the fair value of the reporting unit may be more likely than not less than its carrying amount or if significant changes to macro-economic factors related to the reporting unit have occurred that could materially impact fair value, a quantitative goodwill impairment test would be required. The quantitative test compares the fair value of a reporting unit with its carrying amount. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. Upon performing the quantitative test, if the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of goodwill. For indefinite life intangible assets, a qualitative assessment can also be performed to determine whether the existence of events and circumstances indicates it is more likely than not an intangible asset is impaired. Similar to goodwill, we can also elect to forgo the qualitative test for indefinite life intangible assets and perform the quantitative test. Upon performing the quantitative test, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and indefinite life intangible assets. However, we could be required to evaluate the recoverability of goodwill and indefinite life intangible assets outside of the required annual assessment if, among other things, we experience disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of the business or a sustained decline in market capitalization or significant changes in macro-economic factors such as increased interest and discount rates. Judgments and Uncertainties We estimate the fair value of our reporting units considering the use of various valuation techniques, with the primary technique being an income approach (discounted cash flow method) and another technique being a market approach (guideline public company method), which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. We include assumptions about sales growth, operating margins, discount rates and valuation multiples which consider our budgets, business plans, economic projections and marketplace data, and are believed to reflect market participant views which would exist in an exit transaction. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period. Generally, we utilize operating margin assumptions based on future expectations, operating margins historically realized in the reporting units' industries and industry marketplace valuation multiples. All of our material reporting units' estimated fair values exceeded their carrying values by more than 20% at the date of the most recent estimated fair value determination other than one Chicken segment reporting unit and two International reporting units. 40 -------------------------------------------------------------------------------- One of our Chicken segment reporting units had goodwill atOctober 1, 2022 of$0.6 billion . The reporting unit's projected operating margins included in the annual impairment test in fiscal 2022 averaged approximately 5%, which was consistent with the reporting unit's fiscal 2022 performance. Additionally, a hypothetical increase in the discount rate of approximately 100 basis points at the date of the 2022 test, with all other assumptions unchanged, would have caused the carrying value of this reporting unit to approximate its fair value. Our International reporting units, which are presented in International/Other for segment presentation, had goodwill atOctober 1, 2022 of$0.4 billion , which originated from acquisitions in fiscal 2019 and fiscal 2018. We generally assumed operating margins in future years would increase as we continue to integrate recent acquisitions and implement our international growth strategy, as we believe this is consistent with market participant views in an exit transaction. Had we assumed future operating margins consistent with those realized in the current fiscal year, two reporting units with goodwill totaling$0.2 billion atOctober 1, 2022 would have failed the quantitative step of the annual impairment test, which may have resulted in a goodwill impairment loss. We are still integrating the recent acquisitions and investing in our international and global business strategy, in addition to managing through the temporary impacts of COVID-19. The reporting units' projected long-term operating margins included in the annual impairment test in fiscal 2022 had to exceed an average of 4% to achieve breakeven results in the analysis. A hypothetical increase in the discount rates of approximately 50 basis points, with all other assumptions unchanged, at the date of the test would have caused the carrying values of the International reporting units to approximate their fair values. The fair value of our indefinite life intangible assets is calculated principally using multi-period excess earnings and relief-from-royalty valuation approaches, which uses significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy, and is believed to reflect market participant views which would exist in an exit transaction. Under these valuation approaches, we are required to make estimates and assumptions about sales growth, operating margins, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. Our impairment analysis contains uncertainties due to uncontrollable events and assumptions, many of which are outside the control of management, which could positively or negatively impact the anticipated future economic and operating conditions. Effect if Actual Results Differ From Assumptions We have not made material changes in the accounting methodology used to evaluate impairment of goodwill and intangible assets during the last three years. During fiscal 2022, 2021 and 2020, all of our material reporting units and indefinite life intangible assets passed the impairment analysis. Our impairment analysis contains inherent estimates and assumptions, many of which are outside the control of management including interest rates, cost of capital, tax rates, market EBITDA comparables and credit ratings, which could positively or negatively impact the anticipated future economic and operating conditions. The assumptions and estimates used in determining fair value require considerable judgement and are sensitive to changes in underlying assumptions. These assumptions can change in future periods as a result of overall economic conditions, including the impacts of inflationary pressures, increased interest and discount rates and global supply chain constraints, amongst others. As a result, there can be no assurance that estimates and assumptions made for the purpose of assessing impairments will prove to be an accurate prediction of the future. Potential circumstances that could have a negative effect on the fair value of our reporting units include, but are not limited to, lower than forecasted growth rates or operating margins and changes in discount rates. A reduction in the estimated fair value of the reporting units could trigger an impairment in the future. We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of our goodwill and indefinite lived assets. All of our material reporting units' estimated fair value exceeded their carrying value by more than 20% at the date of their most recent estimated fair value determination, other than one Chicken segment reporting unit and two International reporting units. Consequently, we do not currently consider any of our other material reporting units at significant risk of impairment. Our fiscal 2022, 2021, and 2020 indefinite life intangible assets impairment analyses did not result in an impairment charge. All indefinite life intangible assets' estimated fair value exceeded their carrying value by more than 20% at the date of their most recent estimated fair value determination. Consequently, we do not currently consider any of our material indefinite life intangible assets at significant risk of impairment. We evaluated the changing macro-economic conditions that occurred in the fourth quarter subsequent to the date of our annual impairment assessment, including inflationary pressures, rising interest rates, demand outlook and export markets as well as the Company's decreased market capitalization. Based on this evaluation, we did not identify additional risk of our goodwill reporting units and indefinite life intangible assets in which estimated fair value did not exceed their carrying value by more than 20% as ofOctober 1, 2022 , other than the one Chicken segment reporting unit and two International reporting units previously described. 41 --------------------------------------------------------------------------------
Impairment of long-lived assets and definite life intangibles
Description
Long-lived assets and definite life intangibles are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Examples include a significant adverse change in the extent or manner in which we use the asset, a change in its physical condition, or an unexpected change in financial performance. When evaluating long-lived assets and definite life intangibles for impairment, we compare the carrying value of the asset to the asset's estimated undiscounted future cash flows. An impairment is indicated if the estimated future cash flows are less than the carrying value of the asset group. For assets held for sale, we compare the carrying value of the disposal group to fair value. The impairment is the excess of the carrying value over the fair value of the asset.
We recorded impairment charges related to long-lived assets of
Judgments and Uncertainties Our impairment analysis contains uncertainties due to judgment in assumptions, including useful lives and intended use of assets, observable market valuations, forecasted sales growth, operating margins, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data that reflects the risk inherent in future cash flows to determine fair value. Effect if Actual Results Differ From Assumptions We have not made any material changes in the accounting methodology used to evaluate the impairment of long-lived assets or definite life intangibles during the last three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments or useful lives of long-lived assets or definite life intangibles. However, if actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses that could be material. We periodically conduct projects to strategically evaluate optimization of such items as network capacity, manufacturing efficiencies and business technology. If we have a significant change in strategies, outlook, or a manner in which we plan to use these assets, we may be exposed to future impairments.
Business Combinations
Description
We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. We use various models to determine the value of assets acquired and liabilities assumed such as net realizable value to value inventory, cost method and market approach to value property, relief-from-royalty and multi-period excess earnings to value intangibles and discounted cash flow to value goodwill.
For significant acquisitions we may use independent third-party valuation specialists to assist us in determining the fair value of assets acquired and liabilities assumed.
Judgments and Uncertainties Significant judgment is often required in estimating the fair value of assets acquired and liabilities assumed, particularly intangible assets. We make estimates and assumptions about projected future cash flows including sales growth, operating margins, attrition rates, and discount rates based on historical results, business plans, expected synergies, perceived risk and marketplace data considering the perspective of marketplace participants.
Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may be considered to have indefinite useful lives.
Effect if Actual Results Differ From Assumptions
While management believes those expectations and assumptions are reasonable,
they are inherently uncertain. Unanticipated market or macroeconomic events and
circumstances may occur, which could affect the accuracy or validity of the
estimates and assumptions, which could result in subsequent impairments. We had
no material business combinations during fiscal 2022.
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